Chapter 27- Macroeconomics

CY = 0.6 G = 4 Using the government expenditure multiplier from the simple model presented in the​ chapter, the plan to spend ​$4 million on highways will increase Y​ (GDP) by ____ million.

$10 ((1/(1 - 0.6)) * 4)

If the total money stock​ (supply) is ​$500,000​, the total amount of reserves held in the banking system is ​________.

$125,000

According to your​ graph, the targeted increase in employment can be achieved with the payment of a subsidy to employers of ​_____ per worker.

$4

Using the government taxation multiplier from the simple model presented in the​ chapter, the plan to reduce taxes by ​$4 million will increase Y​ (GDP) by ​______ million.

$6 ((-0.6/(1-0.6)) * -4)

This exercise utilizes two balance​ sheets, one for the Federal Reserve and one for BHZ​ Bank, a representative member of the banking system. Given the following balance sheet showing the​ Fed's initial​ position, suppose the Federal Reserve wants to raise bank reserves by ​$200 million by transacting with BHZ Bank.

(Add 200 to Treasury Bonds and Reserves)

After its transaction with the Fed is​ completed, show how BHZ​ Bank's balance sheet will look

(Add 200 to the Reserves and subtract it from Bonds and other investments)

If the​ economy's actual growth was 5 ​percent, then without the stimulus​ package, growth would have been ______ percentage points.

-1.92 (5 - 6.92)

To achieve its target for the federal funds​ rate, the Fed may​ ____________.

-Decrease/Increase the reserve requirement. -Purchase/Sell Treasury bonds in the open market. -Increase/Decrease lending from the discount window. -Decrease/Increase the interest rate paid on reserves deposited at the Fed.

According to the Taylor​ rule, the Federal Reserve should raise the federal funds rate when the​ ____________.

-Fed's inflation rate target falls -output gap rises -Fed's long-run target for the federal funds rate rises -inflation rate falls/rises

Now suppose the economy slows down​, causing the actual inflation rate to decrease to 0.5 percent and the economy to fall 1 percent below trend GDP. In this​ case, the Fed will seek to set the federal funds rate at _____ percent.

0

If the government taxation multiplier is 0.8​, the tax cut portion of the stimulus package will add ___ percentage points of extra growth to the economy.

0.67 (100 * 0.8 / 12,000)

Suppose the Fed commits itself to the use of the Taylor rule​ (shown below) to set the federal funds rate. Federal funds rate = Long-run target + 1.5(Inflation rate - Inflation target) + 0.5(Output gap) Suppose the Fed has set the​ long-run target for the federal funds rate at 1.25 percent and its target for inflation at 1.5 percent. If the economy is currently hitting the​ Fed's inflation target and GDP exactly equals the trend​ GDP, then the Fed will set the federal funds rate at ________ percent.

1.25 (1.25 + 1.5(1.5-1.5) + 0.5(0))

The figure on the right depicts the labor market in equilibrium with employment at _____ million jobs.

100

Reserves: 500 Loans: 1500 Total Assets: 2000 Checking Deposits: 2000 Net Worth: 0 Liabilities and Net Worth: 2000 The required reserve ratio in this economy is _____.

16%

If the current value of GDP is ​$13.28 trillion and the government is planning to increase spending by ​$700 billion​ (all in one​ year), the percentage increase in GDP using the multiplier estimate of the first economist is _____ percent.

3.95 (multiply 0.75 by 0.7 to get .525 and divide that by 13.28. Then multiply by 100)

Suppose the government enacts a stimulus program composed of ​$500 billion of new government spending and ​$100 billion of tax cuts for an economy currently producing a GDP of ​$12,000 billion. If all of the new spending occurs in the current year and the government expenditure multiplier is 1.5​, the expenditure portion of the stimulus package will add ________ percentage points of extra growth to the economy.

6.25 (500 * 1.5 / 12,000)

Using the multiplier estimate of the second economist and the same current value of​ GDP, the percentage increase in GDP is _____ percent.

6.33 (multiply 1.2 by 0.7 to get 0.84 and divide that by 13.28. Then multiply by 100)

As a result of the stimulus​ program, the​ economy's GDP was increased by _______ percentage points over its value without the program.

6.92 (6.25 + 0.67)

What could explain why a decrease in taxes could lead to a​ less-than-proportionate increase in​ output?

A and B only: - Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. - As a result of diminishing returns to current​ consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once.

Central banks undertake quantitative easing programs to​ ____________.

A and C only.

The former chairman of the Federal​ Reserve, Alan​ Greenspan, used the term​ "irrational exuberance" in 1996 to describe the high levels of optimism among stock market investors at the time. Stock market indexes such as the​ S&P Composite Price Index were at an​ all-time high. Some commentators believed that the Fed should intervene to slow the expansion of the economy. Why would central banks want to clamp down when the economy is​ growing?

A and C only.

The graph on the right shows actual and projected estimates of potential GDP and GDP. Potential GDP is also a measure of trend GDP. When is the output​ gap, defined as the percent difference between GDP and potential​ GDP, negative​?

All of the above

How do expansionary policies differ from contractionary​ policies?

All of the above: - Expansionary policies seek to reduce the severity of​ recessions, while contractionary policies seek to slow down the economy when it grows too fast. - Expansionary policies seek to shift the labor demand curve to the​ right, while contractionary policies seek to shift it to the left. - Expansionary policies seek to increase economic growth and increase​ employment, while contractionary policies seek to reduce the risk of excessive price inflation.

Two economists estimate the government expenditure multiplier and come up with different results. One estimates the multiplier at 0.75​, while the other comes up with an estimate of 1.2. Explain why these estimates are different in terms of the assumptions that each economist is making.

Compared to the first​ economist, the second economist must be assuming either a larger induced increase in​ consumption, a smaller crowding out​ effect, or both.

What are the similarities and the differences between monetary and fiscal​ policies? The manner​ (or ways) in which they work. The aspect of the labor market they impact. The result their implementation seeks to achieve. The entities​ (or authorities) that oversee them

D S S D

The figure on the right depicts the​ pre-recession condition of the labor market in equilibrium at point 1. Complete the following to illustrate the impact of a recession in the labor market.

Draw a new demand line under the demand line and label it D2. Plot a point at the intersection of D2 and the top part of the dotted box and label it 2. Plot a point at the intersection of D2 and the supply line and label it 3.

According to the Taylor​ rule, should the Fed raise or lower the federal funds rate when the output gap is negative​?

It should lower the federal funds rate.

In the market on the​ right, suppose the government seeks to directly stimulate the employment of an additional 20 million workers. ​1.) Using the line drawing​ tool, shift the demand curve such that this employment target is achieved.

Make a new demand line to the right of the demand curve that will intersect the supply curve at 120 Quantity of labor

Reserves: 300 Bonds and other investments: 700 Total Assets: 1000 Deposits and other liabilities: 800 Shareholders' equity: 200 Liabilities + Shareholders' equity: 1000

Reserves: 500 Bonds and other investments: 500 Total Assets: 1000 Deposits and other liabilities: 800 Shareholders' equity: 200 Liabilities + Shareholders' equity: 1000

Following the​ Fed's successful open market purchase​, the process that ensues is given by​ ____________.

Short-term interest rates fall>Long-term interest rates fall>Demand for goods and services increases>Labor demand shifts right.

What policies could the government and the central bank use to achieve the goal of slowing down the economic​ expansion?

The government could raise taxes​ and/or reduce​ expenditures, while the central bank could raise interest rates.

Treasury Bonds: 1200 Other bonds: 800 Total Assets: 2000 Reserves: 1400 Currency: 600 Total Liabilities: 2000

Treasury Bonds: 1400 Other bonds: 800 Total Assets: 2200 Reserves: 1600 Currency: 600 Total Liabilities: 2200

Quantitative easing is​ ____________.

all of the above.

Suppose the Fed decides to sell ​$15 billion in Treasury bonds. Assume that the reserve requirement is 6 ​percent, banks hold 3 percent in excess​ reserves, and the public holds no cash. This action by the Fed causes the money supply to _________ by _________ billion.

decrease, $166.67 (15 billion/(6+3))

Suppose traditional monetary and fiscal policy has had only limited success in promoting higher employment. Governments sometimes seek to directly stimulate hiring by the private sector by engineering a shift in the labor _______ curve.

demand

According to your completed​ figure, a recession impacts employment less severely when wages exhibit downward _________.

flexibility

graph

make a vertical line to the right of the red line and plot the intersection

Suppose the Fed conducts an open market PURCHASE. Such an action would be called for if the economy faced the possibility of _________. (if the question says sale, reverse all answers)

recession

The Sylvania Central Bank decides that it wants to cut the money stock in half. It is considering an open market operation. With commercial banks holding 9 percent of their checking deposits as excess reserves and the required reserve ratio equal to the value computed​ above, the Central Bank should _______ bonds worth ______.

sell, $62,500 (divide your last answer by two)

The plan that appears to be the most effective in achieving​ Congress's goal is to​ ____________.

spend ​$4 million on highways.

The​ Fed's open market purchase impacts the federal funds market shown on the right by shifting the __________ reserves.

supply of