econ exam 3
How do lower taxes affect aggregate demand?
They increase disposable income, consumption, and aggregate demand.
Spending on the war in Afghanistan is essentially categorized as government purchases. How do decreases in spending on the war in Afghanistan affect the aggregate demand curve?
They will shift the aggregate demand curve to the left.
In October 2008, Congress passed the ________, under which the Treasury provided funds to banks in exchange for stock.
Troubled Asset Relief Program (TARP)
On the long-run aggregate supply curve
a decrease in the price level has no effect on the aggregate quantity of GDP supplied.
The level of aggregate supply in the long run is not affected by
changes in the price level.
In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending.
complete
Higher personal income taxes
decrease aggregate demand.
An increase in the money supply will
decrease the interest rate.
Potential GDP is also referred to as
full-employment GDP.
An increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand.
Congress and the president carry out fiscal policy through changes in
government purchases and taxes.
Increases in the price level
increase the quantity of money needed for buying and selling.
Deflation will
increase the quantity of real GDP demanded.
Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to
increase.
A decrease in individual income taxes ________ disposable income, which ________ consumption spending.
increases; increases
Stagflation occurs when
inflation rises and GDP falls.
The ________ curve is vertical.
long-run aggregate supply
A decrease in real GDP can
shift money demand to the left and decrease the interest rate.
For the federal deficit to be lowered
the federal government's expenditures must be lower than its tax revenue.
When the economy enters into a recession, your employer is ________ to reduce your wages because ________.
unlikely; lower wages reduce productivity and morale
Which of the following describes what the Fed would do to pursue an expansionary monetary policy?
use open market operations to buy Treasury bills
If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP.
$250 billion
Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the basic AD-AS model in the figure above, this would be depicted as a movement from
C to D.
Which of the following is considered contractionary fiscal policy?
Congress increases the income tax rate.
Refer to Figure 13-1. Ceteris paribus, a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would result in U.S. exports increasing faster than U.S. imports. This would be represented by a movement from
AD1 to AD2.
Refer to Figure 13-1. Ceteris paribus, a decrease in government spending would be represented by a movement from
AD2 to AD1.
Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run?
Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
Suppose the Fed increases the money supply. Which of the following is true?
At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.
Refer to Figure 13-3. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP.
B and D
Refer to Figure 16-1. An increase in taxes would be depicted as a movement from ________, using the basic AD-AS model in the figure above.
B to A
Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the basic AD-AS model in the figure above, this would be depicted as a movement from
C to B.
An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may A) reduce investment in new capital. B) make domestic businesses less competitive in international markets as the dollar appreciates in value. C) raise interest rates and reduce consumer expenditures on automobiles and new houses. D) All of these are correct.
D) All of these are correct.
Reducing the marginal tax rate on income will A) reduce the tax wedge faced by workers and increase labor supplied. B) raise the return to entrepreneurship and encourage the opening of new businesses. C) increase the after-tax return on saving, and encourage saving. D) All of these are correct.
D) All of these are correct.
Refer to Figure 15-10. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
an open market sale of Treasury bills
The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
automatic stabilizers.
If policymakers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to
be below potential GDP.
Refer to Figure 15-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will
buy Treasury bills.
Fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle.
The federal budget deficit acts as an automatic stabilizer because
government tax revenues decrease during a recession.
Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result
he short-run aggregate supply curve will shift to the left as wages increase.
Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________
higher; higher
Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to ________ taxes, which would cause aggregate demand to ________.
increase; decrease
The international trade effect states that a(n) ________ in the price level will ________ net exports.
increase; decrease
An increase in investment causes the price level to ________ in the short run and ________ in the long run.
increase; increase further
A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.
increasing; increasing
The multiplier effect refers to the series of
induced increases in consumption spending that result from an initial increase in autonomous expenditures.
Refer to Figure 16-12. An increase in government purchases causes aggregate demand to shift ultimately from AD1 to AD2. In the new equilibrium at point B, both real GDP and the price level have increased. The increase in real GDP is ________ than that indicated by the multiplier effect with a constant price level.
less than
The money demand curve has a negative slope because
lower interest rates cause households and firms to switch from financial assets to money.
When the economy enters a recession, your employer is unlikely to reduce your wages because ________ during a recession.
lower wages increase your incentive to find employment elsewhere.
Rising prices erode the value of money as a ________ and as a ________.
medium of exchange; store of value
When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have
more money than they want to hold.
An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by
more than $200 billion.
An increase in the price level will
move the economy up along a stationary aggregate demand curve.
If the amount you owe on your house is greater than the price of the house, you have
negative equity in your house.
The money demand curve has a
negative slope because an increase in the interest rate decreases the quantity of money demanded.
Government deficits tend to increase during
periods of war and recession.
Refer to Figure 13-2. Ceteris paribus, an increase in the price level would be represented by a movement from
point A to point B.
The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly.
positive; final goods and services; inputs
When the price level falls from 135 to 120, the aggregate level of GDP supplied falls from $140 billion to $125 billion. This ________ relationship represents the ________ relationship between GDP and the price level.
positive; short-run
Although the Federal Reserve had traditionally made discount loans only to commercial banks, in response to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.
primary dealers
Firms that participate in regular open market transactions with the Federal Reserve are called
primary dealers.
Crowding out refers to a decline in ________ as a result of an increase in ________.
private expenditures; government purchases
The money market model is concerned with ________ and the loanable funds market model is concerned with ________.
short-term nominal interest rates; long-term real interest rates
If rapid increases in oil prices caused price levels to increase and real GDP to decrease in the short run, the economy would experience
stagflation.
Economists who believe the supply-side effects of tax cuts are small essentially believe that
tax cuts mainly affect aggregate demand.
Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment.
taxes; expenditures
Firms that participate in regular open market transactions with ________ are called primary dealers.
the Federal Reserve
Long-run macroeconomic equilibrium occurs when
the aggregate demand and short-run aggregate supply curves intersect at a point on the long-run aggregate supply curve.
The monetary policy target the Federal Reserve focuses primarily on today is
the interest rate.
If technological change occurs in the economy
the long-run aggregate supply curve will shift to the right.
if the economy receives an influx of new workers from immigration
the long-run aggregate supply curve will shift to the right.
The long-run adjustment to a negative supply shock results in
the short-run aggregate supply curve shifting to the right.
Workers and firms both expect that prices will be 3% higher next year than they are this year. As a result
the short-run aggregate supply curve will shift to the left as wages increase.
Which of the following is an example of discretionary fiscal policy?
the tax cuts passed by Congress in 2001 to combat the recession
Which of the following explains why mortgages weren't considered securities prior to 1970?
Prior to 1970, mortgages were rarely resold in the secondary market.
Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?
They will shift the aggregate demand curve to the right.
If the U.S. dollar increases in value relative to other currencies, how does this affect the aggregate demand curve?
This will shift the aggregate demand curve to the left.
The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?
This will shift the aggregate demand curve to the left.
By the 2000s, investment banks had become significant participants in the secondary market for mortgages.
True
Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?
a decrease of less than $80 billion
A decrease in the price level will
move the economy down along a stationary short-run aggregate supply curve.
Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.
multiplier
Refer to Figure 13-1. Ceteris paribus, an increase in the price level would be represented by a movement from
point B to point A.
According to the "wealth effect," when the ________ falls, the ________ rises.
price level; the real value of household wealth
Which of the following are goals of monetary policy?
price stability, economic growth, and high employment
With the federal funds rate near zero and the economy still struggling, in response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as
quantitative easing.
A decrease in aggregate demand results in a(n) ________ in the ________
recession; short run
When the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run.
rises; rises
When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to
sell Treasury bills.
To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac
sell bonds to investors and use the funds to purchase mortgages from banks.
Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.
sell; up
A rapid increase in the price of oil will tend to
shift short-run aggregate supply to the left.
In 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico. This subsequently drove up natural gas, gasoline, and heating oil prices. As a result, this should
shift the short-run aggregate supply curve to the left.
Workers expect inflation to fall from 4% to 1% next year. As a result, this should
shift the short-run aggregate supply curve to the right.
The ________ curve has a positive slope because as prices of final goods and services rise, prices of inputs rise more slowly.
short-run aggregate supply
If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
taxes.
If the Fed raises its target for the federal fund rate, this indicates that
the Fed is pursuing a contractionary monetary policy.
If the Fed lowers its target for the federal funds rate, this indicates that
the Fed is pursuing an expansionary monetary policy.
A negative supply shock in the short run causes
the aggregate supply curve to shift to the left.
Suppose a developing country experiences a reduction in machinery and capital equipment as foreign entrepreneurs decrease the amount of investment in the economy. As a result
the long-run aggregate supply curve will shift to the left.
suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result
the long-run aggregate supply curve will shift to the right.
An increase in the price level causes
the money demand curve to shift to the right.
The Fed's two main monetary policy targets are
the money supply and the interest rate.
When the Fed uses contractionary policy
the price level rises less than it would if the Fed did not pursue policy
Refer to Figure 15-7. Suppose the Fed lowers its target for the federal funds rate. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from
A to B.
Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the basic AD-AS model in the figure above, this would be depicted as a movement from
A to B.
Refer to Figure 16-1. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the basic AD-AS model in the figure above, this would be depicted as a movement from
A to B.
Refer to Figure 13-1. Ceteris paribus, a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from
AD2 to AD1.
Despite saving Lehman Brothers from failing, the Fed and the Treasury decided to allow Bear Stearns to go bankrupt, which it did in September, 2008.
False
In 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was the Treasury's move to have the federal government take control of
Fannie Mae and Freddie Mac.
Which of the following is one explanation as to why the aggregate demand curve slopes downward?
Increases in the U.S. price level relative to the price level in other countries lowers net exports.
Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?
Potential GDP is forecasted to be higher than equilibrium GDP.
In which of the following situations would the Fed conduct contractionary monetary policy?
The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.
A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?
The price level will fall, and the level of GDP will be unaffected.
An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?
The price level will rise, and the level of GDP will be unaffected.
Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?
Unemployment will decline.
Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?
Unemployment will rise.
If the federal government's expenditures are less than its tax revenues, then
a budget surplus results.
In the long run, most economists agree that a permanent increase in government spending leads to
a decrease in private spending by the same amount that government spending increased.
Which of the following would increase the size of the government purchases multiplier?
a decrease in the amount saved by households from an increase in income
Contractionary monetary policy on the part of the Fed results in
a decrease in the money supply, an increase in interest rates, and a decrease in GDP.
An increase in the interest rate causes
a movement up along the money demand curve.
A financial asset is considered ________ if it can be sold in a secondary market.
a security
Contractionary monetary policy causes
aggregate demand to fall and the price level to fall.
The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as
an automatic mechanism.
Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?
an increase in government purchases
On the long-run aggregate supply curve
bring real GDP back to potential GDP more quickly but would result in a permanently higher price level.
The aggregate demand curve will shift to the right ________ the initial increase in government purchases.
by more than
Expansionary fiscal policy
can be effective in the short run.
Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
decrease.
An increase in interest rates
decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.
Changes in the price level
do not affect the level of aggregate supply in the long run.
When housing prices ________, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements decline as many households find it ________ to borrow against the value of their homes.
fall; harder
The interest rate that banks charge other banks for overnight loans is the
federal funds rate.
Suppose the economy is in long-run equilibrium and there is an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.
increase; decrease to its initial value
A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.
increase; increase
Last week, 13 Mexican pesos could purchase one U.S. dollar. This week, it takes 11 Mexican pesos to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Mexico and ________ U.S. aggregate demand.
increase; increase
The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.
induced; consumption; autonomous
Long-run macroeconomic equilibrium occurs when the aggregate demand curve ________ the short-run aggregate supply curve, and they ________ the long-run supply curve.
intersects; intersect at a point on
Which of the following would not be considered an automatic stabilizer?
legislation increasing funding for job retraining passed during a recession
Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply
lowers the interest rate, and firms increase investment spending.
Refer to Figure 13-3. Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?
C
Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from ________ using the basic AD-AS model in the figure above.
C to B
Fiscal policy is determined by
Congress and the president.
Which of the following is considered expansionary fiscal policy?
Congress decreases the income tax rate.
If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium
GDP will be below potential GDP
________ of unemployment during ________ make it easier for workers to ________ wages.
High levels; a recession; accept lower
if full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?
It is a vertical line at $4.2 trillion of GDP.
If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look like?
It is a vertical line at $600 billion of GDP.
The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do the short-run supply curve?
It shifted the short-run aggregate supply curve to the right.
________ of unemployment during ________ make it easier for workers to ________ wages.
Low levels; an expansion; negotiate higher
Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?
Real equilibrium GDP will rise.
Refer to Figure 13-2. Ceteris paribus, an increase in the number of workers and firms adjusting to having previously underestimated the price level would be represented by a movement from
SRAS2 to SRAS1.
Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
Short-run aggregate supply will shift to the left.
The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?
The Fed lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves.
Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?
a decrease in income taxes
Which of the following will shift the aggregate demand curve to the left, ceteris paribus?
an increase in interest rates
Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
an increase in net exports
An equal increase in government purchases and taxes will cause
an increase in real GDP.
A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending.
an induced; an autonomous
Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Sweden and ________ U.S. aggregate demand.
decrease; decrease
An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
decrease; rise; falls
An increase in individual income taxes ________ disposable income, which ________ consumption spending.
decreases; decreases
For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the
federal funds rate.
Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.
discretionary fiscal policy; automatic stabilizers
When the price of a financial asset ________ its interest rate will ________.
falls; rise
When the price level in the United States falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise.
imports; exports; net exports
Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to
increase government expenditures.
If Congress wanted to counteract the effects of a recession it could
increase government purchases.
Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to
increase government transfer payments.
An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.
real GDP; the price level
If firms and workers could predict the future price level exactly, the short-run aggregate supply curve would be
vertical.
By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ________ and "Alt-A" borrowers ________
with flawed credit histories; who did not document their incomes
