Econ Podcast and EOC Questions

unexpected inflation results from:

cost push and demand pull inflation and equals the difference between total and expected inflation

The president unexpectedly announces a tariff on aluminum and steel. This causes

cost-push inflation

A decrease in rare metals used in production will

create negative cost-push inflation, shifting the Phillips curve out.

an increase in the price of oil:

creates supply-push inflation throughout the economy

why does inflation tend to occur when the economy is growing rapidly?

high levels of demand lead to higher prices

An increase in government purchases or in transfer payments will

increase GDP by more than that initial amount because it produces extra income across the economy.

How can increases in government spending crowd out investment spending?

increases the real interest rate, which reduces private investment spending.

If actual output is greater than potential output, the Fed would respond by

increasing real interest rates to try to reduce aggregate demand and inflation.

which way does the labor market Phillips curve slope?

slopes downwards since a more positive output gap is associated with lower levels of unemployment -excess demand leads to higher inflation

which way does the Phillips curve slope?

slopes upwards since a more positive output gap is associated with more unexpected inflation -excess demand leads to higher inflation

If the output gap has shifted without much movement in the real interest rate, it suggests that there's been a

spending shock

In the early months of the pandemic, the Federal Reserve reduced interest rates to near zero in order to:

stimulate aggregate demand.

If inflation rises in a weak economy or falls in a strong economy, while there is no change in the real interest rate, that points to a

supply shock

Fiscal policy is best implemented when it is

targeted, timely, temporary

Policy makers tend to want to achieve:

temp. higher output and overheat the economy, causing higher inflation, which leads to higher expected inflation in the future. The temp. increase in output eventually dissipates, but higher inflation persists.

What curve links the real economy and how much output people want to buy with inflation?

the Phillips curve

Policy makers announce that effective next week, the federal minimum wage will be $15 an hour. This will cause

the Phillips curve to shift upward

You are the managing director of a small local bank. The Fed announces that it is moving its federal funds rate target from 2.25% up to 3.0%. What happens to the FFR?

the federal funds rate will increase the interest rates on the business lines of credit and personal loans you make. -you would change long-term rates if you believe the change in the federal funds rate will be long‑lasting.

If the Fed raises the interest rate on excess reserves:

- the marginal cost to banks of loaning money rises. -supply of loanable funds falls, pushing interest rates up. -banks raise interest rates on car, student loans, etc.

What are two potential caveats that are not reflected in the interaction between the IS-MP and Phillips framework?

-Actual output can suffer changes that may not be reflected in the model if potential output also moves with it. -The IS-MP model does not factor in changes in output due to changes in input prices.

Why didn't the Phillips curve shift in response to a shift in the MP curve?

-Changes in the output gap affect the wedge between inflation and inflation expectations. -The IS-MP framework affects demand-pull inflation. -Only shifts in aggregate supply shift the Phillips curve.

With the advent of big data and increased computing power, some people have advocated for monetary policy by algorithm. Basically, real time data are fed into a program that then determines monetary policy decisions. What are some potential benefits of this approach?

-Changes to monetary policy would be perfectly predictable. -It would prevent the Fed from engineering potentially inflationary short‑term economic booms.

IS curve shifts left and results in lower inflation, what could cause this?

-Decreased business confidence recently revealed in a recent business confidence index estimate. -Recent legislation that reduced government spending on infrastructure. -Decreased consumer wealth stemming from depressed asset prices.

How the Fed operates

-The Fed is an independent government agency. -The Fed is overseen by the federal government. -The Fed conducts monetary policy through open market operations.

A political candidate has written an op-ed piece in which she claims that the U.S. government debt has continually grown and is out of control. In what ways might the political candidate's arguments be misleading?

-The graph depicts the absolute size of the debt, whereas the sustainability of the debt depends on the size of the debt relative to the size of the economy. -Government debt differs from household debt in that the government has ways of handling debt that households lack. -The graph depicts gross government debt, whereas what matters is net government debt.

What factors shift MP up?

-an event caused financial institutions to increase the risk premium -the Fed increased the federal funds rate -causes a recessionary EQ: lower inflation

Select the tool(s) the Fed uses to create a lower bound for the federal funds rate.

-borrows money overnight from financial institutions. -pays banks interest on excess reserves.

Select the tool(s) the Fed uses to incentivize financial institutions to move the federal funds market to the targeted federal funds rate.

-buys and sells gov. bonds -pays banks interest on excess reserves -lends directly to banks through the discount window. -borrows money overnight from financial institutions.

Why does the Fed target inflation rather than unemployment?

-can influence unemployment with tools it uses to target inflation, since inflation and unemployment are interdependent. -has many tools to influence inflation over the long run but none to influence unemployment over the long run.

What are some ways in which government debt differs from personal debt?

-can pay its debt using options that households do not have in paying off theirs. -can pay its debt over multiple generations, whereas individuals cannot.

Examples of a spending shock

-change in aggregate expenditure -shift in the IS curve -decrease in consumption

Examples of a supply shock

-change in production costs that lead to a change in output -shift in the Phillips curve -change in input prices

Examples of financial shocks

-change in the real interest rate -shift of the MP curve -change in monetary policy

Which of the following are reasons why the Fed targets an inflation rate greater than 0%?

-enables the Fed to more effectively fight recessions. -enables the labor market to function more smoothly. -helps avoid the risk of deflation

What are some key ways in which government spending and tax expenditures differ?

-government spending explicitly subtracts from the federal budget, whereas tax expenditures reduce the tax revenue available for government spending. -government spending must be renewed or evaluated each year, whereas tax expenditures renew automatically.

Explain how the initial increase in the federal minimum wage for low‑wage earners could lead to a wage‑price spiral throughout the economy.

-increased disposable income -greater demand -higher prices

Shifts the Phillips curve

-inflations was greater than people forecasted, despite an output gap of zero. -a freeze destroys crops across the US.

Select the tool(s) the Fed uses to create an upper bound for the federal funds rate.

-lends directly to banks through the discount window.

The Fed's lender of last resort function gives rise to which of the following tradeoffs?

-limits the severity of financial crises but incentivizes financial firms to take on extra risk. -prevents potentially destructive failures of major financial institutions but places public money at risk.

How might you find the best estimate of the likely inflation rate?

-look at financial markets -analyze surveys of people's inflation expectations -obtain the ave. forecast of many economists

Steps the government could take to stabilize the economy

-lower taxes -increase gov. spending -increase transfer payments

Why might requiring the federal government to balance its budget each year limit its ability to respond to an economic downturn?

-prevent the government from employing an expansionary fiscal policy, since increased government spending would have to be offset by increased taxes. -compel the government to cut spending to offset lost tax revenues, which decline during recessions.

Steps the government should not or cannot take to stabilize the economy

-raise taxes -decrease gov. spending -decrease transfer payments -raise real interest rates -lower real interest rates

How can the Fed and Gov. ease a recession

-reduce the federal funds rate -gov. can increase government purchases

Use the three Ts of fiscal policy to explain the challenges faced when using discretionary fiscal policy to counter a recession.

-target the specific regions and groups of workers who need help the most. -be used only for as long as needed to avoid crowding out. -be implemented before economic conditions have severely worsened.

The Fed has decreased the federal funds rate—a nominal short‑term interest rate—to 0%, and yet the economy is still struggling. Which of the following actions could the Fed take to further stimulate the economy?

-use forward guidance -use quantitative easing

A rapid influx of foreign investment causes the output gap to become more positive. This gives rise to

Demand-pull inflation

Of the following reasons, which one is a legitimate concern about having too much government debt.

Excess government borrowing may crowd out spending on more productive projects or investments.

In response to concerns about rising national debt, the federal government passes a new bill that dramatically reduces government spending on education and the military. This will shift the

Is curve to the left, a decrease in output, no change in the IR, and an decrease in inflation.

The election of a new president leads households to become more hopeful about their future economic prospects, which leads them to increase their consumption. This will shift the

Is curve to the right, an increase in output, no change in the real IR, an increase in inflation

Predict how the Fed would likely respond if the output gap became more positive, so that output moved from being 0.1% above potential output to being 3% above potential output, and inflation rose above its 2% target rate.

It will set a higher interest rate target, an unemployment would increase

You open the newspaper and read that Europe is headed for a recession. Use the Fed model to forecast what you expect to happen to the U.S. economy.

Macro shock that decreases US. agg. expenditure, due to a decrease in net exports. -moves IS curve back and a point moves left on Phillips curve.

Seana owns a small pet shop and expects inflation to be 3% next year. How much does she expect marginal costs and competitors prices to change?

She expects both marginal costs and competitors prices to change by 3%

80% of federal government spending

Social insurance programs plus spending on military and veteran's benefits

When there are few jobs available and unemployment is high in an economy, the amount of funding spend on unemployment claims rises. This is an example of

an automatic stabilizer.

when the federal government spends more than it's revenue in a given year

budget deficit

the Fed adjusts the federal funds rate by:

buying and selling short‑term government bonds (quantitative easing)

vehicle automation has made production more efficient, how does this affect the Phillips curve and inflation?

causes a downward shift in the Phillips curve, causing lower unexpected inflation

A financial shock will

change the real interest rate, which affects the output gap and hence the inflation rate.

expected inflation results from:

collective feelings about inflation in the future and causes future inflation

movement along the Phillips curve

consumer confidence increases unexpectedly, creating a more positive output gap.

inflation expectations in the United Kingdom fell from 2.9% to 2.6%. If nothing else changes in the economy, this will

decrease inflation

The FOMC is presented with data and analysis showing that the output gap has gone from nearly 0 to large and negative. Additionally, inflation is 1.2% instead of the target rate, 2%. Using the floor framework, the FOMC is likely to influence interest rates by:

decreasing the interest rate it pays on excess reserves and decreasing its overnight borrowing from financial institutions. -Additionally, the FOMC is likely to decrease the discount rate.

A change in the amount of government purchases will

directly increase or decrease GDP. This is because something is purchased or produced in the transaction.

Congress levies a $1000 tax cut on car manufactures to expand social security. How does this impact unexpected inflation

does not change unexpected inflation, as managers have sufficient time to incorporate these increased costs into their expectations

state government spending goes to

employment and income support, and one-fifth goes toward education.

countries with independent central banks:

face less short-term political pressure. This allows the central banks to make good long term decisions regarding the economy. -have lower inflation on ave. bc they are better equipped to balance the economy over the long run.

How do automatic stabilizers respond when output is above potential output?

falls and tax payments rise to help keep the economic expansion in check.

How does the saying, "The federal government is an insurance company with a military," while exaggerating a bit, describe U.S. federal government spending?

federal government spends the vast majority of its budget on the military and social insurance.

If the real interest rate changes, that's evidence that the economy has been hit by a

financial shock

A change in the amount of transfer payments will

indirectly increase or decrease GDP. This is because nothing is purchased or produced when a change is made.

If the price of coffee in Venezuela increased by 81,150%, what will happen to inflation in the future?

inflation expectations will rise, which causes higher inflation in turn

Inflation expectations are a self fulfilling prophecy because

inflation managers will raise their prices by whatever rate they expect and create that level of inflation

Is crowding out a major concern when actual output is below potential output?

is not a major concern, because the Fed will likely lower the real interest rate when actual output is far below potential.

How does mandatory government spending differ from discretionary government spending?

is set by law, whereas discretionary spending is appropriated annually.

Inflation occurs when actual output is:

more than potential output

The economy is currently producing 5% less output than its potential. In an attempt to boost output, the federal government announces an unexpected stimulus package that you expect will increase output to 5% above potential. How does the Philips curve change?

movement upwards and right along the curve (higher output and expected inflation)

the accumulation of everything owed by the government plus interest.

national debt

Policy makers announce that the federal minimum wage will increase to $15 an hour over the next 10 years by annual increases of $0.78. This will cause

no change in the Phillips curve

A supply shock will

not affect either the real interest rate or the output gap but will change the inflation rate.

A spending shock will

not affect the real interest rate but will affect the output gap and hence the inflation rate.

Why does the Fed use interest rates to influence the economy?

opportunity cost of spending today; by varying interest rates, the Fed nudges people and businesses to spend more or less today, which affects the level of economy activity.

If the growth rate of GDP is higher than the real IR, then:

our ability to pay back debts rises

In an effort to encourage people to purchase electric cars, the federal government passes a tax credit of $2,500 for each new electric car that is bought in the United States. This policy will primarily benefit those who

pay more than $2,500 in taxes each year. -will also increase the number of electric cars sold

A breakthrough in solar power technology decreases the price of energy. This will shift the

phillips curve down, no change in the output gap or real interest rate, and a decrease in inflation

The Fed model is used to:

predict what happens to the economy when a shock occurs.

The biggest chunk of local government spending goes to

public primary and secondary education, followed by smaller chunks for various community services.

When the federal reserve tries to influence long-term interest rates by buying and selling long-terms bonds, it is referred to as

quantitative easing

The Fed does not directly set the federal fund rate but it is able to announce that it will borrow any amount of money overnight from banks at a specific interest rate. This effectively

sets a floor for the federal funds rate.

In a shock to financial markets, the Federal Reserve announces that it will decrease the federal funds rate from 3% to 1.5%. This will shift the

shifts MP down, increases output, decreases IR, and increases inflation

Betsey mentions that the U.S. national debt is projected to rise in the coming years because

the government has obligations to the aging portion of the population for retirement and healthcare.

Why does the Fed pay such close attention to GDP, if its mandate is to promote maximum employment while keeping prices stable?

the maximum sustainable level of employment occurs when the economy's GDP is equal to its potential GDP.

If the Fed pushes rates down:

the opportunity cost of borrowing falls. The level of output in the economy should increase.

Government spending should be countercyclical because the spending can boost GDP, but also because

the opportunity cost of resources is lower.

Inflation last year was 5%, unemployment was low, GDP was high, and geopolitical tensions led oil prices to rise by 50%. What will happen to annual inflation?

the rate will be above 5%

The debt-to-GDP ratio in 2021 was about 100%. This means

the total government debt owed was equal to it's total income in 2021.

Business owners determine how much to raise their prices based on

their inflation expectations

The main goal of any country's central bank is

to maintain low and stable inflation rates

The Monetary National Income Analogue Computer (MONIAC) illustrates the interdependencies in the economy using:

water

Quantitative easing is:

when the Fed buys long‑term government bonds and securities in order to put downward pressure on long‑term interest rates. -considered unconventional monetary policy -may be used when the FFR has hit the zero lower bound