Econ test 4

Suppose Congress passes a $10,000 spending bill and the marginal propensity to consume for each consumer is .8. What will be the increase in Aggregate Demand from the spending bill?

$50,000

If a $500 increase in reserves ultimately leads to a $2,000 increase in the money supply, the reserve ratio is

0.25

During what period did this economy experience disinflation?

2001 to 2005

(look at graph #26) During what period did this economy experience deflation

2003 to 2005

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The average tax rate for a person earning $35,000 is

4.3

The maximum amount of time that a person can receive welfare payments is _____ during a lifetime.

5 years

An increase in the money supply typically affects the economy with a lag that varies in time from

6-18

The best type of negative shock for the Federal Reserve to respond to is a negative shock to

AD.

Which of the following limits the effectiveness of fiscal policy?

Crowding out

The purpose of FICA taxes is to fund

Social Security payments

Which is an example of quantitative easing by the Federal Reserve?

The Fed purchases $50,000 worth of long-term government bonds

Clinton's administration experienced a federal budget surplus. Which of the following is therefore correct?

The national debt held by the public decreased.

What demographic change in the United States will cause government spending to increase in the next 50 years?

The population older than 65 will grow

Legislative Lag

The time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called the

Legislative Lag

The time necessary for Congress to propose and pass a fiscal policy plan is called the

Effectiveness Lag

The time necessary for a fiscal policy plan to have an impact is called the

Implementation Lag

The time necessary for government bureaucracies to carry out a fiscal policy plan is called the

Recognition Lag

The time necessary to determine that an economic problem exists is called the

Which of the following statements about the Social Security program is correct?

Women, who generally live longer than men, benefit more from the system

A liquid asset is

an asset that can be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments.

When the government conducts fiscal policy, it can make up for a decrease in C with

an increase in G

When the government conducts fiscal policy, it makes up for a decrease in with

an increase in G

(#31) This economy initially begins at point A and a negative supply shock takes it to point Y. Taking the economy back to the original LRAS curve would require:

an inflation rate much greater than 16%

Which is not included in the U.S. money supplies M1 and M2?

bond mutual funds

The FICA tax burden is

borne more by the employee even though the employer contributes an equal dollar amount

If the Fed overreacts to a negative spending shock by increasing money growth too much

both real GDP growth and inflation will increase more than the Fed prefers

An increase in money growth will cause the inflation rate to increase in:

both the short run and the long run.

To increase the money supply in the economy, the Fed would

carry out open market purchases and/or lower the discount rate

To increase the money supply in the economy, the Fed would

carry out open market sales and/or raise the reserve ratio

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

consumers used much of the rebate to pay off existing debt

What are the four major limits to fiscal policy?

crowding out, a drop in the bucket, a matter of timing, and real shocks

Which of these would help a government fight a recession?

cutting taxes

In a fractional reserve banking system, banks hold only a fraction of their

deposits as reserves

When C falls, the LRAS curve

does not move

The medicare program offers health-care benefits for the

elderly

When countries have severe debt problems

expansionary fiscal policy can reduce real growth

When the Fed buys short-term Treasury securities, short-term interest rates

fall

Which statement pertains to the condition of crowding out

gov cuts taxes, resulting in an increase in investment spending by $270 million

The primary tools of fiscal policy are

government expenditure and taxation

Fiscal policy can best be defined as the use of:

government expenditure, borrowing, and taxation to influence the business cycle.

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising

inflation

Government spending on "interest on the debt" refers to

interest paid to owners of government debt held by the public

The alternative minimum tax

is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes

Whereas covers the elderly, covers the poor and the disabled

medicare; medicaid

Which is a limitation of monetary policy in stabilizing the economy?

monetary policy is subject to uncertain lags

Debt held outside the U.S. government is called the:

national debt held by the public

When the text refers to the current U.S. national debt, it means the

national debt held by the public

The annual di↵erence between federal spending and revenues is called the

national deficit.

the money you pay into social security goes

pay current beneficiaries

(look at graph #30) This economy initially begins at point A and a negative supply shock takes it to point Y. If the Fed reacts by increasing money growth by 9%, this would take the economy to:

point V

The medicaid program offers health-care benefits for the

poor and disabled

Which is not a function of the Federal Reserve?

providing loans to small businesses

The Term Auction Facility involves the Federal Reserve

providing reserves to banks through auction

the us social security tax (FICA) is an example

regressive tax

When C falls, the aggregate demand curve:

shifts to the left

he largest spending program for the U.S. federal government is

social secruity

When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered

solvent; illiquid

What is the overnight lending rate from one bank to another?

the Federal Funds rate

Systemic risk is present when:

the failure of one financial institution will bring down other institutions as well.

The largest source of revenue for the U.S. federal government is:

the individual income tax.