Econ Test

A change in tax rates A) has a less complicated effect on GDP than does a tax cut of a fixed amount. B) has a larger multiplier effect the smaller the tax rate. C) will not affect disposable income. D) will not affect the size of the multiplier

b

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises

b

Automatic stabilizers refer to A) the money supply and interest rates that automatically increase or decrease along with the business cycle. B) government spending and taxes that automatically increase or decrease along with the business cycle. C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives. D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

b

Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-‐‑side effect versus no supply-‐‑side effect. Compared to no supply-‐‑side effect, including a supply-‐‑side effect for the decrease in tax rates will cause the price level to increase ________ and real GDP to increase ________. A) less; less B) less; more C) more; less D) more; more

b

During the Great Depression, what appeared to be ________ fiscal policy was actually not when the ________ budget deficit or surplus is examined. A) expansionary; actual B) expansionary; cyclically adjusted C) contractionary; actual D) contractionary; cyclically adjusted

b

Expansionary fiscal policy will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) not shift the aggregate demand curve. D) shift the short-‐‑run aggregate supply curve to the left.

b

Federal government purchases, as a percentage of GDP, A) have risen since the early 1950s. B) have fallen since the early 1950s. C) have remained roughly the same since the early 1950s. D) rose from the early 1950s until the mid 1980s, and then fell.

b

Fiscal policy actions that are intended to have long-‐‑run effects on real GDP attempt to increase ________ through changing ________. A) aggregate demand; government spending B) aggregate supply; taxes C) aggregate demand; taxes D) aggregate supply; government spending

b

Fiscal policy refers to changes in A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to fund the war on terrorism. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

b

For the federal deficit to be lowered, A) the federal government must decrease its spending and increase net exports. B) the federal government'ʹs expenditures must be lower than its tax revenue. C) the Federal Reserve must raise interest rates and lower the required reserve ratio. D) the Federal Reserve must reduce the money supply.

b

From an initial long-‐‑run equilibrium, if aggregate demand grows faster than long-‐‑run and short-‐‑run aggregate supply, then Congress and the president would most likely A) decrease the required reserve ratio. B) decrease government spending. C) decrease oil prices. D) decrease tax rates.

b

If tax reduction and simplification are effective, then A) real wages will rise as labor supply and demand increase. B) saving and investment in new capital will increase. C) interest rates will rise in financial markets and demand for financial assets falls. D) fewer new firms will be established, since existing firms will make more profit.

b

Tax cuts on business income ________ aggregate demand. A) would decrease B) would increase C) would not change D) may increase or decrease

b

The aggregate demand curve will shift to the left ________ the initial decrease in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than

b

The aggregate demand curve will shift to the right ________ the initial decrease in taxes. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than

b

The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than

b

The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle A) destabilize the economy. B) stabilize the economy. C) decrease potential GDP. D) increase potential GDP.

b

The crowding out of private spending by government spending will be greater the A) less sensitive consumption, investment, and net exports are to changes in interest rates. B) more sensitive consumption, investment, and net exports are to changes in interest rates. C) less sensitive consumption, investment, and net exports are to changes in the price level. D) more sensitive consumption, investment, and net exports are to changes in the price level.

b

The government purchases multiplier equals the change in ________ divided by the change in ________. A) government purchases; equilibrium real GDP B) equilibrium real GDP; government purchases C) government purchases; consumption spending D) consumption spending; government purchases

b

The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures. A) induced; investment; autonomous B) induced; consumption; autonomous C) autonomous; consumption; induced D) autonomous; investment; induced

b

The multiplier effect refers to the series of A) autonomous increases in consumption spending that result from an initial increase in induced expenditures. B) induced increases in consumption spending that result from an initial increase in autonomous expenditures. C) autonomous increases in investment spending that result from an initial increase in induced expenditures. D) induced increases in investment spending that result from an initial increase in autonomous expenditures.

b

The tax multiplier equals the change in ________ divided by the change in ________. A) taxes; equilibrium real GDP B) equilibrium real GDP; taxes C) taxes; consumption spending D) consumption spending; taxes

b

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the A) absolute size of the budget deficit or surplus. B) budget deficit or surplus as a percentage of GDP. C) budget deficit or surplus as a percentage of tax revenues. D) budget deficit or surplus as a percentage of government spending.

b

An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises

c

Double taxation refers to A) corporations paying taxes on profits and individuals paying taxes on wage income. B) individuals paying taxes on wage income and individuals paying taxes on dividends. C) corporations paying taxes on profits and individuals paying taxes on dividends. D) corporations paying taxes on capital gains and individuals paying taxes on wage income.

c

During 1970-‐‑1997, the U.S. federal government was A) in surplus every year. B) balanced every year. C) in deficit every year. D) in deficit most of those years.

c

Federal government expenditures, as a percentage of GDP, A) have risen since the early 1950s to the present. B) have fallen since the early 1950s to the present. C) rose from 1950 to 1991, fell from 1992 to 2001, and have risen from 2001 to the present. D) rose from 1950 to 2001 and then fell from 2001 to the present. E) rose from 1950 to 1980, fell from 1981 to 2001, and have risen from 2001 to the present.

c

If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy? A) a decrease in the money supply and an increase in the interest rate B) an increase in government spending C) an increase in taxes D) an increase in oil prices

c

In the long run, most economists agree that a permanent increase in government spending leads to A) no decrease in private spending. B) a decrease in private spending by less than the amount that government spending increased. C) a decrease in private spending by the same amount that government spending increased. D) a decrease in private spending by more than the amount that government spending increased.

c

In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending. A) no B) partial C) complete D) more than complete

c

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009, the largest spending increase occurred in which category? A) energy and the environment B) military, veterans, and homeland security C) health care, social services, and education D) transportation and housing

c

Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally A) less difficult than with monetary policy. B) far less difficult than with monetary policy. C) more difficult than with monetary policy. D) about the same difficulty as with monetary policy

c

The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was A) in a recession. B) in an expansion. C) at potential GDP. D) at potential tax revenue.

c

The tax wedge is the difference between the A) amount of taxes needed to balance the federal budget and the actual amount of taxes. B) amount of taxes needed to pay off the national debt and the actual amount of taxes. C) pretax and posttax returns to an economic activity. D) nominal and real interest rates.

c

The use of fiscal policy to stabilize the economy is limited because A) changes in government spending and tax rates have a small effect on aggregate demand. B) changes in government spending and tax rates have a small effect on interest rates. C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. D) the Internal Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code.

c

Changes in the federal funds rate usually result in changes in both short-term and long-term interest rates with more of an effect on short-term interest rates. changes in both short-term and long-term interest rates with more of an effect on long-term interest rates. changes in both short-term and long-term interest rates with equal effect on both. no change in both short-term and long-term interest rates.

changes in both short-term and long-term interest rates with more of an effect on short-term interest rates.

The Fed uses discount loans to maintain ______ in the financial system

confidence

4) From an initial long-‐‑run equilibrium, if aggregate demand grows more slowly than long-‐‑run and short-‐‑run aggregate supply, then Congress and the president would most likely A) increase the required reserve ratio and decrease government spending. B) decrease government spending. C) decrease oil prices. D) decrease taxes. E) lower interest rates.

d

5) Which of the following is an objective of fiscal policy? A) energy independence from Middle East oil B) health care coverage for all Americans C) discovering a cure for AIDs D) high rates of economic growth E) homeland security

d

8) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

d

Congress and the president carry out fiscal policy through changes in A) interest rates and the money supply. B) taxes and the interest rate. C) government purchases and the money supply. D) government purchases and taxes.

d

Crowding out refers to a decline in ________ as a result of an increase in ________. A) tax revenues; unemployment B) government purchases; tax rates C) government purchases; private expenditures D) private expenditures; government purchases

d

Cutting taxes A) will lower disposable income and lower spending. B) will raise disposable income and lower spending. C) will lower disposable income and raise spending. D) will raise disposable income and raise spending

d

Fiscal policy is determined by A) the Federal Reserve. B) the president and the Federal Reserve. C) Congress and the Federal Reserve. D) Congress and the president

d

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) an increase of less than $80 billion B) an increase equal to $80 billion C) an increase of greater than $80 billion D) a decrease of less than $80 billion E) a decrease of more than $80 billion

d

The federal government debt equals A) tax revenues minus government spending. B) government spending minus tax revenues. C) the accumulation of past budget deficits. D) the total value of U.S. Treasury bonds outstanding

d

The largest and fastest-‐‑growing category of federal government expenditures is A) grants to state and local governments. B) interest on the national debt. C) national park spending. D) transfer payments.

d

The interest rate that banks charge other banks for overnight loans is the federal funds rate. Treasury bill rate. prime rate. discount rate.

federal funds rate.

The Fed directly influences these monetary policy targets

money supply; interest rate

The Fed has three monetary policy tools at its disposal:

open market operations, discount policy, reserve requirements

When the Federal Reserve System was established in 1913, its main policy goal was encouraging strong economic growth. promoting price stability. keeping employment high. preventing bank panics.

preventing bank panics.

The Federal Reserve System's four monetary policy goals are low rate of bank failures, high reserve ratios, price stability, and economic growth. price stability, low government budget deficits, low current account deficits, and low rate of bank failures. price stability, high employment, economic growth, and stability of financial markets and institutions.

price stability, high employment, economic growth, and stability of financial markets and institutions.

Growth is a _____ goal in many emerging economies.

primary

Stable economic growth encourages ____-___ investment, which itself is necessary for growth.

long-term

Higher interest rates result in a ____ quantity of money demanded.

lower

Rising prices erode the value of money as a ________ and as a ________. unit of barter; unit of account medium of exchange; store of value store of value; unit of barter store of value; unit of liquidity

medium of exchange; store of value

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy goals

monetary policy

If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run. reduce; raise reduce; lower increase; raise increase; lower

reduce; lower

Price Stability + High Employment

Dual Mandate

"responsibility of the Federal government... to foster and promote...conditions under which there will be afforded useful employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power."

Employment Act of 1946

T / F Adhering to the Fed's primary goals satisfies the secondary goals.

T

The Fed uses its three monetary policy tools to try to influence the ____ and ___ rates.

Unemployment; inflation

Money supply's curve is ____ and does not depend on the ____ rate.

vertical; interest

Monetary policy goals: Which are primary

1. Price Stability, 2. High employment, 3. Stability of financial markets and institutions, 4. economic growth, 1 and 2

What causes the money demand curve to shift?

Change in the need to hold money, to engage in transactions.

Monetary policy refers to the actions the President and Congress take to manage government spending and taxes to pursue their economic objectives. Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. President and Congress take to manage the money supply and interest rates to pursue their economic objectives. Federal Reserve takes to manage government spending and taxes to pursue its economic objectives.

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.

A decrease in which of the following would decrease the tax wedge? A) marginal tax rate B) money supply C) national debt D) federal budget deficit

a

An increase in government purchases will increase aggregate demand because A) government expenditures are a component of aggregate demand. B) consumption expenditures are a component of aggregate demand. C) the decline in the price level will increase demand. D) the decline in the interest rate will increase demand.

a

An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier. A) will decrease B) will increase C) will not change D) may increase or may decrease

a

As the tax wedge associated with a given economic activity gets smaller, we would expect A) more of that economic activity to occur. B) the distortions caused by taxes on that activity to be greater. C) people to engage in less of that particular activity. D) no change in the practice of that activity until the tax wedge ultimately disappears

a

Before the Great Depression of the 1930s, the majority of government spending took place at the ________ and after the Great Depression the majority of government spending took place at the ________. A) state and local levels; federal level B) local level; federal level C) federal level; state and local levels D) federal level; state level

a

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect. A) multiplier B) expenditure C) consumption D) aggregate demand

a

Economists who believe the supply-‐‑side effects of tax cuts are small essentially believe that A) tax cuts mainly affect aggregate demand. B) tax cuts mainly affect aggregate supply. C) tax cuts will increase the quantity of labor supplied. D) tax cuts will result in relatively small changes in the price level.

a

Expansionary fiscal policy A) can be effective in the short run. B) causes complete crowding out in the short run. C) is never effective because of crowding out. D) can be effective in the long run.

a

Expansionary fiscal policy involves A) increasing government purchases or decreasing taxes. B) increasing taxes or decreasing government purchases. C) increasing the money supply and decreasing interest rates. D) decreasing the money supply and increasing interest rates.

a

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

a

Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during A) World War I and World War II. B) the Great Depression. C) 1970-‐‑1997. D) the Vietnam war. E) 1998-‐‑1999.

a

If Congress passed a one-‐‑time tax cut in order to stimulate the economy in 2014, and tax rate levels returned to their pre-‐‑2014 level in 2015, how should this tax cut affect the economy? A) The tax cut would increase consumption spending less than would a permanent tax cut. B) The tax cut would increase consumption spending more than would a permanent tax cut. C) The tax cut would increase consumption spending by the same amount as would a permanent tax cut. D) The tax cut would raise the price level in 2014.

a

Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act, which is an example of ________ aimed at increasing real GDP and employment. A) discretionary fiscal policy B) an automatic stabilizer C) contractionary fiscal policy D) a transfer payment

a

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 the above are correct.

a

Tax cuts on business income increase aggregate demand by increasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates.

a

Tax reduction and simplification should ________ long-‐‑run aggregate supply and ________ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

a

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because A) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. B) the Federal Reserve can immediately recognize when real GDP is below or above potential GDP. C) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. D) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time

a

The impact of crowding out may be the least A) during a deep recession. B) when real GDP is above but close to potential GDP. C) during an expansion. D) when real GDP is below but close to potential GDP.

a

The tax multiplier A) is negative. B) is larger in absolute value as compared to the government spending multiplier. C) is a measure of how much taxes will fall when income is falling. D) is always less than one.

a

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods. C) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods. D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods.

a

Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant A) decrease in investment spending. B) decrease in oil prices. C) increase in consumption spending. D) increase in net exports.

a

Which of the following best describes supply-‐‑side economics? A) Labor productivity affects aggregate supply. B) Education affects labor productivity which affects aggregate supply. C) Education affects the incentive to work, save, and invest and, therefore, aggregate supply. D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.

d

Which of the following would be classified as fiscal policy? A) The federal government passes tax cuts to encourage firms to reduce air pollution. B) The Federal Reserve cuts interest rates to stimulate the economy. C) A state government cuts taxes to help the economy of the state. D) The federal government cuts taxes to stimulate the economy. E) States increase taxes to fund education.

d

A decrease in real GDP or a ____ in the price level will shift the money demand curve to the ____.

decrease; left

Stable and efficient financial markets are essential to a growing

economy

The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was increasing employment. fighting inflation. increasing regulation of commercial banks. increasing economic growth. a low current account deficit.

fighting inflation.

All advanced economies have a well-developed

financial system

When the interest rate is ____, alternatives to holding money begin to look attractive--like U.S. Treasury bills.

high

The opportunity cost of holding money is ____ when the interest rate is high.

higher

If more transactions are taking place, what is the effect on GDP?

higher real GDP

An increase in the interest rate increases the opportunity cost of holding money. decreases the opportunity cost of holding money. decreases the percentage yield of holding money. increases the percentage yield of holding money.

increases the opportunity cost of holding money.

If real GDP is higher, the price level ____, and the money demand curve will shift ____.

increases; right

This is the primary monetary policy target of the Fed:

interest rate

The monetary policy target the Federal Reserve focuses primarily on today is the inflation rate. the unemployment rate. the interest rate. M2. M1.

the interest rate.