ECON2010 Ch15-16

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

If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP.

$250 billion

Refer to Figure 15-7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from

C to B (down and to the left to reach long-run equilibrium).

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 static AD-AS model in the figure above, this would be depicted as a movement from

C to B (down and to the left to reach long-run equilibrium).

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

C to D (up and to the left to reach LRAS but above long-run equilibrium)

An increase in the interest rate

increases the opportunity cost of holding money.

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

The Federal Reserve System's four monetary policy goals are

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

Crowding out refers to a decline in ________ as a result of an increase in ________.

private expenditures; government purchases

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.

Refer to Figure 15-8. In the figure above, if the economy is at point A (to the right of LRAS) the appropriate monetary policy by the Federal Reserve would be to

raise interest rates.

Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 (shift right) if

real GDP increased.

When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

sell Treasury bills.

The Fed can increase the federal funds rate by

selling Treasury bills, which decreases bank reserves.

The Fed's two main monetary policy targets are

the money supply and the interest rate.

Refer to Figure 15-1. In the figure above, the money demand curve would move from Money demand1 to Money demand2 (shift right) if

the price level increased.

Which of the following is an example of discretionary fiscal policy?

the tax cuts passed by Congress in 2001 to combat the recession

The federal government debt equals

the total value of U.S. Treasury bonds outstanding.

Refer to Figure 15-7. Suppose the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

A to B (up and to the right to reach long-run equilibrium).

Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B (up and to the right to reach long-run equilibrium).

Refer to Figure 16-1. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B (up and to the right to reach long-run equilibrium).

Refer to Figure 16-1. An increase in taxes would be depicted as a movement from ________, using the static AD-AS model in the figure above.

B to A (down and to the left).

Refer to Figure 15-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

C to B (down and to the left to reach long-run equilibrium).

Fiscal policy is determined by

Congress and the president.

Monetary policy refers to the actions the

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

Expansionary monetary policy refers to the ________ to increase real GDP.

Federal Reserve's increasing the money supply and decreasing interest rates

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.

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)

a $300 billion decrease in GDP

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 (up and to the right to reach long-run equilibrium) 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 would cause the money demand curve to shift to the left?

a decrease in real GDP

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.

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

The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as

a liquidity trap.

Refer to Figure 15-5. In the figure above, the movement from point A to point B in the money market (movement up along MS with a shift right of MD) would be caused by

an increase in the price level.

Refer to Figure 15-9. In the figure above suppose the economy is initially at point A. The movement of the economy to point B (up and to the right to reach long-run equilibrium). as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market purchase of Treasury bills

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 (down and to the left to reach long-run equilibrium) 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

Refer to Figure 15-2. In the figure above, the movement from point A to point B in the money market (money supply shift left along MD) would be caused by

an open market sale of Treasury securities by the Federal Reserve.

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.

When the Fed embarked on a policy known as quantitative easing, they

bought longer-term securities than are usually bought in open market operations.

Refer to Figure 15-3. In the figure above, when the money supply shifts from MS1 to MS2 (money supply shift right along MD), at the interest rate of 3 percent households and firms will

buy Treasury bills.

The aggregate demand curve will shift to the right ________ the initial increase in government purchases.

by more than

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the

decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods.

An increase in the demand for Treasury bills will

decrease the interest rate on Treasury bills.

An increase in the money supply will

decrease the interest rate.

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.

The government purchases multiplier equals the change in ________ divided by the change in ________.

equilibrium real GDP; government purchases

The tax multiplier equals the change in ________ divided by the change in ________.

equilibrium real GDP; taxes

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

federal funds rate.

The interest rate that banks charge other banks for overnight loans is the

federal funds rate.

Fiscal policy refers to changes in

federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand.

Automatic stabilizers refer to

government spending and taxes that automatically increase or decrease along with the business cycle.

Refer to Figure 16-2. In the graph above, if the economy is at point A (left of LRAS), an appropriate fiscal policy by Congress and the president would be to

increase government expenditures.

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase.

An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________.

increase; decrease

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

increase; fall; rises

The tax multiplier

is negative.

Refer to Figure 15-6. In the figure above, if the economy is at point A (left of LRAS) the appropriate monetary policy by the Federal Reserve would be to

lower interest rates.

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 ________.

lower; lower

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.

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.

multiplier

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded.

Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.

partial crowding out; complete crowding out

The tax wedge is the difference between the

pretax and posttax returns to an economic activity.

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics.

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

Economists who believe the supply-side effects of tax cuts are small essentially believe that

tax cuts mainly affect aggregate demand.

If the Fed raises its target for the federal fund rate, this indicates that

the Fed is pursuing a contractionary monetary policy.

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.

The federal funds rate is

the interest rate banks charge each other for overnight loans.

An increase in the price level causes

the money demand curve to shift to the right.

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

use open market operations to buy Treasury bills

Refer to Figure 16-11. In the graph above, the rightward shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion.

would be greater than

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B (up and to the right to reach long-run equilibrium).

Refer to Figure 15-7. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

A to E (down and to the right to LRAS but below long-run equilibrium)

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to E (down and to the right to LRAS but below long-run equilibrium)

An increase in individual income taxes ________ disposable income, which ________ consumption spending.

decreases; decreases