Economics Chapter 9

Check Understanding What do monetarists believe about monetary policy?

Monetary policy is the most useful tool to improve macroeconomic performance

How do entitlement programs affect the creation of the federal budget?

Their funding is dictated by law, so policy-makers cannot change spending on them.

Identify Main Ideas What is the main tool that the Federal Reserve uses to adjust the money supply?

adjusting the federal funds rate banks charge one another

What is a major concern about Fed policies that lower interest rates and increase lending?

They might produce growing inflation

What kind of government budget best reflects an expansionary fiscal policy?

a budget that increases government spending and reduces taxes

Look at the graph. Which of the following has most likely played a role in changing in the pattern in annual GDP changes between 1920 and the present?

automatic stabilizers

Under what circumstances might the Federal Reserve enact an easy money policy?

businesses are laying off workers and GDP goes down

The use of the right monetary policy tools at the right time can help

even out the business cycle

What is the first step in the federal budget process?

federal agencies propose spending

Apply Concepts What problem can result from expansionary monetary policy that takes effect after the economy has already begun to expand following a period of contraction?

inflation

What causes the crowding-out effect?

large government borrowing

Fiscal Policy (Expansionary)

Government Spending (up) Taxation (Down)

Recall How did President Reagan bring about a shift in U.S. economic policy?

He instituted policies based on supply-side economics

Income and Taxes

Income (up) Taxes (up) Income (down) Taxes (down)

Identify Cause and Effect What would likely happen to interest rates if the supply of money were increased?

Interest rates would go down

Recall What is the most common method the federal government uses to pay for expenditures that exceed revenues?

It borrows more

Why might it be a bad idea to create money to cover budget deficits?

It can cause inflation

Which explains the role of the federal budget in fiscal policy?

It estimates government revenue and authorizes government spending for each year

Monetary Policy (Contractionary)

Sell Bonds RRR (Up) Interest Rates (Up)

How might lowering income taxes during an economic downturn decrease the national debt?

by stimulating the economy, increasing revenues, and decreasing the deficit

Identify Main Ideas During the Great Depression, the federal government followed the ideas of John Maynard Keynes and

increased spending

Identify Which of the following factors contributed to the deficit spending of the 2000s?

increased spending on defense

Identify Central Ideas A basic principle of supply-side theory is that a tax cut

increases economic output

What gives the federal government its enormous power to influence demand through spending?

its ability to levy taxes and borrow money

Stagflation

low GDP High unemployment High inflation

Which of the following is a basic tool the Fed can use to implement monetary policy?

open market operations

Identify The dangers associated with having a large national debt are

the crowding-out effect, high interest payments, and the influence of foreign debt-holders

What would be likely to happen if the Fed raised reserve requirements?

Banks would call in loans

Monetary Policy (Expansionary)

Buy Bonds RRR (Down) Interest Rates (Down)

Express Problems Clearly During the Great Depression, the U.S. economy seemed to defy the theories of classical economics. Which of the following illustrates this point?

Demand should have increased as prices fell, but it did not

Fiscal Policy and the Economy

G (up) Taxes (down) Demand (up) Prices (up) Output (up) G (down) Taxes (up) Demand (down) Prices (down) Output (down)

GDP and Government Spending

GDP (Up) G (up) GDP (down) G (down)

Fiscal Policy (Contractionary)

Government Spending (Down) Taxation (Up)

How might a budget deficit be related to the national debt?

A deficit adds to the debt.

What is money creation?

the process by which money enters into circulation

How did President Reagan apply supply-side economics to promote economic recovery in the 1980s?

through a tax cut

Check Understanding To whom does the government owe the national debt?

to investors who hold government bonds

Identify Main Ideas Which of the following is today the Fed's preferred monetary policy tool?

using open market operations

Budget Deficit

T < G

Which of these economists believed strongly in monetarism, the idea that the money supply is the most important factor in economic performance?

Milton Friedman

Whose economic ideas and beliefs most closely match this statement: "Let the free enterprise system solve economic problems, not the government"?

Milton Friedman

Why is it difficult to time the use of monetary policy to control business cycles?

Monetary policy takes effect slowly, and business cycles are hard to predict

List What two offices assist the President and Congress in preparing the federal budget?

Office of Management and Budget (OMB) and Congressional Budget Office (CBO)

When John Maynard Keynes said, "In the long run we are all dead," what serious economic point was he making?

People with limited savings could not afford to wait for the market, on its own, to restore equilibrium

Budget Surplus

T > G

Why does inside lag affect fiscal policy more than monetary policy?

The Federal Reserve can enact monetary policy more quickly than the federal government can enact fiscal policy

Why do the discount rate, federal funds rate, and prime rate have a limited impact on the long-term growth of the economy?

They are interest rates on short-term loans

Check Understanding What effect would a reduction in the required reserve rate (RRR) have on banks?

They could lend and create more money.

Describe How do banks create money by going about their ordinary business?

by making loans from a portion of customers' deposits

Discount Rate (Expansionary)

discount rate (down) money supply (up) GDP (up) price level (up)

Discount Rate (Contractionary)

discount rate (up) money supply (down) GDP (down) price level (down)

Analyze Information What would be the appropriate course of action for the Fed if it predicted that a recession would quickly turn into an expansion?

do nothing

Identify What two categories account for more than half of the federal budget and make it difficult for the government to change spending levels significantly?

entitlement spending and servicing the national debt

Which of the following is considered a problem associated with a large national debt?

foreign ownership of debt

Identify Central Ideas What are the two main tools that government uses to implement fiscal policy?

government spending and taxes

Fiscal policy is the use of government spending and revenue to influence

the economy