macro: final
less than the marginal tax rate
At income levels above the limit for the lowest tax bracket, the average tax rate is:
buy government bonds
If the Fed wants to increase the money supply, it will:
AD curve
Increases in government spending are NOT very effective in offsetting real shocks because they shift the:
trade
Tariffs, like the Smoot-Hawley Tariff of 1930, make which of the following less efficient?
banks have low reserves and the money multiplier is large
The Fed will be most effective at changing the money supply when:
the Fed has the most influence over short-term interest rates, but investment spending depends on longer-term rates.
The Fed's actions do NOT change aggregate demand by any guaranteed amount, because:
the Fed operates in real time and information on recessions becomes available with a lag.
The Fed's job in manipulating monetary policy is made harder by the fact that:
primarily address the problem of high inflation.
The Federal Reserve's response to the oil crisis of the 1970s was to:
80%
The debt-to-GDP ratio in 2020 was a little over:
stabilize
The phenomenon of sticky wages usually leads to _______________ unemployment during a recession.
Social Security.
The single item on which the U.S. federal government spent the most in 2017 was:
provides a distorted price signal
When government policy moves the price in a manner that encourages investors to take risks, the price:
intertemporal substitution
how people choose to allocate consumption, work, and leisure across time to maximize well-being is known as:
25
if the reserve ratio is 4%, the money multiplier is:
the envy of the world
in the late 1990s, the American economy was:
3%
over the last 60 years, US real GDP has grown at an average rate of...
monetary base
over which aspect of the money supply does the Fed have the most direct control?
aggregate demand
the Fed wants to use its tools to influence:
the elderly
the largest amount of federal dollars goes to which group?
subsequent consumer spending that increases AD as a result of expansionary fiscal policy.
the multiplier effect is the:
true
true/false: The Fed has considerable power to influence aggregate demand, but that power is constrained by uncertainty.
true
true/false: the difference between the deflation of the great depression and the disinflation of the 1980s is that the disinflation of the 1980ss was a policy chosen on purpose
less investment spending
what is not a result of expansionary OMOs?
its ability to boost market confidence
what is one of the Fed's most important tools?
aggregate demand inflation
when a financial bubble collapses, what two things falls?
Ricardian Equivalence
when consumers save a tax cut instead of spending it, this is known as:
balanced budget
when government spending and taxes are equal
a monetary offset
when the central bank contracts the money supply in response to expansionary fiscal policy, this is known as:
budget deficit
when the federal government spends more than it collects in taxes in a given time period
budget surplus
when the government receives more in taxes than it spends in a given time period
increases the money supply result in price increases in the long run
3. How does the Quantity Theory of Money help us understand the limitations of the Federal Reserve's power to control economic growth?
AD shift to the left
A decrease in consumption growth will cause:
inflation rate; real growth rate
A negative real shock leads to a higher _____ and a lower _____.
decrease / increase
A negative real shock to the economy shifts the LRAS curve to the left, causing a(n) ____________ in growth and a(n) ____________ in inflation.
money supply
All of the following factors are fundamental to an economy's potential growth rate except for:
solow growth rate
An economy's potential growth rate is also known as what?
decrease in both velocity and money supply
An increase in uncertainty will lead to:
the money multiplier will decrease
As the reserve ratio rises:
make the boom even bigger.
Banks' responses to higher asset prices in an economic boom will tend to:
the federal reserve is considered a powerful institution because it has the power to:
Buy government bonds, act as a lender of last resort, and create money.
sell treasury bills to banks
Contractionary OMOs are the reverse of expansionary OMOs and are intended to have the opposite effect. Which of the following should the Fed do to conduct contractionary OMOs?
reduced cash flow; less money
During a recession, firms have _____, which means that banks are willing to lend _____ to firms.
expansionary fiscal policy & fiscal multiplier
During a recession, the government increases spending by $300B, which in turn increases GDP by $350B.
transmission mechanisms
Economic forces that can amplify shocks by making their effects extend across time and sectors of the economy are known as:
short-term real interest rates
Fed has the most influence over:
shock to aggregate demand
Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a:
time bunching
GDP consistently grows more in the fourth quarter (sept-dec) than in any other quarter. this is evidence of:
The Federal Reserve tries to offset a negative shock to aggregate demand with an increase in the money supply.
Given a best-case scenario, which of the following statements correctly describes the Federal Reserve's behavior?
consumption spending declines rapidly as many people fear a recession american workers get laid off by the hundreds of thousands because of a sudden collapse in investment purchases
Given that an ideal stimulus is timely, targeted, and temporary, which of the following scenarios would most benefit from expansionary fiscal policy?
inflation does not have an effect on long-run real growth
How does inflation affect the long-run real growth?
the aggregate demand curve shifts right
If the government performs expansionary fiscal policy, which curve shifts and in what direction?
aggregate demand
In the best-case scenario, the Federal Reserve is most successful at counteracting a negative _____ shock.
raise its expenditures and/or lower taxes to increase aggregate demand
In working to correct a recession with fiscal policy, the government can:
exempt income
Income that is not subject to taxation is called:
The Federal Reserve can control short-run growth better than long-term growth but even then, there are limits to its powers to influence short-term growth, in part because:
It has incomplete data about the economy, lagged results from policy to growth, and limited control.
time bunching
Once some economic activity is moving upward or downward, other parts of economic activity tend to follow that momentum in an effort to gain the advantages of:
expectations; the money supply
One of the Federal Reserve's most powerful tools is its influence over _____, not its influence over _____.
regressive tax
Social Security payroll tax is an example of what type of tax?
a fall in taxes OR a rise in government spending
Suppose a change in fiscal policy causes the AD curve to shift up and to the right. Which response below would most likely cause that shift?
true
T/F: the government can cut taxes during a recession to try to increase private spending
it has the incomplete data about the economy, lagged results from policy to growth, and limited control
The Federal Reserve can control short-run growth better than long-term growth but even then, there are limits to its powers to influence short-term growth, in part because:
the federal reserve
The bank that issues the money we use in the United States today is known as:
may be greater than, less than, or equal to
The benefits each person receives from the federal government _____ the amount of taxes that person pays.
banks can decide to hold more cash than the minimum reserve ratio requires people might not hold their money in banks, which limits the loanability of that cash
The control the Federal Reserve has in manipulating the money supply by setting the minimum reserve ratio is limited because:
earned income tax credit
The federal tax system assists people below the poverty level through the:
systemic risk
The possibility that the failure of one bank affects the performance of other banks is called:
not fixed but depends on how much of their assets banks want to hold as reserves.
The size of the money multiplier is:
how changes in interest rates impact the number of depositors
To design effective monetary policy, the Fed does NOT need to monitor or estimate:
engage in actions to increase interest rates
To reduce the money supply in the economy, the Fed would:
the effects of sticky prices and wages
Using both a long-run aggregate supply curve and a short-run aggregate supply curve can help demonstrate what effects in a real economy?
fiscal policy
What policy on taxes, spending, and borrowing is designed to influence business fluctuations?
an increase in the average price level
When the economy is at full employment, the main impact of an increase in total spending is:
a leftward shift of the long-run aggregate supply curve
Which creates the most difficult combination of economic problems for a monetary policymaker to address?
The growth rate of the money supply fell.
Which event occurred as a result of falling real estate prices in 2006 and 2007?
The central bank announces its policy in public and sticks with the policy over time.
Which is the MOST credible monetary policy action?
dust bowl drought
Which of the following natural shocks hit the United States early-on in the Great Depression, contributing to the length and slow recovery?
a war leads to more government spending
Which of the following would increase the velocity of money?
false
a business fluctuation is a type of recession
an increase in the value of an asset
a capital gain is...
a portion of profits paid back to shareholders
a dividend is...
disinflation
a significant reduction in the rate of inflation
increase government spending expand the money supply
according to keynesian business cycle theory, what should the government do in response to a recession?
diversify the economy
according to real business cycle theory, how can we avoid recessions?
outward / inward
an increase in spending growth will shift the AD curve __________, while a decrease in spending growth will shift the AD curve _____
automatic stabilizers
changes in fiscal policy that stimulate aggregate demand in a recession without the need for explicit action by policymakers
true
credible inflation reduction by the federal reserve empirically increases unemployment
menu cost
firms' costs associated with changing their prices
investors become pessimistic about future profit opportunities the federal government passes a national sales tax
for what shocks is the best course of action is to increase the money supply
solow growth rate
given flexible prices and the existing factors of production, a measure of how much the economy grows
it allows the Fed to discretion to react to velocity shocks
how does market monetarism differ from standard monetarism?
ricardian equivalence
is less significant when consumers deem tax cuts or rebates as permanent.
taking action to increase aggregate demand when confidence falls lending to banks to help stave off a recession sending countersignals when market fears arise
methods used by the Federal Reserve to maintain market confidence?
can influence aggregate demand, but it can't push the demand for housing down and at the same time keep the demand for everything else up.
monetary policy:
fed purchase of long-term government bonds
quantitative easing is the:
real GDP and employment
recessions are declines in
electronic claims
reserves held by banks are mainly held in the form of:
false
t/f: economists are rarely confused by the causes of aggregate demand shocks
crowding out
the decrease in private spending that occurs when government spending increases
it takes time for data to be gathered, released, and interpreted banks may be unwilling to lend changes in monetary policy typically affect the economy with a lag that can vary from 6 to 18 months
three statements that describe the difficulty that makes it hard for the Fed to get monetary policy exactly right all of the time?
nominal wage confusion
when workers respond, not to the purchasing power of their wage, but to the face value of their wage or salary
output
which is NOT neutral in the long run?
a shot to AD
which shock can the Fed deal with most effectively?
increase/increase
A positive shock to the AD curve will cause inflation to __________ in the short run and growth to ___________ in the short run.
it will fall
According to Keynesian business cycle theory, if consumption and investment fall, what will happen to government spending?
Malinvestments made in response to distorted price signals fail when met with insufficient consumer demand.
According to the Austrian theory of business cycles, how does the boom part of the business cycle lead to the bust? *
by increasing inflation, the central bank causes interest rates to fall, falsely signaling an increase in consumer savings.
According to the Austrian theory of business cycles, how does the central bank distort price signals? *
increase inflation in the short run increase GDP growth in the short run increase GDP growth in the long run
According to the quantity theory of money, expansionary fiscal policy will do what?
Which of the following best describes the monetary base?
Currency plus reserve deposits.
expansionary fiscal policy & crowding out
During a recession, the government sends $500 checks to every American family. 70% of American families save the money or use it to pay off their debt.
greater cash flow; more money
During an economic boom, firms have _____, which means that banks are willing to lend _____ to firms.
private sector is reluctant to spend or to invest
Given the possibilities for crowding out, expansionary fiscal policy financed through government borrowing is MOST likely to be effective when the:
less than 5%
Households in the bottom 20% of the income distribution pay approximately what percentage of their income in federal taxes?
they work more
How do individuals respond to positive shocks, given that they engage in intertemporal substitution?
By paying interest on reserves.
How does the Fed now influence how much banks hold in reserves?
$200,000
If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?
4
If a $500 increase in reserves ultimately leads to a $2,000 increase in the money supply, the money multiplier is:
0%
If inflation is 1% and you receive a 1% raise in your nominal wage, by how much did your real wage change?
-5%
If inflation is 6% and you receive a 1% raise in your nominal wage, by how much did your real wage change?
high inflation
If the Fed increases 𝑀−→ to fight slower real growth after a negative real shock, what should occur?
GDP volatility will increase rather than decrease.
If the Fed responds too often in the wrong direction or with the wrong strength:
buy bonds in open market operations
If the Fed wants to decrease interest rates, it should:
a distorted price signal
If the Fed's monetary policy moves a price in a manner that encourages investors to take risks, economists like von Mises and Hayek would say that there is:
the banks can make fewer loans and the money supply decreases
If the Federal Reserve increases the minimum reserve ratio that private banks are required to hold, the following will occur:
consumption investment government spending
If the velocity of money increases, then the growth rate of which of the following must also change?
expanding / contracted
In the 1930s, instead of ________ the money supply, the Federal Reserve ________ the money supply, which prolonged the Great Depression.
decrease / decrease
In the short run, a decrease in consumption would lead to a(n) _________ in growth and a(n) _________ in inflation.
wages and prices are sticky
In the short run, a monetary contraction leads to increased unemployment because:
lessen
In theory, inflation in an economy should ___________________ the sticky-wage phenomenon.
How does the Quantity Theory of Money help us understand the limitations of the Federal Reserve's power to control economic growth?
Increases in the money supply result in price increases in the long run.
consumption, work, and leisure
Intertemporal substitution is the allocation of _____ across time to maximize well-being.
longer
It's often very difficult to time fiscal policy correctly. Suppose each fiscal lag identified in the video lasts approximately 3 months. If the average U.S recession since World War II lasts around 11 months, is the total fiscal lag longer or shorter than the typical recession?
credit is easy and it is a good idea to borrow money
Low interest rates are a signal that:
currency and checkable deposits
M1 includes:
currency, checkable deposits, saving deposits, money market mutual funds, small-time deposits
M2 includes:
Over which aspect of the money supply does the Fed have the most direct control?
Monetary base.
crude: can't
Monetary policy is a _____ means of popping a bubble because monetary policy _____ push down the price of specific commodities.
real shocks; aggregate demand shocks
Monetary policy is much less effective at combating _____ than _____.
Which of the following count as money?
Money market mutual funds, currency, checkable deposits.
Gift cards are a part of
None of the above.
Contractionary open market operations.
Reverse repurchase agreements are like temporary ___________.
higher if the central bank counters the shock than if it does not react.
Suppose the central bank targets a low rate of unemployment. If a negative real shock occurs, the real growth rate will be:
engage in actions to raise interest rates
Suppose the economy is growing faster than its long-run potential growth rate. To bring the real growth rate back to the long-run potential rate, the Fed should:
increases: increases
Suppose the government decreases taxes. What will happen to disposable income and consumer spending?
increase by $1,000
Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will:
$1,500
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. A person earning $35,000 pays an income tax of:
4.3%
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:
the aggregate supply curve shifts left
Suppose there is a negative oil shock and oil prices dramatically increase. What has happened?
expansionary fiscal policy & crowding out
The government hires 2000 workers for new infrastructure projects. Over half of the newly hired construction workers, however, were employed in other sectors of the economy and quit their jobs to take this better paying opportunity. *
amplify shocks by transmitting them across time and sectors of the economy.
Transmission mechanisms are best described as economic forces that can:
they do not know the priorities of the public and there is little incentive to spend carefully.
Two reasons why government leaders do NOT spend tax revenue as carefully as individuals spend their own income are that:
investors will wait to see what will happen, which causes resources to sit idle.
Uncertainty can make an economic slowdown worse because:
investment spending: assets like cash
Uncertainty drives people away from _____ and toward _____.
more than double
Under a progressive tax system, tax payments will _____ if a person's income doubles.
increased spending doesnt immediately cause full inflation, so there is short run growth
What happens in the short run when spending increases?
Labor adjustment costs can increase structural unemployment due to the costs of moving labor from declining sectors of the economy to growing sectors of the economy.
What impact do labor adjustment costs have on structural unemployment after a negative shock hits the economy?
With interest rates near zero, it became nearly impossible to impact the economy by lowering the federal funds rate.
What is one reason open market operations stopped being as effective during and after the Great Recession?
nominal GDP targeting
What is the name of the monetary policy rule that changes interest rates based on a target for the nominal GDP growth rate?
crowding out and the multiplier effect
What two opposing forces affect the degree of impact that fiscal policy has on the economy?
both tax changes and government spending changes
What types of expansionary fiscal policy actions can be offset by crowding out?
The tariff taxed foreign goods intending on increasing demand for domestic goods, but it backfired when other nations also imposed tariffs and trade fell.
What were the intentions of the Smoot-Hawley Tariff, and what was the actual outcome of the policy?
the bridge between saving and investing collapsed, making the economy less efficient
When banks failed, people lost their money and had less to spend, leading to a negative AD shock. Which of the following describes how bank failures also resulted in a negative real shock to the economy?
people decide to invest in an education.
When jobs are scarce and wages are stagnant:
fiscal policy
Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing?
the ability to change taxes
Which is NOT needed for the Fed to design and implement effective monetary policy to reduce the severity and length of a recession?
Corporate owners, workers, and consumers each bear the burden of the increase.
Which is correct regarding who bears the cost when corporate tax rates increase?
unemployment insurance
Which of the following are automatic stabilizers used by the government? *
long-term contracts
Which of the following is a reason for sticky wages?
US dollar
Which of the following is also known as a Federal Reserve note?
a drought stifles crop growth for the searson
Which of the following is an example of a negative real shock to an economy?
Repos are also conducted with other financial institutions besides banks.
Which of the following is an important difference between repos and OMOs?
interest rates
Which of the following is not a component of aggregate demand?
a fall in velocity caused by consumer pessimism
Which of the following would not affect the long-run aggregate supply curve?
Rick notices that his brother Steve and many other investors have reduced the amount they invest, and Rick decides to do the same.
Which of the situations describes a bandwagon effect caused by a lack of confidence in markets?
Inflation is kept in check in the long run by keeping the growth of M1 and M2 on a steady path.
Which of the statements best describes the monetary rule, as proposed by the economist Milton Friedman?
short implementation time with a long lag before observation of effectiveness
Which statement best describes the Federal Reserve timeframe for monetary policy implementation and observable policy effect?
negative real shocks
While a series of negative aggregate demand shocks largely caused the Great Depression, ___________ contributed and led to a slow recovery.
When countering a negative supply shock to reduce unemployment, Fed action will raise inflation.
Why is monetary policy not fully effective in combating a negative supply shock?
Directly influence particular sectors of the economy
With quantitative easing, the Fed can now ____________.
workers would have earned higher wages without the tax payments.
Workers bear at least a majority, if not all, of the burden of the employers' share of FICA and Medicare tax payments because the:
AD curve to shift to the left
a decrease in money supply growth will cause the:
a bank begins to have liabilities in excess of the value of their assets
a solvency crisis occurs when:
long run aggregate supply
according to real business cycle theory, negative real shocks initially affect ______
government program that is designed to stimulate aggregate demand during recessions without the need for specific actions by policymakers.
an automatic stabilizer is a:
when people save during good economic times and use those savings during bad economic times
an example of automatic stabilizer:
a decrease in the average level of prices
deflation is best defined as:
a decrease in prices, that is, a negative inflation rate
deflation is:
disinflation
disinflation/deflation: a period when the inflation rate is positive, but declining
disinflation
disinflation/deflation: a reduction in the rate of inflation
disinflation
disinflation/deflation: results in a decrease in output
deflation
disinflation/deflation: results in a decrease in the general price level
deflation
disinflation/deflation: the opposite of inflation
decreasing taxes during a recession
example of countercyclical fiscal policy
real growth
inflation occurs when more money chases the same amount of goods and services. If _________ increases, we can expect a corresponding decrease in inflation, because more money will be chasing more goods
The alternative minimum tax:
is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes.
recession
mistimed contractionary fiscal policy can cause:
anything that is widely accepted means of payment
money is best defined as:
there is no money in "your account" the social security tax is "pay as you go"
reasons NOT to depend on social security as a retirement plan
inflation: recession
suppose that the federal reserve bank achieves the growth it wants, but also experiences the negative consequences. as a result, it will seek to decrease _______, at the risk of leading the economy into a ________.
aggregate demand
suppose that the federal reserve bank wants to address high levels of unemployment in the economy. to do so, it would likely increase:
consumers the central bank businesses
the effects of expansionary fiscal policy depend on the behavior of:
inflation
the federal reserve bank is able to instigate the growth it desires, it will likely come at the cost of increasing:
false
the federal reserve can always achieve its stated monetary policy targets or goals
false
the federal reserve does not consider market confidence when creating monetary policy
regulate banks loan money to banks increase the economy's money supply
the federal reserve has the power to:
buy government bonds, act as a lender of last resort, and create money
the federal reserve is considered a powerful instititon because it has the power to:
true
the federal reserve operates in real time, where data concerning the economy is not completely known
regulates the banking system
the federal reserve:
contractionary fiscal policy
the government increase taxes on corporations
longer for changes in government spending than for changes in taxation.
the implementation lag is likely to be:
implementation lag
the time lag due to the fact that bureaucracies must put the plan into action is called the:
government debt
the total accumulated amount that the government has borrowed and not yet paid back over time
true
true / false: banks earn profits on loans
true
true / false: intertemporal substitution magnifies negative economic shocks
true
true / false: labor adjustment costs are the costs of shifting workers from declining sectors of the economy to the growing sectors?
true
true / false: under fractional reserve banking, banks hold only a small portion of deposits in reserve, and they lend the rest
false
true/false: fed has little power to influence aggregate demand, but that power is constrained by incertainty
it fails to explain why entrepreneurs dont account for the distortions in price signals caused by the central bank it fails to explain why failed investments cause so much unemployment
two problems with the austrian theory of business cycles
in less-productive uses
uncertainty tends to keep resources:
business fluctuations
variations in the growth rate from the long-run of economic growth
policy implementation lags are long and variable a stable inflation rate should be enough to stabilize business cycles the information of policymakers is limited
what are reasons that monetarists want to constrain the fed?
falling aggregate demand may be a symptom, not a cause, of recession wages are only sticky during recessions
what are some problems with the keynesian business cycle theory
lending to banks and other financial institutions changes in the interest rate paid on reserves open market operations
what are the three main tools used by the Fed to influence aggregate demand?
stabilizing one measure of the money supply may destabilize other measures of it it leaves the Fed unable to act in case of negative real shocks and velocity shocks
what are two problems with monetarism?
Fed could have restrained some of the subprime mortgages that were sold during the boom
what could the Fed have done to prevent the housing bubble that led to the financial crisis of 2007-2008?
money market mutual funds, currency, checkable deposits
what counts as money?
currency plus reserve deposits
what describes the monetary base?
high inflation leads to misallocation of resources
what do monetarists and keynesians disagree on?
increase uncertainty
what do negative shocks do to uncertainty
revenue from the current social security tax is used to fund current payments
what does it mean that social security is a pay-as-you-go system?
it doesnt explain why unemployment is so high during recessions
what is a weakness of real business cycle theory?
to keep the interest rate from becoming too low
what is not a reason that banks keep reserves?
when the Fed swaps money with banks for assets other than treasury bills
what is quantitative easing?
the money multiplier
what is the amount by which the money supply expands with each dollar increase in reserves.
limited government that doesnt interfere with market price signals
what is the austrian solution to business cycles?
increase in aggregate demand
what is the intended effect of expansionary open market operations (OMOs)?
decrease in aggregate demand
what is the intended effect of raising the federal funds rate?
individual income taxes
what is the largest source of tax revenue in the US?
systemic risk
what is the risk that the failure of one financial institution will bring down other institutions as well
the Fed buys bonds in an open market operation the monetary base increases short-term interest rates decrease
what would occur if the Fed's goal was to increase aggregate demand?
insolvent
when a bank has liabilities that are greater than its assets, the bank is:
sticky
when wages and prices are ________, an aggregate demand shift will cause a shift along the short-run aggregate supply curve, which will cause the rate of real growth to change
a tax increase that occurs without a government spending increase. to the left and down
which policy is likely to shift the AD curve? which direction will it shift?
decrease taxes
which properly describes fiscal policy that could be used to fight a recession?
the borrower, unless he or she defaults
who owns collateral