Macro Hw Review for Final Exam
examples of discretionary fiscal policies
1. the government provides stimulus funds to repair roads and bridges to increase spending in the economy 2. congress provides a tax rebate to encourage additional spending in order to reduce the UE rate 3. the president and congress reduce tax rates to increase the amount of investment spending
ffr=3% target inflation=3% current inflation=2% real gdp=2% below potential gdp What does the federal funds target rate equal?
3.5%
FFR=2% target rate of inflation=3% current inflation rate=5% potential real gdp=14.83 trillion real gdp=14.14 trillion What does the federal funds target rate equal?
5.65%
Consider the demand for U.S. dollars in exchange for British pounds. Which of the following will not increase the foreign currency demand for the dollar? Part 2
Currency traders who believe that the value of the dollar in the future will be less than its value today.
Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?
If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.
Which of the following best describes the difference between crowding out in the short run and in the long run?
In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.
Why might the author be worried that Medicare is on course to "bankrupt the nation"
Rising Medicare costs are leading to a dramatic increase in the share of the federal budget spent on Social Security, Medicare, and Medicaid, which means that the federal government will eventually have to either cut benefits or sharply increase taxes.
What is the difference between the federal budget deficit and federal government debt?
The federal budget deficit is the year-to-year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.
If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliersLOADING...?
The impact of the multiplier would be larger if the SRAS curve is horizontal.
what does a "tight labor market" mean
a labor market with a very low UE rate, usually lower than the natural rate of UE
one of the goals of the federal reserve is price stability, to achieve this goal they should
a low inflation rate ideally between 1 and 3 percent and it needs to be fairly constant
What is the Volcker disinflation?
a significant reduction in the inflation rate between 1979 and 1989, under the leadership of Fed chairman Paul Volcker
revenue the federal government collects from the individual income tax declines during a recession
automatic stabilizer
total the federal government pays out of UE insurance decreases during an expansion
automatic stabilizer
government spending and taxes that increase or decrease without any actions taken by the government are referred to as
automatic stabilizers
The concept of a nonaccelerating inflation rate of unemployment (NAIRU) helps us to understand why in the long run, the Federal Reserve
can affect the inflation rate but not the UE rate
most economists would argue that inflation is caused by
changes in both aggregate demand and aggregate supply
corporate income tax is increased
contractionary fiscal policy
what is meant by crowding out
crowding out is a decline in private expenditures as a result of increases in government purchases
What does the author mean by "fatal financial flaws"?
declining birth rates, resulting in fewer workers per Medicare beneficiary, and insufficient revenues at current rates of payroll taxes to cover rising medical costs and increasing numbers of retired people over time.
congress and the president enact a temporary cut in payroll taxes
discretionary fiscal policy
what is the short-run Phillips curve
downward sloping
individual income tax rate is decreased
expansionary fiscal policy
U.S.households and U.S. firms supply U.S. dollars in exchange for foreign currency
if the interest rate and other conditions in the foreign countries are lucrative for U.S. firms and households to invest dollars.
It is inconsistent to believe that the long-run aggregate supply curve is vertical and the long-run Phillips curve is downward sloping because
in order for the long-run Phillips curve to be downward sloping, changes in the price level (inflation) would have to affect the unemployment rate in the long run, which does not happen with a vertical long-run aggregate supply curve.
If the unemployment rate is below the natural rate, the inflation rate tends to ___________, and eventually, the short-run Phillips curve will shift _______.
increase up
monetary policy target used by the fed
interest rate
why does the fed use policy target rate and/or money supply
it can affect the interest rate and the money supply directly and these in turn can affect UE, GDP, and price level
why are there disagreements over the value of the NAIRU
it is hard to estimate the NAIRU because the natural rate of UE changes over time
what do economist mean by the demand for money?
it is the amount of money-currency and checking account deposits-that individuals hold
why does a failure of the inflation rate to increase despite a tight labor market indicate that the Phillips curve is flattening
it means the inflation rate is becoming less responsive to the UE rate than would otherwise be the case
what is the advantage of holding money?
money can be used to buy goods, services, or financial assets
what is the disadvantage of holding money
money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest
the balance on the financial account is
net capital flows = capital inflows - capital outflows
federal government changes the required gasoline mileage for new cars
not a fiscal policy
federal government increases spending on rebuilding the New Jersey shore following a hurricane
not a fiscal policy
federal reserve sells treasury securities
not a fiscal policy
defense spending is increased
not part of fiscal policy
families are allowed to deduct all their expenses for daycare from their federal income taxes
not part of fiscal policy
federal reserve lowers the target for the federal funds rate
not part of fiscal policy
What actions would Congress and the president need to take to resolve the problems Medicare faces?
reduce benefits—limit coverage of services or expenses, raise the age for receiving benefits, or reduce benefits for future recipients—or increase funding—increase payroll taxes, draw on general tax revenues, or shift more of the cost to higher-income beneficiaries
the fed buys a security from a financial firm, which promise to buy it back from the fed the next day
repurchase agreement
under Volcker the UE rate
rose from 6% to 10% during the period of the Volcker disinflation
Covid-19 pandemic caused the aggregate demand curve to ____ and the aggregate supply curve to ____, resulting in ______ in real GDP. In order for real GDP to return to potential, the appropriate approach is _____ fiscal policy.
shift to the left shift to the left a decrease expansionary
if, in the long run, real GDP returns to potential level, then in the long run
the Phillips curve will be vertical
what is the cyclically adjusted budget deficit or surplus
the deficit or surplus in the federal government's budget if the economy were at potential GDP
What does the Phillips curve exhibit
the relationship between the UE and the inflation rates
why do disagreements over the NAIRU pose a problem for the fed
those disagreements make it difficult for the fed to know what level of UE to target
If the Fed wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation, then it should
use expansionary monetary policies
when is it considered "good policy" for the government to run a budget deficit
when borrowing is used for long-lived capital goods
assuming people have rational expectations then
when the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP
