Macroeconomics: Section 6 review

public debt

governemnt debt held by individuals and institutions outside the government

inflation tax

reduction in the value of money held by the public caused by inflation

c

A 10% decrease in the money supply will change the aggregate price level in the long run by a. zero. b. less than 10%. c. 10%. d. 20%. e. more than 20%.

e

A graph of percentage increases in the money supply and average annual increases in the price level for various countries provides evidence that a. changes in the two variables are exactly equal. b. the money supply and aggregate price level are unrelated. c. money neutrality holds only in wealthy countries. d. monetary policy is ineffective. e. money is neutral in the long run.

b

An increase in expected inflation will shift a. the short-run Phillips curve downward. b. the short-run Phillips curve upward. c. the long-run Phillips curve upward. d. the long-run Phillips curve downward. e. neither the short-run nor the long-run Phillips curve.

d

An increase in the money supply will lead to which of the following in the short run? a. higher interest rates b. decreased investment spending c. decreased consumer spending d. increased aggregate demand e. lower real GDP

c

An inflation tax is a. imposed by governments to offset price increases. b. paid directly as a percentage of the sale price on purchases. c. the result of a decrease in the value of money held by the public. d. generally levied by states rather than the federal government. e. higher during periods of low inflation.

a

At each meeting of the Federal Open Market Committee, the Federal Reserve sets a target for which of the following? I. the federal funds rate II. the prime interest rate III. the market interest rate a. I only b. II only c. III only d. I and III only e. I, II, and III

e

Bringing down inflation that has become embedded in expectations is called a. deflation. b. negative inflation. c. anti-inflation. d. unexpected inflation. e. disinflation.

a

Contractionary monetary policy attempts to __________ aggregate demand by _____________ interest rates. a. decrease increasing b. increase decreasing c. decrease decreasing d. increase increasing e. increase maintaining

e

Debt deflation is a. the effect of deflation in decreasing aggregate demand. b. an idea proposed by Irving Fisher. c. a contributing factor in causing the Great Depression. d. due to differences in how borrowers/lenders respond to inflation losses/gains. e. all of the above.

d

During a recession in the United States, what happens automatically to tax revenues and government spending? Tax revenues/ Government spending a. increase/ increases b. decrease/ decreases c. increase/ decreases d. decrease/ increases e. decrease/ does not change

b

If government spending exceeds tax revenues, which of the following is necessarily true? There is a I. positive budget balance. II. budget deficit. III. recession. a. I only b. II only c. III only d. I and II only e. I, II, and III

b

In the classical model of the price level a. only the short-run aggregate supply curve is vertical. b. both the short-run and long-run aggregate supply curves are vertical. c. only the long-run aggregate supply curve is vertical. d. both the short-run aggregate demand and supply curves are vertical. e. both the long-run aggregate demand and supply curves are vertical.

c

In the first FYI box of this module (p. 357) you learned about supply-side economics. Which of the following is stressed by supply siders? a. Taxes should be increased. b. Lower taxes will lead to lower tax revenues. c. It is important to increase incentives to work, save, and invest. d. The economy operates on the upward-sloping section of the Laffer curve. e. Supply side views are widely supported by empirical evidence.

c

In the long run, changes in the quantity of money affect which of the following? I. real aggregate output II. interest rates III. the aggregate price level a. I only b. II only c. III only d. I and II only e. I, II, and III

c

Monetary neutrality means that, in the long run, changes in the money supply a. can not happen. b. have no effect on the economy. c. have no real effect on the economy. d. increase real GDP. e. change real interest rates.

a

Revenue generated by the government's right to print money is known as a. seignorage. b. an inflation tax. c. hyperinflation. d. fiat money. e. monetary funds.

d

That fluctuations in total factor productivity growth cause the business cycle is the main tenet of which theory? a. Keynesian b. classical c. rational expectations d. real business cycle e. natural rate

c

The "clean little secret of macroeconomics" is that a. microeconomics is even more contentious than macroeconomics. b. debate among macroeconomists has ended. c. economists have reached a significant consensus. d. macroeconomics has progressed much more than microeconomics in the past 70 years. e. economists have identified how to prevent future business cycles.

a

The Fed's main concerns are a. inflation and unemployment. b. inflation and asset prices. c. inflation, asset prices, and unemployment. d. asset prices and unemployment. e. inflation and the value of the dollar.

b

The classical model of the price level is most applicable in a. the United States. b. periods of high inflation. c. periods of low inflation. d. recessions. e. depressions.

c

The cyclically adjusted budget deficit is an estimate of what the budget balance would be if real GDP were a. greater than potential output. b. equal to nominal GDP. c. equal to potential output. d. falling. e. calculated during a recession.

b

The long-run Phillips curve is I. the same as the short-run Phillips curve. II. vertical. III. the short-run Phillips curve plus expected inflation. a. I only b. II only c. III only d. I and II only e. I, II, and III

a

The main difference between the classical model of the price level and Keynesian economics is that a. the classical model assumes a vertical short-run aggregate supply curve. b. Keynesian economics assumes a vertical short-run aggregate supply curve. c. the classical model assumes an upward sloping long-run aggregate supply curve. d. Keynesian economics assumes a vertical long-run aggregate supply curve. e. the classical model assumes aggregate demand can not change in the long run.

b

The natural rate hypothesis says that the unemployment rate should be a. below the NAIRU. b. high enough that the actual rate of inflation equals the expected rate. c. as close to zero as possible. d. 5%. e. left wherever the economy sets it.

d

The real quantity of money is I. equal to M/P. II. the money supply adjusted for inflation. III. higher in the long run when the Fed buys government securities. a. I only b. II only c. III only d. I and II only e. I, II, and III

c

The short-run Phillips curve shows a _________ relationship between ___________. a. negative/ the aggregate price level and aggregate output b. positive/ the aggregate price level and aggregate output c. negative/ unemployment and inflation d. positive/ unemployment and aggregate output e. positive/ unemployment and the aggregate price level

d

When implementing monetary policy, the Federal Reserve attempts to achieve a. an explicit target inflation rate. b. zero inflation. c. a low rate of deflation. d. a low, but positive inflation rate. e. 4-5% inflation.

a

Which of the following actions can the Fed take to decrease the equilibrium interest rate? a. increase the money supply b. increase money demand c. decrease the money supply d. decrease money demand e. both (a) and (d)

political business cycle

results when politicians use macroeconomic policy to serve political ends

d

Which of the following fiscal policies is expansionary? Taxes/Government spending a. increase by $100 million/ increases by $100 million b. decrease by $100 million/ decreases by $100 million c. increase by $100 million/ decreases by $100 million d. decrease by $100 million/ increases by $100 million e. both (a) and (d)

d

Which of the following is a central point of monetarism? a. Business cycles are associated with fluctuations in money demand. b. Activist monetary policy is the best way to address business cycles. c. Discretionary monetary policy is effective while discretionary fiscal policy is not. d. The Fed should follow a monetary policy rule. e. All of the above.

c

Which of the following is a goal of monetary policy? a. zero inflation b. deflation c. price stability d. increased potential output e. decreased actual real GDP

e

Which of the following is a reason to be concerned about persistent budget deficits? a. crowding out b. government default c. the opportunity cost of future interest payments d. higher interest rates leading to decreased long-run growth e. all of the above

d

Which of the following is an example of an opinion on which economists have reached a broad consensus? I. The natural rate hypothesis holds true. II. Discretionary fiscal policy is usually counterproductive. III. Monetary policy is effective, especially in a liquidity trap. a. I only b. II only c. III only d. I and II only e. I, II, and III

e

Which of the following is true regarding central bank targets? a. The Fed has an explicit inflation target. b. All central banks have explicit inflation targets. c. No central banks have explicit inflation targets. d. The Fed clearly does not have an implicit inflation target. e. Economists are split regarding the need for explicit inflation targets.

e

Which of the following was an important point emphasized in Keynes's influential work? I. In the short run, shifts in aggregate demand affect aggregate output. II. Animal spirits are an important determinant of business cycles. III. In the long run we're all dead. a. I only b. II only c. III only d. I and II only e. I, II, and III

monetary policy rule

a formula that determines the central bank's action

liquidity trap

a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound

new classical macroeconomics

an approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output

cyclically adjusted budget bbalance

an estimate of what the budget balance would be if real GDP were exactly equal to potential output

monetarism

asserts that GDP will grow steadily if the money supply grows steadily

monetary neutrality

changes in the money supply have no real effects on the economy

real business cycle theory

claims that fluctuations in the rate of growth of total factor productivity cause the business cycle

target federal funds rate

desired level for the federal funds rate

quantity theory of money

emphasizes the positive relationship between the price level and the money supply

cost-push inflation

inflation that is caused by a significant increase in the price of an input with economy-wide importance

demand-pull inflation

inflation that is caused by an increase in aggregate demand

new keynesian economics

market imperfections can lead to price stickiness for the economy as a whole

expansionary monetary policy

monetary policy that increases aggregate demdn

contractionary monetary policy

monetary policy that reduces aggregate demand

inflation targeting

occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target

taylor rule for monetary policy

rule for setting the federal funds rate that takes into account both the inflation rate and the output gap

fiscal year

runs form October 1 to September 30 and is labeled according to the calendar year in which it ends

long-run phillips curve

shows the relationship between unemployment and inflation after expectation of inflation have had time to adjust to experience

implicit liabilities

spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics

debt-GDP ratio

the government's debt as a percentage of GDP

short-run phillips curve

the negative short-run relationship between the unemployment rate and inflation rate

zero bound

the nominal interest rate: it cannot go below zero

velocity of money

the ratio of nominal GDP to the money supply

classical model of the price level

the real quantity of money is always at its long run equilibrium level

debt dflation

the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation

nonaccelerating inflation rate of unemployment (NAIRU)

the unemployment rate at which inflation does not change over time

discretionary monetary policy

the use of changes in the interest rate or the money supply to stabilize the economy

rational expectations

the view that individuals and firms make decisions optimally, using all available information

natural rate hypothesis

to avoid accelerating inflation over time, the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate

macroeconomic policy activism

use of monetary and fiscal policy to smooth out the business cycle

M multiplied by V equal P multiplied by Y

velocity formula: