Test 4
the corporate income tax rate is increased. this is
part of a contractionary fiscal policy
the individual income tax rate is decreased. this is
part of an expansionary fiscal policy
the federal reserve's four goals of monetary policy are
price stability, high employment, economic growth, and stability of financial markets and institutions
Refer to the diagram to the right. The money demand curve would move from Money demand 1 to Money demand 2 if
real GDP increased
To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac
sell bonds to investors and use the funds to purchase mortgages from banks
are federal expenditures higher today than they were in 1960?
as a percentage of GDP, federal expenditures have increased since 1960
are federal purchases higher today than they were in 1960?
as a percentage of GDP, federal purchases have decreased since 1960
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
government spending and taxes that increase or decrease without any actions taken by the government are referred to as
automatic stabilizers
problem -> rising inflation policy -> contractionary actions -> ____ or increase taxes result -> real GDP and price level ___
decrease gov't spending, fall
problem -> recession policy -> expansionary Actions -> gov't spending or ____ result -> real gdp and price level ___
decrease taxes, rise
an economic expansion tends to cause the federal budget deficit to _____ because tax revenues _____ and government spending on transfer payments _____
decrease, rise, fall
an increase in individual income taxes _____ disposable income, which ____ consumption spending
decreases, decreases
what is an expansionary fiscal policy?
expansional fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand
the interest rate that banks charge other banks for overnight loans is the
federal funds rate
what is the difference between federal purchases and federal expenditures?
federal purchases require that the government receives a good or service in return federal expenditures include transfer payments
monetary policy refers to the actions the
federal reserve takes to manage the money supply and interest rates to pursue its economic objectives
expansionary monetary policy refers to the ____ to increase real GDP
federal reserve's increasing the money supply and decreasing interest rates
fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives
what is fiscal policy?
fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives
_______ represent total government spending including goods, services, grants to state and local governments, and transfer payments
government expenditures
an increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand
_________ are spending by the government on goods, services, and factors of production
government purchases
each year that the federal government runs a deficit, the federal debt ____. each year that the federal government runs a surplus, the federal debt _____
grows, shrinks
the largest and fastest - growing category of federal government expenditures is
transfer payments
if the economy is falling below potential real GDP which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? an increase in
government purchases
congress and the president carry out fiscal policy through changes in
government purchases and taxes
which of the following are examples of discretionary fiscal policy?
- the government provides stimulus funds to repair roads and bridges to increase spending in the economy - the president and congress reduce tax rates to increase the amount of investment spending - congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate
Refer to the figure. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the basic AD-AS model in the figure, this would be depicted as a movement from
A to B
Refer to the figure. Suppose the Fed sells Treasury bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure, this situation would be depicted as a movement from
C to B
in what ways does the federal budget serve as an automatic stabilizer for the economy?
During a recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand
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
congress and the president enact a temporary cut in payroll taxes. this is an example of
a discretionary fiscal policy
an increase in the interest rate causes
a movement up along the money demand curve
the revenue the federal government collects from the individual income tax declines during a recession. this is an example of
an automatic stabilizer
the total the federal government pays out for unemployment insurance decreases during an expansion. this is an example of
an automatic stabilizer
some spending and taxes increase or decrease with the business cycle. this event often has an effect on the economy that is similar to fiscal policy and is called
automatic stabilizers
to evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the
budget deficit or surplus as a percentage of GDP
what is a contractionary fiscal policy?
contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand
the goals of monetary policy tend to be interrelated. for example, when the fed pursues the goal of ____, it also can achieve the goal of _____ simultaneously.
high employment, economic growth
which of the following is an objective of fiscal policy
high rates of economic growth
what changes should they make if they decide a contractionary fiscal policy is necessary?
in this case, congress and the president should enact policies that decrease government spending and increase taxes.
if congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
in this case, congress and the president should enact policies that increase government spending and decrease taxes.
using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to
increase
using the money demand and money supply model, an open market sale of treasury securities by the federal reserve would cause the equilibrium interest rate to
increase
what actions can congress and the president take to move the economy back to potential GDP
increase government spending or decrease taxes
since the 1950's, total government expenditures, as a percentage of GDP, have ______ and total government purchases, as a percentage of GDP, have _______
increased, decreased
an increase in the interest rate
increases the opportunity cost of holding money
expansionary fiscal policy involves
increasing government purchases or decreasing taxes
which of the following would not be considered an automatic stabilizer
legislation increasing funding for job retraining passed during a recession
in the figure to the right, if the economy is at point A, the appropriate monetary policy by the federal reserve would be to
lower interest rate
an increase in real GDP can shift
money demand to the right and increase the equilibrium interest rate
after september 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. is this increase in spending considered fiscal policy?
no. the increase in defense spending after that date was designed to achieve homeland security objectives.
the federal government changes the required gasoline milage for new cars. this is an example of
not a fiscal policy
the federal government increases spending on rebuilding the new jersey shore following a hurricane. This is an example of
not a fiscal policy
the federal reserve sells treasury securities. this is an example of
not a fiscal policy
defense spending is increased. this is
not part of fiscal policy
families are allowed to deduct all their expenses for daycare from their federal income taxes. this
not part of fiscal policy
the federal reserve lowers the target for the federal funds rate. this is
not part of fiscal policy
government transfer payments include which of the following
social security and medicare programs
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.
who is responsible for fiscal policy?
the federal government controls fiscal policy
which of the following would be classified as fiscal policy
the federal government cuts taxes to stimulate the economy
for the federal deficit to be lowered,
the federal government's expenditures must be lower than its tax revenue
the federal reserve's two main monetary policy targets are
the money supply and interest rates
the federal government debt equals
the total value of U.S. treasury bonds outstanding
the major cause of these trends is
there has been a major increase in the amount of transfer payments the government makes through programs such as social security and unemployment insurance
why do few economists argue that it would be a good idea to balance the federal budget
to keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession.
is it possible for congress and the president to carry out an expansionary fiscal policy if the money supply does not increase
yes, because fiscal policy and monetary policy are separate things
in 2009, congress and the president enacted "cash for clunkers" legislation that paid people buying new cars up to $4,500 if they traded in an older, low gas-milage car. was this piece of legislation an example of fiscal policy?
yes, because the primary goal of the spending program was to stimulate the national economy.