chapter 15/ 16
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
increase in government spending or a decrease in taxes means Real GDP and price level _________
rise
decrease in government spending or a increase in taxes means Real GDP and price level _________
fall
Each year that the federal government runs a deficit, the federal debt ________. . Each year that the federal government runs asurplus, the federal debt _________.
grows, shrinks
When the Fed conducts an open market purchase, the interest rate should _______.
decrease
Which of the following are examples of discretionary fiscal policy?
- Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. - The president and Congress reduce tax rates to increase the amount of investment spending. - The government provides stimulus funds to repair roads and bridges to increase spending in the economy.
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.
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 anexpansion, 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.
What is the difference between federal purchases and federal expenditures?
Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments.
What is fiscal policy?
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
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.
What do economists mean by the demand for money?
It is the amount of money—currency and checking account deposits cash that individuals hold.
What is a "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit history?
Loans granted to borrowers with flawed credit histories; a higher interest rate.
What is the advantage of holding money?
Money can be used to buy goods, services, or financial assets.
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.
Which one of the following is not one of the monetary policy goals of the Fed?
Reduce income inequality.
Why would securitization give mortgage borrowers access to a deeper pool of capital?
Since banks could resell mortgages to investors, they had access to more funds than just their own deposits.
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.
Why do few economists argue that it would be a good idea to balance the federal budget every year?
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.
Congress and the president enact a temporary cut in payroll taxes.
a discretionary fiscal policy.
The revenue the federal government collects from the individual income tax declines during a recession.
an automatic stabilizer.
The total the federal government pays out for unemployment insurance decreases during an expansion.
an automatic stabilizer.
Government spending and taxes that increase or decrease without any actions taken by the government are referred to as
automatic stabilizers.
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.
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it _______. U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it________ U.S. Treasury securities.
buys, sells.
"The role of the Federal Reserve is to remove the punchbowl just as the party gets going." When he said "to remove the punchbowl," he meant to engage in ___________ policy. In terms of the economy, "just as the party gets going" refers to a situation in which real GDP is greater than potential GDP, which will result in an_________ the inflation rate.
contractionary, increase in
"The Fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that amount." the statement is _____ because an increase in the money supply _____ affect real GDP directly.
incorrect, does not
Which of the following is a monetary policy target used by the Fed?
interest rate
The federal funds rate.
is the rate that banks charge each other for short-term loans of excess reserves.
The Fed uses policy targets of interest rate and/or money supply because
it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.
Why is the Fed sometimes said to have a "dual mandate"? The Fed is said to have a" dual mandate" because
maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.
What are the Fed's main monetary policy targets?
money supply and interest rates
The Federal Reserve sells Treasury securities.
not a fiscal policy.
The federal government changes the required gasoline mileage for new cars.
not a fiscal policy.
The federal government increases spending on rebuilding the New Jersey shore following a hurricane.
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 is
not part of fiscal policy
The Federal Reserve lowers the target for the federal funds rate. This is
not part of fiscal policy
An increase in interest rates affects aggregate demand by
shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.
How can investment banks be subject to liquidity problems? Investment banks can be subject to liquidity problems because
they often borrow short term, sometimes as short as overnight, and invest the funds in longer-term investments.
If the Fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left.
If the Fed believes the economy is about to fall into recession, it should.
use an expansionary monetary policy to lower the interest rate and shift AD to the right.
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
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.
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-mileage 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.
As the interest rate increases,
consumption, investment, and net exports decrease; aggregate demand decreases.