chapter 29/ 32 study

Which of the following would not be considered an automatic stabilizer?

Defense spending

A contractionary monetary policy decreases the money supply and the interest rate, which decreases investment and output.

False

The Taylor Rule relates changes in the money supply to changes in interest rates.

False

The assumption that the size of the debt doesn't matter has been called into question even more fervently than ever because of the debt problems faced by:

Greece, showing that major debts are unsustainable.

If interest rates have no effect on investment, how much crowding out will occur?

No crowding out because changes in interest rates are the cause of crowding out..

Which of the following Fed policies would help the economy out of a recession?

Open market purchases of government securities

According to the Ricardian equivalence theorem, why is government spending offset by a reduction in private spending?

People increase their savings in anticipation of a future increase in taxes to pay for that deficit.

According to___________ finance, there is no room for activist fiscal policy because government cannot be trusted to implement the right policies.

Sound

Why does sound finance not depend on the Ricardian equivalence theorem?

Sound finance is based on political grounds, not economic principles.

Why does the Fed have significant influence on the Fed funds rate?

The Fed most directly affects bank reserves and the Fed funds rate is the rate banks charge one another for overnight reserves

Which of the following is not directly affected by monetary policy?

The budget deficit

Although rarely used, which of the following is an instrument the Fed has to conduct monetary policy?

The discount rate

If the Fed eliminated the reserve requirement, what would happen to the money multiplier and the supply of money?

They would both increase

An increase in the federal funds rate is a signal that the Fed wants a tighter monetary policy.

True

The Fed's duties include acting as a lender of last resort and supervising or regulating a variety of financial institutions. Correct!

True

Why are there few regional Fed banks in the western part of the United States?

When the Fed was established, there were fewer banks in the West.

What is sound finance?

a view of fiscal policy that the government budget should always be balanced except in wartime

The Federal Open Market Committee:

makes decisions that affects excess reserves available to banks.

Suppose the government never borrows, so that it always finances its expenditures with taxes. Suppose further that government spending does not depend on income. In this case:

neither government spending nor taxes are automatic stabilizers.

Expansionary monetary policy is always expected to increase:

nominal income.

According to most economists, fiscal policy is:

not an effective tool for fine tuning the economy.

Suppose the government borrows $50 million to finance an increase in its spending and that as a result, the level of investment is reduced by $50 million. In this case, the aggregate demand curve will:

not shift

One of the duties of the Fed is to:

offer financial advising to the government.

Increasing government spending shifts_________ aggregate demand and thereby____________ income and__________ unemployment. This makes people_______ off in the_______ and more likely to vote for the incumbent president. The exception would be if the economy is already_______ potential income and there is a significant_________ threat.

out, increases, reduces. Better, short run. Above, inflation

During an economic contraction, automatic stabilizers:

reduce a budget surplus or increase a deficit.

The concept of fiscal policy refers to the:

running of a deficit or surplus to affect the level of output in the economy.

Because automatic stabilizers lower transfer payments and raise tax receipts as an economy recovers from a recession, they:

slow down the pace of an economic recovery.

One of the ultimate Fed's targets is:

stable prices.

Most of the government budget is mandatory spending through programs like Medicare and Social Security, and much of the rest is politically difficult to alter. Because of this:

the amount of spending is unlikely to be implemented as economists suggest.

Crowding out would most likely occur when:

the federal government engages in bond sales to finance its budget deficit.

What is crowding out?

the offsetting of a change in government expenditures by a change in private expenditures in the opposite direction

What is the Ricardian equivalence theorem?

the theoretical proposition that deficits do not affect the level of output in the economy because individuals increase their savings to account for expected future tax payments to repay the deficit

Automatic stabilizers are government programs or policies that will counteract the business cycle without any new government action.

true

Suppose the federal funds rate rises by 0.5 percent. If the Taylor rule is correct, this might be because output is:

1 percentage point above potential output

The body that directly oversees the 12 regional Federal Reserve banks is the:

Board of Governors.

Which is not something the Fed can do directly to conduct monetary policy?

Change the exchange rate

Because reducing both unemployment and inflation simultaneously are conflicting goals:

aggregate demand policy will allow policymakers to achieve one of these objectives, but not both.

The income tax is:

an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion.

What is functional finance?

as a theoretical proposition, governments should make spending and taxing decisions on the basis of their effect on the economy, not on the basis of some moralistic principle that budgets should be balanced.

When the Fed sells bonds, the money supply:

contracts.

An expansionary monetary policy is most likely to:

decreases interest rates, raises investment, and increases income.

Fiscal policy is typically:

difficult to implement quickly.

By law, a commercial bank is allowed to lend out of all its:

excess reserves.

When the Fed decreases the reserve requirement, the money supply is expected to:

expand, as is the money multiplier.

Financing expansionary fiscal policy by increasing the deficit does not generally affect interest rates.

false

Sound finance holds that government spending should be directed toward sound investment.

false

The 2008-2009 deficit stimulus spending by the federal government is an example of expansionary sound finance.

false

According to _____________ finance, there is room for activist fiscal policy. The economy is subject to fluctuations in output and if it is believed that fiscal policy will smooth out those fluctuations, it should do so.

functional

If output is falling, a procyclical fiscal policy will result in:

higher taxes and/or decreased government spending.

Contractionary fiscal policy that reduces the budget deficit may:

increase business investment by reducing interest rates.

In the AS/AD model, an expansionary monetary policy has the greatest effect on the price level when it:

increases nominal income but not real income.

Functional finance:

is a theoretical proposition, not a moral proposition.