EC112 CH 25-28

What is the difference between federal government purchases (spending) and federal government expenditures?

Government purchases are included in government expenditures.

In addition to the Federal Reserve Bank, what other economic factors influence the money supply?

Households, firms, and banks.

Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?

In the long run, aggregate supply is vertical.

Credit cards are

Included in neither the M1 definition of the money supply not in the M2 definition,

Suppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $60 billion?

$400 billion increase

After September 11, 2011, 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 use of money

1) Allows for greater specialization 2) Reduces the transaction costs of exchange 3) Eliminates the double coincidence of wants ANSWER: All of the Above

According to manny economists the policymakers, what other options does the Fed have to improve its credibility with workers, firms, and investors?

1) Following a discretion strategy 2) Following a rules strategy 3) Following the Taylor rule. ANSWER: All of the above

What are the gains to be had from simplifying the tax code?

1) Increased efficiency of households and firms 2) Resources from the tax preparation industry freed up for other endeavors. 3) Greater clarity of the decisions made by households and firms ANSWER: All of the Above

Which of the following is true with respect to hyperinflation?

1) It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. 2) It can be hundreds-even thousands-of percentage points per year. 3) In the presence of hyperinflation, firms and households avoid holding money. ANSWER: All of the Above

In a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic?"

A bank run involves one bank; a bank panic involves many banks.

What effect does expansionist monetary policy have on equilibrium if consumers have rational expectations?

A movement from point A to point C

Which of the following is NOT a function of money?

Acceptability

An initial increase in a bank's reserves will increase checkable deposits

By an amount greater than the increase in reserves

The figure to the right shows a breakdown of the M1 definition of the money supply. Which area corresponds to the amount of checking account deposits

C

The Phillips curve was developed by A. W Phillips in 1957 and shoes the relationship between unemployment and inflation. The curve, shown at the right, indicates what type of relationship between the two variables?

Inverse realtionship

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets.

From an understanding of the multiplier process, explain why an increase in the tax rate would decrease the rise of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier

The MPC is multiplied by (1- t).

Does government spending ever reduce private spending?

Yes, due to crowding out.

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent trade-off between unemployment and inflation.

What is the Fed doing to increase the credibility of it policies?

1) Announcing the federal funds target rate. 2) Whenever a change i policy is announced, the change actually takes place. ANSWER: A and B only

Indicate the two main objective to the idea that the short-run Phillips curve is vertical.

1) Contracts with workers keep wages sticky. 2) Workers and firms might not have rational expectations

If the marginal propensity to consume equals .76, the tax rate equals .2, and the marginal propensity to import equals .2, what is the value of the government purchases multiplier? The government purchases multiplier is equal to__

1/1 - (MPC x (1- t) - MPI) = 1.67

Assume a fixed amount of taxes and a closed economy and that the marginal propensity to consume equals .5, calculate the value of the following multipliers. The government purchases multiplier equals ___ The tax multiplier equals ____ The balanced budget multiplier equals ____

1/1-MPC = 2, -MPC/1-MPC = -1 1- MPC / 1 - MPC = 1

The United States is divided into ___ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of ___ members appointed by the president of the U.S to 14-year, non-renewable terms. One of the board members is appointed to a ___ year, renewable term as the chairman.

12, 7 & 4

Alan Greenspan

Agreed with Paul Volcker about the importance of keeping inflation low.

Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to long-run macroeconomic equilibrium

Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.

Evaluate the following statement: "Banks use deposits to make consumer loans to households and commercial loans to business. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve

As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment?

Federal funds rate

In the figure to the right, at what point is the inflation rate stable? This is, at what point can we refer to the inflation rate as the non accelerating inflation rate of unemployment?

Point C

Complete the following table fir a static AD-AS model:

Problem: Recession Policy: Expansionary Actions: ^ Gov't Spending or Decrease Taxes Result: Real GDP and pice level rise Problem: Rising inflation Policy: Contractionary Actions: Decrease gov't spending or ^ Taxes Result: Real GDP and price level fall

Policy that is specifically designed to affect supply an increase incentives to work, save and start a business, by reducing the tax wedge is called

Supply-side economics

What is it considered "good policy" for the government to run a budget deficit?

When borrowing is used for long-lived capital goods.

One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase

current income

Increased government debt can lead to higher interest rates and as a result, crowing out private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?

1) Debt-spending on education 2) Debt spending on highways and ports 3) Debt-spending on research and development ANSWER: All of the above

Which of the following is a monetary policy tool used by the Federal Reserve Bank?

1) Decreasing the rate at which banks can borrow money from the Federal Reserve. 2) Buying $500 million worth of government securities, such as Treasury bills. 3) Increasing the reserve requirement from 10% to 12.5% ANSWER: All of the Above

How does a budget deficit act as an automatic stabilizer and reduce the severity of a recession?

1) During recessions, tax obligations fall due to falling wages and profits. 2) Transfer payments to households increase. 3) Consumers spend more than they would in the absence of social insurance programs, like unemployment. ANSWER: All of the Above

The figure to the right illustrates the dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move AD2 to Ad2policy and each equilibrium (point C) in the second period?

Increase government spending

Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD1 to AD2. As a result both price level and real GDP increased. When can be said, however, about the increase in real GDP?

It increased by less than indicated by multiplier with a constant price level.

When SRAS1 shifts to SRAS2, the price level increases and the level of real GDP falls. What happens to the short-run Phillips curve when the short-run aggregate supply curve shifts (a supply shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

As a result of crowding out in the short run, the effect on real GDP of an increase in government spending is often

Less than the increase in government spending

Paul Volcker is credited largely with which of the following?

1) The "Volcker disinflation." 2) Fighting inflation by reducing the growth of the money supply. ANSWER: A and B only

In the figure to the right, expected inflation is initially at 1.5%. When expected inflation increases to 4.5% which of the following will occur?

1) To have 3.5% unemployment rate, inflation wold be 7.5% 2) Unemployment reaches the natural rate of 5% 3) At the natural rate of unemployment, inflation is 4.5% ANSWER: All of the Above

Which of the following is true with respect to Irving Fisher's quantity equation, M x V = P x Y?

1) V = Average number of times a dollar is spent on goods and services. 2) V = PxY/M 3) < = M1 definition of the money supply 4) P = the GDP deflator ANSWER: All of the Above

Similarly, explain why a decrease in the marginal propensity to import would increase the size of the government purchases multiplier. The value of the government purchases multiplier would decrease in the formula for the multiplier the denominator is

1- [MPC x (1 - t) - MPI]

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the federal government to pursue a(n) ____________ fiscal policy. If the government's policy is successful, what is the effect of the policy o the following macroeconomic indicators? Actual real GDP _________________ Potential real GDP ________________ Price level _______________________ Unemployment __________________

Contractionary Decreases Does not change decreases increases

In 2008, the required reserve ratio for a bank;s first $.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10 percent on all deposits. Therefore the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less then, or equal to the simple deposit multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.

If actual inflation is higher than expected inflation, the

actual real wage is less than the expected real wage: unemployment falls

The U.S dollar can be best described as

Fiat Money

Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

Real business cycle models

According to the quantity theory of money, inflation results from which of the following?

The money supply grows faster than real GDP.

If, in the long run, real GDP returns to its potential level, then in the long run,

the Phillips curve is vertical