ECO213 MACRO STUDY GUIDE #3

Suppose that the nominal wage, the expected and actual price levels, and the expected and actual inflation rates for a hypothetical economy in 2025 are presented in the table above. What is the expected real wage rate in 2025? A) $28.57 B) $28.12 C) $29.41 D) $29.73

$29.41

One of the positive affects of the flat tax is that A) it increases the paperwork associated with taxes. B) it reduces compliance costs in filing taxes. C) it decreases labor supply. D) it will increase interest rates.

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Which of the following would be considered a fiscal policy action? A) A federal tax cut on hybrid cars that is designed to encourage the purchase of fuel efficient cars. B) A city changes its hotel tax to attract tourists. C) Spending on the war in Afghanistan to promote homeland security. D) A tax cut designed to stimulate spending passed during a recession

A tax cut designed to stimulate spending passed during a recession

Suppose the Fed raises the money supply. Which of the following is true? A) At the original interest rate, the quantity of money demanded is equal to the quantity of money supplied. B) The interest rate must rise for the money market to clear. C) At the original interest rate, the quantity of money demanded is greater than the quantity of money supplied. D) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.

At the original interest rate, the quantity of money demanded is less than the quantity of money supplied

Why doesn't the Fed have both a money supply target and an interest rate target? A) The Fed controls money demand but not money supply, so it cannot set the equilibrium values of both. B) The Fed controls money supply but not money demand, so it cannot set the equilibrium values of both. C) The Fed controls both money supply and money demand, but setting both targets will destabilize the economy. D) The Fed can only control money demand.

The fed controls money supply but not money demand, so it cannot set the equilibrium values of both

Accumulating debt can be a problem for the federal government because A) the debt has to ultimately be paid off. B) a large debt to GDP ratio causes crowding out. C) purchases of roads and bridges add burden but no benefit to the economy. D) it is currently in danger of defaulting on on the debt.

a large debt to GDP ratio causes crowding out

Supply-sider fiscal policy actions that are intended to have long-run affects attempt to increase ______ by lowering ______ and encouraging work and entrepreneurship A) aggregate demand; taxes B) aggregate supply; government spending C) aggregate demand; government spending D) aggregate supply; taxes

aggregate supply; taxes

As the fed increases the money supply and lowers the interest rates, this will A) decrease the value of the dollar and lower net exports. B) decrease spending on consumer durables. C) decrease spending on new homes. D) artificially increase investment projects by firms in the short run.

artificially increase investment projects by firms in the short run

The cyclically adjusted budget deficit calculates the budget surplus or deficit A) as if the economy was producing below potential GDP. B) as if the economy were in recession. C) as if the economy was producing above potential GDP. D) as if the economy were at potential GDP.

as if the economy was producing below potential GDP

The Fed A) can have difficulty distinguishing the minor ups and downs of the economy from a recession. B) can easily determine if a drop in production means a recession is inevitable. C) always times its policy responses correctly. D) can easily distinguish the minor ups and downs of the economy from a recession

can have difficulty distinguishing the minor ups and downs of the economy from a recession

If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will A) fall substantially and investment and consumer spending will change very little. B) rise substantially and investment and consumer spending will rise substantially. C) fall substantially and investment and consumer spending will fall substantially. D) change very little and investment and consumer spending will change very little.

change very little and investment and consumer spending will change very little

A decrease in Real GDP can A) decrease money demand and decrease the interest rate. B) increase money demand and decrease the interest rate. C) increase money demand and increase the interest rate. D) decrease money demand and increase the interest rate.

decrease money demand and decrease the interest rate.

All else equals, an increase in the money supply will; A) have no affect on the interest rate. B) decrease the interest rate. C) decrease the equilibrium quantity of money in the economy. D) increase the interest rate.

decrease the interest rate

Suppose congress reduces income taxes. Assume that the movement from A to B represents normal growth in the economy before the tax change. Also assume that aggregate demand does not change.If the tax change is effective and labor supply and savings increase because of the tax change, then the tac change will A) not change the price level. B) shift LRAS2 to the left. C) decrease the price level to less than P2. D) decrease output to less than Y2.

decrease the price level to less than p2

A monetary policy rule can ____ the Fed's credibility and ____ the fed's ability to us discretionary monetary policy. A) decrease; limit B) increase; limit C) increase; enhance D) decrease; enhance

decrease; enhance

In the short run, the federal budget deficit acts as an automatic stabilizer because A) Medicaid payments increase during expansionary periods. B) unemployment insurance payments decrease during a recession. C) food stamp payments increase during expansionary periods. D) government tax revenues decrease during a recession.

government tax revenues decrease during a recession

Crowding out results in A) higher interest rates, a lower exchange rate, and lower net exports. B) lower interest rates, a lower exchange rate, and lower net exports. C) higher interest rates, a higher exchange rate, and lower net exports. D) lower interest rates, a higher exchange rate, and lower net exports.

higher interest rates, higher exchange rate, and lower net exports

An increase in real GDP can A) decrease money demand and decrease the interest rate. B) increase money demand and increase the interest rate. C) decrease money demand and increase the interest rate. D) increase money demand and decrease the interest rate.

increase money demand and increase the interest rate

The fed's two main monetary policy targets are A) the money supply and short term interest rates. B) the inflation rate and real GDP C) short term interest rates and real GDP. D) the money supply and the inflation rate.

the money supply and short term interest rates

Which of the following describes what the Fed would do to pursue an expansionary monetary policy? A) Use discount policy to raise the discount rate. B) The Fed would raise the reserve requirement. C) Use open market operations to buy Treasury bills. D) Use open market operations to sell Treasury bills.

use open market operations to buy treasury bills

If the Fed's policy is described as contractionary, then it would A) lower the reserve requirement. B) lower the discount rate. C) use open market operations to sell Treasury bills. D) use open market operations to buy Treasury bills.

use open market operations to sell treasury bills

Cutting personal income taxes by a specific fixed amount A) will lower household income and lower consumer spending. B) will raise household income and lower consumer spending. C) will raise household income and raise consumer spending. D) will lower household income and raise consumer spending

will raise household income and raise consumer spending

The leader of the monetarist school and major proponent of a monetary growth rule was A) Alan Greenspan. B) Milton Friedman. C) Ben Bernanke. D) Paul Volker.

Milton Friedman

In which of the following situations would the fed conduct contractionary monetary policy? A) The Fed fears that unemployment is climbing above the natural rate. B) The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP, thus causing rising inflation. C) The Fed believes that aggregate demand was growing too slowly to keep up with potential GDP. D) The Fed is worried that deflation will become a problem.

The fed is concerned that aggregate demand would continue to exceed the growth in potential GDP, thus causing rising inflation.

The body that is responsible for dating the beginning and ending dates for a recession is A) the National Bureau of Economic Research. B) the Fed. C) the Bureau of Economic Analysis. D) the Congress.

The national Bureau of Economic Analysis

Which of the following summarizes the president's and congress' role in conducting monetary policy, or at least in theory? A) Congress and the president do not play a role in conducting monetary policy. B) Congress directs the FOMC on what its interest rate targets should be. C) The president submits input to the chairman and the FOMC votes on it. D) Both the president and Congress determine the level of funds that the Fed needs to operate, and thereby influence policy.

The president and congress do not play a role in conducting monetary policy

If the federal governments expenditures are more than its tax revenues, then A) a budget surplus results. B) expansionary monetary policy results. C) the budget is balanced. D) a budget deficit results.

a budget deficit results.

If the federal government's expenditures are less than its tax revenues, then A) the government is deficit spending. B) the budget is balanced. C) a budget surplus results. D) a budget deficit results.

a budget surplus results.

Government spending and taxes that take place with conscious government action are called ______, and government spending and taxes that take place "automatically" without conscious government action are called _____. A) automatic stabilizers; monetary policy B) discretionary fiscal policy; conscious fiscal policy C) discretionary fiscal policy; automatic stabilizers D) automatic stabilizers; discretionary fiscal policy

discretionary fiscal policy; automatic stabilizer

Just as real GDP _____ potential GDP in the long run, the unemployment rate _____ the natural rate of unemployment in the long run. A) is not related to; is not related to B) is less than; is less than C) is greater than; is greater than D) equals; equals

equals; equals

When the market price of a financial asset _____ its interest rate will ____ A) falls; rise B) rises; rise C) falls; fall D) rises; does not change

falls; rise

An increase in real GDP A) increases the buying and selling of goods and increases the demand for money as a medium of exchange. B) decreases the buying and selling of goods and decreases the demand for money as a medium of exchange. C) decreases the buying and selling of goods and increases the demand for money as a medium of exchange. D) increases the buying and selling of goods and decreases the demand for money as a medium of exchange.

increases the buying and selling of goods and increases the demand for money as a medium of exchange

If crowding out occurs, an increase in government deficit spending A) increases the interest rate and consumption and investment spending rise. B) increases the interest rate and consumption and investment spending decline. C) decreases the interest rate and consumption and investment spending decline. D) decreases the interest rate and consumption and investment spending rise.

increases the interest rate and consumption and investment spending decline

The federal government debt ____ when the federal government runs a deficit and ___ when the federal government runs a surplus A) increases; increases B) decreases; increases C) decreases; decreases D) increases; decreases

increases; decreases

Expansionary fiscal policy ____ the price level and _____ equilibrium real GDP in the short run. A) decreases; increases B) increases; decreases C) decreases; decreases D) increases; increases

increases; increases

Money demand will increase if the price level ____ or if real GDP ____ A) decreases; decreases B) decreases; increases C) increases; decreases D) increases;increases

increases; increases

A government could use control of a central bank to further its political interests by A) decreasing the money supply before an election to decrease inflation. B) decreasing the money supply before an election to increase inflation. C) increasing the money supply before an election to increase production and employment. D) increasing the money supply before an election to decrease production and employment.

increasing the money supply before an election to increase production and employment

The multiplier effect is the series of _____ increases in _____ expenditures that result from an intentional increase in ____ expenditures A) autonomous; investment; induced B) induced; investment; autonomous C) autonomous; consumption; induced D) induced; consumption; autonomous

induced; consumption; autonomous

The federal funds rate A) is determined administratively by the Fed. B) is determined directly by firm demand for funds. C) is determined directly by household demand for funds. D) is determined by the supply and demand of bank reserves.

is determined by the supply and demand of bank reserves

The argument for adopting a monetary growth rule is that A) active monetary policy does a good job maintaining price stability. B) active monetary policy does a good job keeping the economy at full employment. C) the growth rate of M1 has been unstable. D) it is believed that active monetary policy destabilizes the economy and make the business cycle worse, not better

it is believed that active monetary policy destabilizes the economy and make the business cycle worse, not better

The money demand curve has a negative slope because A) lower interest rates cause households and firms to switch from money to financial assets. B) lower interest rates cause households and firms to switch from financial assets to money. C) lower interest rates cause households and firms to switch from money to bonds. D) lower interest rates cause households and firms to switch from money to stocks.

lower interest rates cause households and firms to switch from financial assets to money

Slow growth in aggregate demand leads to _____ inflation and _____ unemployment in the short run. A) higher; lower B) higher; higher C) lower; lower D) lower; higher

lower; higher

Which of the following is NOT a goal of monetary policy? A) price stability B) low unemployment C) maximizing the value of the dollar relative to other currencies D) economic growth

maximizing the value of the dollar relative to other currencies

Rising prices erode the value of money as a ____ and a ____ A) medium of exchange; store of value B) unit of barter; unit of account C) store of value; unit of barter D) store of value; unit of liquidity

medium of exchange; store of value

Suppose that the economy is at point A on the Phillips curve graph. Suppose that the aggregate demand curve in the economy shifts to the right by more than the long run aggregate supply A) remain at point A on the Phillips curve. B) move to point B on the Phillips curve. C) move to point C on the Phillips curve. D) move to point D on the Phillips curve

move to point B on the Phillips curve

Increases in government deficit spending results in ____ in the short run, and permanent increases in government spending result in ___ in the long run A) complete crowding out; complete crowding out B) partial crowding out; partial crowding out C) complete crowding out; partial crowding out D) partial crowding out; complete crowding out

partial crowding out; complete crowding out

Reducing the marginal tax rate on income will A) increase the tax wedge faced by workers and increase labor supplied. B) lower the return to entrepreneurship and encourage the opening of new businesses. C) raise the return to entrepreneurship and discourage the opening of new businesses. D) reduce the tax wedge faced by workers and increase labor supplied.

reduce the tax wedge faced by workers and increase labor supplied.

Suppose that the economy is at point A on the Phillips curve graph. Suppose that the aggregate demand curve shifts to the right by the same amount as long run aggregate supply. Then the economy will A) remain at point A on the Phillips curve. B) move to point B on the Phillips curve. C) move to point C on the Phillips curve. D) move to point D on the Phillips curve.

remain at point A on the Phillips curve

If tax reduction and tax simplification are effective, then A) labor supply decreases. B) less new firms are formed. C) saving should increases. D) investment decreases.

saving should increase

The fed can increase the federal funds rate by A) buying Treasury bills, which decreases bank reserves. B) selling Treasury bills, which decreases bank reserves. C) buying Treasury bills, which increases bank reserves. D) selling Treasury bills, which increases bank reserves.

selling treasury bills, which decrease bank reserves

In the short run, expansionary fiscal policy would typically A) shift the aggregate demand curve to the left. B) shift the short run aggregate supply curve to the right. C) shift the short run aggregate supply curve to the left. D) shift the aggregate demand curve to the right.

shift the aggregate demand curve to the right

If the Fed FOMC buys Treasury bills through an open market purchase, this will A) shift the money supply curve to the left. B) shift the money supply curve to the right. C) shift the money demand curve to the right. D) shift the money demand curve to the left.

shift the money supply curve to the right

The Phillips curve illustrates that there is a A) long-run positive relationship between unemployment and inflation. B) short-run negative relationship between unemployment and inflation. C) long-run negative relationship between unemployment and inflation. D) short-run positive relationship between unemployment and inflation.

short-run positive relationship between unemployment and inflation

Fiscal policy is defined as changes in federal ___ and ___ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) taxes; interest rates B) taxes; purchases C) interest rates; money supply D) taxes; the money supply

taxes; purchases

Milton Friedman argued that there is a _____ tradeoff between unemployment and inflation, and this tradeoff comes from _____ inflation. A) permanent; actual B) temporary; unanticipated C) permanent; unanticipated D) temporary; actual

temporary; unanticipated

if the fund raises its target for the federal fun rate, this indicates that A) the Fed is pursuing an expansionary monetary policy. B) the Fed is attempting to combat deflation. C) The Fed is concerned that the growth in aggregate demand is too slow to keep up with potential GDP. D) the Fed is pursuing a contractionary monetary policy.

the fed is pursuing a contractionary monetary policy

If the fed lowers its target for the federal fund rate, this indicates that A) the Fed is attempting to combat inflation. B) the Fed is pursuing an expansionary monetary policy. C) the Fed is pursuing a contractionary monetary policy. D) the Fed is concerned that the growth in aggregate demand will exceed potential GDP.

the fed is pursuing an expansionary monetary policy

The total value of the U.S. Treasury bonds outstanding is A) the federal government deficit. B) the cyclically adjusted budget deficit. C) the federal government surplus. D) the federal government debt.

the federal government debt

Which of the following is a government expenditure but not a government purchase? A) The federal government pays the salary of an FBI agent. B) The federal government buys a Humvee. C) The Federal government pays to support research on Aids. D) The federal government pays out an unemployment insurance claim.

the federal government pays out an unemployment insurance claim

The federal funds rate is A) the interest rate on a Treasury Bill. B) the interest rate a bank charges its best customers. C) the interest rate a bank charges each other for overnight loans. D) the interest rate the Fed charges commercial banks.

the interest rate a bank charges each other for overnight loans

A monetary growth rule means that A) the Fed will lower interest rates if it thinks a recession is on the horizon. B) the money supply should grow in response to economic conditions. C) the money supply should grow at a constant rate independent of the ups and downs in real GDP. D) the Fed will raise interest rates if it thinks the economy is growing faster than potential.

the money supply should grow at a constant rate independent of the ups and downs in real GDP

The empirical evidence presented by Summers and Alesina describing the relationship between central bank independence and inflation shows that A) there is no relationship between central bank independence and inflation. B) the more independent the central bank the lower the inflation rate. C) the less independent the central bank the lower the inflation rate. D) the more independent the central bank the higher the inflation rate.

the more independent the central bank the lower the interest rate

Suppose the economy is at at point B on the short run Phillips curve. If workers and firms adjust their expectations about inflation upward, anticipating higher inflation in the future, then A) the short-run Phillips curve will shift to the right. B) the short-run Phillips curve will become steeper. C) each unemployment rate will be associated with lower inflation rates. D) unemployment will fall below the natural rate

the short run Phillips curve will shift to the right

Both Milton Friedman and Edmund Phelps argued that if the long-run aggregate supply curve was vertical, then A) the slope of the long-run Phillips curve must be zero. B) the slope of the long-run Phillips curve must be positive. C) the slope of the long-run Phillips curve must be infinite (vertically shaped). D) the slope of the long-run Phillips curve must be negative.

the slope of the long-run Phillips curve must be infinite (vertically shaped)

If actual inflation is greater than expected inflation A) the unemployment rate falls. B) the actual real wage equals the expected real wage. C) the actual real wage is greater than the expected real wage. D) firms will hire less workers than they planned.

the unemployment rate falls

If the long run Phillips curve is vertical, then A) there is a tradeoff between inflation and unemployment in the long run. B) there is a tradeoff between inflation and unemployment in the long run, but not in the short run. C) there is no tradeoff between inflation and unemployment in the long run. D) there is no tradeoff between inflation and unemployment in the short run.

there is no tradeoff between inflation and unemployment in the long run.

Both Milton Friedman and Edmund Phillips argued A) permanently higher inflation was the cost of permanently lower unemployment in the long run. B) there was no trade-off between inflation and unemployment in the long run. C) the Phillips curve represented a menu of policy choices in the long run. D) permanently higher unemployment was the cost of permanently lower inflation in the long run.

there was no trade-off between inflation and unemployment in the long run

The fastest growing category of government expenditure is A) transfer payments. B) defense spending. C) government purchases. D) grants to state and local governments.

transfer payments

Which of the following is the largest category of federal government expenditures? A) grants to state and local governments B) transfer payments C) defense spending D) interest on the debt

transfer payments

The Phillips curve shows the short run relationship between A) real wages and real GDP B) real GDP and the inflation rate. C) unemployment and the inflation rate. D) real wages and the inflation rate

unemployment and the inflation rate