Econ Chapters 11 & 12 Quiz

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, an open market purchase would cause

a shift of the aggregate demand curve from AD1 to AD2.

All of the following are instruments of fiscal policy except

an interest rate cut

In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do?

Increase government spending

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by:

M × V = P × Y.

Which of the following is an interest rate that the Fed has targeted in the last several years?

The federal funds rate

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap

by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand.

If the federal budget is initially balanced and government expenditures remain constant, then an increase in GDP will _________ tax revenues and create a budget _________.

increase tax revenues and create a budget surplus.

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c,

it is in a recessionary gap.

If there is an inflationary gap in the economy, discretionary fiscal policy would likely involve an action to

shift the aggregate demand curve to the left

If the economy's long-run aggregate supply curve is LRAS1, and if the economy is in equilibrium at Y 1, supply-side economists would advocate

tax cuts to stimulate LRAS and SRAS and move them to LRAS2 and SRAS2.

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap by buying bonds. In the bond market,

the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.

According to the text, in many respects, the single most powerful economic policymaker in the United States is

the federal reserve

The delay between the time a policy is enacted and the time the policy has its effect on the economy is called

the impact lag

The lag in realizing that a macroeconomic problem exists is called

the recognition lag

Payments to households that do not require anything in exchange are called

transfer payments

A transfer payment that rises automatically during a recession is

unemployment compensation.

A recessionary gap can be closed with

using an expansionary fiscal policy.

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the

implementation lag

Government tax and expenditure policies that affect real GDP are called

fiscal policy

The rational expectations hypothesis suggests that

people use all available information to make forecasts about future economic activity and adjust their behavior to these forecasts.