ECON Exam 3 Practice
Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output gap is therefore _____%.
-10
In your current job, you earn $55,000. You take the standard deduction of $12,200. You have an offer of a new job working for a different employer. Your salary would go up by $5,000. Given your current taxable income, what is your marginal tax rate?
22%
Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.
A $250 billion increase in government spending
If the central bank reduces the quantity of money that is circulating in the economy, the _____ curve will shift to the _____.
AD1; left
How can "crowding out" be a negative side effect of fiscal policy?
Citizens and businesses find it more expensive to borrow money, which reduces aggregate demand. This is a negative side effect because it increases government debt
A 25% tariff on steel imports is implemented. Ceteris paribus, which of the graphs shows the correct effect on the AD-AS framework for the importing country?
Decreased AS Increased price level Decreased GDP
Which of the following is a reason NOT to worry about government debt?
Future generations can help repay the debt.
How is monetary policy different from fiscal policy?
Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.
You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when productivity increases in the economy?
Prices decrease, and GDP increases.
Based on Okun's rule of thumb, if you forecast that the output gap will decline from 0% to -3%, the unemployment rate will:
Rise by 1.5%
What is the floor framework that the Federal Reserve uses to influence the federal funds rate?
The Fed's approach of setting other interest rates to put a lower bound on how low the federal funds rate can go
Potential output would NOT be increased by
a decrease in the aggregate price level
An excise tax is a tax on:
a specific product
Macroeconomic equilibrium occurs where:
aggregate demand intersects with aggregate supply
On which of the following is there a tax incentive in the United States? (i) health insurance purchased through employers (ii) your mortgage (iii) rental value on owner-occupied housing (iv) contributions toward your retirement account
all of the above
If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:
an increase in government spending.
Which of the following services are provided by local government?
bus services
Monetary policy affects GDP and the price level by:
changing aggregate demand.
The short-run aggregate supply curve will shift to the left if:
commodity prices rise
If the Turkish Central Bank forecasts a negative output gap, you can reasonably expect _____ on the horizon.
deflation
(Figure: Equilibrium in the Money Market) Refer to Figure: Equilibrium in the Money Market. If the rate of interest is below equilibrium, there will be an excess _____ money and the interest rate will _____
demand for; rise
Which of the following stages of the business cycle is most preferable when you graduate from college and begin looking for a job?
expansion
Suppose that an economy is in a recession. You would expect to see real GDP:
fall below potential GDP.
The Federal Reserve will lose money as a lender of last resort if:
financial institutions fail to pay back their loans
Government spending adds directly to GDP through _____ and indirectly through _____.
government purchases; transfer payments
Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 3%, then the Fed will want the new real interest rate to be:
higher than the neutral interest rate.
The long run in macroeconomic analysis is a period:
in which nominal wages and other prices are flexible.
If the Federal Reserve buys treasury bills in the open market, the quantity of money in the money supply will ____
increase
Shift right of the Aggregate Demand Curve
increase in government spending
If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____.
increase; decrease
The purpose of "Fedspeak" was to:
minimize market reactions from Federal Reserve statements.
A fall in prices leads to a:
movement down and to the right along the same aggregate demand curve.
The long-run level of output is known as _____ output.
potential
The Federal Reserve was created to:
provide stability in the banking sector and the economy.
Forward guidance occurs when the Federal Reserve:
provides information about the future course of monetary policy in order to influence expectations about future interest rates.
Mandatory spending is spending that:
supports programs that do not get determined annually but instead are set in law.
The marginal tax rate is the:
tax rate you pay if you earn another dollar.
The members of the Federal Open Market Committee (FOMC) who can actually vote on policy decisions are:
the Fed governors, the New York Fed president, and a rotating group of four other district bank presidents.
In the AD-AS framework, price and quantity are represented by _____, respectively.
the GDP deflator and the real GDP
What are overnight reverse repurchase agreements?
the sale of government bonds to financial institutions, with an agreement to purchase the bonds back the next day, at a higher price
The size of the multiplier increases as the size of the marginal propensity to consume increases.
true
An example of a lagging indicator is:
unemployment insurance claims.
The long-run supply curve illustrates how the aggregate output supplied is _____ the aggregate price level.
unrelated to
In the short run, a positive demand shock _____ aggregate output and _____ the aggregate price level.
increases; increases
When the Federal Reserve purchases more long-term bonds, this:
lowers long-term bond interest rates.
If an economy has a negative output gap of 2%, this means:
GDP is 2% below potential GDP.
The wealth effect is the:
inverse relationship between prices and consumption spending due to changes in real wealth.
The Federal Reserve's lender-of-last-resort function means that it:
lends to financial institutions when they are having trouble getting loans.
If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer payments is:
less than 4
In a recessionary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.
lower; induce
In late 2008, the Federal Reserve began purchasing billions of dollars' worth of mortgage-backed securities from banks. This was evidence of:
quantitative easing
The lower bound for the federal funds rate is set by
repurchase agreements and interest on excess reserves
Expansionary monetary policy causes a:
right shift of the aggregate demand curve
Ceteris paribus, a decrease in imports leads to a:
right shift of the aggregate demand curve.
Potential output is the level of real GDP that:
the economy would produce if all prices, including nominal wages, were fully flexible.
Suppose a high-income person, a middle-income person, and a low-income person purchase identical houses that are financed by similar mortgages. Who gets the largest tax benefit?
the high-income person
A change in _____ does NOT shift the money demand curve.
the interest rate
The government's debt is:
the accumulation of all the deficits.
The quantity demanded of money is negatively related to _____, and the demand for money is positively related to _____.
the interest rate; real GDP
In the long run, the aggregate supply curve is vertical because the:
quantity of output returns to potential GDP as market prices adjust and resource markets return to equilibrium
a recessionary gap
when aggregate output is below potential output
