Econ Final
Which of the following events would cause the supply curve in the foreign exchange market to shift?
Increase in foreign interest rates. B. Changes in expectations of the future value of foreign currencies. C. Increased demand for foreign goods and services. D. All of the above.
In order to attract foreign investment, the government of Alzuria had introduced various economic reforms five years back. Although the country is heavily dependent on imports, with increased foreign direct investments and foreign portfolio investments, the Alzurian economy grew at a faster pace for the last few years. The government is currently considering removing all restrictions on cross-border capital flows and allowing its currency to float freely. Dmitri Smirnoff, an importer of clothing and textiles, is of the opinion that unrestricted cross-border capital flows could hurt the economy. His business partner, Anna Azarov, however feels that the exchange rate is likely to appreciate and therefore benefit all importers. Which of the following, if true, will strengthen Dmitri's claim that unrestricted cross-border capital flows could hurt the economy?
Alzuria's currency is artificially overvalued to help importers.
An article published in a leading trade journal in the country Avalon states that Avalon's current account balance will improve in the coming year. The author reasons that since the government is expected to run a budget surplus in the next fiscal year, this should lead to a current account surplus. Frank Nicolai, an economist, publishes a rejoinder in the same journal. He says that international transactions are controlled by multiple factors. Hence a budget surplus may not necessarily indicate a trade surplus. Which of the following, if true, will support Frank's claim that current account balance may not improve in spite of a budget surplus?
Avalon's inability to meet global environmental standards is causing many trading partners to impose high import barriers on goods manufactured in Avalon.
A "premature tightening" of the "pace of purchases" would slow down the economic recovery because this action would be
contractionary, reducing lending and economic activity.
The growth rate of real GDP in the country of West Pruasia was very low last year. The government was unable to fully meet its expenses with the revenue generated during the year. A committee was appointed to suggest appropriate policy measures to boost economic growth. Some of the committee members were of the opinion that an expansionary fiscal policy alone should be able to increase aggregate demand and output sufficiently. Other members of the committee, however, disagreed. According to them, expansionary fiscal policies may not suffice and the government should consider monetary policy measures instead, especially when the government already has a fiscal deficit. The government of West Pruasia decided that they would increase government spending considerably to boost aggregate demand in the economy. The government planned and implemented a series of nationwide programs aimed at increasing output and employment. A review of the impact of the higher government spending showed that the increase in aggregate demand was much larger than anticipated. Which of the following, if true, would explain this outcome?
Interest rates in West Pruasia are still lower than in most other countries.
The Taylor rule for federal funds rate targeting does which of the following?
It links the Fed's target for the federal funds rate to economic variables.
After September 11, 2001, 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 growing economy of Platonia has been consistently running a current account surplus for the past few years. Two industry experts, Nicole Watson and Denise Kohl, are discussing the implications of a current account surplus on the economy as a whole. Nicole is of the opinion that a persistent current account surplus indicates that the country does not attract a lot of FDI. She also feels that the financial account balance is unlikely to improve in the near future, which could pose a bottleneck for economic growth. Denise, however, feels that the persistent current account surplus is reflective of Platonia's competitive exports. In fact, she feels that the focus on exports will continue to drive economic growth. Which of the following, if true, will weaken Nicole's claim that the financial account balance will not improve in the near future?
Platonia is increasingly emerging as a likely outsourcing destination due to low labor costs and a skilled workforce.
How does real GDP LOADING... deal with the problem inflation causes with nominal GDP?
Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. B. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced. C. Real GDP separates price changes from quantity changes. D. All of the above.
In the graph of the money market shown on the right, what could cause the money supply curve to shift from MS11 to MS22?
The Fed decreases the money supply by deciding to sell U.S. Treasury securities.
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
The latest estimates published by the government of Rossland, a small open economy, shows that the government's expenses over the next year are expected to be $50 million. The tax revenue on the other hand, is likely to be $45 million. The data also projects that the real GDP of the country will be approximately $130 million and that the household spending on consumption is likely to amount to $70 million. The domestic investment, however, is expected to be low at $40 million. At the end of the following year, it was noted that tax revenue was actually $46.5 million, while the other estimates (real GDP, investment, government expenditure, and consumption) were accurate. Which of the following must also be true, given that the other four variables were correctly estimated?
The actual level of national savings was equal to what was estimated.
Use the graph to help determine which one of the following statements is true:
The average American in the year 2006 could buy nearly eight times as many goods and services as the average American in the year 1900.
A recent report on GDP growth rates showed that the GDP of Dorada, a developed economy, has declined by 1.5 percent this year. Emily George and her friend Tabitha Jude, both students of economics, are discussing the possible reasons for the decline in the growth rate. Emily feels that the government deficit has reached an unsustainable level, as a result of which interest rates now are extremely high. This has reduced government expenditure in recent times, leading to a decline in GDP. Tabitha however disagrees. According to her, the fall in GDP must imply a fall in consumer spending as household consumption accounts for the largest share in Dorada's GDP. Which of the following, if true, will weaken the claim that a fall in government expenditure was mainly responsible for the decline in GDP?
The domestic currency sharply appreciated against a basket of currencies earlier this year.
Firm X, a leading manufacturer of rubber tires in country A, caters to almost one-third of the domestic tire market. The country was hit by a recession last year that caused the national output growth to be negative. Simon Reeds, the CEO of firm X, feels that these fluctuations in the business environment are short-lived and expects the economy to recover very soon. In spite of the recession, Simon feels that the firm can actually invest in expanding its facilities as it has sufficient cash flows to continue its operation during the crisis period. The firm's marketing head, Sandra Jones, counters this by saying that the firm is already losing sales due to the recession and they should not increase costs further by making large-scale investments in the present climate. Which of the following, if true, would support the CEO's claim?
The government recently announced a plan to offer incentives to buyers in the car and household appliances market.
The latest estimates published by the government of Rossland, a small open economy, shows that the government's expenses over the next year are expected to be $50 million. The tax revenue on the other hand, is likely to be $45 million. The data also projects that the real GDP of the country will be approximately $130 million and that the household spending on consumption is likely to amount to $70 million. The domestic investment, however, is expected to be low at $40 million. Which of the following can be inferred from the information given above?
The net capital inflow to Rossland is expected to be $30 million next year.
Paul Schumer and Jim Miller, two analysts at a research institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the following, if true, will weaken Paul's argument?
The number of foreign students enrolling in domestic universities has increased steadily in the last three years.
The production of LCD television sets in Australia increased by 20% this year as compared to last year. Those TV sets were no less advanced technologically than the sets sold in previous years. However, the value of the contribution LCD television sets made to Australia's nominal GDP during this year was the same as the previous year. Which of the following, if true, would best explain this outcome?
The price of LCD television sets declined in the past year.
In order to attract foreign investment, the government of Alzuria had introduced various economic reforms five years back. Although the country is heavily dependent on imports, with increased foreign direct investments and foreign portfolio investments, the Alzurian economy grew at a faster pace for the last few years. The government is currently considering removing all restrictions on cross-border capital flows and allowing its currency to float freely. Dmitri Smirnoff, an importer of clothing and textiles, is of the opinion that unrestricted cross-border capital flows could hurt the economy. His business partner, Anna Azarov, however feels that the exchange rate is likely to appreciate and therefore benefit all importers. Which of the following can most reasonably be concluded from the information given above?
The value of the domestic currency in the foreign exchange market is likely to become more volatile if the restrictions are removed.
Fiscal policy refers to:
The government's use of taxes and expenditures to achieve macroeconomic policy objectives.
Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.
Which of the following was the Fed's objective in using "quantitative easing" and "Operation Twist"?
To keep interest rates on mortgages low. B. To increase aggregate demand. C. To keep interest rates on 10-year Treasury notes low.
The growth rate of real GDP in the country of West Pruasia was very low last year. The government was unable to fully meet its expenses with the revenue generated during the year. A committee was appointed to suggest appropriate policy measures to boost economic growth. Some of the committee members were of the opinion that an expansionary fiscal policy alone should be able to increase aggregate demand and output sufficiently. Other members of the committee, however, disagreed. According to them, expansionary fiscal policies may not suffice and the government should consider monetary policy measures instead, especially when the government already has a fiscal deficit. Which of the following, if true, would suggest that monetary policy may work better than fiscal policy in the current situation?
West Pruasia is an open economy with a freely floating exchange rate regime.
Why does inflation make nominal GDP LOADING... a poor measure of the increase in total production from one year to the next?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
Expansionary monetary policy on the part of the central bank of the Unoted Kingdom
a decrease in interest rates in the United Kingdom and a decrease in the value of the pound relative to other currencies.
The "twin deficits" refers to the idea that
a government budget deficit may lead to a current account deficit.
Increases in real GDP per capita increase life expectancy at birth.
agree
In the graph of the money market shown on the right, what could cause the money demand curve to shift from MD11 to MD22?
an increase in real GDP, an increase in price level
Relative to a market economy, a centrally-planned economy would be expected to be
better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.
If the government changes its tax policy and taxes only real interest payments and not nominal interest payments,
both saving and investment increase.
If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to
buy U.S. Treasury securities
How does the dynamic model of aggregate supply and aggregate demand explain inflation?
by showing that if total spending in the economy grows faster than total production, prices will rise
An increase in the money supply in the U.S. will not
cause the value of investing in U.S. financial assets to become more desirable to foreign investors.
In the figure to the right, the exchange rate between the Japanese yen and the U.S. dollar increased because demand increased by more than supply. As a result, what happens to U.S. real GDP?
decreases
Increases in real GDP per capita do not increase the amount of goods and services available to a country's citizens
disagree
Increases in real GDP per capita mean people will have a lower portion of leisure time over the course of their lives.
disagree
Since the United States has negative net foreign investment, its
domestic saving must be less than its domestic investment.
Concept Question 29.5.03 Both interest rate and exchange rate will be increased by
expansionary fiscal policy and contractionary monetary policy.
The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy.
Most economists agree that the above-market wage paid in unionized industries significantly increases the unemployment rate in the United States.
false
The multiplier effect is only a consideration for increases in government purchases.
false
If the Fed would no longer have a specific target for the money supply, it would be targeting the
federal funds rate
The interest rate that banks charge each other for overnight loans is called the
federal funds rate
The part of the balance of payments LOADING... that records purchases of assets a country has made abroad and foreign purchases of assets in the country is called
financial account
In economics, the term capital refers to
goods used to produce other goods.
Monetary policy has a greater impact on aggregate demand in an open economy than in a closed economy.
greater
The Fed changes the discount rateas a part of its policy to reach all of the following objectives except:
high unemployment
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.
high;low
Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce.
The equilibrium quantity of wine will The equilibrium price of wine will
increase only if demand increases more than supply decreases. increase
Higher interest rates strengthen a currency because they
increase the demand for the currency.
When the government runs a budget surplus, national saving
increases
If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then
inflation will be higher than if the Fed had not acted.
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
Keynes appears unconcerned if government spending is wasteful because
it will still lead to an increase in production and employment.
A strong Australia dollar would cause problems for Australian manufacturers because Australian manufactured goods will cost
more in terms of foreign currencies, and the demand for Australian manufactured goods will fall.
According to an article in the Economist: "countries with persistent current-account deficits tend to have higher real interest rates than surplus countries." Source: "Carry on Trading," Economist, August 10, 2013. What do high interest rates have to do with current account deficits? Current account deficits
must be funded through a financial account surplus which is facilitated by higher interest rates.
The difference between net exports and the current account balance is
net exports is a subcategory of the current account balance.
The current account records
net exports, net investment income, and net transfers.
In an economy with rising prices, compared to the base year,
nominal GDP is larger than real GDP in years after the base year.
Economists use the term fiscal policy to refer to changes in taxing and spending policies
only by the federal government.
The financial account records
only net capital flows.
The purchases Fed Chairman Bernanke is referring to are
open market purchases of government securities.
If a country saves more than it invests domestically, then its net foreign investment must be
positive
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could.
When the articles refers to a "weakening currency," it means that the Indian rupee will
purchase less foreign currency.
The sequester could create a headwind for the economic recovery because government spending cuts resulting from the sequester could
reduce aggregate demand
When the People's Bank of China "cut the amount of cash that banks must set aside as reserves," the monetary policy tool they used was a change in the
required reserve ratio.
From 2015 to 2016,
supply decreased more than demand increased.
When the author says a "strong Australian dollar," he means
the Australian dollar is worth more in terms of foreign currencies.
In 2013, Japan's government debt was approaching 250 percent of GDP, more than twice as high as in the United States. An article in the Economist noted that "the sheer size of the debt weighs ever more heavily." Source: "Don't Mention the Debt," Economist, May 4, 2013. Government debt weighs heavily on
the Japanese economy because of the taxes required to service the debt.
In the balance of payments, the difference between the value of the goods a country exports and the value of the goods a country imports is called
the balance of trade.
The balance of payments is equal to
the current account plus the financial account.
The primary reason for this change in the sources of mortgage finance was _____; the consequence of this change was also _____ in mortgage rates.
the development of a secondary mortgage market; a decrease
In the balance of payments, the current account records
the difference between transfers made to residents of other countries and transfers U.S. residents receive from other countries. B. imports and exports of goods and services. C. investments in foreign countries made by citizens of the United States and investments in the United States made by citizens of foreign countries
Assets Liabilities Reserves $10 million Discount loan $10 million Assume that before receiving the discount loan, FNB had no excess reserves LOADING... . The maximum amount of the $10 million that FNB can issue in loans is $10 million . Assume that the required reserve ratio is 10%. The maximum total increase in the money supply that can result from the Fed's discount loan is
100 million
When the Federal Reserve increases the required reserve ratio as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the interest rate.
The growing economy of Platonia has been consistently running a current account surplus for the past few years. Two industry experts, Nicole Watson and Denise Kohl, are discussing the implications of a current account surplus on the economy as a whole. Nicole is of the opinion that a persistent current account surplus indicates that the country does not attract a lot of FDI. She also feels that the financial account balance is unlikely to improve in the near future, which could pose a bottleneck for economic growth. Denise, however, feels that the persistent current account surplus is reflective of Platonia's competitive exports. In fact, she feels that the focus on exports will continue to drive economic growth. Which of the following, if true, will weaken Denise's view that the focus on exports will continue to drive economic growth in Platonia?
A group of European countries, that together account for a large proportion of Platonia's exports, have recently been hit by a severe financial crisis.
The graph to the right illustrates the static AD-AS model. Suppose the economy is initially in long-run equilibrium at point A. The government decides to decrease government spendingdecrease government spending. In the short-run, this contractionary fiscal policy will cause:
A shift from AD 2AD2 to AD 1AD1 and a movement to point D, with a lower price level and lower output.
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
the federal funds rate
Which of the following is not a correct comparison between an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
A. In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand falls. B. The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static. C. If the economy is below full employment, expansionary monetary policy will cause an increase in the price level in both models. D. All of the above are correct statements about the two models.
The part of the balance of payments LOADING... that records purchases of assets a country has made abroad and foreign purchases of assets in the country is called
the financial account.
The federal funds rate is
the interest rate that banks charge each other for overnight loans.
A recent report on GDP growth rates showed that the GDP of Dorada, a developed economy, has declined by 1.5 percent this year. Emily George and her friend Tabitha Jude, both students of economics, are discussing the possible reasons for the decline in the growth rate. Emily feels that the government deficit has reached an unsustainable level, as a result of which interest rates now are extremely high. This has reduced government expenditure in recent times, leading to a decline in GDP. Tabitha however disagrees. According to her, the fall in GDP must imply a fall in consumer spending as household consumption accounts for the largest share in Dorada's GDP. Which of the following, if true, will weaken Tabitha's argument?
Although sales tax rates remained unchanged, the government's revenue from sales taxes increased considerably this year.
Which of the following is not a viable monetary policy target for the Fed?
the money demand
If the FOMC orders the trading desk to sell Treasury securities
the money supply curve will shift to the left, and the equilibrium interest rate will rise.
Suppose instead that the demand curve shifts to the right. Then, relative to the initial market equilibrium,
the new equilibrium price would be higher and the new equilibrium quantity would be higher.
How would this action "pump money into the financial system to support lending"?
Banks can make more loans.
The unemployment rate in the United States typically has been lower than the unemployment rates in Canada and countries in Western Europe because
the opportunity cost of job search is lower in Canada and countries of Western Europe and unemployed workers in those countries search longer for jobs.
When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives,
the policies are consistent with economic incentives.
Concept Question 29.2.02 Real exchange rate is
the price of domestic goods in terms of foreign goods.
The two key factors that cause labor productivity to increase over time are
the quantity of capital per hour worked and the level of technology.
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,
the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent.
The Fed gave up targeting the money supply because
the relationship between monetary aggregates and other economic variables was becoming unreliable.
The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.
true
Additionally, the federal funds rate is
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
In 1914, Henry Ford increased the wage he paid workers in his car factory in Dearborn, Michigan to $5 per day. This wage was more than twice as much as other car manufacturers were paying. Ford was quoted as saying: "The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made." Giving workers a raise can result in overall lower costs for a firm if
workers are motivated by higher wages to work harder.
Which of the following is not one of the main sets of factors that cause the supply and demand curves in the foreign exchange market to shift?
Changes in the U.S. supply of oil and changes in the foreign supply of oil.
Two neighbors, countries A and B, produce books and blankets, among other goods and services. However, Country A produces more of both goods than country B. A student of economics, Maya, also notes that in both countries, these industries individually employ 30 percent of the population. She concludes that country A has an absolute advantage in the production of books and blankets over country B. Which of the following, if true, would weaken Maya's conclusion?
Country A employs more capital per unit of labor in all industries than country B.
Suppose that currency traders expect that the value of British pound will fall in the future. How will this will affect the demand and supply of British pound in the foreign exchange market?
Demand for pounds will decrease and supply of pounds will increase.
Alzuria is a developing economy. With trade and liberalization, the country has now seen substantial development in the private sector. However, government intervention in certain markets remains strong. The banking sector has a good mix of both private banks and those called "government undertakings," or public sector banks. Consumers are becoming increasingly aware of the difference in the quality of service provided by the private and the public sector banks. Competition among private banks has ensured that their employees adhere to high standards of customer service. Their public sector counterparts, however, do not appear to be making an effort to improve their customer service. Which of the following, if true, would explain the rationale behind continued patronage despite the bad service provided by public sector banks in Alzuria?
Deposits with public sector banks are insured unlike those with private banks.
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. 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.
In a speech at the New York University Law School, Federal Reserve Chairman Ben Bernanke stated: Writing in the eighteenth century, Adam Smith conceived of the free-market system as an "invisible hand" that harnesses the pursuit of private interest to promote the public good. Smith's conception remains relevant today, notwithstanding the enormous increase in economic complexity since the Industrial Revolution. Source: Ben S. Bernanke, "Financial Regulation and the Invisible Hand," speech made at the New York University Law School, New York, New York, April 11, 2007. What is so important about the idea of the invisible hand?
Firms will provide consumers what they want without the government.
What is fiscal policy?
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
Which one of the following is not a measure of the price level?
Government Price Index: an average of the prices paid by the government for goods and services used only by different government agencies.
The growth rate of real GDP in the country of West Pruasia was very low last year. The government was unable to fully meet its expenses with the revenue generated during the year. A committee was appointed to suggest appropriate policy measures to boost economic growth. Some of the committee members were of the opinion that an expansionary fiscal policy alone should be able to increase aggregate demand and output sufficiently. Other members of the committee, however, disagreed. According to them, expansionary fiscal policies may not suffice and the government should consider monetary policy measures instead, especially when the government already has a fiscal deficit. Which of the following questions is most important to answer in order to determine the accuracy of the claim that fiscal policy can sufficiently increase aggregate demand?
How strong is the impact of government spending on the country's net exports?
The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model LOADING... What would be the federal government's reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06LRAS06? That is, what step can we expect the federal government to take to control inflation in the second period?
A. Increase taxes on businesses B. Decreases government spending on goods and services C. Contractionary policy
The latest estimates published by the government of Rossland, a small open economy, shows that the government's expenses over the next year are expected to be $50 million. The tax revenue on the other hand, is likely to be $45 million. The data also projects that the real GDP of the country will be approximately $130 million and that the household spending on consumption is likely to amount to $70 million. The domestic investment, however, is expected to be low at $40 million. At the end of the following year, it was noted that real GDP was actually $132 million, while the other estimates (tax revenue, investment, government expenditure, and consumption) were accurate. Which of the following must also be true given that the other variables were correctly estimated?
Actual private saving in the economy must have exceeded the estimate by $2 million.
A political commentator argues: "Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular." Briefly explain whether you agree.
Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.
A Federal Reserve publication discusses an estimate of the tax multiplier that gives it a value of 1.2 after one year and 2.8 after two years. Source: Sylvain Leduc, "Fighting Downturns with Fiscal Policy," Federal Reserve Bank of San Francisco Economic Letter, June 19, 2009. Why might the tax multiplier have a larger value after two years than after one year?
Consumers are more likely to perceive the tax change as permanent and change their spending choices.
Consider the figures below. Determine which combination of fiscal policies shifted AD 1AD1 to AD 2AD2 in each figure and returned the economy to long-run macroeconomic equilibrium.
Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.
What changes should they make if they decide a contractionary fiscal policy is necessary?
In this case, Congress and the president should enact policies that decrease government spending and increase taxes.
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
What do economists mean by the demand for money?
It is the amount of moneylong dash—currency and checking account depositslong dash—that individuals hold.
Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. The Fed cannot target both the money supply and the interest rate simultaneously.
Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
None of the above are correct statements about the two models.
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 Fed likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)
Open market purchase of government securities
Which of the following is not an issue with using active monetary policy to reduce business cycles?
Real GDP and employment changes from monetary policy actions can move in a countercyclical manner.
Which of the following equations below represents the saving and investment equation in an open economy?
S = I + NFI
Which of the following statements is true about the Fed's monetary policy targets?
The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.
For a country such as France which of the following statements is always true?
The balance of payments is zero.
Who is responsible for fiscal policy?
The federal government controls fiscal policy.
What is the relationship between the federal funds rate falling and the money supply increasing?
To decrease the federal funds rate, the Fed must increase the money supply.
How does lowering the target for the federal funds rate "pour money" into the banking system?
To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
Persistent current account deficits pose a problem for the United States, because it results in
U.S. net foreign investment to be negative.
In the figure to the right, the exchange rate equilibrium occurs at the point where the quantity demanded equals the quantity supplied, yen¥120 = $1 (point A). If the equilibrium exchange rate changed from yen¥120 = $1 to yen¥150 = $1, we would say that the dollar
appreciated against the yen.
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers.
Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called
automatic stabilizers.
By repercussions, Keynes means that an initial increase in autonomous expenditures will
change production by an amount greater than the initial increase in autonomous expenditures.
when the fed conducts an open market purchase, the interest rate should
decrease
This statement is true because the Chairman of the Fed
has the ability to influence interest rates for the world's top reserve currency.
The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:
high unemployment
A countercyclical policy is one that
is used to attempt to stabilize the economy.
What is the advantage of holding money?
money can be used to buy goods, services, or financial assets.
Related to the Chapter Opener] We saw in the chapter opener that during 2013, Congress and President Obama were unable to reach an agreement to avoid the sequester, which involved a series of automatic cuts in federal government purchases. In testifying before Congress, then Federal Reserve Chairman Ben Bernanke said that the sequester "could create a significant headwind for the economic recovery." Source: Binyamin Appelbaum, 'Austerity Kills Government Jobs as Cuts to Budgets Loom," New York Times, February 26, 2013. When Bernanke said "headwind," he meant that
the sequester could slow down the economic recovery.
All of the following are arguments against an explicit inflation targeting rule for monetary policy except:
An explicit target is easier to understand by households and firms which makes monetary policy more transparent.
Two years back, the Republic of Terbia, a developed economy, experienced a massive boom in the information technology (IT) industry. The rapid expansion of credit to the firms in this industry resulted in a significant increase in employment and prices in the economy. However, due to overvaluation and speculation in the market, stock prices of these firms fell sharply. IT being one of the most important sectors, this downturn affected the economy adversely, leading to a recession. Alicia White, an industry expert, suggests that expansionary monetary policy by the central bank is necessary to induce greater spending in the economy. However, Jaime Russell, a teacher at a community college, disagrees. According to him, increasing the supply of money would not help. The only possible impact of a fall in the interest rate would be an increase in aggregate supply. This, in turn, will reduce prices and profits further. Instead, the government should use expansionary fiscal policies to boost aggregate demand. Which of the following, if true, will support Jaime's view that an expansionary fiscal policy would be ideal in the given situation?
The current nominal interest rate is close to zero in the country.
An article published in a leading trade journal in the country Avalon states that Avalon's current account balance will improve in the coming year. The author reasons that since the government is expected to run a budget surplus in the next fiscal year, this should lead to a current account surplus. Frank Nicolai, an economist, publishes a rejoinder in the same journal. He says that international transactions are controlled by multiple factors. Hence a budget surplus may not necessarily indicate a trade surplus. Which of the following, if true, will support the claim that a budget surplus will lead to an improvement in Avalon's current account balance?
The domestic interest rate has declined to a ten-year low, causing people in Avalon to invest in assets abroad.
The growth rate of Zerbia, a small developing country, has fallen close to zero percent in the current year. Harry Miller and Jonathan Taylor, who are columnists with a business daily, are discussing suitable fiscal measures to revive economic growth in the country. Jonathan feels that the income tax rates in Zerbia are too high. Lower income tax rates would increase consumer spending and so would promote economic growth. Harry, on the other hand, believes that an increase in government expenditure would have a substantial impact on the country's GDP. Additionally, he feels that investing in green technology would not only accelerate growth, it is also likely to be more sustainable in the long term. Which of the following, if true, would weaken Harry's claim that government investment in green technology will revive the economy in the near term?
The green technology industry in this country is highly capital-intensive and dependent on imported machinery.
If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers
The impact of the multiplier would be larger if the SRAS curve is horizontal.
Expansionary monetary policy on the part of the central bank of Canada will cause:
a decrease in interest rates in Canada and a decrease in the value of the Canadian dollar relative to other currencies.
If the government cuts taxes in order to increase aggregate demand, the action is called
a discretionary fiscal policy.
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
According to the Taylor Rule, if the Fed reduces its target for the inflation rate, the result will be
a higher target federal funds rate.
The government would want the economy to contract when real GDP is
above potential GDP and the price level is rising.
In the figure to the right, the exchange rate between the Japanese yen and the U.S. dollar increased because demand increased by more than supply. As a result, what happens to U.S. real GDP?
it decreases
According to the multiplier effect LOADING... , an initial increases in government purchases increases real GDP by more than the initial increase in government purchases.
more than
As interest rates decline, stocks become a __________ attractive investment relative to bonds, which causes the demand for stocks and their prices to __________.
more; rise
Which of these variables are the main monetary policy targets of the Fed?
the money supply and the interest rate
"Operation Twist" refers to
the Fed's program to purchase $400 billion in long-term Treasury securities while selling an equal amount of shorter-term Treasury securities.
The goal of expansionary fiscal policy is
to increase aggregate demand.
Since World War II, the federal government's share of total government expenditures has been between
two-thirds and three-quarters
In order to attract foreign investment, the government of Alzuria had introduced various economic reforms five years back. Although the country is heavily dependent on imports, with increased foreign direct investments and foreign portfolio investments, the Alzurian economy grew at a faster pace for the last few years. The government is currently considering removing all restrictions on cross-border capital flows and allowing its currency to float freely. Dmitri Smirnoff, an importer of clothing and textiles, is of the opinion that unrestricted cross-border capital flows could hurt the economy. His business partner, Anna Azarov, however feels that the exchange rate is likely to appreciate and therefore benefit all importers. Which of the following, if true, will strengthen Anna's claim that the currency will appreciate?
Exports, which have traditionally accounted for a substantial portion of Alzuria's GDP, are growing at an impressive pace.
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.
contractionary; fall; fall
Expansionary fiscal policy has a ________ multiplier effect on equilibrium real GDP, and contractionary fiscal policy has a ________ multiplier effect on equilibrium real GDP.
positive; negative
