Macro CH. 15 & 16

The Federal​ Reserve's four goals of monetary policy are

price​ stability, high​ employment, economic​ growth, and stability of financial markets and institutions.

In the figure to the​ right, the opportunity cost of holding money ____________ when moving from Point A to Point B on the money demand curve.

decreases

The interest rate that banks charge other banks for overnight loans is the

federal funds rate.

Fiscal policy refers to changes in

federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand.

Congress and the president carry out fiscal policy through changes in

government purchases and taxes.

If the economy is falling below potential real​ GDP, which of the following would be an appropriate fiscal policy to bring the economy back to​ long-run aggregate​ supply? An increase in

government purchases.

Each year that the federal government runs a​ deficit, the federal debt ____________. Each year that the federal government runs a​ surplus, the federal debt ____________.

grows; shrinks

e. The individual income tax rate is decreased. This is ____________. (i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy.

(i) part of an expansionary fiscal policy

a. The corporate income tax rate is increased. This is ____________. (i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy.

(ii) part of a contractionary fiscal policy

b. Defense spending is increased. This is ____________. (i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy.

(iii) not part of fiscal policy

c. The Federal Reserve lowers the target for the federal funds rate. This is ____________. (i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy.

(iii) not part of fiscal policy

d. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is ____________. (i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy.

(iii) not part of fiscal policy

6A) ____________ are spending by the government on​ goods, services, and factors of production. ____________ represent total government spending including​ goods, services, grants to state and local​ governments, and transfer payments. Since the​ 1950s, total government​ expenditures, as a percentage of​ GDP, have ____________ and total government​ purchases, as a percentage of​ GDP, have ____________. 6B) The major cause of these trends is

6A) government purchases; government expenditures; increased; decreased 6B) there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.

Refer to the diagram. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the basic AD−AS model, this would be depicted as a movement from

A to B.

In the graph of the money market shown on the​ right, what could cause the money demand curve to shift from MD1 to MD2​?

A. An increase in real GDP. B. A reduction in the interest rate. C. An increase in the price level D. Both​ (a) and​ (c). D.

Consider the figures below and determine which is the best description of what causes the shift from

A. Example A shows a contractionary monetary policy. The price level and real GDP both fall. B. Example B shows an expansionary monetary policy. The price level and real GDP both rise. C. Both examples show expansionary monetary policy. The price level and real GDP both rise. D. Example A shows an expansionary monetary policy. The price level rises and real GDP falls. E. Both A and B. E.

Are federal expenditures higher today than they were in​ 1960?

As a percentage of​ GDP, federal expenditures have increased since 1960.

Are federal purchases higher today than they were in​ 1960?

As a percentage of​ GDP, federal purchases have decreased since 1960.

Refer to the diagram. An increase in taxes would be depicted as a movement from​ ___________, using the basic AD−AS model.

B to A.

Which of the following is a monetary policy target used by the​ Fed? A. Growth rate of GDP. B. Interest rate. C. Unemployment rate. D. Budget deficit.

B. Interest rate

What is a contractionary fiscal​ policy?

Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

Which of the following are examples of discretionary fiscal​ policy? ​(Check all that​ apply.) A. Additional taxes are collected as the economy experiences an increase in income resulting from economic growth. B. The government spends more on the military to provide assistance to England after a natural disaster. C. A state government borrows money to finance the building of a new bridge. D. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. E. The president and Congress reduce tax rates to increase the amount of investment spending. F. The government provides stimulus funds to repair roads and bridges to increase spending in the economy.

D, E, & F

In what ways does the federal budget serve as an automatic stabilizer for the​ economy?

During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand.

What is an expansionary fiscal​ policy?

Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.

What is the difference between federal purchases and federal​ expenditures?

Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures include transfer payments.

Expansionary monetary policy refers to the​ ________ to increase real GDP.

Federal​ Reserve's increasing the money supply and decreasing interest rates

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

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 actions can Congress and the president take to move the economy back to potential​ GDP?

Increase government spending or decrease taxes.

What do economists mean by the demand for​ money?

It is the amount of money—currency and checking account deposits—that individuals hold.

What is a​ "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit​ history?

Loans granted to borrowers with flawed credit​ histories; a higher interest rate.

What is the advantage of holding​ money?

Money can be used to buy​ goods, services, or financial assets.

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.

Which one of the following is not one of the monetary policy goals of the​ Fed?

Reduce income inequality.

Why would securitization give mortgage borrowers access to a deeper pool of​ capital?

Since banks could resell mortgages to​ investors, they had access to more funds than just their own deposits.

Government transfer payments include which of the​ following?

Social Security and Medicare programs

In the graph of the money market shown on the​ right, what could cause the money supply curve to shift from MS1 to MS2​?

The Fed decreases the money supply by deciding to sell U.S. Treasury securities.

What is the difference between the federal budget deficit and federal government​ debt?

The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy.

Which of the following would be classified as fiscal​ policy?

The federal government cuts taxes to stimulate the economy.

What are the​ Fed's main monetary policy​ targets?

The money supply and interest rates

Why do few economists argue that it would be a good idea to balance the federal budget every​ year?

To keep a balanced budget during a​ recession, taxes would have to increase and government expenditures would have to​ decrease, which would further reduce aggregate demand and deepen the recession.

Which of the following would cause the money demand curve to shift to the​ left?

a decrease in real GDP

Contractionary monetary policy on the part of the Fed results in

a decrease in the money​ supply, an increase in interest​ rates, and a decrease in GDP.

Congress and the president enact a temporary cut in payroll taxes. This is an example of

a discretionary fiscal policy.

The revenue the federal government collects from the individual income tax declines during a recession. This is an example of

an automatic stabilizer.

The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of

an automatic stabilizer.

Government spending and taxes that increase or decrease without any actions taken by the government are referred to as

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.

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

automatic stabilizers.

To evaluate the size of the federal budget deficit or surplus over​ time, it would be best to look at the

budget deficit or surplus as a percentage of GDP.

When the Fed conducts an open market​ purchase, the Fed ____________ and the money supply ____________.

buys securities from banks; increases

When the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it ____________ U.S. Treasury securities. If the FOMC wishes to decrease the money​ supply, it ____________ U.S. Treasury securities.

buys; sells

When the Fed conducts an open market​ purchase, the interest rate should ____________.

decrease

Which of the following is an objective of fiscal​ policy?

high rates of economic growth

The goals of monetary policy tend to be interrelated. For​ example, when the Fed pursues the goal of​ __________, it also can achieve the goal of​ ________________ simultaneously.

high​ employment; economic growth

Using the money demand and money supply​ model, an increase in money demand would cause the equilibrium interest rate to

increase.

Using the money demand and money supply​ model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

increase.

An increase in the interest rate

increases the opportunity cost of holding money.

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

The federal funds rate

is the rate that banks charge each other for​ short-term loans of excess reserves.

The Fed uses policy targets of interest rate​ and/or money supply because

it can affect the interest rate and the money supply directly and these in turn can affect​ unemployment, GDP​ growth, and the price level.

Which of the following would not be considered an automatic​ stabilizer?

legislation increasing funding for job retraining passed during a recession

In the figure to the​ right, if the economy is at point A​, the appropriate monetary policy by the Federal Reserve would be to

lower interest rates.

Why is the Fed sometimes said to have a​ "dual mandate"? The Fed is said to have​ a" dual​ mandate" because

maintaining price stability and high employment are the two most important goals of the Fed.

An increase in real GDP can shift

money demand to the right and increase the equilibrium interest rate.

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded.

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of

not a fiscal policy.

The Federal Reserve sells Treasury securities. This is an example of

not a fiscal policy.

The federal government changes the required gasoline mileage for new cars. This is an example of

not a fiscal policy.

To reassure investors who were unwilling to buy mortgages in the secondary​ market, the U.S. Congress used two government sponsored​ enterprises, Fannie Mae and Freddie​ Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac

sell bonds to investors and use the funds to purchase mortgages from banks.

An increase in interest rates affects aggregate demand by

shifting the aggregate demand curve to the​ left, reducing real GDP and lowering the price level.

For the federal deficit to be​ lowered,

the federal​ government's expenditures must be lower than its tax revenue.

The Federal​ Reserve's two main monetary policy targets are

the money supply and interest rates.

The federal government debt equals

the total value of U.S. Treasury bonds outstanding.

How can investment banks be subject to liquidity​ problems? Investment banks can be subject to liquidity problems because

they often borrow short​ term, sometimes as short as​ overnight, and invest the funds in​ longer-term investments.

The largest and fastest−growing category of federal government expenditures is

transfer payments.

If the Fed believes the inflation rate is about to​ increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Fed believes the economy is about to fall into​ recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right.

What two institutions did Congress create in order to increase the availability of mortgages in a secondary​ market?

​"Fannie Mae" and​ "Freddie Mac"

What is the disadvantage of holding​ money?

​Money, in the form of currency or checking account​ deposits, earns either no interest or a very low rate of interest.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

​Yes, because fiscal policy and monetary policy are separate things.

In​ 2009, Congress and the president enacted​ "cash for​ clunkers" legislation that paid people buying new cars up to​ $4,500 if they traded in an​ older, low​ gas-mileage car. ​ Was this piece of legislation an example of fiscal​ policy?

​Yes, because the primary goal of the spending program was to stimulate the national economy.

As the interest rate​ increases,

​consumption, investment, and net exports​ decrease; aggregate demand decreases.

An increase in individual income taxes​ __________ disposable​ income, which​ ____________ consumption spending.

​decreases; decreases

A recession tends to cause the federal budget deficit to​ ____________ because tax revenues​ ____________ and government spending on transfer payments​ _____________.

​increase; fall; rise