Macro Economics Final Exam

Federal funds rate

The interest rate banks charge each other for overnight loans.

Multiplier Effect

The series of induced increases in consumption spending that result from an initial increase in autonomous expenditures.

Government purchases are included in government expenditures.

True

Two ​government-sponsored enterprises that stand between investors and banks that grant mortgages are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. True or False?

True

Inflation Targeting

A framework for conducting monetary policy that involves the central bank announcing its target level of inflation.

Taylor Rule

A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables.

A newspaper article in the fall of 2007 reported stated​ that: ​"The luxury-home builder Hovnanian Enterprises reported its fourth consecutive quarterly loss on​ Thursday, citing continuing problems of credit availability and high​ inventory." ​ Hovnanian was suffering losses because A. the economy was slowing down and about to head into a severe recession. B. the cost of production skyrocketed as more buyers were flipping houses for a quick profit. C. they were cited for using faulty building materials from China. D. the CEO unwisely expanded into metals which reduced the profits of Hovnanian Enterprises. When the article refers to​ "credit availability," it means the ability of A. banks to obtain credit. B. people to use credit cards. C. people to obtain credit. D. banks to issue credit cards. Problems of credit availability would affect a homebuilder such as Hovnanian Enterprises because A. Hovnanian Enterprises must offer credit to homebuyers. B. most potential homeowners need mortgages to buy homes. C. banks partner with builders and if banks​ can't get​ credit, homes​ can't be built. D. the Federal Reserve will limit the number of new houses when there is a recession.

A. the economy was slowing down and about to head into a severe recession. C. people to obtain credit. B. most potential homeowners need mortgages to buy homes.

Westville, a small developed​ country, is experiencing a very high rate of inflation. Roma​ Anderson, a market research​ analyst, thinks that the high level of inflation is due to an acute shortage of goods available in the economy. According to​ her, the government should use expansionary fiscal policies to boost the economy.​ Meanwhile, Robert​ Simpson, a member of the finance​ ministry, is of the opinion that the high level of inflation is the result of excessive household spending. He suggests that the government should increase personal income tax rates to curb consumption demand. Which of the​ following, if​ true, will strengthen​ Roma's claim that prices are rising due to an acute shortage of goods in the​ economy? A. A severe drought in the​ country's agricultural belt caused considerable damage to crops and livestock this year. B. The​ country's manufacturing exports declined due to severe competition from developing countries. C. The industrial production index increased by 2 percent this year. D. The government extended tax breaks for foreign firms that have investments in Westville. E. The country had to reduce tariffs and import quotas after becoming a member of the WTO last year.

A. A severe drought in the​ country's agricultural belt caused considerable damage to crops and livestock this year.

Are federal expenditures higher today than they were in​ 1960? A. As a percentage of​ GDP, federal expenditures have increased since 1960. B. As a percentage of​ GDP, federal expenditures have decreased since 1960. C. As a percentage of​ GDP, federal expenditures have remained unchanged since 1960.

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

Are federal purchases higher today than they were in​ 1960? A. As a percentage of​ GDP, federal purchases have decreased since 1960. B. As a percentage of​ GDP, federal purchases have increased since 1960. C. As a percentage of​ GDP, federal purchases have remained unchanged since 1960.

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

What is an expansionary fiscal​ policy? A. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. B. Expansionary fiscal policy includes increasing government spending and taxes to increase aggregate demand. C. Expansionary fiscal policy includes decreasing government spending and increasing taxes to increase aggregate demand. D. Expansionary fiscal policy includes decreasing government spending and taxes to increase aggregate demand.

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

The Taylor rule for federal funds rate targeting does which of the​ following? A. It links the​ Fed's target for the federal funds rate to economic variables. B. It multiplies the inflation gap by the output gap to obtain a target of the federal funds rate. C. It sets the target for the federal funds rate so that it is equal to the sum of the inflation rate and the unemployment rate. D. The Taylor rule does all of the above.

A. It links the​ Fed's target for the federal funds rate to economic variables.

Which of the following statements is true about the​ Fed's monetary policy​ targets? A. The Fed is forced to choose between the interest rate and the money supply as its monetary policy target. B. The only monetary policy target the Fed can choose is the money supply. C. The only monetary policy target the Fed can choose is the interest rate. D. The Fed could simultaneously choose the interest rate and the money supply as its monetary policy targets.

A. The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.

Why does an estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal​ policy? A. The larger the​ multiplier, the greater the effects of an expansionary fiscal policy. B. The larger the​ multiplier, the smaller the effects of an expansionary fiscal policy. C. The smaller the​ multiplier, the smaller the effects of an expansionary monetary policy. D. The smaller the​ multiplier, the greater the effects of an expansionary fiscal policy.

A. The larger the​ multiplier, the greater the effects of an expansionary fiscal policy.

How does lowering the target for the federal funds rate​ "pour money" into the banking​ system? A. To increase the money​ supply, the Fed buys bonds on the open​ market, which increases bank reserves. B. To increase the money​ supply, the Fed increases government​ spending, which increases aggregate demand. C. To increase the money​ supply, the Fed decreases​ taxes, which increases consumer spending. D. To increase the money​ supply, the Fed sells bonds on the open​ market, which increases bank reserves.

A. To increase the money​ supply, the Fed buys bonds on the open​ market, which increases bank reserves.

U.S. federal government expenditures are comprised of purchases of goods and services​ (defense spending plus spending on all​ day-to-day activities), transfer​ payments, interest​ payments, and grants to state and local governments. Which of the following statements is​ true? A. Transfer payments are the largest component of the federal budget​ (about 50%) followed by defense spending​ (about 20%), while spending on all its​ day-to-day activities is the smallest component​ (about ​8%). B. Interest payments are the largest component of the federal budget​ (about 50%) followed by spending on all its​ day-to-day activities​ (about 20%), while defense spending is the smallest component​ (about ​8%). C. Grants to state and local governments are the largest component of the federal budget​ (about 50%) followed by spending on all its​ day-to-day activities​ (about 20%), while transfer payments are the smallest component​ (about ​8%). D. Spending on all its​ day-to-day activities is the largest component of the federal budget​ (about 50%) followed by grants to state and local governments​ (about 20%), while interest payments are the smallest component​ (about ​8%).

A. Transfer payments are the largest component of the federal budget​ (about 50%) followed by defense spending​ (about 20%), while spending on all its​ day-to-day activities is the smallest component​ (about ​8%).

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. A. True .B. False

A. True

According to the Taylor​ Rule, if the Fed reduces its target for the inflation​ rate, the result will be A. a higher target federal funds rate. B. a higher target real GDP growth rate. C. no change in the target federal funds rate. D. a lower target federal funds rate.

A. a higher target federal funds rate.

As a fraction of​ GDP, total expenditures by the U.S. federal​ government, including transfer​ payments, A. have risen since the early 1950s in contrast to U.S. federal purchases of goods and​ services, which have fallen. B. have fallen since the early 1950s in contrast to U.S. federal purchases of goods and​ services, which have risen. C. and U.S. federal purchases of goods and services have both risen since the early 1950s. D. and U.S. federal purchases of goods and services have both fallen since the early 1950s.

A. have risen since the early 1950s in contrast to U.S. federal purchases of goods and​ services, which have fallen.

A housing bubble occurs when A. housing prices rise by more than the value of housing​ services, as measured by rental prices. B. the value of housing​ services, as measured by rental​ prices, rises by more than housing prices. C. there is an increase in the number of buyers who do not intend to live in the houses they​ purchase, but are using them as investments. D. rental prices rise by more than the value of housing services.

A. housing prices rise by more than the value of housing​ services, as measured by rental prices.

According to the​ crowding-out effect, if the federal government increases​ spending, the demand for money and the equilibrium interest rate will​ ___________, which will cause​ consumption, investment, and net exports to​ ___________. A. ​increase; decrease B. ​decrease; decrease C. ​increase; increase D. ​decrease; increase

A. increase; decrease

The U.S. federal government raises revenue from individual and corporate income​ taxes, social insurance​ taxes, and other sources​ (including excise​ taxes, tariffs, and payments to cut timber on federal​ lands). The largest share of federal revenues comes from A. individual income taxes​ (about 43%), followed by social insurance taxes​ (about 35%) and corporate income taxes​ (about ​13%). B. individual income taxes​ (about 43%), followed by corporate income taxes​ (about 35%) and social insurance taxes​ (about ​13%). C. corporate income taxes​ (about 43%), followed by social insurance taxes​ (about 35%) and individual income taxes​ (about ​13%). D. social insurance taxes​ (about 43%), followed by corporate income taxes​ (about 35%) and individual income taxes​ (about ​13%).

A. individual income taxes​ (about 43%), followed by social insurance taxes​ (about 35%) and corporate income taxes​ (about ​13%).

The economy of country Rumblen was hit by a banking crisis which has led to a recession. Jason​ Wallace, a real estate​ agent, says that the economy will recover soon because the government is taking various measures to counter the recession. According to​ him, the flow of credit will soon return to​ pre-crisis levels. His wife Anna Wallace disagrees with him. She says that the situation may not improve​ soon, given the substantial increase in unemployment. Which of the​ following, if​ true, will weaken​ Jason's claim that the economy will recover​ soon? A. International agencies recently slashed the credit ratings of leading banks due to large debt​ write-offs. B. Some banks in Rumblen reduced the overdraft fee on checking accounts in order to attract more customers. C. A large portion of the treasury securities issued by the government of Rumblen are held by its largest trading partner. D. The government of Rumblen recently bailed out two of the major banks in the country. E. Credit card debt in Rumblen had reached unsustainable levels prior to the​ crisis, prompting a series of defaults.

A. international agencies recently slashed the credit ratings of leading banks due to large debt​ write-offs.

The recessions accompanied by a financial crisis are more severe than recessions that do not involve bank crises because A. severe financial crises collapse asset​ markets, lower real housing prices and cause a significant fall in GDP and employment. B. bank failures reduce the money​ supply, increase the interest rate and cause high inflation. C. severe financial crises reduce​ savings, increase consumption and reduce exports thereby increasing the trade deficit. D. people use the easy credit to buy assets when their income and credit are not sufficiently high.

A. severe financial crises collapse asset​ markets, lower real housing prices and cause a significant fall in GDP and employment.

The government purchases multiplier can have a value greater than zero and less than 1 if A. the marginal propensity to consume is negative. B. the marginal propensity to save is negative. C. the marginal propensity to consume is greater than zero. D. the marginal propensity to consume is greater than 1.

A. the marginal propensity to consume is negative.

The goal of expansionary fiscal policy is A. to increase aggregate demand. B. to decrease​ short-run aggregate supply. C. to decrease​ long-run aggregate supply. D. All of the above.

A. to increase aggregate demand.

What is a contractionary fiscal​ policy? A. Contractionary fiscal policy includes increasing government spending and decreasing taxes to decrease aggregate demand. B. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand. C. Contractionary fiscal policy includes decreasing government spending and taxes to decrease aggregate demand. D. Contractionary fiscal policy includes increasing government spending and taxes to decrease aggregate demand.

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

The higher the tax​ rate, the larger the multiplier effect. A. True B. False

B. False

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes? A. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes. B. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. .C. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes. D. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes.

B. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation to a publicly announced​ level, it is using A. monetary policy independence. B. inflation targeting. C. the Taylor rule. D. contractionary monetary policy.

B. Inflation targeting.

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy? A. Yes. Fiscal policy refers to changes in government spending and taxes. B. No. The increase in defense spending after that date was designed to achieve homeland security objectives. C. Yes. Increases in defense spending are designed to achieve macroeconomic policy objectives. D. No. Fiscal policy refers to changes in interest rates and the money supply.

B. No. The increase in defense spending after that date was designed to achieve homeland security objectives.

How important is it to pay off this​ debt? A. Not very important because as the economy​ grows, the debt​ vanishes, and the economy will grow over time. B. Not very important if the debt is at a sustainable​ level, and the interest payments are relatively constant. C. Very important because the next generation is being saddled with huge debt. D. Very important because the debt is eliminating economic growth.

B. Not very important if the debt is at a sustainable​ level, and the interest payments are relatively constant.

What is the​ long-run effect of a permanent increase in government​ spending? A. ​Investment, consumption, and net exports decline but by less than the increase in government​ spending; therefore, real GDP increases. B. The decline in​ investment, consumption, and net exports exactly offsets the increase in government​ spending; therefore, real GDP remains unchanged. C. ​Investment, consumption, and net exports decline but by more than the increase in government​ spending; therefore, real GDP decreases. D. ​Investment, consumption, and net exports remain​ unchanged; therefore, there is no change in real GDP.

B. The decline in​ investment, consumption, and net exports exactly offsets the increase in government​ spending; therefore, real GDP remains unchanged.

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? A. Consumption spending and investment in Dorado grew by an average of five percent in the last two years. B. The domestic currency sharply appreciated against a basket of currencies earlier this year. C. The government increased the retirement age from 60 years to 62 years last year. D. Commodity​ prices, in​ general, have declined by 1.25 percent this year. E. Following a change in​ regulations, the number of people eligible for unemployment benefits has fallen.

B. The domestic currency sharply appreciated against a basket of currencies earlier this year.

During a housing​ bubble, the numbers of new homes sold A. mirror the pattern of sales of existing​ homes; sales of both new and existing homes remain largely unaffected. B. mirror the ups and downs of house​ prices; they rise as house prices rise and fall as house prices fall. C. follow a different pattern than do sales of existing​ homes; they rise at the start of a bubble and then fall when the bubble​ bursts, while sales of existing homes remain largely unaffected. D. move in the opposite direction of house​ prices; they fall as house prices rise and rise as house prices fall.

B. mirror the ups and downs of house​ prices; they rise as house prices rise and fall as house prices fall.

Economists use the term fiscal policy to refer to changes in taxing and spending policies A. only by state and local governments. B. only by the federal government. .C. by all levels of​ government, federal,​ state, and local. D. by none of the above.

B. only by the federal government.

How can investment banks be subject to liquidity​ problems? Investment banks can be subject to liquidity problems because A. they are highly regulated and are taxed very heavily. B. they often borrow short​ term, sometimes as short as​ overnight, and invest the funds in​ longer-term investments. C. they often borrow long​ term, sometimes as long as thirty​ years, and invest the funds in​ shorter-term investments. D. they borrow from households and firms in the form of checking and savings deposits.

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

Support for a monetary rule of the kind advocated by Friedman declined since 1980 because A. other countries that follow inflation targeting have had less than a desirable effect on their economy. B. the​ Fed's performance since 1980 has been excellent even without a formal inflation target. C. the large following of Milton Friedman has dwindled since 1980s. D. the Fed had actually practiced inflation targeting for a few years before the 1980s with very unfavorable results.

B. the​ Fed's performance since 1980 has been excellent even without a formal inflation target.

Since World War​ II, the federal​ government's share of total government expenditures has been between A. ​one-third and​ two-thirds. B. ​two-thirds and​ three-quarters. C. ​one-half and​ two-thirds. D. ​one-quarter and​ one-half.

B. ​two-thirds and​ three-quarters.

Changes in taxes and spending that happen without actions by the government are called A. discretionary fiscal policy changes. B. autonomous fiscal expenditures. C. automatic stabilizers. D. transfer payments.

C. Automatic Stabilizers.

Consider the figures to the right. Which of the following combinations of specific fiscal policy will return the economy to​ long-run macroeconomic equilibrium​ (point C)? That​ is, what policy will move aggregate demand from AD 2AD2 to AD Subscript 2 comma left parenthesis policy right parenthesisAD2, (policy) in the second​ period? A. Example​ (A): Decrease government spending Example​ (B): Decrease government spending B. Example​ (A): Decrease government spending Example​ (B): Decrease taxes C. Example​ (A): Increase government spending Example​ (B): Increase taxes D. Example​ (A): Increase taxes Example​ (B): Increase government spending

C.Example​ (A): Increase government spending Example​ (B): Increase taxes

The central bank of the country Oakville is hosting its annual economic policy symposium with monetary policy as the theme. Several bankers and professional economists are in attendance. Dorah​ Baker, a professor at the University of​ Oakville, is of the opinion that monetary policy should target the rate of growth of money supply.​ This, she​ claims, would increase economic stability. Jack​ Snyder, a delegate attending the​ conference, does not agree. He thinks that monetary policy is highly effective in controlling inflation and so the central bank should continue to follow​ inflation-targeting. In​ fact, Jack also believes that the central bank should bring inflation down from the current level of four percent to as close to zero as possible. Which of the​ following, if​ true, would weaken​ Dorah's claim that monetary policy should target the rate of growth of money​ supply? A. It takes about six to eight months for the impact of a monetary policy measure to trickle down to the producers and consumers in Oakville. B. According to several​ estimates, the current level of GDP is substantially lower than the​ country's potential GDP. C. Fearing an impending sovereign​ default, the demand for Trussian government bonds has fallen sharply. D. The country has a floating exchange rate system. E. The central bank in Oakville enjoys a high degree of independence in that its decisions are not influenced by the government.

C. Fearing an impending sovereign​ default, the demand for Trussian government bonds has fallen sharply.

What changes should they make if they decide a contractionary fiscal policy is​ necessary? A. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes. B. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. C. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes. D. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes.

C. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

How do investment banks differ from commercial​ banks? ​(Mark all that​ apply.) A. Commercial banks do not lend to households. B. Investment banks take deposits. C. Investment banks do not take deposits. D. Investment banks generally do not lend to households. E. Commercial banks are financial advisors to firms issuing stocks.

C. Investment banks do not take deposits. D. Investment banks generally do not lend to households

If the government cuts taxes in order to increase aggregate​ demand, the action is called A. a discretionary monetary policy. B. an automatic stabilizer. C. a discretionary fiscal policy. D. a procyclical policy.

C. a discretionary fiscal policy.

The large budget deficits of​ $1.4 trillion in fiscal year 2009 and​ $1.3 trillion in fiscal year 2010 were A. caused by the crowding out effect of increased government spending and increased welfare spending. B. the result of the ailing social security and Medicare programs and the growing number of aging​ baby-boomers receiving benefits. C. caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell. D. caused mostly by huge bailouts given to big investment banks and insurance companies.

C. caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell.

The cyclically adjusted budget deficit A. is never negative. B. increases or decreases as real GDP increases above or falls below potential real GDP. C. is measured as if the economy were at potential real GDP. D. is always zero.

C. is measured as if the economy were at potential real GDP.

If the economy moves into​ recession, monetarists argue that the Fed should A. keep the money supply fixed. B. increase the federal funds rate. C. keep the money supply growing at a constant rate. D. decrease the money supply.

C. keep the money supply growing at a constant rate.

Milton Friedman would have liked the Fed to follow a monetary rule where the A. interest rate is increased every year by a percentage rate equal to the​ long-run growth rate of real GDP. B. money supply is increased every year by a percentage rate equal to the​ short-run growth rate of nominal GDP. C. money supply is increased every year by a percentage rate equal to the​ long-run growth rate of real GDP. D. money supply is kept unchanged as Milton Friedman did not want the Fed to intervene with the market economy.

C. money supply is increased every year by a percentage rate equal to the​ long-run growth rate of real GDP.

Expansionary fiscal policy has a​ ________ multiplier effect on equilibrium real​ GDP, and contractionary fiscal policy has a​ ________ multiplier effect on equilibrium real GDP. A. ​negative; positive B. ​negative; negative C. ​positive; negative D. ​positive; positive

C. positive; negative

Two economists at the Federal Reserve Bank of Cleveland note that​ "estimates of potential GDP are very​ fluid, [which] suggests there is considerable error in our current​ measure." They conclude that​ "this lack of precision should be recognized when policy recommendations are made using a​ Taylor-type rule." The Federal Reserve Bank of Cleveland economists made this argument based on A. the likelihood that the federal funds target rate or the current inflation rate cannot be accurately measured. B. observations that the Taylor rule has been consistently wrong when applied. C. the likelihood that potential output or the natural rate of unemployment cannot be accurately measured. D. expected changes in the process for formulating monetary policy.

C. the likelihood that potential output or the natural rate of unemployment cannot be accurately measured.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________. A. ​expansionary; rise; rise B. ​expansionary; rise; fall C. ​contractionary; fall; fall D. ​contractionary; rise; fall

C. ​contractionary; fall; fall

Taylor rule equation

Federal funds target rate = Current Inflation Rate + Equilibrium Real Funds Rate + [(1/2)*Inflation Gap] + [(1/2)*output Gap]

Inflation Gap Equation

Current Inflation Rate - Target Inflation Rate

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? A. The impact of the multiplier would not be changed if the SRAS curve is horizontal. B. The impact of the multiplier would be smaller if the SRAS curve is horizontal. C. The impact of the multiplier would be impossible to determine if the SRAS curve is horizontal. D. The impact of the multiplier would be larger if the SRAS curve is horizontal.

D. The impact of the multiplier would be larger if the SRAS curve is horizontal.

During the expansion and deflation of the housing​ bubble, housing prices rose by A. 60 percent between January 2000 and July 2005 and then fell by 35 percent between July 2005 and May 2010. B. 80 percent between January 2000 and July 2005 and then fell by 60 percent between July 2005 and May 2010. C. 30 percent between January 2000 and July 2005 and then fell by 80 percent between July 2005 and May 2010. D. 60 percent between January 2000 and July 2005 and then fell by 80 percent between July 2005 and May 2010.

D. 60 percent between January 2000 and July 2005 and then fell by 80 percent between July 2005 and May 2010.

Economic growth in the country of Southville has slowed down in the last few months. Following a collapse in housing​ prices, several homeowners have defaulted on their mortgages. Given that this sector accounts for a sizeable portion of the​ GDP, many commentators believe that this will prompt a​ 'domino effect' in the economy. On a TV chat​ show, three industry experts are discussing the crisis and its possible impacts. Megan Greenboe is of the opinion that housing prices were driven up by speculation prior to the crisis. According to​ her, this crisis will eventually reduce liquidity in the economy and lead to a credit crunch. Bob​ Sacberg, however, does not agree with Megan. Bob feels that the increase in housing prices can be explained by the steady growth in population and were therefore driven by fundamentals. Samantha Morris meanwhile is not very convinced that the housing sector is solely responsible for the economic slowdown. She argues that a twelve percent fall in housing prices is unlikely to have a very widespread impact. Which of the​ following, if​ true, will weaken​ Bob's argument that fundamental factors in the housing market led to the increase in housing​ prices? A. Prior to the​ crisis, the prices of existing homes also increased in proportion to the prices of new homes in Southville. B. The​ inflation-adjusted real wage in the construction industry increased by 10 percent prior to the crisis. C. According to census​ data, the percentage of​ Southville's population that lives in rural areas has gradually been shrinking. D. A large proportion of home buyers in Southville were individuals who already owned one or more houses. E. The standards for obtaining a mortgage loan in Southville have been more stringent compared to many other countries.

D. A large proportion of home buyers in Southville were individuals who already owned one or more houses.

Consider the following choices and determine the correct definition for the monetary rule. A. A monetary rule is a plan for increasing government spending during a recession and reducing government spending during inflation. B. A monetary rule is a plan where the Fed reduces the money supply during a recession and increases the money supply during inflation. C. A monetary rule is a plan for increasing taxes during inflation and reducing taxes during a recession. D. A monetary rule is a plan for increasing the money supply at a constant rate regardless of the prevailing economic condition.

D. A monetary rule is a plan for increasing the money supply at a constant rate regardless of the prevailing economic condition.

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. A. Disagree because both contractionary and expansionary fiscal policies make the economy grow by increasing​ income, output and employment and are therfore popular. B. Disagree because contractionary fiscal policies create employment and increase GDP whereas expansionary fiscal policies impose an artificial recession on the economy. C. Disagree because both contractionary and expansionary fiscal policies create economic woes for the public and are therfore unpopular. D. Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.

D. Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.

Which of the following is a monetary policy response to the economic recession of 2007dash-2009 and the accompanying financial​ crisis? A. The Fed purchased large amounts of​ mortgage-backed securities. B. The Fed provided loans directly to corporations by purchasing commercial paper. C. The Fed expanded the eligibility for discount loans to firms other than commercial banks. D. All of the above were responses.

D. All of the above were responses.

The decline in housing prices that began in 2006 led to rising defaults among which​ borrowers? A. ​alt-A and subprime borrowers B. borrowers with​ adjustable-rate mortgages C. borrowers who had made only small down payments D. All of the above.

D. All of the above.

Which of the following are categories of federal government​ expenditures? A. transfer payments B. grants to state and local governments C. interest on the national debt D. All of the above.

D. All of the above.

Suppose that at the same time Congress and the president pursue an expansionary fiscal​ policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short​ run? A. An expansionary monetary policy would increase interest rates and thus increase the extent of crowding out. B. An expansionary monetary policy would have no effect on the extent of crowding out. C. An expansionary monetary policy would only affect the extent of crowding out in the long run. D. An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out.

D. An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out

For more than 20​ years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the A. Fed does not have the authority to control both targets. B. Fed cannot target both at the same​ time, so it has decided to target the money supply from now on. C. Fed can target both at the same​ time, but it has chosen to target the interest rate as it is more reliable as a target. D. Fed cannot target both at the same​ time: It has to choose between targeting an interest rate and targeting the money supply.

D. Fed cannot target both at the same​ time: It has to choose between targeting an interest rate and targeting the money supply.

What is fiscal​ policy? A. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

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

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 can most reasonably be inferred from the information given​ above? A. Private investment in green technology industries in Zerbia has been negligible. B. The economy of Zerbia is in a recession. C. Increase in government investment in infrastructure is likely to result in a higher budget deficit than the policy measure suggested by Jonathan. D. Harry thinks that the value of the government purchases multiplier is high. E. Jonathan believes that the tax structure is not progressive enough.

D. Harry thinks that the value of the government purchases multiplier is high.

Recall that​ "securitization" is the process of turning a​ loan, such as a​ mortgage, into a bond that can be bought and sold in secondary markets. An article in the Economist ​notes: That securitization caused more subprime mortgages to be written is not in doubt. By offering access to a much deeper pool of​ capital, securitization helped to bring down the cost of mortgages and made​ home-ownership more affordable for borrowers with poor credit histories. 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? A. Loans granted to borrowers with the best credit​ histories; a lower interest rate. B. Loans granted to borrowers with the best credit​ histories; a higher interest rate. C. Loans granted to borrowers with flawed credit​ histories; a lower interest rate. D. Loans granted to borrowers with flawed credit​ histories; a higher interest rate.

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

Which of the following events was an important cause of the 2007-2009 ​recession? A. a financial crisis in Europe B. a federal budget crisis C. monetary policy that was contractionary D. the collapse of a housing bubble

D. The collapse of a housing bubble

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending? A. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to a decrease in induced spending. B. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to an increase in induced spending. C. 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 a decrease in induced spending. D. 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.

D. 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.

In the summer of​ 2015, many economists and policymakers expected that the Federal Reserve would increase its target for the federal funds rate by the end of the year. Some economists​ argued, though, that it would be better for the Fed to leave its target unchanged. At the​ time, the unemployment rate was 5.3​ percent, close to full​ employment, but the inflation rate was below the​ Fed's target of 2 percent. If it did not increase its target for the federal funds​ rate, the policy goal the Fed would be promoting is A. price​ stability, because maintaining lower interest rates would stimulate the economy and lower the price level. B. stability of financial markets and​ institutions, because maintaining lower interest rates would provide stability to financial markets. C. zero​ unemployment, because maintaining lower interest rates would stimulate the economy and increase employment. D. economic​ growth, because maintaining lower interest rates would stimulate the economy and raise the price level.

D. economic​ growth, because maintaining lower interest rates would stimulate the economy and raise the price level.

U.S. federal government spending A. has decreased continuously as a share of total government spending since World War II. B. has increased continuously as a share of total government spending since World War II. C. has been​ one-third to​ one-half as high as the combined government spending at the state and local levels since World War II. D. has been two to three times higher than the combined government spending at the state and local levels since World War II.

D. has been two to three times higher than the combined government spending at the state and local levels since World War II.

Crowding out refers to A. the reduction in government expenditures following an increase in consumption or investment expenditures. B. the​ ever-decreasing amount of induced expenditures that eventually stop the multiplier process resulting from an increase in government purchases. C. the problem arising from the president having to consult with a large number of senators and representatives to get fiscal policy approved in time to help the economy. D. the decline in private expenditures that result from an increase in government purchases.

D. the decline in private expenditures that result from an increase in government purchases.

Another infrastructure project in northern California funded in part by ARRA funds involved expanding the Caldecott Tunnel between the cities of Oakland and Orinda. A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a​ "ripple effect" on employment. The ripple effect meant that A. the income earned by the Caldecott tunnel project workers would trickle down to those who would be still unemployed. B. the job creation would be restricted to the construction industry only as more workers would be hired by other construction companies. C. other​ non-construction industries would also want to share the​ government's stimulus money. D. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.

D. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.

"Maximum sustainable​ employment" means the economy is producing at its potential where A. the unemployment rate is zero percent. B. unemployment includes frictional and cyclical unemployment. C. unemployment includes cyclical and structural unemployment. D. unemployment includes frictional and structural unemployment.

D. unemployment includes frictional and structural unemployment.

Two examples of automatic stabilizers in the U.S. are A. social security payments and the regressive income tax system. B. social security payments and the proportional income tax system. C. the proportional income tax system and student loan subsidies. D. unemployment insurance payments and the progressive income tax system.

D. unemployment insurance payments and the progressive income tax system.

Which of the following were important developments in the mortgage market that took place during the​ 1970s? A. Banks began to resell mortgages on the secondary market rather than holding them in their portfolios. B. Fannie Mae and Freddie Mac began to act as intermediaries between investors and home buyers. C. Lending standards greatly loosened credit​ standards, enabling more borrowers to obtain mortgages. D. All of the above. E. A and B only.

E. A and B only.

Why did the Fed help JP Morgan Chase buy Bear​ Stearns? A. Failure of Bear Stearns would lead to a larger investment bank failure. B. JP Morgan Chase is an influential partner with the Fed. C. Commercial banks would be reluctant to lend to investment banks. D. All of the above. E. A and C only.

E. A and C only.

Monetary Policy

The actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic policy goals.

Output Gap Equation

Real GDP - Potential GDP/Potential GDP * 100

Rate of Return (housing)

Return = (increase in Price)/(down payment)*100

Expansionary Monetary Policy

The Federal Reserve's policy of decreasing interest rates to increase real GDP.

Contractionary monetary policy

The Federal Reserve's policy of increasing interest rates to reduce inflation.