Macroeconomics Ch. 10, 11 HW questions

Neither M1 or M2

-credit cards -gold -common stock

M1 and M2

-currency -balances in checking accounts

Components of M2

-money market account balances -balances in the savings account -certificates of deposit

Suppose you purchase a perpetuity bond from Blue Sun Corp. for $5,000 with an annual coupon rate of 3%. What is the yearly return on your $5,000 investment

5000*.03 yearly return: $150

Suppose you purchase a perpetuity bond from Blue Sun Corp. for $5,000 with an annual coupon rate of 3%. Changes in the economy push the interest rate from 3% to 1%. For how much can you sell your bond following this change in market interest rates?

5000*.03=150 150/.01= 15000 price of bond: $15000

Suppose you purchase a perpetuity bond from Blue Sun Corp. for $5,000 with an annual coupon rate of 3%. Changes in the economy push the interest rate from 3% to 5%. For how much can you sell your bond following this change in market interest rates?

5000*.03=150 150/.05=3000 price of bond: $3000

If the economy starts below full employment, an expansionary fiscal policy will shift the aggregate demand curve _______, and equilibrium will move_______.

AD shifts outward, equilibrium price level will increase.

Which country has the largest public debt as a percentage of GDP?

Japan

What would increase M1 in the country where Joe, Nan, and the Hardware Store are located?

Joe withdraws $500 from his savings account and deposits it in his checking account

The largest category of federal government spending in 2015 was:

Social Security

If the government is required to balance the budget and the economy falls into a recession, what would be a feasible policy response?

cut spending equal to the reduction in tax revenue

Which fiscal policy time lag can occur when the legislative process works slowly?

decision lag

An increase in savings and a decrease in investor optimism will cause the interest rate to

decrease

Borrowers like John are likely to borrow more when the real interest rate______. Therefore, the supply of loanable funds _______.

decreases; slopes downward

If a government collects $550 billion in taxes and spends $700 billion, it would have a:

deficit of $150 billion

Suppose in 2009, country X had tax revenues of $550 billion and government expenditures of $700 billion. In addition, at the end of 2008, its national debt was $6.5 trillion. In 2009, country X had a________ and at the end of 2008, a public debt of ________.

deficit of $150 billion; $6.65 trillion

The source of the ____ for loanable funds is investment.

demand

The advantage of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers:

do not require overt action by policymakers

The_____ represents the price of a loan

interest rate

Which term acts as the "price" in the market for loanable funds?

interest rate

The focus of supply-side fiscal policies is on:

long-run economic growth

Norah quickly walks to the checkout line where she pays the cashier for her new dress. Here, money is serving as a:

medium of exchange

Suppose the government increases aggregate demand to a level that increases GDP above its long-run equilibrium level. What sequence of events would follow?

prices rise; GDP increases; workers demand higher wages; SRAS shifts to the left; GDP drops

As interest rate decreases, what happens to the quantity of loanable funds demanded?

quantity demanded will increase

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

quantity supplied will increase

Assume that market interest rates are 6% and the bondholder receives a $60 coupon payment per year on a bond with a face value of $1,000. If the market interest rates fall to 4%, the bond price:

rises to $1,500 60/.04= 1500

Norah is especially excited because she has been saving each week in her piggy ball at home so that she can afford a trip to Florida next summer. Here, money is serving as a:

store of value

The source of the ____ for loanable funds is saving.

supply

Giving tax breaks to firms that undertake research and development is an example of what

supply-side fiscal policy

A negative consequence of cutting spending equal to the reduction in tax revenue would be

that the negative consequences of the recession are magnified.

If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

the business will not take out the loan

What will happen to the market if there is an improvement in the technology firms use in production

the real interest rate increases and the quantity of loanable funds increases the demand curve shifts to the right

Suppose the government changes the tax code to allow additional amounts of money to be placed in 401k retirement accounts, increasing the extent to which people can delay their tax obligations. What effect does this have on the supply and demand curves in the market for loanable funds.

the supply curve shifts to the right decreasing the price (interest rate)

Primary role of financial intermediaries in the market for funds include:

-reducing transaction costs -spreading risk -reducing information costs

Contractionary fiscal policy is typically used to:

combat inflation stemming from an overheated economy

Savers like Dan are likely to save more when the real interest rate ________. Therefore, the supply of loanable funds______.

increases; slopes downward

The largest source of federal government revenues is:

individual income taxes

Government Debt

total accumulated amount that the government has borrowed and not yet paid back over time

Norah walks into her favorite department store, Bullseye, to pick out a new dress. She checks out the price tag and is excited to see that the dress is on sale and is now relatively cheaper than another dress she was considering. Here, money is serving as a:

unit of account

When money is used to measure and compare the value of goods and services, it is used as a :

unit of account

Balanced Budget

when government spending and taxes are equal

Budget Deficit

when the federal government spends more than it collects in taxes in a given time period

Budget Surplus

when the government recieves more in taxes than it spends in a given time period

According to the crowding-out effect, if the government sells bonds to finance spending, _______ can eventually fall.

consumption and investment

Reducing government spending, reducing transfer payments, or raising taxes describes which policy?

contractionary fiscal policy

If the national debt is $55 million and this year's deficit is $5 million, what would the new national debt be?

$60 million

Why are persistent budget deficits worrisome?

- deficits can lead to private investment spending being crowded out - ikelihood of default increases - debt places an increased burden on the economy in the future

Automatic Stabilizers include:

- unemployment compensation benefits - welfare payments - tax revenues

Suppose the government finances its expansionary fiscal policy by borrowing from the public. Joseph is concerned that this will increase the demand for loanable funds, price up interest rates, and make less loanable money available for consumers and businesses. Joseph is concerned about the:

Crowding-out effect

What is this an example of: Jack wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wild West" however the government is running a deficit which has increased the interest rates so much that jack can no longer afford to borrow the money

Crowding-out effect

_________ is the part of the budget that works its way through Congress each year; it includes programs such as national defense, transportation, Medicaid, and education

Discretionary Spending

What is M2?

M1 + savings

Automatic stabilizers have _______ effects during times of economic prosperity and ______ effects during times of economic downturn.

contractionary; expansionary

John owns a pizzeria and needs to borrow money for a new oven. In the loanable funds market, John is:

a demander of loanable funds

What best describes a financial intermediary?

a financial institution that transforms investor funds into financial assets

Dan saves a portion of his income in an interest-earning account. In the loanable finds market, Dan is

a supplier of loanable funds

The progressive income tax and transfer payments are the two main:

automatic stabilizers

What is M1?

currency and checkable deposits

The best discretionary fiscal policy is:

expansionary fiscal policy that leads to full employment

Suppose that while households are deciding to increase savings, the demand by firms for investment funds fall. In the market for loanable funds, the real interest rate will_______ and the quantity of loanable funds will _________.

fall; rise, fall, or stay the same

The ______ lag is the time required to turn fiscal policy into law to have an impact on the economy.

implementation

An investment tax credit and an increase in large investments will cause the interest rate to

increase

Suppose the economy is in a recession. To increase demand using discretionary fiscal policy, the government can:

increase government spending or reduce taxes