Chap 13/14 Fiscal Policy & Monetary Policy

When the government imposes a tax on labor income, _______ the ppf occurs and potential GDP ________.

a leftward movement along; decreases

A country has been in existence for only two years. In the first year, receipts were $1.0 million and outlays were $1.5 million. In the second year, receipts were $1.5 million and outlays were $2.0 million. At the end of the second year, the government had issued debt worth______

$ 1 million

To determine whether the federal rate should be raised, lowered, or left unchanged, the Fed forecasts _________.

- the inflation rate - the output gap - the unemployment rate

Consider the following statement: "Unemployment is a more serious economic problem than inflation and it should be the focus of the Fed's monetary Policy."

1. The Fed's primary goal is price stability because price stability helps the Fed reach all three of its goals. 2. The Fed's goals are maximum employment, stable prices, and moderate long-term interest rates

Suppose the Fed raises the federal funds rate. 1. _____interest rates _____ aggregate expenditure. 2. Aggregate demand ______, which ______ real GDP and the price level, relative to what they would have been

1. higher; decrease 2. decreases; decreases

Suppose the Fed raises the federal funds rate. 1. The _____ the real interest rate _______ consumption expenditure and investment. 2. The _____ exchange rate makes U.S. exports ________ and imports _______. So net exports ______.

1. higher; decreases 2. higher; more costly; cheaper; decrease

The Fed's actions influence real GDP by changing expenditure plans. 1. Other things remaining the same, the higher the real interest rate, the _____is the amount of consumption expenditure and the _____is the amount of saving. 2. Other things remaining the same, the higher the interest rate, the ______is the amount of investment and the _____are net exports. 3. The monetary policy transmission process is almost immediate and its results are easy to predict.

1. smaller; greater 2. smaller; smaller 3. False

The ______ appoints the members and the Chairman of the Board of Govornors of the Fed.

President

Suppose the Fed raises the federal funds rate. Real GDP growth and inflation ______.

Slow down

If the Federal funds rate is greater than the Federal funds rate target, there is a ______of reserves and the Federal funds rate _____.

Surplus; falls

Fiscal policy attempts to achieve all of the following objectives _________; EXCEPT _______

Sustained economic growth, full employment, & price level stability; a stable money supply

T or F: The Fed uses open market operations to make the quantity of reserves supplied equal the quantity of reserves demanded at the federal funds target rate.

TRUE

T or F: The Fed's open market operations determine the supply of reserves.

TRUE

T or F: The federal funds rate is the opportunity cost of holding reserves.

TRUE

_____plays NO role in making monetary policy decisions.

Congress

The Fed's mandated policy goals are "maximum employment, stable prices, and moderate long-term interest rates." Suppose the Fed lowers the federal funds rate to combat a recession. As a result, the unemployment rate _____ and the price level ______.

Decreases; Increases

T or F: As the federal funds rate rises, the quantity of reserves supplied increases.

FALSE

The ______ is responsible for the conduct of monetary policy.

Fed

When the Fed fights inflation,

a decrease in bank reserves decreases the quantity of money demanded

When the Fed fights recession,

an increase in the supply of loanable funds lowers the long-term interest rate and increases investment

Taxes and government expenditures that, without need for additional government action, change in response to changes in the level of economic activity are examples of

automatic fiscal policy

The federal funds rate is the interest rate that

banks change each other on overnight loans

The short-term interest rates-- the federal funds rate and short-term bill rate--move _____.

closely together

A ______ deficit will disappear when the economy moves back to full employment.

cyclical

Suppose the Fed raises the federal funds rate. The quantity of money and the supply of loanable funds ______. The long-term real interest rate ______.

decreases; rises

The tax rebates passed by Congress in 2008 to help move the economy more rapidly towards potential GDP are an example of:

discretionary fiscal policy

Interest rates _____ in response to the Fed's actions.

fluctuate

The higher the federal funds rate, the _____the opportunity cost of holding reserves, which _______the incentive to economize on reserves

higher; increases

The long-term bond rate is ____than the short-term rates, and it fluctuates _____than the short-term rates.

higher; less

The Fed's goals of maximum employment, stable prices, and moderate long-term interest rates are______

in harmony and reinforce each other in the long run but in the short run might come into conflict.

An economy is experiencing a recessionary gap. The government can________

increase expenditure or cut taxes to increase aggregate demand

Which of the following is NOT a role played by the Budget Committees of the House of Representatives and the Senate in creating fiscal policy?

making the initial budget proposal in Feb

Suppose the Fed raises the federal funds rate. When it does so, the Fed makes an open market ______ Other short-term interest rates and the exchange rate _____.

sale; rise

A budget deficit that needs government action to remove it is a _____deficit.

structural

U.S. federal budget in 2010 is primarily a _____ deficit.

structural

The Laffer curve is the relationship between

tax rates and tax revenue

The Fed's monetary policy instrument is:

the federal funds rate