Econ 202 final

Which of the following is an argument against using policy to stabilize the economy?

Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.

From Ch 16, 17, what is the conventional way to changing the money supply

Open Market Operations (OMO) Required reserves ratio (RR) Discount rate

Other things the same, if prices are greater than expected, then in the short run

Output will be above it's natural rate

If the Fed conducts open-market purchases, the money supply

increases and aggregate demand shifts right.

When the interest rate increases, the opportunity cost of holding money

increases, so the quantity of money demanded decreases

The Federal Reserve will tend to tighten monetary policy with the goal is to stabilize the economy when

it thinks inflation is too high today, or will become too high in the future.

Some economists believe that there are positives from a little inflation and that it may "grease the wheels" in the

labor market.

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

likely smaller than if the cut had been permanent.

Suppose prices suddenly decrease which causes a shift in money demand. This leads to a ______

movement along the aggregate demand curve

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

A consumption tax that replaces an income tax

only taxes a household on the money it spends

Critics of stabilization policy argue that

policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.

A policymaker opposed to using government policy to stabilize the economy would be likely to believe

policymakers should "do no harm."

When the Federal Reserve decreases the federal funds target rate, the lower rate is achieved through

purchases of government bonds, which reduces interest rates and causes people to hold more money.

Other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions.

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply.

An increase in taxes will

shift aggregate demand from AD1 to AD3.

A tax cut shifts the aggregate demand curve the farthest if

the MPC is large and if the tax cut is permanent.

f a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is

0.8 and the multiplier is 5.

There is an excess demand for money at an interest rate of

2 percent

Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect on the slope of aggregate demand?

3,2,1,4

If the MPC = 4/5, then the government purchases multiplier is

5

Suppose the crowding-out effect is greater than the multiplier effect, this means that:

AD shifts rightwards by less than what the government initially spent

Suppose that the money demand and supply is in equilibrium such that the equilibrium interest rate is the same as the Fed's target interest rate. Money demand then shifts leftwards. How would the Federal Reserve return interest rates back to its target?

Conduct an open-market sale to shift money supply leftwards

The multiplier effect and crowding-out effect occur due to ______.

Expansionary fiscal policy

Automatic stabilizers is a monetary policy which stimulates aggregate demand to counter minor economic volatility.

False

During the past two recessions (Financial Crisis and COVID pandemic), traditional monetary policy became ineffective because the short-term policy interest rate hit zero and couldn't be reduced further (Zero Lower Bound). What is the main "unconventional" monetary policy tools the U.S. Federal Reserve has used to stabilize and stimulate the macroeconomy when it reaches the Zero Lower Bound.

Forward guidance Large scale asset purchases

Interest rates adjusting to bring money demand and supply into balance is known as:

The Theory of Liquidity Preference

Advocates of stabilization policy argue that when there is a recession, the government should increase the money supply and increase government expenditures.

True

Both monetary policy and fiscal policy affect aggregate demand.

True

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

True

During recessions, the government tends to run a budget deficit.

True

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

True

Once state and federal taxes are added together, a typical worker faces about a 40 percent marginal tax-rate on interest income.

True

One prominent debate over macroeconomic policy centers on the question of whether monetary and fiscal policy should be used to try to stabilize the economy.

True

Some studies have found that saving is not very sensitive to the rate of return on saving.

True

Sometimes, changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control

True

The wealth effect is one explanation for the slope of the AD curve ; when the price level ( P ) declines the real value of money ( M ) will increase and consumers will be wealthier so consumption will rise .

True

Unemployment insurance and welfare programs work as automatic stabilizers.

True

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

True

In the short run, open-market purchases

increase investment and real GDP, and decrease interest rates.

Economists who are skeptical about the relevance of "liquidity traps" argue that

a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.

According to the theory of liquidity preference,

an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.

Opponents of active stabilization policy

believe that the political process creates lags in the implementation of fiscal policy

A law that requires the money supply to grow by a fixed percentage each year would eliminate

both the time inconsistency problem and political business cycles.

monetary policy

can be described either in terms of the money supply or in terms of the interest rate

Monetary policy affects the economy with a long lag, in part because

changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.

An increase in household saving causes consumption to

fall and aggregate demand to decrease.

During recessions, taxes tend to

fall and thereby increase aggregate demand

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate

Fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

increase government expenditures

If the Fed increases the money supply,

the interest rate decreases, which tends to raise stock prices

According to liquidity preference theory, if there were a surplus of money, then

the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium.

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more

the larger the MPC and the weaker the influence of income on money demand.

An increase in the expected price level shifts

the short-run aggregate supply curve to the left but does not affect the long-run aggregate supply curve.

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

the time inconsistency of policy.

Part of the lag in the effects of monetary policy is due to

the time required for firms and households to alter their spending plans

According to liquidity preference theory, the money-supply curve is

vertical