ECON final

An equal increase in government purchases and taxes will cause

an increase in real GDP.

Refer to Figure 14-3. In the figure above, the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve.

The Federal Reserve in 2007 did not lower interest rates to help the housing market because

the inflation rate was at or above the level the Fed considered acceptable.

If the Fed pursues expansionary monetary policy then

the money supply will increase, interest rates will fall and GDP will rise.

Refer to Figure 14-5. In the figure above, if the economy is at point A, the appropriate countercyclical monetary policy by the Federal Reserve would be to

lower interest rates.

If tax reduction and simplification are effective, then

saving and investment in new capital will increase.

The Fed can increase the federal funds rate by

selling Treasury bills, which decreases bank reserves.

Expansionary fiscal policy will

shift the aggregate demand curve to the right.

A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money?

standard of deferred payment

Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment.

taxes; expenditures

The money supply curve is vertical if

the Fed is able to completely fix the money supply.

The government purchases multiplier is defined as

(Change in equilibrium real GDP/Change in government purchases).

Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.

increases; increases

A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the mulCplier effect.

increasing; increasing

The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.

induced; consumption; autonomous

The money demand curve has a negaFve slope because

lower interest rates cause households and firms to switch from financial assets to money.

The money demand curve has a negative slope because

lower interest rates cause households and firms to switch from financial assets to money.

Suppose commercial banks have no excess reserves. Then new deposits totaling $1 billion come into the banking system. The required reserve ratio is 20 percent. What is the maximum amount by which banks can increase deposits in the entire banking system?

$5.0 billion.

The Consumer Price Index (CPI) in an economy is equal to 180 in 2016 and is equal to 189 in 2017. The rate of inflation in the economy over that year period is:

5 percent.

Refer to Table 15-2. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2011 and in 2012 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2012, they should

decrease government purchases.

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________.

decrease; increase

Fiat money

has no or very little value except as money.

Which of the following is the most important in increasing a nation's economic growth in the long run?

Higher rates of technological change.

An increase in the money supply will

decrease the interest rate.

Refer to Figure 15-9. An increase in government purchases of $200 billion causes aggregate demand to shift ultimately from AD 1 to AD 2. Assuming a constant price level, the difference in real GDP between point A and point B will be ________ $200 billion.

greater than

Consider a tax cut which affects not only consumer disposable income, but also after-tax earnings from labor supplied to labor markets and from financial assets acquired through saving. In the long run we would expect this tax cut to

increase the level of real GDP.

An argument advanced against the flat tax is that

it may make the distribution of after-tax income more unequal than it is under current tax law.

Reducing the marginal tax rate on income will

reduce the tax wedge faced by workers and increase labor supplied.

If the Fed raises the interest rate, this will ________ inflaFon and ________ real GDP in the short run.

reduce; lower

If the Fed raises its target for the federal fund rate, this indicates that

the Fed is pursuing a contractionary monetary policy.

If the Fed lowers its target for the federal funds rate, this indicates that

the Fed is pursuing an expansionary monetary policy.

(Figure: Aggregate Demand and Supply) The graph depicts an economy originally in equilibrium at point e. Assume that the government uses expansionary fiscal policy. The movement from point a to point b is due to:

workers and suppliers adjusting their expectations to higher price levels.

Suppose the reserve ratio is RR . Then,

required reserves = RR × deposits.

(Table)According to the table, the GDP for 2010 was:

$14,592.3 billion.

(Table) The following table shows data on consumption at various levels of income. The value of the MPC (marginal propensity to consume) is:

0.90.

If the required reserve ratio is RR, the simple deposit multiplier is defined as

1/(RR).

(Table) According to the table, what is the unemployment rate of this economy?

14.3%

If the Federal Reserve tries to target inflation near 2%,the inflation rate is 3%, and output is 3% below potential GDP, then the target federal funds rate according to the Taylor rule is:

4%.

Suppose the Fed increases the money supply. Which of the following is true?

At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.

During the currency crisis in Argentina in 2001, which of the following did not occur?

Banks increased lending to lessen the crisis.

Which of the following statements about the Social Security, Medicare, and Medicaid programs is true?

Costs are being driven up by the fact that Americans are living longer and medical costs are rising substanCally.

Which of the following situaFons is one in which the Fed will potenFally pursue expansionary monetary policy?

Potential GDP is forecasted to be higher than equilibrium GDP.

Which of the following is a government expenditure, but is not a government purchase?

The federal government pays out an unemployment insurance claim.

If the federal government's expenditures are less than its tax revenues, then

a budget surplus results.

(Figure: Predicting Aggregate Demand Shifts) Which of the following would shift the aggregate demand curve from AD1 to AD2?

a decrease in interest rates

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.

Refer to Figure 14-11. In the figure above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

buy Treasury bills

(Figure: Shifts in SRAS and AD) If the economy is at short-run equilibrium point b because of a negative supply shock, the Federal Reserve could enact an expansionary monetary policy, thus shifting the new equilibrium to point _____. As a result of this, the price level would _____ and real output would _____.

c; further increase; increase

If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run.

reduce; lower

An increase in the domestic interest rate relative to other interest rates should

decrease consumption spending.

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.

discretionary fiscal policy; automatic stabilizers

The rate of interest banks charge other banks for overnight loans of reserves is the

federal funds rate

Paper currency is a

fiat money.

A barter economy is an economy where

goods and services are exchanged for other goods and services.

Falling interest rates can

increase a firm's stock price, which causes firms to issue more stock shares, and thus increases funds for investment.

If Congress wanted to counteract the effects of a recession it could

increase government purchases.

Refer to Figure 15-4. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?

increase government spending

Refer to Figure 15-1. In the graph above, if the economy is at point A, an appropriate fiscal policy by the Congress and the president would be to

increase government transfer payments.

Lowering the interest rate will

increase investment projects by firms.

An increase in real GDP

increases the buying and selling of goods and increases the demand for money as a medium of exchange.

In order to expedite the impact of tax cuts enacted in 2001, the U.S. government.

mailed out checks during the summer of 2001 for the estimated amount each taxpayer would receive.

Rising prices erode the value of money as a ________ and as a ________.

medium of exchange; store of value

An increase in real GDP can shift

money demand to the right and increase the interest rate.

As the tax wedge associated with a given economic activity gets smaller, we would expect

more of that economic activity to occur.

It is ________ difficult to effectively time fiscal policy than monetary policy because _________

more; fiscal policy takes longer to implement

A stock market bubble

occurs when stock prices rise above levels that can be jusFfied by the profitability of the firms issuing the stock.

Government deficits tend to increase during

periods of war and recession.

Which of the following are goals of monetary policy?

price stability, economic growth, and high employment

The fastest growing category of government expenditure is

transfer payments.

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

use open market operations to buy Treasury bills

Reserves of a bank equal its

vault cash plus deposits with the Federal Reserve.

A bank holds its reserves as ________ and ________.

vault cash; deposits at the Federal Reserve