Iowa FAR Quiz 1

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. ​Source: Min​ Zeng,"Inflation Expectations​ Fall, Making Rate Hike​ 'More Difficult to​ Justify,'" Wall Street Journal​, August​ 6, 2015. If it did not increase its target for the federal funds​ rate, the policy goal the Fed would be promoting is A. economic​ growth, because maintaining lower interest rates would stimulate the economy and raise the price level. B. stability of financial markets and​ institutions, because maintaining lower interest rates would provide stability to financial markets. C. price​ stability, because maintaining lower interest rates would stimulate the economy and lower the price level. D. zero​ unemployment, because maintaining lower interest rates would stimulate the economy and increase employment.

A

The term​ "crowding out" refers to a situation​ where: A. Government spending increases interest rates and decreases private investment. B. Government spending decreases interest rates and increases private investment. C. Fed policy increases interest rates and decreases private investment. D. Fed policy decreases interest rates and increases private investment.

A

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

A

When the economy is experiencing a recession automatic stabilizers will​ cause: A. transfer payments to increase and tax revenues to decrease B. transfer payments to decrease and tax revenues to decrease. C. transfer payments to increase and tax revenues to increase. D. transfer payments and tax revenues to be unaffected.

A

Which one of the following is not one of the monetary policy goals of the​ Fed? A. Reduce income inequality. B. Maintain stability of financial markets and institutions. C. Maintain high employment. D. Maintain price stability.

A

An article in the Wall Street Journal reported in 2015 that the​ People's Bank of​ China, which is the central bank of​ China, "is freeing up cash by reducing the amount that banks must keep in​ reserve." The monetary policy tool that the​ People's Bank of China was using was changes to the A. required reserve ratio. B. volume of bonds. C. interest rate. D. discount rate. This policy change would​ "free up​ cash" because A. reserves that were excess are now required reserves available for lending. B. reserves that were required are now excess reserves available for lending. C. total reserves would increase. D. total deposits would increase. The​ People's Bank of China was hoping this policy action would A. lower the inflation rate. B. expand the banking sector. C. stimulate economic growth. D. increase interest rate income for investors.

A B C

An article in the Wall Street Journal discussing the Federal​ Reserve's monetary policy included the following​ observation: "Fed officials have been signaling since last year that they expected to raise rates in 2015 ... pushing up the value of the currency and contributing to the economic slowdown officials now​ confront." ​Source: Jon​ Hilsenrath, "Fed's Rate Decisions Hang on​ Dollar, Growth​ Concerns," Wall Street Journal​, April​ 22, 2015. ​"Pushing up the value of the​ currency" means A. increasing the exchange rate between the dollar and other currencies. B. increasing the demand for money. C. causing other currencies to exchange for more dollars. D. causing the dollar to exchange for fewer units of foreign currencies. By increasing U.S. interest​ rates, the Fed would cause the value of the currency to increase because A. there will be more imports resulting in a larger demand for U.S. dollars. B. U.S. investors will demand more dollars so they can buy more international bonds. C. international investors will demand more U.S. dollars to buy U.S. financial assets that now pay higher interest rates. D. there will be more exports resulting in a larger demand for U.S. dollars. An increase in the value of the currency would contribute to a slowdown in the growth of the U.S. economy because A. U.S. exports will fall and imports from other countries will​ rise, increasing net​ exports, but reducing aggregate demand. B. U.S. exports will rise and imports from other countries will​ fall, reducing net exports and aggregate demand. C. U.S. exports will rise and imports from other countries will​ fall, increasing net​ exports, but reducing aggregate demand. D. U.S. exports will fall and imports from other countries will​ rise, reducing net exports and aggregate demand

A C D

An increase in interest rates affects aggregate demand by A. shifting the aggregate demand curve to the​ right, increasing real GDP and lowering the price level. B. shifting the aggregate demand curve to the​ left, reducing real GDP and lowering the price level. C. shifting the aggregate supply curve to the​ left, decreasing real GDP and increasing the price level. D. shifting the aggregate supply curve to the​ right, increasing real GDP and lowering the price level.

B

As the interest rate​ increases, A. ​consumption, investment, and net exports fall but government spending​ increases, and aggregate demand increases. B. ​consumption, investment, and net exports​ decrease; aggregate demand decreases. C. consumption increases but investment and net exports​ decrease; aggregate demand remains unchanged. D. ​consumption, investment, and net exports​ increase, and aggregate demand increases.

B

Consider the figures below. Determine which combination of fiscal policies shifted AD 1AD1 to AD 2AD2 in each figure and returned the economy to​ long-run macroeconomic equilibrium. A. Example​ (A): Contractionary fiscal policy. Example​ (B): Expansionary fiscal policy. B. Example​ (A): Expansionary fiscal policy. Example​ (B): Contractionary fiscal policy. C. Example​ (A): Expansionary fiscal policy. Example​ (B): Expansionary fiscal policy. D. Example​ (A): Contractionary fiscal policy. Example​ (B): Contractionary fiscal policy.

B

The federal funds rate is A. the required reserve ratio that the Federal Reserve requires banks to maintain. B. the interest rate that banks charge each other for overnight loans. C. the interest rate that the banks charge for loans to its important commercial borrowers. D. the interest rate that the Federal Reserve charges for its loans to banks.

B

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

What is the difference between federal government purchases​ (spending) and federal government​ expenditures? A. Government purchases refer to spending for which no good or service is received. B. Government purchases are included in government expenditures. C. Government expenditures are included in government purchases. D. They are the same.

B

Which of the following is not a policy tool the Federal Reserve uses to manage the money​ supply? A. Open market operations. B. Changing Income tax rates. C. Reserve requirements. D. Discount policy.

B

An article in the Wall Street Journal quoted a Federal Reserve economist as referring to​ "the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price​ stability." ​Source: Pedro Nicolaci Da​ Costa, "Fed Should Make Bond Buys a Regular Policy​ Tool, A Boston Fed Paper​ Finds," Wall Street Journal​, April​ 23, 2015. ​"Maximum sustainable​ employment" means the economy is producing at its potential where A. unemployment includes cyclical and structural unemployment. B. unemployment includes frictional and structural unemployment. C. the unemployment rate is zero percent. D. unemployment includes frictional and cyclical unemployment. ​"Price stability" means A. prices are set by the Fed. B. a low and stable inflation rate. C. prices do not change. D. a zero percent inflation rate.

B B

When the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it _____ U.S. Treasury securities. If the FOMC wishes to decrease the money​ supply, it ______U.S. Treasury securities.

Buys Sells

A student says the​ following: ​"I understand why the Fed uses expansionary policy but I​ don't understand why it would ever use contractionary policy. Why would the government ever want the economy to​ contract?" The government would want the economy to contract when real GDP is A. below potential GDP and the price level is falling. B. below potential GDP and the price level is rising. C. above potential GDP and the price level is rising. D. above potential GDP and the price level is falling.

C

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

C

Which can be changed more​ quickly: monetary policy or fiscal​ policy? A. Monetary policy can be changed more quickly than fiscal policy. Fiscal policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. B. Fiscal policy can be changed more quickly than monetary policy. Monetary policy has much longer delays due to the larger number of legislators involved. C. Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. D. Fiscal policy can be changed more quickly than monetary policy. Fiscal policy has much shorter delays due to the smaller number of legislators involved.

C

Which of the following is NOT a monetary policyLOADING... goal of the Federal Reserve bank​ (the Fed)? A. Stable financial markets B. Higher living standards C. Low prices D. Low unemployment

C

Why do few economists argue that it would be a good idea to balance the federal budget every​ year? A. To keep a balanced budget during a​ recession, taxes would have to decrease and government expenditures would have to​ increase, which would further reduce aggregate demand and deepen the recession. B. To keep a balanced budget during an​ expansion, taxes would have to decrease and government expenditures would have to​ increase, which would increase aggregate demand and decrease inflation. C. To keep a balanced budget during a​ recession, taxes would have to increase and government expenditures would have to​ decrease, which would further reduce aggregate demand and deepen the recession. D. To keep a balanced budget during an​ expansion, taxes would have to increase and government expenditures would have to​ decrease, which would increase aggregate demand and lead to inflation.

C

​Additionally, the federal funds rate is A. not important for the​ Fed's monetary policy since households and firms are not directly affected by any adjustment of this rate. B. very important for the​ Fed's monetary policy because individual borrowers pay this interest rate for mortgage loans. C. very important for the​ Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations. D. very important for the​ Fed's monetary policy because it is administratively set by the Fed.

C

An increase in the money supply in the U.S. will not A. cause the U.S. interest rate to decline relative to interest rates in other countries. B. cause the amount of net exports from the U.S. to​ increase, as exports rise and imports fall. C. cause the value of the dollar to decrease relative to other assets. D. cause the value of investing in U.S. financial assets to become more desirable to foreign investors.

D

In what ways does the federal budget serve as an automatic stabilizer for the​ economy? A. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these require government action to stabilize aggregate demand. B. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits rise. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits fall. Both of these occur automatically and both effects help to stabilize aggregate demand. C. During a​ recession, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. During an​ expansion, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. Both of these occur automatically and both effects help to stabilize aggregate demand. D. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand.

D

Who is responsible for fiscal​ policy? A. The Federal Reserve controls fiscal policy. B. The federal government and the Federal Reserve jointly control fiscal policy. C. Fiscal policy is controlled by market forces. D. The federal government controls fiscal policy.

D

If the Federal Reserve is late to recognize a recession and implements an expansionary policy too​ late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the​ recession, the poor timing caused another​ problem: inflation. This is an example of what type of​ policy? A. Fiscal policy B. Tight policy C. Countercyclical policy D. Procyclical policy

Procyclical policy