Macro Economics Review Questions 15 and 16
Bill's income is $1,000 and his net taxes are $350. His disposable income is what?
$650
Suppose the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from what?
A to B
Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from what?
A to B
Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure, this situation would be depicted as a movement from what?
A to E
An increase in taxes would be depicted as a movement from_____, using the static AD-AS model in the figure above.
B to A
In 2012, the city of Canfield collected $500,000 in taxes and spent $450,000. In 2012, the city of Canfield had a what?
budget surplus of $50,000
If the Federal Reserve targets the interest rate and the money demand curve shifts to the left, then the Fed can do what?
can maintain the interest rate target, but at a lower quantity of the money supply
If the Federal Reserve targets the money supply, and the money demand curve shifts to the left, then the Fed can do what?
can maintain the money supply target, but at a lower interest rate
Changes in the federal funds rate usually result in what?
changes in both short-term and long-term interest rates with more of an effect on short-term interest rates
In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely pursue what?
contractionary monetary policy
In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in a year 2, and no fiscal or monetary policy is pursued, then at point B what?
firms are operating below capacity
Which of the following is NOT a category of fiscal policy?
government policies regarding money supply in the economy
If the government wants to reduce unemployment, government purchases should be_____ and/or taxes should be____.
government purchases should be increased taxes should be decreased
During recessions, government spending usual does what?
increases because unemployment payments increase.
An increase in the interest rate does what?
increases the opportunity cost of holding money
In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in what?
inflation higher than what would occur if no policy had been pursued
When the Fed uses contractionary policy is does what?
it does not change the price level
When a government runs a deficit what happens?
its debt increases
If the probability of losing your job remains_____, a recession would be a good time to purchase a home because the Fed usually_____ interest rates during this time.
losing your job remains low the fed usually lowers interest rate
Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be_______ and real GDP to be______.
lower lower
If they economy is at point A, the appropriate monetary policy by the Federal Reserve would be to do what?
lower interest rates
The Federal Reserve's two main_____ are the money supply and the interest rate.
monetary policy targets
The Federal Reserve cannot target both the money supply and the interest rate because it does not control what?
money demand
When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have what?
more money than they want to hold
The money demand curve has a
negative slope because an increase in the interest rate decreased the quantity of money demanded
The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect what?
nominal interest rates
Crowding out refers to a decline in____ as a result of an increase in____
private expenditures; government purchases
When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to do what?
sell Treasury bills
When the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and girls will do what?
sell Treasury bills
The Fed can increase the federal funds rate by doing what?
selling Treasury bills, which decreases bank reserves
Suppose that in the beginning of 2012 the federal debt was $9 trillion. During 2012, the government balanced its budget. At the end of 2012, the federal debt did what?
stayed the same
The Federal Reserve can directly affect its monetary policy_____, which then affect its monetary policy_____.
targets goals
The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of______, it also can achieve the goal of____ simultaneously.
the Fed pursues the goal of high employment can achieve the goal of economic growth
Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2015?
the Fed should lower the target for the federal funds rate
In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B what happens?
the economy is below full employment
The presence of automatic stabilizers means that the federal deficit is____ than it otherwise would be in a recession and ____ than it otherwise would be in an expansion
the federal deficit is larger smaller than it otherwise would be in an expansion
An example of an automatic stabilizer is what?
the food stamp program
The difference between what a government spends and what it collects in taxes in a year is what?
the government budget deficit or surplus
Aggregate demand increases if what?
the government increases taxes
Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively____ and real GDP to be relatively_____.
the inflation rate to be relatively higher real GDP to be relatively higher
The use of fiscal policy to stabilize the economy is limited because
the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way
An increase in the price level causes what?
the money demand curve to shift to the right
The tax multiplier is what?
the ratio of the change in the equilibrium level of output to the change in taxes
Fiscal policy refers to what?
the spending and taxing policies used by the government to influence the economy
Which of the following is INCORRECT regarding tax revenues?
they increase during recessions
The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as
a liquidity trap
An increase in the interest rate causes what?
a movement up along the money demand curve
In which case will the government collect more tax revenue?
20% tax rate and $90,000 average income
Which of the following would cause the money demand curve to shift to the left?
A decrease in real GDP
Monetary policy refers to the actions the what?
Federal Reserve takes to manage the money supply and interest rates to pursue its microeconomic policy objectives
Expansionary monetary policy refers to the____ to increase real GDP.
Federal Reserve's increasing the money supply and decreasing interest rates
An increase in the interest rate should____ the demand for dollars and the value of the dollar, and net exports should____.
Increase Decrease
Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy?
Increasing the money supply lowers the interest rate, and firms increase investment spending
The Federal Reserve System's four monetary policy goals are what?
Price Stability high employment economic growth stability of financial markets and institutions
Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to increase____ and real GDP to increase_____
Less more
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be_____ and real GDP to be_____.
Lower Lower
Which of the following is a CORRECT sequence of events during a recession?
Unemployment falls income falls tax revenue falls unemployment benefits rise the budget deficit rises
Which of the following will lead to a decrease in the equilibrium interest rate in the economy?
a decrease in GDP
Contractionary monetary policy on the part of the Fed results in what?
a decrease in the money supply, an increase in interest rates and a decrease in GDP
Most economists believe that the best monetary policy target is what?
an interest rate
Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to do what?
decrease
If the government spending multiplier is 5 and government spending decreases by $200 billion, output will_____ by $____billion.
decrease by $1,000
An economic expansion tends to cause the federal budget deficit to____ because tax revenues_____ and government spending on transfer payments____
decrease rise falls
In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point V in year 2, the Federal Reserve would most likely do what?
decrease interest rates
An increase in individual income taxes_____ disposable income, which_____ consumption spending
decreases decreases
An increase in interest rates does what?
decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports
The interest rate that banks charge other banks for overnight loans is the what?
discount rate
The total amount owed by the federal government to the public is the what?
federal debt
For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the what?
federal funds rate
A government's debt is reduced when it does what?
runs a surplus
During a recession, automatic stabilizer cause the federal deficit to do what?
increase
Suppose that households became mistrustful of the banking system and decided to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should do what?
increase
Using the money demand and money supply model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to do what?
increase
A recession tends to cause the federal budget deficit to_____ because tax revenues_____ and government spending on transfer payments_____.
increase fall rises
Proponents of spending on infrastructure as a means to stimulate the economy note that the multiplier effect for______ is estimated to be larger than the multiplier effect for___, and would therefore have a greater impact on expanding GDP.
increase in government spending; tax cuts
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy?
increase in inflation
In the dynamic model of AD-AS, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely do what?
increase interest rates
In response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as what?
quantitative easing
In the figure, the money demand curve would move from MD1 and MD2 if what?
real GDP increased
During the turmoil in the market for subprime mortgages in 2007 and 2008, the Fed increased the volume of discount loans. The goal of the Ged was to what?
reassure financial markets and promote financial stability
The President of Vulcan hired you as an economic consultant. He is concerned that the output level in Vulcan is too high and that this will cause prices to rise. He feels that it is necessary to reduce output by $10 billion. He tells you that the MPC in Vulcan is 0.6. Which of the following would be the best advice to give to the Vulcan president?
reduce government purchases by $4 billion
The objective of a contractionary fiscal policy is to what?
reduce inflation
The objective of an expansionary fiscal policy is to what?
reduce unemployment
In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in what?
unemployment rates higher than what would occur if no policy had been pursued
Which of the following describes what the Fed would do to pursue an expansionary monetary policy?
use open market operations to buy Treasury bills