Macroeconomics Final Review
Refer to the diagram to the right. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model, this would be depicted as a movement from
A to B
The government purchases multiplier is defined as
Change in equilibrium real GDP/ change in government purchases
Which of the following is considered contractionary fiscal policy?
Congress increases the income tax rate
Which of the following would cause the money demand curve to shift to the left?
a decrease in real GDP
Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?
a decrease of less than $80 billion
According to the short-run Phillips curve, which of the following would result in low rates of unemployment?
a higher inflation rate
an increase n the interest rate causes
a movement up along the money demand curve
Which of the following would be considered a fiscal policy action?
a tax cut is designed to stimulate spending during a recession.
An economic expansion tends to cause the federal budget deficit to ___ because tax revenues _____ and government spending on transfer payments____.
Decrease; rise; fall
Expansionary monetary policy refers to the ____ to increase real GDP.
Federal REserve's increasing the money supply and decreasing interest rates
Monetary policy refers to the actions the
Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.
In which of the following situations would the Fed conduct contractionary monetary policy
The Fed is concerned that aggregate demand wold continue to exceed the growth in potential GDP.
Contractionary monetary policy causes
aggregate demand to fall and the price level to fall
If the Fed pursues expansionary monetary policy
aggregate demand will rise and the price level will rise
Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?
an increase government purchases
If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy?
an increase in taxes
In the figure to the right, the movement from point a to point b in the money market would be caused by
an increase in the price level (CH 15 Q 21)
In the figure to the right, the movement from point A to point B i the money market would be caused by
an open market sale of Treasury securities by the Federal Reserve.
The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
automatic stabilizers
The increased in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of
automatic stabilizers
To combat a recession with discretionary fiscal policy, Congress and the president should
decrease taxes to increase consumer disposable income
An increase in the money supply will
decrease the interest rate
If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in:
government purchases.
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle.
From the 1960s to 2014, transfer payments
have risen from 25 percent to about 48 percent of federal government expenditures.
Crowding out, following an increase in government spending, results from ( the exchange rate is the foreign exchange price of the domestic currency)
higher interest rates and a higher exchange rate
expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be _____ and real GDP to be _____.
higher; higher
During 1970-1997, the U.S. federal government was
in deficit every year
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant
increase in inflation
Increases in the price level
increase the quantity of money needed for buying and selling
An increase in the interest rate should _____ the demand for dollars and the value of the dollar, and net exports should _____.
increase, decrease
A recession tends to cause the federal budget deficit to ___ because tax revenues ____ and government spending on transfer payments______.
increase; fall;rise
An increase in real GDP
increases the buying and selling of goods and increases the demand for money as a medium of exchange
Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to increase government purchases by
less than $500 billion
In the figure to the right, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to
lower interest rates
The Federal Reserve's four goals of monetary policy are
price stability, high employment, economic growth, and stability of financial markers and institutions
Crowding out refers to a decline in ______ as a result of an increase in_____.
private expenditures; government purchases
An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may
raise interest rates and reduce consumer expenditures on automobiles and new houses make domestic businesses less competitive in international markets as the dollar appreciates in value reduce investment in new capital
Which of the following is true
the money market model is essentially a model of that determines the short term nominal rate of interest
The Federal REserve's two main monetary policy targets are
the money supply and interest rates
Monetary policy refers to the action the Federal Reserve takes to manage
the money supply and interest rates to pursue its economic objectives
If the Fed's policy is contractionary, it will
use open market operations to sell Treasury bills
In the long run, the Phillips curve is a ____ at _______.
vertical line; the natural rate of unemployment
An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate _____ the government purchases multiplier.
will decrease
Refer to the diagram to the right. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-As model, this situation would be depicted as a movement from
C to B
Which of the following would be classified as fiscal policy?
The federal government cuts taxes to stimulate the economy.
Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during
WW1 and WW2
If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding all else constant? (you may assume the price level stays constant.)
a $300 billion decrease in GDP
The government purchases multiplier equals the change in ______ divided by the change in _____.
equilibrium real GDP; government purchases
The tax multiplier equals the change in _____ divided by the change in_____.
equilibrium real GDP; taxes
For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the
federal funds rate
The interest rate that banks charge other banks for overnight loans is the
federal funds rate
Fiscal Policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives
The federal government debt as a percentage of GDP fell
from 1998-2001
Expansionary fiscal policy involves
increasing government purchases or decreasing taxes
The largest source of federal government revenue in 2014 was
individual income taxes
The three categories of federal government expenditures, in addition to government purchases, are
interset on the nation debt, grants to state and local governments, and transfer payments.
Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?
is forecasted to be higher than equilibrium GDP
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
Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often
lowers interest rates during recessions
If the Fed buys Treasury bills, this will shift the
money supply curve to the right
The crowding out of government spending by private spending will be greater the
more sensitive consumption, investment, and net exports are to changes in the interest rates.
An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by:
more than $200 billion
The money demand curve has a
negative slope because an increase in the interest rate decreases the quantity of money demanded
According to the short- run Phillips curve, the unemployment rate and the inflation rate are
negatively related
Government deficits tend to increase during
periods of war and recession.
Refer to the diagram to the right. The money demand curve would move from Money demand1 to money demand 2 if
real GDP increased. (CH 15 Q8)t
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
real interest rates
If the FEd raises the interest rate, this will____ inflation and _____ real GDP in the short run.
reduce; lower
During recessions, government expenditure automatically
rises because of programs such as unemployment insurance and Medicaid.
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
Fiscal policy is defined as changes in federal____ and ____ to achieve macroeconomics objectives such as price stability, high rat3es of economic growth, and hight employment.
taxes; expenditures
The curve showing the short-run relationship between the unemployment rate and the inflation rate is called
the Phillips curve
If the federal government's expenditures are less than its tax revenues, then
the budget surplus results
The monetary policy target the Federal Reserve focuses primarily on today is
the interest rate
If the Fed pursues expansionary monetary policy then
the money supply will increase, interest rates will fall and GDP will rise
In the figure to the right, the money demand curve would move from Money demand 1 5o Money demand 2 if
the price level increased (CH 15 Q9)
The federal government debt equals
the total value of U.S. treasury bonds outstanding.
What is the natural rate of unemployment?
the unemployment rate that exists when the economy is at potential GDP
The largest and fastest-frowing category of federal government expenditures is
transfer payments
