Unit 5: Long-Run Consequences of Stabilization Policies

Crowding out is

an increase in government spending causing a decrease in private spending and investment.

Many feel the federal government should live within its means and have a budget that is fully financed by the revenues collected. Such a proposal is known as

balanced budget.

In terms of the velocity of money and growth policy Mainstream macroeconomists and monetarists

disagree; mainstreamers do not believe velocity is stable, monetarists do.

When a large firm is able to spread overhead costs across large numbers of items, thereby reducing costs on such items substantially, then the firm is operating under

economies of scale.

If Congress involves itself in trying to stimulate or slow down the economy it would be called

fiscal policy

An advantage of economic growth is

increased standard of living.

A tax system that is more progressive

increases the built-in stability within the economy.

If unemployment rate drops, then according to the SRPC

inflation rises.

On a long-run Phillips Curve, the correct y-axis label is

inflation.

Human capital is best defined as

knowledge and skills that make a worker productive.

If Aggregate Demand Shifts left on the AD/AS model then one would expect

no SRPC shift.

If aggregate demand shifts right on the AD/AS model then one would expect

no Short-run Phillips Curve shift.

Suppose a new long-term trade dispute arose between China and the US which caused exports from both countries to decline by 20%. Given this scenario the long-run Phillips curve will

shift right.

Federal budget deficits are the result of

spending by the federal government that is greater than its revenue from tax collection.

High inflation occurred in the late 1970's. Part of the blame rests with the Federal Reserve because their policy focus was on

stable interest rates.

For monetarists, expansionary fiscal policy when the Federal Budget is balanced would be

strongly criticized.

Fiscal Policy refers to

taxing and spending policy.

A.W. Phillips developed the ideas behind the Phillips curve but originally his work centered around the relationship between unemployment and

wage rates.

As the United States is a developed economy, what is the ideal growth rate?

2-3%

If the SRPC data point moved from the lower right of the curve to the upper left part of the curve then

Aggregate Demand Increased.

Which of the following describes stagflation?

All of the above.

According to the short-run Phillips curve, lower inflation rates are associated with higher unemployment rates. Which one of the economic policies below will result in lower inflation rates and higher unemployment rates in the short-run?

Both C and D.

Which fiscal policy action will NOT increase the inflation rate or decrease the unemployment rate?

Both C and D.

Which of the following would most likely be the steps for the central bank of Country A to take to keep an expansionary monetary policy in place?

Buy bonds to increase the money supply and lower the interest rate.

During an economic expansion, which of the following results from the appropriate fiscal policy?

Creation of a budget surplus.

Which of the following is NOT a supporting argument for supply-side fiscal policy?

Deficit spending is not as likely.

If the Fed sought to drastically reduce Money Supply one would expect

GDP to fall unless velocity increased.

Which of the following goals should Country A's economic policy support if it wanted to increase economic growth?

Higher standard of living.

If the U.S. government borrows money to support its fiscal policy, which of the following occurs? I. Increase in interest rates II. Increase in net exports III. Decrease in net exports

I and III only.

Nobel prize-winning Princeton University economist Paul Krugman suggests that during a recession: I. Expansionary policy is not useful II. Interest rates will not necessarily rise due to increased federal borrowing III. The economy will be self-healing so long as the trade balance is positive

II Only

In order to combat a severe recession, Country A should take which of the following actions? I. Increase taxes II. Increase government spending III. Decrease taxes

II and III only.

Which of the following is a true interpretation of the interaction between the Aggregate Supply/Aggregate Demand model and changes in the short-run Phillips curve?

Inflation may not be used to sustain long-term job creation.

A simultaneous decrease in inflation and unemployment could be explained by a decrease in which of the following?

Inflationary expectations.

A decrease in which of the following would be most likely to increase long-run economic growth?

Interest rates.

Which of the following best represents real output per worker?

Labor productivity.

President Reagan's administration supported cutting the marginal tax rates in the United States and believed that government revenues would actually climb due to the cuts. This idea was based on

Laffer Curve.

Which of the following does the Fed has the LEAST amount of control over?

Long-Term Interest Rates

Which of the following would explain unemployment during the recovery period following a recession using the sticky wages theory?

Long-term contracts.

The biggest difference between monetarist policy advocates and rational expectations policy advocates in terms of their view of money supply changes is

Monetarists believe the money supply changes affect AD and GDP while rational expectations supporters don't.

In the short run, which way does the Phillips Curve shift if aggregate demand increases, wages and resources increase, and aggregate supply decreases?

Right.

Which of the following describes the government overspending beyond its revenues in a given year?

Budget Deficit.

Which of the following is NOT a determinant or characteristic trait of the New Economy?

Command Economy.

Which of the following are issues associated with debt retirement of bonds when budget surpluses occur and the economy is at full employment? I. Inflation may be higher II. Public debt service increases III. Interest rates may fall

I and III

According to the Short-Run Phillips Curve (SRPC), which of the following occurs during a recession? I. Unemployment Increases II. Unemployment Decreases III. Inflation Decreases

I and III only.

Suppose soy milk is a substitute for dairy milk. If the U.S. government ended a subsidy program for dairy farmers then which of the following is most likely to occur? I. Increased short-run dairy prices II. Decreased competition III. Increased consumption of soy milk.

I, II and III

Which of the following is true of the Long Run Phillips Curve (LRPC)? I. There is no trade-off between unemployment and inflation. II. It exists at the natural rate of unemployment. III. It is represented by a downward or negatively sloping curve.

I, II, and III.

Which of the following is true of the short-run Phillips curve (SRPC) and the long-run Phillips curve (LRPC)? I. The SRPC is upward sloping. II. The SRPC is downward sloping. III. The LRPC is vertical.

II and III only.

Which of the following actions should occur if the Federal Reserve wants to increase the money supply? I. Increase the discount rate II. Decrease the discount rate III. Increases reserve requirement

II only.

Which of the following are criticisms of Fiscal Policy maneuvers? I. Re-election lag II. Administrative Lag III. Recognition lag IV. Operational lag

II, III and IV

According to the Monetarist transmission mechanism, when the Money Supply Increases the final effect of that action in the economy is

Increased Income.

A decrease in labor productivity would most likely cause real gross domestic product and the price level to change in which of the following ways?

RGDP decrease and Price Level increase.

Monetary policy designed to stimulate aggregate demand could include

buying government securities.

Suppose an economy is performing such that the aggregate demand curve intersects aggregate supply in the Keynesian Range. Given the above data, at least part of the short-run Phillips curve would be

horizontal.

If a government allows a surplus to sit idle for a specific purpose it is called

impounding.

Monetarist supporters of the Taylor Rule would argue that combat inflation the Fed should

increase nominal interest rates any time inflation is above 1%.

One way Country A can increase its economic growth would be to

increase training courses for employees.

If a country had a general decline in labor force participation and productivity declines as well then

real output will decrease.

Disinflation occurs when

year over year inflation reductions occur.

Which of the following statements are part of the Quantitity Theory of Money? I. M×P=V×YM×P=V×Y II. If output is increasing and the veleocity of money is constant, then the money supply must increase to maintain the price level. III. If real GDP and the velocity of money are constant, an in increase in the money supply will lead to inflation.

I, II, and III.

A leftward shift of the short-run Phillips curve is most likely due to

an increase in short-run aggregate supply.

One sign that a country is not experiencing economic growth is

low technological advancements.

Which monetary policy action will NOT increase the inflation rate and will NOT decrease the unemployment rate?

All of the above.

Which of the following best describes the economic growth of a country?

An increase in the capacity to produce goods and services.

Which of the following reactions would automatic stabilizers most likely create?

Budget deficit

In the short run, an expansionary policy will result in which of the following?

Decrease in nominal interest rates.

Which act of Congress requires the Federal government to attempt to create conditions under which there will be ample employment opportunities for those willing and able to work?

Employment Act of 1946.

Which of the following would an economist use to compare the economic growth of Country A to Country B?

Gross domestic product.

Critics of a balanced budget feel that it would actually hurt the economy because raising taxes when revenues fall may I. Cause further contraction of the economy II. Decrease the number of available jobs III. Increase output

I and II

Which of the following options is considered infrastructure? I. Highways and transit systems II. Wastewater and water systems III. Educational facilities

I, II, and III.

A decrease in aggregate demand would result from which of the following monetary policy actions?

Increase discount rate, sell bonds, increase reserve requirements.

Which of the following fiscal policy actions would have the greatest positive potential impact on a recessionary economy?

Increase government expenditure with no additional tax revenues being raised.

From a Keynesian economic perspective, which of the following results would occur if the appropriate fiscal policy was implemented by Country A, who is experiencing a recession with a budget deficit?

Increase in demand for loanable funds.

If the Federal Reserve is wanting to use monetary policy to support expansionary fiscal policy, which of the following actions would be appropriate?

Increase in open market buying.

The short-run Phillips curve is an expression of which of the following tradeoffs?

Inflation and unemployment.

Which of the following is true of the short-run Phillips curve?

It is related to the AD/AS model and a mirror image of short-run aggregate supply.

Which of the following is true of the long-run Phillips Curve?

It is vertical.

How would a temporary cut in the tax rate of the employee portion of the U.S. Social Security payroll tax affect a recessionary economy?

It would likely cause an aggregate demand curve shift to the right.

Priceleville's economy is at full employment, but the country decides to increase their money supply (MS) to help boost their economy. Which of the following scenarios would most like happen to Priceleville in the long run?

Price levels will rise in the long run.

Assume Congress lowered taxes. If the FED wanted to COUNTERACT that move, then which of the following best describes what the FED would do?

Raise the Reserve Requirement.

Suppose fiscal policy was enacted to prevent a recession, but due to the lagging nature of implementing the policy, the economy was already back to normal. Which of the following is the most likely action taken by the Federal Reserve?

Sell bonds on the open market.

If de-regulation in the trucking and transportation industries occurred, which of the following is most likely to happen to the long-run Phillips curve?

Shift left.

Consider an economy that has $2 trillion money supply with no inflation. If annual GDP for that economy is $20 trillion, then which of the following statements is true?

Velocity of money is 10.

Suppose an economy only produced two goods −− fertilizer or bottled water −− and a new unknown water source was located. Suppose also that water is not used in the production of the fertilizer. Reflecting this change on the production possibilities curve would mean

a shift in only one end of the curve since fertilizer production capabilities didn't change.

Suppose the US economy had the following statistics: 3% unemployment -Real GDP growth of 4.5% and 5% inflation. The most likely monetary response to this situation would be to

sell bonds on the open market.