macro exam 2 study guide chap 8-12

question

Aggregate Expenditure, or the total amount of spending in the economy, equals:

answer

consumption spending plus planned investment spending plus government purchases plus net exports.

Aggregate expenditures cover all spending in the economy by households, government, businesses, and the net effect of imports and exports.

question

At points above the 45 degree line in the AE model:

answer

aggregate expenditure is greater than GDP. When aggregate expenditures exceed production the inventory levels will fall and signal to firms to increase production.

question

The value of the multiplier is larger when the value of the __________.

answer

MPC is larger

A larger MPC means consumers are spending more of each dollar of disposable income which results in a larger multiplier. Mathematically the multiplier is = 1 / (1 - MPC). So, an MPC of .8 will give you a multiplier of 5, while an MPC of .5 will only give you a multiplier of 2.

If the MPS is larger that means the MPC is smaller since they both sum to one.

question

The amount by which consumption spending increases when disposable income increases is called __________.

answer

the marginal propensity to consume

The MPC also represents the slope of the consumption function and it tells us how much of each new dollar in disposable income will be spent and how much will be saved.

Autonomous consumption is the part of consumption that is independent of income. Marginal dissaving is not a term used in this context.

question

Autonomous consumption is

answer

the amount that you would consume that is independent of income

question

Actual investment will equal planned investment only when __________.

answer

there is no unplanned change in inventory

question

Aggregate expenditure, or the total amount of spending in the economy, equals:

answer

consumption spending plus planned investment spending plus government purchases plus net exports.

question

Consumption spending

answer

is household spending on durable goods plus household spending on nondurable goods.

question

The most important determinant of consumption is __________.

answer

current disposable income

question

When aggregate expenditures are less than the GDP inventories will:

answer

rise

The GDP measures production and the AE measures total spending. Therefore, when total spending is less than production you will see inventories build up.

question

What happens when there is an unplanned decrease in inventories?

answer

Actual investment is less than planned investment

question

If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income?

answer

$90 billion

If the marginal propensity to consume (MPC) is 0.9, another $90 billion in additional consumption will result from an increase of $100 billion in disposable income. An MPC of 0.9 means we spend about 90 cents of every dollar in disposable income. So, if the MPC is 0.9 and disposable income changes by $100 billion we will spend 90% of that or $90 billion.

question

The aggregate expenditure model focuses on the relationship between total spending and __________.

answer

real GDP in the short run

question

The value of the multiplier is larger when the value of the __________

answer

MPC is larger

question

An increase in household wealth will:

answer

increase the consumption component of aggregate expenditure

question

If the marginal propensity to save (MPS) is 0.2, how much additional consumption will result from an increase of $100 billion in disposable income?

answer

$80 billion

An MPS of 0.2 means the MPC must be 0.8 so we will spend about 80 cents of every dollar in disposable income. So, if the MPC is 0.8 and disposable income changes by $100 billion we will spend 80% of that or $80 billion.

question

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals:

answer

one

question

MPC vs MPS

answer

The MPC represents the fraction of the next dollar in disposable income that is spent on consumption and the MPS represents the fraction of the next dollar that is saved. Therefore the sum of the two fractions must equal one.

question

An increase in __________ will cause savings to increase.

answer

interest rates

When the interest rate is high, the reward for saving is increased providing households with additional incentive to save.

question

The aggregate expenditure model focuses on the relationship between total spending and __________.

answer

real GDP in the short run

According to the AE model, the economy is in short-run equilibrium when total spending equals real GDP. The basic premise of the model is that in any given year the level of real GDP will be determined primarily by the level of aggregate expenditure.

The model only focuses on the short-run and assumes the price level is constant.

question

An increase in household wealth will:

answer

increase the consumption component of aggregate expenditure.

question

Household wealth

answer

is the value of a household's assets minus its liabilities (debts). As wealth increases, we are more likely to consume more and as wealth falls we tend to consume less.

question

Macroeconomic equilibrium occurs where

answer

total spending, or aggregate expenditure, equals total production or GDP.

question

Macroeconomic equilibrium in the short run:

answer

will occur at a point on the 45 degree line.

question

The paradox of thrift states that increased household savings will ultimately lead to:

answer

lower income

question

The paradox of thrift refers

answer

to the conundrum that occurs when households save more which leads to reduced consumption and ultimately to lower income. The higher savings rate ultimately caused their income to fall.

question

If the MPC is 0.8, then a $100 million increase in government expenditures will increase equilibrium GDP by __________.

answer

The multiplier is 1 / (1 - MPC) so in this case it is 1 / (1 - 0.8) = 5. So a $100 million x 5 = $500 million increase in GDP.

question

A variable that does not change in response to changes in the economy is called a(n);

answer

exogenous variable.

question

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.

answer

fall, increase

question

If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income?

answer

If the marginal propensity to consume (MPC) is 0.9, another $90 billion in additional consumption will result from an increase of $100 billion in disposable income. An MPC of 0.9 means we spend about 90 cents of every dollar in disposable income. So, if the MPC is 0.9 and disposable income changes by $100 billion we will spend 90% of that or $90 billion.

question

The balanced budget multiplier is approximately equal to;

answer

one

question

Every time the federal government runs a budget deficit, the Treasury must

answer

borrow funds from savers by selling U.S. Treasury securities.

The U.S. Treasury finances the deficit by selling bonds and uses the bond proceeds to fund government operations.

question

The government's spending and taxation policies are referred to as;

answer

fiscal policy

question

Fiscal policy covers three broad areas that are

answer

government purchases of goods and services, transfer payments, and taxation.

question

Monetary policy

answer

is conducted by the Federal Reserve and typically involves expanding or contracting the money supply. The Treasury is the branch of government charged with receipt of taxes and paying the government's bills.

question

Which of these fiscal policy actions will increase real GDP in the short run?

answer

An increase in government expenditures

question

___________ are automatic changes in government spending or receipts that exacerbate the impact of growth or recession.

answer

Automatic destabilizers

question

automatic destabilizers example

answer

Inflation is an automatic destabilizer since government spending increases simply due to changes in the price level which fuels even more growth.

question

Fiscal drag refers to

answer

the impact of inflation on higher taxes, and in turn economic growth, when tax brackets are not indexed to inflation. The higher taxes lower after-tax income and slow the economy down. Since 1982, tax brackets have been indexed to inflation to reduce the impact of fiscal drag.

question

Automatic stabilizers

answer

change in a manner that stabilizes the GDP. For example, in times of high growth in a progressive tax system more people pay higher taxes resulting in slower growth. When the economy is in recession, transfer payments automatically increase and lessen the impact of the recession. Automatic stabilizers are government spending and taxes that automatically increase or decrease depending on the phase of the business cycle.

question

example of an automatic stabilizer

answer

An unemployment benefit program

question

_________ fiscal policy results from deliberate action from the government.

answer

Discretionary

question

One example of discretionary fiscal policy

answer

the "cash for clunkers" legislation designed to stimulate auto sales and put more efficient vehicles on the road

question

Non-discretionary programs

answer

some examples are called entitlement programs, are the result of past legislation and are funded automatically. Social Security is an example of this type of fiscal policy.

question

The federal debt is the;

answer

total amount owed by the federal government.

question

When the government spends more money than it receives in revenues it will result in a;

answer

budget deficit.

question

Which of these statements about the federal debt is correct?

answer

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

question

If the federal government's expenditures are less than its revenue, there is a __________.

answer

budget surplus

question

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________.

answer

automatic stabilizers

question

Expansionary fiscal policy

answer

can be used to stabilize the economy but it does not occur automatically. The same holds for discretionary spending

question

When the economy is in a recession, the government can:

answer

increase government purchases or decrease taxes in order to increase aggregate demand.

question

Which of these statements about the federal debt is correct?

answer

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

question

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

answer

An increase in government expenditures

question

The tax multiplier equals the change in:

answer

equilibrium GDP divided by the change in taxes.

question

Budget deficits automatically __________ during recessions and __________ during expansions.

answer

increase, decrease

question

When the tax rate increases, the size of the multiplier effect:

answer

decreases.

The higher the tax rate, the smaller the amount of any increase in income that households have available to spend, which in turn reduces the size of the multiplier effect.

question

The government spending multiplier is defined as the ratio of the;

answer

The government spending multiplier is defined as the ratio of the;

question

Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output?

answer

Increasing income tax rates

question

We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier.

answer

smaller

question

Personal income taxes expressed as a percentage of taxable income during President Bill Clinton's administrations.

answer

rose

Taxes were slightly below 10% when President Clinton took office and ended up around 12% when he exited office.

question

How much was the budget deficit or surplus during fiscal year 2014 if government outlays were $3,504 billion and government revenues were $3,021 billion?

answer

$483 billion deficit

question

Which of these policies affects the economy through intended changes in the money supply?

answer

Monetary policy

question

refers to the impact of inflation on higher taxes, and in turn economic growth, when tax brackets are not indexed to inflation.

answer

Fiscal drag

question

Which body of the Federal Reserve System sets the majority of U.S. monetary policy?

answer

The Federal Open Market Committee

question

The Fed conducts monetary policy primarily through:

answer

open market operations.

question

When is the opportunity cost of holding money higher?

answer

When interest rates are high

if interest rates are higher you are giving up more return and experiencing a higher opportunity cost for holding cash.

question

When the interest rate decreases, __________.

answer

there is movement down a stationary money demand curve

question

The Board of Governors of the Federal Reserve has _________ members that are appointed for staggered _________ by the __________ and confirmed by the Senate.

answer

Seven, 14-year terms, President

question

Credit cards are:

answer

not part of the money supply.

question

The Federal Open Market Committee (FOMC) of the Federal Reserve System

answer

sets the majority of U.S. monetary policy.

question

The Board of Governors

answer

is in charge of the Federal Reserve and each of these seven members is also a member of the FOMC.

question

The Open Market Desk

answer

carries out the monetary policy directives of the FOMC via buying and selling U.S. Treasury securities on the open market.

question

A decline in the value of money due to a rapid increase in supply is known as;

answer

currency debasement.

question

Fiat money is

answer

money that has value only because it is backed by government promises. It has no intrinsic value.

question

Legal tender

answer

is money that the government legally mandates to be accepted to satisfy debts and make transactions. Legal tendering is a fictional construct.

question

Who is the chairperson of the Federal Open Market Committee (FOMC)?

answer

The chairperson of the Board of Governors.

question

The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.

answer

Monetary policy

question

To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to:

answer

buy U.S. Treasury securities from the public.

question

Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of:

answer

$1,000 billion in deposits.

Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of $1,000 billion in deposits. The money multiplier in this case is 10 so 10 x $100 billion initial deposit = $1,000 billion.

The money multiplier is equal to 1 / required reserve ratio so 1 / .1 = 10.

question

Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:

answer

each additional dollar of reserves creates $5 of deposits.

question

When we say that money serves as a unit of account, we mean that:

answer

Prices are quoted in terms of money.

question

The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:

answer

question

answer

is the most basic measure of money used in the United States and it is the most liquid form of money.

question

answer

consists of M1 plus other less liquid assets such as deposits in savings and loans and money market mutual funds.

question

answer

consists of everything in M2 plus large time deposits and institutional money market funds. M3 is not used with any frequency since it includes monies that often leave the U.S. system in search of higher earnings. Each definition is broader in scope and includes every asset included in previous definitions.

question

Which of these will shift the money demand curve to the right?

answer

An increase in real GDP

A change in interest rates will simply cause a movement up or down a stationary money demand curve.

question

When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed:

answer

provides funds to troubled banks that cannot find any other source of funds.

question

How many Federal Reserve districts are there?

answer

question

Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:

answer

$400

1 / reserve ratio. So, $100 x (1 / .25) = $400.

question

The Federal Reserve System is __________.

answer

the central bank of the United States

question

The Federal Reserve System is the central bank of the United States.

answer

The Fed was established in 1913 after a series of bank panics that crippled the U.S. financial system. The Fed's main job is to control the money supply but it also serves as a lender of last resort and performs other functions such as check clearing.

question

The Securities Exchange Commission (SEC) is the institution that regulates

answer

U.S. stock markets. And, the U.S. Treasury is the branch of the government charged with financing operations and it is a totally separate entity.

question

The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.

answer

required reserves

question

When was Federal Reserve System (the Fed) created

answer

dec 23,1913

question

If the FOMC orders the trading desk to sell Treasury securities:

answer

the money supply curve will shift to the left and the equilibrium interest rates will rise.

question

When many depositors decide simultaneously to withdraw their money from a bank, there is __________.

answer

a bank run

question

On the balance sheet of a bank:

answer

loans are the most important asset.

question

Which of these factors will cause the aggregate demand curve to shift?

answer

A change in the expectations of households and firms

question

A change in the price level will cause the aggregate demand curve to

answer

simply a movement along an existing aggregate demand curve. And, an increase in productivity impacts aggregate supply.

question

The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:

answer

on the long-run aggregate supply curve

question

The long-run aggregate supply curve represents

answer

the potential real GDP

question

Fluctuations in total spending in the economy may affect:

answer

both employment and production in the short run.

question

The graphical relationship between interest rates and aggregate output in the goods market is the:

answer

IS curve

question

shows the relationship between planned aggregate expenditure and output

answer

The AE line

question

shows the relationship between aggregate supply and the price level.

answer

the short-run AS curve

question

When wages are sticky in the short-run, the firms' short-run aggregate supply curve is:

answer

upward sloping.

question

When wages are sticky in the long-run

answer

supply curve is vertical.

question

The primary factors the Fed considers when making interest rate decisions are:

answer

output and inflation.

question

The aggregate demand and aggregate supply model explains:

answer

short-run fluctuations in real GDP and the price level

question

Long-run economic growth and the standard of living are impacted by

answer

productivity and modeled using the aggregate production function.

question

The equation that shows how the Fed's interest rate decision depends on several economic factors is called the:

answer

Fed rule

question

Which of these shifts the aggregate demand curve to the right?

answer

Lower interest rates

question

Falling exports

answer

decrease aggregate demand and will shift the AD curve to the left. An increase in exports would shift AD to the right.

question

A fall in the price level

answer

is a movement along the existing aggregate demand curve.

question

A new discovery of oil that lowers the price of energy can cause a:

answer

cost shock

question

Which of these options is most likely when the economy is operating below the potential GDP?

answer

The Federal Reserve will lower interest rates.

question

The level of aggregate output that can be sustained in the long run without spurring inflation is called the:

answer

potential GDP.

question

The nominal GDP

answer

is the actual measured dollar value of the GDP.

question

The real GDP

answer

is the nominal GDP adjusted for inflation so we can see true changes in output and remove changes in GDP due to changes in the price level.

question

The aggregate demand curve shows the relationship between:

answer

The price level and the quantity of real GDP demanded

question

An unexpected change in the price of oil would be called __________ by economists.

answer

a supply shock

question

If wage increases lag price increases then the wages are said to be;

answer

sticky

question

Which of these factors will shift the short-run aggregate supply to the left?

answer

A decrease in the size of the labor force

question

The aggregate demand curve shows the relationship between:

answer

The price level and the quantity of real GDP demanded

question

When interest rates , aggregate expenditure , ceteris paribus.

answer

Increase; falls

question

The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:

answer

on the long-run aggregate supply curve

question

A rapid increase in the price of oil can shift the short-run aggregate supply:

answer

to the left.

question

How can government policies shift the aggregate demand curve to the right?

answer

By increasing government purchases

question

The aggregate demand and aggregate supply model explains:

answer

short-run fluctuations in real GDP and the price level

question

When consumption increases because overall prices fall this change is due to the:

answer

real wealth effect.

question

Historically the Federal Reserve interest rates during recessions and interest rates during expansions.

answer

Lowers; raises

question

A cost shock will only occur if the product is used:

answer

as an input into numerous other products.

question

Which of these actions is the government likely to take if the economy is operating above the potential GDP?

answer

Increase taxes

question

When the Fed would like to push interest rates into negative territory but is unable to do so it is called a:

answer

binding situation.

question

_______ results from consumers bidding higher prices for goods and services while business are forced to pay higher wages to entice people to work.

answer

demand-pull inflation

This type of inflation is due to excess demand and occurs when the economy is overheating.

question

Expansionary fiscal policy works well when the economy is operating:

answer

well below the full employment level of output.

question

Stagflation

answer

occurs when the economy has simultaneous high inflation and declining output. Supply shocks, like a large unexpected increase in the price of oil, can cause stagflation.

question

John Maynard Keynes referred to animal spirits which are:

answer

optimistic views of investors that propel economic growth.

question

Stagflation is a:

answer

combination of inflation and recession

question

The Fed's practice of increasing or decreasing interest rates to keep inflation in some range is known as:

answer

inflation targeting.

question

When economic growth occurs, a nation's:

answer

short-run and long-run AS curves shift rightward.

question

Some economists believe the wages can be "stuck" and not adjust downward during recessions. These economists advocate:

answer

active fiscal stimulus to move the economy back to full employment.

question

A(n) in net taxes has the same qualitative impact as a(n) in government spending.

answer

Decrease; increase

question

Government policies that increase aggregate demand are called __________.

answer

expansionary policies

question

Since 1991 there have been economic recessions.

answer

question

Keynes maintained that the economy could remain long-term at levels of output below the full-employment level of output due to:

answer

sticky wages and prices

question

Looking at recent Fed policy it appears the Fed has:

answer

not engaged in inflation targeting

question

If the Fed is zero interest rate bound it means the Fed:

answer

cannot push interest rates below zero

question

In the horizontal range of the short-run aggregate supply curve, if aggregate demand shifts to the left, then:

answer

real GDP falls

question

________ is driven by rising input prices.

answer

Cost-push inflation

question

The American Recovery and Reinvestment Act of 2009 is a clear example of:

answer

expansionary fiscal policy.

1 of 151

question

Aggregate Expenditure, or the total amount of spending in the economy, equals:

answer

question

At points above the 45 degree line in the AE model:

answer

aggregate expenditure is greater than GDP. When aggregate expenditures exceed production the inventory levels will fall and signal to firms to increase production.

question

The value of the multiplier is larger when the value of the __________.

answer

question

The amount by which consumption spending increases when disposable income increases is called __________.

answer

question

Autonomous consumption is

answer

the amount that you would consume that is independent of income

question

Actual investment will equal planned investment only when __________.

answer

there is no unplanned change in inventory

question

Aggregate expenditure, or the total amount of spending in the economy, equals:

answer

consumption spending plus planned investment spending plus government purchases plus net exports.

question

Consumption spending

answer

is household spending on durable goods plus household spending on nondurable goods.

question

The most important determinant of consumption is __________.

answer

current disposable income

question

When aggregate expenditures are less than the GDP inventories will:

answer

rise

The GDP measures production and the AE measures total spending. Therefore, when total spending is less than production you will see inventories build up.

question

What happens when there is an unplanned decrease in inventories?

answer

Actual investment is less than planned investment

question

If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income?

answer

question

The aggregate expenditure model focuses on the relationship between total spending and __________.

answer

real GDP in the short run

question

The value of the multiplier is larger when the value of the __________

answer

MPC is larger

question

An increase in household wealth will:

answer

increase the consumption component of aggregate expenditure

question

If the marginal propensity to save (MPS) is 0.2, how much additional consumption will result from an increase of $100 billion in disposable income?

answer

question

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals:

answer

one

question

MPC vs MPS

answer

question

An increase in __________ will cause savings to increase.

answer

interest rates

When the interest rate is high, the reward for saving is increased providing households with additional incentive to save.

question

The aggregate expenditure model focuses on the relationship between total spending and __________.

answer

question

An increase in household wealth will:

answer

increase the consumption component of aggregate expenditure.

question

Household wealth

answer

is the value of a household's assets minus its liabilities (debts). As wealth increases, we are more likely to consume more and as wealth falls we tend to consume less.

question

Macroeconomic equilibrium occurs where

answer

total spending, or aggregate expenditure, equals total production or GDP.

question

Macroeconomic equilibrium in the short run:

answer

will occur at a point on the 45 degree line.

question

The paradox of thrift states that increased household savings will ultimately lead to:

answer

lower income

question

The paradox of thrift refers

answer

to the conundrum that occurs when households save more which leads to reduced consumption and ultimately to lower income. The higher savings rate ultimately caused their income to fall.

question

If the MPC is 0.8, then a $100 million increase in government expenditures will increase equilibrium GDP by __________.

answer

The multiplier is 1 / (1 - MPC) so in this case it is 1 / (1 - 0.8) = 5. So a $100 million x 5 = $500 million increase in GDP.

question

A variable that does not change in response to changes in the economy is called a(n);

answer

exogenous variable.

question

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.

answer

fall, increase

question

If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income?

answer

question

The balanced budget multiplier is approximately equal to;

answer

one

question

Every time the federal government runs a budget deficit, the Treasury must

answer

borrow funds from savers by selling U.S. Treasury securities.

The U.S. Treasury finances the deficit by selling bonds and uses the bond proceeds to fund government operations.

question

The government's spending and taxation policies are referred to as;

answer

fiscal policy

question

Fiscal policy covers three broad areas that are

answer

government purchases of goods and services, transfer payments, and taxation.

question

Monetary policy

answer

question

Which of these fiscal policy actions will increase real GDP in the short run?

answer

An increase in government expenditures

question

___________ are automatic changes in government spending or receipts that exacerbate the impact of growth or recession.

answer

Automatic destabilizers

question

automatic destabilizers example

answer

Inflation is an automatic destabilizer since government spending increases simply due to changes in the price level which fuels even more growth.

question

Fiscal drag refers to

answer

question

Automatic stabilizers

answer

question

example of an automatic stabilizer

answer

An unemployment benefit program

question

_________ fiscal policy results from deliberate action from the government.

answer

Discretionary

question

One example of discretionary fiscal policy

answer

the "cash for clunkers" legislation designed to stimulate auto sales and put more efficient vehicles on the road

question

Non-discretionary programs

answer

some examples are called entitlement programs, are the result of past legislation and are funded automatically. Social Security is an example of this type of fiscal policy.

question

The federal debt is the;

answer

total amount owed by the federal government.

question

When the government spends more money than it receives in revenues it will result in a;

answer

budget deficit.

question

Which of these statements about the federal debt is correct?

answer

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

question

If the federal government's expenditures are less than its revenue, there is a __________.

answer

budget surplus

question

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________.

answer

automatic stabilizers

question

Expansionary fiscal policy

answer

can be used to stabilize the economy but it does not occur automatically. The same holds for discretionary spending

question

When the economy is in a recession, the government can:

answer

increase government purchases or decrease taxes in order to increase aggregate demand.

question

Which of these statements about the federal debt is correct?

answer

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

question

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

answer

An increase in government expenditures

question

The tax multiplier equals the change in:

answer

equilibrium GDP divided by the change in taxes.

question

Budget deficits automatically __________ during recessions and __________ during expansions.

answer

increase, decrease

question

When the tax rate increases, the size of the multiplier effect:

answer

decreases.

The higher the tax rate, the smaller the amount of any increase in income that households have available to spend, which in turn reduces the size of the multiplier effect.

question

The government spending multiplier is defined as the ratio of the;

answer

The government spending multiplier is defined as the ratio of the;

question

Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output?

answer

Increasing income tax rates

question

We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier.

answer

smaller

question

Personal income taxes expressed as a percentage of taxable income during President Bill Clinton's administrations.

answer

rose

Taxes were slightly below 10% when President Clinton took office and ended up around 12% when he exited office.

question

How much was the budget deficit or surplus during fiscal year 2014 if government outlays were $3,504 billion and government revenues were $3,021 billion?

answer

$483 billion deficit

question

Which of these policies affects the economy through intended changes in the money supply?

answer

Monetary policy

question

refers to the impact of inflation on higher taxes, and in turn economic growth, when tax brackets are not indexed to inflation.

answer

Fiscal drag

question

Which body of the Federal Reserve System sets the majority of U.S. monetary policy?

answer

The Federal Open Market Committee

question

The Fed conducts monetary policy primarily through:

answer

open market operations.

question

When is the opportunity cost of holding money higher?

answer

When interest rates are high

if interest rates are higher you are giving up more return and experiencing a higher opportunity cost for holding cash.

question

When the interest rate decreases, __________.

answer

there is movement down a stationary money demand curve

question

The Board of Governors of the Federal Reserve has _________ members that are appointed for staggered _________ by the __________ and confirmed by the Senate.

answer

Seven, 14-year terms, President

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Credit cards are:

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not part of the money supply.

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The Federal Open Market Committee (FOMC) of the Federal Reserve System

answer

sets the majority of U.S. monetary policy.

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The Board of Governors

answer

is in charge of the Federal Reserve and each of these seven members is also a member of the FOMC.

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The Open Market Desk

answer

carries out the monetary policy directives of the FOMC via buying and selling U.S. Treasury securities on the open market.

question

A decline in the value of money due to a rapid increase in supply is known as;

answer

currency debasement.

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Fiat money is

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money that has value only because it is backed by government promises. It has no intrinsic value.

question

Legal tender

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is money that the government legally mandates to be accepted to satisfy debts and make transactions. Legal tendering is a fictional construct.

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Who is the chairperson of the Federal Open Market Committee (FOMC)?

answer

The chairperson of the Board of Governors.

question

The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.

answer

Monetary policy

question

To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to:

answer

buy U.S. Treasury securities from the public.

question

Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of:

answer

question

Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:

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each additional dollar of reserves creates $5 of deposits.

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When we say that money serves as a unit of account, we mean that:

answer

Prices are quoted in terms of money.

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The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:

answer

question

answer

is the most basic measure of money used in the United States and it is the most liquid form of money.

question

answer

consists of M1 plus other less liquid assets such as deposits in savings and loans and money market mutual funds.

question

answer

question

Which of these will shift the money demand curve to the right?

answer

An increase in real GDP

A change in interest rates will simply cause a movement up or down a stationary money demand curve.

question

When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed:

answer

provides funds to troubled banks that cannot find any other source of funds.

question

How many Federal Reserve districts are there?

answer

question

Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:

answer

$400

1 / reserve ratio. So, $100 x (1 / .25) = $400.

question

The Federal Reserve System is __________.

answer

the central bank of the United States

question

The Federal Reserve System is the central bank of the United States.

answer

question

The Securities Exchange Commission (SEC) is the institution that regulates

answer

U.S. stock markets. And, the U.S. Treasury is the branch of the government charged with financing operations and it is a totally separate entity.

question

The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.

answer

required reserves

question

When was Federal Reserve System (the Fed) created

answer

dec 23,1913

question

If the FOMC orders the trading desk to sell Treasury securities:

answer

the money supply curve will shift to the left and the equilibrium interest rates will rise.

question

When many depositors decide simultaneously to withdraw their money from a bank, there is __________.

answer

a bank run

question

On the balance sheet of a bank:

answer

loans are the most important asset.

question

Which of these factors will cause the aggregate demand curve to shift?

answer

A change in the expectations of households and firms

question

A change in the price level will cause the aggregate demand curve to

answer

simply a movement along an existing aggregate demand curve. And, an increase in productivity impacts aggregate supply.

question

The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:

answer

on the long-run aggregate supply curve

question

The long-run aggregate supply curve represents

answer

the potential real GDP

question

Fluctuations in total spending in the economy may affect:

answer

both employment and production in the short run.

question

The graphical relationship between interest rates and aggregate output in the goods market is the:

answer

IS curve

question

shows the relationship between planned aggregate expenditure and output

answer

The AE line

question

shows the relationship between aggregate supply and the price level.

answer

the short-run AS curve

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When wages are sticky in the short-run, the firms' short-run aggregate supply curve is:

answer

upward sloping.

question

When wages are sticky in the long-run

answer

supply curve is vertical.

question

The primary factors the Fed considers when making interest rate decisions are:

answer

output and inflation.

question

The aggregate demand and aggregate supply model explains:

answer

short-run fluctuations in real GDP and the price level

question

Long-run economic growth and the standard of living are impacted by

answer

productivity and modeled using the aggregate production function.

question

The equation that shows how the Fed's interest rate decision depends on several economic factors is called the:

answer

Fed rule

question

Which of these shifts the aggregate demand curve to the right?

answer

Lower interest rates

question

Falling exports

answer

decrease aggregate demand and will shift the AD curve to the left. An increase in exports would shift AD to the right.

question

A fall in the price level

answer

is a movement along the existing aggregate demand curve.

question

A new discovery of oil that lowers the price of energy can cause a:

answer

cost shock

question

Which of these options is most likely when the economy is operating below the potential GDP?

answer

The Federal Reserve will lower interest rates.

question

The level of aggregate output that can be sustained in the long run without spurring inflation is called the:

answer

potential GDP.

question

The nominal GDP

answer

is the actual measured dollar value of the GDP.

question

The real GDP

answer

is the nominal GDP adjusted for inflation so we can see true changes in output and remove changes in GDP due to changes in the price level.

question

The aggregate demand curve shows the relationship between:

answer

The price level and the quantity of real GDP demanded

question

An unexpected change in the price of oil would be called __________ by economists.

answer

a supply shock

question

If wage increases lag price increases then the wages are said to be;

answer

sticky

question

Which of these factors will shift the short-run aggregate supply to the left?

answer

A decrease in the size of the labor force

question

The aggregate demand curve shows the relationship between:

answer

The price level and the quantity of real GDP demanded

question

When interest rates , aggregate expenditure , ceteris paribus.

answer

Increase; falls

question

The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:

answer

on the long-run aggregate supply curve

question

A rapid increase in the price of oil can shift the short-run aggregate supply:

answer

to the left.

question

How can government policies shift the aggregate demand curve to the right?

answer

By increasing government purchases

question

The aggregate demand and aggregate supply model explains:

answer

short-run fluctuations in real GDP and the price level

question

When consumption increases because overall prices fall this change is due to the:

answer

real wealth effect.

question

Historically the Federal Reserve interest rates during recessions and interest rates during expansions.

answer

Lowers; raises

question

A cost shock will only occur if the product is used:

answer

as an input into numerous other products.

question

Which of these actions is the government likely to take if the economy is operating above the potential GDP?

answer

Increase taxes

question

When the Fed would like to push interest rates into negative territory but is unable to do so it is called a:

answer

binding situation.

question

_______ results from consumers bidding higher prices for goods and services while business are forced to pay higher wages to entice people to work.

answer

demand-pull inflation

This type of inflation is due to excess demand and occurs when the economy is overheating.

question

Expansionary fiscal policy works well when the economy is operating:

answer

well below the full employment level of output.

question

Stagflation

answer

occurs when the economy has simultaneous high inflation and declining output. Supply shocks, like a large unexpected increase in the price of oil, can cause stagflation.

question

John Maynard Keynes referred to animal spirits which are:

answer

optimistic views of investors that propel economic growth.

question

Stagflation is a:

answer

combination of inflation and recession

question

The Fed's practice of increasing or decreasing interest rates to keep inflation in some range is known as:

answer

inflation targeting.

question

When economic growth occurs, a nation's:

answer

short-run and long-run AS curves shift rightward.

question

Some economists believe the wages can be "stuck" and not adjust downward during recessions. These economists advocate:

answer

active fiscal stimulus to move the economy back to full employment.

question

A(n) in net taxes has the same qualitative impact as a(n) in government spending.

answer

Decrease; increase

question

Government policies that increase aggregate demand are called __________.

answer

expansionary policies

question

Since 1991 there have been economic recessions.

answer

question

Keynes maintained that the economy could remain long-term at levels of output below the full-employment level of output due to:

answer

sticky wages and prices

question

Looking at recent Fed policy it appears the Fed has:

answer

not engaged in inflation targeting

question

If the Fed is zero interest rate bound it means the Fed:

answer

cannot push interest rates below zero

question

In the horizontal range of the short-run aggregate supply curve, if aggregate demand shifts to the left, then:

answer

real GDP falls

question

________ is driven by rising input prices.

answer

Cost-push inflation

question

The American Recovery and Reinvestment Act of 2009 is a clear example of:

answer

expansionary fiscal policy.

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