UW-MADISON ECON 102 FINAL EXAM

question

What is Fiscal Policy?

answer

changes in government taxes and spending that affect the level of GDP

question

How does fiscal policy shift aggregate demand to the right?

answer

1. increases in government spending
2. decreases in taxes

question

How does fiscal policy shift aggregate demand to the left?

answer

1. Decrease government spending
2. Increase taxes

question

Expansionary polices

answer

government polices that increase aggregate demand

question

Contractionary polices

answer

government polices that decrease aggregate demand

question

When should the government use expansionary polices?

answer

If the current level of GDP is below full employment

question

When should the government use contractionary polices?

answer

If the current level of GPD is above full employment

question

Stabilization polices

answer

policy action to move the economy closer to full employment

question

Why is it hard for the government to use stabilization polices successfully?

answer

1. Lags (inside and outside)
2. Economists don't know enough

question

Inside lags

answer

the time it takes a policy to formulate

question

Outside lags

answer

the time it takes for the policy to actually work

question

(T or F) Outside lags in fiscal policy are short

answer

question

What are the 2 components of Federal spending?

answer

1. Federal government purchases of good and services
2. Transfer payments

question

Discretionary spending

answer

programs that congress authorizes on a annual basis that are not automatically funded by prior laws. For example, defense spending

question

Entitlement and mandatory spending

answer

spending that congress has authorized by prior law, primarily providing support for individuals. For example, social security

question

What is the largest component of federal revenue?

answer

Individual income taxes

question

Present Value Equation

answer

FV=dollars i=interest rate n=number of years (time)

question

As interest rates increase, the opportunity cost of your fund ___________

answer

increases

question

Real Rate equation

answer

nominal rate - inflation rate

question

Procyclical

answer

moving in the same direction as real GDP

question

Neoclassical theory of investment

answer

taxes along with real interest rates play a key role in determining investment spending

question

What are the 3 ways a firm can finance money for a project?

answer

1. Use retained earnings
2. Sell corporate bonds
3. Issue and sell new shares of stock

question

Q-theory

answer

high stock prices lead to high investments

question

How many Federal Reserve banks across the United States?

answer

question

What are the 3 properties of money?

answer

1. Medium of exchange
2. Unit of account
3. Store of value

question

What are bank assets?

answer

Reserves and loans

question

What are bank liabilities?

answer

Deposits and equity

question

M1 is

answer

the sum of currency in the hands of the public (cash), demand deposits, other checkable deposits, and traveler's checks.

question

If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a....

answer

Store of Value

question

The short-run aggregate supply curve is relatively flat because

answer

in the short run, prices do not change very much but output may be above, below, or equal to potential output.

question

How long do economists think its the U.S economy to move from the short run to the long run?

answer

None of the above; economists disagree on the answer

question

A rise in the value of a currency is called a(n)

answer

appreciation

question

A bank's reserves is...

answer

the sum of its excess and required reserves, can be held as cash in its vault, and can be held as deposits with the Federal Reserve

question

The present value of a government bond ________ when interest rates rise.

answer

decreases

question

An open market ________ by the Fed increases the money supply, which leads to ________ interest rates and increased GDP.

answer

purchase; decreased

question

The demand for money that arises because holding money over short periods is less risky than holding stocks or bonds is called the

answer

speculative demand for money.

question

Studies by economists have tended to show that countries with more independent central banks have

answer

less inflation.

question

Loans are examples of a bank's

answer

assets

question

Higher U.S. interest rates cause the value of the dollar to

answer

rise, making U.S. goods relatively more expensive on world markets.

question

If potential output is ________ than the current level of GDP, the unemployment rate is ________ the natural rate

answer

greater; above

question

According to this Application, the Fed injected large amounts of reserves into banks during the 2008 financial crisis. The Fed needs to make sure that, in the long run, banks do not loan out too many of these reserves or the result will be

answer

higher inflation.

question

When an economy is experiencing a "liquidity trap," monetary policy to bring the economy back to full employment

answer

no longer works.

question

The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to

answer

insulate the governors' policy decisions from the influence of presidential elections and politics.

question

An increase in the reserve requirement most likely

answer

decreases the money supply, which leads to increased interest rates and a decrease in GDP.

question

Which of the following factors does NOT shift the demand curve for money?

answer

changes in the interest rate

question

If GDP is ________ potential output, the economy is in a ________ and wages will tend to decrease.

answer

below; recession

question

When the Fed ________ interest rates, bond prices ________.

answer

lowers; rise

question

If a firm wants to finance a new project, it can obtain financing by

answer

issuing and selling new shares of stock and selling corporate bonds to the public and using its retained earnings.

question

A cut in the corporate profits tax (tax on capital) should contribute to which of the following?

answer

Increases in real wages and increases in GDP

question

The chairman of the Federal Reserve Board of Governors

answer

sits on the Federal Open Market Committee.

1 of 50

question

What is Fiscal Policy?

answer

changes in government taxes and spending that affect the level of GDP

question

How does fiscal policy shift aggregate demand to the right?

answer

1. increases in government spending
2. decreases in taxes

question

How does fiscal policy shift aggregate demand to the left?

answer

1. Decrease government spending
2. Increase taxes

question

Expansionary polices

answer

government polices that increase aggregate demand

question

Contractionary polices

answer

government polices that decrease aggregate demand

question

When should the government use expansionary polices?

answer

If the current level of GDP is below full employment

question

When should the government use contractionary polices?

answer

If the current level of GPD is above full employment

question

Stabilization polices

answer

policy action to move the economy closer to full employment

question

Why is it hard for the government to use stabilization polices successfully?

answer

1. Lags (inside and outside)
2. Economists don't know enough

question

Inside lags

answer

the time it takes a policy to formulate

question

Outside lags

answer

the time it takes for the policy to actually work

question

(T or F) Outside lags in fiscal policy are short

answer

question

What are the 2 components of Federal spending?

answer

1. Federal government purchases of good and services
2. Transfer payments

question

Discretionary spending

answer

programs that congress authorizes on a annual basis that are not automatically funded by prior laws. For example, defense spending

question

Entitlement and mandatory spending

answer

spending that congress has authorized by prior law, primarily providing support for individuals. For example, social security

question

What is the largest component of federal revenue?

answer

Individual income taxes

question

Present Value Equation

answer

FV=dollars i=interest rate n=number of years (time)

question

As interest rates increase, the opportunity cost of your fund ___________

answer

increases

question

Real Rate equation

answer

nominal rate - inflation rate

question

Procyclical

answer

moving in the same direction as real GDP

question

Neoclassical theory of investment

answer

taxes along with real interest rates play a key role in determining investment spending

question

What are the 3 ways a firm can finance money for a project?

answer

1. Use retained earnings
2. Sell corporate bonds
3. Issue and sell new shares of stock

question

Q-theory

answer

high stock prices lead to high investments

question

How many Federal Reserve banks across the United States?

answer

question

What are the 3 properties of money?

answer

1. Medium of exchange
2. Unit of account
3. Store of value

question

What are bank assets?

answer

Reserves and loans

question

What are bank liabilities?

answer

Deposits and equity

question

M1 is

answer

the sum of currency in the hands of the public (cash), demand deposits, other checkable deposits, and traveler's checks.

question

If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a....

answer

Store of Value

question

The short-run aggregate supply curve is relatively flat because

answer

in the short run, prices do not change very much but output may be above, below, or equal to potential output.

question

How long do economists think its the U.S economy to move from the short run to the long run?

answer

None of the above; economists disagree on the answer

question

A rise in the value of a currency is called a(n)

answer

appreciation

question

A bank's reserves is...

answer

the sum of its excess and required reserves, can be held as cash in its vault, and can be held as deposits with the Federal Reserve

question

The present value of a government bond ________ when interest rates rise.

answer

decreases

question

An open market ________ by the Fed increases the money supply, which leads to ________ interest rates and increased GDP.

answer

purchase; decreased

question

The demand for money that arises because holding money over short periods is less risky than holding stocks or bonds is called the

answer

speculative demand for money.

question

Studies by economists have tended to show that countries with more independent central banks have

answer

less inflation.

question

Loans are examples of a bank's

answer

assets

question

Higher U.S. interest rates cause the value of the dollar to

answer

rise, making U.S. goods relatively more expensive on world markets.

question

If potential output is ________ than the current level of GDP, the unemployment rate is ________ the natural rate

answer

greater; above

question

answer

higher inflation.

question

When an economy is experiencing a "liquidity trap," monetary policy to bring the economy back to full employment

answer

no longer works.

question

The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to

answer

insulate the governors' policy decisions from the influence of presidential elections and politics.

question

An increase in the reserve requirement most likely

answer

decreases the money supply, which leads to increased interest rates and a decrease in GDP.

question

Which of the following factors does NOT shift the demand curve for money?

answer

changes in the interest rate

question

If GDP is ________ potential output, the economy is in a ________ and wages will tend to decrease.

answer

below; recession

question

When the Fed ________ interest rates, bond prices ________.

answer

lowers; rise

question

If a firm wants to finance a new project, it can obtain financing by

answer

issuing and selling new shares of stock and selling corporate bonds to the public and using its retained earnings.

question

A cut in the corporate profits tax (tax on capital) should contribute to which of the following?

answer

Increases in real wages and increases in GDP

question

The chairman of the Federal Reserve Board of Governors

answer

sits on the Federal Open Market Committee.

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