ECON TEST 4
Terms in this set (133)
Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act, which is an example of ________ aimed at increasing real GDP and employment.
discretionary fiscal policy
Which of the following would be classified as fiscal policy?
The federal government cuts taxes to stimulate the economy.
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle.
The largest and fastest-growing category of federal government expenditures is
Social Security began as a "pay-as-you-go" system, meaning that payments to current retirees were paid
from taxes collected from current workers.
Expansionary fiscal policy involves
increasing government purchases or decreasing taxes.
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 ________.
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
Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect
The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because
the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.
To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the
budget deficit or surplus as a percentage of GDP.
Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during
World War I and World War II.
A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
increase; fall; rises
During the Great Depression, what appeared to be ________ fiscal policy was actually not when the ________ budget deficit or surplus is examined.
expansionary; cyclically adjusted
Which of the following is a reason why we should consider the federal national debt a problem?
If the debt drives up interest rates, crowding out will occur.
Which of the following best describes supply-side economics?
Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.
The tax wedge is the difference between the
pretax and posttax returns to an economic activity
Economists who believe the supply-side effects of tax cuts are small essentially believe that
tax cuts mainly affect aggregate demand.
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 ________.
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.
increases in government spending; tax cuts
CarMax benefitted when the Federal Reserve slashed the federal funds rate to near-zero levels in 2008. Lower interest rates increased demand for its used cars, which would allow Carmax to ________ employment and ________ prices.
The curve showing the short-run relationship between the unemployment rate and the inflation rate is called
The Phillips curve
According to the short-run Phillips curve, which of the following would result in low rates of unemployment?
a higher inflation rate
What is the natural rate of unemployment?
the unemployment rate that exists when the economy is at potential GDP
In the long run, the Phillips curve is a ________ at ________.
vertical line; the natural rate of unemployment
The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms.
If the long-run aggregate supply curve is vertical,
the trade-off between unemployment and inflation cannot be permanent.
The expansionary monetary and fiscal policies of the 1960s resulted in
high inflation rates and low rates of unemployment.
If workers and firms raise their inflation expectations,
the short-run Phillips curve will shift upward.
A decrease in expected inflation will
increase the natural rate of unemployment. // shift the short-run Phillips curve to the left.
Which of the following would increase the natural rate of unemployment?
an increase in the number of younger, less skilled workers in the economy
If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see?
The Fed will follow inflationary monetary policies.
In the long run, the Federal Reserve can control which of the following?
the inflation rate
During which of the following time periods did inflation remain above 5 percent every year?
1973 through 1982
According to economists Robert Lucas and Thomas Sargent, when are the gains to accurately forecasting inflation highest?
when inflation is high and unstable
If workers and firms know that the Federal Reserve is following an expansionary monetary policy, workers and firms will expect inflation to ________ and will adjust wages so that the real wage ________.
increase; remains unchanged
If firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve
expansionary monetary policy is ineffective.
Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by
workers and firms being fooled by unexpected changes in monetary policy.
The major criticism of real business cycle models is
negative technology shocks are uncommon and can't explain all business cycle fluctuations.
If the Federal Reserve announces that its target for the federal funds rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react?
As long as the Fed's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation.
The experience of Paul Volcker's fight against inflation during the late 1970s and early 1980s indicates that firms and workers may have
both A and B are correct answers.
In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in ________ and ________.
disinflation; high unemployment
What actions could the Federal Reserve take to achieve consistent growth in real GDP at 4 percent per year?
The Fed has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal.
In conducting monetary policy, how has the Federal Reserve enhanced its credibility?
by revealing the Fed's target for the federal funds rate
Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008. Which of the following was one of those actions?
the decision to keep the federal funds rate at 1 percent from June 2003 to June 2004
Some economists and lawmakers believe the Fed lost some of its independence when it
began working closely with the Treasury Department while dealing with the financial crisis of 2008.
A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with highly independent central banks had ________ than countries whose central banks had little independence.
lower inflation rates
Some economists are concerned that by holding its target for the federal funds rate close to zero for three years, the Fed's policy is actually
causing inflation to increase.
Assume the actual unemployment rate is equal to the nonaccelerating inflation rate of unemployment (NAIRU) of 5 percent. If the Fed wants to raise the inflation rate permanently from 1 percent to 3 percent, it should ________ the target for the federal funds rate so the economy's equilibrium moves ________ along the short-run Phillips curve.
Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment
If the economy is growing beyond 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
Which of the following is considered expansionary fiscal policy?
Congress decreases the income tax rate.
From an initial long-run equilibrium, if aggregate demand grows faster than long-run and short-run aggregate supply, then Congress and the president would most likely
decrease government spending
if government spending and the price level increase, then
the interest rate increases, consumption declines, and investment spending declines.
As the tax wedge associated with a given economic activity gets smaller, we would expect
more of that economic activity to occur.
According to the short−run Phillips curve, which of the following would result in low rates of unemployment?
a higher inflation rate
The long−run aggregate supply curve is ________, while the long run Phillips curve is ________.
vertical; also vertical
If wages and prices adjust slowly, we would expect expansionary monetary policy to be
more likely to affect the unemployment rate.
If the economy experiences a negative supply shock, which of the following will be true?
Inflation will rise, and real GDP will fall.
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 ________
Which of the following would be most likely to induce congress and the president to conduct expansionary fiscal policy? A Significant
Decrease in investment spending
If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy
A decrease in the money supply and an increase in the interest rate
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant
Increase in inflation
If policymakers are concerned that the economy is in danger of raising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to?
The government purchases multiplier equals the change in ______________ divided by the change in_____________.
Equilibrium real GDP; government purchases
A decrease in the tax rate will____________ the disposable income of households and ___________ the size of the multiplier effect.
The multiplier effect is the series of____________ increases in_____________ expenditures that result from an initial increase in _____________ expenditure.
Induced; consumption; Autonomous
Fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives
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
The government purchases multiplier equals the change in ________ divided by the change in ________
equilibrium real GDP; government purchases
Tax cuts on business income ________ aggregate demand
Tax cuts on business income increase aggregate demand by increasing
business investment spending
Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced.
What will happen to real equilibrium GDP
Real equilibrium GDP will rise
The multiplier effect refers to the series of
induced increases in consumption spending that result from an initial increase in autonomous expenditures.
The tax multiplier equals the change in ________ divided by the change in ________
equilibrium real GDP; taxes
An increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand
Which of the following would not be considered an automatic stabilizer
legislation increasing funding for job retraining passed during a recession
Expansionary fiscal policy
can be effective in the short run
Which of the following is considered contractionary fiscal policy?
Congress increases the income tax rate
According to the short-run Phillips curve, the unemployment rate and the inflation rate are
What should the Fed reserve do if they wish to move down along the short-run Phillips curve? And the opposite?
sell treasury bills; purchase treasury bills
According to the short-run Phillips curve, What would result in low rates of unemployment?
higher inflation rate
In the long run, the Phillips curve is...
vertical at the natural rate of unemployment
If actual inflation is less than expected inflation...
Real wages will rise
If actual inflation is greater than expected inflation...
Real wages will fall
An increase in the expected inflation rate will shift the Short-run Phillips curve to the...
Where do the short and long run Phillips curves intersect?
Where actual inflation equals expected inflation
Does monetary policy effect the long run Phillips curve?
What is the Fed doing to increase the credibility of its policies?
Whenever a policy is announced the change actually takes place and by announcing the federal fund target rate
Economists who believe that the Phillips curve represented a structural relationship believe that the curve represented...
A permanent trade off between unemployment and inflation.
As of 1993, the Fed sets targets for what in order to achieve price stability and high employment.
Federal funds rate
What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations?
Movement directly up the vertical LR Phillips curve
The LR Phillips curve is always vertical at?
The natural rate of unemployment
The S.R. Phillips curve is an inverse relationship between what?
Unemployment rate and inflation rate
Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called?
Real business cycle models
The inflation rate is considered to be at a stable non accelerating point when what?
It intersects with the vertical LR Phillips curve at the natural rate of unemployment.
If the S.R.A.S. shifts to the left, the price level increases and level of real GDP falls. What is this called and what effect will it have on the S.R. Phillips curve?
Supply shock; it shifts up so that the given rate of unemployment occurs at a higher price
If actual inflation is higher than expected inflation then...
Actual real wage is less than expected real wage; unemployment falls
A decrease in the expected inflation rate will cause the short run Phillips curve to shift to the...
Which of the following best explains the negative slope of the short-run Phillips curve?
Weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls.
Suppose that the economy is currently at point A. If the Federal Reserve engaged in contractionary monetary policy, where would the economy end up in the short run?
B (down to the right)
Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C (up left), which of the following must be true?
Equilibrium GDP at point C must be above potential GDP.
Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 4 percent over the next year, which of the following will occur?
Real wages for university employees will rise.
Suppose the economy is at point C (down right) in the figure above. If workers adjust their expectations of inflation, which of the following will be true?
The short-run Phillips curve will shift to the left.
If actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage?
The actual real wage will be lower than the expected real wage.
If firms and workers have rational expectations, an expansionary monetary policy will cause the short-run equilibrium to move from
point A to point C (up long run Phillips curve)
According to the "rational expectations" school of thought in macroeconomics, the short-run Phillips curve is ________ in face of anticipated changes in monetary policy.
The money demand curve has a
negative slope because an increase in the interest rate decreases the quantity of money demanded.
Changes in the federal funds rate usually result in
changes in both short-term and long-term interest rates with more of an effect on short-term interest rates.
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
Left down to up right (mid)
Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from
up right to left down (mid)
Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?
Potential GDP is forecasted to be higher than equilibrium GDP.
If actual inflation is less than expected inflation, which of the following will be true?
Real wages will rise
If actual inflation is less than expected inflation, actual real wages will be ____ expected real wages and unemployment will ___.
greater than; rise
A higher inflation rate can lead to lower unemployment if ___ mistakenly expect the inflation rate to be lower than it turns out to be.
neither workers nor employers
Assume weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls. This explains the ___ slope of the short-run Phillips curve
If the Phillips curve represents a "___ relationship," then the trade-off between unemployment and inflation is permanent.
All other factors held constant, increased growth in aggregate demand will
all of the above
An increase in the expected inflation rate will
shift the short-run Phillips curve to the right
If expected inflation rises, the long-run Phillips curve will
not be affected
If the economy is producing at potential GDP,
unemployment is at its natural rate
What impact does monetary policy have on the long run Phillips curve?
Monetary policy has no impact on the long-run Phillips curve
When unemployment is below its natural rate, the inflation rate will eventually
Growth in aggregate demand will
move the economy to a higher point on the short-run Phillips curve
Monetary policy has ____ impact on the long run Phillips curve
If strong aggregate demand is pushing the economy beyond potential real GDP, which of the following must be true?
The economy is at an equilibrium that is not on the long run Phillips curve
When individuals use all available information about an economic variable to make a decision, expectations are
When inflation is very low, how do workers and firms adjust their expectations of inflation?
They tend to ignore inflation
If people assume that future rates of inflation will follow the pattern of inflation rates in the past, they are said to have
If workers and firms know that the Federal Reserve is following an expansionary monetary policy, workers and firms will expect inflation to ____ and will adjust wages so that the real wage ___
Increase; remains unchanged
If actual inflation is greater than expected inflation, what is the relationship between the actual real wage in the expected real wage?
The actual real wage will be lower than the expected real wage
Which of the following would be the source of a real business cycle?
Changes in technology
Monetary policy can
shift the short-run trade-off between inflation and unemployment if it affects expected inflation.