Practice Questions Exam 3

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sales tax is a tax on:
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sales tax is a tax on:
purchases that is typically a percentage of the purchase price of goods and services.
When the Federal Reserve purchases more long-term bonds, this:
lowers long-term bond interest rates
Which of the following services are provided by the federal government?
medicare
Tax expenditures are:
special deductions, credits, or exemptions that lower your tax obligations.
How is monetary policy different from fiscal policy?
monetary policy adjusts interest rates,whereas fiscal policy adjust government spending and taxes
If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____.
raise; cool inflationary pressures
What kind of interest rate does forward guidance affect?
longer term
When choosing a new interest rate, the neutral interest rate is an important starting point for the Federal Reserve because it is the rate at which:
there is no unemployment in the economy
One of the important tasks that banks perform is to:
create long-term loans from short-term deposits.
How might deflation set off further deflation?
falling prices my cause people to defer spending in expectation of futher lower prices
In response to an overheating economy, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.contractionary; lowers; raisesMaturity transformation occurs when banks:use short-term loans to create long-term loans.If the output gap is positive, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.raise; downWhat is a regressive tax?those with less income tend to pay a higher share of their income in taxesIf unemployment is above its sustainable level, then the economy is:operating below capacity, and inflation will likely fallWhich of the following is an example of hyperinflation?An economy experiences inflation of more than 7,500% in one year.You are the manager of a local bank. Due to unstable financial conditions, savers are worried that your bank may fail. When they show up in large numbers to withdraw their savings, you find that you do not have enough cash to meet the obligations. Where can you turn for a loan if no other bank will lend to you?the discount windowWho runs the Federal Reserve of the United States?the chair of the federal reserveWhich of the following tasks are performed by banks? (i) Print new money. (ii) Provide zero-interest loans. (iii) Create long-term loans from short-term deposits. (iv) Pool savings from many savers.iii; ivWhy is the discount rate the upper bound for the federal funds rate?it is set higher than the federal funds rateYou use your bank debit card to purchase a bottle of soda from the convenience store. What function is the bank performing here?providing payment servicesYou hear a rumor that your bank is going to collapse. You rush to the bank, along with many other customers, to withdraw your savings. This scenario demonstrates:the interdependence principleIf the output gap is negative, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.lower; less; decreaseIn order to lower output, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.contractionary; lowers; raisesThe neutral interest rate is the rate at which:real GDP equals potential GDP.Menu costs are the:marginal costs of adjusting pricesWhich of the following shows the medium of exchange function of money?daniela goes to the store and purchases roses with U.S. dollars____ income taxes and payroll taxes _____ after-tax incomes, which _____ consumption and therefore lower aggregate expenditure.higher; lower; decreaseIn late 2008, the Federal Reserve began purchasing billions of dollars' worth of mortgage-backed securities from banks. This was evidence of:quantitative easing.You have $5,700 at a local bank. You hear a rumor that the bank is going to fail. You rush over to the bank to withdraw your money and find many other bank customers who all want to withdraw their money from the bank. The scenario described here is a:bank runSuppose you have the following statistics for the economy. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. If the Federal Reserve sets the federal funds rate according to the Fed's rule of thumb, then what is the real interest rate?4.25%Social Security is an example of:mandatory spendingA budget surplus occurs when:government revenue exceeds government spending.If the output gap is negative, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.lower; upIn a recessionary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.lower; induceA bank run can happen when:people believe that a bank run is likely.When inflation is higher than expected, there is redistribution from:lenders to borrowersThe marginal tax rate is the:tax rate you pay if you earn another dollar.If unemployment is below its sustainable level, then the economy is:operating above capacity, and inflation will likely riseSocial insurance is provided by:the government