Study sets, textbooks, questions
Upgrade to remove ads
Macro - Exam 2
Terms in this set (62)
Recessions always involve
I. Falling inflation
II. Rising unemployment
III. Falling real GDP growth
II and III
Movement along the aggregate demand curve holds everything constant except:
the price level
According to our model of aggregate demand, why does consumption spending fall when the price level rises?
As the price level rises, the real value of wealth falls so people consume less
Holding all else equal, when the price level rises, the demand for money ______________ and interest rates are likely to ______________.
Which of the following would result in a steeper slope of the aggregate demand curve?
Investment spending is insensitive to interest rate changes
How do we represent the long run effect of an increase in investment due to more favorable tax treatment of investment income?
The AD curve first shis right then the AS curve shis right.
As we move down the aggregate supply curve, the unemployment rate ______________.
The Federal Reserve Board of Governors is located in
Which monetary policy tool did the US Federal Reserve introduce most recently?
interest on excess reserves
What happens to the Federal Funds rate and US treasury interest rates when the Federal Reserve decides to sell bonds?
Contractionary or restrictive monetary policy typically results in ______________ in the monetary base and ______________ in interest rates.
a decrease; an increase
If the Federal Reserve raises the required reserve ratio, what will happen to the monetary base?
it will not change
What will likely happen if the Federal Reserve tries to maintain very low employment in the long run?
inflation will rise and become unpredictable
The quantity theory of money predicts that since velocity should be stable, a doubling of the money supply, all else equal should result in
a doubling of the price level
If there are significant increases in spending causing significant increases in inflation, which of the following would be the best policies for the Federal Reserve?
increased reserve requirements and a Fed sale of bonds.
Active changes in government spending and taxes in order to smooth the business cycle are called ______________, and changes in government spending and taxes that happen passively over the parts of the business cycle are called ______________.
discretionary fiscal policy; automatic stabilizers
Contractionary fiscal policy would ______________ real GDP and ______________ inflation.
An increase in government purchases of $300 billion will shift the ______________ curve to the right by ______________.
aggregate demand; more than $300 billion
It is ______________ to time fiscal policy compared to monetary policy because ______________.
harder; fiscal policy takes longer to implement
Government budget deficits are more likely to increase during times of
recession or war
What is an argument AGAINST forcing the government to operate a balanced budget?
It would require the government to increase tax rates or decrease spending during a recession resulting in policy which would make the recession worse
Suppose the US federal government dramatically increases its spending; specifically, it funds the construction and maintenance of new interstate highways. The government does not increase taxes. This policy will likely result in ______________. Assume we start in a long-run equilibrium for the economy and go to a new short-run equilibrium.
A higher price level and a higher real GDP
Suppose the US federal government dramatically increases tax rates. The government does not make any other policy changes. This new tax policy will likely result in ______________. Assume we start in a long-run equilibrium for the economy and go to a new short-run equilibrium.
A lower price level and a lower real GDP
Assume the U.S. imports bananas from abroad at a market price of $0.25 per banana, and a tariff of $0.10 is placed on imported bananas. If the supply and demand for bananas are normal supply and demand relationships, the effect of the tariff on the price of bananas will be:
an increase in the price in the U.S. but a decrease in price received by foreign exporters.
One difference between the effects of a tariff and a quota is that the:
The government receives a tariff revenue in the case of a tariff but may or may not receive any revenue under a quota.
What happens to the demand and price of domestically produced good once a tariff is established?
Demand increases and price increases
periods of falling GDP
the total amount of spending, measured in constant dollars, at each price level; consumption, investment, government spending, and net exports
we can identify three possible effects on spending
a change in net exports, a new level of consumption spending, or a change in investment
exchange rates remain unchanged so that a rise in the dollar price of a U.S. good means that it will be
more expensive for foreigners
as the price level in the States rises, our goods are more expensive and
foreigners substitute their own goods
aggregate quantity demanded
the amount of output consumers, businesses, and governments are willing to buy at each overall level of prices
a number of factors influence consumption spending, including
individuals' incomes, taxes, wealth, savings, expectations, and interest rates
at higher prices
we simply need more money to carry on daily life and business
as interest rates rise
the cost for funds used for investment increases; investment spending thus falls, and one part of total spending decreases
when something other than price is changing, the
whole AD curve shifts
if consumption, investment, government, or net exports spending change for reasons other than changes in prices, then the
entire aggregate demand curve shifts
if prices, consumption, investment, or net exports will change, then there
will be a movement along the aggregate demand curve
when one spending component changes, it actually
causes further repercussions in the economy
the spending multiplier indicates
how much total spending, at any given price level, will change relative to the initial change in spending
represents production of all goods and services - that is, real GDP, that will occur at each price
supply for the entire economy depends on
prices of all inputs, available technology, and the availability and quantity of all labor and capital
to draw a single aggregate supply curve, we will begin by assuming that
the amount of labor and capital available to businesses is fixed, along with the production technology and the prices of inputs
at even higher levels of real GDP
the costs of additional units of output begin to increase
a bank for commercial banks
policies of the Federal Reserve System that affect the supply of money and credit
fed's four primary tools
open market operations, discount rate, required reserve ratio, and interest on excess reserves (relatively new)
federal open market committee (FOMC) manages
open market operations
open market operations
i.e. buying and selling existing federal government bonds
buying bonds ___ the money supply
selling bonds ___ the money supply
federal funds rate
the market interest rate which banks pay each other when they borrow reserves from each other
the fed achieves its target for the federal funds rate by
buying or selling bonds
he interest rate that the Federal Reserve charges banks when banks borrow reserves from the Federal Reserve
the percentage of bank deposits that the Federal Reserve System requires banks to keep as reserves
required reserve ratios
the federal reserves now pays
interest on excess reserves
a restrictive or contractionary monetary policy is one that
is intended to reduce the rate of growth of spending in the economy
face 2 problems with supply shock
rising unemployment and rising inflation
policies that affect the level of federal government spending on goods and services, taxes, and transfer payments
activation stabilization policies
fiscal policies designed to mitigate the effects of a recession
supply side economics
tax cuts that are intended to increase aggregate supply by increasing work effort, saving, and investment
capital gains tax
a tax on the increase in the value of a financial or real asset. If an asset is sold, the difference between the purchase price and the sale price is the capital gain and is taxed
Other sets by this creator
Quan Meth: Lecture Quiz 1
Financial Accounting - Chapter Two
Financial Accounting - Chapter 1
Macro - Exam 1
Other Quizlet sets
GD in Canada
History Ch. 1 Test Study Guide
BAR -PMBR Flashcards