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Ch 20 22 23 Macro

Terms in this set (64)

Once you have identified the point of equilibrium in the IS-MP graph in the Fed model, the horizontal axis will show you the:
unexpected inflation.
output gap.
equilibrium real interest rate.
actual inflation.
B
If the U.S. dollar appreciates, which of the following graphs correctly represents the effect on the IS curve?
Falling Costs
Decreased spending
Rising costs
Increased Spending
B
A financial shock is any change in:

aggregate expenditure, at a given interest rate and level of income.

borrowing conditions that changes the real interest rate at which people can borrow.

production costs that leads suppliers to change the prices they

charge at any given level of output.
potential GDP in the economy.
B
The Fed model combines the _____ curve, the _____ curve, and the ____ curve to link interest rates, the output gap, and inflation.

dollar demand; dollar supply; AS

IS; MP; Phillips

AD; AS; Phillips

demand for loanable funds; supply of loanable funds; AD
B
Once you have connected the output gaps from the IS-MP model and the Phillips curve, the next step is to identify the:

potential GDP level.

unexpected inflation from the Phillips curve.

unemployment rate from the labor market.

price level from the Phillips curve.
B
When using the Fed model, the first step is to:

find the output gap.

assess inflation.

increase the federal funds rate.

identify the shock and shift the curve.
D
In the IS-MP analysis in the Fed model, a decrease in the risk-free rate shifts the:

IS curve to the right.

MP curve up.

MP curve down.

IS curve to the left.
C
When using the Fed model to diagnose the economy, if a shock causes the real interest rate to rise, then the economy has been hit by _____ shock.

a financial

a supply

a spending

an inflation
A
Tariffs on inputs lead to a _____ shock.

financial

spending

deflation

supply
D
Which of the following graphs correctly represents the effect on the Phillips curve in Ethiopia if the Ethiopian birr appreciates?

Decreased interest rates

Increased spending

Rising Costs

Falling costs
D
A supply shock is any change in:

aggregate expenditure at a given interest rate and level of income.

borrowing conditions that changes the real interest rate at which people can borrow.

production costs that leads suppliers to change the prices they charge at any given level of output.

potential GDP in the economy.
C
In the IS-MP analysis in the Fed model, the MP curve shows you the:

potential GDP level in the economy.

price level in the economy.

current real interest rate.

output level in the economy.
C
The economy shown here begins at a 0% output gap. Now suppose that manufacturers in China face rising costs of rubber as an input. This leads to:

a new real interest rate of 4%.
unexpected inflation of 1%.
a new real interest rate of 0%.
a new output gap of -6%.
B
Take a look at the IS-MP-PC model shown here. The equilibrium real interest rate is:

3%.
5%.
-1%.
-4%.
A
In the IS-MP analysis in the Fed model, a fall in the interest rate causes a:

movement to the left along the IS curve.

movement to the right along the IS curve.

right shift of the IS curve.

left shift of the IS curve.
B
When a spending shock occurs, the IS curve shifts by the:

change in spending.

change in spending times the multiplier.

change in spending divided by the multiplier.

size of the multiplier.
B
If a spending shock increases aggregate expenditure by $35 billion and the multiplier is 2.5, then the IS curve will shift:

left by $14 billion.

right by $35 billion.

right by $87.5 billion.

left by $35 billion.
C
Which of the following graphs correctly represents the effect of increased consumer confidence and spending on the IS curve?

Decreased Spending

Falling Costs

Increased spending

Rising Costs
C
If you see a newspaper headline that says "Steel prices rise sharply," this is an example of _____ shock.

a spending

a financial

an interest rate

a supply
D
You are an economic adviser using the Fed model to analyze the economy. Now suppose that manufacturers in China face rising costs of rubber as an input. What is the effect on the economy?

an unchanged real interest rate, an unchanged output gap, and unexpected inflation

a rise in the real interest rate, an unchanged output gap, and unexpected deflation

an unchanged real interest rate, falling output, and unexpected inflation

a rise in the real interest rate, rising output, and unexpected inflation
A
The Fed model links the IS, MP, and Phillips curves. In the IS-MP analysis, an increase in exports will shift the:

MP curve down.

IS curve to the right.

MP curve up.

IS curve to the left.
B
In the IS-MP analysis in the Fed model, contractionary fiscal policy will shift the:

IS curve to the left.

MP curve up.

MP curve down.

IS curve to the right.
A
A bank run occurs when:

interest rates are too high.

many people want to withdraw their savings from a bank at the same time, and the bank does not have enough cash on hand.

too many borrowers want to take out loans from a bank, and the bank is unable to meet loan demands.

consumers increase their deposits at banks faster than the bank can loan out the funds.
B
What is the floor framework that the Federal Reserve uses to influence the federal funds rate?

Operations by the Open Market Trading Desk at the Fed

The Fed's approach of setting other interest rates to put a lower bound on how low the federal funds rate can go

The use of open market operations by the Fed

The Fed's approach of setting the discount rate above the federal funds rate
B
You have saved $747. Where should you go if you want to open a checking account?

the New York Federal Reserve district bank

a commercial bank

the Federal Reserve in Washington, D.C.

your local federal reserve district bank
B
The Federal Reserve's lender-of-last-resort function has been curtailed over time by the:

very financial institutions that it is meant to serve.

public.

Dodd-Frank Act.

governor of the Federal Reserve.
C
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 window

The stock market

The bond markets

The market for overnight loans
A
If inflation is 0%, and a firm wants to lower real wages by 1%, it will need to:

lower nominal wages by 1%.

raise inflation by 2%.

lower real wages by 2%.

raise nominal wages by 1%.
A
If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy.

lower; downward; increase

raise; upward; decrease

raise; upward; increase

lower; downward; decrease
B
If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____.

lower; reduce unemployment

lower; cool inflationary pressures

raise; reduce unemployment

raise; cool inflationary pressures
D
You are sitting at your desk in your new job as the Chair of the Federal Reserve Bank of the United States. The interest rate where potential GDP meets real GDP is 2%, the inflation rate is 1%, and the output gap is -1%. What is the appropriate new nominal federal funds rate that you should set for the economy?
0.5%
1%
1.5%
2.5%
C
Why is the discount rate the upper bound for the federal funds rate?

It is set lower than the federal funds rate.

The discount rate is the highest interest rate that banks can charge
the public when they make loans.

It is set higher than the federal funds rate.

The discount rate does not change over time.
C
You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 1%, and the output gap is -0.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?
1%
2%
0.5%
3%
B
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; down
raise; down
lower; up
raise; up
C
If inflation is 4% and a firm gives its workers a 1.5% nominal wage raise, then:

inflation rises by 1.5%.


inflation decreases by 1.5%.

real wages have gone up by 2.5%.

real wages have fallen by 2.5%.
D
Forward guidance occurs when the Federal Reserve:

carries out open market operations to influence future interest rates.

follows the same future course of monetary policy that it has been
following in the past.

provides information about current monetary policy in order to influence expectations about future interest rates.

provides information about the future course of monetary policy in order to influence expectations about future interest rates.
D
Monetary policy is defined as the:

implementation of ceilings on the federal funds rate in the economy.

change in government spending to change economic conditions.

adjustment of interest rates to influence economic conditions.

change of the tax code to achieve economic changes.
C
If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.
raise; down
lower; down
lower; up
raise; up
A
What is a reserve requirement?

the amount of money that the Federal Reserve spends on buying bonds

a maximum loan amount on the overnight loan market

the minimum amount of reserves that each bank must hold

the ceiling on the federal funds rate
C
What was the Fed's inflation target in 2019?
2%.
3.5%.
0.75%.
5%.
A
The Federal Reserve was created after:

a series of bank runs and bankruptcies.

an extended period of economic stagnation.

a period of very high unemployment.

an increase in the inflation rate.
A
Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 1%, then the Fed will want the new real interest rate to be:

equal to the inflation rate.

equal to the neutral interest rate.

higher than the neutral interest rate.

lower than the neutral interest rate.
D
Payroll taxes are 6.2%, and Medicare taxes are 2.9%. Your employer owes you $665. How much will your work cost your employer?
$725.52
$41.23
$60.52
$604.48
A
The government's debt is:
the accumulation of all the deficits.
the current year's deficit.
the equivalent of the country's imports.
always zero by the end of the year.
A
Fiscal policy is increased in its effectiveness through:
administrative lags.
monetary policy.
crowding out.
the multiplier effect.
D
A budget deficit occurs when:
government spending exceeds government revenue.
imports exceed exports.
discretionary spending exceeds automatic spending.
government revenue exceeds government spending.
A
Payroll taxes are 6.2%, and Medicare taxes are 2.9%. If your employer owes you $665, approximately how much will you get after these deductions?
$41.23
$19.29
$604.49
$60.52
C
The Affordable Care Act is an example of:
discretionary spending.
mandatory spending.
health care spending.
military defense spending.
A
In your current job, you earn $41,000. You take the standard deduction of $12,200. You have an offer of a new job working for a different employer. Your salary would go up by $6,500. How much extra will you owe in federal income taxes if you take the new job?
$9,020
$1,430
$650
$780
D
In order to boost output, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.
contractionary; lowers; raises
contractionary; raises; lowers
expansionary; raises; lowers
expansionary; lowers; raises
C
The standard deduction for a single person is $12,200. Based on this table, if your total income is $84,200, what is the amount of tax you will pay on your taxable income?
$15,840
$13,156
$11,699
$18,524
C
Fiscal policy works best when it is:
discretionary.
timely, targeted, and temporary.
not countercyclical.
general, nonspecific, and long-lasting.
B
Payroll taxes are 6.2%, and Medicare taxes are 2.9%. Your employer owes you $850. How much will your work cost your employer?
$24.65
$77.35
$927.35
$52.70
C
Which of the following did the New Deal create?
quotas
the stock exchange
tariffs
unemployment benefits
D
Consider the following graph. One of the reasons that government spending rose during the 2007 to 2009 period was the introduction of:
Social Security.
the Affordable Care Act.
Medicaid.
the Securities and Exchange Commission.
B
Why don't most tax expenditures help much if your federal tax bill is zero?
Most tax breaks reduce taxable income, but reducing taxable income below zero does not reduce the tax bill.
Most tax expenditures are specifically for high-income people.
You don't qualify for tax breaks if your federal tax bill is zero.
Taxes are an automatic stabilizer.
A
Which of the following is a reason to worry about government debt?
High and rising debt slows economic growth.
Most of the debt is domestic debt.
Future generations can help repay the debt.
The government never really needs to repay the debt.
A
On which of the following is there a tax incentive in the United States?(i) health insurance purchased through employers(ii) employer contributions for life insurance(iii) rental value on owner-occupied housing(iv) your mortgage
(iv) only
(iii) and (iv)
(i), (ii), (iii), and (iv)
(i), (iii), and (iv)
D
The Philippines government provides retirement benefits, unemployment benefits, maternity leave benefits, death and funeral benefits, and other benefits. These are examples of:
social insurance.
consumption.
taxes.
items that count toward GDP.
A
A debt crisis occurs when:
a government cannot repay its loans.
interest rates rise.
consumers spend too much on credit cards.
bond markets weaken.
A
With a progressive tax, those with _____ income tend to pay a _____.
more; lower share of their income in taxes
less; higher share of their income in taxes
more; flat tax rate
more; higher share of their income in taxes
D
Suppose a high-income person, a middle-income person, and a low-income person purchase identical houses that are financed by similar mortgages. Who gets the largest tax benefit?
the low-income person
the middle-income person
They all pay the same tax rate.
the high-income person
D
Suppose a high-income person, a middle-income person, and a low-income person all purchase identical houses that are financed by similar mortgages. Who spends the most on tax-preferred goods?
the middle-income person
They all spend the same on tax-preferred goods.
the high-income person
the low-income person
C
Which of the following services are provided by local government?
Medicare
military defense
bus services
Pell grants
C
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