ECON 201 Problem Sets 4 & 5

The primary purpose of the AD-AS model is to explain

business flucuations

Which of these would cause the aggregate demand curve to shift to the right?

an increase in the growth rate of the money supply

Considering the aggregate demand curve and the long-run aggregate supply curve, what change will result in a lower inflation rate and a higher real growth rate?

an increase in long-run aggregate supply

Considering the aggregate demand curve and the long-run aggregate supply curve, what change will result in a higher inflation rate and a lower real growth rate?

a decrease in long-run aggregate supply

The long-run aggregate supply curve

is a vertical line

Real shocks to the economy shift the long-run aggregate supply curve to the

left or the right by a little or a lot

From point X in the accompanying graph, a negative real shock could cause the economy to move to point

Y

What causes a shift in the short-run aggregate supply curve?

a change in the expected inflation rate

In the AD-AS model, what happens to the economy in the short run when consumer spending decreases?

Inflation is lower, and the real growth rate is lower

From an initial equilibrium in the AD-AS model, an increase in consumption growth will initially cause inflation

and real growth to increase

The Fed is the “lender of last resort” because it

lends to financial intermediaries during financial crises

The goal of an open market sale by the Federal Reserve is to

reduce bank reserves and reduce the money supply

Open market operations involve the Federal Reserve

buying and selling government bonds

In the AD-AS model, an increase in the growth rate of the money supply will cause the growth rate of real GDP to increase in

the short run

When aggregate demand decreases, the Fed will want to use its policy tools to

restore aggregate demand to its original level

Deflation is a(n)

negative inflation rate

Disinflation is a(n)

decrease in the rate of inflation

In the short run, a negative real shock will cause the inflation rate to

increase

A negative real shock will cause the economy’s

SRAS and LRAS curves to shift to the left

Monetary policy is

less effective in dealing with real shocks than with aggregate demand shocks

A progressive tax

places higher tax rates on people with higher incomes

The Federal Insurance Contributions Act taxes are paid to fund

Social Security and Medicare

Social Security and Medicare transfer wealth primarily to

the elderly

Social Security operates on a _____ basis

pay-as-you-go

The amount by which expenditures exceed revenue in a given year is known as _____. The total amount owed is the total _____.

a deficit; debt

Suppose the federal government incurred a $1 billion deficit in 2011. What was TRUE of the national debt?

The national debt increased by $1 billion

The annual difference between federal spending and revenues is called the

national deficit

What kind of rising costs will mostly cause US government spending to skyrocket in the future?

health care

The US individual income tax system can BEST be described as a _____ tax system.

progressive

The FICA tax burden is

borne more by the employee even though the employer contributes an equal dollar amount

Fiscal policy involves _____ and is designed to influence business cycle fluctuations.

taxation, government spending, and borrowing

Which of the following fiscal policy action would be MOST effective at fighting a recession if people react to uncertainty by saving all additional money that they earn or receive?

an increase in government spending

To the extent that people behave according to Ricardian equivalence, fiscal policy

is overall less effective

Which of the following is an example of crowding out?

An increase in government spending is partially offset by a decrease in private spending

Crowding out

is the decrease in private spending that can occur when government spending increases

When expansionary fiscal policy increases household income and thus consumer spending, the resulting additional increase in aggregate demand is called the

multiplier effect

An automatic stabilizer is a

government program that is designed to stimulate aggregate demand during recessions without the need for specific actions by policymakers

Fiscal policy is a good option for stimulating the economy when

consumer spending is very low

Fiscal policy is

less effective in dealing with real shocks than with aggregate demand shocks

Which of the following is an example of a “common sense” fiscal policy?

increasing government spending during an expansion