ECO 202 Final Exam

The Federal Reserve defines the monetary policy goal of price stability to mean an average inflation rate equal to

2 percent.

For purposes of monetary policy, which interest rate does the Federal Reserve target? The

federal funds rate.

The Federal Reserve was established in 1913 to

end bank panics by acting as a lender of last resort.

Fiscal policy is determined by ______ and monetary policy is determined by ______.

the Congress & the President, the Federal Reserve.

Automatic stabilizers refer to

government spending and taxes that automatically increase or decrease along with the business cycle.

The federal government debt equals the

accumulation of past budget deficits minus budget surpluses.

The Laffer Curve shows that a decrease in tax rates

could increase tax revenues.

Which statement best describes supply-side economics?

Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest, and therefore aggregate supply.

A recession tends to cause the federal budget deficit to _____ because tax revenues _____ and government spending on transfer payments ______.

increase; fall; rise

When a recession causes a budget deficit, an annual balanced-budget amendment would require the government to enact

contractionary fiscal policy -- a decrease in government spending and/or an increase in taxes —- to balance the budget.

Which of the following statements about the government budget constraint is TRUE?

I) The government budget constraint shows that a government has two ways to pay for government spending:

taxes or printing money

Il) The government budget constraint does NOT require the goverment to have a balanced budget.

II

Which of the following best describes how banks create money?

Banks create checking account deposits when making loans from excess reserves.

During the 2007-2009 financial crisis, the "run" on investment banks took the form of

lenders to investment banks not renewing their short-term loans.

The sale of Treasury securities by the Federal Reserve will

decrease the quantity of reserves held by banks.

The real interest rate equals the nominal interest rate ____ the inflation rate.

plus

The value of total income for an economy ______ the value of total production.

equals

The rule of 70 states that

the number of years it takes an economy to double in size is 70 divided by the growth rate.

If cyclical unemployment is eliminated in the economy, then the

economy is considered to be at full employment

On the long-run aggregate supply curve, the unemployment rate equals

the natural rate of unemployment.

Which of the following would be the best measure of the standard of living of a country?

real GDP per capita

The key idea of the aggregate expenditure model is that in any particular year the level of GDP is determined by the level of

aggregate expenditure.

In the graph of the aggregate expenditure model, what variable is on the vertical axis?

aggregate expenditure

Which type(s) of unemployment does the aggregate expenditure model explain?

cyclical unemployment

In the aggregate expenditure model, an increase in foreign real GDP would cause the aggregate expenditure line to shift

up, increasing equilibrium real GDP.

Suppose real GDP is $1 trillion below potential GDP If the marginal propensity to consume equals 0 5, then for real GDP to reach potential GDP autonomous spending must increase by

less than $1 trillon

In the aggregate expenditure model, if aggregate expenditure is less than real GDP, how will the economy reach macroeconomic equilibrium?

Inventories will rise, and real GDP and employment will decline.

To explain inflation in the long run, we use the

Quantity Theory of Money

There is a strong link between changes in the money supply and inflation

in the long run, but not in the short run

Using the quantity equation expressed in growth rates, if the velocity of money is constant, the money supply grows at 6 percent, and real GDP grows at 2 percent, then the inflation rate will be

4 percent

If the quantity of goods and services produced in the economy decreases,

it may be possible for nominal GDP to increase.

In the static aggregate demand - aggregate supply model, a decrease in foreign exchange value of the dollar will in the short run lead to ______ in real GDP and __ in the price level.

an increase, an increase

In the static aggregate demand - aggregate supply model, an increase in interest rates will in the short run lead to ______ in real GDP and ______ in the price level.

a decrease, a decrease.

If the economy is in a short-run equilibrium with real GDP below potential GDP, an appropriate FISCAL policy would be

a decrease in taxes.

If the economy is in a short-run equilibrium with real GDP above potential GDP, an appropriate MONETARY policy would be

an increase in interest rates.

In the static (basic) aggregate demand - aggregate supply model, wich of the following would a recession? A decrease in

government purchases

A depreciation in the foreign exchange value of the U.S. dollar makes

U.S. exports less expensive.

In the graph of the short-run model of foreign exchange rates, what variable is on the horizontal axis? The quantity of

U.S dollars

The demand for U.S. dollars in the foreign exchange market is a derived demand for

U.S. goods, services, and assets.

The supply for U.S. dollars in the foreign exchange market is a derived demand for

foreign goods, services, and assets.

What would increase the demand for U.S. dollars in the foreign exchange market?

an increase in U.S interest rates

Which of the following would cause the foreign exchange value of the U.S. dollar to appreciate?

A decrease in foreign interest rates.

A depreciation in the foreign exchange value of the U.S. dollar would cause

the aggregate expenditure line to shift up.