Exam #2 MacroEconomics

The primary tool of fiscal policy is

the federal budget

when the federal government is running a budget deficit what happens with government expenditures and revenues?

the government expenditures must exceed government revenues

changes in government spending and/or taxes as the result of legislation is called

discretional fiscal policy

what is the political incentive to spend and/or to tax

politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes

what is the difference between the federal budget deficit and the national debt?

• the budget deficit is the amount by which expenditures exceed revenues in a particular year, while all the national debt is the cumulative effect of all past budget deficits and surpluses

the privately held government debt is that portion of the national debt that

is owed to domestic and foreign investors

when government debt is financed internationally, future generations will

inherit both higher taxes and additional interest income

deficit spending and a large debt can have important effects on future generations because they

make it possible for those living in the present to pass the opportunity costs of current government spending on to future generations

what is the political attractiveness of debt financing relative to taxation ?

debt financing pushes the visible cost of government into the future

prior to the time of john maynard keynes, most economist stressed that

market adjustments would automatically direct an economy to full employment within a relatively brief period of time

according to the keynesian view, the prolonged unemployment of the great depression resulted because of?

the total expenditures on goods and services were less than the full-employment rate of output

according to Keynes, wages and prices are highly__

inflexible

in the keynesian view, equilibrium takes place when

the level of total spending in the economy is equal to current output

the concept that an increase in total income will expand by a multiple of the initial increase is

the multiplier principle

t/f: the multiplier process always brings previously idle workers into the labor force

false

the government is pursuing an expansionary fiscal policy if it

increases government spending and/or reduces taxes

if the economy is experiences less than full employment, the Keynesian model recommends that the government

undertake expansionary fiscal policy to stimulate AD

according to the Keynesian model, what policy would be most appropriate during a period of rapid inflation?

a budget surplus

what is the policy designed to counter or offset fluctuations in AD

countercyclical policy

what is recognition lag

it takes time to identify an economic problem, such as recession/inflation

decision lag

once the issue is recognized, policymakers must debate and agree on a course of action, which can take months.

implementation lag

even after decisions are made, it takes time for government spending programs or tax change to be put into effect.

impact lag

: the effects of fiscal policy take time to influence AD, as people adjust their spending and businesses respond.

what are features of existing policies that automatically stead the economy by decreasing government spending or increasing taxes during a boom, or by increasing government spending and decreasing taxes during a recession

automatic stabilizers

what is the idea that when households simultaneously try to increase their saving, actual saving may fail to increase because the reduction in consumption and AD will reduce income and employment

the paradox of thrift

the crowding out effect suggests that ?

budget deficits that lead to higher interest rates reduce private investment spending

money is used as a unit of account what does this mean?

money is used to measure the exchange value and costs of goods, services, assets, and resources

money that has neither intrinsic value nor the backing of a commodity with intrinsic value is?

fiat money

are funds available on a credit card included in a definition of the money supply?

no, because these funds are not a store of value

in the U.S., the money supply (M1) consists of..

coins, paper currency, demand deposits, other checkable deposits, and traveler’s checks

an institution that regulates the banking system and controls the money supply

central bank and federal reserve

t/f: the lower % of reserves requires, the larger the potential expansion in the money supply generated by creation of new reserves

true

a federally chartered corporation that insures the deposits held by commercial banks, savings, and loans, and credit unions

federal deposit insurance corporation (FDIC)

members of the federal reserve board of governors are appointed by who?

by the president to staggered 14 year terms

the interest rate that banks pay on loans from the FED is

the discount rate

what does the demand curve for money show?

the amount of money that households and businesses wish to hold at various rates of interest

t/f: when the fed raises the interest rate it pays on reserves, banks are encouraged to hold more reserves and lend less

true

if the FED wanted to institute a more expansionary monetary policy, what would it need to do?

buy government bonds from the public

if the FED wanted to institute a more contractionary monetary policy what would they need to do?

raise the discount rate

what does a decrease in the money supply do ?

raises the interest rate, causing a decrease in investment and a decrease in GDP

the most likely impact of an unanticipated in the money supply is

a decrease in the real interest rate, which in turn stimulates investment and GDP

if the graph is pushed to the right in a boom, how could the FED return the economy to potential output

sell u.s. gov bonds to banks

the __ of money is the average number of times a dollar is used to buy goods and services in GDP

velocity

the equation of exchange states

that velocity multiplied by money suppy equals real output times the price level

according to the quantity theoiry of money, what is the predicted result of an increase in the money supply

a proportional increase in the price level

classical economists assumed that both y and _____ were constant over short periods

v - money velocity

in the long run the primary effect of rapid monetary growth is ____ and ____

higher nominal interest rates and inflation

t/f: in the short run , an expansionary policy will increase real output and employment

true

according to modern analysis, the relationship between money growth and inflation is?

money growth and inflation are closely linked in the long run

the FED serves as the nation’s central bank conducts monetary policy, and ..

regulates the commercial banking industry

an expected increase in the prices of consumer goods in the near future will

increase AD now

money is?

whatever is generally accepted in exchange for goods and services

with a proportional tax, higher income individuals will pay

a bigger amount in taxes compared to lower income individuals