ECON test #3

Expansionary fiscal policy involves BLANK government spending and BLANK taxation.

increased; decreased

Fiscal policy that involves changes in government spending affects which of the following components of aggregate demand?

Government spending

Investment spending

Household consumption

Taxation and spending policies designed to increase aggregate demand are called BLANK

expansionary fiscal policy.

What is the appropriate policy response by the government to an economy that lawmakers fear is growing too fast?

Contractionary fiscal policy

A(n) implementation lag refers to the time BLANK...

fiscal policy takes to have a measurable effect on the economy.

Which of the following policy-making bodies is/are responsible for U.S. fiscal policy?

The U.S. President

Congress

According to the AD/AS model, what would have happened after the collapse of the U.S. housing market?

AD falls, wages fall, SRAS increases, and the economy self-corrects at lower prices in the long run.

Why might the government intervene when the economy is "booming?"

Price level increases too quickly

The time it requires to assemble accurate information about GDP and other economic indicators leads to BLANK

an information lag.

Suppose the federal government pursues an expansionary fiscal policy. By the time the fiscal policy's effects actually reach the economy, it has already corrected itself. What might have caused this?

Implementation lags

Information lags

Formulation lags

Taxes and government spending that affect fiscal policy independent of policy-makers' actions are called BLANK

automatic stabilizers.

When lawmakers disagree on the type of stabilization policy the economy requires, what is the result?

Time lags

Automatic stabilizers face less severe consequences of time lags because they don't require BLANK

specific policy action.

The time required to pass legislation necessary to stabilize the economy can lead to a(n) BLANK

formulation lag.

In a recession, how does government spending work as an automatic stabilizer?

Increased reliance on social welfare programs increases government spending.

In the face of a recession, tax cuts today are often countered by __________ in the future. (Select all that apply).

tax increases

government spending cuts

In the presence of recession, discretionary fiscal policy can BLANK spending by BLANK taxes.

increase; lowering

Suppose the government cuts taxes in response to recessionary pressure in an attempt to stimulate spending. However, people don't change their spending patterns. What theory explains this?

Ricardian equivalence

In an expansion, how does government spending work as an automatic stabilizer?

Decreased reliance on social welfare programs decreases government spending.

During a recession, government often pursues expansionary fiscal policy. How does this affect budget balances?

Deficits increase as spending rises and revenues fall.

What is the relationship between the deficit and public debt?

Debt is the sum of all deficits and surpluses.

It is helpful to consider public debt as a percentage of GDP rather than as a simple numeric amount because:

it allows us to compare the amount to our ability to pay it back.

The U.S. government borrows money from people by selling BLANK

Treasury securities.

Liquidity and interest paid are BLANK related.

inversely

The repayment period on U.S. government Treasury securities is either BLANK

short-or long-term.

A big risk to the otherwise safe Treasury securities is BLANK.

inflation

The return on a Treasury bill is relatively BLANK, but considered very BLANK.

low; safe

Treasury notes pay less interest than Treasury bonds because Treasury notes are BLANK than Treasury bonds.

more liquid

Indicate one benefit of public debt?

Flexibility in emergencies

What is the direct cost of government debt?

Interest rate paid

Which of the following is a benefit of government debt?

The ability to pay for investments that lead to economic growth.

Debt allows the U.S. to maintain a system of subsidized student-loan programs.

The indirect costs of government debt involve which of the following?

Slow economic growth

A distorted credit market

Crowding out

Government budget contain:

Receipts + Outlays

Receipts

Receipts = tax revenue and other revenues

Outlays

Outlays = government spending + transfer payments

Transfer payments are payments from the government to individuals for programs that don't involve a purchase of goods or services

Spending is when the government buys something in the marketplace

A transfer is when money is moved from one group to another

If outlays exceed receipts there is a BLANK

budget deficit

Budget deficit =

outlays - receipts

If revenues exceed expenditures there is a BLANK

budget surplus

Budget surplus =

receipts - outlays

National debt is the BLANK

total amount of money that a government owes at a point in time

Deficit is BLANK debt

NOT

Deficit:

a shortfall in revenue for a particular year's budget

National debt:

total of all accumulated and unpaid deficits

The national (federal) debt:

Held by public (public debt)

Held by government agencies (one branch of government can owe another branch)

Two thirds of intergovernmental debt is held by social security and medicare "trust funds"

US national debt has BLANK in the last decade, with larger budget deficits.

risen rapidly

Almost every country in the world BLANK

has some debt

There is a BLANK in the amount of debt owed among countries

wide discrepancy

Benefits of government debt:

It allows the government to be flexible when something unexpected happens

Government debt can pay for investments that lead to economic growth and prosperity

Cost of government debt:

The direct cost associated with government debt is the interest on borrowing

As the interest rate increases the cost of debt also increases

There are indirect costs associated with government debt distorting credit markets

As government borrows more, the interest rate increases and investments of the private sector are crowded out

THE 2 OUTLAYS:

Mandatory outlays

Discretionary outlays

Mandatory outlays:

Altering requires long-run changes to existing laws (SS, medicare, etc)

Discretionary outlays:

Can be altered when the annual budget is set (bridges, roads, payments to government works, defense, etc)

BLANK are the main reasons why SS and medicare currently make up such a large portion of the budget.

Demographic changes

People are living longer today than ever before and BLANK

draw post-retirement benefits longer

Those who paid into the programs for many years are BLANK

now retired and drawing benefits

The baby-boom generation is now entering BLANK. Baby boomers were born in the years 1946-1964. The oldest boomers reached 65 years old in 2011.

retirement age

Government revenues:

Taxes

Other small fees (national park admittance)

Main sources (2013):

Individual income taxes 47.4%

SS and retirement receipts 34.2%

Corporation income taxes 9.9%

Money:

is the set of all assets that are regularly used to directly purchase goods and services

- Cash

- Balances in bank accounts

--> Stocks, bonds, real estate and other assets are not included.

Money serves three main functions:

1) Store of value

2) Medium of exchange

3) Unit of account

Store of value:

money represents a certain amount of purchasing power

Medium of exchange:

money can be used to purchase goods and services

- A barter system is where people directly offer a good or service for another good or service

Unit of account:

money provides a standard unit of comparison

What makes certain money better than others?

1) Stability of value

2) Convenience

Stability of value:

Early versions of money were durable and had intrinsic value (value unrelated to its use as money).

Note: money does not need intrinsic value to maintain stability

Convenience:

Technology has allowed for the development of more convenient forms of money

For example, paper money is not so heavy as gold coins

Commodity-backed money:

money that can be legally exchanged into a fixed amount of an underlying commodity

The most common underlying commodity is gold

US: the dollar was gold-backed until 1971 for about 100 years. Banks were required to exchange dollars for a fixed amount of gold.

Nowadays the dollar is not backed by any commodity.

Fiat money:

money created by rule, without any commodity backing it.

US currency is backed only by the trust that the government will keep the value of money relatively constant.

The money supply:

= is the amount of money available in the economy.

The money supply is managed by the federal reserve system (Fed).

The Fed classifies different types of money by their liquidity:

Monetary base

M1

M2

Monetary base:

Currency in circulation + reserve balances (deposits held by banks and other depository institutions in their accounts at the federal reserve)

M1:

Currency held by the public + travelers checks + demand deposits

M2:

M1 + saving deposits, small time deposits, money market mutual funds

M1 indicates BLANK

spending (liquidity).

M2 includes BLANK and BLANK.

M1; savings

The BLANK is the institution responsible for managing the nation's money supply and coordinating the banking system.

central bank

In the US, the central bank is the BLANK

Federal Reserve.

Federal reserve is mandated by congress to conduct monetary policy to perform two essential functions:

1) Manage the money supply

2) Act as a lender of last resort

BLANK refers to the actions made by the central bank to manage the money supply:

Monetary policy

The fed has a twin or dual mandate:

Ensuring price stability

Maintaining full employment

In order to solve mistiming issues, banks must:

loan out money to people who would like to spend more than they earn

collect money from people who earn more than they currently spend

What is classified as a bank function?

Banks diversify risk

Banks act as intermediaries

Banks provide liquidity

If a person saves $1000 now with the expectation that he will receive $1200 in one year, then it can be said that:

this person is willing to forgo $1000 of current consumption

Suppose a business is interested in borrowing in order to purse a particular investment project. The project will not be funded if:

the rate of return is less than the cost of borrowing

Suppose a business is interested in borrowing in order to purse a particular investment project. The project will be necessarily funded if:

the rate of return exceeds the cost of borrowing

What shifts the supply curve for loanable funds (savings)?

cultural expectations

uncertainty about future economic conditions

current economic conditions

wealth

borrowing constraints

social welfare policies

expectations about future economic conditions

Changes in factors other than the interest rate can often affect the market for loanable funds. In this case, what happens to the supply of loanable funds?

The supply of loanable funds curve shifts

Describe the effect on the supply of loanable funds when the interest rate decreases.

The quantity of loanable funds supplied decreases.

How do booming markets affect the market for loanable funds?

Investors are eager to borrow money.

When interest rates increase, the demand curve for loanable funds:

does not change

Increases in government borrowing BLANK the demand for loanable funds. As a result, interest rates BLANK and private investment BLANK

increases; rise; falls

Indicate the essential non-price factor that affects the demand for loanable funds:

expectations about future economic conditions

How do booming markets affect the market for loanable funds?

investors are eager to borrow money.

Tools of the Monetary Policy:

The reserve requirement

Lending to banks at the discount rate

open-market operations

The reserve requirement:

Is the amount of money banks must hold in reserve

When reserve requirements increase the amount of money decreases

Too powerful of a tool; it is rarely used.

Lending to banks at the discount rate:

The discount window is the lending facility that allows banks to borrow reserves from the fed.

The discount rate is the interest rate charged by the Fed for loans through the discount window

Borrowing from the Fed is a bad sign for a bank, because the discount rate is higher than market interest rate. Banks use this as a last resort.

If the discount rate increases then the amount of money decreases. This tool is rarely used for monetary policy.

Open-market operations:

Open-market operations are sales or purchases of government bonds by the Fed to or from banks on the open market

If Fed buys bonds the amount of money increases

If Fed sells the bonds the amount of money decreases

The most used tool of monetary policy!!!!

Federal funds rate:

the interest rate at which banks choose to lend reserves held at the Fed to one another.

Banks are required to maintain a certain amount of reserves. If at the end of the day the bank is short BLANK

it borrows from another bank.

If the Fed buys bonds the reserves of banks in Fed BLANK and federal funds rate BLANK.

increases; decreases