ECONOMICS 501 Chapter 15 to 18 Final Questions. 100% Verified Answwers

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ECONOMICS 501 Chapter 15 Final Questions 1. Increases in government purchases will make the aggregate demand curve shift to the right. 2. A student was asked to draw an aggregate demand and aggr... egate supply graph to illustrate the effect of an increase in aggregate supply. The student drew the following graph: Which of the following is a correct statement about the student’s analysis? 3. The graph to the right shows the aggregate demand curve for an economy. Use the line drawing tool to show the effect of a monetary policy change that causes a decrease in interest rates. Properly label this line. A decrease in taxes would cause a similar shift in the aggregate demand curve. 4. In the diagram to the right, moving from point A to point B is called a movement along the AD curve. Moving from point A to point C is referred to as a shift in the AD curve. 5. Indicate which of the following would cause a shift in the aggregate demand curve from A to point C. 6. Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)? 7. Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the following, if true will indicate that higher prices will not induce firms to increase output? 8. Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the following, if true will support Harry’s view that aggregate output can increase in spite of domestic inflation? 9. Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Jane’s argument is based on which of the following assumptions? 10. How does an increase in the price level affect the quantity of real GDP supplied in the long run? 11. The position of the long-run aggregate supply (LRAS) curve is determined by 12. An increase in the labor force or capital stock is illustrated as a shift from A to B. An increase in the expected price of an important natural resource is indicated by a shift from B to A. An improvement in technology is shown as a shift from A to B An increase in the expected future price level causes a shift from B to A. 13. Consider the figure to the right. Why does the short-run aggregate supply curve (SRAS) slope upward? 14. Neutron Inc., is one of the leading electric car manufacturers in Northbay, a developing economy. Neutron’s sales increased by more than 20 percent this year compared to the previous year, which started a debate within the company about whether the firm should increase prices. Among those in favor of a price hike is Eric Johnson, the operations head at Neutron. Eric is of the opinion that given the high demand for neutron’s cars, the firm should increase price to improve profits. Mike Wilson, the CEO of the firm, however, feels that a price increase would adversely affect the demand for Neutron’s products because he thinks consumers in this industry are more price conscious than brand loyal. 15. Neutron Inc., is one of the leading electric car manufacturers in Northbay, a developing economy. Neutron’s sales increased by more than 20 percent this year compared to the previous year, which started a debate within the company about whether the firm should increase prices. Among those in favor of a price hike is Eric Johnson, the operations head at Neutron. Eric is of the opinion that given the high demand for neutron’s cars, the firm should increase price to improve profits. Mike Wilson, the CEO of the firm, however, feels that a price increase would adversely affect the demand for Neutron’s products because he thinks consumers in this industry are more price conscious than brand loyal. 16. Euphrasia, a mixed open economy, was severely affected by a recession that almost paralyzed its service sector. The Euphrasian government announced a fiscal stimulus package of $15,000 billion to boost economic growth. GDP of the economy was expected to increase by 2.5 percent during the following year after the implementation of the fiscal stimulus. However, it was observed that instead of increasing, the GDP of Euphrasia actually declined by 0.75 percent that year Which of the following, if true, will explain this outcome? 17. Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from AD0 to AD1 The new short-run macroeconomic equilibrium occurs at point B. Long-run adjustment will shift the SRAS curve from SRAS0 to SRAS1 as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at point C. 18. The graph to the right shows the aggregate demand curve, short-run aggregate supply curve, and the long-run potential output for an economy 19. Almora, a developing open economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson’s view. In one of his recent articles in the country’s leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the following, if true, will support Bill’s argument? 20. Almora, a developing open economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson’s view. In one of his recent articles in the country’s leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the following, if true, will support Robin’s argument? 21. Almora, a developing open economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson’s view. In one of his recent articles in the country’s leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the following statements is Bill and Robin likely to agree with? 22. Suppose that the economy grows from 2013 to 2014 without inflation. Which of the following graph correctly shows this situation? 23. Consider the information in the following table. The values for the price levels in the above table are well below 100. This information indicates that 24. “FedEx Corp’s forecast for record holiday shipping this year shows that U.S. customers are buying more things online. But retailers still anticipate a soft holiday season, with the growth in shipping volume largely expected to come from shoppers scouring the Web for cheap deals.” The information implies that the “FedEx indicator” discussed in the chapter opener 25. According to the dynamic AD-AS model, what is the most common cause of inflation? 26. Which of the following is a major difference between the AD-AS model and the dynamic AD-AS model? The dynamic AD-AS model assumes 27. Paul Schumer and Jim Miller, two analysts at a research institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the following, if true, will weaken Paul’s argument? Chapter 15-A Quiz 1. Consider the figure to the right. Why does the short-run aggregate supply curve (SRAS) slope upward? 2. According to the dynamic AD-AS model, what is the most common cause of inflation? 3. In the diagram to the right, moving from point A to point B is called a movement along the AD curve. Moving from point A to C is referred to as a shift in the AD curve 4. Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from AD0 to AD1. The new short-run macroeconomic equilibrium occurs at point B. Long-run adjustment will shift the SRAS curve from SRAS0 to SRAS1 as workers adjust to lower-than expected prices. The new long-run macroeconomic equilibrium occurs at point C. Chapter 15-B Quiz 1. The following graph shows aggregate demand and short-run aggregate supply. 2. A change in the price level causes a movement along the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point A to B. A change in any other factor causes a shift in the SRAS curve. In the figure, this is shown by moving from point B to C. 3. Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)? (Mark all that apply) 4. Which of the following is a major difference between the AD-AS model and the dynamic AD-AS model? The dynamic AD-AS model assumes Chapter 16 1. The U.S. dollar can best be described as 2. Which of the following is NOT a function of money? 3. When money is acting as a store of value, it allows an individual to 4. The fiscal deficit of the country Zoldova has been increasing at an alarming rate for the last decade. One of the major reasons for the worsening fiscal deficit has been indiscriminate government spending which had to be financed by printing more currency. The continuous increase in money supply to finance wasteful government expenditure cause the inflation rate to hit triple digits. With rising instability in the country, the central bank had to redenominate its currency earlier this year. As a result, currency worth 10,000 Zoldovan dollars last year are now worth only 100 Zoldovan dollars. 5. Credit cards are 6. M1 includes more than just currency because The amount of U.S. currency outstanding averages to about $2,800 per person in the U.S. This large amount of currency per person can be partially explained because 7. The M2 definition of the money supply includes 8. The formula for the simple deposit multiplier is? 9. Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $40 billion? 10. An initial decrease in a bank’s reserves will decrease checkable deposits 11. Suppose banks keep no excess reserves and that all banks are currently meeting the reserve requirement. The Federal Reserve then makes an open market purchase of $13,000 from Bank1. Use the T-account to show the result of this transaction for Bank 1. Assuming Bank1 keeps no excess reserves after the transaction. 12. Hermesia, a developing economy, has been experiencing low growth in output with a high rate of unemployment for more than a year. Two members of the National Trade Union in Hermesia, Geoffrey Miller and Arthur Davis, are discussing the relevant expansionary policies that can be taken by the central bank or the government to stimulate economic growth in Hermesia. Geoffrey suggests that the central bank should substantially lower the reserve requirements of the commercial banks so that money supply and household spending both increase. Arthur, however disagrees. According to him, a decrease in the reserve requirements will not have the desired impact on money supply. He believes that an increase in government spending is more likely to boost the economy than an expansionary monetary policy. Which of the following, if true, will weaken Arthur’s claim that a decrease in the reserve requirements will not substantially increase money supply? 13. In a fractional reserve banking system, what is the difference between a “bank run” and a “bank panic”? 14. The United States is divided into 12 Federal Reserve Districts. The Federal Reserve Bank’s Board of Governors consists of 7 members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a 4 year, renewable term as the chairman. 15. The Federal Reserve is divided into two bodies: Which of the following is not a Federal Reserve district? 16. Which of the following is a monetary policy tool used by the Federal Reserve Bank? 17. Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply? Reserve Requirements Reserve Requirements are changed so infrequently because 18. In addition to the Federal Reserve Bank, what other economic actors influence the money supply? 19. In the last few years investments in green technology has increased substantially in Daslow, a developed economy. With an increased flow of credit to this sector, the stock prices of some of the leading green technology firms went up by 75 percent or more in the current fiscal year. A group of economists in Daslow claims that such a sharp increase in stock prices are an indication of a bubble. Since bubbles are unsustainable, this could hurt the economy in the near future. However, a group of industry analysts disagrees. They feel that with rising concern for the environment, the green technology industry is only likely to grow faster. Which of the following, if true, will support the economists’ claim? 20. In the last few years investments in green technology has increased substantially in Daslow, a developed economy. With an increased flow of credit to this sector, the stock prices of some of the leading green technology firms went up by 75 percent or more in the current fiscal year. A group of economists in Daslow claims that such a sharp increase in stock prices are an indication of a bubble. Since bubbles are unsustainable, this could hurt the economy in the near future. However, a group of industry analysts disagrees. They feel that with rising concern for the environment, the green technology industry is only likely to grow faster. Since the sector has been growing due to an increase in demand, it is unlikely that there is a bubble. 21. In the last few years investments in green technology has increased substantially in Daslow, a developed economy. With an increased flow of credit to this sector, the stock prices of some of the leading green technology firms went up by 75 percent or more in the current fiscal year. A group of economists in Daslow claims that such a sharp increase in stock prices are an indication of a bubble. Since bubbles are unsustainable, this could hurt the economy in the near future. However, a group of industry analysts disagrees. They feel that with rising concern for the environment, the green technology industry is only likely to grow faster. Which of the following questions would be most important to answer in order to determine whether the economists’ claim is accurate? 22. If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 4 percent per year, and velocity is constant, what will the inflation rate be? If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 4 percent per year, and velocity is growing at 3 percent per year instead of remaining constant, what will the inflation rate be? 23. Which of the following is true with respect to hyperinflation? 24. According to the quantity theory of money, inflation results from which of the following Chapter 16-A Quiz 1. According to the quantity theory of money, inflation results from which of the following? 2. The use of money 3. Which of the following is a monetary policy tool used by the Federal Reserve Bank? 4. The M2 definition of the money supply includes 5. Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit. Chapter 16-B Quiz 1. Credit cards are. 2. Which of the following is NOT a function of money? 3. Which of the following is true with respect to hyperinflation? 4. An initial increase in a bank’s reserves will increase checkable deposits 5. In addition to the Federal Reserve Bank, what other economic actors influence the money supply? Chapter 17 1. When congress established the Federal Reserve in 1913, its main responsibility was Congress broadened the Fed’s responsibility since 2. How can investment banks be subject to liquidity problems? Investment banks can be subject to liquidity problems because 3. Why is price stability one of the Fed’s monetary policy goals? Which of the following is not a problem of high inflation rates? 4. One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal, 5. The economy of country Rumblen was hit by a banking crisis, which has led to a recession. Jason Wallace, a real estate agent, says that the economy will recover soon because the government is taking various measures to counter the recession. According to him, the flow of credit will soon return to pre-crises levels. His wife Anna Wallace disagrees with him. She says that the situation may not improve soon, given the substantial increase in unemployment, Which of the following, if true, will weaken Anna’s claim that the situation is not likely to improve in the short term? 6. If the Federal Reserve purchases $150 million worth of U.S. treasury bills from the public, the money supply will increase. 7. The federal funds rate 8. In the figure to the right, the opportunity cost of holding money decreases when moving from point A to point B on the money demand curve. 9. Inflation in the developing country of Terbia has been rising over the last few years and is currently at a very high level. Two stock market analysts, Stanley Durro and Michelle Thompson, are discussing the possible causes of inflation. Michelle thinks that the real reason why prices are rising is because Terbia’s economy is expanding. Stanley disagrees. He argues that the inflation is not demand driven; o the contrary, too much money in the economy is increasing the price level. Which of the following, if true, would weaken Stanley’s claim that the inflation is driven by an excess supply of money? 10. The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages) Can the Fed, therefore, eliminate recessions? 11. In the figure to the right, the economy experiences inflation in the second period. What would be the Fed’s reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS2? 12. An increase in the money supply in the U.S. will not 13. Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? 14. Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2. 15. The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the Federal Reserve Bank to pursue a contractionary monetary policy. If the Fed’s policy is successful, what is the effect on the following macroeconomic indicators? 16. The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. What would be the Fed’s reaction if actual GDP in 2006 occurs at point B and potential GDP occurs at LRAS06? That is, what step will the Fed likely take to control inflation in the second period? 17. The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period? 18. Wendy Hendricks is a financial reporter for a news channel in Trussia, a large landlocked country. According to her, the economy is running the risk of deflation because prices in some sectors like computers and consumer goods have actually been falling in the past three years. As the economy is showing signs of slowing down, she feels that the central bank should adopt an expansionary monetary policy. Which of the following, if true, would weaken Wendy’s claim that the economy is slowing down? 19. Suppose that the equilibrium real federal funds rate is 6 percent and the target rate of inflation is 1 percent. Use the following information and the Taylor Rule to calculate the federal funds rate 20. Glenn Rudebusch, an economist at the Federal Reserve Bank of San Francisco, argues that if the Fed had followed the Taylor Rule during the recession of 2007 – 2009, then by the end of 2009 the target for the federal funds rate would have been – 5 percent. 21. Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target? 22. The central bank of the country Oakville is hosting its annual economic policy symposium with monetary policy as the theme. Several bankers and professional economists are in attendance. Dorah Baker, a professor at the University of Oakville, is of the opinion that monetary policy should target the rate of growth of money supply. This, she claims, would increase economic stability. Jack Snyder, a delegate attending the conference, does not agree. He thinks that monetary policy is highly effective in controlling inflation and so the central bank should bring inflation down from the current level of four percent to as close to zero as possible. Which of the following, if tru, would weaken Dorah’s claim that monetary policy should target the rate of growth of money supply? 23. Suppose you buy a house for $150,000. One year later, the market price of the house has risen to $160,000. If you made a down payment of 25 percent and took out a mortgage loan for the other 75 percent, the return on your investment in the house is If you made a down payment of 15 percent and borrowed the other 85 percent, the return on your investment in the house is 24. The introduction of Fannie Mae and Freddie Mac into the mortgage-backed securities market by the government 25. How do investment banks differ from commercial banks? 26. Why did the Fed help JP Morgan Chase buy Bear Stearns? 27. Economic growth in the country of Southville has slowed down in the last few months. Following a collapse in housing prices, several homeowners have defaulted on their mortgages. Given that this sector accounts for a sizable portion of the GDP, many commentators believe that this will prompt a domino effect in the economy. On a TV chat show, three industry experts are discussing the crisis and its possible impacts. Megan Greenboe is of the opinion that housing prices were driven up by speculation prior to crisis. According to her, this crisis will eventually reduce liquidity in the economy and lead to a credit crunch. Bob Sacberg, however, does not agree with Megan. Bob were therefore driven by fundamentals. Samantha Morris meanwhile is not very convinced that the housing sector is solely responsible for the economic slowdown. She argues that a twelve percent fall in housing prices in unlikely to have a very widespread impact. Which of the following, if true, will weaken Bob’s argument that fundamental factors in the housing market led to thin increase in housing prices? 28. Economic growth in the country of Southville has slowed down in the last few months. Following a collapse in housing prices, several homeowners have defaulted on their mortgages. Given that this sector accounts for a sizable portion of the GDP, many commentators believe that this will prompt a domino effect in the economy. On a TV chat show, three industry experts are discussing the crisis and its possible impacts. Megan Greenboe is of the opinion that housing prices were driven up by speculation prior to crisis. According to her, this crisis will eventually reduce liquidity in the economy and lead to a credit crunch. Bob Sacberg, however, does not agree with Megan. Bob were therefore driven by fundamentals. Samantha Morris meanwhile is not very convinced that the housing sector is solely responsible for the economic slowdown. She argues that a twelve percent fall in housing prices in unlikely to have a very widespread impact. Which of the following, if true, will weaken Megan’s argument that the economy is moving toward a credit crunch? 29. Economic growth in the country of Southville has slowed down in the last few months. Following a collapse in housing prices, several homeowners have defaulted on their mortgages. Given that this sector accounts for a sizable portion of the GDP, many commentators believe that this will prompt a domino effect in the economy. On a TV chat show, three industry experts are discussing the crisis and its possible impacts. Megan Greenboe is of the opinion that housing prices were driven up by speculation prior to crisis. According to her, this crisis will eventually reduce liquidity in the economy and lead to a credit crunch. Bob Sacberg, however, does not agree with Megan. Bob were therefore driven by fundamentals. Samantha Morris meanwhile is not very convinced that the housing sector is solely responsible for the economic slowdown. She argues that a twelve percent fall in housing prices in unlikely to have a very widespread impact. Which of the following, if true, will weaken Samantha’s argument that the fall in housing prices are unlikely to have widespread impact on the economy? Chapter 17-A Quiz 1. Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? 2. What are the Fed’s main monetary policy targets? 3. What is inflation targeting? 4. The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions? The Fed can only soften the magnitude of recessions, not eliminate them. 5. Which of the following is NOT a monetary policy goal of the Federal Reserve Bank (the Fed). 6. The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period? 7. What two institutions did Congress create in order to increase the availability of mortgages in a secondary market? 8. The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. What would be the Fed’s reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06? That is, what step will the Fed likely take to control inflation in the second period? 9. In the figure to the right, the opportunity cost of holding money decreases when moving from Point A to Point B on the money demand curve. Chapter 17-B Quiz 1. In the figure to the right, when the money supply increased from MS1 to MS2, the equilibrium interest rate fell from 4% to 3%. Why? 2. In the figure to the right, the economy experiences inflation in the second period. What would be the Fed’s reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS2? 3. How do investment banks differ from commercial banks? 4. The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the Federal Reserve Bank to pursue a contractionary monetary policy. If the Fed’s policy is successful, what is the effect of the policy on the following macroeconomic indicators? 5. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?) Open market purchase of government securities 6. As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target? 7. The Fed changes the discount rate as a part of its policy to reach all of the following objectives except: 8. Consider the figure to the right. Can the Fed achieve a $900 billion supply (MS) AND a 5% interest rate (point C)? 9. The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period? If the Federal Reserve Bank’s policy is successful, what is the effect on the following macroeconomic indicators? Chapter 18 1. Some spending and taxes increase or decrease with the business cycle. This event has an effect on the economy that is similar to fiscal policy and is called 2. After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy? 3. Government spending and taxes that increase or decrease without any actions taken by the government are referred to as Which of the following are examples of discretionary fiscal policy? (Check all that apply) 4. What is the difference between federal government purchases (spending) and federal government expenditures? 5. Complete the following table for a static AD-AS model: 6. Which of the following is an example of an expansionary fiscal policy? 7. Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to long-run macroeconomic equilibrium. 8. Consider the figures to the right. Which of the following combinations of specific fiscal policy will return the economy to long-run macroeconomics equilibrium (point C)? That is, what policy will move aggregate demand from AD2 to AD2 (policy) in the second period? 9. Westville, a small developed country, is experiencing a very high rate of inflation. Roma Anderson, a market research analyst, thinks that the high level of inflation is due to an acute shortage of goods available in the economy. According to her, the government should use expansionary fiscal policies to boost the economy. Meanwhile, Robert Simpson, a member of the finance ministry, is of the opinion that the high level of inflation is the result of excessive household spending. He suggests that the government should increase personal income tax rates to curb consumption demand. The government did increase personal income tax rates to reduce inflation. However, inflation did not decline as expected. Which of the following, if true, will explain this outcome? 10. The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the federal government to pursue a(n) contractionary fiscal policy. If the government’s policy is successful, what is the effect of the policy on the following macroeconomic indicators? 11. The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. What would be the federal government’s reaction if actual real GDP in 2006 occurs a point B and potential GDP occurs at RAS06? That is, what step can we expect the federal government to take to control inflation in the second period? 12. The figure to the right illustrates the dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). We would expect the federal government to pursue what type of policy in order to move AD2 to AD2 (policy) and reach equilibrium (point C) in the second period? If the federal government’s policy is successful, what is the effect on the following macroeconomic indicator? 13. The figure to the right illustrates the dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move AD2 to AD2 (policy) and reach equilibrium (point C) in the second period? 14. Two years back, the Republic of Terbia, a developed economy, experienced a massive boom in the information technology (IT) industry. The rapid expansion of credit to the firms in the industry resulted in a significant increase in employment and prices in the economy. However, due to overvaluation and speculation in the market, stock prices of these firms fell sharply. IT being one of the most important sectors, this downward affected the economy adversely, leading to a recession. Alicia White, an industry expert, suggests that expansionary monetary policy by the central bank is necessary to induce greater spending in the economy. However, Jaime Russell, a teacher at the community college, disagrees. According to him, increasing the supply of money would not help. The only possible impact of a fall in the interest rate would be an increase in aggregate supply. This, in turn, will reduce prices and profits further. Instead, the government should use expansionary fiscal policies to boost aggregate demand. Which of the following, if true, will weaken Alicia’s view? 15. One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase 16. According to the multiplier effect, an initial decrease in government purchases decreases real GDP by more than the initial decrease in government purchases. 17. The multiplier effect is only a consideration for increases in government purchases. False 18. The higher the tax rate, the smaller the multiplier effect. 19. The recession accompanied by a financial crisis are more sever than recessions that do not involve bank crisis because The large budget deficits of $1.4 trillion in fiscal year 2009 and $1.3 trillion in fiscal year 2010 were 20. Suppose that at the same time Congress and the President pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. 21. If the government increases expenditure without rising taxes, this will 22. In the long run, increases in government purchases result in 23. Does government spending ever reduce private spending 24. The federal government’s budget surplus was $189.4 billion in 2000 and $41.8 billion in 2001. A decrease in the federal government’s budget surplus can be the result of 25. How does a budget deficit act as an automatic stabilizer and reduce the severity of a recession? 26. Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy? 27. When is it considered “good policy” for the government to run a budget deficit? 28. The budget deficit of the government of Lyria, an open economy, has persistently remained higher than 6 percent of GDP. Murphy Smith, a banker, feels that a high budget deficit is detrimental to economic growth. In his opinion, there should be a law that makes it mandatory for the government to balance the budget. Dorina Shaw, a business analyst, however, disagrees. According to her, this budget deficit by itself need not be a problem. Governments usually run fiscal deficits even when their economies are at full employment. Which of the following, if true, would suggest that making it mandatory for the Lyrian government to balance its budget will benefit the economy? 29. In the long run, government tax policy can affect private investment which impacts the production function and factors of production. In other words, aggregate supply may be impacted by different types of taxes the government can use. Which of the following is not true in terms of potential long run impacts of tax policies? 30. Policy that is basically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is cal Chapter 18-A Quiz 1. After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy? 2. In the long-run, increases in government purchases result in 3. Complete the following table for a static AD-AS model: 4. The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model. What would be the federal government’s reaction if actual real GDP in 2006 occurs a point B and potential GDP occurs at LRAS06? That is, what step can we expect the federal government to take to control inflation in the second period? 5. According to the multiplier effect, an initial decrease in government purchases decreases real GDP by more than the initial decrease in government purchases. 6. Each year that the federal government runs deficit, the federal debt grows. Each year that the federal government runs a surplus, the federal debt shrinks. 7. Policy that is basically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called 8. One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase Chapter 18-B Quiz 1. The figure to the right illustrates the dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). We would expect the federal government to pursue what type of policy in order to move AD2 to AD2 (policy) and reach equilibrium (point C) in the second period? If the federal government’s policy is successful, what is the effect on the following macroeconomic indicator? 2. What is the difference between federal government purchases (spending) and federal government expenditures? 3. What are the gains to be had from simplifying the tax code? 4. When is it considered “good policy” for the government to run a budget deficit? 5. Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to long-run macroeconomic equilibrium. 6. The higher the tax rate, the smaller the multiplier effect. 7. The multiplier effect is only a consideration for increases on government purchases. False 8. Does government spending over reduce private spending? Yes, due to crowding out. [Show More]

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