Macro 202 Econ exam 3 PDF

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Macro 202 Econ exam 3...

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1. If an economy is in a recession and the government opts for an expansionary fiscal policy to shift AD closer to the potential output, a sound finance economist with a Classical view who holds the Ricardian equivalence theorem to be practically true would conclude that AD: does not shift since the higher government spending is offset by lower private consumption. 2. According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people: recognize that current deficits must be paid in the future and therefore increase savings today to pay higher future taxes.

3. A key difference between functional finance and sound finance is that in the functional finance approach the government has the potential for: a more active role in spending and taxing decisions. 4. Even as the U.S. government ran large budget deficits in the early 2000s, the interest rate did not rise substantially. Which of the following is among the reasons that crowding out did not raise interest rates at that time? 5. If an economy is above potential output and the government opts for a contractionary fiscal policy (running surpluses) to shift AD, an economist with a Classical view who holds the Ricardian equivalence theorem to be practically true would conclude that AD: does not shift since the lower government spending is offset by higher private consumption.

6. Why doesn't the minimum job proposal offer jobs commensurate with people's skills and education? These people are holding out for a job in the marketplace. Providing them with jobs wouldn't be offering a minimum job, which is the program's objective. 7. According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people: recognize that current deficits must be paid in the future and therefore increase savings today to pay higher future taxes. Monetary regimes: more effective than monetary policies bc they produce smaller changes in inflationary expectations. According to structural stagnationists, when workers lose their jobs in the tradable sector they are pressured to: lower their reservation wage. The structural deficit: does not change when income changes, but changes only when potential income changes. Taylor Rule: fairly successful in describing Fed policy

Why the quantity theory of money is problematic: the velocity of money has fluctuated over time. A cost of inflation is that it: reduces the informational content of prices. Crowding out: decreases the multiplier effect, so that an increase in government spending raises income by less. Open market purchase: raises bond prices and reduces interest rates. If Fed simultaneously raises the discount rate and the reserve requirement, money supply will: Contract When the government runs a deficit, it will: sell bonds to finance the deficit. One of the reasons that expansionary monetary policy has not been as effective as expected in recent years is that: banks were holding significant excess reserves. Cyclical unemployment: can be reduced with demand side policies. Cyclical unemployment is the portion of unemployment that results from fluctuations in output; structural unemployment is the portion of unemployment caused by the institutional structure of an economy. Only cyclical unemployment can be reduced by demand side policies. When a bank makes a loan, the money supply: increases Inflation is undesirable because it: distorts the information value of prices. Inflation CANNOT: make society poorer on average because higher prices imply that while people pay more when they buy goods and services, they also earn more when they sell these goods and services. When the Fed sells bonds, the Fed: reduces the reserves and the federal funds rate increases. An economist who follows a functional finance principle believes that the government should: run either a deficit or surplus depending on the state of the economy. If a cyclical surplus exists, the economy must be: above potential income. When inflation and unemployment are both higher than desired, most economists believe that the government should: determine whether reducing inflation is more or less important than reducing unemployment and adopt a policy that targets the more important goal. The amount of money ultimately created per dollar deposited is the: money multiplier Checking account deposits are classified as money because: they can be readily used in the making of purchases and the payment of debts. If the Fed wants a tighter monetary policy, it might: sell government securities to increase the federal funds rate. Frictional unemployment is most closely associated with: people quitting a job just long enough to look for and find another one.

Monetary policy is: undertaken by the Fed. The real deficit is the nominal deficit adjusted for changes in: The general price level If banks hold excess reserves whereas before they did not, the money multiplier: will become smaller Savings and money market accounts are not included in: M1 includes currency, demand deposits, and traveler’s checks Money can be many things, but it is not: illiquid One of the duties of the Fed is to: offer financial advising to the government In the short run if the Fed undertakes contractionary monetary policy, the effect will be to shift? AD CURVE TO THE LEFT Using fiscal policy to stabilize the economy is difficult bc? There are time lags involved in the use of fiscal policy If the Fed decreases the reserve requirement, it will likely: increase the amount of excess reserve will eventually increase the money supply With an upward sloping SAS curve, an expansionary monetary policy that affects the price level but not real output could be the result of a shift of: both the AD / SAS curve The higher the rate of inflation the lower the?: real interest rate can fall A reservation wage that is higher than the equilibrium wage creates? STRUCTURAL UNEMPLYMENT Cyclical unemployment: can be reduced with demand side policies AS/AD model in the short run monetary policy affect? Both inflation and real output Unemployment compensation: an automatic stabilizer because it falls as income increases, slowing an economic expansion Crowding is associated with: a reduction in business investment resulting from an increase in gov. borrowing and higher interest rates Economists who believe in sound finance would say that in a recession the gov, should? Maintain a balanced budget for political and moral reasons If a banks reserve ratio is increasing: The rate of change in reserves must exceed the rate of change in the deposits Government debt held by citizens of a country is: Less...