Exam 3 Review

Question 1

What relationship does the short-run Phillips Curve show?

Answer 1

the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant

Question 2

Other things remaining the same, what does the short-run Philips curve show?

Answer 2

The inflation rate rises when unemployment falls

Question 3

According to Okun’s Law, if the real and potential GDP are $10 trillion, and the unemployment rate increases 1% above the natural rate of unemployment, what is real GDP?

Answer 3

$9.8 Trillion

Question 4

Which statement best explains why the long-run Phillips curve is a vertical line?

Answer 4

In the long run, the only unemployment rate available is the natural unemployment rate

Question 5

Which statement best explains the natural rate hypothesis?

Answer 5

when the inflation rate changes, the unemployment rate changes temporarily and eventually returns to the natural unemployment rate

Question 6

What can the Fed do if they want to lower unemployment?

Answer 6

speed up the growth rate of money

Question 7

If real GDP exceeds potential GDP, then employment is ____ full employment, and the unemployment rate ____ the natural unemployment rate.

Answer 7

above; is less than

Question 8

According to Okun’s Law, if the natural unemployment rate is 5 percent, the actual unemployment rate is 4 percent, and potential GDP is $10 trillion, then actual real GDP is _______.

Answer 8

$10.2 trillion

Question 9

When a movement up along the aggregate supply curve occurs, there is also _________.

Answer 9

a movement up along the short-run Phillips curve

Question 10

If the natural unemployment rate decreases, then the short-run Phillips curve ____ and the long-run Phillips curve ____.

Answer 10

shifts leftward; shifts leftward

Question 11

A credible announced inflation reduction results in ____ natural unemployment rate and ____ shift in the short-run Phillips curve.

Answer 11

no change in the; a downward

Question 12

What is fiscal policy?

Answer 12

the use of the federal budget to achieve the macroeconomic objectives

Question 13

What is the budget balance?

Answer 13

Tax revenues – Outlays

Question 14

What is the largest portion of total federal spending?

Answer 14

Transfer Payments

Question 15

By 2030, all baby boomers will be supported by Social Security and Medicare and benefit payments will have doubled? Which of the following is not a way the federal government can diffuse this “time bomb”?

Answer 15

Increase the money supply

Question 16

Which school of thought firmly believes that fiscal stimulus (increase in government outlays) is the best way to boost real GDP and create jobs?

Answer 16

Keynesian

Question 17

What does the mainstream view think are the durable results of fiscal stimulus?

Answer 17

lower potential GDP

Question 18

Induced taxes that vary with real GDP are considered what?

Answer 18

automatic fiscal policy

Question 19

If real GDP is below potential GDP, how might the government might pursue a fiscal stimulus?

Answer 19

cutting taxes

Question 20

If potential GDP is $13 Trillion, real GDP is $12 Trillion, and the government expenditure multiplier is 0.8, how big will the government fiscal stimulus need to be?

Answer 20

$1.25 Trillion

Question 21

When government outlays exceed tax revenues, the government ______.

Answer 21

has a budget deficit

Question 22

National debt decreases in a given year when the government of the country has a ______.

Answer 22

budget surplus

Question 23

If the economy is at an above full-employment equilibrium, ____ gap exists, and discretionary fiscal policy that ____ will return real GDP to potential GDP.

Answer 23

an inflationary; decreases aggregate demand

Question 24

Discretionary fiscal policy is hampered by _____.

Answer 24

law-making time lags, estimation of potential GDP, and economic forecasting

Question 25

What is Monetary Policy?

Answer 25

the adjustment of interest rates and the quantity of money to achieve the dual objective of price stability and full employment

Question 26

What is the dual mandate?

Answer 26

the federal reserve’s goal to achieve stable prices and maximize employment

Question 27

What is the federal funds rate?

Answer 27

the interest rate at which banks can borrow and lend reserves

Question 28

Using the Taylor Rule, calculate the federal funds rate when inflation is 2% and the GDP gap is 2%.

Answer 28

5%

Question 29

What should the response be if the output gap increases?

Answer 29

raise the federal funds rate

Question 30

Which of the following best describes the Fed’s monetary policy?

Answer 30

When the economy is in a recession, the Fed cuts the federal funds rate target aggressively to almost zero

Question 31

Which of the following is most likely to show the effects of a change in the federal funds rate first?

Answer 31

The Quantity of Money supply

Question 32

Which of the following is most likely to show the effects of a change in the federal funds rate last?

Answer 32

Inflation Rate

Question 33

To lower the federal funds rate, the Fed conducts an open market ____ of securities which ____.

Answer 33

purchase; decreases the demand for reserves

Question 34

To fight inflation, the Fed will ____ the federal funds rate to bring about a ____.

Answer 34

raise; decrease in aggregate demand

Question 35

Which of the following does not impact the quantity of Aggregate Supply (the quantity of real GDP supplied)?

Answer 35

Interest Rates

Question 36

How does worker misperception lead to an upwards sloping aggregate supply curve?

Answer 36

workers confuse nominal wages for real wages and are therefore willing to supply more labor hours.

Question 37

Which of the following is not a way a firm can respond to a change in the price level?

Answer 37

adjust market prices to meet the desired level of output.

Question 38

Wages that are slow to respond to changes in real GDP and the price level are referred to as what?

Answer 38

Sticky Wages

Question 39

If the buying power of money were to increase, which of the following would occur?

Answer 39

increase quantity of real GDP demanded

Question 40

Which of the following occurs if the price level rises?

Answer 40

the real interest rate rises and quantity of real GDP demanded falls

Question 41

Which of the following is likely to result from a rapid rise in aggregate demand?

Answer 41

Rising prices

Question 42

If the Federal Reserve takes steps that decrease planned expenditure, which of the following occurs?

Answer 42

aggregate demand decreases

Question 43

What do we have when potential GDP exceeds real GDP?

Answer 43

a Recessionary Gap

Question 44

Inflation that starts because aggregate demand increases is called what?

Answer 44

demand-pull inflation

Question 45

Investment, plus government expenditure, plus exports, plus the components of consumption expenditure and imports that are not influenced by real GDP refer to what?

Answer 45

Autonomous expenditure

Question 46

What are the components of aggregate expenditure that change when real GDP changes?

Answer 46

Induced expenditure

Question 47

What occurs when the consumption function is above the 45° line?

Answer 47

Dissaving

Question 48

What is the marginal propensity to consume if a $4 trillion change in disposable income brings a $3 trillion change in consumption expenditure?

Answer 48

0.75

Question 49

If disposable income remains the same and consumption expenditure increased, which of the following could have happened?

Answer 49

real interest rate fell

Question 50

Using the table below, what is the aggregate planned expenditure at point B?

Answer 50

$13.5 Trillion

Question 51

What happens when aggregate planned expenditure exceeds real GDP?

Answer 51

an unplanned decrease in inventories occurs

Question 52

Using the table below, which of the following best explains what happens at point F?

Answer 52

Firms cut production and try to reduce their inventories which causes Real GDP to decrease

Question 53

Which of the following statements is true?

Answer 53

The marginal tax rate causes the slope of the Aggregate Expenditure curve to decline, which causes the multiplier to decrease.

Question 54

An economy has no imports and no income taxes, MPC is 0.80, and real GDP is $150 billion. Businesses increase investment by $5 billion. What is the change in real GDP?

Answer 54

$25 billion