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ECO2013 > Exam 3 Review > Flashcards

Exam 3 Review Flashcards

1
Q

What relationship does the short-run Phillips Curve show?

A

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

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2
Q

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

A

The inflation rate rises when unemployment falls

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3
Q

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?

A

$9.8 Trillion

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4
Q

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

A

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

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5
Q

Which statement best explains the natural rate hypothesis?

A

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

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6
Q

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

A

speed up the growth rate of money

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7
Q

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

A

above; is less than

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8
Q

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 _______.

A

$10.2 trillion

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9
Q

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

A

a movement up along the short-run Phillips curve

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10
Q

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

A

shifts leftward; shifts leftward

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11
Q

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

A

no change in the; a downward

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12
Q

What is fiscal policy?

A

the use of the federal budget to achieve the macroeconomic objectives

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13
Q

What is the budget balance?

A

Tax revenues – Outlays

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14
Q

What is the largest portion of total federal spending?

A

Transfer Payments

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15
Q

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”?

A

Increase the money supply

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16
Q

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

A

Keynesian

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17
Q

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

A

lower potential GDP

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18
Q

Induced taxes that vary with real GDP are considered what?

A

automatic fiscal policy

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19
Q

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

A

cutting taxes

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20
Q

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?

A

$1.25 Trillion

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21
Q

When government outlays exceed tax revenues, the government ______.

A

has a budget deficit

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22
Q

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

A

budget surplus

23
Q

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

A

an inflationary; decreases aggregate demand

24
Q

Discretionary fiscal policy is hampered by _____.

A

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

25
Q

What is Monetary Policy?

A

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

26
Q

What is the dual mandate?

A

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

27
Q

What is the federal funds rate?

A

the interest rate at which banks can borrow and lend reserves

28
Q

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

A

5%

29
Q

What should the response be if the output gap increases?

A

raise the federal funds rate

30
Q

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

A

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

31
Q

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

A

The Quantity of Money supply

32
Q

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

A

Inflation Rate

33
Q

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

A

purchase; decreases the demand for reserves

34
Q

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

A

raise; decrease in aggregate demand

35
Q

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

A

Interest Rates

36
Q

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

A

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

37
Q

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

A

adjust market prices to meet the desired level of output.

38
Q

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

A

Sticky Wages

39
Q

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

A

increase quantity of real GDP demanded

40
Q

Which of the following occurs if the price level rises?

A

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

41
Q

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

A

Rising prices

42
Q

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

A

aggregate demand decreases

43
Q

What do we have when potential GDP exceeds real GDP?

A

a Recessionary Gap

44
Q

Inflation that starts because aggregate demand increases is called what?

A

demand-pull inflation

45
Q

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

A

Autonomous expenditure

46
Q

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

A

Induced expenditure

47
Q

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

A

Dissaving

48
Q

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

A

0.75

49
Q

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

A

real interest rate fell

50
Q

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

A

$13.5 Trillion

51
Q

What happens when aggregate planned expenditure exceeds real GDP?

A

an unplanned decrease in inventories occurs

52
Q

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

A

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

53
Q

Which of the following statements is true?

A

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

54
Q

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?

A

$25 billion

ECO2013 (12 decks)

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