Exam 3 Review Flashcards
What relationship does the short-run Phillips Curve show?
the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant
Other things remaining the same, what does the short-run Philips curve show?
The inflation rate rises when unemployment falls
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?
$9.8 Trillion
Which statement best explains why the long-run Phillips curve is a vertical line?
In the long run, the only unemployment rate available is the natural unemployment rate
Which statement best explains the natural rate hypothesis?
when the inflation rate changes, the unemployment rate changes temporarily and eventually returns to the natural unemployment rate
What can the Fed do if they want to lower unemployment?
speed up the growth rate of money
If real GDP exceeds potential GDP, then employment is ____ full employment, and the unemployment rate ____ the natural unemployment rate.
above; is less than
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 _______.
$10.2 trillion
When a movement up along the aggregate supply curve occurs, there is also _________.
a movement up along the short-run Phillips curve
If the natural unemployment rate decreases, then the short-run Phillips curve ____ and the long-run Phillips curve ____.
shifts leftward; shifts leftward
A credible announced inflation reduction results in ____ natural unemployment rate and ____ shift in the short-run Phillips curve.
no change in the; a downward
What is fiscal policy?
the use of the federal budget to achieve the macroeconomic objectives
What is the budget balance?
Tax revenues – Outlays
What is the largest portion of total federal spending?
Transfer Payments
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”?
Increase the money supply
Which school of thought firmly believes that fiscal stimulus (increase in government outlays) is the best way to boost real GDP and create jobs?
Keynesian
What does the mainstream view think are the durable results of fiscal stimulus?
lower potential GDP
Induced taxes that vary with real GDP are considered what?
automatic fiscal policy
If real GDP is below potential GDP, how might the government might pursue a fiscal stimulus?
cutting taxes
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?
$1.25 Trillion
When government outlays exceed tax revenues, the government ______.
has a budget deficit
National debt decreases in a given year when the government of the country has a ______.
budget surplus
If the economy is at an above full-employment equilibrium, ____ gap exists, and discretionary fiscal policy that ____ will return real GDP to potential GDP.
an inflationary; decreases aggregate demand
Discretionary fiscal policy is hampered by _____.
law-making time lags, estimation of potential GDP, and economic forecasting
What is Monetary Policy?
the adjustment of interest rates and the quantity of money to achieve the dual objective of price stability and full employment
What is the dual mandate?
the federal reserve’s goal to achieve stable prices and maximize employment
What is the federal funds rate?
the interest rate at which banks can borrow and lend reserves
Using the Taylor Rule, calculate the federal funds rate when inflation is 2% and the GDP gap is 2%.
5%
What should the response be if the output gap increases?
raise the federal funds rate
Which of the following best describes the Fed’s monetary policy?
When the economy is in a recession, the Fed cuts the federal funds rate target aggressively to almost zero
Which of the following is most likely to show the effects of a change in the federal funds rate first?
The Quantity of Money supply
Which of the following is most likely to show the effects of a change in the federal funds rate last?
Inflation Rate
To lower the federal funds rate, the Fed conducts an open market ____ of securities which ____.
purchase; decreases the demand for reserves
To fight inflation, the Fed will ____ the federal funds rate to bring about a ____.
raise; decrease in aggregate demand
Which of the following does not impact the quantity of Aggregate Supply (the quantity of real GDP supplied)?
Interest Rates
How does worker misperception lead to an upwards sloping aggregate supply curve?
workers confuse nominal wages for real wages and are therefore willing to supply more labor hours.
Which of the following is not a way a firm can respond to a change in the price level?
adjust market prices to meet the desired level of output.
Wages that are slow to respond to changes in real GDP and the price level are referred to as what?
Sticky Wages
If the buying power of money were to increase, which of the following would occur?
increase quantity of real GDP demanded
Which of the following occurs if the price level rises?
the real interest rate rises and quantity of real GDP demanded falls
Which of the following is likely to result from a rapid rise in aggregate demand?
Rising prices
If the Federal Reserve takes steps that decrease planned expenditure, which of the following occurs?
aggregate demand decreases
What do we have when potential GDP exceeds real GDP?
a Recessionary Gap
Inflation that starts because aggregate demand increases is called what?
demand-pull inflation
Investment, plus government expenditure, plus exports, plus the components of consumption expenditure and imports that are not influenced by real GDP refer to what?
Autonomous expenditure
What are the components of aggregate expenditure that change when real GDP changes?
Induced expenditure
What occurs when the consumption function is above the 45° line?
Dissaving
What is the marginal propensity to consume if a $4 trillion change in disposable income brings a $3 trillion change in consumption expenditure?
0.75
If disposable income remains the same and consumption expenditure increased, which of the following could have happened?
real interest rate fell
Using the table below, what is the aggregate planned expenditure at point B?
$13.5 Trillion
What happens when aggregate planned expenditure exceeds real GDP?
an unplanned decrease in inventories occurs
Using the table below, which of the following best explains what happens at point F?
Firms cut production and try to reduce their inventories which causes Real GDP to decrease
Which of the following statements is true?
The marginal tax rate causes the slope of the Aggregate Expenditure curve to decline, which causes the multiplier to decrease.
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?
$25 billion
