Final Exam Flashcards
What is the difference between expansionary and contractionary fiscal policy?
The difference between expansionary and contractionary fiscal policy is that expansionary increases in government expenditures and/or decreases in taxes to achieve economic goals and contractionary decreases government expenditures and/or increases taxes to achieve economic goals.
What is the difference between discretionary and automatic fiscal policy?
The difference between discretionary and automatic fiscal policy is that discretionary is deliberate changes in government expenditures and/or taxes in order to achieve economic goals and automatic is changes in government expenditures and/or taxes that occur automatically without (additional) congressional action.
Discuss the three income tax structures. Which income tax structure is currently used in the U.S.
The three income tax structures are 1. Progressive: Pay higher tax rate on additional income. 2. Proportional: Pay same rate on additional income tax. 3. Regressive: Pay lower tax rate on additional income. The U.S. currently uses progressive income tax structure.
List and define the three functions of money
Medium of exchange: Anything that is generally acceptable in exchange for goods and services.
Unit of account: A common measure in which relative values are expressed.
Store of value: The ability of an item to hold value over time.
First, evaluate why using money is generally preferable to bartering. Then, explain what gives the U.S. dollar its value
Money is preferable to bartering because of the Double Coincidence of Wants which means that two traders must find each other at the same time willing to trade their goods and services with each other. In barter economy transactions also take longer and costs are higher. Economic activity and economic outlook for the U.S. gives the dollar its value.
Compare M1 and M2. Do credit cards fall under either M1 or M2? Why or Why not?
M1 is currency held outside of banks, plus demand deposits, plus other liquid deposits and M2 is M1, plus small-denomination time deposits, plus money market mutual funds (retail). M2 is a larger measure of the money supply because it contains M1, M1 is also less liquid than M2 meaning it will take a longer time to convert it into cash.
Credit cards fall under neither M1 or M2 because credit cards represent debts and liabilities to the person that owns the credit card.
Describe what a fractional reserve banking mean and then explain how it came to exist.
Fractional Reserve Banking is a banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities.
Fractional reserve banking came to exist because in the earliest years of banking gold coins were primarily used and they were not easy or safe to carry so people would go to goldsmiths to store their gold and the goldsmiths would issue warehouse receipts to their customers for the stored gold eventually people started using the receipts to exchange for goods and services and goldsmiths would even lend some of the gold out and they would earn interest on the loans, eventually the warehouse receipts came to represent a greater amount of gold than was on deposit. This whole process of fractional reserve banking had begun.
Describe the membership and functions of the Federal Open Market Committee (FOMC).
The Federal Open Market Committee consists of 12 members that are a policy making group. This committee has the ability to conduct open market operations conducting the nations monetary policy which is changes in the money supply or in the rate of change of the money supply, intended to achieve stated macroeconomic goals.
List and describe in detail the four major monetary policy tools available to the Fed.
Tool 1: Open market operations
Tool 1: Open market operations – The buying of government securities by the fed (open market purchase) or the selling of government securities by the fed (open market sale). Basically, in either situation the bank changes the amount of any given banks account balance, and it increases or decreases the money supply. This process continues until no new excess reserves can be created.
Distinguish between federal funds rate and discount rate.
Federal funds rate is the interest rate that banks lend to other banks and discount rate is the rate that central banks lend to banks as a last effort before something seriously bad happens.
- A balanced budget occurs when
A. the national debt is reduced to zero dollars.
B. a budget deficit during one year is matched by a budget surplus in the next year.
C. transfer payments equal tax revenues.
D. government expenditures equal tax revenues.
E. the deficit-GDP ratio equals one.
D. government expenditures equal tax revenues.
- Expansionary fiscal policy actions include __________ government spending and/or __________ taxes, while contractionary fiscal policy actions include __________ government spending and/or __________ taxes.
A. increasing; increasing; decreasing; decreasing
B. decreasing; decreasing; increasing; increasing
C. increasing; decreasing; increasing; decreasing
D. decreasing; increasing; increasing; decreasing
E. increasing; decreasing; decreasing; increasing
E. increasing; decreasing; decreasing; increasing
- Suppose Congress increases income taxes. This is an example of
A. expansionary fiscal policy.
B. expansionary monetary policy.
C. contractionary fiscal policy.
D. contractionary monetary policy.
C. contractionary fiscal policy.
- An example of automatic fiscal policy is
A. the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a recession.
B. when interest rates automatically fall in a recession.
C. Congress passes a law during a recession that automatically extends unemployment benefits for those whose benefits will soon expire.
D. A and B
E. A, B, and C
A. the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a recession.
- The requirement of a “double coincidence of wants” is the chief __________ of the __________ exchange system.
A. advantage; barter
B. advantage; monetary
C. disadvantage; barter
D. disadvantage; monetary
C. disadvantage; barter
