Quiz #2

Question 1

Identify and explain the components of Government Spending

Answer 1

Government Expenditures
Purchases: the government buys goods and services
Grants: government gives money to state, cities, and towns for projects
Transfer payments: government gives money to those who are in need
Interest on debt: government borrows money for spending, pay back money borrowed plus interest

Question 2

Debt vs Deficit

Answer 2

Debt: within a given year
Deficit: net accumulation of all past deficits and surpluses

Question 3

Government budget surplus

Answer 3

government spending < Taxes

Question 4

Balanced budget

Answer 4

government spending = taxes

Question 5

government budget deficit

Answer 5

government spending > taxes

Question 6

-b∆T

Answer 6

identifies the change in consumption spending due to change in taxes

Question 7

Full Employment Income/GDP

Answer 7

Yf is the dollar amount of output (income) that could be produced (earned) if all firms operated at “capacity”

Question 8

Natural Rate of unemployment

Answer 8

there is zero cyclical unemployment

Question 9

Two main problems that economy faces over time

Answer 9

1. Recession
2. Inflation

Question 10

Recessionary Gap

Answer 10

the dollar amount by which full-employment income/GDP exceeds equilibrium income/GDP

Question 11

How to close a recessionary gap

Answer 11

Expansionary Fiscal Policy
- Increase government spending
- decrease taxes

Question 12

Inflationary Gap

Answer 12

the dollar amount by which equilibrium income/GDP exceeds full-employment income/GDP

Question 13

How to close an inflationary gap

Answer 13

Contractionary Fiscal Policy
- decrease government spending
- increase taxes

Question 14

Identify and explain the four functions of money

Answer 14

1. Medium of Exchange
   - money used to buy goods and services
2. Units of account
   - money is our standard measure of value, money use to assign and to compare the value of goods
3. Liquid Store of Wealth
   - money easily stored and can be quickly converted into goods without loss of value
4. Standard of Deferred Payment
   - money is accepted to pay off debt

Question 15

Required Reserve ratio (m)

Answer 15

the percent of deposited funds that banks must hold as reserves
m = 10% for checking deposits

Question 16

Required Reserves (RR)

Answer 16

the dollar amount of deposited funds that banks are required to hold as reserves

Question 17

Excess Reserves (ER)

Answer 17

the dollar amount of deposited funds that banks hold in excess of require reserves

Question 18

bank assets

Answer 18

value of what a bank owns

Question 19

bank liabilities

Answer 19

the value of what a bank owes

Question 20

Total reserves (TR)

Answer 20

= Required Reserves + Excess Reserves
= RR + ER

Question 21

maximum change in the money supply

Answer 21

1/m x (initial change in excess reserves)

Question 22

What two reasons can the money supply may change by less than the maximum amount?

Answer 22

1. If banks choose to hold onto same excess reserves than the money supply will not increase by the maximum amount
2. If money is not redeposited into the banking system, than the expansion of the money supply will be curtailed (reduced/cut down)