Econ – Flashcard Questions
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Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
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Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
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In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS,
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A) inflation occurs.
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Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the money supply?
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Buy US treasury bills
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To decrease the money supply, the Federal Reserve could
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Raise required reserve ratio
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An increase in the interest rate
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increases the opportunity cost of holding money.
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The quantity theory of money predicts that, in the long run, inflation results from the
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money supply growing at a faster rate than real GDP.
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An increase in the price level causes
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the money demand curve to shift to the right.
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Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
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decrease.
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For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the
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federal funds rate.
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If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run.
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reduce; lower
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When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have
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more money than they want to hold.
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The Fed can increase the federal funds rate by
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selling Treasury bills, which decreases bank reserves.
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Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.
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higher, higher
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Government transfer payments include which of the following?
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Social Security and Medicare programs
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Fiscal policy is determined by
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Congress and the president.
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Expansionary fiscal policy involves
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increasing government purchases or decreasing taxes
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If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
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taxes
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The multiplier effect refers to the series of
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induced increases in consumption spending that result from an initial increase in autonomous expenditures.
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A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending
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) an induced; an autonomous
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The government purchases multiplier equals the change in ________ divided by the change in ________.
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equilibrium real GDP; government purchases
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If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)
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) a $300 billion decrease in GDP
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Suppose that the economy is experiencing an expansion and the change in real GDP needed to bring the economy back into long-run equilibrium is $200 billion. To move the economy back to potential GDP, Congress should
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lower government purchases by an amount less than $200 billion.
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In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending
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complete
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Which of the following best describes supply-side economics?
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Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.
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A decrease in which of the following would decrease the tax wedge?
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marginal tax rate
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Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.
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increase; increase
