Econ Exam 5 – Flashcards
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Use this image to answer the following question. When government sets a price for a good above equilibrium, there will be
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a surplus
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What would most likely happen if Congress decreased taxes and increased spending?
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Economic contraction
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How does the president most directly influence the Federal Reserve System?
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Through appointments to the Board of Governors
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Banks that are members of the Federal Reserve have the benefit of
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earning dividends from stock in the Federal Reserve
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Which is an example of a natural monopoly?
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A single source for electricity in your community
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From an Associated Press article on Venezuela dated January 22, 2008: "... troops are cracking down on the smuggling of food ... the National Guard has seized about 750 tons of food ... [President] Hugo Chàvez ordered the military to keep people from smuggling scarce items like milk ... He's also threatened to seize farms and milk plants ..." These actions were the result of a price ceiling on food. Which zone (represented by a letter) on the graph reflects this policy, and what does it create?
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Letter C; demand exceeds supply, resulting in a shortage
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Why do governments regulate natural monopolies?
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To prevent prices from rising too high and to increase efficiency
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The inflation rate is decreasing and unemployment is rising. The economy is likely in
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contraction / contractiontary
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Lowering the discount rate can promote full employment because
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companies are more likely to expand and hire more workers
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The country of Lilliput has low unemployment and high consumer spending, and small businesses are thriving. However, prices are starting to rise throughout the economy. What should Lilliput's government do to prevent inflation from happening?
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Raise the income tax, which gives citizens less money to spend, and buy more services from civilian - owned businesses, which creates more jobs.
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Which of the following circumstances usually comes before a period of economic contraction?
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Peak production
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In the diagram above, what will happen if the government sets the minimum wage at Point A?
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There will be a surplus of workers.
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Which of these is required to balance the budget for the year?
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Revenue equal to spending
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Which of these is the result of a government-regulated natural monopoly?
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Fewer pricing plans and options for the consumer
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When a government spends more money in one year than it collects in taxes, there is a budget
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deficit
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Use this image to answer the following question. When the economy is operating at point C, the U.S. Congress is most likely to follow
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INCORRECT
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What is the difference between a deficit and a surplus?
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A deficit results when more money is spent than is taken in; a surplus results when more money is taken in than is spent.
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During a cold winter, there is a natural-gas shortage. The government sets a price ceiling on natural gas so that people can continue to afford heating. If the price ceiling remains in effect, what will happen?
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Quantity demanded will exceed the quantity supplied
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Consumers benefit from Federal Reserve oversight because they
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entrust their money to banks and other financial institutions
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Inflation is skyrocketing, and prices are out of control. What are banks most likely to ask the Federal Reserve to do with regards to government bonds and reserve requirements? Be sure to explain why.
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The banks are most likely to ask the Fed's to raise interest rates, sell bonds on the open market, and raise the reserve ratio in order to decrease inflation. So, there will be less money in the hands of the people and less spending, over all. OR
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The Federal Open Market Committee promotes price stability and economic growth through
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management of the money supply
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How does the U.S. government promote economic growth?
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By decreasing taxes and increasing spending
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When a government collects more revenue in one year than it spends, there is a budge
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surplus
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Look at the graph. Does zone A represent the result of a price ceiling or price floor, and which scenario is an example of these conditions?
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A price floor and the large amount of corn stored in silos in the U.S. Midwest due to overproduction by farmers
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The government sets the price of subsidized corn too low. Which of the following statements describes the result?
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At that price, quantity demanded exceeds quantity supplied.
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When the economy is operating at point C, the Federal Reserve may decrease the discount rate to
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increase growth
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Which of these is not a result of the federal government spending more than it earns?
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Budget deficits
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Inflation is low but the unemployment rate is the highest seen in several years. Economists report signs that show in six months the economy is likely to improve. The economy is likely in
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expansion INCORRECT
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How are national debt and deficit related?
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The national debt is an accumulation of deficits.
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Some products are produced most efficiently when there is a single supplier. What is this called?
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Natural monopoly
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How does the government help ensure fair prices for all citizens of a particular area served by one utility company?
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By negotiating affordable rates with the supplier
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Which of the following circumstances usually accompanies a period of economic expansion?
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High inflation
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Unemployment is low and inflation is rising, but slowly. Gross Domestic Product is also rising. The Federal Reserve may increase the reserve requirement at this point in order to
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protect the public from the potential of inflation rising out of control
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In the diagram above, what will happen if the government sets the price for Internet access at Point B?
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There will be a shortage of Internet access.
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The Federal Reserve includes twelve
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regional banks
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Federal Reserve Banks directly affect the national economy by
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providing oversight and services for financial institutions
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Buying securities in open market operations may promote economic growth because
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this action increases banks' cash, allowing for more loans and investment
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The accumulation of years of spending more money than is collected in revenues over several years creates a budget
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debt
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The country of Lilliput has high unemployment and low consumer spending, and small businesses are closing. What should Lilliput's government do to improve the economy?
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Lower the income tax, which gives citizens more money to spend, and buy more services from civilian-owned businesses, which creates more jobs.
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The government increases taxes. What might be a reason for this change in fiscal policy?
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A deficit due to improving nationwide public transportation
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Which of these could result from decreased federal spending?
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Fewer social programs
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The Federal Reserve uses three tools to set monetary policy through the banks. Identify these three tools and provide an example of how each tool affects individual consumers.
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The three tools the Federal Reserve uses are discount rate, reserve equipment, and open market operations. Discount rate will effect consumers by decreasing the interest on loans. Open mark operations affects consumers by selling and buying government securities. Reserve requirement will effect consumers by the percentage of bank deposits.
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In the diagram above, what will happen if the government sets the price for potatoes at point A?
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There will be a surplus of potatoes.
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How does the U.S. government slow economic growth?
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By increasing taxes and decreasing spending
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In the business cycle, when is "deflation" most likely to occur?
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During a recession
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In the 2000s, Venezuelan President Hugo Chàvez instituted economic policies that caused smuggling and hoarding of food. What did Chàvez do to create this behavior, and which zone (represented by a letter) on the graph represents the result?
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Chàvez set a price ceiling (letter C), which resulted in quantity demanded exceeding quantity supplied for food.
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Which are more popular with citizens, contractionary or expansionary government actions, and why?
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Expansionary, because they increase the amount of money held by the people and put less in the hands of the government
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Use this image to answer the following question. In the business cycle phase marked A, economists expect
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economic growth to slow down
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Which actions would the Federal Reserve most likely take to slow inflation?
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Raise reserve requirement and sell government securities
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To promote economic growth, countries would most likely act so that inflation
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Remains at a low level ???
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How could government-sponsored grants for the private development of new technologies result in a lower national debt?
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Making initial development private saves the government from funding all of the research.
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The economy is in a severe recession. The government should
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increase spending
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Sales of new homes increased each month of the last year. The economy is likely in
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expansion
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The part of the Federal Reserve with the most impact on the money supply is the
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Federal Open Market Committee
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Unemployment is on the rise, though inflation is quite low. Gross Domestic Product is rising but more slowly than the goal rate. The Federal Reserve may buy government securities in open market operations in order to
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increase the money supply and encourage economic growth
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How does the government deal with a budget deficit?
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Increase taxes, sell bonds, and decrease spending
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Meetings of Federal Reserve officials occur in
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Washington, D.C.
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What role does government regulation serve in business?
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Protect consumers and producers
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Concerned that the size of the federal debt is stifling economic growth, citizen groups encourage Congress to tackle the issue with meaningful reform to the federal budget. Which actions are most likely to accomplish this goal?
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Increase taxation and decrease spending
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Use this image to answer the following question. When the economy is operating at point B, the U.S. Congress is most likely to follow
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INCORRECT
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Use this image to answer the following question. When government sets a price for a good below equilibrium, there will be
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a shortage
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How do member banks of the Federal Reserve differ from other depository institutions?
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They are stockholders in their regional Federal Reserve Bank.
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The government sets the price of wheat for the coming year above the equilibrium price. What effect would this have on supply and demand?
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There will be more wheat produced than demand requires.
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The inflation rate is increasing and unemployment is decreasing. The economy is likely in
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expansion
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Explain how the Federal Reserve may use the discount rate and the reserve requirement to increase the money supply. What impact should these actions have on employment and why?
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Note: Discount rate is the minimum rate of interest. The Federal Reserve also requires the given percentage of total deposits. OR The tools of the monetary policy promote full employment, price stability, and economic growth. The more money banks have to lend, the more businesses can expand. People will make frequent large purchases, like homes and cars. Business growth leads to jobs and people with jobs can make more purchases. An indicator of a growing economy is moderate inflation, which is good. However, the tools of the monetary policy, like discount rate and the reserve requirement, can promote price stability and prevent inflation from going out of control.
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Which describes a benefit from government regulation of a natural monopoly?
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Livy's gas utility bill does not go up during a natural gas shortage
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Use this image to answer the following question. When the economy is operating at point B, the U.S. Congress is most likely to follow
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INCORRECT A. expansionary fiscal policy B. contractionary fiscal policy C. expansionary monetary policy D. contractionary monetary policy
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In the diagram, what will happen if the government sets the price for potatoes at Point B?
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There will be a shortage of potatoes
