Econ Unit 4 test – Flashcards
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who is responsible for fiscal policy
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Congress and the president
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fiscal policy
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laws on taxation and government spending designed to influence the economy.
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Passive fiscal policy
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the federal government allows existing policy to remain unchanged and leaves the laws as they are written.
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Active fiscal policy
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Congress and the president deliberately attempt to alter the course of the economy through changes in taxation and/or government spending.
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revenue
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The income from taxes and other income
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expendature
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Government purchases
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expansion
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refers to the part in the business cycle when the economy is growing higher GDP lower unemployment higher wages
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contraction
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refers to the part in the business cycle when the economy is getting smaller lowet GDP higher unemployment
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recession
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occurs when economic activity declines—that is, the economy contracts declining real income, as measured by real GDP, and rising unemployment.
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depression
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a severe and long-lasting economic downturn that is worse than a recession.
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real GDP
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the total market value, expressed in dollars, of all final goods and services produced in an economy in a given year adjusted for inflation.
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inflation
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a general, sustained upward movement of prices for goods and services in an economy.
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the main source of income for the governement
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taxes
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transfer payments
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Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans' benefits, and welfare payments.
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how does increased gov spending help the economy
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cause businesses to increase production and hire more workers
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MV=PQ
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money supply x velocity (speed of spending = Price level x quantity
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Central bank independence is most strongly linked with which economic outcome?
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price stability
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Which of the following best describes the relationship between bank reserves, the federal funds rate, and a decrease in interest rates for consumers and business?
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If the FOMC uses monetary policy to increase the amount of reserves in the banking system, the federal funds rate will decrease, which will result in generally lower interest rates.
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Which of the following is one of the Federal Reserve System's two policy goals (also called its dual mandate)?
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price stability
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In the long run, increasing the money supply will most likely lead to which scenario?
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inflation
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Which interest rate serves as the target for open market operations?
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federal funds rate
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If the money supply (M) increases while velocity (V) and quantity (Q) remain constant, what will likely happen as a result?
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The price level (P) will increase, which means there is inflation.
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If the inflation rate were falling and the unemployment rate were high and rising, the FOMC would likely respond by doing which of the following?
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Decreasing the federal funds target rate and buying government securities
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During a period when unemployment is high and economic growth is stagnant, Federal Reserve policymakers might decide to pursue which type of monetary policy?
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Expansionary monetary policy
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Which of the Federal Reserve's monetary policy tools is associated with its role as lender of last resort but is used primarily as a signal of the Fed's policy intentions?
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discount rate
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In an economy experiencing a recession, with many unemployed resources, an increase in the money supply (M) would most likely lead to which scenario in the short run?
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An increase in the quantity of goods and services produced (Q) and then an increase in the price level (P)
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Which monetary policy tool is the Federal Reserve using when it buys and sells government securities?
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open market operations
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Real GDP has been declining and unemployment has been edging upward. What might the Congress and the president do about this problem?
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Decrease taxes and increase gov spending
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Generally speaking, if the economy is in an expansionary phase of the business cycle, which of the following are more likely to occur?
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falling unemployment rate rising inflation rate increasing tax revenue
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During a period when unemployment is high and economic growth is stagnant, government policymakers might decide to pursue which one of the following?
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expansionary fiscal policy
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Economic reports show real GDP is declining and unemployment is on the rise. What are members of Congress likely to do?
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decrease taxes and increase spending
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Which of the following factors contribute to policy lags?
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Recognition of change in the economy Negotiation of policy Implementation of policy Realization of results
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What could result as political parties, economists, and lobbyists with differing opinions slow down implementation of fiscal policy actions?
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The economic problem could stay the same. The economic problem could get worse. The economic problem could go away on its own.
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Which of the following would be considered an automatic stabilizer?
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Food stamps Unemployment compensation
