question

Fiscal Policy

answer

the governments plan for spending and taxation. it is desired to steer aggregate demand in a desired direction.

question

Fiscal Policy is decided by

answer

the president and congress

question

During the deliberations on fiscal stimulus in 2009 (Recovery Act), the debate over fiscal policy focused on

answer

1. the multiplier effects of tax cuts versus higher govt spending 2. the multiplier effects of different types of tax cuts 3. the incentive effects of tax cuts

question

Disposable Income (DI)

answer

DI=Y-T GDP minus taxes the amount actually available to consumers, principle determinate of Consumer Spending (C)

question

decrease in taxes shifts the

answer

consumption schedule upward

question

Tax policy multiplier effect

answer

an increase or decrease in taxes will have a multiplier effect equilibrium GDP on the demand side. tax reductions increase equil GDP and tax increases reduce it. shifts and takes work INVERSELY

question

Total Spending (TS)

answer

C+I+G+(IM-X)=TS consumer spending + investments + govt spending + (imports - exports)

question

in 2009 the US economy was experiencing a(n)

answer

recessionary gap

question

In 2009, President Obama and Congress stimulated aggregate demand by

answer

decreasing taxes and increasing government spending

question

In contrast to changes in government spending, tax changes affect spending

answer

Indirectly

question

When you compare the effects of government spending on aggregate demand with the effects of taxes on aggregate demand, the effects of government spending are

answer

larger

question

Why does a tax change affect aggregate demand?

answer

A tax change alters disposable income and consumption spending

question

An increase in taxes shifts the

answer

consumption schedule downward

question

If personal income taxes are increased, disposable income and consumption

answer

decrease

question

An automatic stabilizer is a feature of the economy that

answer

reduces its sensitivity to shocks.

question

the multiplier

answer

1/1-MPC

question

the multiplier for changes in taxes is _______ than the multiplier for changes in government purchased because note every dollar of the tax cut is spent

answer

smaller

question

When an income tax is added...

answer

the multiplier is reduced because an IT reduces the fraction of each dollar of GDP that consumers actually receive/spend

question

the multiplier is ______ by an income tax because an IT ________ the amount of GDP (money) that consumers actually get and can spend

answer

reduce,reduces

question

3 Reasons why the oversimplified formula over states the multiplier:

answer

1. it ignored variable imports which reduce the size of the multiplier 2. it ignores price level changes which reduce the multiplier **3. it ignores income taxes which also reduce

question

If there is an inflationary gap and the govt wants to use fiscal policy to eliminate it they could

answer

decrease govt spending/increase taxes

question

if there is a recessionary gap, individuals who believe in stabilization policy and want a larger govt would advocate__________ and those who want a smaller govt would advocate __________

answer

increase govt spending, decrease taxes

question

Automatic stabilizer is a feature of the economy that

answer

reduces its sensitivity to shocks, such as sharp increases or decreases in spending

question

3 goals of macro policy

answer

low inflation low unemployment high growth

question

If individuals with relatively high income had increased personal income tax, how will this change the consumption schedule?

answer

it will shift and become flatter

question

Suppose the US personal income tac was eliminated and replaced with a fixed tax that raised the exact same amount of revenue. the multiplier would be

answer

larger

question

If the government decides to change the level of government spending, what happens to the value of the multiplier?

answer

it does not change

question

Transfer payments are income that is

answer

received but not earned

question

If Congress votes to increase government purchases and at the same time decrease personal income taxes, they

answer

have voted for the proper policy to counteract a recessionary gap.

question

To eliminate an inflationary gap, the aggregate demand curve should

answer

shift outward

question

To eliminate a recessionary gap, the aggregate demand curve should

answer

shift inward

question

A conservative who was opposed to an increase in the size of the government sector but believed in the Keynesian approach to aggregate demand management would most likely favor which of the following expansionary policies?

answer

decrease taxes

question

For conservatives, the United States needs

answer

a smaller public sector and less regulation

question

A proponent of supply-side economics would advocate

answer

reducing corporate income tax

question

One of the objectives of supply-side policies is to

answer

eliminate the trade-off between inflation and unemployment.

question

Critics of supply-side economics argue that a major flaws are

answer

the small magnitude of supply-side effects. the large size of demand-side effects. increased income inequality.

question

Supply-side tax cuts designed to increase investment spending are attractive in theory, but in practice

answer

are less useful because they take a long time to increase the capital stock

question

Which of the following conclusions about supply-side tax initiatives is accepted by most economists?

answer

Tax reductions aimed at stimulating business investment are likely to have a greater impact than tax reductions aimed at getting people to work longer hours or save more.

question

As a general rule, when an income tax is added to the basic macroeconomic model, what happens to the consumption schedule?

answer

it will become flatter

question

If the mpc =.75, and the income tax rate =.2, how much will RGDP change if transfers are increased by $50 billion?

answer

Increase by $75 billion

question

Assume the mpc =.8, and the income tax rate = .25, and there is an inflationary gap of $500 billion. If the government wants to get back to full employment by adjusting direct government spending, how much should it be changed by

answer

decreased by $200 billion

question

what are difficulties of stabilization policy?

answer

the multiplier is uncertain potential RGDP is uncertain Policy often takes effect with a lag Aggregate Demand is always changing

question

Which of the following is true of supply side economics

answer

it tends to affect demand

question

if the government raises taxes, or cuts spending by say $200 billion, the deficit will typically

answer

decrease by less than $200 billion

question

An income tax tends to

answer

reduce the size of the multiplier

question

Tax multiplier

answer

[1/1-mpc]

question

mandatory spending

answer

spending authorized by perminant law that does NOT get voted on each year-- social security, maid, mcare, interest on debt, food stamps

question

discretionary spending

answer

the negotiable part of the budget that gets voted on each year-- national defense, transportation, environmental projects

question

transfer payments

answer

a redistribution of money from the government to individuals

question

recessionary gap graph... when PRGDP is to the _____ of equilibrium

answer

right

question

inflationary gap graph... when PRGDP is to the _____ of equilibrium

answer

left

question

demand side policies

answer

altering spending, taxes, or transferred aimed at affecting the demand side of the economy AD

question

contractionary fiscal policy

answer

decrease govt spending

question

supply side tax cuts

answer

lowering income and capital gain (businesses) taxes aimed at influencing the supply side AS

question

PROBLEMS with implemations

answer

we don't really know what full employment/PRGDP is we dont really know how big the multiplier is govt policy is not the only thing changing timing lags politicians can have other motives

question

stabilization policy: recessionary expansionary stimulus Smaller Govt

answer

Tax Cuts

question

stabilization policy: recessionary expansionary stimulus Larger Govt

answer

Increase Govt Spending

question

stabilization policy: inflationary contractionary austerity smaller govt

answer

decrease govt spending

question

stabilization policy: inflationary contractionary austerity larger govt

answer

Increase in taxes

question

self correcting method works best in _______ gaps

answer

inflationary

question

some say fiscal policy shouldn't be used for stabilization, instead ________ poilicy

answer

Monetary (changing interest rate to get to PRGDP)

question

monetary policy in recession

answer

decrease interest rate

question

monetary policy in inflamatory

answer

increase interest rate

question

itr

answer

interest tax rate

question

g multiplier

answer

[1/1-(1-itr)]

question

T multiplier

answer

=G multiplier - 1 =change in RGDP/ -change in net taxes =net taxes=taxes-transfers ???=change in RGDP/ change in G

question

The banking industry is heavily regulated because

answer

bankers do what is best for their stockholders, not necessarily what is best for the economy.

question

Bankers' business decisions effect the money supply because bankers

answer

have the ability to create money

question

Bank failures in the U.S.

answer

occurred frequently through the 1930s, declined after that time, and became more common in 2008.

question

What is an example of money serving as a medium of exchange?

answer

Marian buys a carbo-loaded drink before a marathon.

question

The primary feature of money is that it serves as

answer

medium of exchange

question

Price levels rarely remain the same. This implies that

answer

money is an imperfect measure for storing value

question

In the modern U.S. economy, most transactions are made with

answer

checking deposits

question

Why are checking account balances included in the M1 definition of the money supply?

answer

They are used to make so many payments

question

The narrowest definition of the money supply, including cash and checking deposits, is known as

answer

M1

question

Liquidity can be defined as the

answer

ease with which an asset can be converted to a spendable asset.

question

Many economists believe that savings accounts should be added to M1 because they

answer

can be transferred quickly into checkable accounts.

question

According to the convention followed in the text, "money" consists all of the following except

answer

credit cards

question

Fractional reserve banking began as a search for

answer

additional profits

question

The early goldsmiths issued money in the form of

answer

receipts for the acceptance of gold deposits

question

If bankers decide to keep a lower fraction of deposits on reserve, the money supply will

answer

increase

question

The objective of bank management is to

answer

strike the appropriate balance between the attraction of bank profits and the need for bank safety.

question

In an economic system with privately owned, profit-maximizing banks, there will always be a difference between

answer

bank profits and macroeconomic objectives

question

The principal innovation that increases the safety of bank deposits is

answer

deposit insurance

question

Which of the following would be an asset to a bank?

answer

cash in the vault a loan to a university student a government security

question

Do bankers create money?

answer

yes through multiple deposit creation

question

If the reserve requirement is 20 percent and a new deposit of $10,000 in cash is made by a customer to their checking account, by how much are excess reserves increased?

answer

$8,000

question

If the required reserve ratio, m, is 20 percent, then the oversimplified money multiplier is

answer

5 (1/.2)=5

question

over simplified multiplier formula

answer

(1/m) x change in reserves

question

The Ponderosa Bank receives a new deposit of $2,500. The reserves requirement is 20 percent. How much can this bank loan out as a result of this deposit?

answer

$2000

question

*****If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?

answer

$20 million

question

One problem for economic stability is that in a period of inflation

answer

banks will be tempted to increase lending in order to increase profits.

question

Rationale for Banking Regulation

answer

banks create money impact change in PL + RGDP tends to amplify recessions and inflation's bank failures harm customers and other bank systematic risk, contagion, too big to fail

question

functions of money

answer

medium of exchange, store value, unit of account

question

ideal properties of money

answer

divisible, uniform and identifiable quality, portable, storable/durable. paper money: commodity, light in weight, convenient, easily divisible, small units

question

fiat money

answer

not backed by any commodity value decreed, exists because people are willing to accept it

question

the two types of govt reported measures of money

answer

M1 and M2

question

M1 consists of

answer

cash (coins and paper), travelers checks, conventional checking accounts, checking in banks and savings institutions narrowest most "liquid" measure

question

M2 consists of

answer

broader, less liquid all of M1 and.... savings accounts, money market and mutual funds <100k

question

reserve requirements

answer

banks must hold x% of deposits on hand (on reserve) US=10%

question

_______ occurs due in part to _______, to prevent this the government instituted _______ which then leads to the problem of ____________.

answer

fractional reserve lending, bank runs, FDIC, moral hazzard

question

the money multiplier estimates are upper bound (a maximum) because

answer

banks hold excess reserves and inflation reduces the multiplier

question

if someone has $9000 in cash in a safe at their home, and deposits it into a checking account at the bank which has a require reserve ratio of 10%, how much does M1 change by?

answer

..

question

If the assets held by a bank have a value of $3 million and the net worth of the company is $.5 million the liabilities of the bank are

answer

..

Macro Economics Exam 3 – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards