ECO372T Week 5 Apply Fiscal and Monetary Policy SCORE 98 PERCENT

Question 1

The graph below depicts an economy where an increase in aggregate demand has caused inflation. The economy's current level of real GDP (Y₂) is above its long-run equilibrium. This is illustrated by the long-run aggregate supply curve (LRAS) and a price level (P₂) above the equilibrium value of P_e. 

Which of the following is an example of an automatic stabilizer that would help this economy move toward full employment again?

multiple choice

    A reduction in the average tax rate

    An increase in the average tax rate

    A decrease in government purchases

    A reduced need for government transfer payments

 

Question 2

 For each of the following scenarios, determine which time lag is most likely to result when designing and implementing fiscal policy.

 

 

 

a. The separation of power demonstrated between the legislative and executive branches of government combined with strong partisanship attitude among our elected politicians.

 

multiple choice 1

    Recognition lag

    Legislative lag

    Implementation lag

    All of these lags

 

b. The fact that it takes economists working for the National Bureau of Economic Research months to declare the dates of peaks and troughs.

 

multiple choice 2

    Recognition lag

    Legislative lag

    Implementation lag (Incorrect)

    All of these lags

 

c. The time it takes to design and build new infrastructure after these projects have been passed by the legislature.

 

multiple choice 3

    Recognition lag  (Incorrect)

    Legislative lag

    Implementation lag

    All of these lags

 

Question 3

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)

 

Multiple Choice

    contractionary fiscal policy.

    supply-side fiscal policy.

    nondiscretionary fiscal policy.

    expansionary fiscal policy.

 

Question 4

When changes in taxes and government purchases occur in the economy without explicit action by Congress, such changes are referred to as

    implicit stabilization.

    cyclical stabilization.

    automatic stabilizers.

    discretionary fiscal policy.

 

Question 5

If taxes and government expenses did not vary with income, then income would

Multiple Choice

    be less stable.

    be more stable.

    be closer to potential income.

    not change.

 

Question 6

When the federal government changes purchases and/or taxes to stimulate the economy or rein in inflation, such policy is

 

Multiple Choice

    active monetary policy.

    discretionary fiscal policy.

    automatic fiscal policy.

    active federal policy.

 

Question 7

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system

 

Multiple Choice

    increases crowding out in the economy.

    serves as an automatic stabilizer for the economy.

    offsets the timing problem for fiscal policy.

    decreases real interest rates in the economy.

 

Question 8

When the federal government cuts taxes and increases purchases to stimulate the economy during a period of recession, such actions are designed to be

 

Multiple Choice

    expansionary.

    contractionary.

    passive.

    automatic.

 

Question 9

Due to automatic stabilizers, when the nation's total income rises, government transfer payments

 

Multiple Choice

    and tax revenues increase.

    increase and tax revenues decrease.

    decrease and tax revenues increase.

    and tax revenues decrease.

 

Question 10

Which of the following is an example of built-in stability? As real GDP decreases,

 

Multiple Choice

    income tax revenues decrease and transfer payments increase.

    income tax revenues and transfer payments both decrease.

    income tax revenues increase and transfer payments decrease.

    income tax revenues and transfer payments both increase.

 

Question 11

One timing problem in using fiscal policy to counter a recession is the "legislative lag" that occurs between the

 

Multiple Choice

    time fiscal action is taken and the time that the action has its effect on the economy.

    start of the recession and the time it takes to recognize that the recession has started.

    time the need for the fiscal action is recognized and the time that the action is taken.

   start of a predicted recession and the actual start of the recession.

 

Question 12

When the federal government uses taxation and purchasing actions to stimulate the economy it is conducting

 

Multiple Choice

 

    monetary policy.

    employment policy.

    incomes policy.

    fiscal policy.

 

Question 13

Using fiscal policy to stabilize the economy is difficult because

 

Multiple Choice

    there are time lags involved in the use of fiscal policy.

    potential income is known.

    the effects of policy changes are known with certainty.

    the size of the government debt doesn't matter.

 

Question 14

Fiscal policy is enacted through changes in

 

Multiple Choice

    the supply of money and foreign exchange.

    interest rates and the price level.

    unemployment and inflation.

    taxation and government purchases.

 

Question 15

 

The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n)

 

Multiple Choice

 

    recognition lag.

    budget lag.

   implementation lag.

    legislative lag.

 

Question 16

Choose the best response for each of the following statements.

a. When the Federal Reserve makes an open market purchase, the Fed:

multiple choice

    sells bonds to the public, which decreases the money supply.

    buys bonds from the public, which increases the money supply.

    sells bonds to the public, which increases the money supply.

    buys bonds from the public, which decreases the money supply.

 

 

 

b. If the Fed wants to increase interest rates, it should make an open market sale .

 

     This would decrease  the money supply and achieve the increase in interest rates.

 

Question 17

a. The discount rate is the:

 

multiple choice 1

    interest rate at which banks can borrow reserves from the Federal Reserve.

    interest rate at which banks can borrow reserves from other banks.

    lowest interest rate that banks can charge for loans to their most creditworthy customers.

    lowest interest rate that banks can charge for lending reserves to other banks or financial institutions.

 

 

 

b. If the Fed were to decrease the discount rate, banks will borrow:

 

multiple choice 2

    more reserves, causing a decrease in lending and the money supply.

    more reserves, causing an increase in lending and the money supply.

    fewer reserves, causing a decrease in lending and the money supply.

    fewer reserves, causing an increase in lending and the money supply.

 

Question 18

The interest rate that the Fed charges on loans made directly to banks is called _____.

 

Multiple Choice

    the prime rate

    interest on reserves

    the federal funds rate

    the discount rate

 

Question 19

Economic investment refers to _____.

Multiple Choice

    postponing purchases of goods and services.

    making new additions to a firm's stock of capital.

    selling a financial asset for a gain.

    buying a financial asset for a gain.

 

Question 20

An increase in the money supply, all else held constant, usually _____.

Multiple Choice

    decreases the interest rate and decreases aggregate demand

    decreases the interest rate and increases aggregate demand

    increases the interest rate and decreases aggregate demand

    increases the interest rate and increases aggregate demand

 

Question 21

If the Fed sells government securities to the general public in the open market, the _____.

 

Multiple Choice

 

    Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase commercial bank reserves at the Fed

    public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will decrease their reserves at the Fed

    public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will increase their reserves at the Fed

    Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at

 

Question 22

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

 

Multiple Choice

    The federal funds rate

    The reserve requirement

    The discount rate

    Open-market operations

 

Question 23

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _____.

Multiple Choice

    short-term rate

    federal funds rate

    discount rate

    prime rate

 

Question 24

The purchase and sale of government securities by the Fed is called _____.

Multiple Choice

    federal funds market

    money market transactions

    term auction facility

    open market operations

 

Question 25

The purpose of expansionary monetary policy is to increase _____.

Multiple Choice

    real GDP

    the GDP gap

    interest rates

    the inflation rate

 

Question 26

The discount rate is the interest _____.

 

Multiple Choice

 

    rate at which commercial banks lend to the public

    yield on long-term government bonds

    rate at which the Federal Reserve Banks lend to commercial banks

    rate at which the central banks lend to the U.S. Treasury

 

Question 27

Financial markets pay close attention to changes in the federal funds rate because these changes _____.

Multiple Choice

    affect other interest rates in the economy

    indicate commercial bank lending policies

    directly affect the interest payments on the national debt

    directly affect a large volume of loans

 

Question 28

The Fed directly sets _____.The Fed directly sets _____.

Multiple Choice

    neither the federal funds rate nor the prime rate

    the prime rate but not the federal funds rate

    the discount rate and the prime rate

    both the federal funds rate and the prime rate

 

Question 29

Which of the following statements is true?

Multiple Choice

 

    The Federal Reserve does not set the federal funds rate, but it influences it through the use of its open-market operations.

    The Federal Reserve sets the federal funds rate.

    The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.

 

    The Federal Reserve sets the target for the federal funds rate, and then uses the reserve requirement to push banks toward that target.

 

Question 30

When the Federal Reserve Banks decide to buy government bonds from banks and the public, the supply of reserves in the federal funds market _____.

Multiple Choice

    increases and the federal funds rate increases

    decreases and the federal funds rate increases

    decreases and the federal funds rate decreases

    increases and the federal funds rate decreases