07 Feb increase aggregate

ECON312N Principles of Economics Week 8 Quiz Question 1 How do the Fed’s monetary policy actions influence the exchange rate? The Fed influences the exchange rate by changing the U.S. interest rate differential. The Fed influences the exchange rate by conducting transactions in the foreign exchange market. The Fed can influence the exchange rate only if it changes expectations. The Fed? can’t influence the exchange rate because the Fed has no influence on foreign interest rates. Question 2 The Fed’s policy tools include required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures. holding deposits for the U.S. government, reserve requirements, and the discount rate. required reserve ratios, income tax rates, and open market operations. setting regulations for lending standards and extraordinary crisis measures. supervision of the banking system and buying and selling commercial banks. Question 3 The tax multiplier is the magnification effect of a change in taxes on government expenditures. magnification effect of a change in taxes on the budget deficit. magnification effect of a change in taxes on the national debt. magnification effect of a change in taxes on aggregate demand. magnification effect of a change in taxes on aggregate supply. Question 4 The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase? $100,000 $200,000 $70,000 $300,000 $33,333 Question 5 There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations? estimating potential GDP fiscal multiplier shrinking area of lawmaker discretion economic forecasting lawmaking time lag Question 6 Using the data in the above table, if potential GDP for this economy is $25 billion, then in order to restore full employment, the federal funds rate can be lowered so that consumption expenditure and investment increase, though net exports decrease. lowered so that government expenditure on goods and services increase. lowered so that consumption expenditure, investment, and net exports increase. raised so that net exports increase. raised so that consumption expenditure, investment, and net exports increase. Question 7 The balanced budget multiplier is based on the point that the ________ multiplier is larger than the ________ multiplier so that an equal increase in government expenditure and taxes ________ aggregate demand. expenditure; tax; decreases tax; expenditure; does not change tax; expenditure; decreases expenditure; tax; does not change expenditure; tax; increases Question 8 When the government’s outlays equal its tax revenue, the budget has a deficit and the national debt is increasing. has a surplus and the national debt is increasing. has a surplus and the national debt is decreasing. has a deficit and the national debt is decreasing. is balanced and the national debt is not changing. Question 9 What the U.S. jobs report means for the Fed Despite U.S. job creation exceeding forecasts in July, experts believe that with weak output growth, the Fed will not raise the interest rate until after the U.S. presidential election. Source: Financial Times, August 5, 2016 Explain why the Fed might be cautious about raising interest rates despite strong jobs growth. The Fed might be cautious about raising interest rates despite strong jobs growth because _______. although raising interest rates encourages further job? growth, it also creates inflation raising interest rates will slow real GDP growth even? further, decrease jobs? growth, and at the same time create inflation with slow real GDP? growth, raising interest rates will slow real GDP growth even further and decrease jobs growth raising interest rates will increase foreign? investment, and domestic investment is better for the U.S. economy Question 10 Clinton and Trump on fiscal policy In the 2016 Presidential election campaign, both Hillary Clinton and Donald Trump committed to big government infrastructure spending and tax cuts. Source: The Wall Street Journal, July 27, 2016 Consider an increase in infrastructure spending and a tax cut of the same magnitude. What policy will change aggregate demand the most: an increase in infrastructure spending or a cut in taxes? A combination of an increase in infrastructure spending and an equal cut in taxes Neither an increase in infrastructure spending nor a cut in taxes will influence aggregate demand A cut in taxes An increase in infrastructure spending Question 11 During the Great Depression, real GDP decreased, unemployment soared, and the inflation rate was negative. Which would have been the appropriate federal government policy combination to improve economic performance? decrease government expenditure, increase taxes, decrease the quantity of money increase government expenditure, decrease taxes, increase the quantity of money increase government expenditure, decrease taxes, decrease the quantity of money do not change government expenditures or taxes , increase the quantity of money decrease government expenditures, increase taxes, do not change the quantity of money Question 12 The money multiplier is equal to? ______. monetary base divided by quantity of money quantity of money divided by monetary base change in monetary base divided by change in the quantity of money the Federal Funds rate Question 13 If the economy is in an equilibrium with real GDP less than potential GDP, a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services. raising; not changing cutting; decreasing cutting; increasing raising; decreasing raising; increasing Question 14 Control of monetary policy rests with Congress. the President. the Federal Reserve. the Comptroller of the Currency. the U.S. Treasury. Question 15 To fight unemployment and close a recessionary? gap, the Fed? ________. stimulates aggregate demand by lowering the federal funds? rate, which increases the quantity of money increases? employment, which increases real GDP increases bank? reserves, which banks use to make new loans to? businesses, which increases aggregate supply stimulates aggregate supply by lowering the federal funds? rate, which increases potential GDP Question 16 The desired reserve ratio is 3 percent. Robert deposits $3,000 in Bank America. Bank America keeps its minimum desired reserves and lends the excess to Fredrica. How much does Bank America lend to Fredrica? $300 $2,700 $3,000 $900 $2,910 Question 17 The Federal Reserve fears that the United States economy is growing too slowly and is stuck in a recession. To move the economy back to its potential GDP, the most likely policy action for the Fed is to ________ the federal funds and thus ________ . lower; increase aggregate supply lower; increase aggregate demand raise; increase aggregate demand raise; decrease aggregate demand lower; decrease aggregate supply Question 18 Explain how aggregate demand changes when the government increases both expenditures on goods and services and taxes by $100 billion. Aggregate demand ______ because the increase in government expenditure has ______ effect on aggregate demand than the effect of the tax increase. ?increases; a smaller ?decreases; a larger ?increases; a larger ?decreases; a smaller Question 19 An example of automatic fiscal policy is Congress passing a tax rate reduction package. the federal government expanding spending at the Department of Education. a change in taxes that has no multiplier effect. expenditure for unemployment compensation increasing as economic growth slows. the Federal Reserve reducing interest rates as economic growth slows. Question 20 When the Fed ________ securities in an open market operation, banks’ reserves ________, and therefore lending ________. sells; decrease; increases buys; do not change; does not change buys; increase; increases buys; decrease; decreases sells; increase; increases

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