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ECON312N Principles of Economics Week 8 Homework Question 1 When the government’s expenditures exceed its tax revenue, the budget has a deficit and the national debt is decreasing. None of the above because by law the government’s expenditures cannot exceed its tax revenue. has a deficit and the national debt is increasing. has a surplus and the national debt is increasing. is balanced and the national debt is increasing. Question 2 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. raised so that net exports increase. raised so that consumption expenditure, investment, and net exports increase. lowered so that consumption expenditure, investment, and net exports increase. lowered so that government expenditure on goods and services increase. 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 aggregate demand. magnification effect of a change in taxes on aggregate supply. magnification effect of a change in taxes on the budget deficit. magnification effect of a change in taxes on the national debt. Question 4 Control of monetary policy rests with Congress. the U.S. Treasury. the Federal Reserve. the Comptroller of the Currency. the President. Question 5 When the Fed ________ securities in an open market operation, banks’ reserves ________, and therefore lending ________. buys; do not change; does not change sells; increase; increases sells; decrease; increases buys; increase; increases buys; decrease; decreases Question 6 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; decrease aggregate supply lower; increase aggregate supply lower; increase aggregate demand raise; increase aggregate demand raise; decrease aggregate demand Question 7 The Fed’s policy tools include holding deposits for the U.S. government, reserve requirements, and the discount rate. required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures. 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 8 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? $900 $2,910 $2,700 $3,000 $300 Question 9 To fight unemployment and close a recessionary? gap, the Fed? ________. stimulates aggregate supply by lowering the federal funds? rate, which increases potential GDP increases? employment, which increases real GDP stimulates aggregate demand by lowering the federal funds? rate, which increases the quantity of money increases bank? reserves, which banks use to make new loans to? businesses, which increases aggregate supply Question 10 There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations? lawmaking time lag estimating potential GDP economic forecasting fiscal multiplier shrinking area of lawmaker discretion Question 11 When the economy is in a recession, ________ taxes decrease while ________ spending increases and, as a result of this automatic fiscal policy, aggregate demand ________. discretionary; needs-tested; increases discretionary; induced; is not changed induced; discretionary; is not changed needs-tested; induced; decreases induced; needs-tested; increases Question 12 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? Neither an increase in infrastructure spending nor a cut in taxes will influence aggregate demand A cut in taxes A combination of an increase in infrastructure spending and an equal cut in taxes An increase in infrastructure spending Question 13 A central bank is? ______. The? ______ is the central bank of the United States. a government department that regulates financial institutions anda ? markets; Federal Reserve Bank of New York a commercial bank that provides banking services to the federala ? government; Federal Reserve System a private bank that provides public service to a centrala ? government; Bank of America a public authority that provides banking services to banks and regulates financial institutions anda ? markets; Federal Reserve Bank of New York a public authority that provides banking services to banks and governments and regulates financial institutions and? markets; Federal Reserve System Question 14 The functions of money are medium of exchange, the ability to buy goods and services, and the ability to pay off debts. medium of exchange, unit of account, and store of value. store of value, use as a barter mechanism, and unit of account. credit cards, checking accounts, currency, and coins. medium of exchange, the ability to buy goods and services, and checking accounts. Question 15 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 deficit and the national debt is decreasing. has a surplus and the national debt is decreasing. is balanced and the national debt is not changing. Question 16 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 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 raising interest rates will increase foreign? investment, and domestic investment is better for the U.S. economy with slow real GDP? growth, raising interest rates will slow real GDP growth even further and decrease jobs growth Question 17 Suppose the currency drain ratio is 25 percent and the desired reserve ratio is 20 percent. The money multiplier equals 3.00. 2.00. 4.00. 5.42. 2.78. Question 18 The? Fed’s “dual? mandate” is to achieve? ________. zero unemployment and a stable means of payment a government budget surplus and low interest rates a stable quantity of money and stable prices low inflation and maximum employment Question 19 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. tax; expenditure; decreases expenditure; tax; increases expenditure; tax; decreases expenditure; tax; does not change tax; expenditure; does not change Question 20 How do the Fed’s monetary policy actions influence the exchange rate? The Fed can influence the exchange rate only if it changes expectations. The Fed influences the exchange rate by conducting transactions in the foreign exchange market. The Fed? can’t influence the exchange rate because the Fed has no influence on foreign interest rates. The Fed influences the exchange rate by changing the U.S. interest rate differential. Question 21 An economic expansion leads to ________ needs-tested spending and ________ induced taxes. higher; lower lower; no change in lower; lower lower; higher higher; higher Question 22 An example of automatic fiscal policy is a change in taxes that has no multiplier effect. the Federal Reserve reducing interest rates as economic growth slows. the federal government expanding spending at the Department of Education. expenditure for unemployment compensation increasing as economic growth slows. Congress passing a tax rate reduction package. Question 23 A decrease in tax revenues in a recession is? _______. Additional government expenditure to upgrade highways is? ______. neither automatic nor discretionary fiscal? policy; discretionary fiscal policy automatic fiscal? policy; discretionary fiscal policy discretionary fiscal? policy; automatic fiscal policy automatic fiscal? policy; automatic fiscal policy Question 24 The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase? $70,000 $33,333 $200,000 $100,000 $300,000 Question 25 The money multiplier is equal to? ______. (Check all that apply.) change in monetary base divided by change in the quantity of money change in the quantity of money divided by change in monetary base quantity of money divided by monetary base monetary mo base divided by quantity of money Question 26 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. cutting; decreasing raising; increasing raising; not changing raising; decreasing cutting; increasing Question 27 Ignoring any supply-side effects, to close a recessionary gap of $100 billion with a government expenditure multiplier of 5, the government could raise taxes by more than $20 billion. decrease government expenditure on goods and services by $20 billion. increase government expenditure on goods and services by $20 billion. increase government expenditure on goods and services by $100 billion. raise taxes by $100 billion. Question 28 Explain how aggregate demand changes when the government increases both expenditure 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 larger ?decreases; a smaller ?increases; a smaller ?decreases; a larger Question 29 The national debt is the amount by which government outlays exceed tax revenue in a given year. of all future entitlement spending. of government outlays summed over time. by which government tax revenue exceed outlays in a given year. of debt outstanding that arises from past budget deficits. Question 30 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? do not change government expenditures or taxes , increase the quantity of money increase government expenditure, decrease taxes, increase the quantity of money increase government expenditure, decrease taxes, decrease the quantity of money decrease government expenditures, increase taxes, do not change the quantity of money decrease government expenditure, increase taxes, decrease the quantity of money

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