According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
a planned increase in the budget deficit
if the government owes $10.0 trillion and then borrows $700 billion more this year, this leads to
a debt of $10.7 trillion and a deficit of $700 billion
the Keynesian analysis of fiscal policy implies that
the federal budget should be used to maintain aggregate demand at a level consistent with full employment.
When the unemployment rate is low, the impact of additional spending on real output will
be smaller than when the unemployment rate is high
According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?
a budget surplus
Which of the following is a major deficiency of fiscal policy as a stabilization tool?
Both political and economic factors make it unlikely that changes in fiscal policy will be timed correctly
Long lags make discretionary policy less effective because
by the time the impact of a policy is felt, the problem may have been corrected by market forces
The crowding-out model implies that restrictive fiscal policy will
reduce real interest rates.
The crowding-out effect refers to the tendency of
the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending
Which of the following most accurately indicates the political incentive to spend and/or tax?
Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes
According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?
Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery
Expansionary fiscal policy during a recession is most effective when it:
directs the economy to full employment and resources into productive projects.
Which of the following best explains why high marginal tax rates retard output?
High marginal tax rates reduce the incentive to earn, invest, and use resources efficiently
If the government cuts the tax rate, workers get to keep
more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right
Though many assets can be used as a store of value, money is a particularly attractive method to store value because:
it is the most liquid of all assets.
Which of the following assets can a commercial bank count as reserves?
its vault cash and deposits with the Fed
If a customer deposits $1,000 cash into her checking account, the bank's:
assets and liabilities both rise by $1,000
You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?
There is no change in the money supply, and the reserves of your bank decline
If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will:
reduce the size of the deposit expansion multiplier.
Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?
the reserve requirements mandated by the Fed
When the Federal Reserve System wants to increase the money supply, what does it typically do?
It purchases U.S. government securities
Which of the following indicates the primary mechanism by which the money supply expands?
The Fed purchases additional bonds, which increases the reserves available to the banking system
The major overall purpose of the Federal Reserve System is to:
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy
If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably:
buying government securities from the public
If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could:
increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans
If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should ~
decrease government spending and/or raise taxes.
Which of the following best expresses the central idea of countercyclical fiscal policy?
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
Why does a tax change affect aggregate demand?
A tax change alters disposable income and consumption spending.
In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates,
there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.
Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?
the crowding-out effect
Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that
you cannot have a strong economy if all or most households are spending just about everything they earn
Within the framework of the AD-AS model, an increase in savings by households will ~
increase the supply of loanable funds and reduce interest rates.
Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if ~
the higher taxes cause workers to work less.
Supply-side economics stresses that high marginal tax rates ~
discourage people from working harder and using their resources productively.
If you deposit $100 of currency into a demand deposit at a bank, this action by itself ~
does not change the money supply.
The legal requirement that commercial banks hold reserves equal to some fraction of their deposits ~
limits the ability of banks to expand the money supply by extending additional loans.
Which of the following will cause the U.S. money supply to expand?
a commercial bank uses excess reserves to extend a loan to a customer
Which of the following would cause the money supply in the United States to expand?
a decrease in reserve requirements
An increase in the discount rate impacts the money supply because it ~
reduces the incentive of commercial banks to borrow from the Federal Reserve.
Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?
sell some of its holdings of government bonds
When the Fed sells Treasury Bonds on the open market, it will tend to ~
decrease the money supply and raise interest rates
If the economy is experiencing less than full-employment, the Keynesian model recommends that the government?
undertake expansionary fiscal policy to stimulate aggregate demand
Suppose long-run equilibrium is present and the government budget is in balance. Which of the following would be most likely to occur if the economy falls into a recession?
a budget deficit
According to the Keynesian view, if real GDP is slowing and the economy appears to be headed for a recession, a reduction in tax rates is?
highly appropriate because it will stimulate aggregate demand and, thereby, help to strengthen the economy
Which of the following best illustrates the use of discretionary countercyclical fiscal policy?
Congress passes a bill authorizing $100 billion in additional spending when it receives news of a deepening recession.
If a budget surplus leads to a decrease in U.S. real interest rates, the lower rates will tend to cause?
the dollar to depreciate.
The political incentive structure tends to?
encourage budget deficits during both recessions and expansions.
Historically, Keynesian economists have argued that government spending will stimulate aggregate demand more than tax cuts because?
all of the spending will add to aggregate demand, but a portion of the tax cut will be saved
Which of the following provides the best explanation of why money is valuable?
Money is valuable because it is scarce relative to the demand for the services it provides
Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will?
increase and the money supply will eventually increase
Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?
sell some of its holdings of government bonds
Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?
buy U.S. securities
Suppose the Fed sells $100 million of U.S. securities to the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact o
$500 million decrease
If Congress votes to increase government purchases and at the same time decrease personal income taxes, they:
have voted for the proper policy to counteract a recession
The crowding-out effect refers to the tendency of:
have voted for the proper policy to counteract a recession.
Both the crowding-out and new classical models indicate that:
there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand
Which of the following attributes of fiscal policy will most likely be stressed by a proponent of supply-side economics?
the impact of marginal tax rates on the supply and productivity of resources
Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank?
There is no change in the supply of money; your bank's excess reserves are reduced by $800
the Fed wanted to expand the money supply as part of an antirecession strategy, it could :
decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
If the Fed wanted to expand the money supply as part of an antirecession strategy, it could:
buy U.S. securities on the open market.
If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should ~
decrease government spending and/or raise taxes.
Which of the following best expresses the central idea of countercyclical fiscal policy?
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
Why does a tax change affect aggregate demand?
A tax change alters disposable income and consumption spending.
In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates,
there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.
Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?
the crowding-out effect
Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that
you cannot have a strong economy if all or most households are spending just about everything they earn
Within the framework of the AD-AS model, an increase in savings by households will ~
increase the supply of loanable funds and reduce interest rates.
Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if ~
the higher taxes cause workers to work less.
Supply-side economics stresses that high marginal tax rates ~
discourage people from working harder and using their resources productively.
Though many assets can be used as a store of value, money is a particularly attractive method to store value because
it is the most liquid of all assets.
If you deposit $100 of currency into a demand deposit at a bank, this action by itself ~
does not change the money supply.
The legal requirement that commercial banks hold reserves equal to some fraction of their deposits ~
mits the ability of banks to expand the money supply by extending additional loans.
Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?
the reserve requirements mandated by the Fed
Which of the following will cause the U.S. money supply to expand?
a commercial bank uses excess reserves to extend a loan to a customer
The major overall purpose of the Federal Reserve System is to ~
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy
Which of the following would cause the money supply in the United States to expand?
a decrease in reserve requirements
An increase in the discount rate impacts the money supply because it ~
reduces the incentive of commercial banks to borrow from the Federal Reserve.
Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?
sell some of its holdings of government bonds
When the Fed sells Treasury Bonds on the open market, it will tend to ~
decrease the money supply and raise interest rates
Which one of the following is an area of agreement among modern macroeconomists with regard to the use of fiscal policy?
It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability.
One advantage of a money system compared to a barter system is that :
money is more efficient
The immediate effect of a member bank's sale of U.S. government securities to the Fed is :
an increase in that bank's excess reserves
Government spending programs that create jobs are often popular because :
the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible.
If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments? :
Loans and investments generally earn more interest income for the banks than excess reserves.
If the Fed lends to member banks, what happens to reserves and the money supply? :
Both Increase
Modern bankers :
hold only a fraction of their assets in the form of reserves against their deposits.