What is the current share in GDP of the federal debt held by the public?
About 70%
Why is it useful to think of the federal debt held by the public as a share of GDP?
It is a measure of the ability to raise taxes in order to pay off the debt�if the debt is a small percentage of GDP it will be relatively easy to raise taxes to pay it off
What three general approaches does the CBO outline as the ways to address the size of the U.S. government budget problem? Which approach, or combination of approaches, do you prefer? Why?
Increase taxes, cut entitlements to the elderly, cut the role of government in other areas of the economy
What are the two basic reasons inside lags occur?
Inside lags occur because it takes time for policy makers to identify and recognize a problem in the economy, and once the problem has been recognized it takes more time for policy makers to take corrective actions.
What is the federal government's largest source of revenue?
Individual Income taxes
Which component of federal spending is included in GDP?
Government purchases
When the government conducts activist fiscal policy, what type of spending does it usually use?
Discretionary
An increased federal budget deficit resulting from a recession can actually help stabilize an economy, because corporate profits tend to fall in a recession which, in turn, results in ________ corporate taxes and ________.
lower; fewer spending cuts for businesses
The Laffer curve illustrates that
high tax rates could lead to lower tax revenues if economic activity is severely discouraged.
What is the "security life cycle" (aka "security food chain") for a mortgage-backed security?
Bank makes a loan for a house => loan then sold by the bank to an investment bank =>bundled into a CDO and sold to investors (1/3 point for each link, don't need to say CDO but do need to indicate it is bundled with other mortgages)
Explain why a CDS might in some cases decrease the risk of a financial crisis, and in other cases increase that risk.
A CDS reduces the risk of owning assets because if loans aren't paid back the CDS-owner gets an insurance payment, thus guaranteeing a return one way or the other. (Or they could argue that it reduces the risk of selling an asset (if I sell you an asset t
Do you think that CDS's should be illegal? Legal but regulated? Why?
that a naked CDS should be prohibited, or that only private citizens may hold them (not banks, investment banks, or pensions, etc), or that we should let the market work and let the buyer beware because government is corrupt and can't be trusted to regula
List four of the Federal Reserve's key functions.
The Fed supplies currency to the economy. The Fed provides a system of check collecting and clearing. The Fed holds reserves from banks and regulates banks. The Fed conducts monetary policy.
Who is the current chairman of the U.S. Federal Reserve Board?
Ben Bernanke
Money that has no intrinsic value and is created by a government decree is called
Fiat Money
Checking account balances are included in
Both m1 and m2
The money multiplier is equal to
1/(reserve ratio)
Draw an aggregate supply and aggregate demand graph which shows the economy producing an output which exceeds potential output in the short run. Describe the adjustments that will occur to bring the economy back to equilibrium (explain the reason for any
In the short run, the economy is at the intersection of AD and AS0, with an output of y0. if the level of output exceeds the level of potential output (a boom economy), the unemployment level will be low. As firms compete for workers and for raw materials
Assume exports (X) increase. Explain why the total shift in AD may be larger than the initial change in X. What does the size of the shift depend on? Explain
If the change in X affects incomes, then there may be a second change in C spending (1/2 point), according to the size of the marginal propensity to consume out of temporary changes in income (1/2 point) . The total change in AD will be the sum of the cha
Explain how the wealth effect can affect aggregate demand.
As price levels change, the purchasing power of money changes. If price levels decrease, people holding money find they are better off, and will spend more on additional goods and services. The increase in consumer spending increases aggregate demand. If
21. The economic theory that emphasizes the role of difficulties in coordinating economic affairs as a cause of economic fluctuations is known as
Keynesian economics