Final Exam Review Flashcards by Donny Geisler

The vertical axis in the AD-AS model shows:

The economy’s inflation rate

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The horizontal axis in the AD-AS model shows:

The economy’s real GDP growth rate

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The economy’s normal, long-run growth rate is shown in the AD-AS model as:

The vertical LRAS curve

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The AD curve is:

A. The combination of inflation rates and real growth rates that add up to a constant amount

B. Horizontal at the economy’s long-run inflation rate

C. The combination of money and velocity growth rates that add up to a constant amount

D. Vertical at the economy’s long-run real GDP growth rate

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The combination of inflation and real growth shown by the AD curve give:

A. The same level of money supply growth

B. The same level of inflation

C. The same level of nominal GDP growth

D. The same level of real GDP growth

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The AD curve will shift when there is a change in:

A. The money growth rate or the velocity growth rate

B. The inflation rate or the money growth rate

C. The real growth rate or the inflation rate

D. The velocity growth rate or the real growth rate

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If the AD curve shifts to the left as a result of a decrease in the money supply growth rate:

A. The economy will permanently depart from its long-run growth rate

B. The economy will temporarily depart from its long-run inflation rate

C. The economy will temporarily depart from its long-run growth rate

D. The economy will adjust immediately and never depart from its long-run growth rate

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A decrease in the growth rate of the money supply causes a short-run departure from the long-run equilibrium because:

prices and wages are sticky

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The position of the SRAS curve depends on:

The expected rate of inflation

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Economic models like the AD-AS model tell us:

A. What to expect if we know what is happening

B. Exactly what is happening

C. How to determine which economic variables are changing

D. Nothing useful about the real world

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The aggregate demand curve shows combinations of:

inflation and real GDP growth

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What do the points on a particular AD curve have in common?

A. a specified rate of spending growth

B. a specified rate of inflation

C. a specified rate of money supply growth

D. a specified rate of real GDP growth

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Suppose the growth rate of the money supply is 5% per year and the velocity of money is constant. In this case:

A. neither the inflation rate nor the real growth rate can exceed 5%

B. the sum of inflation and the real growth rate must be 5%

C. inflation and the real growth rate must both be 5%

D. the difference between inflation the real growth rate must be 5%

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If the growth rate of the money supply were 4% and the growth rate of the velocity of money were 2%, then which of the following could be a point on the AD curve?

A. inflation = 6% and real growth = 6%

B. inflation = 4% and real growth = 4%

C. inflation = 2% and real growth = 2%

D. inflation = 3% and real growth = 3%

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Another way to describe the growth rate of spending is:

the growth rate of nominal GDP

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Which of the following is correct?

A. Nominal GDP growth + inflation = real GDP growth

B. nominal GDP growth + real GDP growth = inflation

C. nominal GDP growth = real GDP growth - inflation

D. nominal GDP growth = inflation + real GDP growth

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An increase in the growth rate of nominal GDP would be displayed in our model as:

A. the AD curve becoming flatter

B. the AD curve becoming steeper

C. a parallel shift of the AD curve inward

D. a parallel shift of the AD curve outward

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According to the AD model, a change in the growth rate of spending, or nominal GDP, can come from:

A. changes in the growth rate of the velocity of money or changes in the growth rate of real GDP

B. changes in the growth rate of the money supply or changes in the growth rate of the velocity of money

C. changes in interest rates or changes in the growth rate of the money supply

D. changes in the growth rate of real GDP or changes in inflation

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The key to a country’s economic growth is combing ___ with ___.

A. human and physical capital; ideas and good institutions

B. human capital; physical capital

C. legal institutions; cultural institutions

D. ideas; good institutions

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Every economy has a(n) ___ given by the fundamental factors of growth.

A. actual inflation rate

B. actual growth rate

C. potential inflation rate

D. potential growth rate

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Do any of the fundamental factors depend on the rate of inflation?

A. yes, but only in the long run

B. no, not even in the short run

C. yes, both in the short run and the long run

D. no, at least not in the long run

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The LRAS curve shows:

A. the economy’s actual growth rate whether things are going well or not

B. the economy’s actual inflation rate whether things are going well or not

C. the economy’s potential inflation rate if all is going well

D. the economy’s potential growth rate if all is going well

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The LRAS curve is:

A. a vertical line

B. a downward-sloping line

C. an upward-sloping line

D. a horizontal line

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What other name describes the economy’s long-run potential growth rate?

Solow growth rate

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Real shocks to one area of the economy: ## Footnote A. always become weaker as they spread to other areas of the economy B. generally remain isolated to that area of the economy C. can cause nominal shocks to other areas of the economy D. can be amplified and transmitted to other areas of the economy

Wages that are "sticky": ## Footnote A. are stuck where they are and fail to adjust downwards in a recession B. have not changed, in real terms, for decades C. are pegged to other variables, such as product prices D. pull other prices up or down with them when they change

Sticky wages: ## Footnote A. slow the process of reducing inflation B. speed the recovery process after a recession C. slow the recovery process after a recession D. speed the process of reducing inflation

As a result of "money illusion," people: ## Footnote A. tend to be more pleased with an increase in their real wage than by an increase in their nominal wage B. tend to be more upset by a decrease in their real wage than by a decrease in their nominal wage C. tend to be more upset by an increase in their nominal wage than by a decrease in their real wage D. tend to be more upset by a decrease in their nominal wage than by a decrease in their real wage

Why don't firms want to cut nominal wages?

Because they don't want to decrease worker morale

Why is price inflation sometimes good in a recession? ## Footnote A. price inflation makes it easier for real wages to fall B. price inflation makes it harder for real wages to rise C. price inflation makes it easier for real wages to rise D. price inflation makes it harder for real wages to fall

If prices were rising at 5% per year during a recession, which of the following responses from firms would help facilitate the economic recovery, protect worker morale, AND reduce the firm's real labor costs? ## Footnote A. a nominal wage increase of 5% B. a nominal wage increase of 7% C. a nominal wage decrease of 1% D. a nominal wage increase of 3%

Wages for some workers do fall during a recession, but it is often: ## Footnote A. only after the worker receives an annual performance evaluation B. only after the worker is fired and gets rehired elsewhere at a lower wage C. too small of a wage decrease to contribute to economic recovery D. only after the worker's current contract expires

Sticky wages: ## Footnote A. speed economic recoveries and decrease the costs that unemployed workers bear B. slow economic recoveries and increase the costs that unemployed workers bear C. slow economic recoveries but decrease the costs that unemployed workers bear D. speed economic recoveries but increase the costs that unemployed workers bear

In the long-run version of the AD/AS model, a shift in the AD curve: ## Footnote A. can change neither the real growth rate nor the inflation rate B. can change the inflation rate as well as the real growth rate C. can change the real growth rate, but not the inflation rate D. can change the inflation rate, but not the real growth rate

Which of the following is the dynamic version of the quantity theory of money? ## Footnote A. money supply + velocity = inflation + real growth B. growth in the money supply - inflation = growth in the velocity of money - real growth C. money supply x velocity = price level x real GDP D. growth in the money supply + growth in the velocity of money = inflation + real growth

If inflation is slow to change after an increase in the growth rate of spending, then: ## Footnote A. interest rates must increase B. interest rates must decrease C. real growth must increase D. real growth must decrease

The reason that changes in spending don't immediately flow into changes in inflation is that:

price and wages are sticky

An increase in spending increases nominal and real wages, but as prices rise: ## Footnote A. both nominal and real wages begin to rise B. neither nominal nor real wages are affected C. real wages begin to fall D. nominal wages begin to fall

The SRAS curve is: ## Footnote A. a vertical line that intersects the AD curve but not the long-run AS curve B. a horizontal line that intersects the AD curve and the LRAS curve C. an upward-sloping curve that intersects the AD curve and the LRAS curve D. an upward-sloping curve located to the left of the LRAS curve

What shifts the SRAS curve? ## Footnote A. a change in the expected level of real growth B. a change in the actual rate of inflation C. a change in the actual level of real growth D. a change in the expected rate of inflation

How do we show the short-run impact of an increase in spending growth in our AD/AS curve?

* AD curve shifts to the right * inflation and real growth both increase along SRAS curve

How does the AD/AS model return to long-run equilibrium after an increase in spending growth?

The SRAS curve shifts up and to the left as inflation expectations adjust

The adjustment back to a long-run equilibrium after a sudden decrease in AD: ## Footnote A. happens very quickly, leading to a temporary increase in the unemployment rate B. happens very quickly, leading to a temporary decrease in the unemployment rate C. takes a long time, during which the economy is growing very rapidly and very few people are unemployed D. takes a long time, during which the economy is not growing much and many people are unemployed

You can think of velocity as: ## Footnote A. the ratio of the money supply to the inflation rate B. how much output money can buy C. how often money changes hands D. how quickly prices are rising

The national income spending identity can be expressed as:

Y = C + I + G + NX

If the growth rate of velocity changes: ## Footnote A. the growth rate of the money supply must change in the other direction B. the growth rate of the money supply must change in the same direction C. the growth rate of C, I, G, or NX must change D. the growth rates of C, I, G, and NX must all change

If the government decides to increase spending on defense: ## Footnote A. the AD curve will shift in permanently B. the AD curve will shift out temporarily C. the AD curve will shift out temporarily D. the AD curve will shift out permanently

What happens in the long run after an increase in government spending growth? ## Footnote A. the AD curve shifts back to its original position B. the AD curve remains permanently in its new position C. the LRAS curve shifts out to match the increase in AD D. inflation expectations adjust and the SRAS curve shifts backwards

Which of the following is correct? ## Footnote A. the growth rate of velocity can be changed permanently but changes in the money supply growth rate are always temporary B. neither the money supply growth rate nor the growth rate of velocity can be changed permanently C. the money supply growth rate of velocity can both be changed permanently D. the money supply growth rate can be changed permanently, but changes in the growth rate of velocity are always temporary

In the AD/AS model, an increase in the growth rate of the velocity of money differs from an increase in money supply growth rate in that: ## Footnote A. the AD curve will eventually shift back to its original position after an increase in velocity growth B. the AD curve will eventually shift back to its original position after an increase in money supply growth C. the SRAS curve will eventually shift upwards after an increase in velocity growth D. the SRAS curve will eventually shift back to its original position after an increase in money supply growth

Changes in the growth rate of the velocity of money can't permanently shift the AD curve because: ## Footnote A. changes in the growth rate of the velocity of money shift the SRAS curve, not the AD curve B. in the long run, the inflation rate is determined by the growth rate of the velocity of money C. in the long run, the inflation rate is determined by the money supply growth rate D. in the long run, the inflation rate will be equal to the Solow inflation rate

Can changes in the growth rate of the velocity of money create a recession? ## Footnote A. no, because changes in the growth rate of velocity only affect inflation, not real growth B. yes, if the change is an unexpected increase in the growth rate of the velocity of money C. yes, if the change is negative and large enough D. no, because changes in the growth rate of velocity are temporary

What role can confidence and fear play in the economy? ## Footnote A. confidence and fear can shift the AD curve inward but not outward B. confidence and fear can shift the SRAS upward and downward, respectively C. confidence and fear can shift the AD curve outward and inward, respectively D. the impact of confidence and fear has not been effectively incorporated into macroeconomic models

The Great Depression was: ## Footnote A. worse in nominal terms, but not in real terms, than any other US recession B. not as bad as the Great Recession in 2008-2009 C. the worst recession in US history D. the brief economic downturn that followed the stock market crash of 1929

What was the most significant cause of the Great Depression? ## Footnote A. a mix of positive and negative real and AD shocks B. one very significant negative real shock C. a series of negative real shocks D. a series of negative AD shocks

In the 1920s, just prior to the start of the Great Depression: ## Footnote A. nominal GDP per capita was not growing, and there was no inflation B. real GDP per capita was not growing, and there was 3% inflation C. nominal GDP per capita was growing at 3% per year, and there was no inflation D. real GDP per capita was growing at 3% per year, and there was no inflation

The first shock that set off the Great Depression was:

the stock market crash of 1929

As pessimism grew following the stock market crash of 1929: ## Footnote A. bank depositors began to worry about banks failing, and they rushed to withdraw their money B. the Federal Reserve responded quickly and expanded the money supply C. consumers became nervous, and the amount of savings skyrocketed D. businesses could tell a depression was coming, and they immediately fired many workers

Between 1929 and 1933, ___ dropped by 75%

investment spending

In the early 1930s, the Federal Reserve caused the largest ___ in US history by ___ 30%. ## Footnote A. positive AD shock; increasing the money supply B. negative AD shock; allowing the money supply to plunge C. negative real shock; allowing the money supply to plunge D. positive real shock; increasing the money supply

By 1932, the growth rate in the US was \_\_\_, and inflation was \_\_\_. ## Footnote A. -3%; -3% B. -10%; 3% C. -13%; 10% D. -13%; -10%

Bank failures: ## Footnote A. represent a negative AD shock but a positive real shock B. represent a positive AD shock but a negative real shock C. represent both a negative AD shock and a negative real shock D. represent only a negative real shock

Each of the following caused a real shock that contributed to the Great Depression EXCEPT: ## Footnote A. a stock market crash B. bad legislation C. bad weather D. bank failures

The most famous proponent of monetarism was: ## Footnote A. Milton Friedman B. Adam Smith C. John Maynard Keynes D. Tyler Cowen

Monetarism focuses on: ## Footnote A. real shocks to the economy that change the economy's potential growth rate B. the role of AD in business fluctuations C. the decisions that central banks make with respect to the money supply D. the federal government's control over interest rates

Which of the following equations is key to understanding monetarism? ## Footnote A. Y = C x I x G x NX B. M x v = P x Y C. M + v = P + Y D. Y = C + I + G + NX

According to the quantity theory of money, in the long run, the amount of money in the economy: ## Footnote A. can affect real output but not real employment B. can affect real employment but not real output C. can have a major impact on both real output and real employment D. doesn't influence real output or real employment

What are the two potential dangers for the economy, according to monetarism?

Too much inflation and too little inflation

Inflation can stimulate the economy in the short run because: ## Footnote A. people are confused about which prices are rising due to inflation and which are rising due to changes in demand B. when prices are higher, people have to work harder to earn enough income to pay for things C. inflation is a monetary phenomenon, so more inflation means that people have more money to spend D. inflation expectations are quick to adjust when prices and wages are sticky

Monetarists tend to favor: ## Footnote A. allowing the central bank to exercise discretion B. implementing a gold standard for the money supply C. constraining the central bank through rules D. targeting a predetermined unemployment rate

The Fed can influence: ## Footnote A. US tax rates B. the US money supply C. the budget of the federal government D. the household savings rate

Which of the following is true about the Fed? ## Footnote A. it cannot directly affect the economy but it can influence institutions that can affect the economy B. it has no real power since in the long run, money is neutral C. it has more power to affect the economy than any other institution D. it has a lot of power to affect the inflation rate, but not the unemployment rate

The Federal Reserve has the power to: ## Footnote A. create money B. increase government spending C. create banks D. cut taxes

Monetary policy is limited in that: ## Footnote A. it can only affect inflation in the short run B. it can only affect real growth in the long run C. it can only affect real growth in the short run D. it can only affect inflation in the long run

Why doesn't GDP change in the long run when the money supply changes? ## Footnote A. because in the long run, GDP is determined by fiscal policy and not by monetary policy B. because the money supply changes only in the short run and then returns to its long-run level C. because in the long run, GDP is determined by the fundamental factors of growth, not the money supply D. because in the long run, households adjust their savings to counteract any change in the money supply

Which of the following explains why the Fed is able to have a dramatic effect on AD and real output in the short run? ## Footnote A. price confusion that speeds up the adjustment of real GDP B. money illusion that speeds up the adjustment of the price level C. sticky wages that slow the adjustment of real GDP D. sticky prices that slow the adjustment of the price level

Which of the following is true about monetary policy? ## Footnote A. it is ineffective in the short run and difficult in the long run B. it is effective in the long run and easy in the short run C. it is effective in the short run and easy in the long run D. it is ineffective in the long run and difficult in the short run

Defining what money is: ## Footnote A. isn't easy, and this makes monetary policy more difficult B. is easier to do in the long run than in the short run C. is easy to do, which explains why monetary policy is so effective D. is the easiest, but least important part of monetary policy

If consumers become less confident and begin to borrow and spend less, what will happen in the dynamic AD/AS model?

The AD curve will shift to the left

In the best case scenario, what is the Fed's response to a negative demand shock? ## Footnote A. the Fed will increase government spending to offset the negative demand shock B. the Fed will decrease the growth rate of the money supply to offset the negative demand shock C. the Fed will decrease government spending to offset the negative demand shock D. the Fed will increase the growth rate of the money supply to offset the negative demand shock

Which of these is NOT one of the issues that makes it difficult for the Fed to choose the right course of action at the right time? ## Footnote A. the quality of the data the Fed uses B. the time it takes for Fed action to have an impact C. the time that it takes for the Fed to decide on a course of action D. the Fed's incomplete and imperfect control of the money supply

Economic data; ## Footnote A. tend to be completely reliable and accurate when first reported B. are meaningless if not interpreted by a policymaker with good instincts C. are never fully reliable, even after years of revisions D. are sometimes revised months or years after their initial release

How long does it take for the Fed's actions to have their intended effect?

6-8 months

The tools of the Federal Reserve: ## Footnote A. sometimes rely on other actors, such as banks, who can sometimes be unreliable B. sometimes rely on other actors, such as banks, whose actions can be easily predicted C. are easy to use and usually have predictable, standardized effects D. tend to be politically unpopular and thus are rarely used to their full capacity

What would happen if banks decided to stop lending altogether and instead held on to enormous amounts of cash? ## Footnote A. the tools of monetary policy would become less effective in response to a recession B. the tools of monetary policy would become less effective in response to high inflation C. this would not impact the effectiveness of monetary policy D. the tools of monetary policy would become more effective in response to a recession

If the Fed overshoots when responding to a negative demand shock: ## Footnote A. it will cause inflation, which the Fed will fight by reducing the growth rate of the money supply B. it will cause deflation, which the Fed will fight by increasing the growth rate of the money supply C. it will cause inflation, which the Fed will fight by increasing the growth rate of the money supply D. it will cause deflation, which the Fed will fight by reducing the growth rate of the money supply

The cost of stimulating the economy in the 1970s was: ## Footnote A. a severe recession with high unemployment in the 1980s B. high inflation and low unemployment for most of the 1980s C. a mild recession with modest unemployment in the 1980s D. high inflation and high unemployment for most of the 1980s

Which of the following would create simultaneous high inflation and high unemployment? ## Footnote A. a negative real shock B. a positive real shock C. a negative demand shock D. a positive demand shock

Fighting inflation and fighting sluggish growth require: ## Footnote A. similar actions from policy makers B. monetary and fiscal policy actions, respectively C. opposite actions from policy makers D. fiscal and monetary policy actions, respectively

In order to fight high inflation the Fed should \_\_\_; in order to fight high unemployment the Fed should \_\_\_. ## Footnote A. increase the growth rate of the money supply; decrease the growth rate of the money supply B. increase the growth rate of the money supply; increase the growth rate of the money supply C. decrease the growth rate of the money supply; decrease the growth rate of the money supply D. decrease the growth rate of the money supply; increase the growth rate of the money supply

Which of the following is true? ## Footnote A. sluggish growth may show up in economic data before high inflation, even if the two have the same cause B. high inflation may show up in economic data before sluggish growth, even if the two have the same cause C. if high inflation and sluggish growth have the same cause, they will show up in the economic data at the same time D. if high inflation and sluggish growth have different causes, they cannot show up in the economic data at the same time

If economic data reveals that inflation is rising, the Fed: ## Footnote A. will also at that time know the state of real GDP growth and can respond accordingly B. may increase the growth rate of the money supply without really knowing the state of real GDP growth C. may reduce the growth rate of the money supply without really knowing the state of real GDP growth D. does not need to know the state of real GDP growth in order to justify increasing the growth rate of the money supply

Negative real shocks and negative demand shocks: ## Footnote A. are shown in the AD/AS model in the same way B. have the same basic causes C. usually do not happen at the same time D. commonly come together

Which of these demonstrates a negative real shock causing a negative demand shock? ## Footnote A. bad news, like rising oil prices, causes people to become pessimistic and to cut back on their spending B. fear among businesses causes them to lay off workers, who lose their skills and become permanently less productive C. fear among businesses causes them to lay off workers, who eventually return to work at lower wages D. bad news, like rising oil prices, causes investors to make more new investments, seeking greater profit opportunities

The combination of shocks hitting an economy is: ## Footnote A. usually known to policymakers before they decide what action to take B. difficult to identify because they are so numerous C. hard to see without looking at lots of economic data D. irrelevant as long as the rates of inflation and real growth are known

The Federal Reserve has: ## Footnote A. made some booms worse but generally makes recessions better B. made some booms and recessions worse rather than better C. made some recessions worse but generally makes booms better D. a good track record of only making booms and recessions better

The economy is: ## Footnote A. complex, and it operates under uncertain rules B. simple, and it operates under clear rules C. simple, though it operates under uncertain rules D. complex, though it operates under clear rules

The Fed's actions leading up to the Great Recession: ## Footnote A. may have contributed to falling consumer confidence and made the recession worse B. may have contributed to the housing bubble and made the recession worse C. may have helped to boost consumer confidence and stopped the recession from having been worse D. may have mitigated the housing bubble and stopped the recession from having been worse

What was troubling about the 2001 recession?

That the unemployment rate remained high, even after the recession ended

The Fed tried to reduce unemployment in the years following the recession of 2001 by: ## Footnote A. raising the reserve requirement for banks B. reducing the growth rate of the money supply C. keeping the Federal funds rate very low D. increasing government spending on construction projects

In what way may the Fed have contributed to the housing bubble? ## Footnote A. by investing heavily in mortgage-backed securities B. by inflating housing prices in the early 2000s C. by causing unemployment with low money supply growth D. by making credit cheaper with a low Federal funds rate

A bubble happens when: ## Footnote A. asset prices rise for a long time, even during a recession B. asset prices rise higher and faster than can be explained by the fundamentals C. asset prices rise higher than experts have predicted they would D. asset prices rise faster than can be tracked with traditional statistical tools

In addition to keeping interest rates too low for too long, the Fed also: ## Footnote A. ran too great of a budget surplus in the years leading up to the recession B. overestimated the importance of the housing sector for the whole economy C. underestimated the impact of a decline in the housing sector on the whole economy D. kept government spending too high for too long in the years leading up to the recession

Most of the Fed's policy tools impact AD as a whole. Is there any way that the Fed could have targeted the housing market directly in the mid-2000s? ## Footnote A. No, there is no way the Fed can target a specific industry B. Yes, through its power to set mortgage interest rates C. Yes, through its power to regulate banks D. Yes, through its power to impact real estate appraisals

One of the problems with a strict monetary policy rule that sets a constant growth rate for the money supply is that when there are large shocks to the economy, the growth rate of \_\_\_, causing real GDP growth to slow down. ## Footnote A. the average price level can fall B. the velocity of money can rise C. the velocity of money can fall D. the average price level can rise

The pitfalls of a strict money supply rule can be avoided if the Fed: ## Footnote A. targets velocity growth B. targets real GDP growth C. targets money supply growth D. targets nominal GDP growth

Fiscal policy occurs when: ## Footnote A. the government raises or lowers nominal interest rates B. the Federal Reserve makes changes to the federal budget C. the government changes its plan for the money supply D. the government changes its plan for spending and taxing

What happens when consumers in the economy start to spend less, perhaps because they become worried about the future? ## Footnote A. prices fall, causing consumers to start spending again B. the demand for dollars falls, causing the exchange rate to fall and exports to rise C. the incomes of other people fall, causing those people to spend less as well D. savings rises, causing increases in investment that boost GDP

The main idea behind using fiscal policy to combat a recession is: ## Footnote A. the government will supplement the increased spending in the economy, contributing to an upward spiral B. the government will make up for the decreased saving in the economy, preventing a downward spiral C. the government will supplement the increased saving in the economy, contributing to an upward spiral D. the government will make up for the decreased spending in the economy, preventing a downward spiral

What is the essence of the problem with timeliness with fiscal policy? ## Footnote A. in order for fiscal policy to have an impact and prevent a recession, it needs to happen very quickly B. the government's budget calendar is very strict and fiscal policy can only be done at certain times in the year C. if fiscal policy is enacted too quickly, it might not be very well thought out D. often there is not enough time to spend all of the money that fiscal policies have authorized

What is the essence of the problem with targeting with fiscal policy? ## Footnote A. economic data takes time to analyze, so the government may not know when the economy has reached its target B. in order to meet interest rate targets, fiscal policy must be enacted very quickly C. the government may not have projects ready that will employ the people who are unemployed D. it is difficult for the government to determine the target unemployment rate

Is there a tradeoff between fiscal policy that is timely and fiscal policy that is targeted? ## Footnote A. yes, because the industries that need help also move the slowest B. yes, because it's hard to create targeted fiscal policy quickly C. yes, because it takes a very long time to decide what the targets should be D. no, the video gives several examples of timely fiscal policy that was targeted

What are the two ways that the government can use fiscal policy to replace spending in a recession?

* Spending money on government projects * Cutting taxes

Fiscal policy can: ## Footnote A. reveal the need for long-term restructuring of the economy B. provide an opportunity to speed up an already on-going restructuring of the economy C. cause a slowdown in an on-going long-term restructuring of the economy D. sometimes be necessary for a long-term restructuring of the economy

What steps did the Federal government take to stimulate the American economy when the recession of 2008-09 hit?

* Cut taxes * Raised spending

The goal of expansionary fiscal policy is to:

stimulate the economy

Which of these is NOT an element of fiscal policy? ## Footnote A. government spending B. government borrowing C. interest rates D. taxes

In general, fiscal policy is used to: ## Footnote A. make business cycle booms and busts both bigger B. even out the booms and the busts in the business cycle C. to reverse the pattern of booms and busts in the business cycle D. make business cycle booms bigger and busts smaller

If the economy is at full employment, then an increase in government spending: ## Footnote A. would have too large an impact on real growth B. would cause deflation, which would increase unemployment C. would simply crowd out private spending D. is the right fiscal policy response

If labor and capital are underemployed, then an increase in government spending: ## Footnote A. would increase GDP by exactly the increase in government spending B. would have no impact on GDP C. would increase GDP by less than the increase in government spending D. would increase GDP by more than the increase in government spending

The "fiscal multiplier" is the ripple effect of subsequent: ## Footnote A. increase rate changes following a change to the federal funds rate B. increases in lending following an initial increase in bank reserves C. private-sector layoffs following an initial layoff in the public sector D. increases in spending following an initial increase in government spending

If the government saved during an economic boom by increasing taxes or decreasing spending, this would be: ## Footnote A. expansionary monetary policy B. contractionary monetary policy C. expansionary fiscal policy D. contractionary fiscal policy

Which of the following is true of the "best case scenario" for expansionary fiscal policy? ## Footnote A. there are lots of underemployed resources B. there are few underemployed or unemployed resources C. there are lots of underemployed resources but few unemployed resources D. there are lots of unemployed resources but few underemployed resources

If there are a lot of underemployed resources, which of the following must be true for expansionary fiscal policy to be the most effective? ## Footnote A. the government needs to be able to target those underemployed resources before they find employment B. the government needs to be able to identify and target those underemployed resources C. the government needs only to be able to identify those underemployed resources D. the government needs to be able to target the geographical home of those underemployed resources

If consumers become fearful about the future and cut back on their consumption: ## Footnote A. the SRAS and LRAS curves will shift to the right B. the AD curve will shift to the right C. the AD curve will shift to the left D. the SRAS and LRAS curves will shift to the left

After consumers cut back on consumption, the economy: ## Footnote A. takes time to adjust its potential growth rate B. remains at its potential growth rate despite the cutback C. takes time to adjust back to its potential growth rate D. remains at a permanently lower growth rate

Which of the following does a leftward shift of the AD curve, caused by a reduction in consumption, cause? ## Footnote A. a permanent reduction in the potential growth rate B. a temporary reduction in the real growth rate C. a permanent reduction in the real growth rate D. a temporary reduction in the potential growth rate

What will happen in the long run if the government takes no action to address a recession caused by a reduction in household consumption? ## Footnote A. productivity will slow down so that the potential growth rate falls to the lower real growth rate B. the Federal Reserve will eventually have to take action to return the economy to its potential C. the reduction in consumption will subside and the real growth rate will return to its potential D. inflation expectations will adjust and the real growth rate will return to its potential

The government can use expansionary fiscal policy to: ## Footnote A. make wages and prices less sticky so that the economy can adjust back to the long run growth rate B. help inflation expectations to adjust more quickly and return the economy to its long run growth rate C. mitigate the slow and painful process of adjustment back to the long run growth rate D. increase productivity in the economy so that the potential growth rate increases

As a result of the fiscal multiplier effect: ## Footnote A. the government can counteract a decrease in consumption with a smaller increase in governmnent spending B. the government can counteract increases in consumption and investment simultaneously with an increase in government spending C. in order to counteract a decrease in consumption the government only needs to announce spending increases; it does not have to take any action D. in order to counteract a decrease in consumption the government needs to increase government spending by a larger amount

The best case scenario for fiscal policy is during a: ## Footnote A. recession caused by an AD shock B. boom caused by an AD shock C. boom caused by a real shock D. recession caused by a real shock

During a recession, the ideal stimulus is all of the following EXCEPT: ## Footnote A. temporary B. timely C. theoretical D. targeted

Which of the following demonstrates the ideal use of expansionary fiscal policy? ## Footnote A. the government quickly hires already-employed workers and puts them to work on projects that are finished as the economy recovers B. the government slowly hires unemployed workers and puts them to work on permanent projects that continue long after the economy recovers C. the government quickly hires unemployed workers and puts them to work on projects that are finished as the economy recovers D. the government quickly hires unemployed workers and puts them to work on permanent projects that continue long after the economy recovers

Which of the following is NOT one of the lags that makes timely fiscal policy difficult? ## Footnote A. Business Cycle lag B. Recognition lag C. Implementation lag D. Legislative lag

Disinflation occurs when the Fed: ## Footnote A. raises the growth rate of the money supply B. reduces the growth rate of the money supply C. sets the money supply growth rate above the inflation rate D. does nothing when a shock occurs

If the Federal Reserve overstimulates the economy by increasing money growth too much, then inflation will: ## Footnote A. make long-term planning and contracting easier B. create arbitrary redistributions of wealth C. make price signals much easier to interpret D. bring the economy into a recession

The Federal Reserve's influence over ___ is more powerful than its influence over \_\_\_. ## Footnote A. expectations; aggregate supply B. expectations; the money supply C. the money supply; expectations D. aggregate supply; aggregate demand

If uncertainty causes people to increase their demand for cash and, at the same time, the Fed raises money supply growth, then the Fed's action will: ## Footnote A. shift the AD curve further to the right than if the uncertainty did not exist B. shift the AD curve less to the right than if the uncertainty did not exist C. shift the AD curve further to the left than if the uncertainty did not exist D. cause the economy to move to a new long-run equilibrium

If the Fed wants to raise real GDP growth by raising money supply growth, which condition will make monetary policy more effective in raising real GDP growth? ## Footnote A. uncertainty causing people to increase their demand for cash B. people losing confidence and reducing investment spending C. people believing the Fed will abandon its policy D. prices continuing to remain very sticky

Why is monetary policy not fully effective in combatting a negative supply shock? ## Footnote A. The Fed has no tools that stimulate an economy after a negative supply shock B. when countering a negative supply shock, Fed action will cause deflation C. when countering a negative supply shock to reduce inflation, Fed action will raise unemployment D. when countering a negative supply shock to reduce unemployment, Fed action will raise inflation

A significant shock in an economy can result in: ## Footnote A. a leftward shift of the LRAS curve B. a leftward shift of the SRAS curve C. consumer pessimism and a leftward shift of the AD curve D. a leftward shift of the LRAS, SRAS, and AD curves

When the Fed increases the money supply to counteract a negative real shock: ## Footnote A. growth usually returns to the level it was before the shock B. half of the increase is seen in growth and half in inflation C. inflation increases a lot and growth increases a little D. growth remains stuck at the level of the negative real shock

When hit with a negative real shock, the Fed, wishing to respond, must choose between a growth rate that's too: ## Footnote A. low and an unemployment rate that's too high B. low an an inflation rate that's too high C. high and wages that are too low D. high and a savings rate that's too low

Monetary policy is: ## Footnote A. equally effective in dealing with real shocks and AD shocks B. more effective in dealing with real shocks than with AD shocks C. less effective in dealing with real shocks than with AD shocks D. totally ineffective in dealing with real shocks and AD shocks

Which statement is true regarding the effects of monetary policy when a real shock occurs? ## Footnote A. monetary policy can always be used to simultaneously achieve a high real growth rate and lower the inflation rate B. monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate C. monetary policy can be used to change only the real growth rate, but not the inflation rate D. monetary policy can be used to change only the inflation rate, but not the real growth rate

Suppose a central bank targets a fixed rate of inflation. If a negative real shock occurs, then the central bank would use monetary policy to shift the: ## Footnote A. AD curve to the right B. AD curve to the left C. SRAS curve to the right D. SRAS curve to the left

If the federal reserve responds to a negative real shock with a decrease in money growth, the Federal Reserve's response will cause inflation to: ## Footnote A. remain constant B. decrease to a lower point than it was before the shock C. increase by less than it otherwise would have D. increase by more than it otherwise would have

If the Federal Reserve reduces the growth rate of the money supply to combat a negative real shock, the inflation rate will be: ## Footnote A. lower, but the growth rate will be higher B. lower, but the growth rate will be even lower C. higher, but the growth rate will be lower D. higher, but the growth rate will be even higher

In the absence of any policy intervention, when C falls the result in the short run will be: ## Footnote A. higher inflation and lower real growth B. lower inflation and lower real growth C. higher inflation and higher real growth D. lower inflation and higher real growth

When the government conducts fiscal policy, it makes up for a decrease in C with: ## Footnote A. an increase in G B. a decrease in NX C. an increase in M D. a decrease in Y_R

The best type of negative shock for fiscal policy to respond to is a negative shock to: ## Footnote A. AD B. SRAS C. the LRAS curve D. inflation

A problem that makes fiscal policy less effective is that: ## Footnote A. fiscal policy must be offset by monetary policy B. government spending is a relatively large portion of GDP C. government spending does not directly affect AD D. higher taxes or increased borrowing to fund government spending can reduce AD

Because of the multiplier effect, if a shock causes AD to increase by $200 million, then the government should \_\_\_, in order to restore the economy back to its original growth rate. ## Footnote A. do nothing B. increase government spending by more than $200 million C. reduce government spending by less than $200 million D. increase government spending by $200 million and cut taxes by $200 million

The multiplier concept is important because it shows: ## Footnote A. why fiscal policy is always effective B. how small changes in government spending may have large impacts on overall output C. how changes in taxes are multiplied into larger government revenues D. why decreases in the tax rate may actually increase tax revenues overall

The crowding out effects of fiscal policy are smaller if: ## Footnote A) real GDP growth is above the economy's long-run potential rate. B) nominal wages and prices are flexible. C) the economy is in a recession caused by low aggregate demand. D) the spending multiplier is also smaller.

If an increase in government spending of $100 million causes an increase in aggregate spending of less than $100 million, we call this phenomenon: ## Footnote A) crowding in. B) crowding out. C) the multiplier. D) the Ricardian effect.

Final Exam Review Flashcards

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