Macro after Test 2

Question 1

multiplier analysis ___ the magnitude of the multiplier

Answer 1

overstates

Question 2

two factors reducing size of multiplier

Answer 2

1. crowding out effect

2. taxes

Question 3

crowding out effect

Answer 3

tendency for increases in gov spending to cause offsetting reductions in spending in private sector

Question 4

if an increase in spending has crowded out something, the magnitude of the multiplier will be ____

Answer 4

reduced

Question 5

multiplier (with taxes) =

Answer 5

1/[1-mpc(1-tax rate)]

Question 6

four goals of tax policy

Answer 6

1. generate revenue
2. redistribute income
3. reallocate resources
4. influence economy via fiscal policy

Question 7

we incur a budget deficit when…

Answer 7

gov spending > tax revenue

Question 8

national debt =

Answer 8

total amount owed by gov = sum of all past deficits and surpluses

Question 9

why is a balanced budget amendment destabilizing?

Answer 9

makes fluctuations in business cycle even bigger

Question 10

trying to achieve a balanced budget during a recession tends to make the recession ___

Answer 10

worse

Question 11

3 arguments for a BBA

Answer 11

1. forces gov to restrain spending
2. smaller gov interference
3. reduce existence of welfare

Question 12

automatic stabilizers

Answer 12

changes in tax revenu/gov spending that occur automatically as economy grows

Question 13

automatic stabilizers are ____ during a recession

Answer 13

beneficial

Question 14

open market operation

Answer 14

fed purchasing bonds from public, which causes money supply to increase

Question 15

fed owns about x% of total national debt

Answer 15

40%

Question 16

t/f the national debt owned by the fed is interest free

Answer 16

true

Question 17

true cost of national debt =

Answer 17

interest that must be paid on treasury securities

Question 18

benefit of the national debt =

Answer 18

current taxpayers are spared the burden for paying for lots of goods/services

Question 19

refinancing the debt

Answer 19

when treasury issues new bonds to generate enough revenue to pay of maturing bonds

Question 20

discretionary fiscal policy

Answer 20

deliberate changes in gov spending and taxing to influence economy

Question 21

leaning against the wind

Answer 21

dampen the economy to reduce inflation threat when the economy is expanding rapidly

Question 22

pro-cyclic BBA

Answer 22

increases the amplitude of the business cycle

Question 23

fiscal policy takes a short/long time to take effect

Answer 23

long

Question 24

recognition lag

Answer 24

time it takes for policy makers to recognize the economy is in a recession

Question 25

implementation lag

Answer 25

time it takes for policy makers to pass laws and put policy into effect

Question 26

response lag

Answer 26

time it takes for policy to actually have an effect

Question 27

supply side economics

Answer 27

gov policies that focus on stimulating economy by boosting supply of goods

Question 28

supply side economists recommend higher/lower taxes

Answer 28

lower

Question 29

laffer curve

Answer 29

graph showing total tax revenue as a function of tax rate

Question 30

laffer believed higher/lower taxes would increase tax revenue

Answer 30

lower

Question 31

primary function of money

Answer 31

serve as a medium of exchange or payment

Question 32

commodity money

Answer 32

items used as money but have value in other areas (gold, silver)

Question 33

disadvantages of commodity money

Answer 33

difficult to control supply

Question 34

advantages of commodity money

Answer 34

supply is limited, so the threat of high inflation is low

Question 35

fiat money

Answer 35

items designated by gov to serve as money, although it is inherently worthless (coins, paper currency)

Question 36

disadvantages to fiat money

Answer 36

gov can create as much as it wants, which can cause high inflation

Question 37

what are federal reserve notes backed by

Answer 37

NOTHING :) faith trust and pixie dust

Question 38

liquidity

Answer 38

property of being easily converted to cash (currency, coins)

Question 39

types of m1 money (used for day to day transactions)

Answer 39

coins, traveler's checks (highly liquid)

Question 40

liquid assets

Answer 40

assets that can be turned into cash quickly with little loss of value

Question 41

m2 money =

Answer 41

m1 + money market funds shares + savings accounts + small time deposits

Question 42

m2 is __ liquid than m1

Answer 42

less

Question 43

m3 money =

Answer 43

m2+large saving accounts+large deposits

Question 44

m3 is __ liquid than m2

Answer 44

less

Question 45

time deposits

Answer 45

if you withdraw money before maturity date, you lose interest

Question 46

money market mutual fund

Answer 46

financial institution accepts money from public and buys assets like bonds

Question 47

three functions of banks

Answer 47

1. provide safekeeping for money 2. make loans 3. create money

Question 48

reserves

Answer 48

cash that a bank has in its vault plus deposits at federal reserve

Question 49

t/f banks earn interest on reserves

Answer 49

false

Question 50

required reserve ratio

Answer 50

minimum percentage of deposits that a bank must keep as reserves

Question 51

required reserves =

Answer 51

total deposits * required reserve ratio

Question 52

excess reserves =

Answer 52

actual reserves - required reserves

Question 53

money multiplier

Answer 53

multiple by which the total supply of money can increase for every $1 increase in reserves

Question 54

money multiplier =

Answer 54

1/required reserve ratio

Question 55

the actual money multiplier is ___ than the theoretical money multiplier

Answer 55

smaller

Question 56

why do banks fail

Answer 56

when bank is unable to meet demands of creditors (unable to pay cash to people who want to withdraw)

Question 57

mcfadden act

Answer 57

prohibit interstate banking

Question 58

glass-steagall act

Answer 58

banks can't sell stocks, bonds, insurance, or real estate

Question 59

monetary control act

Answer 59

allowed interest on checking accounts by banks

Question 60

banking act

Answer 60

abolished interest rate ceilings

Question 61

t/f fed is a non-profit organization

Answer 61

true

Question 62

how does fed earn income

Answer 62

from interest on gov bonds

Question 63

functions of fed

Answer 63

1. conduct monetary policy 2. banker for gov 3. regulates banks 4. issue money

Question 64

federal reserve reform act

Answer 64

max employment, stable prices, moderate long-term interest rates

Question 65

target inflation rate =

Answer 65

2%

Question 66

unemployment target rate =

Answer 66

5.2%-6%

Question 67

fed board of governors

Answer 67

7 members appointed by president, can't be fired

Question 68

federal reserve district banks

Answer 68

has 9 directors that tries to promote interests of that specific district

Question 69

federal open market committee

Answer 69

decides monetary policy

Question 70

expansionary monetary policy

Answer 70

lower fed stuff to stimulate economy

Question 71

contractionary monetary policy

Answer 71

increase fed stuff to slow down economy

Question 72

feds raise the discount rate to __ loans

Answer 72

discourage

Question 73

discount rate =

Answer 73

fed funds rate + .25%

Question 74

open market operations

Answer 74

purchase of sale of treasury securities by fed in open market

Question 75

a fed purchase of securities ___ money supply

Answer 75

increases

Question 76

expansionary monetary policy (open market)

Answer 76

purchase to increase money supply

Question 77

contractionary monetary policy (open market)

Answer 77

sale to decrease bank loans and higher interest rates

Question 78

role of treasury

Answer 78

collect taxes and pay bills of fed

Question 79

greatest source of gov revenue

Answer 79

individual income taxes

Question 80

during recent years, national debt has been increasing ___ than gdp

Answer 80

faster

Question 81

currency debasement

Answer 81

expanding money supply rapidly so it loses value

Question 82

bank run

Answer 82

when depositors all withdraw money at the same time

Question 83

bank panic

Answer 83

when many banks experience bank run