unit 3 test

Question 1

what is monetary policy

Answer 1

policies done by the federal reserve

Question 2

what is fiscal policy

Answer 2

policies done by government efforts to promote full employment and price stability

Question 3

what does fiscal policy change

Answer 3

government spending
taxes

Question 4

recession is combated with which fiscal policy

Answer 4

expansionary policy
increase govt spending
decrease personal income taxes
increase transfer payments

Question 5

inflation is combated with which fiscal policy

Answer 5

contractionary policy
decrease govt spending
increase personal income taxes
decrease transfer payments

Question 6

when taxes lower

Answer 6

consumption and disposable income both increase

Question 7

discretionary

Answer 7

involves policy makers doing fiscal policy in response to economic problem

Question 8

automatic

Answer 8

takes place without policy makers having to respond to current economic problem

Question 9

automatic examples

Answer 9

unemployment compensation and marginal tax rates

Question 10

weakness of fiscal policy

Answer 10

outside, inside lag, and political motivation

Question 11

inside lag

Answer 11

takes time to recognize economic problem and to promote solutions to problem

Question 12

outside lag

Answer 12

takes time to implement solutions to problem

Question 13

GDP and unemployment rate

Answer 13

inverese relation (opposite)

Question 14

Price level and inflation rate

Answer 14

direct relation (same)

Question 15

if inflated

Answer 15

workers demand higher nominal wages
(fixed the economy)

Question 16

if recession

Answer 16

workers will work for lower nominal wages
(fixed the economy)

Question 17

three names for a shift to the left of the aggregate supply line

Answer 17

negative supply shock, stagflation, cost push inflation

Question 18

what is on the ID graph

Answer 18

r% or i% on y axis
Ig on x axis

Question 19

LRAS

Answer 19

period of time where input prices are completely flexible and adjust to changes in price level

level of RGDP is independent of price level

Question 20

when changing interest rates or price

Answer 20

it moves along the line

Question 21

SRAS

Answer 21

period of time where input prices are sticky

nominal wages are slow to fall even in high unemployment
(directly related RGDP and price level)

Question 22

what shifts the SRAS line

Answer 22

input prices/nominal wages
productivity
legal institution environment
capital stock

Question 23

aggregate meaning

Answer 23

adding all together

Question 24

aggregate demand relation with RGDP and price level

Answer 24

inverse relationship

Question 25

political motivation

Answer 25

politicians face re election and more likely to support expansionary than contractionary fiscal policy (lower taxes and increase govt spending)

Question 26

three reasons AD is downward sloping

Answer 26

real balances effect (wealth effect) interest rate effect foreign purchases effect

Question 27

real balances effect (wealth effect)

Answer 27

price levels vs. purchasing power (price level high, households cannot afford as much) (price level low, households can buy more)

Question 28

interest rate effect

Answer 28

real interest rate vs investment higher price level = increase interest rate = discourage investment

Question 29

foreign purchases effect

Answer 29

higher price level increases demand for relatively cheaper imports

Question 30

disposable income

Answer 30

gross income - taxes income after taxes

Question 31

two types of fiscal policy

Answer 31

discretionary and automatic

Question 32

which has a bigger impact (decrease taxes or increase govt spending)

Answer 32

increase govt spending because no savings left would need to decrease taxes a lot more than the amount increased of spending

Question 33

how do businesses determine the amount of investment they undertake

Answer 33

expected return>interest cost, then invest expected return

Question 34

shifts in ID (investment demand)

Answer 34

cost of production business taxes technological change stock of capital expectations

Question 35

what moves along line in ID

Answer 35

interest rate change

Question 36

monetary policy

Answer 36

promote maximum employment, stable prices, moderate long term interest rates