ECON312N Principles of Economics
Week 8 Quiz
How do the Fed’s monetary policy actions influence the exchange rate?
The Fed influences the exchange rate by conducting transactions in the foreign exchange market.
The Fed can influence the exchange rate only if it changes expectations.
The Fed? can’t influence the exchange rate because the Fed has no influence on foreign interest rates.
The Fed’s policy tools include
required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures.
required reserve ratios, income tax rates, and open market operations.
setting regulations for lending standards and extraordinary crisis measures.
supervision of the banking system and buying and selling commercial banks.
The tax multiplier is the
magnification effect of a change in taxes on government expenditures.
magnification effect of a change in taxes on the budget deficit.
magnification effect of a change in taxes on the national debt.
magnification effect of a change in taxes on aggregate demand.
magnification effect of a change in taxes on aggregate supply.
The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase?
There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations?
estimating potential GDP
shrinking area of lawmaker discretion
lawmaking time lag
Using the data in the above table, if potential GDP for this economy is $25 billion, then in order to restore full employment, the federal funds rate can be
lowered so that consumption expenditure and investment increase, though net exports decrease.
lowered so that government expenditure on goods and services increase.
lowered so that consumption expenditure, investment, and net exports increase.
raised so that net exports increase.
raised so that consumption expenditure, investment, and net exports increase.
The balanced budget multiplier is based on the point that the ________ multiplier is larger than the ________ multiplier so that an equal increase in government expenditure and taxes ________ aggregate demand.
expenditure; tax; decreases
tax; expenditure; does not change
tax; expenditure; decreases
expenditure; tax; does not change
expenditure; tax; increases
When the government’s outlays equal its tax revenue, the budget
has a deficit and the national debt is increasing.
has a surplus and the national debt is increasing.
has a surplus and the national debt is decreasing.
has a deficit and the national debt is decreasing.
is balanced and the national debt is not changing.
Source: Financial Times, August 5, 2016
Explain why the Fed might be cautious about raising interest rates despite strong jobs growth.
The Fed might be cautious about raising interest rates despite strong jobs growth because _______.
although raising interest rates encourages further job? growth, it also creates inflation
raising interest rates will slow real GDP growth even? further, decrease jobs? growth, and at the same time create inflation
with slow real GDP? growth, raising interest rates will slow real GDP growth even further and decrease jobs growth
Clinton and Trump on fiscal policy
In the 2016 Presidential election campaign, both Hillary Clinton and Donald Trump committed to big government infrastructure spending and tax cuts.
Source: The Wall Street Journal, July 27, 2016
Consider an increase in infrastructure spending and a tax cut of the same magnitude. What policy will change aggregate demand the most: an increase in infrastructure spending or a cut in taxes?
A combination of an increase in infrastructure spending and an equal cut in taxes
Neither an increase in infrastructure spending nor a cut in taxes will influence aggregate demand
A cut in taxes
An increase in infrastructure spending
During the Great Depression, real GDP decreased, unemployment soared, and the inflation rate was negative. Which would have been the appropriate federal government policy combination to improve economic performance?
decrease government expenditure, increase taxes, decrease the quantity of money
increase government expenditure, decrease taxes, increase the quantity of money
increase government expenditure, decrease taxes, decrease the quantity of money
do not change government expenditures or taxes , increase the quantity of money
decrease government expenditures, increase taxes, do not change the quantity of money
The money multiplier is equal to? ______.
monetary base divided by quantity of money
quantity of money divided by monetary base
change in monetary base divided by change in the quantity of money
the Federal Funds rate
If the economy is in an equilibrium with real GDP less than potential GDP, a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services.
raising; not changing
Control of monetary policy rests with
the Federal Reserve.
the Comptroller of the Currency.
To fight unemployment and close a recessionary? gap, the Fed? ________.
stimulates aggregate demand by lowering the federal funds? rate, which increases the quantity of money
increases? employment, which increases real GDP
increases bank? reserves, which banks use to make new loans to? businesses, which increases aggregate supply
stimulates aggregate supply by lowering the federal funds? rate, which increases potential GDP
The desired reserve ratio is 3 percent. Robert deposits $3,000 in Bank America. Bank America keeps its minimum desired reserves and lends the excess to Fredrica. How much does Bank America lend to Fredrica?
The Federal Reserve fears that the United States economy is growing too slowly and is stuck in a recession. To move the economy back to its potential GDP, the most likely policy action for the Fed is to ________ the federal funds and thus ________ .
lower; increase aggregate supply
lower; increase aggregate demand
raise; increase aggregate demand
raise; decrease aggregate demand
lower; decrease aggregate supply
Explain how aggregate demand changes when the government increases both expenditures on goods and services and taxes by $100 billion.
Aggregate demand ______ because the increase in government expenditure has ______ effect on aggregate demand than the effect of the tax increase.
?increases; a smaller
?decreases; a larger
?increases; a larger
?decreases; a smaller
An example of automatic fiscal policy is
Congress passing a tax rate reduction package.
the federal government expanding spending at the Department of Education.
a change in taxes that has no multiplier effect.
expenditure for unemployment compensation increasing as economic growth slows.
the Federal Reserve reducing interest rates as economic growth slows.
When the Fed ________ securities in an open market operation, banks’ reserves ________, and therefore lending ________.
sells; decrease; increases
buys; do not change; does not change
buys; increase; increases
buys; decrease; decreases
sells; increase; increases