ECON 2301 Test 3 Flashcards
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Questions and Answers

Typically, the budget deficit is financed by:

  • Both A and C
  • Printing money
  • Issuing debt (correct)
  • Raising taxes

    • If there is initially a federal budget deficit, and taxes fall while transfer payments rise:

  • AD increases and the budget deficit decreases
  • There is an indeterminate effect on both AD and the budget deficit
  • AD decreases and the budget deficit decreases
  • AD increases and the budget deficit increases (correct)
  • AD decreases and the budget deficit increases

    • AD will shift to the right, other things being equal, when:

  • The government budget deficit increases because government purchases rose (correct)
  • Under any of the above circumstances
  • The government budget deficit increases because taxes rose
  • The government budget deficit increases because transfer payments fell

    • An expansionary monetary policy is likely to increase real output more than just temporarily:

    <p>When the economy is operating at less than full capacity</p> Signup and view all the answers

    If the Fed buys a U.S. government bond from a member of the public:

    <p>The banking system has more reserves and the money supply tends to grow</p> Signup and view all the answers

    When the money supply decreases, other things being equal:

    <p>Real interest rates rise and investment spending falls</p> Signup and view all the answers

    Which of the following is not a function of the Federal Reserve System?

    <p>Limiting the national debt</p> Signup and view all the answers

    If the Fed sells bonds, the short-run impact of this policy will tend to include:

    <p>An increase in real interest rates</p> Signup and view all the answers

    Which of the following is most frequently used when the Fed is attempting to adjust the money supply?

    <p>Open market operations</p> Signup and view all the answers

    All decisions of the Federal Reserve are subject to approval by:

    <p>Only the Board of Governors of the Federal Reserve</p> Signup and view all the answers

    Ceteris paribus, when nominal GDP falls:

    <p>Interest rates will tend to fall</p> Signup and view all the answers

    The primary reason that money is demanded is for:

    <p>Transaction purposes</p> Signup and view all the answers

    Federal funds market rate is:

    <p>Lower than the discount rate</p> Signup and view all the answers

    What is typically written as C + I + G + NX?

    <p>D</p> Signup and view all the answers

    Expansionary fiscal policy, other things being equal, will tend to:

    <p>Do both A and C.</p> Signup and view all the answers

    How does a change in income taxes primarily affect aggregate demand?

    <p>An income tax change alters disposable income and consumption spending.</p> Signup and view all the answers

    Which of the following combinations of changes would have a contractionary effect on aggregate demand?

    <p>An increase in taxes and a decrease in government purchases.</p> Signup and view all the answers

    To offset the effect of a steep fall in net exports on the economy, the government might:

    <p>Increase government purchases.</p> Signup and view all the answers

    The government's fiscal policy is its plan to regulate aggregate demand by manipulating:

    <p>Taxation and spending.</p> Signup and view all the answers

    Assume that the government is considering plans to increase aggregate demand in order to reduce unemployment. Which of the following would be effective?

    <p>Any of the above.</p> Signup and view all the answers

    If the government sought to end a recession, which of the following would be an appropriate policy?

    <p>Decrease taxes and increase transfer payments.</p> Signup and view all the answers

    If unemployment is the most significant problem in the economy, which of the following actions would be an appropriate fiscal policy response?

    <p>Both A and C above.</p> Signup and view all the answers

    The Magic Number for this quiz is:

    <p>77</p> Signup and view all the answers

    The most important automatic stabilizer (the one with the biggest impact on the economy) is:

    <p>The tax system.</p> Signup and view all the answers

    When the economy goes into a _____, the amount of unemployment compensation and welfare payments _____ automatically.

    <p>recession; increase</p> Signup and view all the answers

    Automatic stabilizers in the United States are:

    <p>Changes in government transfer payments and tax revenues that vary automatically and inversely to business cycle changes.</p> Signup and view all the answers

    Which of the following statements is not true with regard to automatic stabilizers?

    <p>They require legislative action.</p> Signup and view all the answers

    During a recession, total public assistance payments and unemployment compensation payments automatically increase while income taxes automatically decrease. Which of the following best describes the effect of these changes on aggregate demand?

    <p>Aggregate demand will be more than it would be without these automatic stabilizers.</p> Signup and view all the answers

    The primary benefit of the automatic stabilizers is:

    <p>They require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle.</p> Signup and view all the answers

    During an expansionary economy, public assistance payments and unemployment compensation payments automatically decrease while income taxes automatically increase. Which of the following best describes the effect of these changes on aggregate demand?

    <p>Both A and D accurately describe their effect.</p> Signup and view all the answers

    The federal government funds deficit spending by:

    <p>Issuing bonds.</p> Signup and view all the answers

    If there is initially a federal budget deficit, and taxes rise, while transfer payments fall:

    <p>Aggregate demand decreases and the budget deficit decreases.</p> Signup and view all the answers

    Which of the following would be an example or result of expansionary fiscal policy in action?

    <p>A budget deficit.</p> Signup and view all the answers

    Contractionary fiscal policy consists of:

    <p>Decreased government purchases, increased taxes, decreased transfer payments.</p> Signup and view all the answers

    Budget surpluses exist when:

    <p>Government tax revenues exceed its spending.</p> Signup and view all the answers

    A contractionary fiscal policy may be implemented in order to:

    <p>Create or expand a budget surplus.</p> Signup and view all the answers

    Which of the following measures is associated with an expansionary fiscal policy?

    <p>Lowering taxes.</p> Signup and view all the answers

    If government policymakers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change?

    <p>Decrease government purchases of goods and services.</p> Signup and view all the answers

    If government policymakers were worried about the inflationary potential of the economy, which of the following would not be a correct fiscal policy change?

    <p>Increase government purchases of goods and services.</p> Signup and view all the answers

    Contractionary fiscal policy, other things being equal, will tend to:

    <p>Do both B and C.</p> Signup and view all the answers

    You are a member of Congress when the economy is in a recession. If your goal is to achieve a fully employed labor force, which of the following fiscal policy scenarios should you follow?

    <p>Raise government purchases, reduce taxes, and/or increase transfer payments.</p> Signup and view all the answers

    Someone earning $150,000 per year will pay the same amount of ____________ as someone earning $150,000,000 per year.

    <p>Social Security tax</p> Signup and view all the answers

    A decrease in net taxes (taxes minus transfer payments) would do which of the following in the short run?

    <p>Reduce unemployment.</p> Signup and view all the answers

    If MPC = 0.8, a $200 billion increase in government purchases would have what size effect on the 'first round' of induced added consumption?

    <p>$160 billion.</p> Signup and view all the answers

    The Magic Number for the Module 12 Complete Quiz (from the Chapter 14 Sections 6 & 7 Section Quiz was:

    <ol start="23"> <li></li> </ol> Signup and view all the answers

    Economists agree that the multiplier is close to zero when:

    <p>The economy is at or near full employment.</p> Signup and view all the answers

    The extent of the multiplier effect visible within a short time will be ____ the total effect indicated by the multiplier formula.

    <p>Less than.</p> Signup and view all the answers

    When the economy goes into a _____, the amount of taxes collected by the government _____ automatically.

    <p>recession; falls</p> Signup and view all the answers

    GDP is:

    <p>The value of all final goods and services produced domestically within a given period.</p> Signup and view all the answers

    Final goods or services used to compute GDP refer to:

    <p>Goods and services purchased by the ultimate users.</p> Signup and view all the answers

    Intermediate products:

    <p>Produced domestically are not directly reflected in a nation's GDP.</p> Signup and view all the answers

    Consumption is the purchase of goods and services by:

    <p>Households.</p> Signup and view all the answers

    Consumption is the largest single component of GDP. In recent years it represents approximately ____ percent of GDP.

    <p>70</p> Signup and view all the answers

    The expenditure method of measuring GDP is calculated by adding up:

    <p>All of the above.</p> Signup and view all the answers

    Net exports are defined as:

    <p>Exports minus imports.</p> Signup and view all the answers

    Transfer payments are included in which category under the expenditure approach to GDP accounting?

    <p>Transfer payments are not directly included in GDP calculations.</p> Signup and view all the answers

    What is the measure of the income received by owners of resources used in making final goods and services?

    <p>Factor payments</p> Signup and view all the answers

    Which of the following is NOT part of U.S. GDP?

    <p>The value of a Toyota manufactured in Japan and sold in the United States</p> Signup and view all the answers

    Given a constant rate of growth of real GDP, what would cause a fall in real GDP per capita?

    <p>A rate of population growth that is greater than the rate of growth of real GDP</p> Signup and view all the answers

    The prosperity of a nation today is typically measured by its:

    <p>Output per capita</p> Signup and view all the answers

    A country will roughly double its GDP in twenty years if its annual growth rate is:

    <p>3.5 percent</p> Signup and view all the answers

    As more capital per worker is added, a per worker production function generally becomes:

    <p>Flatter because capital is subject to diminishing marginal returns.</p> Signup and view all the answers

    The faster the rate of technological progress:

    <p>The greater the rate of economic growth.</p> Signup and view all the answers

    In a fully employed economy, invention and discovery:

    <p>Are achieved through sacrifices in current consumption.</p> Signup and view all the answers

    Which of the following best describes the relationship between economic growth and literacy?

    <p>Increased literacy stimulates economic growth by raising labor productivity, and as the economy grows, people consume more education.</p> Signup and view all the answers

    Sergei has developed a new fat substitute that has no calories and produces no side effects. In order for him to be encouraged to bring this innovation to the marketplace he is likely to want which of the following the most?

    <p>A patent.</p> Signup and view all the answers

    GDP is:

    <p>The value of all final goods and services produced domestically within a given period of time.</p> Signup and view all the answers

    The goods and services that are used in the production of other goods and services are called:

    <p>Intermediate goods.</p> Signup and view all the answers

    Which of the following products are not included in current U.S. GDP?

    <p>A Ford Mustang produced last year and sold this year.</p> Signup and view all the answers

    GDP does not directly include:

    <p>The value of intermediate goods sold during a period.</p> Signup and view all the answers

    The total dollar value of purchases in the economy is far larger than GDP primarily because:

    <p>GDP excludes the value of intermediate goods exchanged.</p> Signup and view all the answers

    The largest single expenditure component of GDP is:

    <p>Consumption.</p> Signup and view all the answers

    The most volatile GDP category under the expenditure approach is:

    <p>Investment.</p> Signup and view all the answers

    The investment component of GDP includes:

    <p>Construction of a new steel mill.</p> Signup and view all the answers

    If a nation's imports exceed its exports:

    <p>GDP will be less than the sum of consumption, investment, and government purchases.</p> Signup and view all the answers

    The services rendered by a special agent with the Federal Bureau of Investigation is included in which expenditure category of GDP?

    <p>Government purchases</p> Signup and view all the answers

    In 2008, U.S. Nominal GDP totaled approximately:

    <p>$14.3 trillion</p> Signup and view all the answers

    If the price index is now 120, it means:

    <p>Prices are 20 percent higher than in the base year.</p> Signup and view all the answers

    Which of the following is a problem with using real GDP as a measure of economic well-being?

    <p>Does not account for production within the household.</p> Signup and view all the answers

    Estimates of the size of the underground economy range from:

    <p>4 to 20 percent.</p> Signup and view all the answers

    Which of the following factors that affect our well-being does GDP fail to adequately account for?

    <p>All of the above.</p> Signup and view all the answers

    Measures of well-being include:

    <p>All of the above.</p> Signup and view all the answers

    The largest single source of revenue for the federal government is the:

    <p>Personal income tax.</p> Signup and view all the answers

    The main components of spending, which can cause changes in aggregate demand, are:

    <p>Consumption, investment, government purchases, and net exports.</p> Signup and view all the answers

    Study Notes

    GDP and Measurement

    • GDP stands for Gross Domestic Product, representing the value of all final goods and services produced domestically within a specified time.
    • Final goods are goods and services purchased by ultimate users, not intermediate goods used in production.
    • Intermediate goods are not included in GDP directly to avoid double counting.
    • The consumption component, accounting for roughly 70% of GDP, includes durable goods, nondurable goods, and services.

    Expenditure Approach to GDP

    • GDP can be measured using the expenditure approach: GDP = Consumption + Investment + Government Spending + (Exports - Imports).
    • Net exports equal exports minus imports, and can be negative if imports exceed exports.
    • Transfer payments are excluded from GDP calculations as they do not correlate with goods or services purchased.

    Economic Growth and Indicators

    • Real GDP per capita measures a country’s economic prosperity, adjusting for population.
    • A country's GDP can approximate doubling in twenty years with an annual growth rate of about 3.5%.
    • Investment is the most volatile GDP component, influenced by interest rates and economic conditions.

    Technological Progress and Education

    • Rapid technological progress correlates with greater economic growth, highlighting innovation's importance in boosting productivity.
    • Increased literacy rates stimulate economic growth by enhancing labor productivity.

    GDP Limitations

    • Real GDP does not effectively capture changes in quality, externalities, leisure, or nonmarket transactions, impacting well-being assessments.
    • The underground economy is estimated at 4 to 20% of GDP, indicating unaccounted economic activity.

    Government Revenue and Fiscal Policy

    • The main revenue source for the federal government is personal income tax, which constitutes a large percentage of total revenue.
    • Expansionary fiscal policy can lower unemployment rates by increasing demand for labor and goods.

    Effects of Tax Changes

    • Changes in income taxes primarily affect aggregate demand by altering disposable income and, consequently, consumption spending.
    • A contractionary effect on aggregate demand can occur with simultaneous increases in taxes and decreases in government purchases.

    Government Response to Economic Changes

    • To counteract a decrease in net exports, increasing government purchases can help stimulate the economy and maintain aggregate demand.### Fiscal Policy Overview
    • Fiscal policy regulates aggregate demand primarily through taxation and government spending.
    • Altering taxes affects disposable income, impacting consumption and aggregate demand.
    • Direct government purchases influence aggregate demand by altering one of its components (G).

    Increasing Aggregate Demand

    • Effective ways to boost aggregate demand and reduce unemployment include:
      • Increasing government purchases of goods and services
      • Decreasing taxes
      • Increasing transfer payments
    • Any of these strategies would tend to lower unemployment.

    Ending a Recession

    • Appropriate measures to address a recession include:
      • Decreasing taxes
      • Increasing transfer payments
    • Both actions can help shorten a recession by stimulating economic activity.

    Unemployment Concerns

    • In cases of significant unemployment, strategies that decrease taxes and increase government purchases are advantageous.
    • Decreasing transfer payments could further aggravate unemployment issues.

    Automatic Stabilizers

    • The tax system is the most influential automatic stabilizer, as it adjusts tax collections with economic cycles.
    • During economic expansions, tax revenues rise; conversely, they fall during contractions.
    • Automatic stabilizers counterbalance business cycle fluctuations without legislative intervention.

    Business Cycle Phases

    • During a recession, unemployment compensation and welfare payments increase automatically while tax revenues fall.
    • These automatic changes help maintain aggregate demand during economic downturns.

    Fiscal Policy Effects

    • A budget surplus occurs when tax revenues exceed government spending.
    • Contractionary fiscal policy is used to create or expand a budget surplus by decreasing government spending and increasing taxes.
    • Expansionary fiscal policy is often characterized by a budget deficit, which arises from increased government purchases.

    Interest Rates and Investment

    • Contractionary fiscal policy leads to higher interest rates, which typically decreases investment and net exports.
    • Expansionary monetary policy can stimulate output significantly when the economy operates below its full capacity.

    Federal Reserve Operations

    • The Federal Reserve influences the money supply by purchasing government bonds, thereby increasing reserves in the banking system.
    • A decrease in the money supply results in higher real interest rates, leading to a reduction in investment spending.

    Key Economic Metrics

    • Marginal Propensity to Consume (MPC) affects the first-round consumption impact of government spending, illustrating the multiplier effect.
    • When expansionary measures are taken, the effects on aggregate demand can diverge based on underlying economic conditions.

    Legislative Response to Economic Conditions

    • Policymakers may face dilemmas during recessions, balancing budget deficits and the need for economic stimulation through adjusted spending and taxation strategies.

    Budget Deficits and Surpluses

    • Changes in tax policy (rising taxes or decreasing transfer payments) directly affect budget deficits and aggregate demand, showcasing the interconnectivity of fiscal measures.

    Conclusion

    • Understanding the mechanisms and implications of fiscal policy is crucial for navigating economic challenges and promoting stability within the economy.### Federal Reserve System Overview
    • Established in 1913, the Federal Reserve System is the central bank of the United States.
    • Aims to create a safer, more flexible, and stable monetary and financial system.
    • Duties include conducting monetary policy, regulating banks, maintaining financial stability, and providing financial services.

    Monetary Policy Functions

    • Influences monetary and credit conditions to achieve maximum employment, stable prices, and moderate long-term interest rates.
    • Open market operations are the most frequently used method to adjust the money supply, involving buying and selling government bonds.

    Impact of Selling Bonds

    • When the Fed sells bonds, the money supply decreases, leading to reduced liquidity.
    • Real interest rates increase as the supply curve shifts left.

    Federal Reserve Governance

    • Decisions are approved solely by the Board of Governors, consisting of seven members appointed for 14-year terms.
    • The President and Senate review Board appointments but do not influence decision-making.

    Effect of Nominal GDP on Interest Rates

    • Ceteris paribus, a fall in nominal GDP typically leads to a decrease in interest rates due to reduced demand for money.

    Reasons for Demand for Money

    • Primary reason is for transaction purposes, facilitating the exchange of goods and services.
    • Additional reasons include precautionary and asset purposes.

    Federal Funds Market Rate

    • The federal funds market rate is usually lower than the discount rate.
    • It represents the cost of overnight loans between banks to meet reserve requirements.

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    Description

    Prepare for your ECON 2301 Test 3 with these flashcards that cover key concepts, including GDP and its components. Understand the definitions and implications of GDP in the context of national income and consumer expenditures. This quiz will help reinforce your knowledge and boost your confidence before the exam.

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