ECON Drexel University Winter 2009 Assignment 4. Due date: Mar. 11, 2008

Transcription

1 ECON Drexel University Winter 2009 Assignment 4 Due date: Mar. 11, 2008 Instructor: Yuan Yuan Name This homework has up to 5 points bonus. Question 1 (40 points, 2 points each): MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ANSWER SHEET: 1) 11) 2) 12) 3) 13) 4) 14) 5) 15) 6) 16) 7) 17) 8) 18) 9) 19) 10) 20) 1) A decrease in interest rates can the demand for stocks as stocks become relatively attractive investments as compared to bonds. A) increase; more B) increase; similar C) decrease; less D) increase; less E) decrease; more 1) 2) An increase in the interest rate should the demand for dollars and the value of the dollar, and net exports should. A) decrease; increase B) increase; not change C) increase; decrease D) increase; increase E) decrease; decrease 2) 1

2 3) From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely A) decrease interest rates. B) increase interest rates. C) increase income tax rates. D) decrease income tax rates. 3) 4) Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively and real GDP to be relatively. A) higher; higher B) lower; lower C) lower; higher D) higher; lower 4) 5) Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve A) cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be. B) does not try to eliminate recessions, but instead focuses on preventing inflation. C) can fine tune the economy and realistically hope to keep the economy from experiencing recessions. D) cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions. 5) 6) Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism in which the Fed can affect the economy through monetary policy? Increasing the money supply A) raises the interest rate and consumers decrease spending on durable goods. B) causes people to spend more because they have more money. C) lowers the interest rate, and firms increase investment spending. D) lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports. 6) 7) The Federal Reserve cannot target both the money supply and the interest rate because it does not control A) the discount rate. B) money demand. C) open market operations. D) bank reserves. 7) 8) The Federal Open Market Committee determines the monetary policy of the United States A) with input from Congress and the president. B) with input from Congress. C) with input from the president. D) without input from Congress or the president. 8) 9) Countries with highly independent central banks tend to have A) almost zero inflation rates. B) higher inflation rates than countries whose central banks have little independence. C) about the same inflation rates as countries whose central banks have little independence. D) lower inflation rates than countries whose central banks have little independence. 9) 2

3 10) Fiscal policy refers to changes in A) the money supply and interest rates that are intended to achieve macroeconomic policy B) federal taxes and purchases that are intended to fund the war on terrorism. C) federal taxes and purchases that are intended to achieve macroeconomic policy D) state and local taxes and purchases that are intended to achieve macroeconomic policy 10) 11) The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of A) discretionary monetary policy. B) automatic stabilizers. C) discretionary fiscal policy. D) automatic monetary policy. 11) 12) The largest and fastest-growing category of federal government expenditures is A) grants to state and local governments. B) national park spending. C) transfer payments. D) interest on the national debt. 12) 13) Government transfer payments include which of the following? A) national defense B) Social Security and Medicare programs C) grants to state and local governments D) interest on the national debt 13) 14) Social Security began as a "pay-as-you-go" system, meaning that payments to current retirees were paid A) from taxes collected from past workers. B) as long as the government had funds available. C) from taxes collected from current workers. D) as the government collected tax revenues. 14) 15) Since the Social Security system began in 1935, the number of workers per retiree has A) continually risen. B) risen and declined with different generations. C) continually declined. D) stayed roughly the same. 15) 16) Expansionary fiscal policy involves A) increasing the money supply and decreasing interest rates. B) increasing government purchases or decreasing taxes. C) decreasing the money supply and increasing interest rates. D) increasing taxes or decreasing government purchases. 16) 17) From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, then the president and the Congress would most likely A) decrease oil prices. B) decrease government spending. C) increase the required reserve ratio and decrease government spending. D) lower interest rates. E) decrease taxes. 17) 3

4 18) Which of the following would be most likely to induce the president and the Congress to conduct contractionary fiscal policy? A significant A) decrease in real GDP. B) decrease in oil prices. C) increase in labor productivity. D) increase in inflation. 18) 19) Automatic stabilizers refer to A) changes in federal taxes and purchases that are intended to achieve macroeconomic policy B) the money supply and interest rates that automatically increase or decrease along with the business cycle. C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy D) government spending and taxes that automatically increase or decrease along with the business cycle. 19) 20) The Federal Reserve plays a larger role than the president and the Congress in stabilizing the economy because A) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. B) the Federal Reserve can immediately recognize when the economy is below or above potential. C) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. D) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time. 20) 4

5 Question 2 (10 points) What is crowding out effect? Use both static AD-AS model and money supply and money demand model to verbally and graphically explain crowding out effect. Question 3 (15 points) 1) If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5, then how much would the government need to change taxes to bring the economy to equilibrium at potential? Show your work. (5 pts) 2) Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion. Use basic AD-AS model to verbally and graphically show what the result on the economy would be if the president and the Congress increased government purchases by $500 billion. Assuming the government purchases multiplier is greater than unity. (10 pts) Question 4 (10 points) If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2, does it necessarily follow that the federal government acted to raise taxes or cut government spending in Year 2? Explain. Question 5 (10 points) Is it a good idea that the federal government always runs a balanced budget? Explain. Question 6 (15 points) What is the Philips curve? Verbally and graphically show the consistence between the Philips curve and basic AD-AS model. Question 7 (Extra 5 points) Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?