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ECO 372T Wk 5 – Apply: Fiscal and Monetary Policy Homework
Payments made by the government that do not require an exchange of economic activity in return are also known as
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built-in stabilizers.
transfer payments.
government spending.
fiscal multipliers.
Using fiscal policy to stabilize the economy is difficult because
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the effects of policy changes are known with certainty.
potential income is known.
there are time lags involved in the use of fiscal policy.
the size of the government debt doesn’t matter.
One timing problem in using fiscal policy to counter a recession is the “legislative lag” that occurs between the
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time the need for the fiscal action is recognized and the time that the action is taken.
start of a predicted recession and the actual start of the recession.
time fiscal action is taken and the time that the action has its effect on the economy.
start of the recession and the time it takes to recognize that the recession has started.
When the federal government cuts taxes and increases purchases to stimulate the economy during a period of recession, such actions are designed to be
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passive.
contractionary.
expansionary.
automatic.
Suppose the reserve requirement is 10%.
- If the Federal Reserve decreases the reserve requirement, banks can lend out:
more reserves, thus decreasing the money multiplier and decreasing the money supply.
fewer reserves, thus increasing the money multiplier and increasing the money supply.
more reserves, thus increasing the money multiplier and increasing the money supply.
fewer reserves, thus decreasing the money multiplier and decreasing the money supply.
- The Federal Reserve:
rarely changes the reserve requirement and does not use the reserve requirement as a major monetary policy tool.
does not have the ability to change the reserve requirement since banks determine the amount of reserves to lend.
needs permission from the president before making changes to the reserve requirement.
changes the reserve requirement frequently in order to make adjustments to the money supply.
The discount rate is the interest _____.
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yield on long-term government bonds
rate at which the central banks lend to the U.S. Treasury
rate at which the Federal Reserve Banks lend to commercial banks
rate at which commercial banks lend to the public
The purpose of expansionary monetary policy is to increase _____.
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the inflation rate
the GDP gap
real GDP
interest rates
The interest rate that the Fed charges on loans made directly to banks is called _____.
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the discount rate
the prime rate
interest on reserves
the federal funds rate
Which of the following statements is true?
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The federal funds rate is higher than the prime rate.
The federal funds rate and the prime rate are often the same.
The prime rate is higher than the federal funds rate.
The prime rate is often the same as the discount rate.
For each of the following scenarios, determine which time lag is most likely to result when designing and implementing fiscal policy.
- The separation of power demonstrated between the legislative and executive branches of government combined with strong partisanship attitude among our elected politicians.
Recognition lag
Legislative lag
Implementation lag
All of these lags
- The fact that it takes economists working for the National Bureau of Economic Research months to declare the dates of peaks and troughs.
Recognition lag
Legislative lag
Implementation lag
All of these lags
- The time it takes to design and build new infrastructure after these projects have been passed by the legislature.
Recognition lag
Legislative lag
Implementation lag
All of these lags
The existence of lags in designing and implementing fiscal policy helps illustrate some of the limitations of fiscal policy aimed at easing the burdens of a recession.
Which of the following statements best describes a situation when fiscal policy is more appropriate?
The economy is quick to self- but the recession is very severe.
The implementation lag is shorter than the recognition and legislative lags.
Fiscal policy favors tax cuts instead of increased government purchases since this removes the legislative lag.
The economy is slow to self- or the recession is very severe.
A key feature of all automatic stabilizers is that they:
involve transfer payments.
require new legislation.
involve existing legislation.
are aimed at expanding the economy.
Which of the following is an example of built-in stability? As real GDP decreases,
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income tax revenues increase and transfer payments decrease.
income tax revenues and transfer payments both increase.
income tax revenues decrease and transfer payments increase.
income tax revenues and transfer payments both decrease.
Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government’s budget that
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reinforce changes in GDP.
produce a dynamically-adjusted budget.
help offset changes in GDP.
produce a standardized budget.
If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)
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expansionary fiscal policy.
contractionary fiscal policy.
nondiscretionary fiscal policy.
supply-side fiscal policy.
If the government wishes to increase the level of real GDP, it might reduce
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its purchases of goods and services.
the size of the budget deficit.
transfer payments.
taxes.
The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the
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recognition lag.
legislative lag.
spending lag.
implementation lag.
Which of the following serves as an automatic stabilizer in the economy?
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the progressive income tax
exchange rates
the inflation rate
interest rates
When the federal government changes purchases and/or taxes to stimulate the economy or rein in inflation, such policy is
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discretionary fiscal policy.
active monetary policy.
automatic fiscal policy.
active federal policy.
The intent of contractionary fiscal policy is to
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decrease aggregate supply.
increase aggregate supply.
increase aggregate demand.
decrease aggregate demand.
If Congress passes legislation to increase government purchases to counter the effects of a recession, then this would be an example of a(n)
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contractionary fiscal policy.
nondiscretionary fiscal policy.
expansionary fiscal policy.
supply-side fiscal policy.
When changes in taxes and government purchases occur in the economy without explicit action by Congress, such changes are referred to as
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cyclical stabilization.
automatic stabilizers.
implicit stabilization.
discretionary fiscal policy.
Fiscal policy is enacted through changes in
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the supply of money and foreign exchange.
unemployment and inflation.
interest rates and the price level.
taxation and government purchases.
One timing problem in using fiscal policy to counter a recession is the “implementation lag” that occurs between the
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time the need for the fiscal action is recognized and the time that the action is taken.
time fiscal action is taken and the time that the action has its effect on the economy.
start of a predicted recession and the actual start of the recession.
start of the recession and the time it takes to recognize that the recession has started.
The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n)
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legislative lag.
implementation lag.
budget lag.
recognition lag.
If taxes and government expenses did not vary with income, then income would
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be less stable.
not change.
be more stable.
be closer to potential income.
Unemployment compensation is
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not an automatic stabilizer.
an automatic stabilizer because it falls as income decreases, slowing an economic contraction.
an automatic stabilizer because it falls as income increases, slowing an economic expansion.
an automatic stabilizer because it rises as income increases, slowing an economic expansion.
One timing problem in using fiscal policy to counter a recession is the “recognition lag” that occurs between the
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start of a predicted recession and the actual start of the recession.
start of the recession and the time it takes to recognize that the recession has started.
time the need for the fiscal action is recognized and the time that the action is taken.
time fiscal action is taken and the time that the action has its effect on the economy.
As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system
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serves as an automatic stabilizer for the economy.
offsets the timing problem for fiscal policy.
increases crowding out in the economy.
decreases real interest rates in the economy.
When the federal government uses taxation and purchasing actions to stimulate the economy it is conducting
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employment policy.
incomes policy.
monetary policy.
fiscal policy
Due to automatic stabilizers, when the nation’s total income rises, government transfer payments
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and tax revenues increase.
decrease and tax revenues increase.
increase and tax revenues decrease.
and tax revenues decrease.
Fiscal policy is sometimes initiated on the advice of the
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Federal Reserve Board.
Council of Economic Advisers.
Congressional Budget Office.
Joint Economic Committee.
When the federal funds rate increases, banks make:
more loans to ensure they do not run low on reserves.
more loans so they can worry less about borrowing reserves.
fewer loans so they can worry less about borrowing reserves.
fewer loans to ensure they do not run low on reserves.
Choose the best response for each of the following statements.
- When the Federal Reserve makes an open market purchase, the Fed:
sells bonds to the public, which increases the money supply.
sells bonds to the public, which decreases the money supply.
buys bonds from the public, which decreases the money supply.
buys bonds from the public, which increases the money supply.
- If the Fed wants to increase interest rates, it should make an open market sale .
This would decrease the money supply and achieve the increase in interest rates.
Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the _____.
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federal funds rate
discount rate
prime rate
consumer price index
The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _____.
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short-term rate
federal funds rate
discount rate
prime rate
Which of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks?
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Reserve requirement
Open-market operations
Issuing currency
Check collection
The lending ability of commercial banks increases when the _____.
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Treasury collects tax revenues
reserve requirement is raised
Fed buys securities in the open market
discount rate is raised
Economic investment refers to _____.
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making new additions to a firm’s stock of capital.
selling a financial asset for a gain.
buying a financial asset for a gain.
postponing purchases of goods and services.
The purchase and sale of government securities by the Fed is called _____.
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open market operations
money market transactions
federal funds market
term auction facility
Financial markets pay close attention to changes in the federal funds rate because these changes _____.
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directly affect a large volume of loans
affect other interest rates in the economy
directly affect the interest payments on the national debt
indicate commercial bank lending policies
A newspaper headline reads: “Fed Cuts Federal Funds Rate for Fifth Time This Year.” This headline indicates that the Federal Reserve is most likely trying to _____.
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tighten monetary policy
reduce inflation in the economy
ease monetary policy
raise interest rates
Lowering the discount rate has the effect of _____.
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making it less expensive for commercial banks to borrow from central banks
forcing commercial banks to call in outstanding loans from their best customers
turning excess reserves into required reserves
turning required reserves into excess reserves
An increase in the money supply, all else held constant, usually _____.
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increases the interest rate and decreases aggregate demand
decreases the interest rate and decreases aggregate demand
decreases the interest rate and increases aggregate demand
increases the interest rate and increases aggregate demand
Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?
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The discount rate
Open-market operations
The federal funds rate
The reserve requirement
The major purpose of the Federal Reserve buying government securities in open market operations is to _____.
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raise money for government spending
increase interest rates
allow banks to increase their lending
reduce the excess reserves of banks
The interest rate that banks charge one another for the loan of excess reserves is the _____.
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discount rate
interest on reserves
prime rate
federal funds rate
If the Fed buys government securities from commercial banks in the open market _____.
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the Fed gives the securities to the commercial banks and increases the banks’ reserves
the Fed gives the securities to the commercial banks and decreases the banks’ reserves
commercial banks give the securities to the Fed, and the Fed decreases the banks’ reserves
commercial banks give the securities to the Fed, and the Fed increases the banks’ reserves
If the Fed sells government securities to the general public in the open market, the _____.
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Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase commercial bank reserves at the Fed
public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will increase their reserves at the Fed
Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed
public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will decrease their reserves at the Fed
If the federal funds rate _____.
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increases, the prime rate will increase
decreases, the prime rate will not change
decreases, the prime rate will increase
increases, the prime rate will decrease
Which of the following statements is true?
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The Federal Reserve does not set the federal funds rate, but it influences it through the use of its open-market operations.
The Federal Reserve sets the federal funds rate.
The Federal Reserve sets the target for the federal funds rate, and then uses the reserve requirement to push banks toward that target.
The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.
During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ______ the money supply, which will put ______ pressure on nominal interest rates.
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decrease; upward
increase; upward
decrease; downward
increase; downward
When the Federal Reserve Banks decide to buy government bonds from banks and the public, the supply of reserves in the federal funds market _____.
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decreases and the federal funds rate increases
increases and the federal funds rate decreases
increases and the federal funds rate increases
decreases and the federal funds rate decreases
The fundamental objective of monetary policy is to assist the economy in achieving a _____.
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full-employment, noninflationary level of total output
balanced budget consistent with full-employment
rapid pace of economic growth
money supply, which is based on the gold standard
The demand curve for federal funds is _____.
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downward-sloping
vertical
horizontal
upward-sloping
Reserves borrowed at the federal funds rate are usually repaid _____.
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at the end of the month
in one year
the next day
in five years
The interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the _____.
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term auction rate
discount rate
real interest rate
prime rate
Which of the following statements is ?
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The federal funds rate is the rate banks charge their most creditworthy customers.
The prime rate involves longer, more risky loans than the federal funds rate.
The federal funds rate is derived based on the prime rate.
The discount rate is the rate banks charge one another on overnight loans.
When the Fed wants to lower the federal funds rate, it _____.
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increases the reserve requirement
increases the discount rate
buys bonds from banks and the public
increases the prime rate
If the Board of Governors of the Federal Reserve System increases the reserve requirement, this change will ___
The existence of lags in designing and implementing fiscal policy helps illustrate some of the limitations of fiscal policy aimed at easing the burdens of a recession.