Econ Self-Test

  1. Selling Cars and buying new ones. Is this an example of fiscal policy?
    Yes bc the goal of the spending program was to stimulate the national economy
  2. Which govt revenue is to increase the most in the future?
    individual income taxes
  3. Who are the baby boomers?
    Ppl born from after WWII to 1965
  4. Why should the retirement of the baby boomers cause a large increase in the growth rate of spending by the federal govt on SS?
    More ppl will be collecting SS than now
  5. The dynamic model assumes potential GDP is constantly growing while the basic model assumes it is static
  6. In the dynamic model, expansionary policy would be used when the demands does not grow and in the basic it is used when the demand falls
  7. If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models
  8. Keeping real GDP at its potential using expansionary fiscal policy, what is Real GDP, Potential GDP, inflation rate and unemployment rate?
    higher/the same/higher/lower
  9. Government purchases multiplier
    change in equilibrium real GDP/change in govt purchases
  10. Tax Multiplier
    change in equilibrium real GDP/change in taxes
  11. The multiplier effect
    The initial increase in spending will result in rounds of "respending" resulting in a greater effect on real GDP than the initial increase in spending
  12. The govt purchase multiplier can have a value greater than 0 and less than 1 if
    the marginal propensity to consume is negative
  13. Why does the estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal policy
    The larger the multiplier, the greater the effects of an expansionary fiscal policy
  14. Change in govt spending
    change in GDP=multiplier * change in govt spending
  15. Why would a tax multiplier have a larger value after 2 years than after one?
    Consumers are more likely to perceive the tax change as permanent and change their spending choices
  16. If the SRAS were a horizontal line, what would the impact on the size of the govt purchases and tax multipliers?
    The impact of the multiplier would be larger if the SRAS curve is horizontal
  17. Crowding Out
    A decline in private expenditures as a result of increases in govt purchases
  18. Diff bet crowding out in the short run and long run
    In the short run, an increase in govt purchases may not cause crowding out, but they will in the long run
  19. Describe how the govt "thirsts" for funds
    The govt borrowing increases the demand for funds, causing the interest rate to rise
  20. Why would crowding out reduce economic growth?
    Increases in interest rates reduce investment, which is likely to reduce economic growth
  21. Temporary income and permanent income and health
    Temporary decrease income ppl have time to lose weight, but permanent income increase ppl have better health
  22. What is the cyclically adjusted budget deficit or surplus?
    the deficit or surplus in the fed govt's budget if the economy were at potential GDP
  23. In a recession, what happens to tax revenues and govt expenditures?
  24. What is the difference bet the federal budget and federal govt debt?
    The federal budget is the year-to-year short fall in tax revenues (T<G+TR). The Federal debt is the accumulation of all past deficits.
  25. A decrease in the federal govt's budget surplus can be the result of
    • decrease in taxes
    • increase in govt purchases
    • recession
  26. What is a tax wedge?
    The diff. between the pretax and post tax return to an economic activity.

    Ex) a tax on interest income would decrease the post tax return on investment
  27. Benefits to a flat tax
    1. Potential increases in labor supply, savings, and investment from a lower marginal tax rate

    2.Reduction in paperwork and compliance cost of the tax system
  28. The Phillip curve exhibits
    the relationship bet the unemployment and the inflation rates
  29. If price level increases over time then the average wage should increase by the same amount
  30. The unemployment rate for the long-run phillips curve is the
    natural rate of unemployment
  31. If workers expect a higher inflation rate, the short run Phillips curve shifts
  32. What should firms, consumers and the govt take into account when making decisions?
  33. If the public starts seeing a higher inflation rate, the Phillips curve will shift to the
  34. What is the Volcker disinflation?
    a reduction in the inflation rate bet 1979-1989
  35. Independent central banks are more effective at fighting
  36. Price Stickiness
    wages and prices declined very slowly during the disinflation process
  37. Nominal interest rates are equal to
    real interest rate plus expected inflation
  38. The current account
    net exports, net investment income, and net transfers
  39. The financial account
    net capital flows
  40. Balance of payment is equal to
    the current account plus the financial account
  41. the diff bet net exports and current account is
    net exports is a subcategory of the current account
  42. The balance of payments must always equal
  43. the surplus in the financial account means that
    a country is selling more financial assets than it buys
  44. You can have a trade deficit and a financial account deficit together if
    there are other current account items that make the overall current account balance a surplus
  45. The US trade deficit is almost always larger than the current account deficit because
    the US has a surplus in the services account
  46. An increase in US interest rates, the dollar has relative to the euro?
  47. An appreciation of the dollar is likely to lead to a current account deficit because
    imports decrease and exports decrease
  48. Income rises in Japan and speculations of the dollar will be higher, which causes the demand to
  49. When a country's currency appreciates, it is good for who and bad for who?
    the consumers and bad for the country's businesses
  50. When a currency appreciates it does what to the price of imports and exports?
  51. sagging dollar
    The Japanese yen has appreciated relative to the US dollar
  52. constant currencies
    the value of the currencies without exchange rate changes
  53. If global sales declined in dollar terms but rose in constant currencies, what happened to the value of the dollar?
  54. the dollar advanced against most currencies means
    the dollar is worth more in purchasing power than other currencies
  55. If there are no transfers or net investments, than net exports equals
    net foreign investments
  56. saving and investment equation in an open economy
  57. If national saving declines and national investment does not change, then net foreign investment has
  58. Net foreign investment was negative
    investment was larger than savings
  59. National saving
    domestic investment plus net foreign investment
  60. budget surpluses do what to public savings and low interest rates do what to foreign investment?
  61. twin deficit
    a govt budget deficit may lead to a current account deficit
  62. increased domestic investment will lead to
    capital inflow
  63. low domestic saving causes the current account to have a
  64. expansionary monetary policy is more effective in an open economy because
    interest rate decrease also reducing the value of the dollar, which increases net exports and increases aggregate demand
  65. expansionary fiscal policy is less effective in an open economy because
    increase govt spending can increase interest rates, which increases value and crowds out net exports
  66. policy channel?
    a way which monetary or fiscal policy affects the domestic economy
  67. higher interest rates cause GDP to decrease more in a open economy than a closed economy
  68. under the gold standard, exchange rates were determined by
    the relative amounts of gold in each country's currency
  69. under bretton woods, they exchange rates were determined by
    an agreement to fix the value of gold and all other currencies
  70. the theory of purchasing power parity states that the long-run level of the exchange rate must
    make it possible to buy equivalent bundles of goods in either country
  71. the 4 determinants of exchange rates in the long run are
    relative price levels, relative productivity growth, tastes, and trade barriers
  72. country that does not use the euro?
  73. When one currency is pegged against another its value
    is fixed in terms of that currency
  74. Why are foreign investors more likely to invest in US govt bonds than in US corporate bonds or stocks?
    The are less risky
  75. Why has globalization increased growth in the world economy?
    savings around the world can be channeled into the most productive investments
  76. undervalued currency
    if the actual rate is larger than the implied rate
  77. implied exchange rate
    local currency price/dollar price of big mac
  78. Countries that use the euro will not be able to
    set their own independent monetary policies
  79. Why does the govt buy its own currency?
    Increase the value
  80. A weaker dollar could mean higher inflation in the US because
    prices of imported goods are likely to be higher
  81. How would a govt manipulate the currency to get an "unfair" trade advantage
    the govt would undervalue the currency
  82. devaluation and revaluation
    reduction and increase in a fixed exchange rate
  83. capital controls
    limitations on the flow of foreign exchange and financial investment bet countries
Card Set
Econ Self-Test