Q: Suppose real GDP is \$$12.6 trillion and potential GDP is \12.4 $$trillion. To move the economy back to potential GDP, Congress should

lower government purchases by an amount less than \$200 \text{ billion}

Question 1

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.

Accepted Answer

discretionary fiscal policy; automatic stabilizers

Question 2

Suppose real GDP is \$$12.6 trillion and potential GDP is \12.4 $$trillion. To move the economy back to potential GDP, Congress should

Accepted Answer

lower government purchases by an amount less than \$200 	ext{ billion}

Question 3

Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy?

Accepted Answer

a significant decrease in investment spending

Question 4

It is ________ difficult to effectively time fiscal policy than monetary policy because ________.

Accepted Answer

more; fiscal policy takes longer to implement

Question 5

The federal budget deficit acts as an automatic stabilizer because

Accepted Answer

government tax revenues decrease during a recession

Question 6

According to the short-run Phillips curve, if unemployment is $$2.4\%$$ and inflation is $$3.7\%$$, an increase in the inflation rate might result in which of the following?

Accepted Answer

a decrease in the unemployment rate to $$2.0\%$$

Question 7

Suppose the Fed used contractionary policy to push short-run equilibrium to point C in the Phillips curve diagram. If the short-run equilibrium remained at point C long enough such that firms and households adjusted their expectations, then

Accepted Answer

the short-run Phillips curve would shift down.

Question 8

If workers and firms know that the Federal Reserve is following an expansionary monetary policy, workers and firms will expect inflation to ________ and will adjust wages so that the real wage ________.

Accepted Answer

increase; remains unchanged

Question 9

If the economy experiences a negative supply shock, which of the following will be true?

Accepted Answer

Inflation will rise, and real GDP will fall.

Question 10

Employees at the university have negotiated a $$5\%$$ increase in wages for the next year, based on their inflation expectations. If inflation is actually $$4\%$$ over the next year, which of the following will occur?

Accepted Answer

Real wages for university employees will rise.

Question 11

China runs a current account surplus with the United States. Which of the following must be true about China's balance of payments with the United States?

Accepted Answer

It must run a financial account deficit.

Question 12

The French fall in love with California wines and triple their purchases of this beverage. Assuming all else remains constant, this would be represented as a movement from

Accepted Answer

B to C.

Question 13

How does a decrease in value of a country's currency relative to other currencies affect its balance of trade?

Accepted Answer

A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and increases the balance of trade.

Question 14

If national saving increases, ________. (Assume that the capital account is zero and net transfers are zero.)

Accepted Answer

the sum of domestic investment and net foreign investment must increase

Question 15

If the Fed pursues an expansionary monetary policy, domestic investment in the United States will ________ and net exports will ________.

Accepted Answer

increase; increase

Question 16

When the value of a currency is determined mostly by supply and demand, but with occasional government intervention, the exchange rate system is defined as

Accepted Answer

a managed float

Question 17

How will the exchange rate (foreign currency per dollar) respond to a decrease in the relative rate of productivity growth in the United States in the long run?

Accepted Answer

Exchange rates will fall.

Question 18

If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will

Accepted Answer

be equal to the relative purchasing power across the currencies in the long run.

Question 19

Which of the following is an example of discretionary fiscal policy?

Accepted Answer

the tax cuts passed by Congress in 2001 to combat the recession

Question 20

To combat a recession with discretionary fiscal policy, Congress and the president should

Accepted Answer

decrease taxes to increase consumer disposable income.

Macroeconomics Midterm Study Guidance: Fiscal Policy, Phillips Curve, Exchange Rates, and Balance of Payments

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