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ECON 002 Lecture Notes - Lecture 10: Automatic Stabilizer, Potential Output, Business Cycle

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carmineant316
1 Aug 2018
School
UPenn
Department
Economics
Course
ECON 002
Professor
Luca Bossi

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Document Summary

Governments could have: output targets: ****, unemployment targets: not in this class, price targets: later on when monetary policy. Suppose the government has an output target and call that target yn. This is called the natural rate of output or potential output = output the economy would achieve at the natural rate of unemployment. When the current level of output is not on target (i. e. at its natural rate) then we have a deviation that is called (income) tax revenues t = * y. = average marginal tax rate on income (%). Intuition:tax revenues are proportional to gdp because when y increases (decreases), tax revenues increase (decreases) because there are more (less) earnings in the economy. Deficits are typically countercyclical (rise when y falls and fall when y rises) Even if the govt has a fiscal policy that would lead to no deficits at yn, deficits could still occur. The reason is simple: y does not always equal yn.

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Related Questions

1. The opportunity cost of holding money is the:___.

a. nominal interest rate.

b. unemployment rate.

c. federal funds rate.

d. prevailing mortgage rate.

2. If government debt is not changing, then:___.

a. the economy is at long-run equilibrium.

b. the government’s budget must be balanced.

c. GDP must equal the natural rate of output.

d. capital per worker is constant.

3.The Taylor rule for monetary policy relates the output gap and inflation to the:___.

a. velocity of money.

b. reserve requirement on deposits.

c. federal funds rate.

d. meeting schedule of the FOMC

4. The inside lag is the:___.

A) time between a shock to the economy and the policy action responding to that shock.

B) time between a policy action and its influence on the economy.

C) time between a shock to the economy and the influence on the economy of a policy action.

D) difference between the time it takes to implement monetary policy and the time it takes to implement fiscal policy.

Short answer?

What causes shifts in the IS or LM curves?

Fiscal policy is carried out primarily by

A) the Federal government.

B) state and local governments working together.

C) state governments alone.

D) local governments alone.

 

Fiscal policy refers to the:

A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

B) manipulation of government spending and taxes to achieve greater equality in the distribution of income.

C) altering the interest rate to change aggregate demand.

D) fact that equal increases in government spending and taxation will be contractionary. 

 

Expansionary fiscal policy is so named because it:

A) involves an expansion of the nation's money supply.

B) necessarily expands the size of government.

C) is aimed at achieving greater price stability.

D) is designed to expand real GDP.

 

An appropriate fiscal policy for severe demand-pull inflation is:

A) an increase in government spending.

B) depreciation of the dollar.

C) a reduction in interest rates.

D) a tax rate increase. 

 

29. The amount by which government expenditures exceed revenues during a particular year is the:

A) public debt.

B) budget deficit.

C) full-employment.

D) GDP gap.

 

30. If actual GDP is greater than potential GDP, we have

A) a negative GDP gap

B) a positive GDP gap

C) minimum GDP gap

D) maximum GDP gap 

 

31. Money functions as:

A) a store of value.

B) a unit of account.

C) a medium of exchange

D) all of the choices 

 

 

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending. 

 

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

 

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

 

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

 

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

 

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

 

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

 

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease