Download Fifth Quiz With Answers

AEM 1300
Fifth Quiz
July 29, 2016
NAME: ___________________________________________________
CORNELL NET ID (Cornell Email Address) __________________________
Signature __________________________________________________
Point values for each question are indicated. Total points – 20
Part I (Each Question is worth 1 point)
1. Which of the following is/are automatic destablizer(s)?
a) Progressive tax structure
b) Food stamps and unemployment insurance
c) A limit on overall expenditures
d) A reduction of the tax rates for the poor during recession
e) Both C and D
f) None of above
F
B
E
GDP
A
C
t0
t1
t2
D
t3
t4
t5
Time
2. Refer to the figure above. If a recession is confirmed at C, and an expansionary policy was
implemented at D, and it takes effect at E, then the policy lags from C to D and D to E are:
a) implementation lag; response lag
b) response lag; implementation lag
c) all of them are response lag
d) all of them are implementation lag
e) none of above
3. According to the life-cycle theory of consumption, which of the following statement is false?
a. People make consumption decisions based on permanent income.
b. Households consume an amount less than their incomes during their prime working years and an
amount greater than their incomes during their early working years and after they have retired
c. Given this theory, we can conclude that giving poor people an unexpected check for $1,000 is an
effective expansionary fiscal policy in recession.
d. Both (a) and (c)
e. Both (a) and (b)
f. None of above
4. Which of the following statements about social security is correct?
I.
Pay-as-you-go system
II.
Defined-benefit pension
III.
Defined-contribution pension
IV.
Individual savings account for retirement
a)
b)
c)
d)
I and II
II,IV
I,III
All of above
5. If financial crises cause incomes to decrease and consumption then decreases dramatically, our
model can explain this if the _____ curve shifts _____ . An increase in the discount rate will
cause the _____ curve to shift _____.
a) aggregate demand; left; aggregate supply; right
b) aggregate supply; down; aggregate supply; not at all
c) aggregate demand; left; aggregate demand; left
d) aggregate supply; up; aggregate demand; left
e) none of the above
6. During the Great Recession of 2008-2009, the time it took for the Obama administration to
put the stimulus package into legislation is called _____________ and the time it took for the
stimulus package to have an effect on the economy is called_____________
a. Recognition lag; Implementation lag
b. Recognition lag; Response lag
c. Implementation lag; Response lag
d. Response lag; Implementation lag
7. In the Life Cycle Theory of consumption, a person’s consumption decisions depend on:
a. The income in the current period
b. Whether or not the government tax take is higher than other countries
c. Whether a given amount of income is seen as permanent or transitory
d. None of the above
8. If the wage increases and we observe that labor supply decreases, we can
conclude___________; If one wins a 2 million dollar lottery and we observe labor supply
decreases, we can conclude__________
a)
b)
c)
d)
Income effect dominates substitution effect; there is only pure income effect
Substitution effect dominates income effect; Substitution effect dominates income effect
Income effect dominates substitution effect; Substitution effect dominates income effect
Substitution effect dominates income effect; there is only pure income effect, no
substitution effect
9. Which of the following is NOT the goal of Social Security?
A)
B)
C)
D)
E)
To help ensure adequate retirement income.
To deduce dependency of the retired on welfare.
To ensure that benefits are positively correlated to contributions.
To support workers with low labor income.
All of the above are the goals of Social Security.
10. When a financial panic occurs and there is a run on the banking system
a. It is the Federal Reserve that must step up to buy assets as the Lender of Last Resort
b. Banks must cover their obligations by selling assets to raise cash
c. It is possible to profit by buying cheap assets and selling them later after the system is
stabilized
d. All of the above
e. None of the above
PART II
1. Automatic destabilizers (4 points) Please describe why budget-targeting policy is an
automatic destabilizer for the business cycle.
See figure 15.7 in text and the accompanying explanation
2. Life Cycle Theory of Consumption (4 points)
a. Please draw a graph illustrating the Life Cycle Theory of Consumption. Be sure to
indicate the three different phases of a life cycle.
See Life Cycle graph in the text on page 300
b. What effects will a transitory one time transfer payment have on consumption and
labor supply? How would your answer change if instead of a transfer, the works got a cut in
their income tax rate?
Transfer payment – consumption up; labor supply down
Income tax cut - consumption up, labor supply up
3. Financial Panics! - Please explain what happens when a panic resulting in a bank run
threatens the banking system. What is the role of the Federal Reserve in preventing the system
from collapsing? (2 points)
As all banks try to sell assets to raise cash to satisfy their depositors, the price of assets crashes
and nobody is able to raise the cash. The Federal Reserve can step in as the lender of last resort
to buy the assets and provide cash to the system