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Week 5 assignment
Please submit your answers electronically (to your assignment folder). This assignment is worth 100
points.
Chapter 13: Fiscal Policy, Deficits, and Debts
1. Expansionary fiscal policy can be achieved with an increase in (government spending, taxes)
_______, a decrease in (government spending, taxes) _______, or a combination of the two;
contractionary fiscal policy can be achieved by a decrease in (government spending, taxes)
______, an increase in (government spending, taxes) _______, or a combination of the two.
2. If there are growing surpluses in the standardized budget, then the direction of fiscal policy is
(contractionary, expansionary) _______ and if there are growing deficits in the standardized
budget, then fiscal policy is (contrationary, expansionary) _______. A deficit produced by swings
in the business cycle is (actual, cyclical) _______. When there is a cyclical deficit, the
standardized budget deficit will be (great, less) _______ than the actual budget deficit.
3. Political problems arise in the application of discretionary fiscal policy to stabilize the economy
because government has (one, several) _______ economic goals, state and local fiscal policies
may (reinforce, counter) ________ Federal fiscal policy, and politicians may use fiscal policies in
a way that creates (an international, a political) _______ business cycle.
4. The less progressive the tax system, the great the economy’s built-in stability. True or false?
5. The public debt is the total accumulation of the deficits, minus any surpluses, that the Federal
government has incurred over time. True or false?
6. A large public debt will bankrupt the Federal government because it cannot refinance the debt
or increase taxes to pay it. True or false?
7. Which combination of policies would be the most expansionary?
A. An increase in government spending and taxes
B. A decrease in government spending and taxes
C. An increase in government spending and a decrease in taxes
D. A decrease in government spending and an increase in taxes
8. When government tax revenues change automatically and in a countercyclical direction over the
course of the business cycle, this is an example of
A. The political business cycle
B. Nondiscretionary fiscal policy
C. The standardized budget
D. Crowding out
9. An economy is in a recession and the government decides to increase spending by $4 billion.
The MPC is 0.8. What would be the full increase in real GDP from the change in government
spending?
A. $3.2 billion
B. $4 billion
C. $16 billion
D. $20 billion
Question 10 is based on the following chart which shows the standardized budget deficit or surplus as a
percentage of GDP over a five-year period.
Year
Deficit (-) or Surplus (+)
1
-2.1%
2
-3.0
3
-1.5
4
+0.5
5
+1.0
10. In which year was fiscal policy expansionary?
A. Year 2
B. Year 3
C. Year 4
D. Year 5
Questions 11 and 12 are based on the following chart. Columns 1 and 2 are an aggregate supply
schedule, while columns 1, 3 and 4 are aggregate demand schedules.
(1)
(2)
(3)
(4)
Price Level
Real GDP
AD1
AD2
220
$2390
$2100
$2200
200
2390
2200
2340
190
2350
2250
2350
180
2300
2300
2400
160
2200
2400
2500
11. The equilibrium real GDP is _______ and the price level is _______, according to AD1.
12. Suppose that an expansionary fiscal policy increases aggregate demand from that shown in
columns 1 and 3 to that shown in columns 1 and 4. The price level will increase to _______, and
this rise in the price level will result in real GDP increasing to _______.
13. Explain the three kinds of time lags that make it difficult to use fiscal policy to stabilize the
economy.
14. Who owns the public debt? What percentage is held by the two major groups? What percentage
of the public debt is held by foreigners?
15. Why can’t the public debt result in the bankruptcy or the Federal government? What two
actions can the government take to prevent bankruptcy?
Chapter 14: Money and Banking
16. The ease with which an asset can be converted into money such as cash with little or no loss in
purchasing power is its (credit, liquidity) _______. Assets that can be converted into cash more
easily than other assets are (more, less) _______ liquid assets.
17. Paper money and coins are considered (currency, checkable deposits) _______ and are one
major component of M1; the other major component is (currency, checkable deposits) _______.
18. M2 is equal to M1 plus (checking, savings) _______ deposits that include money market (deposit
accounts, mutual funds) _______, plus (small, large) _______ time deposits, and plus money
market (deposit account, mutual funds) _______.
19. The Federal Reserve Banks are (private, quasi-public) _______ banks, serve as (consumers’,
bankers’) _______ banks, and are (local, central) _______ banks whose policies are coordinated
by the Board of Governors.
20. List the seven major functions of the Fed.
21. The Congress established the Fed as a(n) (dependent, independent) _______ agency of
government. The objective was to protect it from political pressure so it could control (taxes,
inflation) _______.
22. High rates of inflation in an economy will
A. Increase the purchasing power of money
B. Decrease the conversion of money to gold
C. Increase the use of money as a measure of value
D. Decrease the use of money as a medium of exchange
23. The most important function of the Federal Reserve is
A. Issuing currency
B. Controlling the money supply
C. Supervising banks and thrifts
D. Lending money to banks and thrifts
24. The major components of the money supply- paper money and checkable deposits- are
A. Legal tender
B. Token money
C. Debts, or promises to pay
D. Assets of the Federal Reserve Banks
Questions 25 and 26 are based on the following table
Item
Small time deposits
$1014
MMMFs held by individuals
743
Checkable deposits
622
Savings deposits, including MMDAs
3649
Currency
730
MMMFs held by businesses
1190
Billions of dollars
25. What is the amount of M1?
26. What is the amount of M2?
27. What backs the money used in the United States? What determines the purchasing power of
money?
28. Describe the purpose and membership of the Board of Governors of the Federal Reserve
System.
29. What is the Federal Open Market Committee and how does it operate?