Exam 4 Review Sheet

Exam 4 Review Sheet1. Check the one that appliesExpansionary fiscal policy increases / decreases real output, employment and national incomeContractionary fiscal policy increases / decreases real output, employment and national income

2. Choose which of these apply for Expansionary or Contractionary fiscal policy

Increases the AD curve

Will cause a budget surplus

Increasing government spending, decreasing taxes or some combination of both higher spending and lower taxes are part of ..

Decreases the AD-curve Will cause a budget deficit

Decreasing government spending, increasing taxes or some combination of both lower spending and higher taxes are part of Used by government to combat recession

Used by government to combat inflation

3. definition of discretionary fiscal policy: deliberate use of changes in government spending and taxes to influence the economy

give examples: 4. automatic stabilizers increase the AD-curve during recessions and decrease the AD-curve during inflation

Examples of automatic stabilizers that are spending programs: Examples of automatic stabilizers that are tax programs:

5. Match the timing lags with their definitions

Recognition lagAdministrative lagEffectiveness lag

Operational lagInability to get quick action on fiscal policy because of the way Congress operates

Time between the beginning of a problem and the realization that there is a problem

The time it takes a fiscal policy, once enacted to be put into operation

Time it actually takes for a fiscal policy to affect the economy

6. Match the terms with definitionsBudget deficit

Budget surplus

Balanced budget

Government debt

the cumulative amount of borrowing by the government over the nations history

if government spending > tax revenues

if tax revenues > government spending

government spending = tax revenues

7. Crowding out process check the one that applies (where an alternative is given) government spending increases/decreases or taxes decrease/increase a budget deficit/surplus occurs

the government must/does not borrow money

this extra borrowing causes interest rates to increase/decrease firms increase/decrease investment spending because of the higher/lower interest rate

8. Match the terms with definitions

medium of exchangestore of value

unit of account

allows consumers to compare relative values of goods due to the stated prices of goods

ability to save money and then use it to make future purchases

something people are willing to accept in payment for goods and services9. Know all components of M1, M2, M3 and their definitions

10. Banks balance sheet give examples of assets and liabilities

Assets

e.g. ..Liabilities

e.g. .

Net Worth =.

11. Required reserves: minimum amount of vault cash and deposits at the Federal Reserve that must be maintained by a bank

Give the definition of Required reserve ratio (r ): 12. Total deposits for a bank = $200,000r = 10%required reserves = excess reserves = loans=

13. excess reserves loans MS calculate the change in Money Supply MS = excess reserves X (1/r)

excess reserves = $100

r = 0.1

MS =

14. Monetary policy instruments: the ways the Fed can control the MS Check the one that applies open market operations: buying and selling of government bonds

buy govt. bonds - excess reserves increase/decrease loans MS

changing the discount rate: the interest rate banks pay for borrowing from the Fed

discount rate increases/decreases borrowing by banks excess reserves loans MS

the required reserve ratio (r )

r excess reserves increase/decrease loans MS

15. Does this apply to Restrictive or Expansionary Monetary policy? MS interest rate borrowing for C and I C and I AD-curve real output UE-rate P

MS interest rate borrowing for C and I C and I AD-curve real output UE- rate P

Fed increases the MS by buying govt. bonds , decreasing discount rate or decreasing r

Fed decreases the MS by selling govt. bonds , increasing discount rate or increasing r

Used during demand-pull inflation

Used during recession

16. Sources of Comparative Advantage match them with examples

differences in preferencesdifferences in climate and natural resourcesdifferences in capital, labor skills and scientific knowledge

wine production in Muslim countries

examples for the U.S.: wheat, corn, cereals

examples for the U.S. aircraft, computers, industrial chemicals, plastics17. Types of trade restriction match them with definitions

Tariffs

Quotas

Government procurement practicesTechnical standardsDomestic-content rulesU.S. products must contain some minimum proportion of U.S.-made parts Restriction on the quantity of imports

The govt. gives preference to U.S. producers when making purchases Tax imposed on imports

Quality standards for imported goods

18. Arguments for Trade Restrictions match them with definitions (make sure you know all the problems with these arguments)Job Protection ArgumentProtection against Cheap Foreign Labor Argument

Level Playing Field or Fair Trade Argument

Infant Industry Argument

National Security Argument

Preservation of Culture ArgumentTrade restrictions are needed to protect U.S. jobs from cheap foreign laborCountry may be put in jeopardy in event of a war if it is heavily dependent on foreign suppliers

Free trade can lead to the elimination of local cultures

Trade restrictions are needed to avoid job losses from foreign competition

Trade restrictions are needed to offset foreign advantages

Newly developing industries should be temporarily shielded from foreign competition

19. Balance of Payments: a record of countrys trading, borrowing and lending check the one that applies

inflows from foreigners to the U.S. are receipts/payments and have a positive/negative effect

outflows from the U.S. to foreigners are payments/receipts and have a positive/negative effect20. Balance of payments structure fill in blanks Current Account

(Merchandise) trade balance includes trade of .. Service balance includes trade of ..

Income account includes ..

Unilateral transfers include..

Capital Account

Includes ..

Statistical Discrepancy

Current account + Capital account + statistical discrepancy = 021. Choose the one that applies so that these accounts have positive effect (inflow) Export / import of goods

Export / import of services

Earnings of US investments abroad / earnings of foreign investments in US

Transfers from US to foreigners / transfers from foreigners to US

Americans buy foreign real and financial assets / foreigners buy U.S. real and financial assets22. Depreciation or Weakening of the U.S dollar choose the one that appliesThis occurs when the exchange rate increases/decreases because it takes more dollars to buy a British pound.

23. Appreciation or Strengthening of the U.S. dollar choose the one that appliesThis occurs when the exchange rate increase/decreases because it takes fewer dollars to buy a pound.

24. Does this apply for depreciation or appreciation of US dollar?

U.S. imports are cheaper

U.S. exports are cheaper

Helps keep inflation low

Foreign countries are cheaper for US tourist The US is cheaper for foreign tourist U.S. exports are more expensive

The U.S. is more expensive to foreign tourists U.S. imports are more expensive

This will cause higher U.S. inflation

Foreign countries are more expensive for U.S. tourists

25. US dollar will depreciate when US has a merchandise trade surplus/deficit. 26. US dollar will appreciate when US has a merchandise trade surplus/deficit. 27. Match the exchange rate systems with their definitions Floating exchange ratesManaged floating exchange rates

Fixed exchange rates

Exchange rate is pegged to a key currency like the dollar

Exchanges rates are determined solely by the supply and demand for foreign exchanges

Both the foreign exchanges market and central bank help determine exchange rates

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