Exam 4 Review Sheet

1. Check the one that applies

Expansionary fiscal policy increases / decreases real output, employment and national income
Contractionary 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 lag

Inability to get quick action on fiscal policy

because of the way Congress operates

Administrative lag

Time between the beginning of a problem

and the realization that there is a problem

Effectiveness lag

The time it takes a fiscal policy, once

enacted to be put into operation

Operational lag

Time it actually takes for a fiscal policy to

affect the economy

Match the terms with definitions

Budget deficit

the cumulative amount of borrowing by the government over the

nations history

Budget surplus

if government spending > tax revenues

Balanced budget

if tax revenues > government spending

Government debt

government spending = tax revenues

6.

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

7. Match the terms with definitions

medium of exchange

allows consumers to compare relative values

of goods due to the stated prices of goods

store of value

ability to save money and then use it to

make future purchases

unit of account

something people are willing to accept in

payment for goods and services

8. Know all components of M1, M2, M3 and their definitions

9. Banks balance sheet give examples of assets and liabilities
Assets
e.g. ..

Liabilities
e.g. .
Net Worth =.

10. 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 ):

11. Total deposits for a bank = $200,000

r = 10%
required reserves =
excess reserves =
loans=
12. excess reserves loans MS
calculate the change in Money Supply
MS = excess reserves X (1/r)
excess reserves = $100
r = 0.1
MS =
13. 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
14. 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
15. Sources of Comparative Advantage match them with examples
differences in preferences

wine production in Muslim countries

differences in climate and natural resources

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

differences in capital, labor skills and

scientific knowledge

examples for the U.S. aircraft, computers,

industrial chemicals, plastics

Types of trade restriction match them with definitions

Tariffs
Quotas
Government procurement practices

U.S. products must contain some minimum

proportion of U.S.-made parts
Restriction on the quantity of imports

Technical standards

The govt. gives preference to U.S. producers when

making purchases
Tax imposed on imports

Domestic-content rules

Quality standards for imported goods

16. Arguments for Trade Restrictions match them with definitions (make sure you know all the
problems with these arguments)
Job Protection Argument

Trade restrictions are needed to protect U.S. jobs

from cheap foreign labor

Protection against Cheap Foreign

Labor Argument

Country may be put in jeopardy in event of a war if

it is heavily dependent on foreign suppliers

Level Playing Field or Fair Trade

Argument

Free trade can lead to the elimination of local

cultures

Infant Industry Argument

Trade restrictions are needed to avoid job losses

from foreign competition

National Security Argument

Trade restrictions are needed to offset foreign

advantages

Preservation of Culture Argument

Newly developing industries should be temporarily

shielded from foreign competition

17. 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
effect
18. Balance of payments structure fill in blanks
Current Account
o (Merchandise) trade balance includes trade of ..
o Service balance includes trade of ..
o Income account includes ..
o Unilateral transfers include..
Capital Account
o Includes ..
Statistical Discrepancy
Current account + Capital account + statistical discrepancy = 0
4

19. 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 assets
20. Depreciation or Weakening of the U.S dollar choose the one that applies
This occurs when the exchange rate increases/decreases because it takes more dollars to buy a
British pound.
21. Appreciation or Strengthening of the U.S. dollar choose the one that applies
This occurs when the exchange rate increase/decreases because it takes fewer dollars to buy a
pound.
22. 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
23. US dollar will depreciate when US has a merchandise trade surplus/deficit.
24. US dollar will appreciate when US has a merchandise trade surplus/deficit.
25. Match the exchange rate systems with their definitions
Floating exchange rates

Exchange rate is pegged to a key currency like the

dollar

Managed floating exchange rates

Exchanges rates are determined solely by the supply

and demand for foreign exchanges

Fixed exchange rates

Both the foreign exchanges market and central bank

help determine exchange rates