Winter 2011 Midterm 2 Answers

B government income tax revenue falls because of a

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Unformatted text preview: re people qualify for the program. b. government income tax revenue falls because of a decrease in real GDP. c. more people receive unemployment insurance payments when the economy is depressed than when it is booming. d. the government decides to cut lump-sum taxes when the economy is depressed, increasing the amount of disposable income available to households. 16. Suppose MPC = ½ and the government’s budget deficit is currently $1000. A group of “fiscal conservatives” come to power and want to reduce the deficit to $500. According to the Keynesian framework, which of the following policies reduces the deficit while having the LEAST impact on rGDP? a. Raise G b. Raise T c. Lower G d. Raise TR 17. Which of the following is NOT a true statement regarding the costs we impose on future generations within our economy when our government runs a fiscal deficit? a. Deficits crowd out investment, so that less capital accumulates and the aggregate growth rate decreases. b. Foreign debt holders receive payments when their treasury note matures. c. By increasing debt today, we may increase the risk of sovereign default tomorrow, making future borrowing more difficult. d. Every one dollar of additional government spending today is exactly one dollar less of aggregate spending in the future. Page 4 of 11 18. Vinny’s bank has no excess reserves, and has a reserve ratio of 20%. Vinny withdraws $400 in cash from his bank account to buy designer muscle shirts. By how much does Vinny cause the money supply to fall in the long run, if banks only hold their required reserves? a. $80 b. $400 c. $1600 d. $2000 19. The reserve ratio in the economy is 10%. Assuming that all possible lending takes place after your initial activity, rank the following options in terms of how much money is created. I. You find $100 in cash that someone dropped on the street and deposit it in the bank. II. You are given $100 by the Fed and deposit it in the bank III. Your employer transfers $100 from its c...
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This note was uploaded on 06/12/2012 for the course ECON 102 taught by Professor Rossana during the Spring '08 term at University of Michigan.

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