MACROECONOMICS
REVIEW FOR TEST No. 4
Chapters 10, 11, 12, & 14/15
CHAPTER 10
Real Balance Effect
Interest-Rate Effect
Net-Export Effect
Stagflation
CHAPTER 11
Fiscal Policy
Monetary Policy
Expansionary Fiscal Policy
Contractionary Fiscal Policy
Cutting Taxes to combat a Recession
Contractionary Fiscal Policy to combat Inflation
Automatic Stabilizers
Budget Surplus
Budget Deficit
CHAPTER 12
The Benefits-Received Principle
The Ability-to-Pay Principle
Progressive Taxes
Regressive Taxes
Proportional Taxes
CHAPTERS 14 & 15
What is Money?
The 3 functions of money
Are Credit Cards Money?
What gives Money its value?
The Federal Reserve System
Required Reserves
Excess Reserves
How can banks create money
Board of Governors
Federal Open Market Committee
Open Market Operations
The 8 Functions of the Federal Reserve System
The Difference between the Treasury & the Fed.
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Practice Questions
1. Keynes advises that the government should incur a budget deficit during
__________________ only.
2. Student Pell grants are an example of supply-side fiscal policy. If not, then give an example
____________________________________________________________________________
3. What do we call transfer payments and progressive taxes? Remember they are incorporated
into the system.
4. Who mints the coins?
5. What does an increase in the price level do to net exports?
6. When the taxes levied increase with income we call that ___________________ taxes.
7. Expansionary discretionary F. P. does this: (circle all that apply)
a. Increase AD
b. Increase the RGDP c. Increase inflation
d. decrease inflation
8. How independent is the Federal Reserves really?
9. What makes up stagflation exactly?
10. During a recession taxes are usually reduced in order to increase disposable income,
Aggregate Demand, Aggregate Supply and RGDP.
11. Transfer payments are part of automatic fiscal policy because they adjust government
spending automatically whenever there is a change in the unemployment rate.
12. An open market sale ___________________ the money supply.
13. The value of money is measured by how much it buys in goods and services.
14. How is the Federal Reserves different from the Treasury?
15. Why is fiscal policy aimed at AD?
16. What happens to disposable income and government spending when enacting contractionary
discretionary Fiscal Policy?
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17. Why does the government collect taxes?
18. Ability-to-pay principle is a _________ that is only applicable to _________ goods, like
_____________________________________________________________________
19. The real balance effect is about the changes that occur in the RDGP based on the inverse
relationship of the price level on real consumption.
20. Banks create money via checkable deposits. How?
21. Credit cards are money.
22. What is stagflation?
23. The treasury is responsible for the government’s accounting, while the Fed’s sole purpose is
to ensure proper rates of exchange and enough quantity of money in circulation.
24. If required reserves were 5% and we needed to shrink the money supply by $50 billion
(50,000,000,000) then the Fed. would have to remove this much from circulation:
25. Benefits-received principle is a ________ that is only applicable to __________ goods, like
___________________________________________________________________
26. What do classical economists say about AS, how do they explain equilibrium in the long run,
and what are the assumptions they use?
27. What are the 4 ways that the Fed. increases M3? (The opposite is true when reducing it.)
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28. Make sure that you know all the functions of money and all the functions of the federal
reserves.
29. What other forms of currencies have there been throughout history?
30. How do disposable income, MPC, M and RGDP relate?
31. Explain what Keynes says about AS curve, what his assumptions are, and what role
autonomous spending plays in his argument.
Check out the additional links I left for you on my website regarding Test 4.
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