2) True or false? a) The budget deficit or surplus is a good way to tell if fisc

Question

2) True or false? a) The budget deficit or surplus is a good way to tell if fiscal policy is contractionary or expansionary b) The tax multiplier could be 7 but the money multiplier could not be .7 c) If the Federal Reserve wants to increase the money supply by $100 bilion, they will have to buy more than $100 billion in bonds. d) The money multiplier is smaller if the reserve requirement is smaller. e) The Federal Reserve tells the federal funds dealers what rate to set 1) An increase in a budget deficit financed by borrowing can increase interest rates and reduce investment spending thereby creating lower rates of economic growth. g) A cut in income taxes will increase GDP and the money supply. Match the following terms and definitions: a) federal funds rate b) marginal propen c) investment d) Social Security trust fund e) discount rate l) the amount of money a bank is able to loan out sity to save ) the excess of taxes over government spending plus transfers crowding out g) budget debt h) reserve requirement ratio ) budget surplus D productivity i) the decrease in investment due to expansionary fiscal policy v) the total amount of money the government owes v) output per unit of labor vi) the interest rate banks charge each other vii) must be used to buy U.S. Treasury bonds vi) the additional saving due to an increase in income vili) the interest rate the Fed charges member banks vii) the percentage of deposits a bank is required to keep on hand

Explanation / Answer

Question 2

In case, contractionary fiscal policy is being administered then this implies that government is increasing taxes or decreasing its spending or is having a combination of both. In such case, budget would be in surplus.

On the other hand, if government is administering expansionary monetary policy then this implies that government is increasing its spending or decreasing taxes or is having a combination of both. In such case, budget would be in deficit.

So, it can be stated that budget deficit or surplus is a good way to tell if fiscal policy is contractionary or expansionary.

The given statement is True.

(b)

The minimum value of money multiplier is 1. So, the value of money multiplier cannot go below 1.

So, the tax multiplier could be 0.7 but the money multiplier could not be 0.7.

The given statement is True.

(c)

Increase in money supply = Bonds purchased by Fed * Money Multiplier

So, bonds purchased will be less than the increase in money supply.

The given statement is False.

(d)

There is inverse relationship between the money multiplier and the reserve requirement.

So, the money multiplier will be larger if the reserve requirement is smaller.

The given statement is False.

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