EC 111 Exam 3 Questions – Flashcards
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A leakage is: -An export from the economy. -A decline in the capacity of the economy to produce goods. -A diversion of income from spending on output. -A decrease in aggregate supply.
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A diversion of income from spending on output.
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Injections include: -Business saving. -Taxes. -Exports. -Consumer saving.
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Taxes.
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Classical economists assumed that: -Spending leakages exceed spending injections. -Interest rate adjustment will cause business investment to equal consumer saving. -The economy might experience persistent macro instability. -No leakages would occur.
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Interest rate adjustment will cause business investment to equal consumer saving.
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Actual investment equals: -Desired investment plus planned investment. -Planned investment minus undesired investment. -Desired investment plus undesired investment. -Desired investment minus undesired investment.
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Desired investment plus undesired investment.
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If an economy is at full employment and investment spending decreases while all other levels of spending remaining constant then the price level: -Increases and output decreases. -Decreases and output decreases. -Increases and output increases. -Decreases and output increases.
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Decreases and output decreases.
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Which of the following is an example of the multiplier at work as a result of an increase in consumption expenditures? -Consumers compete with the government by increasing their expenditures, causing businesses to increase their investments in order to satisfy the increased demand. -Consumption expenditures increase inflation, which reduces real incomes; consumer expenditures and investment decline, which reduces aggregate spending. -Households and businesses receive income from consumption expenditures; they spend a portion of this new income; these expenditures in turn generate income for other businesses and households, which in turn spend a portion of the new income, and so on. -Consumption expenditures stimulate investment in new plant and equipment in order to produce goods and services for the government, which provides jobs and increases incomes.
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Households and businesses receive income from consumption expenditures; they spend a portion of this new income; these expenditures in turn generate income for other businesses and households, which in turn spend a portion of the new income, and so on.
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When unwanted business inventories pile up, which of the following is likely to occur? -A lower level of unemployment -A higher level of output -A lower price level -No change in the level of output
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A lower price level
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An initial (autonomous) decrease in aggregate demand will likely be: -Much smaller than the eventual decline in spending. -Much larger than the eventual decline in spending. -Equal to the eventual decline in spending. -Offset by an increase in planned investment.
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Much smaller than the eventual decline in spending.
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Given C = 200 + 0.75YD, the multiplier is: -0.25. -0.75. -4. -1.33.
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4.
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Given the MPS = 0.40, with no government and no foreign trade a $10 billion increase in investment will eventually result in an increase in: -Consumption by $40 billion. -Total spending by $15 billion. -Consumption by $15 billion. -Total spending by $2.5 billion.
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Consumption by $15 billion.
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If the MPC = 0.90, the total change in spending resulting from an initial $200 increase in aggregate spending will be: -$2,000. -$200. -$180. -$1,800.
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$2,000.
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Assuming an upward-sloping aggregate supply curve, when aggregate demand decreases, unemployment: -Decreases and the price level decreases. -Increases and the price level decreases. -Decreases and the price level increases. -Increases and the price level increases.
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Increases and the price level decreases.
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An economy with no government and no foreign trade tends to move toward equilibrium GDP because at output levels greater than equilibrium GDP inventories are: -Too large, and below equilibrium GDP, desired investment exceeds desired saving. -Too large, and below equilibrium GDP, desired saving exceeds desired investment. -Declining, and below equilibrium GDP, desired investment exceeds desired saving. -Declining, and below equilibrium GDP, desired saving exceeds desired investment.
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Too large, and below equilibrium GDP, desired investment exceeds desired saving.
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Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion. If aggregate demand increases by a total of $50 billion: -The recessionary GDP gap will be eliminated. -The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output. -The resulting equilibrium GDP will be greater than full employment GDP because of demand-pull inflation. -Cyclical unemployment will increase.
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The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output.
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The recessionary GDP gap represents the: -Amount by which aggregate demand must increase to reach full employment. -Value of the goods and services that could be produced but were not due to unemployed resources. -Leakages minus injections. -Amount by which actual investment differs from desired investment.
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Value of the goods and services that could be produced but were not due to unemployed resources.
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When an economy is operating at "full employment," as economists usually define the term: -Everyone who wants a job has a job. -Inflation is a significant problem. -The unemployment rate is between 4-6 percent. -The unemployment rate is zero percent.
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The unemployment rate is between 4-6 percent.
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Full employment is estimated to occur at an unemployment rate: -Between 4 and 6 percent. -Between 1 and 2 percent. -Equal to zero percent. -Between 10 and 12 percent.
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Between 4 and 6 percent.
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If desired investment exceeds actual investment, then: -A recessionary GDP gap will emerge. -Inventories are less than the desired level. -Inventories are accumulating beyond desired levels. -Cyclical unemployment exists.
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Inventories are less than the desired level.
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An inflationary spiral can emerge when: -Desired spending at full employment falls short of full-employment output. -Desired saving falls short of desired investment at full employment. -Actual investment exceeds desired investment. -Desired leakages exceed desired injections.
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Desired saving falls short of desired investment at full employment.
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The consumption function will shift when: -Autonomous consumption changes. -Induced consumption changes. -Autonomous or induced consumption changes. -Investment changes.
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Autonomous consumption changes.
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One In the News article states "Consumer Spending Drops 1%." This article suggests that the drop in consumer spending in late 2008 was worrisome for the economy since: -Interest rates could not be lowered further to compensate for the drop in consumer spending. -Consumer spending accounts for nearly two-thirds of GDP. -Foreigners would not likely be buying many U.S. exports to offset the fall in domestic spending. -Many economists had forecast a fourth quarter economic rebound.
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Consumer spending accounts for nearly two-thirds of GDP.
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Purchases of new plant and equipment plus any desired changes in business inventories is: -Economic investment. -Undesired investment. -Desired investment. -Actual Investment.
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Desired investment.
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Which of the following gave the U.S. federal government the power to tax income? -The Sixteenth Amendment to the Constitution -The Full Employment and Balanced Growth Act of 1978 -The Social Security Act -The capital gains tax of the Bush administration
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The Sixteenth Amendment to the Constitution
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Prior to 1913, most of the federal government's tax revenues came from: -Social Security payroll taxes. -Customs, whiskey, and tobacco taxes. -Individual income taxes. -Corporate income taxes.
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Customs, whiskey, and tobacco taxes.
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The use of government taxes and spending to alter economic outcomes is known as: -Monetary policy. -Fiscal policy. -Income policy. -Foreign-trade policy.
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Fiscal policy.
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Assume the economy is operating below full employment. Which of the following policy actions will allow aggregate spending to increase but will not increase the size of the government in the process? -Increase government spending and leave tax rates unchanged -Decrease tax rates and leave government spending unchanged -Increase government spending and taxes by the same amount -Decrease government spending by more than an increase in taxes
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Decrease tax rates and leave government spending unchanged
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From a Keynesian perspective, the way out of recession is to: -Wait for the economy to fix itself. -Monetary restraint. -Get consumers to spend less on goods and services. -Get consumers to spend more on goods and services.
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Get consumers to spend more on goods and services.
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If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward sloping: -The economy will move to full employment. -An AD surplus will occur. -A recessionary GDP gap will still exist. -An inflationary GDP gap will develop.
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A recessionary GDP gap will still exist.
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The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is: -The AD shortfall. -The AD excess. -The recessionary GDP gap. -The inflationary GDP gap.
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The AD shortfall.
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In a diagram of aggregate demand and supply curves, the AD shortfall is measured as the: -Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment. -Horizontal distance between the equilibrium output and the full-employment output. -Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price. -Vertical distance between the recessionary GDP gap and the inflationary GDP gap.
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Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price.
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Ceteris paribus, if the AD shortfall equals $600 billion, then the federal government can close it by increasing: -Government spending by exactly $600 billion. -Government spending by less than $600 billion. -Taxes by more than $600 billion. -Taxes by exactly $600 billion.
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Government spending by less than $600 billion.
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Which of the following formulas is used to find the cumulative increase in AD from a particular fiscal stimulus? -Fiscal stimulus ÷ the multiplier -Fiscal stimulus ÷ MPC -The multiplier × fiscal stimulus -MPC × fiscal stimulus
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The multiplier × fiscal stimulus
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If the multiplier equals 2 and the AD shortfall is $6 million, then the desired fiscal stimulus is: -$6 million. -$12 million. -$333,333. -$3 million.
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$3 million.
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The general formula for calculating the desired fiscal stimulus is: -AD shortfall × the multiplier. -1/(AD shortfall × the multiplier). -AD shortfall ÷ the multiplier. -1/(AD shortfall ÷ the multiplier).
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AD shortfall ÷ the multiplier.
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To eliminate an AD shortfall of $120 billion when the economy has an MPC of 0.75, the government should decrease taxes by: -$400 billion. -$120 billion. -$30 billion. -$40 billion.
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$40 billion.
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Which of the following is the best choice to eliminate a recessionary gap if the desired fiscal stimulus is $10 billion and the aggregate demand shortfall is $100 billion, while the MPC is 0.90? -Tax hike of $11.11 billion -Tax cut of $11.11 billion -Tax hike of $10 billion -Tax cut of $10 billion
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Tax cut of $11.11 billion
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Jack has an MPC of 0.82 and Jill has an MPC of 0.78. Ceteris paribus, if the government transfers income from people who behave like Jack to people who behave like Jill: -It is not possible to predict what will happen to aggregate demand. -Aggregate demand will increase. -Aggregate demand will remain the same. -Aggregate demand will decrease.
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Aggregate demand will decrease.
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The balanced budget multiplier says that: -An increase in government spending paid for by a tax cut of equal size has no effect on aggregate demand. -An increase in government spending must be paid for by a tax cut of equal size. -An increase in government spending paid for by a tax cut of equal size shifts aggregate demand rightward. -An increase in government spending paid for by a tax cut of equal size shifts aggregate demand leftward.
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An increase in government spending paid for by a tax cut of equal size shifts aggregate demand rightward.
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The desired tax cut to close a GDP gap is given by: -AD shortfall × MPS. -Desired fiscal stimulus ÷ MPC. -AD shortfall ÷ MPC. -Desired fiscal stimulus × MPC.
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Desired fiscal stimulus ÷ MPC.
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Assume the economy is at full employment and prices are reasonably stable. If the government wants to increase spending for public schools, which of the following policies will have the least inflationary impact? -An increase in taxes by an amount greater than the increase in spending -An increase in taxes by an amount smaller than the increase in spending -An increase in taxes equal to the increase in spending -No change in taxes when expenditures increase
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An increase in taxes by an amount greater than the increase in spending
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If the government cuts taxes by $200 million and simultaneously decreases government spending by $200 million, then: -Aggregate demand will rise because the government decrease in purchases occurs so slowly. -Aggregate demand in the economy will remain unchanged. -People will spend only a part of their tax cut, so aggregate demand will eventually fall by $200 million. -Aggregate demand will decrease by $200 million times the multiplier.
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People will spend only a part of their tax cut, so aggregate demand will eventually fall by $200 million.
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Fiscal restraint is defined as: -Tax hikes or spending cuts intended to reduce aggregate demand. -Tax hikes or spending cuts intended to increase aggregate demand. -Tax cuts or spending hikes intended to increase aggregate demand. -Tax cuts or spending hikes intended to reduce aggregate demand.
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Tax hikes or spending cuts intended to reduce aggregate demand.
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The inflationary GDP gap differs from the AD excess when: -The aggregate supply curve slopes upward. -The multiplier effect raises spending. -The aggregate supply curve is horizontal. -There is a time lag in the implementation of fiscal policy.
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The aggregate supply curve slopes upward.
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If the MPC for an economy is 0.90, a $4 billion increase in taxes will ultimately cause consumption to decrease by: -$40 billion. -$36 billion. -$4.4 billion. -$3.6 billion.
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$36 billion.
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The desired fiscal restraint is equal to: -Excess AD times the multiplier. -Excess AD divided by the multiplier. -Desired AD reduction. -GDP gap divided by the multiplier.
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Excess AD divided by the multiplier.
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If the MPC equals 0.75, a $100 billion transfer payment decrease will decrease consumption in the first round by: -$25 billion. -$75 billion. -$100 billion. -$400 billion.
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$75 billion.
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The statement "balancing the budget on the backs of the poor" refers to: -Transfer payment cuts in order to reduce government expenditures. -Tax increases on the poor in order to increase government revenues. -Government spending increases in order to increase aggregate expenditures. -Government spending cuts on public parks in order to reduce government expenditures.
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Transfer payment cuts in order to reduce government expenditures.
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A limitation on fiscal policy is time. Which of the following does not impact the timeliness of fiscal policy? -It takes time to recognize that the economy is in trouble -It will take time to develop a policy strategy and for Congress to pass it -It will take time for the President to sign the policy measures into law -It will take time for the policy to be implemented and for the many steps in the multiplier process to unfold
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It will take time for the President to sign the policy measures into law
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The crowding out effect refers to a decrease in: -Consumption or investment as a result of an increase in government borrowing. -Investment resulting from an increase in consumption and a decrease in savings. -Government spending resulting from a decrease in taxes. -Consumption resulting from an increase in investment.
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Consumption or investment as a result of an increase in government borrowing.
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According to one In the News article, "Economy Is Already Feeling the Impact of Federal Government's Spending Cuts," a decrease in government spending has contributed to the sluggish economy. This would imply that: -The aggregate demand curve has shifted to the right. -The aggregate demand curve has shifted to the left. -Injections into the circular flow have increased. -The aggregate supply curve has shifted to the right.
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The aggregate demand curve has shifted to the left.
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The World View article in the text titled, "China Sets Big Stimulus Plan in Bid to Jump-Start Growth," states that China's plan includes spending in housing, infrastructure, agriculture, as well as a tax deduction for capital spending by companies. These policies will cause the aggregate: -Demand curve to shift to the left. -Supply curve to shift to the left. -Demand curve to shift to the right. -Supply curve to shift to the right.
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Demand curve to shift to the right.
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The use of government taxes and spending to alter economic outcomes is known as: -Monetary policy. -Fiscal policy. -Incomes policy. -Foreign-trade policy.
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Fiscal policy.
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With greater deficit spending, ceteris paribus: -Aggregate spending should fall. -Any inflationary gap will become larger. -There are greater leakages. -There is inadequate information to tell what happens to aggregate spending.
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Any inflationary gap will become larger.
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When there is excess aggregate demand, the appropriate policy would be for the government to: -Make budget surpluses smaller. -Make budget surpluses larger. -Make budget deficits larger. -Increase the public debt.
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Make budget surpluses larger.
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Much of each year's federal budget is considered "uncontrollable" because: -It must be spent for purchases, as opposed to transfer payments. -Most of the current revenues and expenditures are the result of decisions made in prior years. -It is determined by decision-makers who do not have the power to change spending and taxes. -Government spending is so large that it's out of control.
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Most of the current revenues and expenditures are the result of decisions made in prior years.
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In order to maintain a balanced budget every year, during a recession the government would have to: -Decrease the money supply. -Increase the money supply. -Decrease spending or increase taxes or both. -Increase spending or decrease taxes or both.
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Decrease spending or increase taxes or both.
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Automatic stabilizers: -Are included in discretionary fiscal spending. -Cause spending to decrease during a recession. -Help to moderate the extremes of the business cycle. -Are zero at full employment.
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Help to moderate the extremes of the business cycle.
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Which of the following is not an automatic stabilizer? -Income taxes -Unemployment benefits -Welfare payments -Defense spending
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Defense spending
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Which of the following is most likely to reduce a federal budget surplus? -A booming economy with rising inflation rates -A recession -Higher inflation and higher unemployment rates -Lower inflation and lower unemployment rates
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A recession
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An increase in unemployment, ceteris paribus: -Leads to decreased government expenditures. -Leads to increased government revenues. -Reduces a budget surplus. -Reduces a budget deficit.
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Reduces a budget surplus.
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For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy, the actual deficit is divided into which of the following components? -Automatic stabilizers and autonomous consumption -C, I, G, X, and M -Structural and cyclical deficits -Frictional and seasonal deficits
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Structural and cyclical deficits
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Which of the following results from a change in the business cycle, ceteris paribus? -Frictional unemployment -Cyclical unemployment -Structural unemployment -Structural deficit
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Cyclical unemployment
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If the total budget deficit is $200 billion and the deficit at full employment is $120 billion, then the: -Cyclical deficit is $120 billion. -Cyclical deficit is $80 billion. -Structural deficit is $320 billion. -Structural deficit is $80 billion.
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Cyclical deficit is $80 billion.
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If the structural deficit is zero then: -Federal tax revenue equals federal government expenditures at equilibrium GDP. -Desired private-sector injections must equal desired private-sector leakages if a closed, mixed economy is at full employment. -If the economy enters a recession, a budget surplus will result, ceteris paribus. -At full employment, the budget is balanced.
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At full employment, the budget is balanced.
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Crowding out is most likely to occur when the federal government: -Runs a surplus and pays off part of the debt. -Has a balanced budget and refinances a portion of the debt that matures. -Runs a deficit and raises taxes to generate more revenue. -Runs a deficit and sells bonds to make up the difference.
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Runs a deficit and sells bonds to make up the difference.
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Which of the following is not true when the economy is fully employed, and government bonds are sold to finance greater government spending? -This pushes the economy along its production possibilities curve toward more public-sector goods -This action results in crowding out -The government is running a structural deficit -The government is running a cyclical deficit
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The government is running a cyclical deficit
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The national debt is: -The amount by which tax revenues exceed government spending for a given year. -The accumulation of annual deficit flows. -The amount by which government spending exceeds tax revenues for a given year. -A fairly risky asset that pays interest.
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The accumulation of annual deficit flows.
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If there was a federal budget surplus and the government decided to either increase spending or decrease taxes: -The budget surplus would get smaller. -The budget surplus would get larger. -The budget surplus would remain unchanged. -Federal tax revenues would decrease.
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The budget surplus would get smaller.
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A measure of the burden of continual deficit financing over time is the ratio of: -The deficit to the GDP. -The debt to the GDP. -The deficit to the debt. -Tax revenues to the debt.
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The debt to the GDP.
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The fiscal agent of the U.S. government is the: -U.S. Treasury. -Federal Reserve System. -Securities and Exchange Commission. -Congress.
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U.S. Treasury.
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Debt accumulation by the U.S. government in the 1980s: -Was small compared with other periods of history. -Exceeded the debt the country had accumulated over the preceding 200 years. -Was caused by war-related expenditures. -Was caused by the same factors that led to debt accumulation in other periods.
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Exceeded the debt the country had accumulated over the preceding 200 years.
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For the United States from the 1980s to today there has been an increase in both absolute size and relative size (relative to GDP) for the federal government in: -The deficit and the debt. -The deficit, but not the debt. -The debt, but not the deficit. -Neither the deficit nor the debt.
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The deficit and the debt.
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An obligation to make future payment is: -Debt refinancing. -Debt service. -A liability. -An asset.
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A liability.
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Internal ownership of the national debt occurs when U.S. Treasury bonds are purchased by all of the following except: -Foreign countries that we trade with. -The Social Security Administration. -The Federal Reserve System. -Individual U.S. citizens.
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Foreign countries that we trade with.
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Foreign households and institutions hold approximately _____ percent of the U.S. national debt. -50 -28 -32 -8
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28
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The U.S. private sector holds about _____ percent of outstanding U.S. Treasury bonds. -50 -17 -30 -22
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17
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The burden of the internal portion of the debt is incurred: -When the debt-financed activity takes place. -Solely by the U.S. government. -By those who buy U.S. Treasury bonds. -When the debt comes due.
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When the debt-financed activity takes place.
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Selling bonds to finance government debt leads to an opportunity cost that is: -Less than when government debt is financed with taxes. -Greater than when government debt is financed with taxes. -The same as financing government debt with taxes. -Dependent on who buys the bonds.
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The same as financing government debt with taxes.
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If deficit spending does not contribute to public investment and crowds out private investment, then: -The rate of economic growth will decline, ceteris paribus. -The current generation will bear the total burden of the debt. -Future productive capacity will be enhanced. -The opportunity cost of the debt will be minimized.
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The rate of economic growth will decline, ceteris paribus.
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External debt of the United States refers to: -The ownership of non-government debt by the government. -Combined foreign debt held by sources outside the U.S. government. -The debt of non-government organizations. -U.S. government debt held by foreigners.
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U.S. government debt held by foreigners.
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Debt ceilings are designed to: -Reduce the deficit. -Balance the federal budget. -Specifically reduce the external debt. -Do nothing since the Supreme Court held them unconstitutional in 1985.
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Reduce the deficit.
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To pay back Social Security loans, Congress could do all of the following except: -Raise future taxes. -Sell fewer U.S. Treasury bonds. -Increase budget deficits. -Reduce spending on non-Social Security programs.
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Sell fewer U.S. Treasury bonds.
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The In the News article in the text titled "Fiscal Policy in the Great Depression" discusses fiscal spending and taxation. During the Great Depression, the federal government pursued a policy of fiscal restraint that lead to: -An increase in the structural deficit. -A decrease in the structural deficit. -An increase in aggregate demand. -An increase in taxes.
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A decrease in the structural deficit.
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Which of the following is true regarding the "American Recovery and Reinvestment Plan"? -The massive 2009 stimulus package was designed to jump start the recession bound economy. -Critics argued the massive deficits generated by President Obama's plan would undermine America's financial stability. -Critics argued that in order to pay the deficits created by the plan, the government would be forced to raise taxes and cut spending which would reverse the boost from the stimulus. -All choices are correct.
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All choices are correct.
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Which of the following is not true about barter? -It involves the direct exchange of one good or service for another. -It is more likely to occur if people lose faith in a nation's currency. -It is considered to be less efficient than the use of money. -It allows people to obtain more goods than they would under a money-payment system.
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It allows people to obtain more goods than they would under a money-payment system.
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Farmer Brown wants some bacon for breakfast. He gets the bacon from Farmer Hernandez by giving him a dozen eggs. This type of transaction is referred to as: -A farm transaction. -A money exchange. -Barter. -An efficient exchange of resources.
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Barter.
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Which of the following statements is not correct about the U.S. monetary system? -The federal government did not print paper money until the Civil War. -Between 1789 and 1865, paper money was issued by hundreds of state-chartered banks. -Credit cards are the most common form of money today. -Early in U.S. history, the money supply consisted of items such as tobacco and bullets.
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Credit cards are the most common form of money today.
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Money does all of the following except: -Reduce the efficiency with which market exchanges take place. -Serve as a mechanism for transforming current income into future purchases. -Promote efficient division of labor. -Facilitate the continuous series of exchanges that characterize a market economy.
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Reduce the efficiency with which market exchanges take place.
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Which of the following is true about the quantity of money in the U.S. economy? -It is equal to the amount of currency in circulation -It is much greater than the amount of currency in circulation -It is equal to the value of the government's gold reserves -It is equal to the total amount of income
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It is much greater than the amount of currency in circulation
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Which of the following is not correct about the money kept in transactions accounts? -It permits direct payment to a third party -It is backed by gold held by the government -It is part of the basic money supply -It is a good substitute for cash in many cases
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It is backed by gold held by the government
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Which of the following is not included in any of the measures of the money supply? -Credit-union share drafts -Cash in the vault of a commercial bank -Currency in circulation outside of commercial banks -Transactions account balances at mutual savings banks
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Cash in the vault of a commercial bank
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Traveler's checks are included in which of the following? -M1 and M2 only -M1 only -M2 only -M1, M2, and M3
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M1, M2, and M3
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Which of the following is not included in M3? -All of the items in M1 -All of the items in M2 -Time deposits, greater than $100,000 -Treasury bills
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Treasury bills
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Suppose Jared takes $200 from his savings account and holds it as cash. The immediate result of this transaction is that M2: -Increases by $200 and M1 remains the same. -Decreases by $200 and M1 remains the same. -And M1 do not change. -Remains the same and M1 increases by $200.
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Remains the same and M1 increases by $200.
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Which of the following is not considered to be a depository institution? -The Federal Reserve -Mutual savings banks -Savings and loan associations -Commercial banks
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The Federal Reserve
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The various money supply measures (M1, M2, M3, and L) are used to distinguish the: -Rate at which money flows through the economy. -Liquidity and accessibility of assets. -Speed with which banks transfer funds between savings and checking accounts. -Speed with which banks transfer funds between themselves.
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Liquidity and accessibility of assets.
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The ratio of a bank's reserves to its total transactions deposits is known as the: -Required reserves. -Reserve ratio. -Excess reserves. -Deposit ratio.
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Reserve ratio.
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Which of the following reflects the concept of fractional reserves? -The money multiplier is greater than one -Excess reserves are equal to zero -Required reserves are equal to total reserves -Banks can loan only their required reserves
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The money multiplier is greater than one
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Banks are required to keep a minimum amount of funds in reserve because: -Depositors may decide to withdraw funds at any time. -The Fed may decide to withdraw funds at any time. -The bank may decide to increase aggregate demand at any time. -Borrowers may decide to repay loans ahead of schedule.
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Depositors may decide to withdraw funds at any time.
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Suppose a bank has $500,000 in deposits and a required reserve ratio of 10 percent. Then required reserves are: -$5,000,000. -$500,000. -$50,000. -$10,000.
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$50,000.
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Excess reserves are: -Total reserves less required reserves. -Total reserves less transactions account balances. -Required reserves less demand deposits. -Bank reserves in excess of vault cash.
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Total reserves less required reserves.
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Which of the following explains why banks try to keep their holdings of excess reserves low? -To maximize profits -To keep the money multiplier low -To escape Fed penalties -To please bank examiners
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To maximize profits
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Suppose a bank has $600,000 in deposits, a required reserve ratio of 5 percent, and bank reserves of $90,000. Then the bank can make new loans in the amount of: -$5,400. -$30,000. -$60,000. -$90,000.
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$60,000.
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Suppose a bank has $100,000 in deposits, a required reserve ratio of 20 percent, and total reserves of $20,000. Then this bank can make new loans in the amount of: -$100,000. -$20,000. -$40,000. -Zero.
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Zero.
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According to a World View article titled "The Cashless Society," the Russian economy turned to a barter system because: -Russian citizens lost confidence in the ruble as a form of money. -The movement to a cashless society was the next step in the movement toward the ideal communist state. -A system of barter is typically more efficient than a monetary system. -It is usually easier to measure the value of goods in terms of other goods than cash.
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Russian citizens lost confidence in the ruble as a form of money.
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One In the News article states "WAMU's Failure Biggest in U.S. Bank History." This article suggests that Washington Mutual Inc. failed due to: -Bad loans it made in the mortgage market. -A classic bank run by concerned depositors. -Heavy intervention by both the state of California and the Federal Reserve. -The inability to issue preferred shares to raise new capital.
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Bad loans it made in the mortgage market.
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One In the News article states "WAMU's Failure Biggest in U.S. Bank History." At the time of its collapse, Washington Mutual was the largest bank to fail with assets valued at _____. -$2.1 billion -$1.1 trillion -$307 billion -$32 billion
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$307 billion
question
If total reserves for a bank are $25,000, excess reserves are $5,000, and demand deposits are $100,000, then the money multiplier must be: -20. -25. -10. -5.
answer
5.
question
If the banking system has a required reserve ratio of 20 percent, then the money multiplier is: -0.2. -0.8. -1.25. -5.0.
answer
5.0.
question
Suppose a banking system has $120 million in deposits, a required reserve ratio of 20 percent, and total bank reserves for the whole system of $100 million. Then the potential deposit creation for the whole system is equal to: -$120 million. -$76 million. -Zero. -$380 million.
answer
$380 million.
question
Suppose a banking system has a required reserve ratio of 0.15. How much can the money supply increase in response to a $1 billion increase in excess reserves for the whole banking system? -$1 billion -$150 million -$15 billion -$6.67 billion
answer
$6.67 billion
question
An essential function for a bank is to: -Maximize its assets. -Create money through lending. -Lend all of its deposits. -Minimize its reserve ratio.
answer
Create money through lending.
question
Ceteris paribus, the money supply becomes smaller when: -A loan is repaid to the banking system by a bank customer. -An individual deposits currency into her transactions account. -The Federal Reserve reduces the reserve requirement. -A bank uses its excess reserves to make a loan.
answer
A loan is repaid to the banking system by a bank customer.
question
The primary purpose of both the FDIC and the Savings Association Insurance Fund (SAIF) is to: -Increase depositor confidence in the banking system. -Control the nation's money supply. -Set reserve requirements for the banking system. -Provide funds for home mortgages.
answer
Increase depositor confidence in the banking system.
question
A higher reserve requirement: -Further limits deposit creation. -Increases the ability of banks to make loans. -Lowers the interest rate. -Increases the borrowing capability of borrowers.
answer
Further limits deposit creation.
question
The required reserve ratio is the: -Fraction of loans to shareholders equity. -Highest level interest rates that can legally be charged to borrowers. -Fraction of deposits that banks can lend out. -Fraction of total deposits banks must hold.
answer
Fraction of total deposits banks must hold.
question
The Federal Reserve System was created by: -The FDIC in 1929. -The Federal Reserve Act in 1913. -The U.S. Treasury in 1914. -The Federal Banking Authority in 1904
answer
The Federal Reserve Act in 1913.
question
The primary method for controlling the money supply in the United States is to limit the: -Amount of currency that is printed. -Amount of money that is spent by changing tax policy. -Amount of money that is spent by changing income transfers. -Volume of loans the banking system can make.
answer
Volume of loans the banking system can make.
question
Suppose Brian receives a check for $100 from a bank in Atlanta. He deposits the check in his account at a Dallas bank. The Dallas bank will most likely collect the $100 directly from the: -The FOMC. -Dallas regional Federal Reserve Bank. -The central Federal Reserve Bank in Washington, D.C. -Board of Governors.
answer
Dallas regional Federal Reserve Bank.
question
Which of the following services is performed by the regional Federal Reserve banks? -Holding bank reserves -Bailing out or liquidating failed banks -Determining open-market operations -Issuing government bonds
answer
Holding bank reserves
question
Members of the Board of Governors are: -Elected by the people and confirmed by the president. -Appointed by the president and confirmed by the Senate. -Selected by each new president at the same time the cabinet is chosen. -Appointed by the Senate and confirmed by the House of Representatives.
answer
Appointed by the president and confirmed by the Senate.
question
The Federal Open Market Committee includes: -All 7 governors and 5 of the regional Reserve bank presidents. -5 of the governors and all of the regional Reserve bank presidents. -12 of the regional Reserve bank presidents plus the Chairman of the Fed. -All 7 of the governors and all 12 of the regional Reserve bank presidents.
answer
All 7 governors and 5 of the regional Reserve bank presidents.
question
All of the following are tools available to the Fed for controlling the money supply except: -The reserve requirement. -The discount rate. -Open market operations. -Taxes.
answer
Taxes.
question
The money supply (M1) includes currency held by the public: -Plus transactions accounts. -Currency held by the Fed and Treasury, and transactions accounts. -Balances in most savings accounts and money market mutual funds. -Transactions accounts plus money market mutual funds.
answer
Plus transactions accounts.
question
Excess reserves are: -Legal reserves in excess of total reserves. -Required reserves plus minimal reserves. -Bank reserves in excess of required reserves. -Total reserves minus deficient reserves.
answer
Bank reserves in excess of required reserves.
question
Assume the reserve requirement is 10 percent, demand deposits are $200 million, and total reserves are $18 million. If the reserve requirement is increased to 14 percent, the banking system will have: -Excess reserves equal to $10 million. -Excess reserves equal to $18 million. -An increase in the money multiplier. -A deficiency of reserves equal to $10 million.
answer
A deficiency of reserves equal to $10 million.
question
A change in the reserve requirement causes a change in all of the following except: -The money multiplier. -The lending capacity of the banking system. -Excess reserves. -Pre-tax income.
answer
Pre-tax income.
question
The federal funds rate is the interest rate charged when: -One bank lends to another bank. -The Fed lends to banks. -The Fed lends to individuals. -Individual banks lend to the Fed.
answer
One bank lends to another bank.
question
Which of the following is true about an increase in the discount rate? -It reduces the cost of reserves borrowed from the Federal Reserve -It signals the Federal Reserve's desire to restrain money growth -It signals the Federal Reserve's desire to support credit creation -It signals the Federal Reserve's eagerness to lend additional reserves
answer
It signals the Federal Reserve's desire to restrain money growth
question
If banks do not have enough reserves to satisfy the reserve requirement, they can: -Buy securities. -Pay off discount loans at the Federal Reserve bank. -Lend additional reserves in the federal funds market. -Sell securities.
answer
Sell securities.
question
The Fed is most likely to pursue: -Frequent adjustment of the reserve requirement. -Use of open market operations as the primary mechanism to change reserves. -Numerous increases in the discount rate to tighten the money supply quickly. -Frequent changes in marginal tax rates.
answer
Use of open market operations as the primary mechanism to change reserves.
question
The choice of how and where to hold idle funds is: -An executive Fed decision. -A fed funds decision. -A discount decision. -A portfolio decision.
answer
A portfolio decision.
question
Rommel buys a bond in the amount of $2,000 with a promised interest rate of 17 percent. If the market interest rate increases to 27 percent, Rommel can sell her bond for up to: -$1,259.25. -$540.00. -$7,407.00. -$11,764.71.
answer
$1,259.25.
question
The rate of return on a bond is the: -Annual interest payment. -Discount rate. -Yield. -Federal funds rate.
answer
Yield.
question
If the Fed wants to sell more bonds than people are willing to buy, then the Fed should: -Decrease the price it asks for the bonds. -Switch to another type of monetary policy lever. -Switch to fiscal policy. -Encourage a government agency to buy the bonds.
answer
Decrease the price it asks for the bonds.
question
If the annual interest rate printed on the face of a bond is 25 percent, the face value of the bond is $1,000, and you purchase the bond for $700, what is the current yield on the bond? -25.5 percent -20.5 percent -35.7 percent -25.0 percent
answer
35.7 percent
question
The Fed can increase the federal funds rate by: -Selling bonds which causes market interest rates to rise. -Buying bonds. -Simply announcing a higher rate since the Fed has direct control of this interest rate. -Changing the money multiplier.
answer
Selling bonds which causes market interest rates to rise.
question
If the Fed wishes to increase the money supply it could: -Lower the discount rate. -Raise the minimum reserve ratio. -Sell securities on the open market. -Issue more bonds.
answer
Lower the discount rate.
question
If the Fed wants to increase the lending capacity of the system by $60 billion and the reserve requirement is 10 percent, it should: -Buy $60 billion in bonds from banks. -Buy $6 billion in bonds from banks. -Sell $60 billion in bonds to the public. -Sell $6 billion in bonds to the public.
answer
Buy $6 billion in bonds from banks.
question
If the Fed buys $32 billion of U.S. bonds in the open market and the reserve requirement is 10 percent, M1 will eventually: -Decrease by $32 billion. -Increase by $32 billion. -Decrease by $320 billion. -Increase by $320 billion.
answer
Increase by $320 billion.
question
If the Fed sells $7.5 billion of U.S. bonds in the open market and the reserve requirement is 15 percent, M1 will eventually: -Decrease by $50 billion. -Decrease by $1.125 billion. -Increase by $50 billion. -Increase by $1.125 billion.
answer
Decrease by $50 billion.
question
Suppose the Federal Reserve System has a required reserve ratio of 0.20. If the Open Market Committee sells $10 billion of securities to the commercial banking system, then initially excess reserves: -Decrease by $10 billion. -Increase by $50 billion. -Increase by $10 million. -Decrease by $50 billion.
answer
Decrease by $10 billion.
question
If the required reserve ratio is 25 percent and the Federal Reserve sells $100,000 worth of bonds, the money supply can potentially: -Decrease by $75,000. -Increase by $75,000. -Decrease by $400,000. -Increase by $400,000.
answer
Decrease by $400,000.
question
Which of the following is true about the Monetary Control Act of 1980? -It reduced the distinction between different types of depository institutions -It further restricted the Federal Reserve's control of the banking system -It placed S&Ls, credit unions, mutual savings banks, and nonmember banks under regulatory institutions other than the Fed -It deregulated the banking industry
answer
It reduced the distinction between different types of depository institutions
question
Which of the following concerns is consistent with the Fed's policy initiative outlined in the In the News article "Fed Cuts Deposit-Reserve Requirements"? -Concern about mounting unemployment -Concern about desired spending exceeding current output -Concern about the lower interest rates -Concern about inflationary pressures on the economy
answer
Concern about mounting unemployment
question
By raising the required reserve ratio the Fed: -Can lower the interest rate charged to borrowers. -Can raise the interest rate charged to borrowers. -Can reduce the lending capacity of the banking system. -Can increase the lending capacity of the banking system.
answer
Can reduce the lending capacity of the banking system.
question
Individuals hold precautionary balances in order to: -Take advantage of future changes in bond prices. -Make anticipated expenditures. -Pay for emergency purchases. -Make speculative purchases.
answer
Pay for emergency purchases.
question
The use of money and credit controls to change the macroeconomy is: -Monetary policy. -Considered ineffective by most economists. -No longer used in the United States. -Fiscal policy.
answer
Monetary policy.
question
The speculative demand for money is related to money functioning as a: -Store of value. -Standard of value. -Medium of exchange. -Unit of account.
answer
Store of value.
question
Which of the following is true about the equilibrium rate of interest? -It is constant because of structural forces -At this rate money demand exceeds money supply -At this rate money supply exceeds money demand -The Fed can change it by changing the money supply
answer
The Fed can change it by changing the money supply
question
An increase in the money supply will: -Reduce interest rates and increase aggregate demand. -Reduce interest rates and decrease aggregate demand. -Raise interest rates and increase aggregate demand. -Raise interest rates and decrease aggregate demand.
answer
Reduce interest rates and increase aggregate demand.
question
A monetary stimulus is designed to shift the: -AS curve to the right. -AS curve to the left. -AD curve to the right. -AD curve to the left.
answer
AD curve to the right.
question
All of the following impact the effectiveness of Fed policy except: -How well the Treasury follows the Fed's directions for releasing money. -The willingness or reluctance of banks to lend funds. -Global sources of money. -The responsiveness of interest rates to changes in the money supply.
answer
How well the Treasury follows the Fed's directions for releasing money.
question
Which shift should occur if the Fed raises the discount rate? -The aggregate supply curve should shift leftward -The aggregate supply curve should shift rightward -The aggregate demand curve should shift leftward -The aggregate demand curve should shift rightward
answer
The aggregate demand curve should shift leftward
question
In which of the following situations is expansionary monetary policy most effective? -The Fed prints more currency -The Fed raises the discount rate and the reserve requirement -The Fed sells more securities -Banks are willing to lend excess reserves
answer
Banks are willing to lend excess reserves
question
The success of Fed intervention depends on how well: -Congress performs when manipulating the money supply. -Individuals respond to the Fed's direct requests of the public. -The Treasury follows the Fed's directions for releasing money. -Changes in long-term interest rates mirror changes in short-term interest rates.
answer
Changes in long-term interest rates mirror changes in short-term interest rates.
question
Monetary stimulus may be ineffective because: -The investment demand curve is inelastic. -Expectations of a boom cause the investment demand curve to shift to the right, offsetting interest-rate effects that would stimulate the economy. -The investment demand curve is horizontal. -People usually respond to lower interest rates by consuming more goods and services.
answer
The investment demand curve is inelastic.
question
Monetary policy will never be effective if interest rates: -Change quickly. -Respond to a change in the money supply, and investment spending responds to a change in the interest rate. -Do not respond to a change in the money supply, and investment spending does not respond to changes in the interest rate. -Change slowly.
answer
Do not respond to a change in the money supply, and investment spending does not respond to changes in the interest rate.
question
Multinational corporations can borrow money from all of the following except: -Domestic banks. -Foreign bond markets. -Foreign subsidiaries. -Federal Reserve district banks.
answer
Federal Reserve district banks.
question
The equation of exchange can be stated as: -MV = PQ. -PV = MQ. -MP = VQ. -MQ = V ÷ P.
answer
MV = PQ.
question
The long-term rate of unemployment, determined by structural forces in labor and product markets, defines the: -Frictional rate of unemployment. -Seasonal rate of unemployment. -Natural rate of unemployment. -Cyclical rate of unemployment.
answer
Natural rate of unemployment.
question
Which of the following increases the effectiveness of monetary policy from a monetarist perspective? -The liquidity trap -The constant velocity of money -Changing expectations -Unresponsive investment demands
answer
The constant velocity of money
question
If a lender desires to earn a return of 4 percent on a loan and the anticipated rate of inflation is 1 percent, the lender should charge a: -Real interest rate of 4 percent. -Nominal interest rate of 4 percent. -Real interest rate of 5 percent. -Nominal interest rate of 5 percent.
answer
Nominal interest rate of 5 percent.
question
If the real rate of interest is negative, then, ceteris paribus: -The nominal interest rate is negative. -Monetary policy is tight. -The nominal interest rate is less than the anticipated inflation rate. -The inflation rate is negative.
answer
The nominal interest rate is less than the anticipated inflation rate.
question
All of the following are disproportionately affected by monetary policy except: -The construction industry. -Public works projects. -Utility industries. -Congressional salaries.
answer
Congressional salaries.
question
If the nominal interest rate is 15 percent and anticipated inflation falls from 10 percent to 7 percent, the real interest rate would change from: -15 to 10 percent. -5 to 8 percent. -7 to 9 percent. -8 to 5 percent.
answer
5 to 8 percent.
question
According to Keynesians, fiscal policy affects: -Real interest rates only. -Aggregate spending, prices, and nominal interest rates only. -Aggregate spending, real output, and real interest rates, with possible effects on prices and nominal interest rates. -The velocity of money only.
answer
Aggregate spending, real output, and real interest rates, with possible effects on prices and nominal interest rates.
question
Which of the following is a monetarist assumption that plays a key role in explaining the ineffectiveness of fiscal policy? -The liquidity trap -The instability in the velocity of money -Crowding out -A vertical aggregate demand curve
answer
Crowding out
question
If the Fed wants to increase AD, it should do which of the following? -Conduct open market purchases -Raise the discount rate -Raise the required reserve ratio -Lower capital gains tax rates
answer
Conduct open market purchases
question
In making monetary policy the Fed currently: -Increases the money supply at a fixed rate each year. -Has adopted the monetarist view and "leans against the wind." -Focuses on the federal funds rate. -Measures success by meeting fixed targets.
answer
Focuses on the federal funds rate.
question
The In the News article titled "Uneasy Banks May Tighten Loans, Stunt Recovery" indicates that Fed policy may be ineffective when: -Consumers spend too much money. -Banks welcome new loans regardless of the quality of the borrower. -Banks are reluctant to make loans. -Businesses have high expectations about the future economy.
answer
Banks are reluctant to make loans.
question
The In the News article titled "Uneasy Banks May Tighten Loans, Stunt Recovery" indicates that Fed policy may be ineffective when: -Consumers spend too much money. -Banks welcome new loans regardless of the quality of the borrower. -Banks are reluctant to make loans. -Businesses have high expectations about the future economy.
answer
Banks are reluctant to make loans.
