question

If DI falls by $100 billion, and C falls by $90 billion, the slope of the consumption is

answer

90

question

A movement upward along the consumption function can be caused only by a(n)

answer

increase in disposable income

question

If the stock market falls by 25% next year and remains down, what is most likely to happen to the consumption function?

answer

it will shift downward

question

Why does an increase in the price level tend to cause the consumption function to shift downward?

answer

an increase in the price level decreases the value of fixed money assets

question

When businesses are cutting back production, then it's probably true that

answer

total spending is less than total output

question

Using the standard 45-degree line diagram, how does a decrease in investment spending effect the expenditure schedule?

answer

it shifts the expenditure schedule downward

question

The basic idea behind the multiplier is that an increase in

answer

GDP brings about an additional, larger increase in GDP

question

If the level of investment spending increases by $100 and the MPC in the economy is 0.8, then the cumulative spending increase after three rounds of spending is

answer

$244

question

The slope of the aggregate demand curve illustrates that real GDP demanded will increase when

answer

the price level falls

question

The equilibrium level of GDP is the level at which

answer

aggregate demand equals output

question

When the expenditure level is above the full employment level of GDP, a possible consequence is

answer

rising prices

question

If aggregate quantity supplied exceeds aggregate quantity demanded, we can expect an unplanned

answer

accumulation of inventories, causing firms to lower prices

question

Critics of supply-side economics argue that

answer

supply-siders exaggerate the effects of tax cuts

question

Critics of supply-side economics argue that tax cuts favored by supply-siders will have the

answer

aggregate demand

question

One advantage of a money system compared to a barter system is that

answer

money is more efficient

question

Fiat money is

answer

only backed by government decree

question

Money is almost always used to quote prices. This illustrates the function of money as a

answer

unit of account

question

One reason why gold and silver have served as money is that they

answer

do not corrode or rust

question

In comparison to commodity money, paper money

answer

has no intrinsic value

question

Which of the following definitions of the money supply includes only the most liquid forms of money?

answer

M1

question

Although checking deposits are considered money, they are actually

answer

bookkeeping entries in bank balance sheets

question

The fractional reserve system of banking evolved because

answer

lenders knew that on any given day, only a few depositors would come to claim the deposits

question

If bankers decide to keep a lower fraction of deposits on reserve, the money supply will

answer

increase

question

The moral hazard problem refers to

answer

banks taking on more risk in their lending because they know their depositors are insured

question

Banks that are managed in a very safe and conservative manner can be expected to earn

answer

low and consistent profits

question

A run on a bank may occur if

answer

depositors lose confidence in the bank and attempt to withdraw all their funds

question

One intention of deposit insurance is to reduce the danger of

answer

bank runs

question

Most checkable deposits are insurance up to $100,000 by

answer

the Federal Deposit Insurance Corporation (FDIC)

question

The oversimplified money multiplier formula, when the required reserve ratio of m, is

answer

change in money supply = (1/m) x initial deposit

question

The government banking regulation that places an upper limit on the money supply is

answer

reserve requirements on bank deposits

question

The immediate impetus for the establishment of the Federal Reserve System came from

answer

four severe banking panics between 1873 and 1907

question

The actual control of the Federal Reserve System resides in the

answer

Board of Governors

question

The monetary policies carried out by the Fed

answer

are sometimes inconsistent with fiscal policy

question

The Fed is institutionally independent. A major advantage of this is that monetary policy

answer

is not controlled by politicians

question

Open market operations generally involve the purchase and sales of

answer

government securities

question

If the Fed sells a T-bill to a commercial bank, how will this effect the money supply?

answer

it will have no effect on the money supply

question

If the Federal Open Market Committee decides to expand the money supply, then it will

answer

issue directions to purchase government securities, thus putting more reserves in member banks

question

The money supply expands and interest rates falls when the Fed

answer

buys government securities

question

The Fed conducts an open market sale of Treasury bills of $5 million. If the required reserve ratio of 0.20, what change in the money supply can be expected using the oversimplified money multiplier?

answer

$25 million

question

What will happen to the demand for reserves if real GDP increases?

answer

it will shift outward

question

The demand for reserves increases as the price level rises because

answer

people need more money to finance transactions

question

Stock prices fell throughout much of 2000 and 2001 and many investors decided to switch their funds into the bond market. What only about 30 percent of surveyed investors knew was that as bond prices rises, interest rates

answer

fall in reaction to the increased demand for bonds

question

As the price level falls, the demand for money

answer

decreases because less money is needed for each transaction

question

The slope of the aggregate demand curve illustrates that as the price level rises,

answer

real GDP demanded decreases

question

What causes an upward shift in the consumption function?

answer

a decrease in the price level

question

If total spending exceeds total output, then

answer

inventory levels will fall

question

If the expenditure schedule lies above the level of potential GDP, then there is a(n)

answer

inflationary gap

question

The reason for the multiplier effect is that

answer

one person's additional expenditure creates a new source of income for another person, and this additional income leads to still more spending

question

The most volatile component of aggregate demand is

answer

investment spending

question

U.S. imports are most likely to increase when

answer

U.S. unemployment rates fall

question

A decrease in disposable income will

answer

lead to a downward movement along the consumption function

question

If total spending is greater than the value of output, firms will

answer

increase production levels

question

Inventory reductions are a signal indicating that

answer

manufacturers need to increase production

question

At the equilibrium level of income it must be true that total

answer

income equals total spending

question

Investment spending

answer

is often the cause of business fluctuations in the United States

question

The nation's disposable income increases by $400 billion and, as a result, consumer spending increases by $320 billion. Therefore, the MPC equals

answer

80

question

Using the standard 45-degree line diagram, how does an increase in investment spending effect the expenditure schedule?

answer

it shifts the expenditure schedule upward

question

Price level changes have their greatest effect on consumers'

answer

wealth

question

Using the standard 45-degree line diagram, how does a decrease in net exports effect the expenditure schedule?

answer

it shifts the expenditure schedule downward

question

If the government increase defense spending by $1 billion and MPC is 0.8, how much additional spending will occur as a result of the multiplier effect?

answer

$5 billion

question

The primary goal of supply-side economics is to

answer

reduce inflation and increase growth at the same time

question

One objection to supply-side tax cuts is that demand-side changes

answer

are larger than supply-side changes

question

If the demand-side effects of supply-side tax cuts are greater than the supply-side effects, then we can expect the result to be a(n)

answer

increase in output and prices

question

Supply-side tax cuts tend to benefit the rich because tax cuts

answer

on income tend to benefit high income earners more than low income earners. on savings benefit high income earners who do most of the personal saving. for capital formation tend to benefit those with the means to accumulate capital. on capital gains tend to benefit those with larger financial assets.

question

The primary benefit of a monetary system of exchange compared to a barter system is the increased

answer

efficiency in arranging transactions

question

Liquidity refers to the

answer

ease with which an asset can be converted into cash

question

Which of the following is an example of money serving as a medium of exchange?

answer

Marian buys a carbo-loaded drink before a marathon

question

One inconvenience of commodity money is the need for

answer

money to be divisible, uniform quality, and portability

question

Fiat money is money

answer

because the government says it is

question

The official definition of the money supply that includes coins, paper money, traveler's checks, conventional checking accounts, and other checkable deposits at banks and saving institutions is called

answer

M1

question

M1 does NOT include

answer

savings accounts, money market deposit accounts, money market mutual funds, or certificates of deposit

question

The distinction between M1 and M2 is based on

answer

liquidity - the case with which an asset can be converted into cash

question

The early goldsmiths issued money in the form of

answer

receipts for the acceptance of gold deposits

question

Under fractional banking, when a bank lends to a customer,

answer

the money supply increases

question

The moral hazard problem refers to

answer

banks taking on more risk in their lending because they know their depositors are insured

question

Banks that are managed in a very safe and conservative manner can be expected to earn

answer

low and consistent profits

question

The government regulates the banking industry by

answer

conducting frequent audits and examinations, limiting the kinds of assets that a bank may own, and limiting the quantity of some kinds of assets that a bank may own.

question

The Federal Deposit Insurance Corporation insures

answer

bank deposits against the failure of an individual bank

question

The oversimplified money multiplier formula, when the required reserve ration is m, is

answer

change in money supply = (1/m) x initial deposit

question

The government banking regulation that places an upper limit on the money supply is

answer

reserve requirements on bank deposits

question

The president has influence on Federal Reserve policy because

answer

he appoints the board members and the chair

question

The actual control of the Federal Reserve System resides in the

answer

Board of Governors

question

The monetary policies carried out by the Fed

answer

are sometimes inconsistent with fiscal policy

question

The Federal Reserve Board of Governors

answer

is structurally independent of the executive and legislative branches of the federal government

question

Proponents of Fed independence maintain that

answer

independence permits objective decisions not based on politics

question

Open market operations have their initial effect on bank

answer

interest rates

question

If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?

answer

It will credit the bank's reserve account

question

When the Fed wants to expand the money supply through open market operation, it

answer

buys government securities from member banks

question

The money supply contracts and interest rates rise when the Fed

answer

sells government securities

question

The Fed conducts an open market purchase of Treasury bills of $10 million. If the required reserve ration is 0.10, what change in the money supply can be expected using the oversimplified money multiplier?

answer

$100 million

question

If the price level rises, what will happen to the demand for reserves?

answer

it will shift outward

question

The quantity of reserves demanded decreases as the federal funds rate rises because

answer

the opportunity cost of holding excess reserves increases as the federal funds rate rises

question

The demand for reserves increases as the price level rises because

answer

people need more money to finance transactions

question

As a knowledgeable investor in 2001, you should have realized that as interest rates fell, bond prices would

answer

rise

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