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In a market system, the most dangerous types of bankruptcies involve

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financial institutions.

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Which of the following are reasons that banks are so heavily regulated?

answer

Governments are concerned about the safety of deposits, The industry is a principal determinant of aggregate demand, Bank failures are contagious

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Bankers' business decisions effect the money supply because bankers

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have the ability to create money.

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A bank run involves a large flow of money

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out of depositors' accounts.

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In order for barter trades to occur, there must be a

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double coincidence of wants

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The "efficiency of the payments mechanism" refers to

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the ease and speed of exchanging money for goods and services.

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7. Money is an imperfect store of value when

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the rate of inflation is high.

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8. Liquidity refers to the

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ease with which an asset can be converted into cash.

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9. Fiat money is

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only backed by government decree.

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10. The primary feature of money is that it serves as

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a medium of exchange.

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11. Currently in the United States, money is backed by

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everyone's willingness to accept it.

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12. The new $20 bills are being introduced by the U.S. Treasury primarily to diminish

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counterfeiting.

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13. The official definition of the money supply that includes coins, paper money, travelers' checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called ____.

answer

M1

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14. Electronic cash or E-cards are

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not included in the definition of the money supply.

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15."Near monies" are

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liquid assets that are close substitutes for money.

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16.One difference between the assets included in M1 and those added to calculate M2 is that items in M1 are

answer

more liquid than those added to compute M2.

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17. Which of the following is included in M1?

answer

travelers' checks

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18. The M2 definition of the money supply is based on the concept that

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many types of deposits can be used as both payments and stores of value.

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19. Are "smart cards" or E-cash cards part of the money supply?

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No, because they are merely means to transfer checking deposits.

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20. Due to new methods of electronically transferring assets from savings accounts to checking accounts, many economists favor moving savings accounts from

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M2 into M1.

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

answer

the money supply increases.

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22. Bank regulators are concerned about the safety of depositors because

answer

bank failures were common throughout most of U.S. history and have even occurred in recent decades,in the absence of federal insurance, depositors would lose their money if a bank failed, in the absence of federal insurance, depositors would lose their money if a bank failed, nervous depositors may rush to withdraw their accounts and produce a "run" that could threaten even a sound bank.

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23. The objective of bank management is to

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strike the appropriate balance between the attraction of bank profits and the need for bank safety.

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24. Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves

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means lower profits for banks.

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25. If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank's reserve position if the required reserve ratio is 20 percent?

answer

The bank has $600,000 of required reserves and $400,000 of excess reserves.

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26. The balance sheet of a solvent bank will show

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assets = liabilities + net worth.

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

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reserve requirements on bank deposits.

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28. The required reserve ratio is 10 percent, but banks actually keep 20 percent on reserve. The actual money multiplier will be

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5.

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29. If people begin to hold more cash, the money multiplier process will

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decrease in actual size.

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30. The Fed's principal objective is to

answer

manage the money supply and interest rates.

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31. The Fed is unlike other central banks in that it

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has 12 branches.

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32. The actual control of the Federal Reserve System resides in the

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Board of Governors.

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33. Members of the Board of Governors of the Fed are

answer

appointed by the president for 14-year terms and confirmed by the Senate.

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34. When the Federal Reserve System was first established, its founders intended the Fed to

answer

provide protection against financial panics by acting as the lender of last resort.

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35. The European Central Bank, established in 1999, was patterned after the

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Federal Reserve, founded in 1914.

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36. In practice, money supply and short-term interest rates are determined by the

answer

Federal Open Market Committee.

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

answer

is not controlled by politicians.

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38. If the Fed buys a T-bill from an individual rather than from a bank, the effect on the money supply is

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the same.

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

answer

It will give the bank new reserves.

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The tool most frequently relied on by the Fed is

answer

open market operations.

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41. Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks. If the oversimplified money multiplier is assumed, then the money supply will

answer

increase by $500 million.

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42. When the Fed sells a government security to the public, how does it usually receive payment for the security?

answer

by accepting checks on bank accounts

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43. Which of the following will lower interest rates in the short run?

answer

a decrease in real GDP

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44. Interest rates rose in the second quarter of 1999. What happened to bond prices during this time?

answer

They decreased.

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45. The concept of "lender of last resort" is that when

answer

commercial banks are hesitant to lend, the Fed will step in and increase reserves.

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46. The reason that the Fed does not actively use discount rate policy to control the money supply is because the Fed

answer

does not know how banks will respond to discount rate changes.

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47. Which of the following will increase interest rates in the short run?

answer

open market sales by the Fed

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48. If the Fed were to increase the money supply at the same time the government was increasing taxes, we could expect

answer

a decrease in interest rates but the effect on real GDP is indeterminant.

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49. Under what conditions will the inflationary impact of an expansionary monetary policy be the largest?

answer

When equilibrium real GDP is at potential real GDP.

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50. After the attacks of September 11, 2001, the proper policy response was

answer

expansionary monetary and fiscal policy.

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51. Which of the following is the formula for velocity?

answer

Velocity = nominal GDP/M

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52. Which is likely to be larger, the velocity of M1 or M2?

answer

M1, because M2 is a larger number.

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53. A look at the historical data indicates that velocity for M1

answer

has been more variable than the velocity for M2, but both have been fairly constant for the past 65 years.

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54. The quantity theory of money assumes that

answer

changes in velocity are so small that velocity can be considered constant.

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55. If credit cards were suddenly ruled illegal and were no longer used, the most likely effect would be a decrease in the

answer

velocity of circulation.

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56. As the price level rises, the demand for money

answer

increases because more money is needed for each transaction.

question

57. The principal factor determining velocity is the

answer

frequency with which paychecks are distributed.

question

58. If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?

answer

It will increase.

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59. When comparing the Keynesian and monetarist approaches, the only substantive difference is that

answer

the Keynesian equation leads to a prediction of real GDP; the monetarist equation leads to a prediction of nominal GDP.

question

60. The major limitation of both the Keynesian approach and the monetarist approach is that both

answer

are ways of studying the aggregate demand curve, but to learn anything about the price level and output, the aggregate supply curve must be i

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61. According to the simple quantity theory of money, a change in the money supply of 9.6 percent would lead to a

answer

9.6 percent change in nominal GDP.

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62. Contractionary fiscal policy

answer

reduces the quantity of money demanded, reduces interest rates, and increases investment spending.

question

63. For Keynesian economists to incorporate monetary policy into their models, they must know

answer

how the money supply affects interest rates.

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64. Which of the following is the Keynesian view of the sequence of cause and effect of monetary policy?

answer

M, r, I, Y

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65. It is often reported by financial news reports that higher interest rates reduce automobile sales. If this is true, we can expect

answer

monetary policy to be more effective.

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66. A major advantage of monetary policy over fiscal policy is that monetary

answer

policy can be put into effect more quickly.

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67. The optimal time for the implementation of contractionary fiscal policy would be

answer

before inflation accelerated.

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68. One of the problems with fixed targets for the money supply is that

answer

demand for money does not grow smoothly and predictably.

question

69. If the Fed decides to target money supply growth, it must be prepared to accept

answer

interest rate volatility.

question

70. Figure 1 shows the equilibrium interest rate and the money stock (M) before the demand for money shifted to M1D1. If the Fed wants to return to the original equilibrium position (E), it should

answer

It is impossible for the Fed to restore the original equilibrium condition.

question

71. In Figure 1, if the Fed wants to target the money supply at $830 billion, and the money demand curve shifts to M1D1, the interest rate will have to

answer

rise above 11 percent.

question

72. In Figure 1 if the Fed wants to stabilize interest rates at 9 percent, and the money demand curve shifts to M1D1, the money supply will have to rise

answer

above $840 billion.

question

73. If the aggregate supply curve is flat,

answer

expansionary fiscal or monetary policy will buy large gains in real output at low cost in terms of inflation.

question

74. Many economists maintain that

answer

the aggregate supply curve is nearly horizontal at low levels of real GDP,the aggregate supply curve is nearly vertical at very high levels of real GDP, any change in aggregate demand will have most of its effect on output when economic activity is low but on prices when

question

75. An expansionary monetary policy is most likely to produce an inflationary effect with little impact on output when the economy

answer

is near full employment and the aggregate supply curve is vertical.

question

76. When will stabilization policy be most effective in combating recessions?

answer

when AS is flat

question

77. What role does ideology play in the debate on stabilization?

answer

A large role, because there are conservative and liberal economists.

question

78. The Fed's quick response to the threat to the economy after September 11, 2001, makes a strong case for

answer

a discretionary-based monetary policy regime.

question

79. After September 11, 2001, both Republicans and Democrats agreed on the need for some type of

answer

stimulus package to counteract recession.

question

80. To maintain a balanced budget during the sag in personal spending in 2000-2001 could cause a(n)

answer

decrease in aggregate demand and a recession.

question

81. If the U.S. government decided to pay off the national debt by creating money in a few years, what would be the most likely effect?

answer

rapid inflation

question

82. The government should not attempt to balance the budget if

answer

the economy is in a recessionary gap.actual GDP is below full-employment GDP.unemployment is rising.

question

83. If the economy is in an inflationary gap, and the government attempts to balance the budget, the effect will be to

answer

continue inflationary pressures.

question

84. If the president and Congress agree to balance the budget during a recession, then the appropriate monetary policy is

answer

increase the growth of the money supply.

question

85. If in fiscal year 2001, the federal government receives $1,990 billion in revenues and spends $1,875 billion for goods and services, the national debt will

answer

decrease by $115 billion.

question

86. Compared to the size of GDP in 2004, the national debt was approximately

answer

one-third as large.

question

87. A chart of the ratio of national debt to GDP from 1915 to 2001 would show

answer

significant increases from 1980 to 1995.

question

88. The net national debt is smaller than the gross national debt because

answer

some debt is held by government agencies.

question

89. With no change in fiscal policy, the budget

answer

deficit will rise during a recession and fall during a boom.

question

90. A recessionary gap causes national debt to increase because

answer

income tax receipts drop off markedly.

question

91. If the inflation rate falls, what will happen to the budget deficit?

answer

It will fall, because interest payments will fall.

question

92. The U.S. government need never default on its debt because

answer

it can raise the funds it needs to repay by taxation, and it can print money to repay.

question

93. The policy mix that the Clinton administration sought in early 1993 was a

answer

smaller budget deficit and looser monetary policy.

question

94. Budget deficits are inflationary when

answer

the economy is at full employment and the aggregate supply curve is vertical.

question

95. The central bank is said to monetize the deficit when it

answer

purchases the bonds that the government issues.

question

96. If the Fed is increasing its holdings of government bonds at the same time the federal deficit is increasing,

answer

the debt is being monetized.

question

97. The decisions on the part of the government to increase spending by $5 billion will have the largest impact on aggregate demand when the spending is financed by the sale of bonds to

answer

the Fed.

question

98. Why might the Fed decide to monetize the deficit?

answer

to keep interest rates low

question

99. Crowding out can best be defined as:

answer

government deficits increase interest rates and decrease investment.

question

100. Economists who argue in favor of rapid deficit reduction claim that deficit reduction will

answer

reduce crowding out, increase investment, and increase AS.

question

101. In the late 1990s, the more than expected increases in tax revenues were the result of

answer

rapid economic growth.

question

102. The economy's self-correcting mechanism to eliminate a recessionary gap relies on

answer

falling wage rates that shift the aggregate supply curve outward.

question

103. Demand-side inflation differs from supply-side inflation in the following way:

answer

demand-side inflation has higher output; supply-side inflation has lower output.

question

104. Aggregate supply tends to grow because

answer

there are more workers in the economy every year.there is more capital in the economy every year.technology tends to improve every year.

question

105. If the aggregate supply curve is vertical, then the short-run Phillips curve will

answer

also be vertical.

question

106. The Phillips curve is built on the assumption that business fluctuations are

answer

from the demand side.

question

107. One reason why the Phillips curve "broke down" is

answer

most of the inflation of the 1970s was from the supply side.

question

108. The recent rapid advance in computer technology is one of the reasons given for the shift of the

answer

aggregate supply curve outward.

question

109. After September 11, 2001, President George W. Bush believed in the need for a fiscal stimulus. The proper fiscal policy to reflect this could include a(n)

answer

increase in government purchases.

question

110. Assume that the government is considering different policies to increase total expenditures in order to reduce unemployment. Which of the following would achieve this objective?

answer

decreasing taxes,increasing government spending,increasing transfer payments

question

111, The central idea of supply-side tax cuts is that certain types of tax cuts will increase

answer

aggregate supply.

question

112. A proponent of supply-side economics would advocate

answer

reducing income taxes on saving.

question

113. The primary goal of supply-side economics is to

answer

reduce inflation and increase growth at the same time.

question

114. A reduction in the capital gains tax, often advocated by proponents of supply-side economics, is supposed to stimulate

answer

investment spending.

question

115. Critics of supply-side economics argue that a major flaw is

answer

the small magnitude of supply-side effects.the large size of demand-side effects.increased income inequality.

question

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

answer

are larger than supply-side changes.

question

117. 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

118. Capital gains tax cuts inevitably benefit

answer

high-income stock owners.

question

119. Tax cuts associated with supply-side economics often lead to increased

answer

federal budget deficits.

question

120. Since the supply-side tax cuts of the 1980s,

answer

there has been no evidence that supply-side incentives increase saving or the labor supply.

question

121. A Keynesian economist would expect a supply-side tax cut to shift

answer

only the aggregate demand curve outward.

question

122. When did we begin experiencing a negative growth rate during current recession?

answer

First quarter of 2008

question

123. Which of the following is said to cause current Great Recession?

answer

Excessive lending by banks which violated lending rules. Subprime mortgage defaults, High leverage,

question

124. If I use $10,000.00 of my own saving and borrow $60,000.00 from a local bank and invest the total Amount, my leverage is:

answer

7 to 1

question

125. One of the following is the main reason as to why the current recession has lasted for so long. Which one is it?

answer

Depressed housing market

question

126. Obama administration and the Fed have been consistent in fighting current recession in that

answer

Fed has engaged in excessive lending and administration has increased government spending

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