question

A barter economy is an economy where

answer

goods and services are exchanged for other goods and services

question

Commodity money is a good

answer

used as money that also has value independent of its use of money

question

Which of the following is a function that money serves? (store of value, unit of account, medium of exchange, or all of the above)

answer

All of the above

question

A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?

answer

Store of value

question

The narrowest official definition of the money supply is

answer

M1

question

* M2 includes M1 plus

answer

savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non-institutional money market fund shares

question

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially

answer

decrease M1 and not change M2

question

If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially

answer

not change M1 and not change M2

question

The portion of ___ that a bank does not loan out or spend on securities is known as ____

answer

deposits; reserves

question

A bank holds its reserves as ___ and ___

answer

vault cash; deposits at the Federal Reserve

question

* Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account ______________________ Assets | Liabilities | Reserves +1000 | Deposits +1000 -------------------------------------- At this point, what percentage of the new deposits does Well Fargo hold in reserves?

answer

100 percent

question

Suppose a transaction changes a bank's balance sheet as indicated in the following T - account, and the required reserve ratio is 10 percent ________________________ Assets | Liabilities | Reserves +2000 | Deposits +2000 ------------------------------------------ As a result of the transaction, the bank can make a maximum loan of

answer

1,800

question

In 1913, Congress established the Federal Reserve system with the intention of putting an end to

answer

bank panics

question

Which of the following is not a major function of the Federal Reserve System? (lender of last resort, clearing checks between banks, controlling the money supply, or setting interests rates)

answer

setting income tax rates

question

* If the Federal Open Market Committee wants to decrease the money supply through open market operations it will

answer

sell U.S. Treasury securities

question

* The primary tool the Federal Reserve uses to increase the money supply is

answer

buying U.S. Treasury securities

question

The quantity equation states that

answer

M(money supply) x V(velocity of money) = P(price level) x Y(real output)

question

* The quantity theory of money assumes that

answer

the velocity of money is constant

question

According to the quantity theory of money, inflation is caused by

answer

the money supply is growing faster than real GDP

question

The quantity theory of money implies that the price level will be stable (no definition or deflation) when the growth rate of the money supply equals

answer

the growth rate of real GDP

question

* Monetary policy refers to the actions the Federal Reserve takes to manage

answer

the money supply and interest rates to purpose its economic purposes

question

Which of the following are goals to monetary policy? ([A]price stability, economic growth, and maximizing the value of the dollar relative to other currencies; [B]price stability, maximizing the value of the dollar relative to other currencies, and high employment; [C] price stability, money growth, and high employment; [D] maximizing the value of the dollar relative to other currencies, economic growth, and high employment)

answer

[C] price stability, money growth, and high employment

question

Rising prices erode the value of money as ____ and as a ____

answer

medium of exchange; store of value

question

The Fed seeks to promote stability of financial markets because

answer

resources are lost when there is not an efficient matching of savers and borrowers

question

The Fed's two main monetary policy targets are

answer

the money supply and interest rate

question

If the Fed raises the interest rate, this will ____ inflation and ___ real GDP in the short run.

answer

reduce; lower

question

Increases in the price level

answer

increase the quantity of money needed for buying and selling

question

In the figure (15.2), a movement from point A to point B would be caused by

answer

an increase in the interest rate

question

In the figure (15.3), the movement from point A to point B in the money market would be caused by

answer

an open market sale of Treasury securities by the Federal Reserve

question

In the figure (15.4), the movement from point A to point B in the money market would be caused by

answer

an increase in the price level

question

* Lowering the interest rate

answer

increase investment projects by firms

question

If money demanded is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will

answer

change very little and investment and consumer spending will change very little

question

Falling interest rates can

answer

increase a firm's stock price, which causes firms to issue more stock shares, and thus increase funds for investments

question

When the Fed embarked on a policy known as quantitive easing, they

answer

bought longer-term securities than are usually bought in open market operations

question

* In the figure (15.6), suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

answer

an open market purchase of Treasury bills

question

In the figure (15.7), suppose the economy is initially at point A. The movement of the economy to point as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

answer

an open market sale of Treasury bills

question

If the Fed pursues expansionary monetary policy then

answer

the money supply will increase, interest rates will fall, and the real GDP will rise

question

If the Fed pursues expansionary monetary policy,

answer

aggregate demand will rise(shift to the right), and the price level will rise

question

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

answer

Potential GDP is forecasted to be higher than equilibrium GDP

question

Which of the following characterizes the Fed's ability to prevent recessions?

answer

The Fed is able to keep recessions shorter and milder than it would be otherwise be

question

In figure (15.8), if the economy in Year 1 is at point A and expected to Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

answer

lower interest rates

question

* In figure (15.10), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

answer

Buy treasury bills

question

*In figure (15.11), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

answer

Sell treasury bills

question

* From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely

answer

Decrease interest rate

question

*Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ___ and real GDP to be ____

answer

higher; higher

question

Refer to Table 15-2. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2014 and 2015 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2015, it should

answer

sell Treasury securities

question

Refer to Table 15-3. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2015 and in 2015 if the Federal Reserve does not sue monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, which of the following will be higher than if the Fed had taken no action?

answer

real GDP and the inflation rate

question

* The Taylor rule helps explain the relationship between the Fed's _____ and ____.

answer

federal funds target; economic conditions

question

The Taylor rule predicted a federal funds rate which was ___ that set when Paul Volcker was chairman of the Fed, and a rate which was ___ that set when Arthur Burns chaired the Fed.

answer

less than; greater than

question

* By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ____ and "Alt-A" borrowers _____.

answer

with flawed credit histories; who did not document their incomes

question

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?

answer

The Fed lent investment banks Treasury securities in exchange for mortgage - backed securities

question

Although the Federal Reserve had traditionally made discount loans only to _____, in response to the financial crisis in 2008 the Fed made primary dealers eligible for discount loans as well.

answer

commercial banks

question

Which of the following would be considered an active fiscal policy?

answer

A tax cut is designed to stimulate spending passed during a recession.

question

* Active changes in tax and spending by government intended to smooth out the business cycle are called ____, and changes in taxes and spending that occur passively over the business cycle are called _____.

answer

discretionary fiscal policy; automatic stabilizers

question

Which of the following is an example of discretionary fiscal policy?

answer

the tax cuts passed by Congress in 2001 to combat the recession

question

The majority of dollars spent by government prior to the Great Depression was spending at the ____ level. In the post World War II period, two - thirds to three quarters of all dollars spent by government in the United States are spend at the ____ level.

answer

state and local; federal

question

* Expansionary fiscal policy will

answer

shift the aggregate demand curve to the right

question

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

answer

an increase in government purchases

question

A decrease in individual income taxes ________ disposable income, which ________ consumption spending.

answer

increases; increases

question

Tax increases on business income decrease aggregate demand by decreasing

answer

business investment spending

question

Refer to Figure 16-2. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

answer

a decrease in income taxes

question

Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

answer

an increase in the marginal income tax rate

question

Refer to Figure 16-4. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?

answer

increase government spending

question

Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.

answer

increase; increase

question

Refer to Figure 16-5. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use to move the economy to point C?

answer

increase government spending

question

Refer to Figure 16-6. Given that the economy has moved from A to B in the graph above, which of the following would the appropriate fiscal policy to achieve potential GDP?

answer

increase taxes

question

Refer to Figure 16-7. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use

answer

increase income taxes

question

Refer to Table 16-4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be lower than if the Congress and the president had taken no action?

answer

real GDP and the inflation rate

question

Cutting taxes

answer

will raise disposable income and raise spending

question

A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.

answer

increasing; increasing

question

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by

answer

less than $500 billion

question

Suppose real GDP is $14 trillion and potential real GDP is $14 trillion. An increase in government purchases of $400 billion would cause real GDP to ____ potential real GDP (assuming a constant price level).

answer

be more than

question

* If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would be to increase by _____ to restore the economy to potential real GDP

answer

$250 billion

question

If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by _____ to restore the economy to potential real GDP

answer

$250 billion

question

It is ____ difficult to effectively time fiscal policy than monetary because ____.

answer

more; fiscal policy takes longer to implement

question

A(n) ____ in private expenditures as a result of a(n) _____ in government purchases is called crowding out

answer

decrease; increase

question

If government spending and the price level increase, then

answer

the interest rate increases, consumption declines, and investment spending declines

question

Crowding out, following an increase in government spending, results form (the exchange rate is the foreign exchange price of the domestic currency)

answer

higher interest rates and a lower exchange rate

question

Crowding out will be greater

answer

the more sensitive investment spending is to changes in the interest rate

question

If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to

answer

be below potential GDP

question

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to _____ and investment to _____.

answer

decrease; increase

question

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

answer

All are correct. Raise interest rates and reduce consumer expenditures on automobiles and new houses, make domestic business less competitive in international markets as the dollar appreciates in value, and reduce investment in new capital.

question

If the federal government's expenditures are less than its tax revenues, then

answer

a budget surplus results

question

During the twentieth century, the largest budge deficits as a percentage of GDP occured

answer

during World Wars I and II

question

If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 million, then the economy

answer

must be blow potential real GDP

question

Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential,

answer

All are correct. Government transfer payments will be rising and tax receipts will be falling, this will result in a current budget deficit, and the cyclically adjusted budget will be balanced.

question

If tax reduction and simplification are effective, then

answer

saving and investment in new capital will increase

question

Tax reduction and simplification should ____ long - run aggregate supply and ____ aggregate demand

answer

increase; increase

question

If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply, we would expect crowding out of investment and net exports brought about by the tax cut to be

answer

less than it would be without the supply - side effects

question

Which of the following transactions would be included in Germany's current account?

answer

An American citizen purchases a new Volkswagen made in Germany

question

Which of the following would decrease net exports in the United States?

answer

An American party planner purchases 350 piñatas from Mexico

question

When the United States sends money to the Philippines to help typhoon survivors, the transaction is recorded in

answer

the current account

question

* A Canadian oil company hires geological survey services form the United State. If all else remains equal, this will

answer

increase net exports

question

* If New Yorkers decrease their purchases of French champagne, assuming all else remains constant, this will _____ of the United States

answer

increase the balance of trade

question

In international exchange markets, a rise in interest rates in the United States will cause the demand for dollars to ____ and the supply of dollars to _____

answer

increase; decrease

question

Ceteris paribus, a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to _____. I.e., the dollar ____ in value against the yen.

answer

increase; appreciates

question

Refer to Figure 18-1. Which of the following events below cause the shifts in the supply and demand curves in the market for dollars against the British pound shown in the graph above?

answer

interest rates rise in England

question

How does an increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, affect its balance of trade?

answer

An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade

question

National saving equals

answer

income - consumption - government spending

question

If net exports are negative,

answer

net foreign investments are also negative

question

If net exports are equal to net foreign investment,

answer

All are true. The current account balance is equal to the negative of the financial account balance, the balance of payment is zero, and net capital inflows are equal to imports minus exports.

question

* A federal budget deficit _____ interest rates, which ____ exchange rates (foreign currency per domestic currency), and _____ the balance of trade

answer

raises; raises; reduces

question

What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar?

answer

Interest rates and exchange rates decrease

question

Suppose the Fed purchases Treasury Securities. Interest rates in the United States will ____ and the U.S. dollar will ____ against foreign currencies?

answer

decrease; depreciate

question

If the Fed pursues an expansionary monetary policy, investment in the United States will ________ and net exports will ________.

answer

increase; increase

question

Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets.

answer

rise; appreciate

question

In an open economy, expansionary monetary policy will cause

answer

consumption, investment, and net exports to rise

question

Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy?

answer

All. Private investment, consumption, and net exports

question

If the government finances an increase in government purchases with an increase in taxes, which of the following would you expect to see?

answer

an increase in the exchange rate

question

* If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?

answer

If the required reserve ratio is 10 percent, then a bank must hold 10 percent of its deposits as reserves. Therefore required reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 - $10,000 or $4,000). This is the maximum that the bank can loan out.

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