question

Investment spending a. cannot be stimulated by decreasing the interest rate. b. is often the cause of business fluctuations in the United States. c. is a remarkably stable function of the level of real GDP. d. is the primary solution to recessions and inflations, according to John Maynard Keynes.

answer

is often the cause of business fluctuations in the United States

question

U.S. imports are most likely to increase when a. U.S. GDP decreases. b. U.S. unemployment rates fall. c. U.S. prices fall d. foreign prices rise.

answer

U.S. unemployment rates fall

question

The slope of the aggregate demand curve illustrates that as the price level rises, a. real GDP demanded decreases b. real GDP demanded increases. c. the aggregate demand curve shifts rightward. d. the aggregate demand curve shifts leftward.

answer

real GDP demanded decreases

question

Price level changes have their greatest effect on consumers' a. income b. wealth c. debt d. expectations

answer

wealth

question

If total spending is greater than the value of output, firms will a. cut prices. b. decrease production levels. c. increase production levels. d. see inventories rise.

answer

increase production levels

question

In Table 1, the equilibrium level of output is (hw 4) a. 2,500. b. 3,000. c. 3,500. d. 4,000.

answer

3,000

question

A decrease in disposable income will a. lead to an upward movement along the consumption function. b. lead to a downward movement along the consumption function. c. shift the consumption function upward. d. shift the consumption function downward.

answer

lead to a downward movement along the consumption function

question

In Figure 3, the economy is (hw 4) a. experiencing an inflationary gap, shown by the horizontal distance EB. b. at full employment without inflation. c. experiencing a recessionary gap, shown by the horizontal distance EB. d. experiencing a recessionary gap, shown by the distance between EF.

answer

experiencing a recessionary gap, shown by the horizontal distance EB

question

The nation's disposable income increases by $400 billion and, as a result, consumer spending increases by $320 billion. Therefore, the MPC equals a. 16. b. 20. c. 60. d. 80. e. 96

answer

80

question

The reason for the multiplier effect is that a. businesses make decisions about investment projects based on anticipated profits. b. one person's additional expenditure creates a new source of income for another person, and this additional income leads to still more spending. c. changes in government spending typically deepen recessions and exacerbate inflationary conditions in the economy. d. additional spending lowers the rate of interest and leads to further borrowing and spending.

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 a. consumption spending. b. government spending. c. investment spending. d. net exports

answer

investment spending

question

In Table 1, inventories are being depleted as long as output is below (hw 4) a. 2,000 b. 2,500. c. 3,000. d. 3,500.

answer

3,000

question

In Figure 2, which of the following moves can be explained by a decrease in the price level? a. A to B b. A to C c. A to D d. A to E

answer

c. A to D

question

Inventory reductions are a signal indicating that a. the economy is close to disaster. b. the Dow Jones Industrial Average will fall. c. manufacturers need to increase production. d. All of the above are true.

answer

manufacturers need to increase production.

question

If total spending exceeds total output, then a. inventory levels will rise. b. inventory levels will remain constant. c. inventory levels will fall. d. output will eventually decrease.

answer

inventory levels will fall

question

Using the standard 45-degree line diagram, how does an increase in investment spending effect the expenditure schedule? a. It shifts the expenditure schedule downward. b. It shifts the expenditure schedule upward. c. It increases the slope of the expenditure schedule. d. It decreases the slope of the expenditure schedule.

answer

It shifts the expenditure schedule upward

question

Given the scatter diagram in Figure 1, what is the MPC (your best estimate)? (hw4) a. 1/2 b. 1/3 c. 2/5 d. 3/4

answer

3/4

question

Using the standard 45-degree line diagram, how does a decrease in net exports effect the expenditure schedule? a. It increases the slope of the expenditure schedule. b. It decreases the slope of the expenditure schedule. c. It shifts the expenditure schedule upward. d. It shifts the expenditure schedule downward.

answer

It shifts the expenditure schedule downward.

question

Which of the following would cause an upward shift in the consumption function? a. a stock market crash b. an increase in the price level c. a decrease in disposable income d. a decrease in the price level

answer

a decrease in the price level

question

At the equilibrium level of income it must be true that total a. income equals total spending. b. product equals total output. c. output equals total inventory. d. income equals total saving.

answer

income equals total spending

question

In Figure 2, which of the following moves can be explained by a decrease in the prices of stock on the NASDAQ? (hw4) a. A to B b. A to C c. A to D d. A to E

answer

A to C

question

In Figure 3, at $7,000 billion real GDP, a. inventories are increasing. b. spending falls short of output. c. spending exceeds output. d. Both a and b are correct.

answer

Both a and b are correct

question

If the government increases defense spending by $1 billion and the MPC is 0.8, how much additional spending will occur as result of the multiplier effect? a. $5 billion b. $3 billion c. $1 billion d. $1.8 billion

answer

$5 billion

question

If the expenditure schedule lies above the level of potential GDP, then there is a(n) a. recessionary gap b. precautionary gap. c. deflationary gap d. inflationary gap.

answer

inflationary gap

question

If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill? It will credit the bank's reserve account It will write the bank a check It will transfer cash to the bank's vault. It will take reserves from another bank

answer

It will credit the bank's reserve account

question

Proponents of Fed independence maintain that a. independence helps ensure low unemployment rates. b. money is too important to be left to the bankers c. independence permits objective decisions not based on politics. d. only the Federal Reserve knows how to act wisely.

answer

independence permits objective decisions not based on politics

question

Which of the following is an example of money serving as a medium of exchange? a. Richard puts money into a piggy bank. b. Ellen deposits cash into a money market account c. Sean puts a new $20 bill into his currency collection. d. Marian buys a carbo-loaded drink before a marathon

answer

Marian buys a carbo-loaded drink before a marathon

question

The early goldsmiths issued money in the form of a. coins made from gold in their safes. b. receipts for the acceptance of gold deposits. c. gold fragments left over from the production of jewelry. d. government backed gold certificates.

answer

receipts for the acceptance of gold deposits

question

Which of the following is included in M1? a. savings accounts b. money market deposit accounts c. money market mutual funds d. certificates of deposit e. None of the above are included.

answer

None of the above are included.

question

In Figure 1, (see posted Figures page) which panel shows the effect of a Fed open market sale on the interest rate? (hw 5) Panel (1) Panel (2) Panel (3) Panel (4)

answer

Panel (3)

question

The demand for reserves increases as the price level rises because people want money to buy goods that will appreciate with inflation. people need more money to finance transactions. the opportunity cost of holding money increases. higher prices reduce the value of dollar assets.

answer

people need more money to finance transactions.

question

The money supply contracts and interest rates rise when the Fed replaces old worn-out notes and bills. borrows from the Treasury sells government securities purchases stocks from corporate businesses.

answer

sells government securities

question

The moral hazard problem refers to difficulty banks have in satisfying the government's reserve requirement depositors making a run on the bank, even though the bank is insured. banks taking on more risk in their lending because they know their depositors are insured. banks issuing bank notes that compete with the government's currency.

answer

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

question

The president has influence on Federal Reserve policy because he can veto any Fed policy he appoints the board members and the chair. he can fire the chair he can replace board members at any time

answer

he appoints the board members and the chair.

question

The quantity of reserves demanded decreases as the federal funds rate rises because people want more liquid assets as the federal funds rate rises. the price of bonds rise as the federal funds rate rises. the opportunity cost of holding excess reserves increases as the federal funds rate rises. people want more money to invest as the federal funds rate rises.

answer

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

question

The Federal Reserve Board of Governors serve at the pleasure of the president similar to other cabinet positions. report directly to Congress and are controlled by Congress. consists of 12 members, one from each district bank Correct is structurally independent of the executive and legislative branches of the federal government

answer

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

question

One objection to supply-side tax cuts is that demand-side changes are smaller than supply-side changes. and supply-side changes are about equal. are more unpredictable than supply-side changes. are larger than supply-side changes.

answer

are larger than supply-side changes.

question

The primary goal of supply-side economics is to balance the federal budget. reduce the balance of payments deficit. reduce the money supply. reduce inflation and increase growth at the same time.

answer

reduce inflation and increase growth at the same time.

question

The distinction between M1 and M2 is based on portability-the ease with which an asset can be moved. divisibility-the ease with which an asset can be used to make smaller payments. liquidity-the ease with which an asset can be converted into cash. storability-how long an asset will retain its value.

answer

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

question

The primary benefit of a monetary system of exchange compared to a barter system is the increased ability to record transactions. time necessary to find trading partners. time devoted to shopping. efficiency in arranging transactions.

answer

efficiency in arranging transactions.

question

The oversimplified money multiplier formula, when the required reserve ratio is m, is change in money supply = change in excess reserves3m. change in money supply = change in excess reserves3m. change in money supply = (1/m) x initial deposit change in money supply = m/change in excess reserves

answer

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

question

Liquidity refers to the rapidity with which money flows through the economy. ease with which an asset can be converted into cash. ease with which banks move funds from checking to savings accounts. All of the above are correct.

answer

ease with which an asset can be converted into cash.

question

If the price level rises, what will happen to the demand for reserves? a. It will shift outward b. It will shift inward. c. It will remain unchanged. d. It depends on what happens to interest rates.

answer

It will shift outward

question

Under fractional banking, when a bank lends to a customer the money supply increases. bank profitability is decreased. the bank is protected from a run. bank credit decreases.

answer

the money supply increases.

question

In Figure 1 (see posted Figures page) , which panel shows the effect of a recession on the interest rate? (hw5) Panel (1) Panel (2) Panel (3) Panel (4)

answer

Panel (2)

question

Fiat money is money backed by land. backed by gold or silver. that can be converted to gold or silver because a government says it is.

answer

because a government says it is.

question

The government banking regulation that places an upper limit on the money supply is deposit insurance by the FDIC. reserve requirements on bank deposits periodic bank examinations and audits. limitations on the types of assets that a bank may own.

answer

reserve requirements on bank deposits

question

Supply-side tax cuts tend to benefit the rich because tax cuts 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. All of the above are correct.

answer

All of the above are correct.

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) decrease in output and prices. decrease in output and an increase in prices. increase in output and prices. increase in output and a decrease in prices.

answer

increase in output and prices.

question

Banks that are managed in a very safe and conservative manner can be expected to earn high, steady profits. high but volatile profits. low and consistent profits. low profits with occasional major losses.

answer

low and consistent profits

question

The government regulates the banking industry by conducting frequent audits and examinations limiting the kinds of assets that a bank may own. limiting the quantity of some kinds of assets that a bank may own. All of the above are correct.

answer

All of the above are correct.

question

The monetary policies carried out by the Fed must be ratified by Congress. must be consistent with fiscal policies passed by Congress. are sometimes inconsistent with fiscal policy must be approved by the president.

answer

are sometimes inconsistent with fiscal policy

question

Open market operations have their initial effect on bank lending. interest rates. profits. revenues.

answer

interest rates.

question

The Federal Deposit Insurance Corporation insures savings accounts against unlawful transfer into checking accounts. bank deposits against the failure of an individual bank. that the bank will maintain sufficient required reserves bank buildings and property against fire and theft

answer

bank deposits against the failure of an individual bank.

question

The actual control of the Federal Reserve System resides in the Congress of the United States. member banks. Senate Banking Committee. Board of Governors.

answer

Board of Governors

question

One inconvenience of commodity money is the need for money to be divisible. uniform quality. portability. All of the above are correct.

answer

All of the above are correct

question

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 ____. M1 M2 M3 L

answer

M1

question

As a knowledgeable investor in 2001, you should have realized that as interest rates fell, bond prices would also fall. rise. become more volatile, like stock prices. fall but not by as much as stock prices.

answer

rise.

question

When the Fed wants to expand the money supply through open market operation, it sells government securities to the Treasury sells government securities to member banks buys government securities from member banks buys government securities from the Treasury

answer

buys government securities from member banks

question

The Fed conducts an open market purchase of Treasury bills of $10 million. If the required reserve ratio is .10, what change in the money supply can be expected using the oversimplified money multiplier? $100 million $10 million 0 -$10 million -$100 million

answer

$100 million

question

If DI falls by $100 billion, and C falls by $90 billion, the slope of the consumption is a. -45 b. 45 c. -90 d. 90 e. 50

answer

90

question

A movement upward along the consumption function can be caused only by a(n) increase in disposable income decrease in disposable income decrease in the price level increase in the price level

answer

increase in disposable income

question

If the stock market falls by 25 percent next year and remains down, what is most likely to happen to the consumption function? it will shift upward it will shift downward it will not shift, but people will move downward along the consumption function it will not shift, but people will move upward along 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? An increase in the price level decreases disposable income An increase in the price level increases the demand for fixed money assets An increase in the price level decreases the value of fixed money assets An increase in the price level decreases saving and increases debt

answer

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

question

When businesses are cutting back production, then it probably true that total spending is greater than total output total output is greater than total income total spending is less than total output inventory levels are decreasing

answer

total spending is less than total output

question

Using the standard 45- standard line diagram, how does a decrease in investment spending effect the expenditure schedule? It increases the slope of the expenditure schedule It decreases the slope of the expenditure schedule It shifts the expenditure schedule downward It shifts the expenditure schedule upward

answer

It shifts the expenditure schedule downward

question

The basic idea behind the multiplier is that an increase in GDP brings about an additional, larger increase in GDP Consumer spending causes a larger increase in investment spending government spending causes a larger increase in tax revenues spending will cause an even larger increase in equilibrium GDP

answer

spending will cause an even larger increase in equilibrium GDP

question

If the level of investment spending decreases by $100 and the MPC in the economy is 0.8, then the cumulative spending increase is $280 $260 $500 $400

answer

-500

question

The slope of the aggregate demand curve illustrates that real GDP demands will increase when the price level rises the price level falls real income rises real income falls

answer

the price level falls

question

The equilibrium level of GDP is the level at which aggregate demand exceeds output aggregate demand equals output aggregate demand is less than output inventories are being depleted to meet demand

answer

aggregate demand equals output

question

When the expenditure level is above the full employment level of GDP, a possible consequence is falling prices rising prices falling disposable income high levels of unemployment

answer

rising prices

question

If aggregate quantity supplied exceeds aggregate quantity demanded, we can expect an unplanned depletion of inventories causing firms to raise prices depletion of inventories causing firms to lower prices accumulation of inventories causing firms to raise prices accumulation of inventories causing firms to lower prices

answer

accumulation of inventories causing firms to lower prices

question

Critics of supply-side economics argue that tax cuts do not affect supply, only demand supply-siders exaggerate the effects of tax cuts incentives have no effect on behavior the goals of supply-siders are not supported by most economics

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 greatest effect on aggregate supply tax receipts aggregate demand the money supply

answer

aggregate demand

question

One advantage of a money system compared to a barter system is that barter never works money creates the need for banks money is more efficient everyone has money

answer

money is more efficient

question

Fiat money is always backed by gold or silver not useful in buying Italian cars only backed by government decree not as liquid as precious metals

answer

only backed by government decree

question

Money is almost always used to quote prices. This illustrates the function of money as a medium of exchange store of value unit of account commodity value

answer

unit of account

question

One reason why gold and silver have served as money is that they are easy to produce are easy to duplicate do not corrode or rust all of the above are correct

answer

do not corrode or rust

question

In comparison to commodity money, paper money is not portable has no intrinsic value is not divisible cannot be stored all of the above are correct

answer

has no intrinsic value

question

Which of the following definitions of the money supply includes only the most liquid M1 M2 saving deposits money market mutual deposits

answer

M1

question

Although checking deposits are considered money, they are actually backed by commodities like gold not very useful for making payments bookkeeping entries in bank balance sheets

answer

bookkeeping entries in bank balance sheets

question

The fractional reserve system of banking evolved because goldsmiths did not have safes large enough to hold all their gold deposits there was always a dire need for additional money lenders knew that on any given day, only a few depositors would come to claim the deposits lenders knew that they would not be prosecuted for lending out money they did not have

answer

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

question

Most checkable deposits are insured up to $100,000 by state banking commissions the federal reserve board U.S. department of the treasury the federal deposit insurance corporation

answer

the federal deposit insurance corporation

question

The oversimplified money multiplier formula, when the required reserve ratio is m, is change in money supply= change in excess reserves3m change in money supply = (1/m) x initial deposit change in money supply= m/change in excess reserves

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 deposit insurance by the FDIC reserve requirements on bank deposits periodic bank examinations and audits limitations on the types of assets that a bank may own

answer

reserve requirements on bank deposits

question

The immediate impetus for the establishment of the Federal Reserve System came from severe outbreaks of inflation in the early 1900s four severe banking panics between 1873 and 1907 the discovery of gold in Alaska the desire to copy the founding of the Bank of England

answer

four severe banking panics between 1873 and 1907

question

The actual control of the Federal Reserve system resides in the congress of the United States member banks senate banking committee board of governors

answer

board of governors

question

The monetary policies carried out by the Fed must be ratified by congress must be consistent with fiscal policies passed by congress are sometimes inconsistent with fiscal policy must be approved by the president

answer

are sometimes inconsistent with fiscal policy

question

The Fed is institutionally independent. A major advantage of this is that monetary policy is subject to regular congressional scrutiny will often offset fiscal policy is not controlled by politicians is usually coordinated with fiscal policy

answer

is not controlled by politicians

question

Open market operations generally involve the purchase and sales of government securities stocks and bonds coins and currency Federal Reserve notes

answer

government securities

question

If the Fed sells a T-bill to a commercial bank, how will this effect the money supply? It will increase the money supply It will increase bank reserves It will decrease the money supply It will have no effect on 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 raise the discount rate to member banks issue directions to purchase government securities, thus putting reserves in member banks issue directions to sell government securities, thus taking reserves from member banks order new federal reserve notes delivered to member banks

answer

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

question

The money supply expands and interest rates fall when the Fed replaces old worn-out notes and bills borrow from the treasury buys government securities purchases stocks from corporate businesses

answer

buys government securities

question

The Fed conducts an open market sale of treasury bills of $5 million. If the required reserve ration is .20, what change in the money supply can be expected using the oversimplified money multiplier? $25 million $5 million 0 -$5 million -$25 million

answer

$25 million

question

What will happen to the demand for reserves if real GDP increases? It will shift outward It will shift inward It will remain unchanged It depends on what happens to interest rates

answer

It will shift outward

question

The demand for reserves increases as the price level rises because people want money to buy goods that will appreciate with inflation people need more money to finance transactions the opportunity cost of holding money increases higher prices reduce the value of dollar assets

answer

people need to 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% of surveyed investors knew was that as bond prices rise, interest rates fall in reaction to the increased demand for bonds fall in reaction to the decreased demand for bonds rise in reaction to the increased demand for bonds rise in reaction to the decreased demand for bonds

answer

fall in reaction to the increased demand for bonds

question

What is national income equal to?

answer

domestic product

question

As the price level falls, the demand for money increases because interest rates also increase increases because consumers more fewer goods and services decreases because less money in needed for each transaction decreases because investment spending will also decrease

answer

decreases because less money in needed for each transaction

question

Aggregate demand

answer

is the total amount that all consumers, business firms, government agencies, and foreigners spend on U.S. final goods and services

question

Consumer expenditure

answer

total value of all consumer goods and services demanded.

question

Investment spending (I)

answer

amount that firms spend on factories, machinery, software, and the like, plus the amount that families spend on new houses

question

Government purchases (G)

answer

items such as paper, computers, airplanes, ships, and labor bought by all levels of government.

question

Net exports

answer

U.S. exports minus U.S. imports.

question

National income

answer

sum of the incomes that all individuals in the economy earn in the forms of wages, interest, rents, and profits.

question

Disposable income (DI)

answer

sum of the incomes of all individuals in the economy after all taxes have been deducted and all transfer payments have been added.

question

Transfer payments

answer

sums of money that the government gives certain individuals as outright grants rather than as payments for services rendered to employers.

question

money-fixed asset

answer

an asset whose value is a fixed number of dollars.

question

Equilibrium

answer

refers to a situation in which neither consumers nor firms have any incentive to change their behavior.

question

Expenditure schedule

answer

shows the relationship between national income (GDP) and total spending.

question

45° line diagram

answer

plots total real expenditure (on the vertical axis) against real income (on the horizontal axis).

question

recessionary gap

answer

is the amount by which the equilibrium level of real GDP falls short of potential GDP.

question

inflationary gap

answer

is the amount by which equilibrium real GDP exceeds the full-emploment level of GDP.

question

Stagflation

answer

is inflation that occurs while the economy is growing slowly or having a recession.

question

M1

answer

sum of all coins and paper money in circulation + certain checkable deposit balances at banks and savings institutions.

question

M2

answer

sum of all coins and paper money in circulation + all types of checking account balances + most forms of savings account balances + shares in money market mutual funds

question

In figure 2, as the slope of the aggregate supply curve increases, this indicates that (midterm) the economy is getting close to (or exceeding) potential GDP the economy is reducing employment inflation will be less of a problem output is falling

answer

the economy is getting close to (or exceeding) potential GDP

question

In figure 1, (midterm) the 45 degrees line represents all points where spending equals output to the left of the equilibrium GDP, inventories will fall to the right of the equilibrium GDP, inventories will rise all of the above are correct

answer

all of the above are correct

question

In table 1, inventories will be increasing as long as output is above (midterm) 1000 1500 2000 3000

answer

3000

question

In figure 4, which panel shows the effect of an expansionary monetary policy on the interest rate? (midterm) panel A panel B panel C Panel D

answer

panel A

question

In figure 4, which panel shows the effect of a Fed open market sale on the interest rate? (Midterm) panel A panel B panel C Panel D

answer

panel C

question

In figure 3, the economy is experiencing a(n) (Midterm) inflationary gap equal to EF inflationary gap equal to ET recessionary gap equal to ET recessionary gap equal to FT

answer

recessionary gap equal to ET

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