ECO 155 - Practice Exam 4A

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits? (a) Consumers used much of the rebate to pay off existing debt. (b) Consumers spent the money on frivolous items that did not have a multiplier effect. (c) Consumers decided to spend all of their rebate money. (d) Consumers overspent the rebate and fell into debt.

(a) Consumers used much of the rebate to pay off existing debt.

When the government conducts fiscal policy, it can make up for a decrease in →− C with: (a) an increase in →− G. (b) a decrease in −−→ NX. (c) an increase in −→ M. (d) a decrease in −→ YR.

(a) an increase in →− G.

The FICA tax burden is: (a) borne more by the employee even though the employer contributes an equal dollar amount. (b) shared equally by employer and employee. (c) the same amount as the alternative minimum tax burden. (d) paid entirely by the employer.

(a) borne more by the employee even though the employer contributes an equal dollar amount.

Which statement pertains to the condition of crowding out? (a) Government cuts spending by $300 million, resulting in a decrease in consumption by $500 million. (b) Government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in investment spending by $270 million. (c) Government increases spending by $300 million on new highway construction, resulting in an increase in consumption by $500 million. (d) Government cuts taxes, resulting in an increase in investment spending by $270 million.

(b) Government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in investment spending by $270 million.

Which is an example of quantitative easing by the Federal Reserve? (a) The Fed raises the money multiplier. (b) The Fed lowers interest rates. (c) The Fed purchases $50,000 worth of long-term government bonds. (d) The Fed purchases $100,000 worth of short-term government bonds.

(c) The Fed purchases $50,000 worth of long-term government bonds.

To increase the money supply in the economy, the Fed would: (a) increase the discount rate. (b) carry out open market sales and/or raise the reserve ratio. (c) carry out open market sales. (d) carry out open market purchases and/or lower the discount rate.

(d) carry out open market purchases and/or lower the discount rate.

What are the four major limits to fiscal policy? (a) sticky wages, Ricardian equivalence, recognition lag, and crowding out (b) poor information, the multiplier effect, the bandwagon effect, and election timing (c) aggregate demand deficiency, unemployed resources, long-run expenses, and implementation lag (d) crowding out, a drop in the bucket, a matter of timing, and real shocks

(d) crowding out, a drop in the bucket, a matter of timing, and real shocks

Fiscal policy can best be defined as the use of: (a) international political relations to influence the business cycle. (b) government expenditure and taxation to mitigate recessions only. (c) money supply manipulation to influence the business cycle. (d) government expenditure, borrowing, and taxation to influence the business cycle.

(d) government expenditure, borrowing, and taxation to influence the business cycle.

The alternative minimum tax: (a) has higher tax rates on people with higher incomes. (b) is the tax rate paid on an additional dollar of income. (c) is the total tax payment divided by total income. (d) is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes.

(d) is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes.

Systemic risk is present when: (a) the Fed increases the money supply when it should decrease it. (b) a bank or other financial institution acts recklessly, hoping that the Fed and regulators will later bail them out. (c) the U.S. government defaults on Treasury securities. (d) the failure of one financial institution will bring down other institutions as well.

(d) the failure of one financial institution will bring down other institutions as well.

26 & 27 are table questions on practice exam a

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30 & 31 are graph questions on practice exam a

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Which is not included in the U.S. money supplies M1 and M2? (a) bond mutual funds (b) checkable deposits (c) currency in circulation (d) savings deposits

a. bond mutual funds

In a fractional reserve banking system, banks hold only a fraction of their: (a) deposits as reserves. (b) currency as reserves. (c) loans as reserves. (d) monetary base.

a. deposits as reserves

When the Fed buys short-term Treasury securities, short-term interest rates: (a) fall. (b) could rise or fall. (c) rise. (d) stay the same.

a. fall

Debt held outside the U.S. government is called the: (a) national debt held by the public. (b) debt-to-GDP ratio. (c) debt to foreign investor holdings. (d) total U.S. national debt.

a. national debt held by the public

Which is not a function of the Federal Reserve? (a) providing loans to small businesses (b) serving as the lender of last resort (c) regulating the U.S. financial system (d) regulating the U.S. money supply

a. providing loans to small businesses

If a $500 increase in reserves ultimately leads to a $2,000 increase in the money supply, the reserve ratio is: (a) 4. (b) 0.25. (c) 1. (d) 40.

b. 0.25

Whereas covers the elderly, covers the poor and the disabled. (a) Medicaid; Medicare (b) Medicare; Medicaid (c) PPO; HMO (d) HMO; PPO

b. Medicare; Medicaid

An increase in money growth will cause the inflation rate to increase in: (a) the short run only. (b) both the short run and the long run. (c) the long run only. (d) neither the short run nor the long run.

b. both the short run and the long run

Which of these would help a government fight a recession? (a) raising taxes (b) cutting taxes (c) paying down the national debt (d) cutting spending

b. cutting taxes

The time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called the: (a) recognition lag. (b) legislative lag. (c) effectiveness lag. (d) adjustment lag.

b. legislative lag

Which is a limitation of monetary policy in stabilizing the economy? (a) Most central bank policymakers are controlled by the government. (b) Monetary policy is subject to uncertain lags. (c) Central banks have too much control over the money supply. (d) Central banks have no discretion over policy tools.

b. monetary policy is subject to uncertain lags

A liquid asset is a. gold and only gold b. a very narrowly accepted means of payment c. an asset that can be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments d. an asset that cannot be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments

c. an asset that can be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments

The annual difference between federal spending and revenues is called the: (a) debt held by the public. (b) debt-to-GDP ratio. (c) national deficit. (d) national debt.

c. national deficit

The Term Auction Facility involves the Federal Reserve: (a) lending reserves directly to banks. (b) buying and selling government bonds. (c) providing reserves to banks through an auction. (d) competing with investment banks for Treasury securities.

c. providing reserves to banks through an auction

The U.S. Social Security tax (FICA) is an example of a: (a) progressive tax. (b) proportional tax. (c) regressive tax. (d) flat tax.

c. regressive tax

When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered: (a) solvent and liquid. (b) insolvent and illiquid. (c) solvent and illiquid. (d) insolvent and liquid.

c. solvent and illiquid

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The average tax rate for a person earning $35,000 is: (a) 10%. (b) 0%. (c) 3.5%. (d) 4.3%.

d. 4.3%

The best type of negative shock for the Federal Reserve to respond to is a negative shock to: (a) inflation. (b) LRAS. (c) SRAS. (d) AD.

d. AD

The purpose of FICA taxes is to fund: (a) defense expenditures. (b) health services for elderly people. (c) presidential campaigns. (d) Social Security payments.

d. Social Security payments

What is the overnight lending rate from one bank to another? (a) the Federal Reserve rate (b) the money multiplier rate (c) the money market rate (d) the Federal Funds rate

d. the Federal Funds rate

The largest source of revenue for the U.S. federal government is: (a) the corporate income tax. (b) excise taxes, such as taxes on gasoline and alcohol. (c) Social Security and Medicare taxes. (d) the individual income tax.

d. the individual income tax