ECON 202 Exam 2
Public saving is equal to national saving minus private saving.
True
The Federal Reserve can alter the size of the money supply by changing reserves or changing reserve requirements.
True
The Federal Reserve primarily uses open-market operations to change the money supply.
True
In a closed economy, if taxes fall and consumption rises, then private saving must fall.
False
Lenders sell bonds and borrowers buy them.
False
Money is the only asset that functions as a store of value.
False
The Federal Reserve is a privately operated commercial bank.
False
The demand for loanable funds comes from saving and the supply of loanable funds comes from investment.
False
The federal funds rate is a long-term interest rate banks charge one another for loans.
False
The money multiplier equals 1/(1 - R), where R represents the reserve ratio.
False
In a closed economy, what does the difference between the tax revenue and government purchases, (T − G), represent?
Public saving
Mutual funds are a type of financial intermediary.
True
A problem that the Fed faces when it attempts to control the money supply is that
the Fed does not control the amount of money that households choose to hold as deposits in banks.
Money is
the most liquid asset but an imperfect store of value.
Other things the same, if reserve requirements are increased, the reserve ratio
increases, the money multiplier decreases, and the money supply decreases.
A bond buyer is a
saver. Bond buyers may sell their bonds prior to maturity.
Which of the following demonstrates the law of supply?
When ketchup prices rose, ketchup sellers increased their quantity supplied of ketchup.
If traveler's checks were $1000 higher and saving deposits were $500 higher, M1 would be (Use the definition of the M1 money stock prior to May 2020).
$1,000 higher and M2 would be $1,500 higher.
Which of the following is included in M2? (Use the definition of the M1 money stock prior to May 2020).
Money market mutual funds
Which of the following policies can the Fed follow to increase the money supply?
Reduce the interest rate on reserves
For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that
S= I + NX
Which of the following is included in M2 but not in M1? (Use the definition of the M1 money stock prior to May 2020).
Savings Deposits
Which of the following events could cause an increase in the supply of ceiling fans?
The number of sellers of ceiling fans increases.
Which of the following is not held constant in a supply schedule?
The price of the good
Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?
The supply of loanable funds shifted left.
What would happen, all else equal, in the market for loanable funds if the government were to decrease the tax rate on interest income?
There would be an increase in the equilibrium quantity of loanable funds.
A decrease in supply will cause an increase in price, which will cause a decrease in quantity demanded.
True
All financial intermediaries are financial institutions, but not all financial institutions are financial intermediaries.
True
If the public decides to hold more currency and fewer deposits in banks, bank reserves
decrease and the money supply eventually decreases.
Northwest Wholesale Foods sells common stock. The company is using
equity financing and the return shareholders earn depends on how profitable the company is.
In a closed economy, if Y, C, and T remained the same, a decrease in G would
increase public saving but not private saving.
Another term for factors of production is
inputs
For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2.5 trillion and the government runs a surplus of $1 trillion. What are private saving and national saving?
$1.5 trillion and $2.5 trillion, respectively
A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank, what is the value of the money supply?
$150
Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5 percent, and excess reserves are $30 billion. What is the level of loans?
$5,400 billion
If a bank with a required reserve ratio of 15 percent receives a deposit of $600, it now has a
$510 increase in excess reserves and a $90 increase in required reserves.
A bank's reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to
$80
A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can, given the reserve requirement. It follows that the reserve requirement is
25 percent
Which of the following counts as part of the supply of loanable funds?
Bank deposits and purchases of bonds
Which of the following lists is included in what economists call "money"?
Cash
A decrease in taxes on interest income would increase the interest rate.
False
A decrease in the price of blueberries will decrease both the equilibrium price and quantity in the market for blueberry muffins.
False
As banks create money, they create wealth.
False
Credit cards are a medium of exchange.
False
Fractional reserve banking is a system where banks must hold an amount of cash based on a percentage of its loans.
False
National saving is equal to Y - T - C.
False
Under a fractional-reserve banking system, the money supply cannot change without any action from the Federal Reserve.
False
Trace the effects on the money supply when the Fed decreases the discount rate.
The discount rate represents the cost of bank borrowing from the Fed. When the cost of bank borrowing decreases, banks will increase the amount of borrowing which will create additional reserves. The additional reserves mean banks can make more loans. These new loans end up as deposits by people which increases the amount of money in the economy (through the multiplier effect).
Suppose private saving in a closed economy is $12b and investment is $10b.
The government budget deficit must equal $2b.
In which of the following cases would it necessarily be true that national saving and private saving are equal for a closed economy?
The government's tax revenue is equal to its expenditures.
An increase in the demand for loanable funds increases the equilibrium interest rate and increases the equilibrium level of saving.
True
Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.
True
Banks cannot influence the money supply if they are required to hold all deposits in reserve.
True
Economic growth causes a production possibilities frontier to shift outward.
True
If Congress instituted an investment tax credit, the demand for loanable funds would shift rightward.
True
If, for an imaginary closed economy, investment amounts to $10,000 and the government is running a $2,500 deficit, then private saving must amount to $12,500.
True
Points inside the production possibilities frontier represent feasible levels of production.
True
Points inside the production possibilities frontier represent inefficient levels of production.
True
The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate, the Fed provides banks with a greater incentive to borrow from it.
True
The term loanable funds refers to all income that is not used for consumption or government expenditures.
True
When a production possibilities frontier is bowed outward, the opportunity cost of one good in terms of the other depends on how much of each good is being produced.
True
A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is
an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply.
If the demand for loanable funds shifts to the right, then the equilibrium interest rate
and quantity of loanable funds rise.
The leverage ratio is calculated as
assets divided by bank capital
If the Apple corporation sells a bond it is
borrowing directly from the public.
The money supply increases when the Fed
buys bonds. The increase will be larger, the smaller is the reserve ratio.
A budget deficit
changes the supply of loanable funds.
A decrease in the price of a good will
decrease quantity supplied.
A mutual fund
is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of both stocks and bonds.
The Federal Reserve
is the central bank of the United States
When the government's budget deficit increases the government is borrowing
more and public savings falls.
Other things the same, when the interest rate rises, people would want to lend
more, making the quantity of loanable funds supplied increase.
If the reserve requirement is 10 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $500, it
must increase required reserves by $50.
In a closed economy, what remains after paying for consumption and government purchases is
national saving.
An increase in the government's budget surplus means public saving is
positive and increasing
In a closed economy, private saving is
the amount of income that households have left after paying for their taxes and consumption.
The economy's two most important financial markets are
the bond market and the stock market.
We associate the term debt finance with
the bond market, and we associate the term equity finance with the stock market.
The bowed-outward shape of the production possibilities frontier can be explained by the fact that
the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing.
National saving is
the total income in the economy that remains after paying for consumption and government purchases.
It is claimed that a secondary advantage of mutual funds is that
they give ordinary people access to the skills of professional money managers.