Econ 202

Refer to Table 13.2. If ABC Bank has a required reserve ratio of 15 percent, it can legally make a onetime maximum loan of

$50,000

Refer to Table 13.1. With a required reserve ratio of 20 percent, XYZ Bank could support maximum transactions account balances of

$500,000

Refer to Table 13.1. With a required reserve ratio of 12 percent, XYZ Bank would have excess reserves of

$52,000

Refer to Table 13.2. With a required reserve ratio of 10 percent, ABC Bank would have excess reserves of

$60,000

Calculate the total change in aggregate demand because of an initial $300 decrease in investment spending, given that C = 150 + 0.50YD.

$600 decrease; Total spending will change by the amount of the multiplier times the initial change in spending, where the multiplier equals 1 / (1 - MPC). The MPC is the slope of the consumption function, which is 0.50. Multiplier=1/(1-.5)=2. Thus, 2(300)=$600.

Suppose the consumption function is C = $100 + 0.85YD. If disposable income is $400, saving is

-$40.00; Consumption is equivalent to 100+.85(400) = 440. Saving will be negative whenever consumption exceeds disposable income ($400 - $440 = -$40).

Given that C = $1,000 + 0.60YD, if the level of disposable income is $1,000, the level of saving is

-$600

The MPC + MPS must always equal

1

The marginal propensity to consume 0.75, then the multiplier equals

1/(1-0.75); The multiplier can be found by using this formula: Multiplier = 1 / (1 - MPC)

If a tax cut of 3 percent causes the output supplied to increase by 6 percent, the absolute value of the tax elasticity of supply is

2.0

Federal agencies hold roughly _____ percent of all outstanding Treasury bonds.

40

Given C = 200 + 0.75YD, the multiplier is

4; The multiplier can be determined by the equation 1 / (1 - MPC), where MPC is the slope variable. Thus, 1/(1-.75).

Given a $500 billion AD shortfall and an MPC of 0.75, the desired fiscal stimulus would be

A $125 billion increase in government expenditures.

Assume the reserve requirement is 25 percent, demand deposits are $500 million, and total reserves are $32 million. If the reserve requirement is decreased to 20 percent, the banking system will experience

A deficiency of required reserves equal to $68 million.

The Phillips curve shows

A historical (inverse) relationship between the rate of unemployment and the rate of inflation.

Which of the following can cause a leftward shift in the aggregate supply curve?

A major natural disaster

If actual investment exceeds desired investment, then

A recession can develop; An excess buildup of inventories may lead firms to cut back production, which could result in a recession

A movement up the Phillips curve will cause

A trade-off between unemployment and inflation.

Assume the economy is at full employment and prices are reasonably stable. If the government wants to increase spending for public schools, which of the following policies will have the least inflationary impact?

An increase in taxes by an amount greater than the increase in spending.

Which of the following policy options would tend to offset each other?

An increase in the discount rate and a decrease in the tax rate.

The closer the economy is to capacity, the greater the risk that fiscal or monetary stimulus will cause

An increase in the price level and no change in output.

According to supply-side theory, which of the following would shift the aggregate supply curve leftward?

An increase in unemployment and welfare benefits.

Suppose Jason takes $150 he had in his wallet and deposits it into his checking account. The immediate result of this transaction is that M1

And M2 do not change.

With greater deficit spending, ceteris paribus,

Any inflationary gap will become larger

Assume you have $1,000 in a savings account at the beginning of the year and the price level is equal to 100. If the price level is equal to 92 at the end of the year, the real value of your savings is closest to

$1,087

Anil buys a bond in the amount of $2,000 with a promised interest rate of 17 percent. If the market interest rate increases to 27 percent, Anil can sell his bond for up to

$1,259.26.

Given the information in Figure 9.7, dissaving would occur at all income levels below

$100 Billion

Given a consumption function of C = $25 + 0.75YD, the average propensity to consume equals 1 when disposable income equals

$100; If the APC equals 1, then YD = C and you can substitute YD for C in the equation. In doing so, you have (YD = 25 +.75 YD). In solving this equation, YD = 100

Assume you have $1,000 in a savings account at the beginning of the year and the price level is equal to 100. If the price level is equal to 92 at the end of the year, the real value of your savings is closest to

$1087; $1,000 × (92 × 100) or approximately $1,087

Suppose the MPC in an economy is 0.9. The APC is initially 0.95 and disposable income is $4 billion. If disposable income increases to $14 billion, what is the new level of consumption?

$12.8 billion; consumption is initially $3.8 billion (.95 ×4). Consumption will rise by the change in disposable income multiplied by the MPC. When income increases by $10 billion, the increase in consumption will be $9 billion (0.9 ×10). Therefore, the total consumption will be $12.8 billion ($3.8 + $9).

If the MPC is 0.60 and disposable income increases from $20,000 billion to $22,000 billion, consumption will increase by

$1200 billion; MPC: (2,000 ×0.60 = $1,200)

Suppose a bank has $160,000 in deposits and a required reserve ratio of 10 percent. Then required reserves are

$16,000

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.80, the government should increase transfer payments by

$25 billion

If the MPC = 0.80, the total change in spending resulting from an initial $500 decrease in aggregate spending will be

$2500; The total change in spending can be determined by multiplying the initial change in spending by the multiplier, where the multiplier is equal to 1 / (1 - MPC). Multiplier=1/(1-.8)=5. 5(500)=$2500.

If the multiplier equals 2 and the AD shortfall is $6 million, the desired fiscal stimulus is

$3 million

Suppose a bank has $300,000 in deposits and a required reserve ratio of 15 percent. Then required reserves are

$45,000

Refer to Figure 12.1. Assuming the economy is on the production possibilities curve, crowding out suggests that an increase in government spending financed by internal borrowing would move the economy from point

C to point A.

The laissez faire view of government involvement in the economy is most consistent with the

Classical theory

If the Fed wants to increase AD, it should do which of the following?

Conduct open market purchases

Given that autonomous consumption equals $1,000, disposable income equals $20,000, and the MPC equals 0.80, the level of

Consumption equals $17,000; This corresponds to $16,000 of spending out of the $20,000 in income (= 20,000*0.8), plus the $1,000 in autonomous consumption

Which of the following caused a recession in the years immediately following World War II?

Cutbacks in defense production

When aggregate expenditures fall below the full-employment level of output, which of the following types of unemployment is most likely to increase?

Cyclical; production will need to fall to avoid overproduction, thereby causing layoffs and cyclical unemployment to increase.

Monetarists argue that

the velocity of money is constant

In Figure 9.2, if the consumption function shifts from C2 to C1, autonomous consumption

Decreases, and aggregate demand shifts to the left; A decreased consumption function will intersect the vertical axis at a lower point, so autonomous consumption will be less; and the AD curve shifts to the left when the consumption function decreases.

The money supply curve is determined by all of the following except

Demand for money

If an increase in investment causes an increase in real output beyond the full-employment level, the result will be

Demand-pull inflation; An increase in investment causes an increase in AD. Inflation will increase since the AS curve has a relatively steep slope beyond the full-employment output level.

If the cyclical deficit shrank by $60 billion while the structural deficit increased by $35 billion, the total deficit

Fell by $25 billion; the total deficit fell by $25 billion (-$60 + $35).

A tax cut intended to increase aggregate demand is an example of

Fiscal Stimulus

Internal ownership of the national debt occurs when U.S. Treasury bonds are purchased by all of the following except

Foreign countries that we trade with.

In the early 1900s, which of the following was not true?

Government Intervention was commonly used to stimulate the economy.

Fiscal policy is the use of

Government spending and taxes to alter macroeconomic outcomes

Which of the following will definitely cause the value of the misery index to increase?

Greater stagflation

In the long run, an increase in aggregate demand will lead to

High prices level only

Using the equation of exchange and assuming fixed price controls and a constant velocity of money, a decrease in the discount rate could temporarily result in

Higher quantity of real output

Using the equation of exchange and assuming fixed price controls and a constant velocity of money, a decrease in the discount rate could temporarily result in

Higher quantity of real output.

Which of the following services is performed by the regional Federal Reserve banks?

Holding bank reserves

A recessionary GDP gap is the

Horizontal distance between full-employment and equilibrium GDP; The recessionary GDP gap means the economy is producing less output than that of a full-employment level consequently leading to an increased level of cyclical unemployment.

A leakage is

Income not spent directly on domestic output but instead diverted from the circular flow

Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will

Increase by $100 billion

If the Fed buys $20 billion of U.S. bonds in the open market and the reserve requirement is 5 percent, M1 will eventually

Increase by $400 billion

Assume an original balance sheet: Refer to Table 14.1. If the Fed changes the required reserve ratio to 10 percent, ceteris paribus, the lending capacity of the system would eventually

Increase by $500 billion

If the absolute value of the tax elasticity of supply is 0.8, a tax decrease of 10 percent will

Increase output by 8 percent and decrease tax revenues.

Assume the MPC is 0.75. To eliminate an AD shortfall of $200 billion, the government should

Increase spending by 50 billion

Investment in human capital

Increases labor productivity.

When the Fed buys bonds from the public, it

Increases the flow of reserves to the banking system.

According to supply-side theory, which of the following would cause a leftward shift in the aggregate supply curve?

Increasing government regulations

In the simple Keynesian model,

Inflation becomes a problem only if demand increases at full employment.

When the Fed raises the discount rate, all of the following result except

It expands the lending capacity of the banking system.

Which of the following economic perspectives focuses on the need for government to use spending and taxes to shift aggregate demand and thus correct problems of unemployment and inflation?

Keynesian

By making infrastructure improvements, the government would change the Misery Index by:

Lowering the unemployment rate and lowering the inflation rate.

In Figure 9.2, if the consumption function shifts from C1 to C2, it can be determined that the

MPC and APC have both increased at income level

If a consumer spent 90 cents out of every extra dollar received, the

MPC is 0.90; The MPC is equal to the change in consumption divided by the change in disposable income

Increased government purchases crowd out private purchases whenever the economy is

On the production possibilities curve.

Individuals hold precautionary balances in order to

Pay for emergency purchases

Individuals hold precautionary balances in order to

Pay for emergency purchases.

The aggregate demand curve is downward-sloping because, other things being equal,

People buy more goods and services at lower average prices.

Many economic policies fail for all of the following reasons except

Politicians and economists work together in formulating policies.

According to Keynes, when the economy falters, the government should do any of the following except

Practice Laissez Faire approach

The AD shortfall is the amount of additional aggregate demand needed to achieve full employment after allowing for

Price level changes

The determinants of macro outcomes include all of the following except

Prices

In order to decrease the money supply, the Fed can

Raise the reserve requirement, increase the discount rate, or sell bonds.

Which of the following is true when an economy produces at full employment, but consumers, government, businesses, and the foreign sector do not buy all the output?

Recessionary gap; inventories will build up. As more output is being produced than demanded, thereby causing unemployment to rise and subsequent production and prices to fall until unwanted inventories of goods are depleted.

An increase in the money supply will

Reduce interest rates and increase aggregate demand.

Money does all of the following except

Reduce the efficiency with which market exchanges take place.

The minimum amount of reserves a bank is required to hold is known as

Required reserve ratio.

The ratio of a bank's total reserves to its total transactions deposits is known as the

Reserve Ratio

In Figure 16.2, according to supply-side theorists, an increase in mandatory employee benefits would result in a

Rightward shift in the Phillips curve. The Phillips curve will shift to the right because more government intervention in the area of employee benefits will lead to a decrease in AS.

Income taxes are an automatic stabilizer because when income rises, ceteris paribus, tax receipts

Rise because taxes are computed on the basis of income.

Which of the following is not a transactions account?

Savings account

Which of the following is not included in M1?

Savings account balances at a federal savings bank.

Fiscal policy works primarily through

Shifts of the AD curve.

If wealth rises,

The AD curve will shift to the right.

Which of the following is true about the equilibrium rate of interest?

The Fed can change it by changing money supply

Which of the following is true about the equilibrium rate of interest?

The Fed can change it by changing the money supply

Unlike the classical economists, Keynes asserted that

The economy was inherently unstable.

The "real burden" of the debt is directly related to

The idea of opportunity cost.

Monetary policy tools include:

The reserve ratio and the discount rate.

Selling bonds to finance new government debt leads to an opportunity cost that is

The same as financing government debt with taxes.

Mark holds $100 in cash in his wallet to make purchases for gas and groceries. This represents the

Transactions demand for money.

Money is functioning as a standard of value when you

Use it to compare two houses that are different prices.

Deficit spending results whenever the government

Uses borrowed funds to finance expenditures that exceed tax revenue.

A rightward shift in aggregate demand will cause an increase in the price level and no change in output if aggregate supply is

Vertical

Spending for unemployment compensation and welfare benefits increase automatically

When the economy goes into recession.

If the Fed wants to increase AD, it should do which of the following?

conducts open market purchases

An open market purchase occurs when the Fed

Buys bonds from the public, increasing bank reserves.

The Fed can decrease the federal funds rate by

Buying government bonds, which causes market interest rates to fall.

According to Figure 12.1, if the economy moves from point C to point A because of increased government spending, the amount of private spending crowded out is equal to the distance

BC

The Federal Reserve holds deposits from

Banks

A tax cut can best be characterized as

Both fiscal and supply-side policy.

If the AD curve shifts to the left, what happens to the equilibrium rate of output

Decrease

Assuming a reserve requirement of 10 percent, if the Fed sells $20 billion in bonds to the public, the lending capacity of the system will eventually

Decrease by $200 billion

If the required reserve ratio is 25 percent and the Federal Reserve sells $100,000 worth of bonds, the money supply can potentially

Decrease by $400,000

If the Fed wants to sell more government bonds than people are willing to buy, then the Fed should

Decrease the price it asks for the bonds.

If the AD curve shifts to the left, what happens to the equilibrium price level

Decreases

The investment demand curve would shift to the left because of

Expectations of a recession; would cause companies to cut back on major outlays in order to be better prepared financially to withstand the economic downturn.

Injections include

Exports, Investment, Gov spending; Money spent on domestic goods and services by sectors other than households represent injections

When money is used to acquire goods and services, it is functioning as a

Medium of exchange.

Refer to Figure 16.2. For the given Phillips curve, an increase in aggregate demand, ceteris paribus, could cause a

Movement from point B to point A. A higher AD may lead to a higher price level when the economy is near full capacity, resulting in higher inflation and lower unemployment, or a movement from B toward point A.

Cost pressures are more intense

as the economy approaches capacity

Which diagram in Figure 15.1 best represents a situation in which lower interest rates do not stimulate additional investment?

c

Given AD2 and AS1, the equilibrium price level in Figure 8.3 is

p3