ECON Exam 4
Suppose the government of a country wants to increase the aggregate demand of its economy by $10 billion at all price levels. However, it currently has a balanced budget with no surplus and is unwilling to borrow money to finance fiscal policy. The government could still accomplish its goal by increasing government purchases by ________ and increasing taxes by $10 billion.
$10 billion
Answer the next question based on the following consolidated balance sheet for the commercial banking system. AssetsLiabilities + Net WorthReserves$50,000Checkable deposits$120,000Loans75,000Stock shares130,000Securities25,000 Property100,000 If the reserve requirement is 15% and the table above represents the balance sheet for the whole commercial banking system rather than a single bank, then loans and deposits could expand by a maximum of approximately
$213,333.
A commercial bank has required reserves of $60 million and the reserve ratio is 20%. How much are the commercial bank's checkable-deposit liabilities?
$300 million
In the graph, Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6% rate of interest. If the supply of money increases as shown, then the asset demand for money will increase by
$75.
In the graph, Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4%, the asset demand for money would be
200$
The equilibrium interest rate in this economy is _____.
4%
How many members can serve on the Board of Governors of the Federal Reserve System?
7
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?
A decrease in government purchases and an increase in taxes
What combination would most likely cause a shift from AD1 to AD3?
An increase in taxes and a decrease in government purchases
The most important among the Federal Reserve district banks in conducting monetary policy is the
New York bank.
Suppose the economy is currently in equilibrium at output level Q2, but full-employment output is at level Q1. If the government fails to enact fiscal policy and no other conditions change, the eventual price level will most likely be closest to
P3
Which of the following government actions would be considered expansionary fiscal policy?
Passing a personal tax credit for the purchase of a new automobile
Which of the following functions does the Federal Reserve System not perform?
Providing banking services to the general public.
In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary, full-employment level of real GDP?
Sell government securities in the open market.
Use the following figure to answer the next question. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?
Shift aggregate demand by increasing taxes.
The economy is at equilibrium at point C, which is below potential output. What fiscal policy would increase real GDP?
Shift aggregate demand to the right by increasing government purchases.
Which of the following statements is true?
The Federal Reserve does not set the federal funds rate, but it influences it through the use of its open-market operations.
Which of the following will increase commercial bank reserves?
The purchase of government bonds in the open market by the Federal Reserve Banks.
Which of the following institutions does not provide checkable-deposit services to the general public?
U.S. Treasury
If you use $1,000 to purchase silver coins, which you plan to keep in a safe, you are using money as
a medium of exchange.
The Federal Reserve System regulates the money supply primarily by
altering the reserves of commercial banks, largely through sales and purchases of government bonds.
When the Fed acts as a "lender of last resort," like it did in the financial crisis of 2007-2008, it is performing its role of
being the bankers' bank.
To reduce the federal funds rate, the Fed can ______.
buy government bonds from the public
To keep high inflation from eroding the value of money, monetary authorities in the United States
control the supply of money in the economy.
The Federal Reserve System performs many functions but its most important one is
controlling the money supply.
In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output of Qf in the economy, the Fed should try to _____.
decrease aggregate demand by increasing the interest rate from 4% to 6%
If the Board of Governors of the Federal Reserve System increases the reserve requirement, this change will _____.
decrease the excess reserves of member banks and thus decrease the money supply
In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output of Qf in the economy, the Fed should _____.
decrease the interest rate from 8% to 6%
The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _____.
discount rate
Crowding out may occur because ________ fiscal policy usually involves the government ________ money.
expansionary; borrowing
When personal savings rates are ________, it takes ________ change in government purchases to have a given amount of impact of real GDP.
higher; more
The impact of monetary policy on investment spending may be weakened _____.
if the investment demand curve shifts to the right during inflation and to the left during recession
It is costly to hold money because
in doing so, one sacrifices interest income.
If government expenditures are increased by $50 billion, assuming all other factors stay constant, we would expect the initial impact of the increased spending to cause real GDP to
increase by $50 billion.
Assume that the full-employment level of output is $600 and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $550 and, at the price level of 100, current aggregate demand is $450. If the government wants to move the economy back to the full-employment level of output and the MPC is 0.9, then it should
increase government purchases by $15.
Assume that the full-employment level of output is $500, and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $450 and, at the price level of 100, current aggregate demand is $400. If the government wants to move the economy back to the full-employment level of output and the MPC is 0.75, then it should
increase government purchases by $25.
Assume the economy is initially at the full employment level of real GDP. If there is a decrease in gross investment, the Fed should _____.
increase the money supply
If the Federal Reserve System buys government securities from commercial banks and the public, then _____.
it will be easier to obtain loans at commercial banks
When output is below the full employment level of real GDP, the Federal Reserve banks should ______.
lower the reserve ratio
The purpose of a contractionary monetary policy is to ______.
raise interest rates and restrict the availability of bank credit
The multiple by which the commercial banking system can expand the supply of money is equal to the
reciprocal of the reserve ratio.
Assume that the full-employment level of output is $500, and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $450 and at the price level of 100 current aggregate demand is $410. If the government wants to move the economy back to the full-employment level of output and the MPC is 0.75, then it should
reduce taxes by $30.
When the reserve requirement is increased, the excess reserves of member banks are _____.
reduced and the multiple by which the commercial banking system can lend is reduced
Cash held by a bank in its vault is a part of the bank's
reserves.
The primary tools the government uses for contractionary fiscal policy are
tax increases and government purchase reductions.
Monetary policy is determined by ______.
the central bank (the Fed)
When a commercial bank borrows from a Federal Reserve Bank, _____.
the commercial bank's lending ability is increased
Which of the following varies directly with the interest rate?
the opportunity cost of holding money
Payments made by the government that do not require an exchange of economic activity in return are also known as
transfer payments.
When a banker records how many dollars each of his borrowers owes the bank, money is serving as a
unit of account.
The main function of the Federal Reserve System is to
control the money supply.
The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment is called
crowding out
The M1 measure of money consists of the sum of
currency, checking deposits, and travelers' checks.
Automatic stabilizers in the economy tend to
dampen the irregular swings in real GDP.
Which of the following fiscal policy changes would be the most contractionary?
A $10 billion increase in taxes and a $30 billion cut in government purchases
When successfully implemented, contractionary fiscal policy will cause
a leftward shift of the aggregate demand curve.
Financial markets pay close attention to changes in the federal funds rate because these changes _____.
affect other interest rates in the economy
Suppose that the demand for money increases as people anticipate upcoming economic problems. To offset this increase in money demand, the Fed should ______ the money supply, which would put ______ pressure on nominal interest rates.
increase; downward
Contractionary fiscal policy tends to ________ consumption because it may reduce ________
reduce; disposable income.
Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve requirement is 20%, then the effect will be to reduce _____.
the money supply by potentially $200 million
