econ exam
1. The interest rate that the Fed has the most control over is the: A) Federal Funds rate. B) mortgage loan rate. C) long-term government bond rate. D) prime rate.
a
100. With free trade, the domestic price of a good must be equal to the world price of a good. A) True B) False
a
12. U.S. currency has the words "Federal Reserve Note" on it. A) True B) False
a
14. M1 is equal to currency plus: A) checkable deposits. B) total reserves held at the Federal Reserve. C) savings deposits. D) small-time deposits.
a
2. (Table: Multiple Deposit Expansion) Refer to the table. For the multiple deposit expansion process described in this table, what is the maximum amount of loans that the Second National Bank can make if it holds only the required reserves? A) $338,560 B) $30,470.40 C) $308,089.60 D) $311,475.20
a
20. The Federal Reserve typically affects the real rate of interest in: A) the short run only. B) the long run only. C) both the short run and the long run. D) neither the short run nor the long run.
a
25. A bank is considered illiquid if: A) it has short-term liabilities greater than its short-term assets, but overall assets greater than liabilities. B) it has liabilities greater than the value of its assets. C) the value of its outstanding loans is greater than the value of its deposits. D) it has lost its FDIC coverage.
a
27. If the Fed adheres to a strict "money growth rule" of 3% (that is, they keep M at 3% no matter what), what happens if velocity growth ( v ) drops? A) Inflation, real growth, and nominal wage growth all decrease. B) Inflation increases, but real growth and nominal wage growth decrease. C) Inflation and nominal wage growth decrease, but real growth increases. D) Inflation, real growth, and nominal wage growth all increase.
a
28. In the short run, a monetary contraction leads to increased unemployment because: A) wages and prices are sticky. B) wages and prices are flexible. C) wages are sticky, while prices are flexible. D) wages are flexible, while prices are sticky.
a
31. Easy credit can start or intensify a housing bubble. A) True B) False
a
33. If the Fed reacts to a series of negative real shocks by raising money growth every time: A) the inflation rate will increase over time. B) the inflation rate will decrease over time. C) deflation will occur. D) the inflation rate will remain unchanged.
a
35. What is the difference between disinflation and deflation? A) Disinflation is a slower increase in prices, whereas deflation is a decrease in prices. B) Deflation is a slower increase in prices, whereas disinflation is a decrease in prices. C) The Fed can engineer disinflation, but not deflation. D) There is no difference between disinflation and deflation.
a
4. Which asset would you classify as being most liquid? A) demand deposits B) small-time deposits C) a home D) gold bullion
a
46. In the AD-AS model, an increase in money growth will cause the growth rate of real GDP to increase in: A) the short run only. B) the long run only. C) both the short run and the long run. D) neither the short run nor the long run.
a
52. If you are a married man, you can expect: A) more in Social Security benefits than a single man. B) less in Social Security benefits than a single man. C) the same in Social Security benefits as a single man. D) more than a single man only if your wife worked
a
57. Because the alternative minimum tax (AMT) is not indexed to inflation: A) more American families have become subject to the AMT over time. B) fewer American families have become subject to the AMT over time. C) every American family is subject to the AMT today. D) no American family is subject to the AMT today.
a
59. The national debt held by the public increases when the federal government runs a deficit. A) True B) False
a
6. If the value of a bank's liabilities is greater than its assets, there is a: A) solvency crisis. B) liquidity crisis. C) liability crisis. D) profitability crisis
a
62. In a progressive tax system, if a person moves from one income bracket to a higher income bracket: A) both the marginal tax rate and average tax rate will be higher. B) both the marginal tax rate and average tax rate will be lower. C) the marginal tax rate will be lower and the average tax rate will be higher. D) the marginal tax rate will be higher and the average tax rate will be lower.
a
63. The debt-to-GDP ratio has roughly doubled since the Great Recession of 2007-2008. A) True B) False
a
7. What is the reserve requirement? A) the legal minimal percentage of deposits required to be held in reserve by banks B) the percentage of reserves that is held only on amounts greater than $50 million C) the amount of reserves that the Fed wants to inject at a given time D) the amount of reserves needed for the Fed to provide a given increase in the money supply
a
70. On average, U.S. households with income in the bottom 20% pay: A) less than 5% of their incomes in federal income tax. B) between 5% and 15% of their incomes in federal income tax. C) between 15% and 25% of their incomes in federal income tax. D) more than 25% of their incomes in federal income tax.
a
72. Crowding out: A) limits the increase in aggregate demand due to fiscal policy. B) affects contractionary fiscal policy. C) increases the multiplier effect. D) shifts the LRAS curve to the left.
a
8. Open market operations involve the Federal Reserve: A) buying and selling government bonds. B) lending reserves directly to banks. C) providing reserves to banks through auction. D) competing with investment banks for treasury securities.
a
86. Automatic stabilizers are: A) changes in fiscal policy that stimulate aggregate demand in a recession without the need for explicit action by policymakers. B) subject to significant lags. C) a result of the United States' regressive tax system. D) not very effective fiscal policy.
a
91. What primary benefit can a temporary investment tax credit have? A) It can accelerate capital outlays in an economic downturn. B) It can encourage workers to work extra hours. C) It can encourage consumers to save more. D) It can encourage firms to hire more workers.
a
93. The multiplier effect is the: A) subsequent consumer spending that increases AD from expansionary fiscal policy. B) subsequent consumer spending that increases AD from contractionary fiscal policy. C) increase in GDP from an increase in the money supply and decrease in taxes. D) increase in GDP from increased consumer savings and private investment.
a
95. When consumers spend all of their tax rebate checks, what takes place in the economy? A) Aggregate demand shifts to the right. B) Aggregate demand shifts to the left. C) The LRAS curve shifts left. D) Inflation decreases.
a
96. After a pair of wars in the late seventeenth and early eighteenth centuries, French-British relations decayed to the point that England began putting high tariffs on French wines. A large part of the support for this law came from British brewers and distillers who feared the return of French competition after the wars. These tariffs help explain why, to this day, the English prefer beer over wine. Of the arguments against free trade, which seems most likely to apply here, given the information provided? A) saving domestic jobs B) preventing child labor C) the importance of national security D) alcohol being a "key industry"
a
97. A tariff ______ the world supply of a good. A) reduces B) increases C) does not change D) has no measurable effect on
a
99. Domestic consumers lose more than domestic producers gain because of import restrictions. A) True B) False
a
10. The Fed loaned money to J. P. Morgan and AIG because it was concerned about: A) moral hazard on the part of these banks. B) systemic risk, should these banks fail. C) the liquidity of these banks. D) the market demands being placed on these banks.
b
17. If the average reserve ratio in the banking system is 25% and the Fed increases bank reserves by $20,000, then the change in the money supply will be equal to $100,000. A) True B) False
b
18. The money multiplier is greater than 1 because most banks keep more than 100% of any increase in bank deposits as reserves. A) True B) False
b
21. Money market mutual funds are more liquid than savings deposits. A) True B) False
b
23. The world's largest bank customer is: A) the Federal Reserve. B) the U.S. Treasury. C) the FDIC. D) the SEC
b
24. The interest rate commercial banks charge each other on overnight loans is called the: A) prime rate. B) Federal Funds rate. C) discount rate. D) Treasury bill rate.
b
30. A central bank can always keep an economy at its long-run growth rate by exactly offsetting any shock to aggregate demand. A) True B) False
b
34. In the short run, a negative real shock will cause output growth to: A) increase. B) decrease. C) remain unchanged. D) become more difficult to predict
b
39. When a central bank reacts the same way to a shock every time, it is likely using: A) policy discretion. B) a policy rule. C) a bandwagon policy. D) a wait-and-see policy
b
41. Monetary policy is more effective at combating real shocks than AD shocks. A) True B) False
b
45. When the Fed responds to a negative spending shock by increasing the money supply, it is using: A) a policy rule. B) a discretionary policy. C) its political power. D) its credibility.
b
53. Social Security taxes account for the largest source of U.S. federal government receipts today. A) True B) False
b
54. The largest source of revenue for the U.S. federal government is: A) the corporate income tax. B) the individual income tax. C) excise taxes, such as taxes on gasoline and alcohol. D) Social Security and Medicare taxes.
b
56. The Social Security payment system began issuing Social Security checks: A) at the end of World War II. B) in 1940. C) during the Great Depression. D) in 1913.
b
58. If the federal government spends 12% of GDP and collects revenues of 10% of GDP, what is the deficit as a percentage of GDP? A) 1% B) 2% C) 11% D) 12%
b
64. The earned income tax credit makes the U.S. federal income tax: A) more regressive. B) more progressive. C) flatter. D) irrelevant to most taxpayers except for the rich.
b
67. Social Security benefits have become more generous over time. A) True B) False
b
69. The alternative minimum tax is only assessed on high-income families. A) True B) False
b
71. In a recession, automatic stabilizers cause: A) an increase in tax revenues and a decrease in government spending. B) a decrease in tax revenues and an increase in government spending. C) an increase in both tax revenues and government spending. D) a decrease in both tax revenues and government spending.
b
73. Which is NOT an automatic stabilizer? A) greater access to credit B) defense spending C) progressive tax system D) welfare programs
b
76. Fiscal policy is most desirable if the economy returns to its long-run equilibrium immediately after a shock occurs. A) True B) False
b
78. An increase in government spending causes: A) the aggregate demand curve to shift to the left. B) the aggregate demand curve to shift to the right. C) an upward movement along the aggregate demand curve. D) a downward movement along the aggregate demand curve.
b
79. The implementation lag is likely to be: A) longer for changes in government spending than for changes in taxation. B) shorter for changes in government spending than for changes in taxation. C) indefinitely long for both changes in government spending and changes in taxation. D) similar in length for both changes in government spending and changes in taxation.
b
82. Other things equal, will an individual tax rebate or a cut in tax rates provide the largest stimulus? A) an individual tax rebate B) a cut in tax rates C) They will both produce the same amount of stimulus. D) Neither will provide any stimulus.
b
85. The crowding out effect refers to an increase in private spending that leads to a decrease in government spending. A) True B) False
b
88. If an increase in government spending of $100 million causes an increase in aggregate spending of less than $100 million, we call this phenomenon: A) crowding in. B) crowding out. C) the multiplier. D) the Ricardian effect.
b
89. Federal government grants to state governments can: A) increase saving rather than spending. B) make states dependent on the federal government. C) cause state-level government layoffs. D) immediately end a recession.
b
9. Which does NOT serve as means of payment in the United States? A) paper bills and coins B) mutual funds C) checking or debit account D) savings deposits
b
92. To fight a recession, the federal government can: A) increase taxes. B) increase its spending. C) increase interest rates. D) decrease the discount rate.
b
98. If a tariff decreases domestic consumption of a good from 230 million units to 150 million units and raises the domestic price by $1.50, given a linear domestic demand curve and a perfectly elastic world supply curve, what is the value of the unexploited gains from trade caused by decreased domestic consumption? A) $45 million B) $60 million C) $80 million D) $120 million
b
11. How many regional banks compose the Federal Reserve System? A) 4 B) 10 C) 12 D) 16
c
13. Holding reserves is costly for banks because: A) it forces banks to pay for ATMs. B) it leads to the risk of bank robberies. C) it leads to fewer profits. D) the Fed charges banks interest on required reserves.
c
15. If the average reserve ratio in the banking system is 20% and the Fed increases bank reserves by $100,000, what will be the total potential increase in the money supply? A) $100,000 B) $120,000 C) $500,000 D) $2 million
c
26. Although the Federal Reserve may increase the monetary base, the larger monetary aggregates (M1 and M2) and thus aggregate demand won't increase very much in response if: A) the interest rate is too high. B) the tax rate is too high. C) banks are slow to lend. D) the economy is in recession.
c
3. (Table: Multiple Deposit Expansion) Refer to the table. For the multiple deposit expansion process described in this table, if all banks hold only the required reserves, what is the money multiplier in this country? A) 8 B) 10 C) 12.5 D) 5
c
32. The Fed could have popped the bubble of the housing boom in the 2000s by: A) lending directly to homeowners. B) regulating the stock markets more. C) reducing the growth rate of the money supply. D) doing nothing.
c
37. Which is a reasonable cause for the formation of the housing bubble in the 2000s? A) high market confidence B) credible monetary policy C) low Federal Funds rate D) the Fed's use of a monetary policy rule
c
43. (Figure: Monetary Policy) Refer to the figure. Assume that the economy is initially at point Y in the graph. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend, then: A) the Fed action would be magnified and the economy would move to point X. B) the Fed action would be nullified and the economy would remain at point Y. C) the Fed action would be partially effective and the economy would move to point Z. D) the LRAS curve would shift to the left.
c
47. When the Fed increases the money supply to counteract a negative real shock: A) growth usually returns to the level it was before the shock. B) half of the increase is seen in growth and half in inflation. C) inflation increases a lot and growth increases a little. D) growth remains stuck at the level of the negative real shock.
c
48. A significant decrease in the rate of inflation is called: A) deflation. B) credible inflation. C) disinflation. D) quantitative easing.
c
5. An illiquid bank is one that: A) borrows in the market for federal funds. B) borrows at the discount window. C) has more short-term liabilities than short-term assets. D) has more long-term assets than liabilities
c
50. Which is the MOST credible monetary policy action? A) The central bank makes policy actions in secret to avoid speculation. B) The central bank attempts to confuse the public by changing its policy stance frequently. C) The central bank announces its policy in public and sticks with the policy over time. D) The central bank does nothing to the economy regardless of any economic shock
c
51. Under a flat tax: A) the marginal tax rate is zero, but the average tax rate is one. B) people with higher incomes pay less tax dollars. C) the average tax rate is the same for people with different income levels. D) the amount of tax payment is the same for people with different income levels
c
66. The top 1% of all income earners pay about _____ of all federal taxes in the United States. A) 1% B) 10% C) 25% D) 50%
c
68. The two lowest marginal tax brackets in the United States are: A) 5% and 10%. B) 7% and 15%. C) 10% and 15%. D) 15% and 25%
c
74. If the government increases its spending, financing methods that can cause crowding out include: A) raising taxes only. B) selling bonds only. C) both raising taxes and selling bonds. D) neither raising taxes nor selling bonds.
c
75. Fiscal policy includes federal government policy on: A) government spending only. B) taxes only. C) both government spending and taxes. D) neither government spending nor taxes.
c
77. An increase in government spending growth will cause the LRAS curve to: A) shift inward. B) shift outward. C) remain unchanged. D) first shift outward and then shift inward.
c
81. When expansionary fiscal policy subsequently increases income and consumer spending, the subsequent increase in AD is called the _____ effect. A) expansionary B) secondary C) multiplier D) crowding out
c
83. The tax rebate of 2008 had a relatively small impact because taxpayers primarily used the rebate to: A) purchase their annual Christmas gifts. B) take vacations. C) reduce their debts. D) increase their savings.
c
87. If Ricardian equivalence is correct, any tax cut will cause consumer spending to: A) increase. B) decrease. C) remain unchanged. D) change in an unpredictable manner
c
94. The primary tools of fiscal policy are: A) money supply and money demand. B) government expenditure and money supply. C) government expenditure and taxation. D) taxation and interest rates.
c
16. Which is NOT a reason so much U.S. currency circulates in other countries? A) Several countries use the U.S. dollar as their official currency. B) The U.S. dollar is frequently used in drug trafficking. C) Dollars hold their value in unstable countries. D) The Federal Reserve makes loans to other countries.
d
22. The discount rate is the interest rate that banks: A) charge borrowers with the lowest credit risk. B) charge borrowers with the highest credit risk. C) pay when borrowing from other banks. D) pay when borrowing directly from the Fed.
d
40. When a major negative aggregate demand shock hits the economy, a central bank can "maintain market confidence" by: A) raising the Federal Funds rate. B) buying stocks in the stock market. C) selling Treasury securities in the open market. D) promising to increase the growth rate of money if the economy worsens further.
d
44. What strict rule did Milton Friedman believe would provide for greater price stability? A) GDP should not go above 5%. B) Unemployment should never be above 10%. C) Inflation should stay below 3% a year. D) Money supply should grow by 3% annually.
d
49. Which is NOT a tool that the Federal Reserve can use to influence AD? A) open-market operations B) lending to banks and other financial institutions C) changes in reserve requirements and the interest rate paid on reserves D) printing money
d
55. Together, Social Security, defense, Medicare, and Medicaid make up approximately _____ of the U.S. federal budget. A) one-quarter B) one-third C) one-half D) two-thirds
d
60. Which of the following is the smallest component of U.S. federal government spending? A) defense B) Social Security C) unemployment and welfare D) interest payments on government debt
d
61. The income tax is a tax on all of the following, except: A) labor income. B) interest income. C) dividends and capital gains. D) welfare benefits.
d
65. The U.S. corporate income tax rate is: A) one of the lowest in the world. B) near average but on the low side for rich countries. C) near average but on the high side for rich countries. D) one of the highest in the world.
d
84. Which statement does NOT limit the effectiveness of fiscal policy? A) Changes in private spending offset the effects of government spending or taxation. B) The size of government is small in comparison with the economy as a whole. C) Fiscal policy is subject to long and uncertain lags. D) Government spending and taxes have little effect on aggregate demand.
d
90. Under which scenario would expansionary fiscal policy work BEST? A) when two real shocks have occurred B) when the economy is at equilibrium in the long run C) when the economy has had a large negative supply shock D) when AD is low compared with the long-run equilibrium position of the economy
d
