Econ Module 3

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Aggregate supply curves are ___________ for low levels of output, and ___________ for high levels of output.

relatively flat; relatively steep

If the Fed sells U.S. government securities to banks, the federal funds rate ________ and banks' reserves ________.

rises; decrease

Which of the following is NOT an asset of banks?

savings deposits

The Fed is concerned that inflation might occur. To help eliminate this possibility, the Fed could ________ government securities to ________ the federal funds rate in the short run.

sell; raise

According to the basic quantity equation of money, if price and output fall while velocity increases, then:

the quantity of money will fall.

Financial intermediaries are institutions that

transfer funds in the form of loans from savers to investors.

A ______________ means that government spending and taxes are equal.

balanced budget

Historically speaking, the U.S. has usually had an annual ____________.

budget deficit

If the country of Tiaola spends $74.8 billion in 2021 while collecting $65.8 billion in tax revenues, the result will be:

budget deficit

The federal budget

can have a deficit, a surplus, or a balance.

Consider the graph below. What type of fiscal policy would be most suitable if an economy is producing at point E0?

contractionary

The process of banks making loans in financial capital markets is intimately tied to the:

creation of money.

An increase in government borrowing can:

crowd out private investment in physical capital.

In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases.

cut taxes

In the U.S., where do depository institutions hold their reserves?

either as vault cash or on reserve at the Federal Reserve district banks

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to

increase aggregate demand.

Suppose you are analyzing data for an economy in which Ricardian neutrality holds true. If the budget surplus increases by 100, then:

private savings will decrease by 100.

In the diagram, a shift from AS3 to AS2 might be caused by an increase in

productivity

A ___________________ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes.

progressive tax

As a "lender of last resort," the Fed

provides loans to banks experiencing temporary liquidity problems.

Automatic stabilizers are

provisions that cause changes in government spending and taxes without new action by Congress or the President.

The quantity of money in an economy and the ____________ are inextricably intertwined.

quantity of credit for loans

Consider the graph below. What type of fiscal policy would be most suitable if an economy is producing at point E0?

Expansionary (E0 below E1)

The crowding-out effect arises when:

Government borrows in the money market, thus causing an increase in interest rates

Suppose there currently is an inflationary gap. What could the government do to bring the overall price level down?

Increase income taxes.

Crowding out is a decrease in business investment and household consumption caused by:

Increased borrowing by the government

The crowding-out effect suggests that:

Increases in government spending may reduce business investment and household consumption

______________ is the largest single source of federal government revenue, but it still represents less than half of federal tax revenue (49.6% in 2019).

Individual income tax

In an AD-AS model, the point where the economy has excess capacity is called the:

Keynesian zone of the AS curve

The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the:

Legislative lag

The goal of expansionary fiscal policy is to increase:

Real GDP

The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):

Recognition lag

Fiscal policy is enacted through changes in:

Taxation and government spending

Public debt is held as

Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds.

In the diagram, a shift from AS1 to AS2 might be caused by

a decrease in the prices of domestic resources.

In macroeconomics, _________________ describes a situation in which two people each want to exchange some good or service that the other can provide.

a double coincidence of wants

A checking deposit in a bank is considered ________ of that bank.

a liability

A checkable and debitable banking account is

a liability to a commercial bank.

Fiscal policy refers to the

adjustment of government spending and taxes in order to achieve certain national economic goals.

A loan made by a bank is considered ________ of that bank.

an asset

Bank customers can withdraw funds quickly, but many of the bank's assets like loans and bonds will only be repaid over years or even decades. This is often referred to as:

an asset-liability time mismatch

In macroeconomics, _____________________________ describes a situation where a bank's liabilities (deposits) can be withdrawn in the short-term while its assets (loans) are being repaid in the long-term.

an asset-liability time mismatch

Banks can protect themselves against an unexpectedly high rate of loan defaults and against the risk of ____________ by adopting a strategy that will ______________.

an asset-liability time mismatch; diversify its loans

"Supply creates its own demand" is known as

Say's Law

The idea that supply creates its own demand is known as

Says law

In the diagram, a shift from AS2 to AS3 might be caused by a(n)

increase in business taxes and costly government regulation.

_________________ are included in the aggregate amount of MI money currently in circulation.

Traveler's checks

When the Fed takes action to decrease the money supply and increase the interest rate, it is following:

a contractionary monetary policy.

In the diagram, a shift from AS1 to AS3 might be caused by a(n)

increase in the prices of imported resources.

A rightward shift of the AD curve in the very steep upper part of the short-run AS curve will

increase the price level by more than real output.

The short-run aggregate supply curve represents circumstances where

input prices are fixed, but output prices are flexible.

The Federal Deposit Insurance Corporation

insures the deposits held in banks.

As the aggregate price level in an economy rises, ____________________.

interest rates increase

The economy's long-run aggregate supply curve

is vertical.

Which of the following is considered a liability to a bank?

demand deposits

Which of the following is not a bank asset?

deposits

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the

determinants of aggregate demand.

If Bill performs plumbing upgrades for Alice in exchange for her incorporating his business, then their _________________ will be satisfied.

double coincidence of wants

The Fed raises the interest rate when it

fears inflation

A bank's net worth is positive if its

assets > liabilities

How are the specific interest rates for the lending and borrowing markets determined?

by the forces of supply and demand

An individual who desires the most liquid asset possible will hold

cash

As the aggregate price level in an economy rises, ____________________.

consumer demand decreases

_______________ will often cause monetary policy to be considered counterproductive because it makes it hard for the central bank to know when the policy will take effect?

Long and variable time lags

M2 consists of

M1 plus saving deposits, small time deposits, and money market funds.

The people in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 10% of the deposits as reserves. What is the money multiplier in this economy?

10

If GDP is 3600 and the money supply is 300, what is the velocity?

12

Which category of the money supply would you be contributing to if you invest in money market funds?

M2

The Federal Reserve System includes _____ regional Federal Reserve banks, each of which is responsible for supporting the commercial banks and economy generally in its district.

12

The people in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 5% of the deposits as reserves. What is the money multiplier in this economy?

20

Stealth bank holds deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. The current market value of the bank's loans is $400 million. What is the value of the bank's total liabilities?

600 mill

Assuming a reserve ratio of 20 percent, if a bank receives $100,000 in deposits how much can the bank loan out?

80000

Which of the diagrams for the U.S. economy best portrays the effects of declines in the prices of imported resources?

A (AS1 to AS2, AD constant)

Total planned expenditures is sometimes used to describe _______.

AD

Whether the economy is in a recession is illustrated in the AD/AS model by how close the ____________ is to the potential GDP line.

AD-AS equilibrium

___________________ are economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the ____________.

Neoclassical economists; long run

Which of the diagrams for the U.S. economy best portrays the effects of a dramatic increase in energy prices?

B (AS1 to AS2 right, Ad constant)

Which of the diagrams for the U.S. economy best portrays the effects of a decrease in the availability of key natural resources?

B (AS1 to As2, AD same)

Which of the diagrams for the U.S. economy best portrays the effects of an increase in foreign spending on U.S. products?

C (AS same, AD increases)

Which type of money limits government spending because they are limited in their ability to circulate this type of money?

Commodity-backed currency

Which of the diagrams for the U.S. economy best portrays the effects of a substantial reduction in government spending?

D

______________ are a form of deposits held in banks that are available by making a cash withdrawal or writing a check.

Demand deposits

_______________________ happens when the economy is producing at its potential and unemployment is at the natural rate of unemployment.

Full employment GDP

A decrease in the government's budget surplus will cause the interest rate to:

increase

If a country's economic data shows that private savings equal $350 million, government spending equals $375 million, taxes equal $300, and the trade surplus equals $125 million, then what does investment equal?

150 million

Stealth bank holds deposits of $200 million. It holds reserves of $15 million. It has purchased government bonds worth $75 million. The current value of its loans, if sold at market value, is $130 million. What is the value of the Stealth bank's liabilities?

200 million

If nominal GDP is 2700 and the money supply is 900, what is velocity?

3

Assuming a reserve ratio of 10 percent, if a bank receives $1,000,000 in deposits how much can the bank loan out?

900000

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):

Contractionary fiscal policy

The crowding-out effect works through interest rates and it tends to:

Decrease the effectiveness of an increase in government spending

Other things equal, a decrease in the real interest rate will

expand investment and shift the AD curve to the right.

Consider the graph below. If the economy is producing at point E0, a(n) __________ gap exists. EO higher than e1

expansionary

When prices of outputs in an economy become sufficiently high causing production to exceed potential GDP, the resulting:

extended production will be unsustainable in the long run.

If the Fed carries out an open market operation and buys U.S. government securities, the federal funds rate ________ and the quantity of reserves ________.

falls; increases

The interest rate banks charge each other on loans of reserves is called the

federal funds rate

When the Federal Reserve announces that it is implementing a new interest rate policy, the ____________________ will be affected?

federal funds rate

Fiscal policy is implemented by

federal government

The primary reason nations use ______ money today is that it doesn't limit how much of their currency they can put into circulation.

fiat

___________ has no intrinsic value, but is declared by a government to be a country's legal tender.

fiat money

Which of the following terms is used to describe the set of policies that relate to government spending, taxation, and borrowing?

fiscal policies

The __________________ in an AD/AS diagram is most relevant to Keynes's Law.

flat portion of the AS curve

Money is any commodity that is

generally accepted as a means of payment.

A reduction in government borrowing can:

give private investment an opportunity to expand.

A ____________________ is one economic mechanism by which government borrowing can crowd out private investment.

higher interest rate

If the price level of what firms produce is rising across an economy, but the costs of production are constant, then:

higher profits will induce expanded production.

The determinants of aggregate supply

include input prices, resource productivity, taxes, and government regulations.

To eliminate an inflationary gap using fiscal policy, the government could

increase taxes.

Since 2009, the U.S.'s debt-to-GDP ratio has _________.

increased

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

Higher debt-to-GDP ratios indicate a nation ____ producing enough to pay off its debt, while lower ratios indicate a nation _____ producing enough output to pay down its debt.

is not, is

Why is productivity growth considered to be the most important factor in the AD-AS model?

it shifts the AS curve in the long-term

From an accounting point of view, a checking account should be considered part of a bank's

liabilities

When you buy a Coke, you are using money as a

medium of exchange

Money serves as a

medium of exchange, unit of account, and store of value.

A moderate increase in a budget deficit that leads to a _____________________ is not necessarily a cause for concern.

moderate increase in a trade deficit and a moderate appreciation of the exchange rate

If we look at the federal government budget over the past 40 years we see thatIf we look at the federal government budget over the past 40 years we see that

most years the budget has been in deficit.

In uncertain economic times, ____________________ serves as a way of preserving economic value that can be spent or consumed in the future.

owning gold

The second largest source of federal revenue is the __________.

payroll tax

Historic data indicate that there is usually a ________ relationship between trade deficits and federal government budget deficits.

positive

The term "full employment GDP" is synonymous with which of the following?

potential GDP

By serving as the lender of last resort,

prevent bank failures

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right.

The aggregate supply curve

shows the various amounts of real output that businesses will produce at each price level.

____________ it the largest single-ticket item of U.S. Government expenditures

social security

Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic

stabilizers.

_________________ results when an economy experiences high unemployment and high inflation at the same time.

stagflation

The ____________________ in an AD/AS diagram is most relevant to Say's Law.

steep portion of the AS curve

To function as money, an item must hold some level of purchasing power over time. In other words, the item must be a(n)

store of value

When we keep part of our wealth in a bank checking account, we are using money as a

store of value.

The government collects tax revenues of $105 million and has $100 million in expenditures. The budget balance is a

surplus of $5 million.

If an economy has a budget deficit of 600, private savings of 2,000, and investment of 800. What is the balance of trade in this economy?

surplus of 600

A ___________________ can lead to disruptive economic patterns and heavy strains on a country's banking and financial system.

sustained pattern of large budget deficits

The government has a budget surplus if

tax revenues are greater than expenditures.

Fiscal policy involves the actions of

taxation and spending in an effort to address inflation and unemployment.

The level of reserves in the monetary system is determined by

the Federal Open Market Committee.

The equilibrium price level and level of real output occur where

the aggregate demand and supply curves intersect

Open market operations are

the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply.

If the Fed sells U.S. government securities,

the federal funds rate rises.

If the Fed buys U.S. government securities,

the federal funds rate will fall.

The period between the recognition of a problem and the implementation of a policy to solve the problem is

the implementation lag.

The federal funds rate is

the interest rate banks charge each other on overnight loans.

When the Fed decides it will sell bonds using open market operations:

the money supply decreases.

When the Fed decides it will buy bonds using open market operations:

the money supply increases.

The public debt is

the total value of all outstanding federal government securities.

A __________________ often results in an outflow of financial capital leaving the domestic economy and being invested in the global economy?

trade surplus

When you see a mansion and think to yourself that it must be worth a million dollars, you are using money to perform which function?

unit of account

According to the quantity theory, if constant growth in the money supply is combined with fluctuating velocity, which of the following is most likely to result?

unpredictable rises and falls in nominal GDP

Say's Law argues that a given _______________ must create an equivalent __________________ somewhere else in the economy.

value of supply; value of demand


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