econ quiz 4

When successfully implemented, expansionary fiscal policy will cause

a rightward shift of the aggregate demand curve.

What function is money serving when you deposit it in a savings account?

a store of value

The demand curve for federal funds is

downward-sloping, because higher interest rates discourage commercial banks from borrowing federal funds, but lower rates encourage borrowing.

Which of the following will create the largest increase in the money supply?

the Federal Reserve buys bonds and the banks choose to hold less excess reserves

Fiscal policy would be more effective if

the government could change taxes and expenditures rapidly.

The Federal Reserve can increase aggregate demand by

reducing the discount rate.

With a tax of $2,000 on $30,000 of income, and $2,000 on $70,000 of income, we can describe the structure of this tax as

regressive.

Assume that there is a 25 percent reserve requirement and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of

$600 million, but by $800 million if the securities are purchased directly from commercial banks.

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has

.2 x 10 bil = 2 bil 2 bil + 1 bil = 3 bil (total reserves) .3 x 10 bil = 3 bil 3 bil - 3 bil = 0 neither an excess nor a deficiency of reserves.

An economy is experiencing a high rate of inflation. The government wants to reduce aggregate demand by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?

.75/ 1-.75 = 3 36 / 3 = 12

The economy is in a recession. The government enacts a policy to increase spending by $6 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

1 / .2 = 5 5 x 6 = 30

Suppose a commercial banking system has $240,000 of outstanding checkable deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of

1/0.25=4 25%of240,000=60,000 and actual reserves = 85000 85000-60000=25000 25000x4=100000 100,000

If the reserve requirement were 15 percent, the value of the monetary multiplier would be

1/15 6.67.

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

With a tax of $4,000 on $24,000 taxable income, the average tax rate is

16.67%.

A negative demand shock has pushed Prosperville into a recession. The government is hoping to increase the money supply by $250 billion. With a reserve requirement of 0.12, what is the change in reserves needed to achieve the desired change in the money supply?

250 x .12 = 30 bil

A commercial bank has checkable-deposit liabilities of $50,000 and a required-reserve ratio of 20 percent. What is the amount of required reserves?

50,000 x .2 $10,000

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

The Federal Reserve System consists of which of the following?

Board of Governors and the 12 Federal Reserve BanksCorrect

If the economy is currently in equilibrium at output level Y2, but full-employment output is at level Y1, which of the following fiscal policy actions would be the most effective at bringing the economy back to its full-employment output level?

Increase taxes.

Which of the following is the most important source of tax revenue for state governments?

Sales and excise taxes

A bank is in the position to make loans when required reserves

are less than actual reserves.

Due to automatic stabilizers, when the nation's total income rises, government transfer payments

decrease and tax revenues increase.

Assume that the reserve requirement is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately

decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million.

An increase in the money supply, all else held constant, usually

decreases the interest rate and increases aggregate demand.

Which of the following is a monetary policy intended to rein in inflation?

decreasing the money supply to shift the aggregate demand curve leftward

Suppose that the economy is operating below the full employment level of real GDP. If a liquidity trap exists, a(n) _____ policy would be most effective for solving the problem.

expansionary fiscal policy

Suppose the economy is experiencing a recession. If the Federal Reserve enacts expansionary monetary policy, interest rates will likely

fall causing prices to increase.

A decrease in the interest rate will cause a(n)

increase in the amount of money held as an asset.

When the Federal Reserve Banks decide to buy government bonds from banks and the public, the supply of reserves in the federal funds market

increases and the federal funds rate decreases.

When the Fed buys government securities in the open market, it

increases the excess reserves of the banking system, raising excess reserves for overnight loans in the federal funds market and thus lowering the federal funds rate.

If both the real interest rate and the nominal interest rate are 3 percent, then the

inflation premium is zero.

If the quantity of money demanded exceeds the quantity supplied, the

interest rate will rise.

All else held constant, if the supply of money is increased

investment spending will increase.

The circular flow model with government included would show that government

provides goods and services to businesses and households and pays for them with net taxes.

The goal of expansionary fiscal policy is to increase

real GDP.

Compared to a country with an MPC of 0.8, a country with an MPC of 0.6 would have to change government expenditures by _________ as much to have the same impact on real GDP.

twice