Econ Test 3

The housing bubble collapsed in:

2007-2009.

Which of the following is NOT a financial intermediary?

Federal Reserve Bank

__________ government spending, _____ transfer payments, and ____ taxes are all examples of contractionary fiscal policy.

Reducing; reducing; raising

Which is NOT one of the three basic functions of money?

a means to collect taxes

At Christmas, people tend to draw money out of their checking accounts to pay for Christmas presents. As a result, the money multiplier will:

decrease

When current real output exceeds potential real output, the Fed will _____ interest rates in an effort to fight _____.

increase; inflation

Automatic stabilizers include all of the following EXCEPT:

increased research and development.

Milton Friedman and Anna Schwartz are most famous for:

monetary theory.

Most studies estimate the overall multiplier of the 2009 stimulus to be between:

1.5 and 2.

The Federal Reserve System includes _____ regional banks.

12

A nominal GDP of $265 billion and an M1 of $12 billion result in a velocity of:

22.08.

Which of the following does NOT explain why the actual money multiplier and the potential money multiplier are different?

Foreign deposits in American banks aren't counted in the actual money multiplier.

Which of the following statements concerning the function of money is INCORRECT?

Money does not lose value when inflation occurs.

26. Which one of the following will cause the demand for loanable funds curve to shift leftward?

an end to a program that provides investment tax credits

The proposition that federal expenditures and taxes would have to be equal to each other every year is called the ________ approach.

annually balanced budget

M1 includes:

cash, demand deposits, and other checkable deposits.

Which fiscal policy time lag can occur when the legislative process works slowly

decision lag

Financial institutions greatly increase the flow of funds to the economy by:

decreasing information costs.

Which of the following is included in M1?

demand deposits

If the reserve requirement is 10%, then a $6,000 decrease in deposits means that the money supply:

has the potential to decrease by $60,000.

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $10,000 bond. The impact on the banking system is a(n):

injection of $10,000 in new reserves.

M1 is the most _____ of all assets because as a medium of exchange it requires no conversion.

liquid

When the economy is overheating and policymakers pursue contractionary fiscal policy, they express willingness to trade off _________ output for a ________ price level.

lower; lower

In the United States, Social Security and Medicare are examples of:

pay-as-you-go programs.

Which of the following is NOT a leakage that reduces the size of the spending multiplier?

personal investment in human capital

Financial institutions:

reduce information costs, reduce transaction costs, and diversify assets.

Which measure is NOT a channel through which the government can influence aggregate demand?

regulation on businesses

To slow down a high inflation rate, the Fed should use a(n) ______________ monetary policy by using open market _____________.

restrictive; sales

If the Fed wants to raise the federal funds rate, it will ______ bonds, which ________ bond prices.

sell; lowers

The phenomenon of hoarding money when the interest rate falls to low levels is an outcome of:

the liquidity trap.

About ____ of U.S. currency is held outside the United States.

two-thirds

A bank has excess reserves of $5,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is:

$3,000.

Suppose a one-year bond with a face value of $200 is sold for $188. What is the bond's yield?

6.4%

The Federal Reserve can purchase ____ to fund fiscal policy, resulting in _____.

bonds; an increase in the money supply

The _____ rate is the rate at which banks charge each other for overnight loans, while the _____ rate is the rate at which regional Federal Reserve banks charge depository institutions for short-term loans.

federal funds; discount

Of the share of the U.S. national debt that is held by the public, __________ hold nearly _____________.

foreigners; the same amount as do Americans

The idea that banks hold only a portion of deposits and lend the rest out is called the:

fractional reserve banking system.

The fractional reserve banking system refers to a system in which banks:

hold reserves equal to a fraction of their deposit liabilities.

All of the following are included in the definition of M2 EXCEPT:

large time deposits.

If mangos were widely accepted for purposes of exchange:

mangos would be money.

Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is ___.

3

If the reserve requirement is 20%, the money multiplier is:

5

_____ is known for showing that reducing tax rates could increase tax revenues

Arthur Laffer

Increasing taxes to fight inflation is an example of:

contractionary fiscal policy.

Money leakages tend to ____ during recessions, causing the actual money multiplier to ____.

rise; fall

A reduction in the interest rate causes consumption and investment to ____, which shifts the aggregate demand curve ____.

rise; rightward

Loosening monetary policy causes interest rates to ____ and consumption and investment to ____.

fall; increase

If the federal government were required to balance its budget annually:

a recession would lead to higher taxes or reduced spending.

The use of money as a medium of exchange helps reduce the inefficiencies inherent in:

barter

The Fed uses its tools to counteract:

booms and recessions.

In counteracting demand shocks, the Fed can achieve:

both full employment and price stability.

According to the crowding out effect, if the government sells bonds to finance spending, _____ can eventually fall.

consumption and investment

An increase in the interest rate causes the aggregate _________ curve to shift _____.

demand; leftward

If the real interest rate were below the equilibrium real interest rate in the loanable funds market, an excess ________ for loanable funds would exist and the real interest rate would _______.

demand; rise

Jody purchases a stock from her employer, Acme Corporation. This is an example of ________ finance:

direct

Liquidity refers to:

how quickly, easily, and reliably an asset can be converted into a medium of exchange.

The _____ lag can be expected to last 18 to 24 months.

implementation

Which two important leakages helped reduce the real life spending multiplier during the stimulus that was implemented during 2009?

imports and taxes

Which are examples of automatic stabilizers?

income tax revenues and transfer payments

Assume the reserve requirement is 10%. If the Federal Open Market Committee buys a $10,000 bond from Bank A, Bank A's reserves:

increase by $10,000.

With a negative supply shock, the Federal Reserve has to decide whether to:

increase inflation and decrease unemployment or decrease inflation and increase unemployment.

In September 2013, the Federal Open Market Committee said it would wait for more evidence that progress had been made on the economic recovery before it cut back on open market purchases. The Bureau of Economic Analysis did not release its advanced estimate of the third quarter's GDP growth until a month after the quarter ended. The second estimate was released two months after the quarter ended, and a third revised estimate was released about three months after the quarter ended. This wait for accurate data to be collected is known as the:

information lag.

Money:

is anything that is accepted in exchange for other goods and services or for payment of debt.

To say that the Fed is transparent means that the Fed:

is open regarding its monetary policy.

According to the Taylor rule, the more GDP falls below potential GDP, other things equal, the

lower the federal funds target rate.

Student loans funded by the government typically offer ____ interest rates than similar bank loans and ____.

lower; can be paid back later

Which economists believe that fiscal policy is ineffective, while monetary policy is effective?

monetarists

The growth of businesses such as Coinstar that convert coins into bank notes or gift cards caused money to ____ and the actual money multiplier to ____, ceteris paribus.

reenter the banking system; rise

Which of the following Eurozone countries had to be bailed out by the European Central Bank?

Ireland

Which of the following is a provision of the Federal Reserve Act or subsequent legislation that contributes to the independence of the Fed?

Members of the Federal Reserve Board cannot be reappointed.

Over the past 30 years, the highest inflation rates occurred under Fed chair _______________ during the ________________.

Paul Volcker; early 1980s

What is the likely chain of events if asset prices rise?

People feel wealthier, so their spending rises and their saving falls, causing interest rates to rise.

Which U.S. presidents reduced marginal tax rates to promote work and business risk taking?

Reagan and Kennedy

Which of the following is NOT a criticism of the Fed's handling of the 2007-2009 financial crisis?

The Fed should have strengthened the dollar to shore up exports.

Which of the following statements is CORRECT?

The Federal Reserve is considered to be an independent central bank.

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's excess reserves?

$1,125

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How much money can the banking system create?

$6,000

If a person borrows $3,000 at 8% interest and never makes any payments, how much will the loan balance be after 10 years?

$6,476.77

If the reserve requirement is 25%, then the potential money multiplier is ____ and the actual money multiplier is ____.

4; less than 4

The fractional reserve banking system:

All of the answers are correct; makes possible the money creation process; helps to prevent bank runs; requires banks to hold a portion of their demand deposits in reserve.

Suppose policymakers wish to use fiscal policy to fight inflation. Which statement is MOST accurate?

Essentially, the way to lower the inflation rate is to decrease aggregate demand and cause a recession.

The government budget constraint can be depicted as _____, where G is government spending, T is tax revenues, M is the money supply, B is bonds held by the public entities, and A is government assets.

G - T = M + B + A

Which statement about inflation targeting is TRUE?

If the Fed pursues an inflation target, it increases the money supply when the actual inflation rate is below the target inflation rate.

The crowding out effect recognizes that if the government sells bonds to finance spending, it can cause interest rates to ___________ investment.

rise, reducing

Barter:

satisfies the double coincidence of wants if an exchange takes place.

When the Fed wants to decrease the money supply, it will:

sell bonds.

The government can finance a budget deficit by:

selling assets.

The membership of the Board of Governors of the Federal Reserve System consists of:

seven persons appointed by the President of the United States.

If Jack Sparrow buries a chest of gold bullion on a deserted island and plans to come back later, then the gold is functioning as a:

store of value.

Which of the following items does NOT constrain the federal budget?

the mortgage interest rate

In the equation of exchange, if M = $2 trillion, P = 1.5, and Q = $8 trillion:

the velocity of money (V) = 6.

To say that interest rates represent the opportunity cost of holding money means that as interest rates rise:

there is a movement upward along the demand curve for money.

When the Fed sells bonds, it is:

tight money policy.

Why did the European Central Bank take extraordinary actions to prevent member countries from defaulting on their debt?

to prevent a loss of confidence in the euro