Economics Exam 4

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

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

If nominal GDP is 1800 and the money supply is 450, what is velocity?

4

If nominal GDP is 2400 and the money supply is 600, what is the velocity?

4

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

12

Which of the following institutions determines the quantity of money in the economy as its most important task?

Central Bank

A ______________________ means that government spending and taxes are equal.

balanced budget

The term ___________________ describes the proportion of deposits that the bank must hold in the form of reserves that are not loaned out or invested in bonds.

reserve ratio

Which of the following terms is used to describe the proportion of deposits that banks are legally required to deposit with the central bank?

reserve requirements

The market in which loans are bought and sold is called the

secondary loan market

The time lag for monetary policy is typically ________________ the time lag for fiscal policy.

shorter than

Why do banks use a T-account?

the T-account separates assets on the left from liabilities on the right

_____________________ are a form of tax and spending rules that can affect aggregate demand in the economy without any additional change in legislation.

Automatic stabilizers

_____________ are a form of financial instrument through which corporations and governments borrow money from financial investors and promise to repay with interest.

Bonds

____________________________ 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

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

M2

________________ serves society in three functions: medium of exchange, unit of account, and store of value.

Money

__________________ pool the deposits of many investors together and invest them in a safe way like short-term government bonds.

Money market funds

Central Bank policy requires Northern Bank to hold 10% of its deposits as reserves. Northern Bank policy prevents it from holding excess reserves. If the central bank purchases $30 million in bonds from Northern Bank what will be the result?

Northern's loan assets increase by $30 million

___________ are funds that the bank keeps on hand that are not loaned out or invested in bonds.

Reserves

Which of the following institutions oversees the safety and stability of the U.S. banking system?

The Federal Reserve

What do goods like gasoline, tobacco, and alcohol typically share in common?

They are all subject to government excise taxes.

If the government for the state of Washington collects $65.8 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be

a budget deficit.

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

a contractionary monetary policy.

If the economy is in recession with high unemployment and output below potential GDP, ____________________ would cause the economy to return to its potential GDP?

a loose monetary policy

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

an asset-liability time mismatch

The government can use _____________ in the form of ____________________ to increase the level of aggregate demand in the economy.

an expansionary fiscal policy; an increase in government spending

Which of the following is a valid criticism of the use of money as a store of value in modern economies?

annual inflationary loss of buying power

What is the name given to the macroeconomic equation MV = PQ?

basic quantity equation of money

If the central bank increases the amount of reserves banks are required to hold to 20%, then:

both the money multiplier and supply of money in the economy will decrease.

A ______________________ is created each time the federal government spends more than it collects in taxes in a given year.

budget deficit

If the state of Washington's government collects $75 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be a

budget surplus.

A typical ____________________________ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes.

contractionary

In 2020, Microsoft will pay corporate income tax to the federal government based on the company's __________________.

corporate profits

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

creation of money.

Which of the following would be classified in the M1 category of the money supply?

demand deposits

What term is used to describe the interest rate charged by the central bank when it makes loans to commercial banks?

discount rate

When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting

discretionary fiscal policy.

If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used?

expansionary

Assume that laws have been passed that require the federal government to run a balanced budget. During a recession, the government will want to implement _____________________, but may be unable to do so because such a policy would ____________________________.

expansionary fiscal policy; lead to a budget deficit

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

federal funds rate

In modern economies, _____________________ receive money from savers and provide funds to borrowers.

financial intermediaries

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

fiscal policies

If individual income tax accounts for more total revenue than the payroll tax in the U.S., why would over half the households in the country pay more in payroll taxes than in income taxes?

income tax is a progressive tax

If a country's GDP decreases, but its debt increases during that year, then the country's debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes.

increase

If the economy is at equilibrium as shown in the diagram above, then a contractionary monetary policy will

increase unemployment, but have little effect on inflation.

When the central bank decides to increase the discount rate, the:

interest rates increase.

When banks hold excess reserves because they don't see good lending opportunities:

it negatively affects expansionary monetary policy.

Which of the following is omitted in the barter transaction?

money

Which of the following is a traditional tool used by the Fed during recessions?

open market operations

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

owning gold

The market where loans are made to borrowers is called the

primary loan market.

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 regressive tax

A ________________________________ is calculated as a flat percentage of income earned, regardless of level of income.

proportional tax

If the economy is at equilibrium as shown in the diagram above, then an expansionary monetary policy will

reduce unemployment, but have little effect on inflation.

When the share of individual income tax collected by the government from people with higher incomes is smaller than the share of tax collected from people with lower incomes, then the tax is ____________________.

regressive

The central bank requires Southern to hold 10% of deposits as reserves. Southern Bank's policy prohibits it from holding excess reserves. If the central bank sells $25 million in bonds to Southern Bank which of the following will result?

the money supply in the economy decreases

If the economy is producing less than its potential GDP, _____________________ will show a larger deficit than the actual budget.

the standardized employment budget

In macroeconomics, a _______________ describes the common way in which market values are measured in an economy.

unit of account