Final Practice 2 Ch.12-17, 20,21

Refer to the graph. Assume that the economy initially has a price level of P1 and output level Q1. If the government implements expansionary fiscal policy, and the full multiplier effect is felt, it will bring the economy to

P1 and Q3

Refer to the graph. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?

P2 and Q2

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government

budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.

Which of the following is an example of an economic investment?

building a new bank office

A mutual fund company uses the funds of its investors to

buy stocks and bonds

Refer to the table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 to 5 percent at a time when the investment demand declines from that shown by columns (1) and (2) to that shown by columns (1) and (3). As a result of these two occurrences, investment will

decrease by $10 billion

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called the

discount rate

A stock investor may expect returns in the form of

dividends and capital gains

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other.

false

As long as the owner (seller) of an asset is willing to accept any price, the asset will sell quickly, thus making it meet the full definition of liquidity.

false

Economic investment refers to the buying or selling of any asset in expectation of a financial gain.

false

If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.

false

The discount rate is the interest rate at which commercial banks lend to their best corporate customers.

false

The general public can open deposit accounts at their district's Federal Reserve Bank.

false

When the Fed pays interest on excess reserves held at Fed banks, the interest rate used is the discount rate.

false

When the Fed raises interest rates on excess reserves, they are attempting to encourage bank lending.

false

The paper money used in the United States is

federal reserve notes

What is the difference between economic and financial investments?

financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods

When the Federal government uses taxation and spending actions to stimulate the economy, it is conducting

fiscal policy

Refer to the given diagram, in which line AB is the U.S. production possibilities curve and AC is its trading possibilities curve. We can conclude that the United States

has chosen to specialize in the production of cheese

Refer to the given diagram, in which line AB is the U.S. production possibilities curve and AC is its trading possibilities curve. We can conclude that the United States

has chosen to specialize in the production of cheese.

Interest paid on excess reserves held at the Fed

incentivizes financial institutions to hold more reserves and reduce risky lending.

Other things equal, an increase in productivity will

increase both aggregate supply and real output

Which combination of fiscal policy actions would most likely offset each other?

increase both taxes and government spending

Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will

increase by $1 billion and the money supply will increase by $10 billion

Other things equal, an improvement in the expected rate of net profit would

increase investment spending, real GDP, and the price level

When the Fed lends money to a commercial bank, the bank

increases its reserves and enhances its ability to extend credit to bank customers

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by

increasing taxes by $20 billion

Arbitrage occurs when

investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money

is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8

The rise of mutual funds has radically changed the way corporations are controlled in that

it shifted ownership away from individual investors toward "institutional" investors like mutual funds

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

the reserve ratio

Answer the question on the basis of the information in the table. An interest rate of 2 percent is not sustainable because

the supply of bonds in the bond market will rise and the interest rate will rise

Which of the following is not a reason why after the Great Recession, when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy?

there was a time lag implementing monetary policy

Which of the following is not true about subprime mortgage loans?

they had always been discouraged by the government and even banned in some cases

Arbitrage equalizes rates of return across assets of a given beta.

true

If the MPC in the economy is 0.75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

true

In 2015, the United States had its first-ever trade surplus with OPEC.

true

One new element of the Fed's open market operations is the use of government securities as collateral for loans to banks and other financial institutions.

true

The production possibilities curves suggest that

west Mudville should specialize in, and export, baseball bats

To say money is socially defined means that

whatever performs the functions of money extremely well is considered to be money

Which of the following is an example of a land-intensive commodity?

wool

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions. The commercial banking system has excess reserves of

zero

The economy is in a recession. The government enacts a policy to increase spending by $2 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?

$10 billion

At the end of 2015, U.S. households and nonprofit organizations held approximately __________ in mutual funds.

$8.1 trillion

If countries A and B produce only either rubber bands or paper clips, their maximum outputs are shown in the accompanying production possibilities schedules. In country A the opportunity cost of 1 paper clip is

1/2 rubber band

In the United States, exports of goods and services accounted for about what percentage of GDP (total output) in 2014?

13 percent

The number of countries belonging to the World Trade Organization (WTO), as of 2015, is about

161

Answer the question on the basis of the accompanying production possibilities tables for two countries, Latalia and Trombonia. Assume that before specialization and trade, Latalia produced combination C and Trombonia produced combination B. If these two nations now specialize completely based on comparative advantage, the total gains from specialization and trade will be

4 tons of beans

The hypothetical nations Wat and Xat have the production possibilities for rice and corn given in the accompanying tables. Assume that Wat originally produced rice and corn at combination C and that Xat originally produced combination B. If the nations now fully specialize based on comparative advantage, the total gains from specialization and trade are

50 units of rice and 50 units of corn

Refer to the diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD3

An appropriate fiscal policy for severe demand-pull inflation is

a tax rate increase

The main function of the Federal Reserve System is to

control the money supply

The United States has had significant trade and current account surpluses in recent years.

False

When commercial banks borrow from the Federal Reserves Banks, they decrease their excess reserves and their money-creating potential.

False

Which of the following financial institutions was acquired by Bank of America as a result of the financial crisis of 2007 and 2008?

Merrill Lynch

In which of the following countries did exports account for the biggest percentage of GDP in 2014?

Netherlands

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with

a contractionary fiscal policy

At the time when a trade deficit is occurring, U.S. consumers benefit from having more goods and services available.

True

Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.

True

The fundamental objective of monetary policy is to assist the economy in achieving

a full-employment, noninflationary level of total output.

What function is money serving when you use it when you go shopping?

a medium of exchange

Which of the following is not true about the use of a credit card?

credit card balances are part of M2 but not part of M1

A money loan is said to be collateralized when

an asset is pledged by the borrower to the lender in case of default

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

an increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP

Arbitrage is the process by which investors simultaneously sell

assets with lower rates of return and buy otherwise identical assets with higher rates of return

What are "mortgage-backed securities"?

bonds backed by mortgage payments

The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy, then there will be a

budget deficit

Which of the following is not a tool of monetary policy?

changes in banking laws

Which of the following is not part of the M2 money supply?

large-denominated time deposits

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should try to

make no change in the interest rate

How do actively managed funds differ from passively managed funds?

managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns

Refer to the figure. The economy is at equilibrium at point B. What would expansionary fiscal policy do?

move the economy from point B towards point A

In the real world, specialization is rarely complete because

nations normally experience increasing opportunity costs in producing more of the product in which they are specializing

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year. Stock B sells for $100 per share and pays dividends of $4 per share per year. Through the process of arbitrage, we would expect the price of

neither stock to change

Currency held within banks is part of

neither the M1 nor the M2 definition of the money supply

Which of the following monetary policy tools was introduced in 2008?

paying interest on excess reserves held at the Fed

The purchase of government securities from the public by the Fed will cause

the money supply to increase

The "shadow banking system" refers to

the process by which securities exchanges provide credit for personal and business needs apart from traditional bank lending

Which of the following actions by the Fed would cause the money supply to increase?

purchases of government bonds from banks

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should

reduce tax rates and/or increase government spending

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce taxes by $80 billion

The principle of comparative advantage indicates that mutually beneficial international trade can take place only when

relative costs of production differ between nations

Upon which of the following industries is a restrictive monetary policy likely to be most effective?

residential construction

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary, full-employment level of real GDP?

sell government securities in the open market

What do stocks represent?

shares of ownership in a corporation and an entitlement to its future profits

The tables give production possibilities data for two countries, Alpha and Beta, which have populations of equal size. Beta

should specialize in catching fish and trade with Alpha for chips

Suppose stock A sells for $30 per share and pays dividends of $1 per share per year. Stock B sells for $40 per share and pays dividends of $2 per share per year. Through the process of arbitrage, we would expect the price of

stock A to fall and/or the price of stock B to rise

The Standard & Poor's 500 Index measures prices of the 500

stocks of the largest companies in the United States

If the Fed sells government securities to the general public in the open market,

the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed

One of the consequences of the U.S. trade deficit is that

the accumulation of American dollars in foreign hands has enabled foreign firms to build factories in America

If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when

the demand for money increases

Which of the following is not common to all investments?

the investment pays a positive rate of interest

Which of the following is not common to all investments?

the investment pays a positive rate of interest.