Macro Economics Exam 4 FSU

If the Federal Reserve wants to increase the availability of money and credit, it can

lower the discount rate.

(I) the 2017 per capita income of all of the 27 countries with the highest average economic freedom ratings during 1995-2017 exceeded $20,000 and the per capita GDP of 23 of the 27 was greater than $30,000. (II) None of the 26 countries with the lowest average economic freedom ratings during 1995-2017 had a per capita income level of $20,000, and with the exception of four major oil exporters, the per capita GDP of all of the countries in the least free group were less than $10,000. A. Both I and II are true. B. Both I and II are false. C. I is true; II is false. D. I is false; II is true.

A

As transportation and communication costs declined during the past half-century, international trade A. increased as a share of world GDP. B. declined as a share of world GDP. C. increased as a share of GDP in the high-income countries but declined in developing countries. D. increased as a share of GDP in developing countries but declined in the high-income countries.

A

How did the world's per capita income and the degree of income inequality change between 1800 and 1980? A. Per capita income expanded by approximately tenfold and income inequality increased. B. Per capita income expanded by approximately tenfold and income inequality declined. C. The per capita income of the world was virtually unchanged and income inequality declined. D. The per capita income of the world declined, but the income was distributed more equally.

A

The neoclassical theory of economic development stresses that A. large investments in physical capital, increases in education and other forms of human capital, and rapid advances in technology provide the major ingredients for strong economic growth. B. the growth of population is the fundamental source of economic growth and rising levels of per capita GDP. C. a country will be unable to achieve rapid economic growth unless it has sound economic institutions. D. international trade is the key to economic development.

A

The per capita income level of the world grew very slowly prior to A. around 1800, when per capita GDP began to increase in western Europe, North America, and Oceania. B. around 1945 at the end of World War II, when income levels began to grow rapidly throughout the world. C. around 2000, when mobile phones became commonly available. D. around 1400, when the Italian Renaissance began to push growth rates upward substantially.

A

When the Fed buys bonds and injects additional reserves into the banking system, this action will A. place downward pressure on short-term interest rates B. cause many decision makers to expect that the future rate of inflation will fall C. place upward pressure on both short-term and long-term interest rates D. place upward pressure on short-term interest rates and downward pressure on long-term interest rates

A

Which of the following will cause the U.S. money supply to expand? A. A commercial bank uses reserves to extend a loan to a custom B. A commercial bank purchases U.S. securities from the Fed as an investment C. Sale of securities by the Fed to a private investor. D. An increase in the discount rate.

A

Which of the following will tend to increase the reserves held by banks? A. An increase in the interest rate paid to banks on their deposits with the Fed B. C. D.

A

If the Fed unexpectedly shifts to a more expansionary monetary policy, which of the following will most likely occur in the short run?

A decrease in the real interest rate

f policy makers wanted to use both monetary and fiscal policy to stimulate demand and reduce a high rate of unemployment, which of the following would be most appropriate?

A larger budget deficit and the purchase of securities in the open market.

What happens to the aggregate demand curve when the Fed reduces the money supply? A. It shifts leftward, lowering real GDP and the price level. B. It shifts leftward, raising real GDP and the price level. C. It shifts leftward, lowering real GDP but raising the price level. D. It shifts rightward, raising real GDP and the price level. E. It shifts rightward, lowering real GDP but raising the price level.

A.

When expansionary monetary policy pushes interest rates downward to a low level, A. the velocity of money will decline, which will weaken the expansionary impact on demand and nominal GDP. B. the velocity of money will increase, which will strengthen the expansionary impact on demand and nominal GDP. C. the prices of stocks and other real assets can be expected to fall, which will weaken the impact of the expansionary policy on demand and nominal GDP. D. the earnings derived from savings accounts will increase, which will stimulate demand and nominal GDP.

A.

Increases in per capita GDP are A. important, because they mean governments have more resources for transfer payments. B. important, because they generally improve our living standards. C. not important, as governments take the increased output and waste it. D. not important, because increases in per capita GDP do not affect our living standards

B

Beginning with the Industrial Revolution around 1800, the real per capita income of people A. throughout the world increased at an annual rate of approximately 3 percent during the century and a half that followed. B. in Western Europe, Oceania, Canada, Japan, and the United States began increasing, but income levels in the rest of the world continued to stagnate near subsistence levels. C. in Asia and the United States increased steadily, but income levels in the rest of the world continued to stagnate near subsist D. in all parts of the world except Africa grew at an annual rate of more than 3 percent for nearly a century.

B

During 1985-2015, the economic freedom gap between the high-income developed countries and low-income less-developed countries has _______ and the world poverty rate has ______. (Fill in the blanks) A. widened; increased B. narrowed; declined C. narrowed; increased D. widened; declined

B

During the 150 years following the Industrial Revolution that started around 1800, real per capita income A. increased substantially in all parts of the world. B. increased in Western Europe, North America, Oceania, and Japan, but continued to stagnate in the rest of the world. C. declined in Western Europe, North America, Oceania, and Japan, but continued to grow in the rest of the world. D. grew rapidly in Japan and China but stagnated near subsistence levels in the rest of the world.

B

I) Even though transportation and communication costs fell sharply during the decades following 1970, the volume of international trade declined. (II) As transportation and communication costs declined sharply in the half-century following 1970, people in poor countries became vastly more aware of what life was like in wealthier regions, and vice versa. A. I is true; II is false. B. I is false; II is true. C. Both I and II are true. D. Both I and II are false.

B

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could A. increase the reserve requirements imposed on commercial banks B. decrease the interest rate paid banks on their deposits with the Fed, encouraging banks to extend more loans. C. sell U.S. government securities and other financial assets that it is currently holding. D. raise the interest rate on loans extended to banks and other financial institutions

B

In a market economy, what must an entrepreneur do in order to be successful? A. Purchase resources at lower prices than rivals. B. Produce a good that can be sold for more than its production cost. C. Obtain large subsidies from the government. D. Hire workers at low wage rates

B

The neoclassical theory of development A. is unable to provide an explanation of why several countries were able to break out of the Malthusian trap following the Industrial Revolution. B. does not explain why capital formation and improvements in technology occur in some countries, but not others. C. is inconsistent with the empirical evidence: countries with high levels of investment in physical and human capital and modern technology do not grow and achieve high levels of per capita GDP. D. is unable to explain why the fastest growing countries in the world are those with the greatest geographic disadvantages.

B

Monetary policy pushed interest rates to historically low levels during 2002-2004, but was more restrictive during 2005-2006. Economic analysis indicates that this policy A. helped to smooth the ups and downs of the business cycle during this era. B. contributed to the boom and bust of the housing market, and thereby the instability of this era. C. contributed to the housing bust of 2002-2004, but helped to restore stability to the housing market in 2006-2008. D. helped to bring inflation under control during 2002-2004, and thereby established a foundation for a strong recovery during 2007-2010

B.

The Economic Freedom of the World index provides a measure of the extent to which various countries A. rely on democratic political decision-making to allocate resources. B. rely on markets rather than political decision-making to allocate resources. C. use transfer payments and subsidies to achieve an Egalitarian distribution of income. D. use political allocation to promote economic nationalism.

B.

When continued for several years, rapid growth in the money supply relative to the growth of real output will likely lead to an extended period of A. low unemployment. B. high inflation. C. low nominal interest rates. D. high rates of real economic growth.

B.

Which of the following is true? A. The United States is rich because it has democratic political institutions. B. Economic growth is primarily the result of gains from trade, discovery of better ways of doing things, and capital investment. C. Without foreign aid, poor countries are unable to break the cycle of poverty, low savings and investment, and economic stagnation. D. Most all countries with an abundance of natural resources have been able to achieve rapid growth and high levels of per capita income.

B.

Which of the following policies would be most likely to reduce the efficiency of a country's economic organization? A. A legal structure that establishes secure property rights. B. Imposition of tariffs and other barriers limiting international trade. C. Competitive markets. D. A stable monetary system.

B.

Which of the following is true of the cost of ocean and air shipping since the mid-1970s? A. The real cost of ocean shipping has increased, but the real cost of air shipping has declined. B. The real cost of ocean shipping has declined, but the real cost of air shipping has increased. C. The real cost of both ocean shipping and air shipping has declined sharply. D. The real cost of both ocean shipping and air shipping has increased substantially.

C

In 1960 the per capita GDP of Hong Kong was substantially less than that of Argentina and Venezuela. By 2015, the per capita income of Hong Kong was more than three times the figures for Venezuela and Argentina. This dramatic change occurred because A. Venezuela and Argentina lacked the natural resources of Hong Kong. B. the United States provided aid to Hong Kong but not to Argentina and Venezuela. C. Hong Kong was able to achieve and sustain a high rate of economic growth while the growth rates of Argentina and Venezuela were exceedingly low. D. Hong Kong was a developed country in 1960, but Argentina and Venezuela were not.

C

Prior to 1800, most people A. living in Western Europe and North America enjoyed income levels that were 15 to 20 times higher than those living in Eastern Europe and Asia. B. achieved steady economic growth and rising income levels. C. throughout the world experienced stagnating incomes at or near the subsistence level of income. D. could count on their income level to double approximately every 25 years.

C

The Malthusian trap is the theory that A. increases in technology will fail to increase income levels. B. rapid growth of income will soon result in shortages of natural resources as more and more of those resources are used up. C. income levels much above subsistence will trigger rapid population growth that will soon drive income downward to the subsistence level. D. rapid growth of income will trigger civil unrest that will undermine the protection of property rights and continuation of the growth.

C

The large reductions in transportation and communication costs of the past half-century A. exerted little impact on economic growth and development, primarily because there was only a small increase in the volume of international trade. B. made it possible for the high-income developed countries to use international trade to exploit people living in poor, less-developed countries. C. made it possible for developing countries, particularly those less geographically disadvantaged, to gain from increased international trade and integration into the world market network. D. led to large increases in international trade as a share of GDP for the 40 most geographically disadvantaged countries, but the gains from trade of other developing countries were much smaller.

C

The primary cause of inflation is A. large budget deficits. B. high taxes. C. rapid expansion of the money supply. D. government expenditures that are large relative to the size of the economy.

C

Which of the following is true of technology? A. Technological improvements are less important today than was true in the past. B. Lack of access to modern technology is a major barrier restraining the growth of low-income countries. C. Perverse institutions and policies have reduced the potential gains from adoption of modern technologies in many less-developed countries. D. Countries with high investment rates will be unable to apply modern technology effectively.

C

Which of the following is true of the 40 most geographically disadvantaged countries? A. The per capita GDP of these countries has increased rapidly during the past half century. B. The ratio of international trade as a share of GDP of these countries is larger than most other developing countries. C. All but two of these countries are located in sub-Saharan Africa. D. The Economic Freedom of the World index indicates that these countries have a high degree of economic freedom.

C

(I)Virtually without exceptions, The Top 25 countries with the highest average economic freedom ratings during 1995-2017 had a high (more than $20,000)per capita income in 2017. (II) Virtually without exceptions, all of the Bottom 25 countries with the lowest average economic freedom ratings during 1995-2017 had a low (less than $20,000) per capita income in 2017. A. I is true; II is false. B. I is false; II is true. C. Both I and II are true. D. Both I and II are false.

C.

When the government is heavily involved in the regulation of business activity, entrepreneurs will be encouraged to spend more time and resources on A. research and the development of better products. B. keeping their production costs low. C. rent seeking. D. productive activities and less on political lobbying.

C.

Which of the following is a key characteristic of economic freedom? A. Subsidies and regulations that favor business. B. Central planning. C. Reliance on open markets. D. Import quotas that protect domestic businesses from rivals.

C.

Which of the following will tend to increase the growth and prosperity of a country? A. Imposition of price controls and regulations that restrain domestic and international trade. B. An expansionary monetary policy that leads to high rates of inflation. C. low marginal tax rates that allow people to keep most of what they earn D. regulations that prevent entrepreneurs from engaging in business activities without the permission of elected government officials

C.

Both economic theory and history indicate that the democratic political process A. can be counted on to achieve and sustain economic institutions and policies consistent with strong economic growth and human progress. B. will lead to efficient outcomes if the "majority rule" concept is followed. C. can be counted on to correct market failure whenever it arises. D. does not guarantee either the establishment or continuation of economic institutions and policies consistent with efficient use of resources and human progress.

D

Demographic changes that increase the number of people in the lending phase (approximately age 50 to 75) and fewer in the borrowing phase (under age 50), would tend to A. expand the demand for loanable funds and push interest rates upward. B. expand the demand for loanable funds and push interest rates downward. C. expand the supply of loanable funds and push interest rates upward. D. expand the supply of loanable funds and push interest rates downward.

D

If real GDP is increasing more rapidly than population, A. population must be declining. B. the country will have to export more than it imports. C. the general level of prices must be increasing. D. per capita real GDP will be increasing.

D

If the 1980 extreme and moderate poverty rates of the world were present today, there would be A. no change in the number of people classified as poor, because the world's extreme and moderate poverty rates are virtually the same today as in 1980. B. approximately one billion more people living in extreme poverty today, but no change in the number living in moderate poverty. C. approximately 500 million fewer people living in both extreme and moderate poverty today. D. approximately 2 billion more people living in both extreme and moderate poverty today.

D

The Economic Freedom of the World data indicate that during 1985-2015 economic freedom in less-developed countries A. declined and the economic freedom gap compared with high-income developed countries expanded. B. increased, but the economic freedom gap compared with high-income developed countries widened because economic freedom rose by an even larger amount in high-income countries. C. declined but the economic freedom gap compared with high-income developed countries narrowed because there was an even larger decline in economic freedom in high-income countries. D. increased, and the economic freedom gap compared with high-income developed countries narrowed.

D

The per capita incomes of countries in the quartile with the most economic freedom during 2013 were A. slightly lower than those of the quartile of countries with the least economic freedom. B. about the same as the quartile of countries with the least economic freedom. C. about twice those of the countries with the least economic freedom. D. about six times those of the quartile of countries with the least economic freedom.

D

Which of the following is a driving force underlying economic growth? A. trade restrictions that protect domestic businesses from competition with foreign producers B. regulations that require businesses to obtain permission from the government before starting a new business C. tax increases that expand the revenues of the government D. entrepreneurial discovery and production of improved products

D

Which of the following is most likely to be a serious obstacle regarding the growth of less-developed nations? A. A lack of knowledge about modern technology. B. A lack of natural resources. C. Slow population growth. D. Low capital formation as the result of a weak legal system.

D

Which of the following is true? A. The FDIC sets the reserve requirements for commercial banks. B. The Federal Reserve System guarantees the deposits in almost all banks up to a $250,000 limit per account. C. Since the Federal Reserve System was established in 1913, bank failures due to panic withdrawals have been virtually eliminated. D. If a bank should fail, the FDIC guarantees that depositors can get their funds up to a $250,000 limit per account.

D

A shift to a more expansionary monetary policy will A. increase the long-term growth rate of the economy. B. reduce the future rate of inflation. C. Stimulate output and employment almost immediately. D. Stimulate output and employment, but only after a time lag that is generally long and variable.

D.

Compared to those with less economic freedom, countries with more economic freedom generally have ____ per capita GDP levels and ____ growth rates. (Fill in the blanks) A. lower; less rapid B. lower; more rapid C. higher; less rapid D. higher; more rapid

D.

Which of the following is inconsistent with the view that Fed monetary policy was excessively expansionary during 2010-2013? A. Short-term interest rates that were near zero throughout these years. B. A rapid increase in the monetary base throughout these years. C. A tripling of Fed asset holdings from less than $1 trillion in 2008 to approximately $3 trillion in 2012. D. Growth of nominal GDP during 2010-2012 at a rate similar to that of recent decades.

D.

If the Fed purchases a bond from a private investor, how will it pay for the bond?

It will write a check to the investor

Which of the following assets can a commercial bank count as reserves?

Its vault cash and deposits with the Fed

Are "smart cards" or E-cash cards part of the money supply?

No, because they are merely means to transfer checking deposits

What effect does restrictive monetary policy have on short-term real interest rates?

Restrictive monetary policy tends to push short-term interest rates upward.

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?

Sell some of its holdings of government bonds

Which of the following tends to reduce bank failures as the result of bank runs by depositors?

The Federal Deposit Insurance Corporation

Checking account deposits are counted as part of the M1 money supply because

They are widely used as a means of making payment.

During the financial crisis of 2008-2010, the Fed

increased its purchases of securities and other financial assets and extended more loans, which expanded the monetary base.

In response to the recession of 2008-2009, the Fed doubled its asset holdings between mid-year 2008 and mid-year 2009. This policy

increased the reserves available to banks, leading to an expansion in the money supply.

During and following the Great Recession of 2008-2009, the Fed quadrupled its holdings of securities and other financial assets, leading to a huge increase in bank reserves. As a result, the M1 money supply

increased, but by a much smaller amount than bank reserves, because the interest payments on deposits with the Fed encouraged banks to hold most of the additional reserves rather than lend them out.

The foreign holdings of U.S. dollars

indicate that foreigners have confidence in the monetary policy and economy of the United States.

If a sizeable amount of U.S. currency is held outside of the United States, the

money supply figures, particularly those for M1, will be less reliable

During the economic crisis of 2008, the Fed acquired the authority to

pay interest to banks on their reserve deposits with the Fed

A decrease in the money supply

raises the interest rate, causing a decrease in investment and a decrease in GDP.

Starting from an initial long-run equilibrium, an unanticipated shift to a more expansionary monetary policy would tend to increase

real output in the short run but not in the long run.

An unanticipated shift to a more expansionary monetary policy by the Fed will

reduce real interest rates and, thereby, stimulate investment, current consumption, and aggregate demand.

The primary source of revenue for the Federal Reserve is

the interest earned on the bonds held by the Fed.

Since the Fed began using interest payments rather than reserve requirements to control bank reserves in 2008,

the size of the deposit expansion multiplier has increased because the banks are holding more reserves.

Open market operations is the

tool most often used by the Fed to alter the money supply

Compared to a barter economy, using money increases efficiency by reducing

transaction costs