MACRO FINAL

an increase in government spending on infrastructure that increases private sector productivity

Which of the following fiscal policy actions is most likely to increase aggregate supply?

A decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward.

Which of the following is a true statement?

Bond prices and interest rates are inversely related

Which of the following is a true statement?

The Fed Board of Governors are appointed to 14 year terms in order to insulate them from political pressure

Which of the following is correct?

The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.

Which of the following is correct?

GDP growth rose in the last quarter and the unemployment rate fell

Which of the following is the best description of the current state of the US economy?

Social Security

Which of the following is the largest part of the US government budget?

high-interest-rate loans to home buyers with above-average credit risk.

"Subprime mortgage loans" refer to

supply to increase.

A fall in labor costs will cause aggregate

2/5

A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?

require no legislative action by Congress to be made effective.

A major advantage of the built-in or automatic stabilizers is that they

It is pro-cyclical and makes matters worse instead of better.

A major problem with a "balanced budget" policy is that:

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

Interest paid on excess reserves held at the Fed

both discretionary fiscal policy and discretionary monetary policy can be effective if appropriately used.

Mainstream economists contend that, as stabilization tools,

excess reserves times the monetary multiplier.

Maximum checkable-deposit expansion in the banking system is equal to

Technological advancements are pushing the AS Curve to the right

To the extent that the steel industry reflects the US economy as a whole, which of the following best describes its impact on the macro-economy?

MV = PQ.

The basic equation of monetarism is

25 percent.

The commercial banking system has excess reserves of $200,000. Then new loans of $800,000 are made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be

deficit financing will increase the interest rate and reduce investment.

The crowding-out effect refers to the possibility that

increases in government spending may reduce private investment.

The crowding-out effect suggests that

decrease the effectiveness of an increase in government spending.

The crowding-out effect works through interest rates, and it tends to

is vertical.

The economy's long-run aggregate supply curve

The MPC of those getting the tax cut

The effectiveness of a tax cut to "stimulate" the economy and increase GDP depends primarily on which of the following?

the discount rate, the reserve ratio, interest on excess reserves, and open-market operations.

The four main tools of monetary policy are

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

The interest-rate effect suggests that

checkable deposits.

The largest component of the money supply (M1) is

by the government's ability to control the supply of money and therefore to keep its value relatively stable.

The money supply is backed

varies directly with the interest rate.

The opportunity cost of holding money

provide a means by which the monetary authorities can influence the lending ability of commercial banks.

The primary purpose of the legal reserve requirement is to

Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

The public debt is held as

appointed by the president with the confirmation of the Senate.

The seven members of the Board of Governors of the Federal Reserve System are

becomes steep at output levels above the full-employment output.

The short-run aggregate supply curve

input prices are fixed, but output prices are flexible.

The short-run aggregate supply curve represents circumstances where

product prices are flexible, while resource prices are fixed.

The short-run version of aggregate supply assumes that

the inflation rate will increase.

The traditional Phillips Curve suggests that, if government uses an expansionary fiscal policy to stimulate output and employment,

LONG RUN

The version of aggregate supply that allows for changes in both product prices and resource prices is the

4,000

Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5,000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank now have?

the bulk of the public debt is owned by U.S. citizens and institutions.

To say that "the U.S. public debt is mostly held internally" is to say that

Increased investment has increased AD

To the extent that the US steel industry reflects the US macro-economy, which of the following is most correct?

the U.S. government's ability to keep the value of money relatively stable

What "backs" the money supply of the United States?

Buyers owe more on their mortgage than the properties are worth.

What does it mean when economists say that home buyers are "underwater" on their mortgages?

Banks can create money through lending their reserves.

What is one significant characteristic of fractional reserve banking?

Bonds

What is the "market" in open market operations?

increased and the multiple by which the commercial banking system can lend is increased.

When the required reserve ratio is decreased, the excess reserves of member banks are

price index is rising and the purchasing power of money is falling.

When there is inflation in the economy, it implies that the

C

Which of the diagrams for the U.S. economy best portrays an improvement in expected rates of return on investment?

It can make credit and money available to be borrowed, but cannot ensure that the money will be borrowed

Which of the following are weaknesses of expansionary monetary policy?

Unemployment insurance

Which of the following as an example of an Automatic Stabilizer?

An increase in the volume of bonds held as assets and an increase in the volume of bank reserves held as liabilities

Which of the following best describes the Fed's balance sheet after thet Grea Recession?

Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

Which of the following best describes the idea of a political business cycle?

The Federal Reserve does not set the federal funds rate, but historically has influenced it through the use of its open-market operations.

Which of the following statements is true?

Housing prices would continue to increase

Which of the following was the incorrect assumption that contributed most to the onset of the Great Recession?

Fiscal and monetary policy

Which of the following was the policy response to the Great Recession?

the reserve ratio

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

a change in the price level

Which one of the following would not shift the aggregate demand curve An increase in personal income tax rates depreciation of the international value of the dollar a decline in the interest rate at each possible price level a change in the price level

The President's nominee to the Fed Board of Governors

Who is Herman Cain?

The Fed started paying interest on commercial bank reserves

Why has the volume of excess reserves at the Fed increased so much since the Great Recession?

leftward shift of the AS curve.

Graphically, cost-push inflation is shown as a

expansionary fiscal policy.

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)

$1,000.

If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are

unit of account.

A $70 price tag on a sweater in a department store window is an example of money functioning as a

cyclical

Expansionary fiscal policy is intended to reduce which type of unemploymnet?

$0 billion.

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. The commercial banking system has excess reserves of

Phillips Curve.

Refer to the diagram for a specific economy. The curve on this graph is known as a

decrease aggregate demand and aggregate supply.

If personal income taxes and business taxes increase, then this will

borrowing funds in the federal funds market.

A bank temporarily short of required reserves may be able to remedy this situation by

$2 million

A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?

PRODUCTIVITY

A rightward shift in the aggregate supply curve is best explained by an increase in

increase real output by more than the price level.

A rightward shift of the AD curve in the very flat part of the short-run AS curve will Multiple Choice increase the price level by more than real output. reduce real output by more than the price level. reduce the price level by more than real output. increase real output by more than the price level.

excess reserves

A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan _________________.

$200 billion.

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

increase the amount of instability in the economy.

According to mainstream economists, the Fed's adherence to a traditional monetary rule rather than to discretionary monetary policy is likely to

investment "booms" and "busts" and, occasionally, adverse aggregate supply shocks.

According to mainstream macroeconomists, U.S. macro instability has resulted from

both the price level and real output.

According to the equation of exchange, changes in the money supply can affect

increased at a constant rate each year.

Adherents of the traditional monetary rule say that the supply of money should be

fall

All else equal, when the Federal Reserve Banks engage in an expansionary monetary policy, the interest rates received on government bonds usually

$12 BILLION

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

commercial banks may not be able to find good loan customers.

An expansionary monetary policy may be less effective than a restrictive monetary policy because

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

An increase in the legal reserve ratio

$9 billion.

Assets Liabilities and Net Worth Reserves $51 Checkable Deposits $140 Loans 109 Stock Shares 130 Securities 100 Property 10 Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The commercial banking system has excess reserves of

7 and 8

Government Spending Consumer Expectations Degree of Excess Capacity Personal Income Tax Rates Productivity National Income Abroad Business Taxes Domestic Resource Availability Prices of Imported Products Profit Expectations on Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. Changes in which combination of factors best explain why the aggregate supply curve would shift?

they held mortgage-backed securities they had purchased from investment firms. Incorrect homebuyers defaulted on mortgages held by the banks. of defaulted loans to investors in mortgage-backed securities. of all of these reasons. Correct

Banks lost money during the mortgage default crisis because

buy government securities in the open market.

Before the financial crisis, if the Fed wanted to lower the federal funds rate, it would

not part of the nation's money supply.

Coins held in commercial bank vaults are

SMALLER

Contractionary fiscal policy would tend to make a budget deficit become

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

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

it will be easier to obtain loans at commercial banks.

If the Federal Reserve System buys government securities from commercial banks and the public,

contractionary fiscal policy.

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)

raise the required reserve ratio.

If the monetary authorities want to reduce the monetary multiplier, they should

1

If the reserve ratio is 100 percent, the value of the monetary multiplier is

store of value.

If you place a part of your summer earnings in a savings account, you are using money primarily as a

a medium of exchange.

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as

the velocity of money diminishes.

In a full-employment economy, a rise in M will cause inflation unless

long run.

In terms of aggregate supply, a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the

short run.

In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the

Federal Reserve System.

In the U.S. economy, the money supply is controlled by the

an increase in input prices

In the accompanying graph, which of the following factors will shift AS1 to AS3?

increase tax revenue.

In the curve, a decline in the tax rate from c to b would

3

In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line

upsloping and the long-run aggregate supply curve is vertical.

In the extended analysis of aggregate supply, the short-run aggregate supply curve is

bundling groups of loans, bonds, mortgages, and other financial debts into new securities.

In the financial industry, "securitization" refers to

5.00

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. The monetary multiplier is

Crowding Out

Modern Monetary Theory argues that which of the following is NOT a problem caused by expansionary fiscal policy?

velocity is relatively stable.

Monetarists believe that

fractional reserves.

Most modern banking systems are based on

hold that, left alone, the economy gravitates to its full-employment level of output.

New classical economists

moves the economy up along its vertical long-run aggregate supply curve.

New classical economists say that a fully anticipated increase in aggregate demand

commercial bank reserves but not the size of the monetary multiplier.

Open-market operations change

decrease the purchasing power of each dollar.

Other things equal, an excessive increase in the money supply will

is financed by borrowing.

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending

a decline in excess reserves in the banking system

Other things equal, which of the following would increase the federal funds rate?

setting a lower target for the federal funds rate.

Prior to the financial crisis of 2007-2009, the Fed would typically initiate an expansionary monetary policy by

both product and resource markets are very competitive.

Rational expectations theory is based on the assumption that

5 AND 10

Real-Balances Effect Household Expectations Interest-Rate Effect Personal Income Tax Rates Profit Expectations National Incomes Abroad Government Spending Foreign Purchases Effect Exchange Rates Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. Investment spending would most likely be influenced by changes in

reducing national income and therefore tax revenues.

Recessions have contributed to the public debt by

move the economy from b to d.

Refer to the diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the long run, an increase in the price level from P2 to P3 will

to give the Fed control over the lending ability of commercial banks.

The actual reason that banks must hold required reserves is:

3 and 6

Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults The M1 definition of money includes item(s)

4

Refer to the graph. Private investments are initially at point 5 on curve B. The crowding-out effect would be illustrated by a movement from point 5 to point

virtually never happens, as most banks have sufficient excess reserves.

Since the financial crisis of 2007-2009, borrowing at the federal funds rate

mortgage-backed securities

Since the financial crisis that began in 2007, the Federal Reserve has added a significant amount of which of the following securities?

moral hazard.

Some economists are concerned that the financial rescue provided by the TARP will encourage financial investors and firms to take on greater risks in the future. This is an example of

an increase in inflation accompanied by decreases in real output and employment.

Stagflation refers to

$38,000

Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank's actual reserves?

5,000

Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return. What level of excess reserves does the bank now have?

$20 billion

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

canada

Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?

$24,000

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves?

of commercial banks are unchanged, but their reserves increase.

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits

and reserves of commercial banks both decrease.

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

Board of Governors and the 12 Federal Reserve Banks

The Federal Reserve System consists of which of the following?

altering the reserves of commercial banks, largely through sales and purchases of government bonds.

The Federal Reserve System regulates the money supply primarily by

supply-side economics.

The Laffer Curve is a central concept in

Refer to the diagram. The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1. In the long run, demand-pull inflation is best shown as

a shift of aggregate demand from AD1 to AD2, followed by a shift of aggregate supply from AS1 to AS2.

3; 2; 1

n the diagram, the economy's immediate-short-run AS curve is line ______, its short-run AS curve is _____, and its long-run AS curve is line ______.