Macro Midterm #2 (set 2)

190. (Table: Balance Sheet) Refer to the information in the balance sheet. If the reserve ratio is 25%, loans are: A) $5,000. B) $15,000. C) $60,000. D) $80,000.

C) $60,000.

212. (Scenario: Monetary Base and Money Supply) By how much can checkable bank deposits increase? A) $100 billion B) $250 billion C) $500 billion D) $1,650 billion

C) $500 billion

185. Which of the following is true concerning the monetary aggregates? A) M2 includes the gold stock but not M1. B) M2 includes M1. C) The gold stock backs M2 but not M1. D) M1 includes M2 but not the gold stock.

B) M2 includes M1.

219. (Table: ABC Bank's Balance Sheet) Refer to the balance sheet. If the minimum reserve ratio for ABC Bank is 10%, then the bank is required to maintain minimum reserves of: A) $10 million. B) $15 million. C) $9.5 million. D) $7.5 million.

A) $10 million.

210. (Scenario: Monetary Base and Money Supply) How much are required reserves? A) $50 billion B) $100 billion C) $150 billion D) $250 billion

A) $50 billion

205. The money multiplier is equal to: A) 1 divided by the reserve ratio. B) 1 divided by excess reserves. C) 1 minus the reserve ratio. D) the reserve ratio plus excess reserves divided by the reserve ratio.

A) 1 divided by the reserve ratio.

171. When the government decreases government spending, the: A) AD curve will shift to the left. B) SRAS curve will shift to the left. C) government's budget balance will move toward a deficit. D) government debt will increase.

A) AD curve will shift to the left.

181. When people use money to purchase downloaded music, they are using money as: A) a medium of exchange. B) a store of value. C) a unit of account. D) a store of account.

A) a medium of exchange.

187. Which of the following financial assets belongs to M2 but not to M1? A) a savings account B) a checkable deposit C) currency D) travelers' checks

A) a savings account

161. Government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as: A) automatic stabilizers. B) discretionary fiscal policy. C) balanced budget policy. D) deficit reduction policy.

A) automatic stabilizers.

188. Included in the M1 definition of money are: A) checkable bank deposits. B) savings deposits. C) U.S. Treasury bills. D) demand deposits, savings deposits, and U.S. Treasury bills.

A) checkable bank deposits.

227. Suppose an economy uses a checkable deposits only monetary system and it has a required reserve ratio of 20%. If the central bank in this economy conducts an open market purchase of $5 million Treasury bills, this will potentially: A) increase the money supply by $25 million. B) decrease the money supply by $25 million. C) increase the money supply by $10 million. D) decrease the money supply by $10 million.

A) increase the money supply by $25 million.

172. Holding everything else constant, the government's budget balance during an expansion will: A) increase. B) remain the same. C) decrease. D) be equal to 100.

A) increase.

216. To ______ the money supply, the Federal Reserve could _______. A) increase; lower the reserve requirements B) decrease; lower the discount rate C) increase; raise the federal funds rate D) decrease; conduct open-market purchases

A) increase; lower the reserve requirements

141. (Figure: Inflationary and Recessionary Gaps) At E2, the economy: A) is in equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) is booming.

A) is in equilibrium.

200. Banks create money when they: A) make loans. B) take deposits. C) hold excess reserves. D) pay withdrawals to depositors.

A) make loans.

199. The existence of banks: A) results in the money supply being larger than the amount of currency in circulation. B) inhibits the creation of money. C) makes the money supply equal to the amount of currency in circulation. D) results in the money supply being less than the amount of currency in circulation.

A) results in the money supply being larger than the amount of currency in circulation.

197. A major problem with bank runs is that they: A) spread to other banks. B) cause inflation, because the money moves so fast in the economy. C) cause interest rates to fall. D) cause both inflation and interest rates to fall.

A) spread to other banks.

206. Scenario: Holding Cash Suppose that the public holds 50% of the money supply in currency and the reserve requirement is 20 percent. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit. 206. (Scenario: Holding Cash) As a result of the deposit, required reserves will increase by: A) $0 B) $1,200 C) $3,000 D) $6,000

B) $1,200

211. (Scenario: Monetary Base and Money Supply) How much are excess reserves? A) $50 billion B) $100 billion C) $150 billion D) $250 billion

B) $100 billion

208. (Scenario: Monetary Base and Money Supply) How much is M1? A) $325 billion B) $330 billion C) $380 billion D) $480 billion

B) $330 billion

183. (Table: Monetary Aggregates) Refer to the information in the table. The value of M1 is: A) $880 billion. B) $895 billion. C) $2,005 billion. D) $920 billion.

B) $895 billion.

160. Congress increases personal income tax rates in order to balance the budget. Which of the following is likely to result? A) Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand. B) Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand. C) Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand. D) Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.

B) Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand.

153. Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following would most likely result? A) Equilibrium real GDP will be more than anticipated. B) The economy could move into a recession. C) The economy will generate a larger inflationary gap than anticipated. D) This will not have any adverse effects on the economy, since inflation has been abated.

B) The economy could move into a recession.

144. (Figure: Inflationary and Recessionary Gaps) Which of the following measures an inflationary gap? A) Y3-Y1. B) Y3-Y2. C) Y2-Y1. D) Y3-Y0.

B) Y3-Y2.

182. Commoditymoneyis: A) whatever the government has decreed is money. B) a good used as a medium of exchange that has other uses. C) money used for commodity futures trading. D) whatever people accept as money.

B) a good used as a medium of exchange that has other uses.

221. Money is: A) any form of wealth. B) an asset that can be easily used to purchase goods and services. C) only currency which is designated by law. D) only currency in circulation.

B) an asset that can be easily used to purchase goods and services.

136. If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is: A) a decrease in government transfers. B) an increase in government spending. C) a decrease in government spending. D) an increase in the money supply to decrease interest rates.

B) an increase in government spending.

195. A bank run can break a bank because: A) borrowers default on their loans, and the bank's assets become worthless. B) banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss. C) depositors' panic spreads to borrowers, who want to take additional loans from the bank. D) the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury bonds.

B) banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.

218. A firm uses financial leverage when it: A) replaces labor with capital. B) borrows money from a bank to enlarge a factory. C) raises the price of a product when demand is inelastic. D) gets a volume discount from a supplier.

B) borrows money from a bank to enlarge a factory.

146. A government might want to increase aggregate demand to: A) close an inflationary gap. B) close a recessionary gap. C) lower prices in the economy. D) lower employment in the economy.

B) close a recessionary gap.

174. Funding for Social Security and Medicare: A) must come from government borrowing. B) comes from dedicated taxes. C) is likely to increase with the retirement of baby boomers. D) can be accomplished with lower taxes in the future.

B) comes from dedicated taxes.

177. Which of the following combination of assets is considered to be money? A) currency in circulation, checkable bank deposits, and credit cards B) currency in circulation, checkable bank deposits, and travelers' checks C) currency in circulation and in bank vaults, checkable bank deposits, and travelers' checks D) currency in circulation and in bank vaults, checkable bank deposits, and credit cards

B) currency in circulation, checkable bank deposits, and travelers' checks

226. If the Federal Reserve wanted to increase the money supply, it could: A) decrease the required reserve ratio, increase the federal funds rate, and sell bonds on the open market. B) decrease the required reserve ratio, decrease the discount rate, and buy bonds on the open market. C) increase the required reserve ratio, increase the personal tax rate, and sell bonds on the open market. D) increase the personal tax rate, decrease the required reserve ratio, and buy bonds on the open market.

B) decrease the required reserve ratio, decrease the discount rate, and buy bonds on the open market.

225. When a bank borrows from the Federal Reserve, it pays the: A) required reserve ratio. B) discount rate. C) federal funds rate. D) prime rate.

B) discount rate.

142. (Figure: Inflationary and Recessionary Gaps) At E3, the economy: A) is in equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) is stagnating.

B) has an inflationary gap.

169. When the budget is in deficit, the government generally: A) raises taxes. B) increases the public debt. C) sells public assets like national parks. D) decreases military spending.

B) increases the public debt.

191. Among the assets of a bank are: A) deposits. B) loans. C) borrowings. D) deposits and loans.

B) loans.

215. All of the following are responsibilities of the Federal Reserve EXCEPT to: A) control the monetary base. B) mint bills and coins. C) oversee and regulate the banking system. D) set the discount rate.

B) mint bills and coins.

228. Generally, the more liquid an asset is: A) the lower its purchasing power. B) the lower its rate of return. C) the higher its capacity to store value over time. D) the higher its rate of return.

B) the lower its rate of return.

224. When a bank lends excess reserves to a customer: A) this does not affect the money supply. B) the money supply is increased. C) the money supply is decreased. D) it has the same effect as when one customer writes a check to another customer at a different bank.

B) the money supply is increased.

176. If the tax rate is 0.1 and the MPC is 0.5: A) the multiplier is equal to 2. B) the multiplier is equal to 1.8. C) the multiplier is equal to 2.1. D) the multiplier is equal to 1.

B) the multiplier is equal to 1.8.

222. Suppose a bank faces a 10% required reserve ratio and it has $100 in required reserves. If it is fully loaned out, what is the amount of deposits into this bank? A) $900 B) $10 C) $1,000 D) $10,000

C) $1,000

209. (Scenario: Monetary Base and Money Supply) How much is the monetary base? A) $325 billion B) $330 billion C) $225 billion D) $175 billion

C) $225 billion

184. (Table: Monetary Aggregates) Refer to the information in the table. M2 is: A) $2,805 billion. B) $3,340 billion. C) $3,355 billion. D) $2,005 billion.

C) $3,355 billion.

159. If the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, the income expenditure model would predict that real GDP will increase by: A) $100 billion. B) $750 billion. C) $400 billion. D) $300 billion.

C) $400 billion.

220. (Table: ABC Bank's Balance Sheet) According to the information in ABC Bank's balance sheet, the bank is holding excess reserves of: A) $17 million. B) $15 million. C) $5 million. D) $25 million.

C) $5 million.

203. Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%. Then Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly. That bank can lend an additional: A) $100. B) $800. C) $900. D) $300.

C) $900

204. Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account at the local bank. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as _____. A) $90; $1,000 B) $100; $900 C) $90; $900 D) $100; $1,000

C) $90; $900

198. If a bank has assets equal to $100 million dollars, according to practice, its liabilities should NOT exceed: A) $7 million. B) $70million. C) $93 million. D) $107 million.

C) $93 million.

157. If the marginal propensity to save is 0.1, then the government spending multiplier has a value of A) one-tenth. B) 9. C) 10. D) one-ninth.

C) 10.

Scenario: Fiscal Policy Consider the economy of Arcadia. The households of Arcadia spend 75% of their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs. 162. (Scenario: Fiscal Policy) Refer to the information provided in the scenario. The government spending multiplier in Arcadia is equal to: A) 5. B) three-fourths. C) 4. D) 3.

C) 4.

147. (Figure: Fiscal Policy I) Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, then: A) AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. B) AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. C) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. D) AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.

C) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP.

194. Which of the following is NOT true about bank runs? A) They may start as a result of a rumor that a bank is in financial trouble. B) Many banks' depositors try to withdraw their funds due to fears of a bank failure. C) Bank runs typically only happen to small banks with few financial assets. D) Bank runs often lead to a loss of faith in other banks, causing additional bank runs.

C) Bank runs typically only happen to small banks with few financial assets.

201. Which of the following would be the initial effect if an individual made a $10,000 cash deposit in a bank? A) The money supply would rise by $10,000. B) The money supply would fall by $10,000. C) The money supply would not be affected by the deposit. D) The money supply would fall but by less than the $10,000 deposit.

C) The money supply would not be affected by the deposit.

145. (Figure: Inflationary and Recessionary Gaps) Which of the following measures a recessionary gap? A) Y3-Y1. B) Y3-Y2. C) Y2-Y1. D) Y3-Y0.

C) Y2-Y1

150. An inflationary gap can be closed with: A) expansionary monetary policy. B) a decrease in taxes. C) a decrease in government purchases. D) expansionary fiscal policy.

C) a decrease in government purchases.

152. (Figure: AD-AS) Suppose the economy is producing the output level Yp and a negative demand shock shifts the AD1 curve to AD3. The economy now has: A) an inflationary gap, which can be closed by expansionary fiscal policy. B) a recessionary gap, which can be closed by contractionary fiscal policy. C) a recessionary gap, which can be closed by expansionary fiscal policy. D) an inflationary gap, which can be closed by contractionary fiscal policy.

C) a recessionary gap, which can be closed by expansionary fiscal policy.

179. "Tuition at State University this year is $8,000." Which function of money does this statement best illustrate? A) as a store of value B) as a medium of exchange C) as a unit of account D) as a means of deferred payment

C) as a unit of account

140. (Figure: Inflationary and Recessionary Gaps) At E1, the economy: A) is in equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) is booming.

C) has a recessionary gap.

143. (Figure: Inflationary and Recessionary Gaps) A movement from AD3 to AD1 could be caused by: A) increased government purchases. B) increased government transfers. C) higher tax rates. D) increased government purchases, increased government transfers, or higher tax rates.

C) higher tax rates.

163. (Scenario: Fiscal Policy) Refer to the information provided in the scenario. If actual output is 500 billion arcs, what should the government do to restore the economy to potential output? A) increase taxes by 25 billion arcs B) decrease taxes by 25 billion arcs C) increase government spending by 25 billion arcs D) decrease government spending by 25 billion arcs

C) increase government spending by 25 billion arcs

151. Contractionary fiscal policy causes the aggregate demand curve to shift to the _______ and is used to close a(n) _______ gap. A) right; inflationary B) right; recessionary C) left; inflationary D) left; recessionary

C) left; inflationary

166. The stability pact, signed by many of the European countries that adopted the euro, limited each member nation's deficit to 3% of GDP. This: A) enhanced the ability of each of the member countries to conduct fiscal policy. B) enhanced the ability of each of the member countries to conduct monetary policy. C) limited each member country's ability to use fiscal policy. D) did away with budget deficits all together.

C) limited each member country's ability to use fiscal policy.

139. To close a recessionary gap by employing fiscal policy, the government could: A) increase national savings so that the interest rate falls. B) lower the annual income exempt from paying the personal income tax. C) lower the corporate income tax rate. D) lower the amount of unemployment insurance benefits.

C) lower the corporate income tax rate.

217. If the Federal Reserve wants to increase the money supply, it will: A) sell U.S. Treasury bills. B) cut taxes across the board. C) lower the reserve requirement. D) increase the discount rate.

C) lower the reserve requirement.

173. The government deficit: A) is the essentially the same as the government debt. B) is much higher than the government debt. C) measures the difference between the amount government spends and the amount it collects in tax revenues in a given period. D) is the total amount of money a government owes at a particular point in time.

C) measures the difference between the amount government spends and the amount it collects in tax revenues in a given period.

214. To change the money supply, the Federal Reserve most frequently uses A) changes in the required reserve ratios. B) changes in the discount rate. C) open-market operations. D) changes in the inflation rate.

C) open-market operations.

213. Decisions about monetary policy are made by: A) the president and Congress. B) the President's Council of Economic Advisors. C) the Federal Open Market Committee. D) representatives of banks that are members of the Federal Reserve System.

C) the Federal Open Market Committee.

189. Bank reserves are: A) the fraction of deposits kept in gold with the Federal Reserve. B) the deposits lent to finance illiquid investments. C) the fraction of deposits kept in the form of very liquid assets. D) gold kept in the bank's vault.

C) the fraction of deposits kept in the form of very liquid assets.

154. Decreasing funding to explore space: A) will shift the aggregate supply curve to the left. B) will shift the aggregate supply curve to the right. C) will shift the aggregate demand curve to the left. D) will shift the aggregate demand curve to the right.

C) will shift the aggregate demand curve to the left.

155. If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by: A) $40 million. B) $50 million. C) $200 million. D) $250 million.

D) $250 million.

207. (Scenario: Holding Cash) As a result of the deposit, the bank's loans will increase by: A) $6,000 B) $1,200 C) $3,000 D) $4,800

D) $4,800

202. Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by: A) $500. B) $2,500. C) $100. D) $400.

D) $400.

168. Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is: A) $10.5 trillion. B) $6.5 trillion. C) $9 trillion. D) $7.5 trillion.

D) $7.5 trillion.

158. (Figure: Short-Run Equilibrium) The accompanying graph shows the economy in short- run equilibrium. To move the economy to potential GDP, the government should reduce government spending by an amount equal to: A) (Y1-YP) B) (Y1 -YP)/(1-MPC) C) (Y1 - YP)MPC D) (Y1 - YP)(1 - MPC)

D) (Y1 - YP)(1 - MPC)

192. If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is: A) 5%. B) 10%. C) 12.5%. D) 25%.

D) 25%.

148. (Figure: Fiscal Policy II) Suppose that this economy is in equilibrium at E1. If there is a decrease in government transfers, then: A) AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. B) AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. C) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. D) AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP .

D) AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP .

164. Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If current real GDP is $850, which of the following policies would bring the economy to potential output? A) Decrease government spending by $50 billion. B) Increase government spending by $50 billion. C) Decrease government transfers by $50 billion. D) Decrease government spending by $10 billion.

D) Decrease government spending by $10 billion.

156. If the government spends an extra $5 billion on goods and services: A) GDP will go up by $5 billion. B) GDP will remain unchanged. C) GDP will increase by less than $5 billion. D) GDP will increase by more than $5 billion.

D) GDP will increase by more than $5 billion.

165. Economists believe that the budget should be balanced each fiscal year. Is this correct? A) Yes, a budget should be balanced annually, otherwise persistent budget deficits can cause havoc in the economy. B) Yes, as the law states that both the federal and state government budgets should always be balanced. C) Yes, since the balanced budget multiplier is larger, hence it makes the economy grow faster. D) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

D) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

170. If the economy exhibited an inflationary gap, the government should follow: A) an expansionary policy, which would shift the AD curve to the right. B) a contractionary policy, which would shift the AD curve to the right. C) an expansionary policy, which would shift the AD curve to the left. D) a contractionary policy, which would shift the AD curve to the left.

D) a contractionary policy, which would shift the AD curve to the left.

186. Which of the following is near-money? A) a traveler's check B) a credit card C) a debit card D) a savings account

D) a savings account

175. The 2009 American Recovery and Reinvestment Act was an example of: A) an automatic stabilizer. B) a contractionary government policy. C) a contractionary monetary policy. D) an expansionary fiscal policy.

D) an expansionary fiscal policy.

137. Which of the following is an expansionary fiscal policy? A) an increase in the money supply that decreases interest rates B) an increase in taxes that reduces the budget deficit and decreases consumption C) a decrease in government spending on the space program D) an increase in unemployment benefits

D) an increase in unemployment benefits

193. The reserve ratio is defined as the ratio of: A) bank assets to bank liabilities. B) bank assets to bank reserves. C) customers' bank deposits to bank assets. D) bank reserves to customers' bank deposits.

D) bank reserves to customers' bank deposits.

167. What can the federal government do to finance a deficit? A) cut taxes B) increase spending C) reduce interest rates D) borrow funds

D) borrow funds

178. Which of the following is considered to be money? A) Google stock B) bonds C) credit cards D) checking account deposits

D) checking account deposits

138. A reduction in government transfers ________, therefore shifting the aggregate demand curve to the ________. A) increases labor costs to companies, increasing investment; left B) decreases government purchases of goods and services, decreasing consumption; right C) increases the marginal propensity to save, decreasing consumption; right D) decreases disposable income and consumption; left

D) decreases disposable income and consumption; left

223. The existence of deposit insurance: A) can increase the possibility of bank runs. B) often makes banks more accountable for their actions and less likely to engage in risky behavior. C) essentially serves the same function as a fractional reserve system. D) leads depositors to be less inclined to monitor bank operations.

D) leads depositors to be less inclined to monitor bank operations.

149. An expansionary fiscal policy: A) usually decreases a government budget deficit or increases a government budget surplus. B) may include decreases in government spending. C) may include increases in taxes. D) may include decreases in taxes.

D) may include decreases in taxes.

180. When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n): A) medium of exchange. B) expander of economic activity. C) factor of production. D) store of value.

D) store of value.

196. Bank runs in the United States during the 1930s had a large negative impact on the economy because: A) capital requirements prevented bank managers from taking additional lending risks. B) the reserve ratio was set too high. C) the Federal Reserve system did not exist at the time. D) the loss of confidence at one bank quickly extended to other banks.

D) the loss of confidence at one bank quickly extended to other banks.