Macroeconomics Final

Investment spending: a. fluctuates more than consumption. b. fluctuates less than consumption. c. fluctuates by the same amount as consumption. d. is less volatile than consumption.

a. fluctuates more than consumption.

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 e. none of the above.

a. increase; lower the reserve requirements

Refer to Figure above. It would be appropriate to use expansionary fiscal policy to shift aggregate demand in _____ from _____. a. panel (b); AD1 to AD2 b. panel (a); AD2 to AD1 c. panel (a); AD1 to AD2 d. panel (b); AD2 to AD1

c. panel (a); AD1 to AD2

An increase in the demand for loanable funds increases the equilibrium interest rate and decreases the equilibrium level of saving. True False

False (Increases the equilibrium level of saving)

Currency in the United States today is commodity-backed money. True False

False (currency in US in fiat money)

Subprime lending is lending at interest rates that are less than the prime rate. True False

False (higher than the prime rate)

Expansionary monetary policy works by decreasing consumption, allowing other sectors of the economy to spend more. True False

False (increases consumption)

If the Fed buys bonds in the open market, the money supply decreases. True False

False (increases money supply)

The Federal funds rate is the interest rate between the Fed and banks. True False

False (interest rate set by FOMC, rate at which commercial banks borrow and lend to each other)

The money multiplier equals 1/(1-R), where R represents the reserve ratio. True False

False (multiplier = 1/(1-MPC))

There is a positive relationship between the quantity of investment spending and the interest rate. True False

False (negative relationship)

A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds. True False

True

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right. True False

True

Banks cannot influence the money supply if they are required to hold all deposits in reserve. True False

True

Commodity-backed money is a medium of exchange with no intrinsic value, whose ultimate value is guaranteed by a promise that it can be converted into valuable goods. True False

True

Expectations of an improving economy will generally cause an increase in investment by shifting the loanable funds demand curve to the right. True False

True

If banks temporarily don't have sufficient funds to pay their depositors, they can borrow the needed funds at the Federal Reserve discount window. True False

True

If the Fed decreases reserve requirements, the money supply will increase. True False

True

M2 is both larger and less liquid than M1. True False

True

The crowding-out effect is the negative effect of government budget deficits on private investment spending. True False

True

The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate, the Fed provides banks with a greater incentive to borrow from it. True False

True

The fraction of customers deposits that a bank holds as reserves is known as the reserve ratio. True False

True

When the value of money is on the vertical axis, the money supply curve is vertical and shifts right if the Federal Reserve buys bonds. True False

True

If the multiplier equals 4, then the marginal propensity to save must be equal to: a. 0.25. b. 0.5. c. 0.75. d. the marginal propensity to consume.

a. 0.25

If the multiplier equals 4, the the marginal propensity to save must be equal to (fraction): a. 1/4. b. 1/2. c. 3/4. d. the marginal propensity to consume. e. none of the above.

a. 1/4

According to the Figure Fiscal Policy 1, supposed that this economy is in equilibrium at E2. If there is an increase in government transfers, then: a. AD2 will shift to the right, causing an increase in the price level and an increase 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. e. none of the above.

a. AD2 will shift to the right, causing an increase in the price level and an increase in real GDP.

Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E2 and the central bank chooses to buy bonds: a. AD2 will shift to the right, creating an inflationary gap. b. AD1 may shift to AD2, closing an existing recessionary gap. c. AD2 may shift to AD1, creating a recessionary gap. d. AD1 will shift to the left, increasing an existing recessionary gap. e. none of the above.

a. AD2 will shift to the right, creating an inflationary gap.

The reserve requirement is 20 percent, and Dave deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. According to this scenario, which is an accurate description of the bank's balance sheet immediately after the deposit? a. Reserves increase by $1000, and demand deposits increase by $1000. b. Reserves increase by $1000, and demand deposits decrease by $1000. c. Reserves decrease by $1000, and demand deposits decrease by $1000. d. Reserves decrease by $200, and demand deposits increase by $1000. e. No change will occur.

a. Reserves increase by $1000, and demand deposits increase by $1000.

To lower the short-term interest rate, the Federal Reserve can: a. buy Treasury bills. b. sell Treasury bills. c. tell the banks to make more loans. d. tell the banks to make fewer loans.

a. buy Treasury bills.

The marginal propensity to consume (MPC) equals the change in ____ divided by the change in ____. a. consumer spending; disposable income b. consumer spending; investment spending c. consumer spending; gross domestic product d. disposable income; consumer spending $15,000.

a. consumer spending; disposable income

Refer to Figure above. If the aggregate demand curve is AD", the most appropriate discretionary fiscal policy is to _____ government transfer payments and _____ income tax rates. a. decrease; increase b. decrease; decrease c. increase; increase d. increase; decrease

a. decrease; increase

Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a _____ in the interest rate as the money _____ shifts _____. a. fall; supply curve; outward b. fall; supply curve; inward c. fall; demand curve; inward d. rise; demand curve; outward

a. fall; supply curve; outward

U.S. Treasury bills are a(n): a. liability of the U.S. government but an asset to the Federal Reserve. b. asset of the U.S. government but a liability to the Federal Reserve. c. part of the net worth of the U.S. government. d. liability to both the U.S. government and the Federal Reserve.

a. liability of the U.S. government but an asset to the Federal Reserve.

Refer to Figure above: Money Market I. If the money market is initially in equilibrium at point E and the central bank sells Treasury bills, then the interest rate will: a. move toward rH. b. move toward rL c. remain at rE. d. shift rightward.

a. move toward rH.

Refer to Figure above. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____. a. panel (b); AD1 to AD2 b. panel (a); AD2 to AD1 c. panel (a); AD1 to AD2 d. panel (b); AD2 to AD1

a. panel (b); AD1 to AD2

An increase in interest rates on business loans will change ____ investment spending. a. planned b. unplanned c. both planned and unplanned d. neither planned nor unplanned

a. planned

Which financial asset belongs to M2 but not to M1? a. savings account b. checkable deposit c. currency d. travelers' checks e. none of the above

a. savings account

If the Federal Open Market Committee engages in an open market purchase, it will shift the money ____ curve to the ____. a. supply; right b. supply; left c. demand; left d. demand; right

a. supply; right

The main difference between the classical model of the price level and Keynesian economics is that a. the classical model assumes a vertical short-run aggregate supply curve. b. Keynesian economics assumes a vertical short-run aggregate supply curve. c. the classical model assumes an upward sloping long-run aggregate supply curve. d. Keynesian economics assumes a vertical long-run aggregate supply curve. e. the classical model assumes aggregate demand cannot change in the long run.

a. the classical model assumes a vertical short-run aggregate supply curve.

Given the consumption function c = $16,000 + 0.5yd, if individual household current disposable income is $20,000, individual household consumer spending will equal a. $36,000 b. $26,000 c. $20,000 d. $16,000 e. $6,000

b. $26,000

Use Figure above: Consumption and Disposable Personal Income. The slope of the consumption function is: a. 0.25. b. 0.50. c. 0.60. d. 0.67.

b. 0.50.

In the classical model of the price level a. Only the short-run aggregate supply curve is vertical b. Both the short-run and long-run aggregate supply curves are vertical c. Only the long-run aggregate supply curve is vertical d. Both the short-run aggregate demand and supply curves are vertical e. Both the long-run aggregate demand and supply curves are vertical

b. Both the short-run and long-run aggregate supply curves are vertical

The interest rate risk premium is the: a. Additional compensation paid to investors to offset rising prices. b. Compensation investors demand for accepting interest rate risk. c. Difference between the yield to maturity and the current yield. d. Difference between the market interest rate and the coupon rate. e. Difference between the coupon rate and the current yield.

b. Compensation investors demand for accepting interest rate risk.

Which of the following is a fiscal policy that is appropriate to combat inflation? a. Decreasing taxes b. Decreasing government spending c. Increasing government transfers d. Increasing interest rates e. Expansionary fiscal policy

b. Decreasing government spending

Expansionary monetary policy does NOT increase: a. aggregate demand. b. GDP and the price level. c. consumption spending. d. interest rates.

b. GDP and the price level.

If the government spending exceeds tax revenues, which of the following is necessarily true? There is a I. Positive budget balance II. Budget deficit III. Recession a. I only b. II only c. III only d. I and II only e. I, II, and III

b. II only (Budget deficit)

If the Fed purchases U.S. Treasury bills from a commercial bank, what happens to bank reserves and the money supply? bank reserves money supply a. Increase Decrease b. Increase Increase c. Decrease Decrease d. Decrease Increase e. Decrease No change

b. Increase Increase

The classical model of the price level is the most applicable in a. The United States b. Periods of high inflation c. Periods of low inflation d. Recessions e. Depressions

b. Periods of high inflation

In the classical model of the price level, a. only the short-run aggregate supply curve is vertical. b. both the short-run and long-run aggregate supply curves are vertical. c. only long-run aggregate supply curve is vertical. d. both the short-run aggregate demand and supply curves are vertical. e. both the long-run aggregate demand and supply curves are vertical.

b. both the short-run and long-run aggregate supply curves are vertical.

Suppose the economy is in an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: a. lower tax rates. b. decrease government purchases. c. increase the investment tax credit. d. lower the real interest rate. e. none of the above.

b. decrease government purchases.

The effect of a government deficit on the economy is: a. contractionary. b. expansionary. c. neutral. d. biased. e. none of the above.

b. expansionary

According the Figure: Crowding out, the demand for loanable funds curve DLF1 will shift to DLF2 when there is a(n): a. decrease in the government budget deficit. b. increase in the government budget deficit. c. increase in private savings. d. decrease in private savings. e. none of the above.

b. increase in the government budget deficit.

If interest rates are at the zero lower bound: a. the effectiveness of monetary policy increases. b. monetary policy is ineffective. c. automatic stabilizers don't work. d. monetary policy is more effective than fiscal policy.

b. monetary policy is ineffective.

A cut in taxes will have the most effect on aggregate demand if it is given to: a. people with a low marginal propensity to consume. b. people with a high marginal propensity to consume. c. everyone in the economy. d. those who hold a large amount of wealth.

b. people with a high marginal propensity to consume.

The classical model of the price level is most applicable in a. the United States. b. periods of high inflation. c. periods of low inflation. d. recessions. e. depressions.

b. periods of high inflation.

Which is NOT a role of the Federal Reserve System? a. controlling bank reserves b. printing currency (Federal Reserve notes) c. carrying out monetary policy d. supervising and regulating banks e. holding reserves for commercial banks

b. printing currency (Federal Reserve notes)

An increase in the marginal propensity to consume (MPC) a. lowers the value of the multiplier. b. raises the value of the multiplier. c. has no impact on the value of the multiplier. d. rarely occurs because the MPC is set by congressional legislation. e. none of the above.

b. raises the value of the multiplier

A sale of Treasury bills by the Federal Reserve ____ interests rates and ____ the money supply. a. raises; increases b. raises; reduces c. lowers; reduces d. lowers; increases

b. raises; reduces

If there is a shortage of loanable funds, then a. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium. b. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium. c. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium. d. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium. e. none of the above.

b. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.

Scenario: Money Creation The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit is the bank require to keep in reserves? a. $1,000 b. $100 c. $200 d. $800

c. $200

If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, the individual consumption spending is: a. $20,000. b. $25,000. c. $30,000. d. $45,000.

c. $30,000

If a bank has assets equal to $100 million dollars, according to practice with a 7 percent reserve requirement, its liabilities should NOT exceed: a. $7 million. b. $70 million. c. $93 million. d. $107. e. None of the above

c. $93 million.

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your marginal propensity to consume is: a. 0.2. b. 0.4. c. 0.6. d. 0.8.

c. 0.6

Refer to Figure above. Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP. a. AD2; left; increase; decrease b. AD2; left; decrease; decrease c. AD1; right; increase; increase d. AD1; right; decrease; increase

c. AD1; right; increase; increase

When banks make loans to each other, they charge the a. Prime rate b. Discount rate c. Federal funds rate d. CD rate e. Mortgage Rate

c. Federal funds rate

The pure time value of money is known as the: a. Liquidity effect. b. Fisher effect. c. Term structure of interest rates. d. Inflation factor. e. Interest rate factor.

c. Term structure of interest rates.

All scenarios are associated with government budget deficits EXCEPT: a. The government becomes a borrower in the market for loanable funds. b. The interest rate rises. c. The total amount of borrowing decreases. d. Private investment spending is crowded out. e. none of the above is true.

c. The total amount of borrowing decreases.

Because money is an asset that can be traded for goods and services, we say that it is: a. a store of value. b. a unit of account. c. a medium of exchange. d. the same thing as wealth. e. none of the above

c. a medium of exchange.

Which of the following changes would be the most likely to reduce the size of the money multiplier? a. a decrease in the required reserve ratio b. a decrease in excess reserves c. an increase in cash holding by consumers d. a decrease in bank runs e. an increase in deposit insurance

c. an increase in cash holding by consumers

Which of the following will increase the supply of loanable funds? a. an increase in perceived business opportunities b. decreased government borrowing c. an increased private saving rate d. an increase in the expected inflation rate e. a decrease in capital inflows

c. an increased private saving rate

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____. a. decrease government purchases; right b. increase government purchases; left c. decrease government purchases; left d. raise tax rates; right

c. decrease government purchases; left

A decrease in the supply of money will lead to a ___ in equilibrium real GDP and a ____ in equilibrium interest rate. a. increase; higher b. increase; lower c. decrease; higher d. decrease; lower

c. decrease; higher

Long-term interest rates and short-term interest rates: a. usually move in lockstep. b. always move closely together. c. don't always move closely together. d. are independent of one another.

c. don't always move closely together.

Refer to Figure above. The government should _____ aggregate demand by _____ taxes to close the _____ gap. a. expand; increasing; inflationary b. reduce; cutting; inflationary c. expand; cutting; recessionary d. reduce; increasing; recessionary

c. expand; cutting; recessionary

According to the Figure: Short-Run Equilibrium, if the economy is at equilibrium at Y1 and P1, the appropriate policy to return the economy to potential output would be a(n): a. increase in transfer payments. b. increase in government spending. c. increase in taxes. d. decrease in taxes. e. none of the above.

c. increase in taxes.

Refer to Figure above. Federal Reserve policy to increase the supply of money, hence to lower the interest rate from 6% to 4%, is accomplished by action that ________ Treasury bills. a. lowers the price of b. increases the interest rate on c. increases the demand for d. increases the supply of

c. increases the demand for

The money multiplier and the required reserve ratio are: a. independent of one another. b. directly related to one another. c. inversely related. d. both greater than 1.

c. inversely related.

The slope of a family's consumption function is equal to a. The real interest rate b. The inflation rate c. The marginal propensity to consume (MPC) d. The rate of increase in household current disposable income e. The tax rate

c. marginal propensity to consume (MPC)

The supply of loanable funds is ____ sloping because ____ respond to lower interest rates by ____ their quantity supplied of loanable funds. a. upward; savers; increasing b. upward; investors; decreasing c. upward; savers; decreasing d. downward; investors; increasing e. none of the above

c. upward; savers; decreasing

Scenario: First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds (the minimum reserve ratio is 20 percent). Refer to the information for First National Bank provided in the Scenario: First National Bank. Given the bank's minimum reserve ratio, how much can the bank issue in loans? a. $76 million b. $8 million c. $6 million d. $4 million e. none of the above.

d. $4 million

Refer to Table: Balance Sheet (A bank has $20,000 in reserves). If the reserve ratio is 25%, deposits are: a. $5,000. b. $15,000. c. $60,000. d. $80,000.

d. $80,000

Suppose that the consumption function is C = $500 + 0.8* YD, where YD is disposable income. The marginal propensity to save is: a. $500. b. 0. c. 0.8. d. 0.2.

d. 0.2

When the Fed makes a loan to a commercial bank, it charges a. No interest b. The prime rate c. The federal funds rate d. The discount rate e. The market interest rate

d. The discount rate

Which of the following will decrease the demand for money? a. an increase in the interest rate b. inflation c. an increase in real GDP d. an increase in the availability of ATMs e. the adoption of Regulation Q

d. an increase in the availability of ATMs

Refer to Figure above. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____. a. expansionary; right b. expansionary; left c. contractionary; right d. contractionary; left

d. contractionary; left

Refer to the Figure: The Money Supply and Aggregate Demand. Panel (b) illustrates what happens when the Federal Reserve decides to _____ the money supply and _____ interest rates. a. decrease; lower b. increase; raise c. increase; lower d. decrease; raise e. none of the above.

d. decrease; raise

The interest rate is 5% in the market for loanable funds. Investors wish to borrow $100 million and savers wish to save $125 million at this interest rate. We would expect the interest to: a. fall, as there is a shortage of loanable funds. b. rise, as there is a surplus of loanable funds. c. rise, as there is a shortage of loanable funds. d. fall, as there is a surplus of loanable funds. e. none of the above is true.

d. fall, as there is a surplus of loanable funds.

If the Fed decreases the reserve requirement from 10% to 5%, the money multiplier will ____ and the money supply will most likely ____. a. decrease; decrease b. decrease; increase c. increase; decrease d. increase; increase

d. increase; increase

In countries with rapidly growing economies, like China and India, the demand for loanable funds is ____ and interest rates are ____ than in countries with slowly growing economies. a. larger; lower b. smaller; higher c. smaller; lower d. larger; higher e. none of the above.

d. larger; higher

Which of the following is a government transfer program? a. Social Security b. Medicare/Medicaid c. Unemployment insurance d. Food stamps e. All of the above

e. All of the above

Which of the following is a reason to be concerned about persistent budget deficits? a. Crowding out b. Government default c. The opportunity cost of future interest payments d. Higher interest rates leading to decreased long-run growth e. All of the above

e. All of the above

Which of the following was an important point emphasized in Keynes's influential work? I. In the short run, shifts in aggregate demand affect aggregate output II. Animal spirits are an important determinant of business cycles III. In the long run we're all dead a. I only b. II only c. III only d. I and II only e. I, II, and III

e. I, II, and III