Macroeconomics Midterm Exam 3

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Refer to Scenario 14-1, below. Assume there are no traveler's checks. M1 in this simple economy equals Currency $1,000 Checking Account Balances $2,000 Savings Account Balances $5,000 Small-Denomination Time Deposits $6,000 Non-institutional Money Market Fund Shares $7,000

3,000

Round Initial Change in Government Spending Change in Consumption 1 $100 2 0 $80.00 2 0 $64.00 3 0 $51.20 4 0 $40.96 5 0 $32.77 6 0 $26.21 7 0 $20.97 8 0 $16.78 9 0 $0 According to the table above, what is the approximate government purchase multiplier?

4

Refer to Figure 16-1, above. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential,

All of the above

Which of the following is a function that money serves?

All of the above are correct

Which of the following transactions would be included in Japan's current account?

An American citizen purchases a new Toyota made in Japan.

Suppose the government spending multiplier is 2. The federal government raises spending by $40 billion. What is the change in GDP if the price level is held constant?

An increase equal to $80 billion

Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the SRAS is positive sloped?

An increase of greater than $80 billion

Refer to Figure 15-5, above. Suppose the Fed sells Treasury bills in pursuit of contractionary monetary policy when the economy is at point C. Using the static AD-AS model in the figure above, this situation would be depicted as a movement to

B

Refer to Figure 15-5, above. Suppose the economy is at point A and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement to

B

Refer to Figure 15-5, above. Suppose the economy is in short-run equilibrium above potential GDP, say point C, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the CORRECT Fed policy for this situation would be depicted as a movement to

B

Refer to Figure 15-5, above. Suppose at point B the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement to

C

Refer to Figure 16-1, above. A contractionary fiscal policy would be depicted as a movement from ________, using the static AD-AS model in the figure above.

C to b

Gold is an example of a

Commodity money

An HMO hires radiology services from India to cut costs. If all else remains equal, this will

Decrease net exports

Refer to Figure 15-5, above. Suppose the economy is in a recession, at point A and no policy is pursued. Using the static AD-AS model in the figure above, when the economy adjusts by itself then it would be depicted as a movement to

E

Expansionary monetary policy refers to the ________ to increase real GDP.

Federal Reserve's increasing the money supply and decreasing interest rates

Paper currency is a

Fiat money

Which of the following would be classified as fiscal policy?

George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 into law to stimulate economy.

Refer to Figure 16-2, above. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to

Increase government expenditures

Suppose the majority of the shares of Ford stock were sold to a Japanese firm. Assuming all else remains constant, this will

Increase the balance of the US financial account

Who is the current Chair of the Board of Governors of the Federal Reserve System?

Janet Yellen

Suppose the Fed increases the money supply, then at the original interest rate, the quantity of money demanded is______________ the quantity of money supplied.

Less than

The most liquid measure of money supply is

M1

The M2 measure of the money supply equals

M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.

Which of the following provides health-care coverage to people age 65 and over?

Medicare

Which of the following functions of money would be violated if inflation were high?

Medium of exchange

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity.

Dollar bills in the modern economy serve as money because

People have confidence that other will accept them as money

Refer to Figure 15-2, above. In the figure above, when the money supply shifts from MS1 to MS2, what does the Fed do to make this change?

Sell treasury bills

Smith buys a $10,000 car by making one immediate payment of $10,000, or one or more deferred payments that total (at least) $10,000. This illustrates which function of money?

Standard of deferred payment

Joe sold his farm-raised chickens and made $200 this morning, but he saved this amount to buy a new cell phone next month. This illustrates which function of money?

Store of value

Rising prices erode the value of money as a_____________.

Store of value

Which of the following best describes supply-side economics?

Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.

Refer to Figure 15-1, above. In the figure, the money demand curve would move from MD1 to MD2 if

The price level increased

The statement " My MacBook is worth $899" illustrates which function of money?

Unit of account

An increase in the interest rate causes

a movement up along the money demand curve

Money is

an asset that people are willing to accept in exchange for goods and services.

A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending.

an induced; an autonomous

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers

In an economy with ________, there are more prices than in an economy with ________.

barter; money

Look carefully at the following list: a. The coins in your pocket b. The funds in your checking account c. The funds in your savings account d. The traveler's check that you have left over from a trip e. Your Citibank Platinum MasterCard Which of the things above are NOT included in the M1 definition of the money supply?

c&e

The government purchases multiplier is defined as

change in equilibrium real GDP / change in government purchases

In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending.

complete

Which of the following is not counted in M1?

credit card balances

The balance of payments includes which three accounts?

current account, financial account, capital account

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease

If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account, then M1 will ________ and M2 will ________.

decrease; not change

An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

decrease; rise; falls

An increase in interest rates

decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.

A decrease in real GDP

decreases the buying and selling of goods and decreases the demand for money as a medium of exchange.

The United States has a trade ______ with all its major trading partners and a trade ___________ with every region of the world except for Latin America.

deficit; deficit

By making exchange ________, money allows for ________ and higher ________.

easier; specialization; productivity

A person's wealth

equals the value the person's assets minus his or her liabilities.

The tax multiplier equals the change in ________ divided by the change in ________.

equilibrium real GDP; taxes

A barter economy is an economy where

goods and services are exchanged for other goods and services.

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand

If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in ________

government purchases

A change in tax rates

has a larger multiplier effect the smaller the tax rate.

Among potential stores of value, money

has the advantage of being the most liquid asset.

Commodity money

has value independent of its use as money.

Which of the following is an objective of fiscal policy?

high employment

Increases in the price level

increase the quantity of money needed for buying and selling

Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.

increase, increase

If a person withdraws $500 from his/her savings account and holds it as currency, then M1 will ________ and M2 will ________.

increase; not change

If the Fed lowers the interest rate, this will______ inflation and _____real GDP in the short run.

increase; raise

If the Fed wants to increase money supply, this will______ inflation and _____real GDP in the short run.

increase; raise

A decrease in individual income taxes ________ disposable income, which ________ consumption spending.

increases, increases

The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.

induced; consumption; autonomous

Which of the following would not be considered an automatic stabilizer?

legislation increasing funding for job retraining passed during a recession

The money demand curve has a negative slope because

lower interest rates cause households and firms to switch from financial assets to money.

Money's most narrow definition is based on its function as a

medium of exchange

Which of the following assets is most liquid?

money

You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets, and $1,000 of debt. You have

money = $300, annual income = $6,000, and wealth = $4,300.

If the Fed buys Treasury bills, this will shift the

money supply curve to the right

It is ________ difficult to effectively time fiscal policy than monetary policy because ________.

more; fiscal policy takes longer to implement

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded.

If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially

not change M1 and not change M2.

Credit card balances are

not part of the money supply

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics

Federal government expenditures, as a percentage of GDP,

rose from 1950 to 1991, fell from 1992 to 2001, and have risen from 2001 to the present.

When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

sell treasury bills

Suppose the Fed decreases the money supply. In response households and firms will______ short term assets and this will drive_____ interest rates.

sell; up

The money market model is concerned with ________ and the loanable funds market model is concerned with ________.

short-term nominal interest rates; long-term real interest rates

Before the Great Depression of the 1930s, the majority of government spending took place at the ________ and after the Great Depression the majority of government spending took place at the ________.

state and local levels; federal level

Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, the cyclically adjusted budget

surplus was $10 billion

The federal funds rate is

the interest rate banks charge each other for overnight loans

Monetary policy refers to the actions the Federal Reserve takes to manage

the money supply and interest rates to pursue its economic objectives

In the United States, currency includes

the paper money and coins in circulation

When the Fed uses contractionary policy,

the price level rises less than it would if the Fed did not pursue policy.

Which of the following is an example of discretionary fiscal policy?

the tax cuts passed by Congress in 2001 to combat the recession

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

use open market operations to buy Treasury bills

The money supply curve, against possible levels of interest rates, has a

vertical slope

An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier.

will decrease

If households and firms decide to hold less of their money in checking account deposits and more in currency, then initially, the money supply

will not change


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