Topics 7,8 Practice for Final Exam
Suppose the exchange rate between the euro and the US dollar is 0.5 pounds to $1: If a Big Mac costs $3 in the US and 1.5 pounds in Germany, the real exchange rate is: A.) 1:1 B.) 2:1 C.) 1:2 D.) 1:3
A.) 1:1
Figure: Three AD Curves In the accompanying diagram, the economy's long-run growth rate following a positive money shock would be: A.) 2% B.) 3% C.) 4% D.) 6%
A.) 2%
In the AD-As model with a long-run potential growth rate of 2%, a 6 percentage point increase in the money supply growth rate will cause the economy's growth rate to be _______ in the long run. A.) 2% B.) 4% C.) 6% D.) 8%
A.) 2%
Suppose an increase in reserves of $5 billion causes the money supply to rise by $17.5 billion. The money multiplier is ______ and the reserve requirement is __________. A.) 3.5, 0.29 B.) 0.28, 1.25 C.) 5.3, 0.23 D.) 8, 0.12
A.) 3.5, 0.29
Figure: Aggregate Demand and Aggregate Supply 1 If the money supply had increased and moved the short-run equilibrium to point B, the long-run equilibrium in this economy will occur at intersection: A.) A B.) B C.) C D.) D
A.) A
The short-run aggregate supply curve shows the relationship between the real growth rate and the: A.) actual inflation rate B.) expected inflation rate C.) long-run inflation rate D.) real interest rate
A.) actual inflation rate
The BEST type of negative shock for fiscal policy to respond to is a negative shock to: A.) aggregate demand B.) short-run aggregate supply C.) the LRAS curve D.) inflation
A.) aggregate demand
All the combinations of inflation and real growth consistent with a specific rate of spending growth are called the: A.) aggregate demand curve B.) short-run aggregate supply curve C.) long-run aggregate supply curve D.) endowment curve
A.) aggregate demand curve
What are the major limits to fiscal policy? A.) crowding out, timing, and real shocks B.) poor information, the multiplier effect, the bandwagon effect, and election timing C.) sticky wages, Ricardian equivalence, recognition lag, and crowding out D.) aggregate demand deficiency, unemployed resources, long-run expenses, and implementation lag
A.) crowding out, timing, and real shocks
Which asset would you classify as being most liquid? A.) demand deposits B.) small-time deposits C.) a home D.) gold bullion
A.) demand deposits
If 兀 > 兀^e: A.) firms' profits will increase B.) money growth will cause the short-run aggregate supply curve to shift C.) firms' profits will decrease D.) there will be no change in real GDP growth, because it is determined by real factors
A.) firms' profits will increase
Crowding out occurs when: A.) higher government spending leads to less private spending B.) personal consumption increases due to a decrease in savings C.) overall output is crowded out by lower government spending D.) increases in government spending lead to increases in taxes
A.) higher government spending leads to less private spending
A bank is considered illiquid but solvent if: A.) it has short-term liabilities greater than its short-term assets, but overall assets greater than liabilities B.) it has liabilities greater than the value of its assets C.) the value of its outstanding loans is greater than the value of its deposits D.) it has lost its FDIC coverage
A.) it has short-term liabilities greater than its short-term assets, but overall assets greater than liabilities
As a result of an increase in the growth rate of the money supply: A.) real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run B.) real GDP growth increases only in the long run, and the inflation rate increases only in the short run C.) real GDP growth increases in both the short run and the long run, and the inflation rate increases only in the short run D.) both the real growth and the inflation rate increase only in the short run
A.) real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run
The multiplier effect is the: A.) subsequent consumer spending that increases AD as a result of expansionary fiscal policy B.) subsequent consumer spending that increase AD as a result of contractionary fiscal policy C.) increase in GDP from an increase in the money supply and a decrease in taxes D.) increase in GDP from increase consumer savings and private investment
A.) subsequent consumer spending that increases AD as a result of expansionary fiscal policy
Figure: Monetary Policy and Demand Shocks In the figure, assume that the initial real growth rate of the economy is 3% when a negative aggregate demand shock shifts the AD curve from AD1 to AD3. As a result of the Fed's policy response, the AD curve shifts to AD2 in the short run. Which of the following is TRUE about the Fed's policy response? A.) the Fed responded too little to the shock B.) the Fed responded too much to the shock C.) the Fed provided just the right amount of response to the shock D.) the Fed was too fast in responding to the shock
A.) the Fed responded too little to the shock
Under which circumstances should an economic advisor for a small economy recommend a large increase in government spending? A.) the country is in a recession that seems to be turning into a depression B.) the government has a record high budget deficit C.) it has become more difficult for the government to borrow D.) the economy is struggling primarily because of high oil prices
A.) the country is in a recession that seems to be turning into a depression
If a negative real shock affects the economy's long-run potential growth rate and the Fed responds by lowering the money supply growth rate, then the economy will experience: A.) too little real growth and low inflation B.) too little real growth and high inflation C.) high real growth and low inflation D.) high real growth and high inflation
A.) too little real growth and low inflation
If velocity is constant, the growth rate of the money supply is 2%, and inflation is 3%, the real output growth will be: A.) -5% B.) -1% C.) 1% D.) 5%
B.) -1%
Which asset is MOST liquid? A.) a money market mutual fund B.) cash C.) a house D.) antique furniture
B.) cash
If the Federal Reserve overstimulates the economy by increasing money growth too much, then inflation will: A.) make long-term planning and contracting easier B.) create arbitrary redistributions of wealth C.) make price signals much easier to interpret D.) bring the economy into a recession
B.) create arbitrary redistributions of wealth
The monetary base (MB) refers to: A.) currency B.) currency plus total reserves held at the Fed C.) currency plus checkable deposits D.) currency, saving deposits, money market mutual funds, and small-time deposits
B.) currency plus total reserves held at the Fed
In the short run, a decrease in consumption growth will cause the inflation rate to: A.) increase B.) decrease C.) remain unchanged D.) become unpredictable
B.) decrease
When the Federal Funds rate is near the zero lower bound, the Fed: A.) engages in open market operations B.) engages in quantitative easing C.) adjusts the Federal Funds rate D.) raises the required reserve rate
B.) engages in quantitative easing
When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered: A.) liquid and solvent B.) illiquid but solvent C.) liquid but insolvent D.) illiquid and insolvent
B.) illiquid but solvent
If velocity is steady, what combination of inflation rate and the output growth rate would NOT be associated with a spending growth rate of 6%? A.) inflation rate = 3.2%, output growth rate = 2.8% B.) inflation rate = 2.5%, output growth rate = 4.5% C.) inflation rate = 4.3%, output growth rate = 1.7% D.) inflation rate = 6.5%, output growth rate = -0.5%
B.) inflation rate = 2.5%, output growth rate = 4.5%
Why have oil shocks become less economically important for the United States in recent years? A.) American oil producers increased production of oil inside the US B.) negative oil shocks have been tempered by other positive productivity shocks C.) new pipelines allow more oil to be imported D.) pipelines increased the distribution of oil within the US
B.) negative oil shocks have been tempered by other positive productivity shocks
When C falls, the aggregate demand curve: A.) shifts to the right B.) shifts to the left C.) becomes steeper D.) becomes flatter
B.) shifts to the left
Sticky wages and prices are incorporated in the AD-AS model by the: A.) long-run aggregate supply curve B.) short-run aggregate supply curve C.) aggregate demand curve D.) both the aggregate demand and short-run aggregate supply curves
B.) short-run aggregate supply curve
When homeowners saw the value of their homes rise in the 1997-2006 boom, they felt wealthier and: A.) saved more B.) spent more C.) worked more D.) spent less
B.) spent more
When the economy grows slowly: A.) prices must remain the same B.) wages must grow slowly C.) wages must remain the same D.) demand must grow slowly
B.) wages must grow slowly
Suppose you deposit $1000 in your checking account. If the reserve ratio is 10%, how much of your deposit can the bank loan out? A.) $0 B.) $100 C.) $900 D.) $1,000
C.) $900
The main difference between M1 and M2 is that: A.) M1 includes some less liquid assets in addition to the assets in M2 B.) M1 includes more liquid assets in addition to the assets in M2 C.) M2 includes some less liquid assets in addition to the assets in M1 D.) M2 includes more liquid assets in addition to the assets in M1
C.) M2 includes some less liquid assets in addition to the assets in M1
Which of the following most likely causes the long-run aggregate supply curve to shift to the right? A.) an increase in the money supply B.) a decrease in tax revenues C.) an increase in crop production due to more rainfall D.) an increase in oil prices due to a fire in a major oil refinery
C.) an increase in crop production due to more rainfall
Which is NOT included in the US money supplies M1 and M2? A.) currency in circulation B.) checkable deposits C.) bond mutual funds D.) savings deposits
C.) bond mutual funds
The lags associated with monetary policy make its implementation more difficult during: A.) recessions B.) expansions C.) both expansions and recessions D.) neither expansions nor recessions
C.) both expansions and recessions
The main reason for the slope of SRAS is: A.) sticky prices B.) sticky wages C.) both sticky prices and sticky wages D.) neither sticky prices nor sticky wages
C.) both sticky prices and sticky wages
An unexpected increase in money growth leads to increased inflation in: A.) the short run B.) the long run C.) both the short run and the long run D.) neither the short run nor the long run
C.) both the short run and the long run
Crowding out is the _________ in private spending that occurs when government __________ spending. A.) increase, increases B.) increase, decreases C.) decrease, increases D.) decrease, decreases
C.) decrease, increases
Suppose the economy is growing faster than its long-run potential growth rate. To bring the real growth rate back to the long-run potential rate, the Fed should: A.) lower the reserve ratio B.) buy government bonds in the open market C.) engage in actions to raise interest rates D.) lower the interest rate on reserves
C.) engage in actions to raise interest rates
The national debt held by the public is the amount of: A.) government debt plus household debt B.) government debt at the federal, state, and local levels C.) federal debt held by individuals and organizations outside the federal government D.) federal debt held by foreign countries
C.) federal debt held by individuals and organizations outside the federal government
The primary tools of fiscal policy are: A.) money supply and money demand B.) government expenditure and money supply C.) government expenditure and taxation D.) taxation and interest rates
C.) government expenditure and taxation
Which of the following causes the AD curve to shift left? A.) a tax cut B.) increased consumer confidence C.) increased import growth D.) an increase in business investment
C.) increased import growth
Figure: Aggregate Demand Shifts 2 Suppose the economy is initially at point A in the diagram. If a decrease in investment spending causes a shift of the AD curve from AD1 to AD2, then the government can avoid a short-run recession by: A.) increasing taxes so that the AD curve shifts back to AD1 B.) increasing taxes so that the AD curve shifts further in to AD3 C.) increasing government spending so that the AD curve shifts back to AD1 D.) increasing government spending so that the AD curve shifts further in to AD3
C.) increasing government spending so that the AD curve shifts back to AD1
Which asset is the LEAST liquid? A.) a mortgage on a house B.) recyclable aluminum cans C.) knowledge of how to tie one's shoe D.) a checkable deposit
C.) knowledge of how to tie one's shoe
The relationship between bond prices and interest rates is: A.) neither positive nor negative B.) positive C.) negative D.) sometimes positive and sometimes negative
C.) negative
________ refers to the Federal Reserve's purchase of longer-term government bonds or other securities. A.) an open market purchase B.) an open market sale C.) quantitative easing D.) quantitative tightening
C.) quantitative easing
Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? A.) the Fed has too much data to sort through quickly B.) all monetary policies must be approved by Congress before being implemented C.) the Fed's control of the money supply is incomplete and subject to uncertain lags D.) the effects of monetary policy always offset those of fiscal policy
C.) the Fed's control of the money supply is incomplete and subject to uncertain lags
Over which of the following definitions of the money supply does the Fed have the most control? A.) M1 B.) M2 C.) the monetary base D.) savings deposits
C.) the monetary base
Which is NOT TRUE of the Fed as bank for bankers? A.) the Fed serves as a safe, convenient place for banks to place their deposits B.) the Fed lends money to banks C.) the Fed holds the reserve deposits of private banks D.) the Fed lends money to private individuals
D.) The Fed lends money to private individuals
If the Federal Reserve decided to decrease the money supply in the US, this would lead to: A.) an appreciation of the US dollar B.) an increase in the relative price of US exports C.) a decrease in AD D.) an appreciation of the US dollar, an increase in the relative price of US exports, and a decrease in AD
D.) an appreciation of the US dollar, an increase in the relative price of US exports, and a decrease in AD
Which would cause a negative shock to the aggregate demand curve? A.) a decrease in taxes B.) an increase in government spending C.) an increase in the money growth rate D.) an increase in imports
D.) an increase in imports
In 2011, most of the 2009 federal stimulus package had been spent, but the unemployment rate remained exceptionally high at nearly 10%. This is an example of the: A.) recognition lag B.) legislative lag C.) implementation lag D.) effectiveness lag
D.) effectiveness lag
When the US Treasury borrows, the borrowing is managed by the: A.) treasury itself B.) senate banking committee C.) comptroller of the currency D.) federal reserve
D.) federal reserve
The AD-AS model is the most useful for explaining what causes: A.) the economy's long run growth rate B.) inflation C.) stock market fluctuations D.) fluctuations in GDP growth around its "normal" rate
D.) fluctuations in GDP growth around its "normal" rate
Which statement pertains to the condition of crowding out? A.) government cuts spending by $300 million, resulting in a decrease in consumption by $500 million B.) government cuts taxes, resulting in an increase in investment spending by $270 million C.) government increases spending by $300 million on new highway construction, resulting in an increase in consumption by $500 million D.) government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in consumption spending by $270 million
D.) government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in consumption spending by $270 million
A problem that makes fiscal policy less effective is that: A.) fiscal policy must be offset by monetary policy B.) government spending is a relatively large portion of GDP C.) government spending does not directly affect aggregate demand D.) higher taxes or increased borrowing to fund government spending can reduce aggregate demand
D.) higher taxes or increased borrowing to fund government spending can reduce aggregate demand
Real shocks to the economy shift the long-run aggregate supply curve to the: A.) right by a lot B.) left by a little C.) left by a lot D.) left or the right by a little or a lot
D.) left or the right by a little or a lot
The amount by which the money supply expands with each additional dollar in reserves is the: A.) reserve ratio B.) prime rate C.) fractional reserve D.) money multiplier
D.) money multiplier
An increase in consumer pessimism will lead to increased inflation in: A.) the short run only B.) the long run only C.) both the short run and the long run D.) neither the short run nor the long run
D.) neither the short run nor the long run
In the long run, a temporary change in aggregate demand results in: A.) an increase in the inflation rate B.) a decrease in the inflation rate C.) a change in the inflation rate in the opposite direction as demand D.) no change in the inflation rate
D.) no change in the inflation rate
Under fractional reserve banking, banks hold: A.) all deposits in reserve for the purpose of lending B.) all deposits in reserve, using other sources of funds for lending C.) no deposits in reserve, lending all deposits D.) only a fraction of deposits in reserve, lending the rest
D.) only a fraction of deposits in reserve, lending the rest
According to the quantity theory of money, in the long run, an increase in money supply causes an increase in: A.) production B.) velocity of money C.) real GDP D.) prices
D.) prices
When a major negative aggregate demand shock hits the economy, a central bank can "maintain market confidence" by: A.) raising the Federal Funds rate B.) buying stocks in the stock market C.) selling treasury securities in the open market D.) promising to increase the growth rate of money if the economy worsens further
D.) promising to increase the growth rate of money if the economy worsens further
In the graph of the AD-AS model, what is measured on the horizontal axis? A.) the average price level B.) real GDP C.) the inflation rate D.) real GDP growth
D.) real GDP growth
When countries dollarize their currencies, what becomes the source of their monetary policy? A.) their prime minister B.) the open market C.) Parliament D.) the US federal reserve
D.) the US federal reserve
Figure: Two SRAS Curves The figure shows the AD-AS model with two SRAS curves. Which of the following is TRUE of point A? A.) the actual inflation rate is 5%, and the expected inflation rate is 3% B.) the actual inflation rate is 3%, and the expected inflation rate is 5% C.) the actual inflation rate and the expected inflation rate are both 3% D.) the actual inflation rate and the expected inflation rate are both 5%
D.) the actual inflation rate and the expected inflation rate are both 5%