AGEC 217 CHAPTER 10-13 PRACTICE PROBLEMS
How much is the budget deficit if savings is $3 trillion, investment is $1 trillion, imports are $3 trillion, and exports are $4 trillion?
$1 trillion
How large is the government's budget deficit if asset sales are $400 billion, the money supply grows by $400 billion, the government sells $1 trillion in bonds, and tax revenues are $500 billion?
$1.8 trillion
How much money can be created if the money multiplier is 3 and the initial deposit is $4,000?
$12,000
Liquidity is best defined as
the ease of converting an asset into cash.
The Federal Reserve Act of 1913 tasked the central bank with all of these purposes EXCEPT
to provide employment in the federal government.
A foreign entity holding cash is considered a leakage in the economy.
true
Among the roles that money serves in an economy, money is considered a unit of account.
true
The reserve requirement is the proportion of its deposits that a bank must keep on hand and not use to create money through making loans to borrowers.
true
When the economy is _____, money leakage tends to rise; this tends to slow the money creation process.
weak
A decrease in the unemployment rate is
not an example of fiscal policy
An increase in corporate bonds purchased is
not an example of fiscal policy
An increase in the money supply is
not an example of fiscal policy
By how much will the money supply increase if the initial deposit is $4,000 and the required reserve ratio is 20%?
$20,000
If the reserve requirement is 25%, how much can a bank lend from an initial $1,000 deposit of cash?
$750
An investor purchased a share of stock for $100 and had a return on investment of −5%. What was the selling price of the share of stock?
$95
Which of these would be considered a teaser rate for a credit card?
0%
Karen was just given a Treasury bill as a gift from her grandmother. How long will it take for that Treasury bill to reach maturity?
1 year or less
What is the formula for the money multiplier?
1/reserve requirement
Suppose a bank must hold $500 in reserves from a $5,000 deposit. What is the reserve requirement that this bank faces for all deposits?
10%
In which year was interest on public debt as a percentage of GDP the highest?
1990
What is the yield of a perpetuity bond that has an interest payment of $500 and a price of $15,000?
3.33%
Some policy makers believe crowding out occurs when excessive government spending:
causes higher interest rates, thereby displacing private sector consumption and investment
Identify which asset is the most liquid.
checking account
During the period before 1776, tobacco was used in the Chesapeake colonies (in what is now the United States) to make payments, even to pay fines and taxes. Consider tobacco leaves as an example of commodity money: Which of these problems would it be most likely to have?
It was not durable.
Appointed by the president to serve 14 year terms
Board of Governors of the Federal Reserve System
Oversees national banking and consumer credit regulation
Board of Governors of the Federal Reserve System
Which of these summarizes the roles of the president and Congress in conducting monetary policy?
Congress and the president do not play a role in carrying out monetary policy.
Which of these statements is NOT true of the tradeoff between lower risk and higher return?
compared to stocks, bonds yield a higher average return on investment over the long run.
Which of these acts did NOT further clarify, supplement, and expand the mission of the Fed as originally mandated by the Federal Reserve Act of 1913?
Fair Housing Act of 1968
Comprises the Board of Governors and five regional bank presidents
Federal Open Market Committee
Oversees the buying and selling of government securities as a form of monetary policy
Federal Open Market Committee
The _____ is the central bank of the United States.
Federal Reserve
After the elections of 2010, the U.S. Senate remained controlled by the Democrats, but the majority of the House of Representatives became Republican. You might expect that this would increase the _____ lag associated with fiscal policy.
decision
If the money multiplier decreases from 12 to 10, what probably happened to the reserve requirement?
It increased from 8.3% to 10%.
Legislators debate the appropriate course of action to address the increased rate of inflation. This debate lasts several quarters. This is a description of the _____ lag.
decision
Mandatory spending includes government funds directed at programs or activities such as _____ and _____.
Medicare; payments on national debt
Lowering inflation and increasing unemployment is a goal of ______________ fiscal policy.
contractionary
Distributes coin and currency
Regional Federal Reserve District Banks
Provides information on regional economic conditions through the Beige Book report
Regional Federal Reserve District Banks
Supervises and regulates member banks
Regional Federal Reserve District Banks
Select the statement that best defines required reserves.
The amount of reserves a bank must keep on deposit at the Fed or in their vault on a given deposit.
The M1 definition of the money supply used by the government includes:
currency and demand deposits (checking/debit accounts).
If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?
The business will not take out the loan.
Policymakers should reduce spending and increase taxes when the economy is growing in order to prevent "overheating"
cyclically balanced budget
During George W. Bush's presidency, there was a five-year plan (2007-2012) to increase oil exploration, with production including new lease sales in the Gulf of Mexico. After being challenged in the courts, the sales looked as though they would take place beginning in August of 2011. What would be the likely impact of these sales on the federal government's budget?
The sales would mean less reliance on increasing the money supply and/or selling bonds to finance a deficit.
_______ pay(s) the lowest interest rate.
the U.S. government
If insisted upon, this approach would only worsen the economy during a recession.
annually balanced budget
This approach was considered conventional wisdom until the advent of the Great Depression.
annually balanced budget
If the reserve requirement is less than the reserve ratio, excess reserves
are greater than zero
The main reason independent central banks are better at fighting inflation than politically controlled banks is because they
are less likely to be influenced by short-term political pressures that engage in excessive expansionary monetary policy.
When a customer deposits money in a bank account, this deposit represents a(n)
asset for the customer
What is one of the weaknesses of supply-side fiscal policies in the economy?
They can take a long time to work
If a customer deposits $100 cash in a checking account, the bank's
assets increase by $100.
Increased unemployment insurance claims during times of an economic downturn is an example of a(n):
automatic stabilizer at work.
when government spending and taxes are equal
balanced budget
_____ minimize the risk of lending money by pooling money from many savers and by lending to many borrowers.
banks.
From the standpoint of an investor, investing in a stock or a bond is similar.
bond
The market for loanable funds most specifically connects:
borrowers and savers.
when the federal government spends more than it collects in taxes in a given time period
budget deficit
The central bank of the United States is
the Federal Reserve System
Which of these assets has the greatest liquidity?
a checking account
A decrease in government spending is
a contractionary fiscal policy
Which of these is a liability for a bank?
deposits made by a firm
The interest rate that the Federal Reserve Bank (the Fed) charges member banks for loans is known as the
discount rate
The interest rate the Federal Reserve charges commercial banks for loans is the
discount rate
If the reserve ratio is equal to the reserve requirement, excess reserves
equal zero
Much of the money creation in the U.S. economy is done through actions of _____ and _____.
the Federal Reserve; commercial banks
Money can be created in the U.S. economy only by printing more paper money and minting more coins.
false
When the demand for loanable funds increases, interest rates decline.
false
The _____ rate influences nearly all other interest rates in the economy.
federal funds
The interest rate banks charge each other for very short-term loans is the
federal funds rate
ecause banks are in the business of lending money, they will _____ so savers don't need to.
gather information from borrowers
Investment decisions hinge on more than just interest rates. Rules, regulations, permits, tax incentives, and future expectations all enter into the process. This contributes to _____ lag.
implementation
The Fed can _____________ the money supply by lowering this rate
increase
The Fed has recently talked about minimizing the risk of inflation. Which of these tools would accomplish this?
increasing the discount rate
The main function of a central bank is to:
influence monetary policy
Bonds are an IOU from a business or a government promising to pay back the value of the bond plus:
interest payments
What happens to the money multiplier when the reserve requirement increases from 10% to 12%?
it decreases
Which of these is true of the Federal Reserve System?
it has the power to create money
The actual money multiplier is lower than the theoretical maximum because of _____ in the economy.
leakages
Currency represents _____ the money supply.
less than half of
The Fed is worried about rising unemployment. Which of these tools would it use if it wanted to lower unemployment?
lower the discount rate
Leakages are reductions in the amount of money used for lending that reduce the
money multiplier
The _____ enables calculation of the maximum amount of money that can be created from a dollar deposited into the banking system.
money multiplier
_______ is/are the buying and selling of U.S. government securities.
open market operations
Money represents anything that can be exchanged for goods and services or for the:
payment of debt
When a company issues stock, it is agreeing to share the company's _____ and _____ with the investor.
profits; control
The price of loanable funds is the
real interest rate.
The portion of deposits that banks must keep on hand for day-to-day operations and other purposes is called the:
reserve requirement
The share of deposits that banks must have in reserves is the
reserve requirement
One of the Federal Reserve's main monetary policy tools is:
setting the discount rate which establishes the cost to banks of borrowing from the Fed.
Money has three roles in an economy. It is a medium of exchange, a unit of account, and a(n):
store of value
In his first year of office, President Bill Clinton pushed through a large tax increase, and in 1994 he also proposed a federal budget with spending restraints. During his presidency the economy boomed. Based on this information, you conclude that while Clinton was president, the national debt
decreased
Barter is best defined as
literally trading one good for another without using money.
Which type of spending currently takes up a larger proportion of the U.S. federal budget?
mandatory spending
For the U.S. government, which of the given is NOT an example of discretionary spending?
medicare
Barbara just purchased a car for $14,000. This is an example of which function of money?
medium of exchange
A decrease in the money supply is
not an example of fiscal policy
The national debt is the sum of all:
prior federal deficits minus prior surpluses.
Lowering unemployment and prices is a goal of _______________ fiscal policy.
supply-side
______________ fiscal policy encourages human and capital development.
supply-side
______________ fiscal policy focuses on reducing regulations on businesses.
supply-side
The primary tools of fiscal policy are:
taxation and spending
What happens to the amount of funds supplied to the loanable funds market when the interest rate increases?
the amount of loanable funds supplied increases
A fiscal policy lag is the length of time it takes:
the president and Congress to agree on a possibly controversial tax and spending program and to begin implementation
What is the implementation lag?
the time required to turn fiscal policy into law and eventually affect the economy
Providing standardized products is a way financial institutions reduce
transactions costs
In a barter economy, each good must be valued in terms of every other good with which it can be traded. Which function of money addresses this problem of a barter economy?
unit of account
Money is best defined as
whatever serves society in three functions: medium of exchange, store of value, and unit of account.
If Amanda has an income of $40,000 and disposable income of $30,000, how much does she pay in taxes?
$10,000
An investor purchased $1,000 bond that paid $50 in coupon payments over the life of the bond. What is the return on investment?
5%
The minimum age at which you can withdraw funds from an IRA without penalty
59.5 years
In which of these is a risk-averse investor LEAST likely to invest?
high-return bonds
Contractionary fiscal policy is deployed in response to policy makers' concerns about:
inflation
Which of the terms acts as the "price" in the market for loanable funds?
interest rate
Which of these will NOT cause the supply of loanable funds to shift?
investment tax incentives
Which of these could be part of a supply-side fiscal policy to encourage long-run economic growth?
investments in human capital
Suppose Congress enacts a new Medicare benefit and finances it by raising payroll taxes such that each year's additional outlay is matched by additional revenue. Would this be considered fiscally sustainable?
no, this is still a pay-as-you go plan, which shifts the burden to future generations
In September 2010, the National Bureau of Economic Research announced that the recession that began in December 2007 ended in June 2009. This illustrates _____ lag.
recognition
As a percentage of the federal government budget, mandatory spending
s larger than discretionary spending
If the economy is in a downturn, classical economists believe that, over time, the economy will _____
self‑correct
An increase in the advancements of technology will
shift the demand for loanable funds to the right.
A decrease in the amount of regulations should
shift the long-run aggregate supply curve to the right
Economists who favor the functional finance approach to the federal budget believe that
whether the budget is in deficit or surplus is a secondary concern
As baby boomers keep retiring in coming years, it is likely that fiscal imbalance will
worsen
Why are persistent budget deficits worrisome?
Deficits can lead to private investment spending being crowded out. Debt places an increased burden on the economy in the future. The likelihood of default increases.
As interest rate decreases, what happens to the quantity of loanable funds demanded?
Quantity demanded will increase.
What effect will an increase in interest rates have on the quantity of loanable funds supplied?
Quantity supplied will increase.
Investors face various choices regarding what they can invest in, and the choices carry varying amounts of risk. For example, stock prices are much more volatile than bond prices. What is the typical reason why investors would choose to put their money into an investment with higher risk rather than one with lower risk?
Riskier investments typically have higher returns.
A decrease in transfer payments is
a contractionary fiscal policy
An increase in tax rates is
a contractionary fiscal policy
Which of the following best defines a financial intermediary?
a financial institution that transforms investor funds into financial assets
Some critics of expansionary fiscal policy believe that:
accumulating more government debt is more harmful than the short-run effects of a recession
A decrease in taxes is
an expansionary fiscal policy
An increase in government spending is
an expansionary fiscal policy
According to the Laffer curve, an increase in tax rates will lead to
an increase, a decrease, or no change in tax revenue
About 85% of federal government revenue in 2018 came from
individual income taxes and payroll taxes
Which of these is true when discussing risk tolerance?
a risk-averse person is more likely to invest in government bonds instead of stocks.
A double coincidence of wants is
a situation where two individuals each want some or service that the other can provide.
Money is _______ when it enables people to save the money they earn today and use it to buy the goods and services they want tomorrow.
a store of value
when the government receives more in taxes than it spends in a given time period
budget surplus
The fixed rate of interest that a seller pays the buyer based on the face value of a bond is the _____ of the bond.
coupon rate
A decrease in aggregate demand caused by contractionary fiscal policy can lead to
decreased employment
Which of these is expansionary fiscal policy?
decreasing taxes
For the U.S. government, which of the given is NOT an example of mandatory spending?
education spending
Lowering unemployment and increasing inflation is a goal of ______________ fiscal policy.
expansionary
______________ fiscal policy involves more government spending money on anything.
expansionary
Money is _______ when it has no intrinsic value, but it is nonetheless accepted as money because the government has decreed it to be money.
fiat money
Which of these is NOT a public choice theory issue?
firm's profitability
Policymakers should focus on keeping unemployment low and providing the people with the public goods and services they want.
functional finance
This approach ignores the impact of the budget on the business cycle.
functional finance
The generational imbalance is an estimate of how much of any fiscal imbalance is being shifted to
future generations
the total accumulated amount that the government has borrowed and not yet paid back over time
government debt
Which of these is a supply-side fiscal policy?
grants for basic research
In February 2009, Congress approved a $787 billion stimulus package. By March 30, 2011, $633.5 had been spent. This illustrates _____ lag.
implementation
Which of these uses would MOST likely help to mitigate the crowding-out effects of deficit spending?
improved highways
When the interest rate increases, the amount of loanable funds supplied to the market
increases; this is a movement up and to the right along the supply curve.
To boost economic activity and employment during a U.S. economic downturn, the government will frequently use expansionary fiscal policy. Such a policy might be composed of:
increasing government spending and transfer payments and reducing taxes
