Chapter 14, 15, 16 MacroEconomics

If the required reserve ratio is RR, the simple deposit multiplier is defined as

(1/RR)

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's required reserves increase by A) $2,000. B) $8,000. C) $10,000. D) $50,000.

A) $2,000.

According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be A) 15 percent. B) 20 percent. C) 25 percent. D) 100 percent.

A) 15 percent.

Which of the following is considered contractionary fiscal policy? A) Congress increases the income tax rate. B) Congress increases defense spending. C) Legislation removes a college tuition deduction from federal income taxes. D) The New Jersey legislature cuts highway spending to balance its budget.

A) Congress increases the income tax rate.

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 A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy.

A) automatic stabilizers.

Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant A) decrease in investment spending. B) decrease in oil prices. C) increase in consumption spending. D) increase in net exports.

A) decrease in investment spending.

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods. C) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods. D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods.

A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods.

Year = 2016 Potential RGDP = $18.0 trillion RGDP = $18.0 trillion Price Level = 150 Year = 2017 Potential RGDP= 18.5 trillion RGDP = 18.2 trillion Price Level = 152 Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2016 and in 2017 if Congress and the president do not use fiscal policy. If Congress and the president want to keep real GDP at its potential level in 2017, they should A) decrease income taxes. B) decrease government purchases. C) decrease the money supply. D) increase the level of interest rates.

A) decrease income taxes.

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely A) decrease interest rates. B) increase interest rates. C) decrease income tax rates. D) increase income tax rates.

A) decrease interest rates.

Commodity money A) has value independent of its use as money. B) has little to no value independent of its use as money. C) is backed by a valuable commodity such as gold. D) can be used to purchase commodities, but not services.

A) has value independent of its use as money.

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, it also can achieve the goal of ________ simultaneously. A) high employment; economic growth B) high employment; lowering government spending C) economic growth; a low current account deficit D) stability of financial markets; a low current account deficit

A) high employment; economic growth

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

A) higher; higher

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should A) increase. B) decrease. C) not change. D) increase, then decrease.

A) increase.

Expansionary fiscal policy involves A) increasing government purchases or decreasing taxes. B) increasing taxes or decreasing government purchases. C) increasing the money supply and decreasing interest rates. D) decreasing the money supply and increasing interest rates.

A) increasing government purchases or decreasing taxes.

Which of the following would not be considered an automatic stabilizer? A) legislation increasing funding for job retraining passed during a recession B) decreasing unemployment insurance payments due to decreased joblessness during an expansion C) rising income tax collections due to rising incomes during an expansion D) declining food stamp payments due to more persons finding jobs during an expansion

A) legislation increasing funding for job retraining passed during a recession

Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan all their excess reserves, the real-world deposit multiplier is A) less than 5. B) equal to 5. C) greater than 5. D) equal to 20.

A) less than 5.

If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time. A) low; lowers B) low; raises C) high; lowers D) high; raises E) low; does not change

A) low; lowers

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect. A) multiplier B) expenditure C) consumption D) aggregate demand

A) multiplier

The money demand curve has a A) negative slope because an increase in the interest rate decreases the quantity of money demanded. B) positive slope because an increase in the interest rate increases the quantity of money demanded. C) negative slope because an increase in the price level decreases the quantity of money demanded. D) positive slope because an increase in the price level increases the quantity of money demanded.

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

(Shift right) In the figure, the money demand curve would move from Money demand 1 to Money demand 2 if A) real GDP increases. B) the price level decreases. C) the interest rate increases. D) the Federal Reserve sells Treasury securities.

A) real GDP increases.

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because A) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. B) the Federal Reserve can immediately recognize when real GDP is below or above potential GDP. C) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. D) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time.

A) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.

If government expenditures increase, then in the long- run A) the interest rate increases, consumption declines, and investment declines. B) the interest rate decreases, consumption declines, and investment declines. C) the interest rate increases, consumption increases, and investment increases. D) the interest rate decreases, consumption increases, and investment increases.

A) the interest rate increases, consumption declines, and investment declines.

The major shortcoming of a barter economy is A) the requirement of a double coincidence of wants. B) the requirement of specialization and exchange. C) that goods and services are not traded. D) that money loses value from inflation.

A) the requirement of a double coincidence of wants.

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A can make a maximum loan of A) $2,000. B) $8,000. C) $10,000. D) $50,000.

B) $8,000.

Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP? A) Real equilibrium GDP will fall. B) Real equilibrium GDP will rise. C) There will be no change in real equilibrium GDP. D) Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value.

B) Real equilibrium GDP will rise.

Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic? A) Bank total reserves would decrease. B) Required reserves would increase. C) Bank checking account balances would decrease. D) Individual banks would have to shrink the value of loans they made. E) The economy would likely enter into a recession.

B) Required reserves would increase.

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 A) increase. B) decrease. C) not change. D) increase if the economy is in a recession.

B) decrease.

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

B) decrease; increase

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; discretionary fiscal policy B) discretionary fiscal policy; automatic stabilizers C) automatic stabilizers; monetary policy D) discretionary fiscal policy; conscious fiscal policy

B) discretionary fiscal policy; automatic stabilizers

If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________. A) increase; decrease B) increase; not change C) not change; increase D) not change; decrease E) not change; not change

B) increase; not change

An increase in the interest rate A) decreases the opportunity cost of holding money. B) increases the opportunity cost of holding money. C) decreases the percentage yield of holding money. D) increases the percentage yield of holding money.

B) increases the opportunity cost of holding money.

The money demand curve has a negative slope because A) lower interest rates cause households and firms to switch from money to financial assets. B) lower interest rates cause households and firms to switch from financial assets to money. C) lower interest rates cause households and firms to switch from money to stocks. D) lower interest rates cause households and firms to switch from money to bonds.

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

The crowding out effect will be greater the A) less sensitive investment is to changes in interest rates. B) more sensitive investment is to changes in interest rates. C) less sensitive consumption and net exports are to changes in interest rates. D) more sensitive consumption and net exports are to changes in interest rates.

B) more sensitive investment is to changes in interest rates.

If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will ________ and M2 will ________. A) increase; decrease B) not change; not change C) not change; increase D) decrease; increase E) decrease: decrease

B) not change; not change

The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect A) tax rates. B) real interest rates. C) nominal interest rates. D) foreign exchange rates.

B) real interest rates.

To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could A) raise bank taxes. B) sell Treasury securities. C) raise government spending. D) lower the required reserve ratio.

B) sell Treasury securities.

The problem causing most recessions is too little A) money (currency plus checking accounts). B) spending. C) unemployment. D) taxes.

B) spending.

Which of the following functions of money would be violated if inflation were high? A) unit of account B) store of value C) certificate of gold D) medium of exchange

B) store of value

The money supply curve is vertical if A) banks and the Fed jointly determine the money supply. B) the Fed is able to completely determine the money supply. C) banks and households determine the money supply. D) households and the Fed jointly determine the money supply.

B) the Fed is able to completely determine the money supply.

(Shift right) In the figure, the money demand curve would move from Money demand 1 to Money demand 2 if A) real GDP decreases. B) the price level increases. C) the interest rate decreases. D) the Federal Reserve sells Treasury securities.

B) the price level increases.

The statement "This Dell laptop costs $1,200" illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment

B) unit of account

If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run. A) reduce; raise B) increase; lower C) increase; raise D) reduce; lower

D) reduce; lower

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's reserves immediately increase by A) $2,000. B) $8,000. C) $10,000. D) $50,000.

C) $10,000.

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of A) $8,000. B) $10,000. C) $50,000. D) $100,000.

C) $50,000.

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent.

C) 11 percent.

Expansionary monetary policy refers to the ________ to increase real GDP. A) government's increasing spending and lowering taxes B) government's decreasing spending and raising taxes C) Federal Reserve's increasing the money supply and decreasing interest rates D) Federal Reserve's decreasing the money supply and increasing interest rates

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

Which of the following will lead to a decrease in the equilibrium interest rate in the economy? A) an increase in the price level B) a sale of government securities by the Fed C) a decrease in GDP D) an increase in the discount rate E) an increase in the reserve requirement

C) a decrease in GDP

(Movement upward along MD) In the figure above, the movement from point A to point B in the money market would be caused by A) an increase in the price level. B) a decrease in real GDP. C) an open market sale of Treasury securities by the Federal Reserve. D) a decrease in the required reserve ratio by the Federal Reserve.

C) an open market sale of Treasury securities by the Federal Reserve.

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve A) does not try to eliminate recessions, but instead focuses on preventing inflation. B) can fine tune the economy and realistically hope to keep the economy from experiencing recessions. C) cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be. D) cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions.

C) cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be.

The M1 measure of the money supply equals A) paper money plus coins in circulation. B) currency plus checking account balances. C) currency plus checking account balances plus traveler's checks. D) currency plus checking account balances plus traveler's checks plus savings account balances.

C) currency plus checking account balances plus traveler's checks.

Rising prices erode the value of money as a ________ and as a ________. A) unit of barter; unit of account B) store of value; unit of liquidity C) medium of exchange; store of value D) store of value; unit of barter

C) medium of exchange; store of value

The three main monetary policy tools used by the Federal Reserve to manage the money supply are A) interest rates, tax rates, and government spending. B) tax rates, government purchases, and government transfer payments. C) open market operations, discount policy, and reserve requirements. D) open market operations, the exchange rate of the dollar against foreign currencies, and government purchases.

C) open market operations, discount policy, and reserve requirements.

The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________. A) goals; targets B) goals; tools C) targets; goals D) targets; tools

C) targets; goals

Fiscal policy is determined by A) the Federal Reserve. B) the president and the Federal Reserve. C) Congress and the Federal Reserve. D) Congress and the president.

D) Congress and the president.

Which of the following would be classified as fiscal policy? A) The federal government passes tax cuts to encourage firms to reduce air pollution. B) The Federal Reserve cuts interest rates to stimulate the economy. C) A state government cuts taxes to help the economy of the state. D) The federal government cuts taxes to stimulate the economy. E) States increase taxes to fund education.

D) The federal government cuts taxes to stimulate the economy.

(Movement upward along MD) In the figure above, a movement from point A to point B would be caused by A) a decrease in real GDP. B) an increase in the price level. C) a decrease in the price level. D) an increase in the interest rate.

D) an increase in the interest rate.

If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will A) fall substantially and investment and consumer spending will fall substantially. B) rise substantially and investment and consumer spending will rise substantially. C) fall substantially and investment and consumer spending will change very little. D) change very little and investment and consumer spending will change very little.

D) change very little and investment and consumer spending will change very little.

To increase the money supply, the Federal Reserve could A) raise the discount rate. B) decrease income taxes. C) raise the required reserve ratio. D) conduct an open market purchase of Treasury securities. E) lower transfer payments.

D) conduct an open market purchase of Treasury securities.

From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, then Congress and the president would most likely A) increase the required reserve ratio and decrease government spending. B) decrease government spending. C) decrease oil prices. D) decrease taxes. E) lower interest rates.

D) decrease taxes.

Decreasing government spending ________ the price level and ________ equilibrium real GDP. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases

D) decreases; decreases

Which of the following is an objective of fiscal policy? A) energy independence from Middle East oil B) health care coverage for all Americans C) discovering a cure for AIDs D) high rates of economic growth E) homeland security

D) high rates of economic growth

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

D) lower; lower

In the graph above, the shift (right) from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion. A) would be equal to B) would be greater than C) would be less than D) may be greater than or less than

D) may be greater than or less than

The quantity theory of money predicts that, in the long run, inflation results from the A) velocity of money growing at a faster rate than real GDP. B) velocity of money growing at a lower rate than real GDP. C) money supply growing at a lower rate than real GDP. D) money supply growing at a faster rate than real GDP.

D) money supply growing at a faster rate than real GDP.

Dollar bills in the modern economy serve as money because A) they are backed by the gold stored in Fort Knox. B) they can be redeemed for gold by the central bank. C) they have value as a commodity independent of their use as money. D) people have confidence that others will accept them as money.

D) people have confidence that others will accept them as money.

The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than

D) sometimes by more than and other times by less than

If the economy is growing beyond 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 A) the money supply and a decrease in interest rates. B) government purchases. C) oil prices. D) taxes.

D) taxes.

The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals A) 0. B) the growth rate of the price level. C) the growth rate of the velocity of money. D) the growth rate of real GDP.

D) the growth rate of real GDP.