ECO 155 - Final Exam

A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank, what is the value of the money supply?

$150

The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank holding in excess reserves?

$19.5 million

When interest rates fall

firms want to borrow more for new plants and equipment and households want to borrow more for homebuilding.

Under a fractional-reserve banking system, banks

generally lend out a majority of the funds deposited.

Fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes.

To obtain the market demand curve for a product, sum the individual demand curves

horizontally.

Which of the following shifts aggregate demand to the left?

households decide to save a larger fraction of their income.

Supply-side economists focus more than other economists on

how fiscal policy affects aggregate supply.

The Federal Reserve was created

in 1913 by Congress

The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change

in the price level, but not output.

Keynes explained that recessions and depressions occur because of

inadequate aggregate demand.

Keynes believed that economies experiencing high unemployment should adopt policies to

increase aggregate demand.

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits. As a result, bank reserves will

increase and the money supply will eventually increase.

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to

increase by $360 billion.

If a good is normal, then an increase in income will result in a(n)

increase in the demand for the good.

In the short run, open-market purchases

increase investment and real GDP, and decrease nominal interest rates

A decrease in the price of a good will

increase quantity demanded.

If suppliers expect the price of their product to fall in the future, then they will

increase supply now.

Refer to Figure 33-4. If the economy starts at A and moves to D in the short run, the economy

moves to C in the long run.

Assets: Reserves $30,000 Loans 170,000 Liabilities: Deposits $200,000 Refer to Table 29-5. If the bank faces a reserve requirement of 20 percent, then it

needs $10,000 more reserves to meet its reserve requirements.

When all market participants are price takers who have no influence over prices, the markets have

numerous buyers and sellers

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy.

Refer to Figure 33-1. Line A is

real GDP.

The long-run aggregate supply curve would shift right if the government were to

reduce the minimum-wage.

A decrease in quantity demanded

results in a movement upward and to the left along a demand curve.

Other things the same, when the price level rises, interest rates

rise, so firms decrease investment.

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

rise. This rise in price expectations shifts the short-run aggregate supply curve to the left

People hold money primarily because it

serves as a medium of exchange.

Refer to Figure 34-8. An increase in government purchases will

shift aggregate demand from AD1 to AD2

Most economists use the aggregate demand and aggregate supply model primarily to analyze

short-run fluctuations in the economy.

Refer to Table 4-11. If the price were $4, a

shortage of 25 units would exist, and price would tend to rise.

Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a

shortage to exist and the market price of roses to increase.

The aggregate-demand curve

shows an inverse relation between the price level and the quantity of all goods and services demanded.

Which of the following is in included M2 but not in M1?

small time deposits

A decrease in the money supply might indicate that the Fed had

sold bonds in an attempt to increase the federal funds rate.

Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?

store of value

You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______.

store of value, unit of account, medium of exchange

Suppose that a decrease in the price of good X results in fewer units of good Y being demanded. This implies that X and Y are

substitute goods.

Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess

supply of money equal to the distance between points a and b.

Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates,

the Federal Reserve could increase the money supply by buying bonds

Recessions in Canada and Mexico would cause

the U.S. price level and real GDP to fall.

The long-run aggregate supply curve shifts right if

the capital stock increases.

The rate at which the Fed lends money to banks is

the discount rate

A production possibilities frontier shifts outward when

the economy experiences economic growth.

If people decide to hold less currency relative to deposits, the money supply

rises. The Fed could lessen the impact of this by selling Treasury bonds.

Which of the following would cause stagflation?

rising oil prices

The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and

the available production technology.

Refer to Figure 4-1. The movement from point A to point B on the graph is caused by a(n)

decrease in price

If a good is inferior, then an increase in income will result in a(n)

decrease in the demand for the good.

In the short run, an increase in the money supply causes interest rates to

decrease, and aggregate demand to shift right.

When the Fed sells government bonds, the reserves of the banking system

decrease, so the money supply decreases.

The opportunity cost of holding money

decreases when the interest rate decreases, so people desire to hold more of it

Which of the following events must cause equilibrium price to fall?

demand decreases and supply increases

A table that shows the relationship between the price of a good and the quantity demanded of that good is called a

demand schedule.

Which of the following is a liability of a bank and an asset of its customers?

deposits of its customers but not loans to its customers

At the equilibrium price, the quantity of the good that buyers are willing and able to buy

exactly equals the quantity that sellers are willing and able to sell.

Refer to Figure 4-18. At a price of $35, there would be

excess supply, and the price would tend to fall from $35 to a lower price.

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves.

An increase in household saving causes consumption to

fall and aggregate demand to decrease

During a recession the economy experiences

falling employment and income

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate

The interest-rate effect

is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

In the short-run an increase in the costs of production makes

output fall and prices rise

In which case can we be sure aggregate demand shifts left overall?

people want to save more for retirement and the Fed decreases the money supply.

As the price level falls

people will want to hold less money, so the interest rate falls.

As the price level rises

people will want to hold more money, so the interest rate rises.

A tax cut targeted at ____ people may have a bigger effect because ​

poorer; poorer people tend to spend a higher share of their income.

A supply schedule is a table that shows the relationship between

price and quantity supplied.

Adam Smith suggested that an invisible had guides market economies. In this analogy, what is the baton that the invisible hand uses to conduct the economic orchestra?

prices

Unemployment would cause an economy to

produce inside its production possibilities frontier.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,

production is less profitable and employment falls.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

production is more profitable and employment rises.

The aggregate-demand curve shows the

quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level.

The aggregate demand and aggregate supply graph has the

quantity of output on the horizontal axis. Output is best measured by real GDP.

Other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions.

Which of the following Fed actions would both decrease the money supply?

sell bonds and raise the reserve requirement

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply

To decrease the money supply, the Fed can

sell government bonds or increase the discount rate.

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

Today's demand curve for gasoline could shift in response to a change in

the expected future price of gasoline.

In the circular-flow diagram, in the markets for

the factors of production, households are sellers and firms are buyers.

Refer to Figure 34-5. What is measured along the vertical axis of the graph?

the interest rate

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes

the interest rate to fall, so aggregate demand shifts right.

Sir Isaac Newton's development of the theory of gravity after observing an apple fall from a tree is an example of

the interplay between observation and theory in science.

A downward-sloping demand curve illustrates

the law of demand.

When the Fed buys government bonds,

the money supply increases and the federal funds rate decreases.

Money is

the most liquid asset but an imperfect store of value.

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

the multiplier effect.

If, at the current price, there is a shortage of a good, then

the price is below the equilibrium price.

The model of short-run economic fluctuations focuses on

the price level and real GDP.

Which of the following adjust to bring aggregate supply and demand into balance?

the price level and real output

Aggregate demand includes

the quantity of goods and services households, firms, the government, and customer abroad want to buy.

An increase in the expected price level shifts the

the short-run but not the long-run aggregate supply curve left.

On the graph that depicts the theory of liquidity preference,

the supply-of-money curve is vertical.

When an economy is operating inside its production possibilities frontier, we know that

there are unused resources or inefficiencies in the economy.

At the Federal Reserve,

to achieve stable prices, full employment, and economic growth

During periods of expansion, automatic stabilizers cause government expenditures

to fall and taxes to rise.

An increase in government spending shifts aggregate demand

to the right. The larger the multiplier is, the farther it shifts.

The aggregate supply curve is

vertical in the long run and slopes upward in the short run.

Which of the following policies is not in the Fed's monetary toolbox?

​Issuing a bank run

Which of the following is NOT an example of monetary policy?

​The Federal Reserve facilitates bank transactions by clearing checks.

​If the reserve ratio increased from 5 percent to 10 percent, then the money multiplier would

​fall from 20 to 10.

Table 29-3. An economy starts with $50,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $45,750. The T-account of the bank is shown below. Assets Reserves $4,250 Loans 45,750 Liabilities Deposits $50,000 Refer to Table 29-3. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by

$1,764.71

Refer to Figure 4-18. At what price would there be an excess demand of 200 units of the good?

$20

If the reserve ratio is 12.5 percent, then $1000 of additional reserves can create up to

$8,000 of new money

In the special case of the 100 percent-reserve banking, the money multiplier is

1 and banks do not create money.

If $500 of new reserves generates $1000 of new money in the economy, then the money multiplier is

2

If the MPC = 0.5 and there is no crowding out, then the spending multiplier is​

2

If the multiplier is 3, then the MPC is

2/3.

If the reserve ratio is 4 percent, then the money multiplier is

25

A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the reserve requirement. It follows that the reserve requirement is

25 percent.

Refer to Figure 34-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?

3, 2, 1, 4

The following table contains a monthly demand schedule for large, single-topping, carry-out pizzas. If the law of demand applies to these pizzas, then A could be

30.

Refer to Table 2-3. What is the opportunity cost to Footville of increasing the production of shoes from 400 to 600?

300 socks

If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is

37.5 percent

Refer to Figure 4-2. Suppose Phil and Miss Kay are the only consumers in the market. If the price is $10, then the market quantity demanded is

4 units.

Refer to Table 4-6. If these are the only four sellers in the market, then the market quantity supplied at a price of $10 is

44 units

Refer to Table 2-2. If the production possibilities frontier is bowed outward, then "?" could be

4500

Refer to Table 4-1. If the market consists of Michelle, Laura, and Hillary and the price falls by $1, the quantity demanded in the market increases by

5 units

Refer to Figure 4-13. If Producer A and Producer B are the only producers in the market, then the market quantity supplied when the price is $2 is

6 units

Refer to Figure 2-5. If this economy devotes all of its resources to the production of dryers, then it will produce

80 dryers and 0 washers.

Assets Reserves $19,800 Loans 160,200 Liabilities Deposits $180,000 Refer to Table 29-7. Assuming the Bank of Springfield and all other banks have the same reserve ratio, then what is the value of the money multiplier?

9.1

If the reserve requirement is 10 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $500, it a. must increase required reserves by $50. b. will initially see reserves increase by $500. c. will be able to use this deposit to make new loans amounting to $450. d. All of the above are correct.

All of the above are correct

Economists, like mathematicians, physicists, and biologists, a. make use of the scientific method. b. try to address their subject with a scientist's objectivity. c. devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. d. All of the above are correct.

All of the above are correct.

Other things the same, which of the following responses would we expect to result from a decrease in U.S. interest rates? a. U.S. citizens decide to hold more foreign bonds. b. People choose to hold more currency. c. You decide to purchase a new oven for your cookie factory. d. All of the above are correct.

All of the above are correct.

The Fed can influence the money supply by a. changing how much it lends to banks. b. changing the interest rate it pays banks on the reserves they are holding. c. using open-market operations. d. All of the above are correct.

All of the above are correct.

The long-run aggregate supply curve shifts right if a. immigration from abroad increases. b. the capital stock increases. c. technology advances. d. All of the above are correct.

All of the above are correct.

Which of the following policy actions shifts the aggregate-demand curve? a. an increase in the money supply b. an increase in taxes c. an increase in government spending d. All of the above are correct.

All of the above are correct.

Which of these statements about economic models is correct? a. For economists, economic models provide insights about the world. b. Economic models are built with assumptions. c. Economic models are often composed of equations and diagrams. d. All of the above are correct.

All of the above are correct.

Which of the following is a correct statement about production possibilities frontiers?

An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier.

Which of the following correctly explains the crowding-out effect?

An increase in government expenditures increases the interest rate and so reduces investment spending.

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

As the price level increases, the interest rate rises, so spending falls

Refer to Figure 2-1. Harvey receives his first paycheck for working as an ice cream vendor. To which of the arrows does this transaction directly contribute?

C and D

Refer to Figure 33-10. If the economy starts at point C, stagflation would be consistent with point

D.

The theory of liquidity preference assumes that the nominal supply of money is determined by the

Federal Reserve.

Which of the following statements is correct about the roles of economists?

In trying to explain the world, economists are scientists; in trying to improve the world, they are policy advisers.

A bank has a 20 percent reserve requirement, $8,000 in loans, and has loaned out all it can given the reserve requirement.

It has $10,000 in deposits.

Refer to Figure 34-7. Which of the following is correct?

It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2.

Which of the following does the Federal Reserve not do?

It makes loans to any qualified business that requests one.

Refer to Figure 2-13. Which points are not currently attainable but could become achievable for this economy if there is an improvement in technology?

J, K

Assets: Reserves = $1000 Loans = $7,000 Liabilities Deposits = $8,000 Refer to Table 29-4. Starting form the situation as depicted by the T-Account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be

Liabilities increase by $800

Demand deposits are included in

M1 and M2

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks. As a result of these changes,

M1 increases by $2,500 and M2 stays the same.

Which of the following statements about models is correct?

Models assume away irrelevant details.

Which of the following is correct?

The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms.

Refer to Figure 2-11. Which of the following events would explain the shift of the production possibilities frontier from A to B?

The economy experienced a technological advance in the production of books

In a certain economy, jam and bread are produced, and the economy currently operates on its production possibilities frontier. Which of the following events would allow the economy to produce more jam and more bread, relative to the quantities of those goods that are being produced now?

The economy experiences economic growth.

OPTIMISM: Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. What happens to the expected price level and what's the result for wage bargaining?

The expected price level rises. Bargains are struck for higher wages

Which of the following events would cause a movement downward and to the left along the supply curve for mangos?

The price of mangos falls

Refer to Figure 2-5. Suppose this economy is producing at point D. Which of the following statements would best explain this situation?

There is widespread unemployment in the economy.

Refer to Figure 2-4. At which point is this economy producing its maximum possible quantity of doors?

U

Which of the following is an example of a normative, as opposed to positive, statement?

Universal health care would be good for U.S. citizens.

Refer to Figure 4-5. Which of the following would cause the demand curve to shift from Demand C to Demand A in the market for DVDs?

a change in consumer preferences toward watching movies in movie theaters rather than at home

Refer to Figure 2-18. Which of the following could result in a movement from point B to point Z?

a change in income

Which of the following shifts aggregate demand to the left?

a decrease in the money supply

According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads to

a decrease in the price level but does not change real GDP.

Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift

aggregate demand left.

A decrease in government spending initially and primarily shifts

aggregate demand to the left.

In 1986, OPEC countries increased their production of oil. This caused

aggregate supply to shift right.

At any given time, the voting members of the Federal Open Market Committee include a. five of the presidents of the regional Federal Reserve banks. b. the president of the Federal Reserve Bank of New York. c. the seven members of the Board of Governors. d. All of the above are correct.

all of the above are correct

Which of the following shifts short-run aggregate supply left?

an increase in price expectations

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will

decrease and the quantity of money demanded will increase.

In a fractional-reserve banking system, an increase in reserve requirements

decrease both the money multiplier and the money supply

Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to

decrease consumption, shown by shifting the aggregate-demand curve to the left.

To increase the money supply, the Feds can

1. lower reserve requirements 2. reduce the discount rate 3. buy bonds

Other things the same, the aggregate quantity of goods demanded decreases if a. real wealth falls. b. the interest rate rises. c. the dollar appreciates. d. All of the above are correct

All of the above are correct

Refer to Figure 4-6. Suppose that the federal government is concerned about obesity in the United States. Congress is considering two plans. One would require "junk food" producers to include warning labels on all junk food. The other would impose a tax on all products considered to be junk food. If the warning labels are successful, we could illustrate the plan as producing a movement from

Point A to Point B in Panel 1.

Consider the following traders who meet. Bill has an eggplant, wants a head of cabbage Tim has a head of lettuce, wants a cucumber Mike has a tomato, wants an eggplant Amy has a cucumber, wants a head of lettuce Which, if any, pairs of traders has a double coincidence of wants?

Tim with Amy

The short-run effects of an increase in the expected price level include

a lower level of output and a higher price level.

Refer to Figure 4-8. Suppose the figure shows the market demand for laptop computers. Suppose the price of wireless printers, a complementary good, decreases. Which of the following changes would occur?

a shift from D2 to D1

During the last half of 2012, the U.S. unemployment rate was just under 8 percent. Historical experience suggests that this is

above the natural rate, so real GDP growth was likely low.

If the stock market booms, then

aggregate demand increases, which the Fed could offset by selling bonds.

Consider the following sequence of events: price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ Τhis sequence explains why the

aggregate-demand curve slopes downward

A bank loans Kelly's Print Shop $350,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is

an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply.

Which of the following might cause the demand curve for an inferior good to shift to the left?

an increase in the price of a complement

When the Fed decreases the discount rate, banks will

borrow more from the Fed and lend more to the public. The money supply increases.

In a competitive market, the quantity of a product produced and the price of the product are determined by

both buyers and sellers

Shifts in aggregate demand affect the price level in

both the short and long run.

Monetary policy

can be described either in terms of the money supply or in terms of the interest rate.

An economic theory about international trade that is based on the assumption that there are only two countries trading two goods

can be useful in helping economists understand the complex world of international trade involving many countries and many goods

Any point on a country's production possibilities frontier represents a combination of two goods that an economy

can produce using all available resources and technology.

The primary difference between commodity money and fiat money is that

commodity money has intrinsic value but fiat money does not.

The ease with which an asset can be

converted into the economy's medium of exchange determines the liquidity of that asset.

Refer to Figure 33-5. The shift of the short-run aggregate-supply curve from SRAS1 to SRAS2

could be caused by a decrease in the expected price level.

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households

increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.

In a fractional-reserve banking system, a decrease in reserve requirements

increases both the money multiplier and the money supply.

An increase in government spending

increases the interest rate and so investment spending decreases.

When the interest rate increases, the opportunity cost of holding money

increases, so the quantity of money demanded decreases.

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

interest rate

When the money supply increases

interest rates fall and so aggregate demand shifts right.

When the money supply decreases

interest rates rise and so aggregate demand shifts left.

An economy's production of two goods is efficient if

it is impossible to produce more of one good without producing less of the other.

When the Fed conducts open-market sales,

it sells Treasury securities, which decreases the money supply

Assume the MPC is 0.65. Assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the

left by about $57.1 billion.

A reduction in U.S net exports would shift U.S. aggregate demand

leftward. In an attempt to stabilize the economy, the government could increase expenditures.

Other things the same, an increase in the price level makes consumers feel

less wealthy, so the quantity of goods and services demanded falls.

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

likely smaller than if the cut had been permanent.

When the Fed purchases $1000 worth of government bonds from the public, the U.S. money supply eventually increases by

more than $1000.

During recessions, automatic stabilizers tend to make the government's budget

move toward deficit.

The aggregate demand and aggregate supply graph has

the price level on the vertical axis. The price level can be measured by the GDP deflator.

Which of the following is not a determinant of demand?

the price of a resource that is used to produce the good

Assume the market for tennis balls is perfectly competitive. When one tennis ball producer exits the market,

the price of tennis balls does not change.

Table 29-3. An economy starts with $50,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $45,750. The T-account of the bank is shown below. Assets Reserves $4,250 Loans 45,750 Liabilities Deposits $50,000 Refer to Table 29-3. The bank's reserve ratio is

8.5 percent

A bank has a 5 percent reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement.

A bank has a 5 percent reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement.

The money supply increases when the Fed

buys bonds. The increase will be larger, the smaller is the reserve ratio.

When the Federal Reserve conducts open-market operations to increase the money supply, it

buys government bonds from the public.

When conducting an open-market purchase, the Fed

buys government bonds, and in so doing increases the money supply.

Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. This can be explained

by technological progress and money supply growth.

An open-market sale

decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.