ECO 202 - EXAM 2
If the money supply is growing at a rate of 4 percent per year, real GDP (real output) is growing at a rate of 0 percent per year, and velocity is growing at 2 percent per year instead of remaining constant, what will the inflation rate be?
Money Supply x Velocity = P(inflation) x Y(growth rate) 4 + 2 = 0 + ? 6%
Imagine Kristy deposits $10,000 of currency into her checking deposit at Bank A and the reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's reserves immediately increase by... a - $8,000 b - $10,000 c - $50,000 d - $2,000
b - $10,000
Open market operations refer to the purchase or sale of ________ to control the money supply. a - corporate bonds and stocks by the Federal Reserve b - U.S. Treasury securities by the Federal Reserve c - discount and advances by the Federal Reserve d - corporate bonds and stocks by the U.S. Treasury e - U.S. Treasury securities by the U.S. Treasury
b - U.S. Treasury securities by the Federal Reserve
In the United States, each bank panic in the late nineteenth and early twentieth centuries was accompanied by... a - a depression b - a recession c - inflation d - deflation
b - a recession
In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door'." In the same article, Ambrose Evans-Pritchard, a writer for the London-based newspaper The Telegraph, is quoted as saying: "Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." 1.) What is price deflation? a - a decrease in the rate of growth of the price level b - a fall in the price level c - an increase in the rate of growth of the price level d - an increase in the price level 2.) What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"? a - an increase in the money supply that exceeds the rate of growth of GDP will increase the price level b - an increase in the money supply will cause consumers to demand more goods c - an increase in the money supply will increase the velocity of money, and thus there will be hyperinflation d - an increase in the money supply will decrease the price level because money will be worth less 3.) Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"? a - deflation increases purchasing power, so it is not necessary to buy as many goods b - consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further c - banks will be unwilling to lend when prices are falling, causing a decrease in investment and fall in demand d - decreases in the price level cause the money supply to decrease, which makes it difficult to purchase goods.
1.) b - a fall in the price level 2.) a - an increase in the money supply that exceeds the rate of growth of GDP will increase the price level. 3.) b - consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.
The following is from a message by President Hoover to Congress, dated May 5, 1932: "I need not recount that the revenues of the Government as estimated for the next fiscal year show a decrease of about $1,700,000,000 below the fiscal year 1929, and inexorably require a broader basis of taxation and a drastic reduction of expenditures in order to balance the Budget. Nothing is more necessary at this time than balancing the Budget." 1.) According to statement, balancing the Budget would require... a - increasing government purchases and decreasing taxes b - decreasing government purchases and increasing taxes c - decreasing government purchases and decreasing taxes d - increasing government purchases and increasing taxes 2.) In the context of what was happening in the economy in 1929, President Hoover was ________ in saying that, in 1932, nothing was more necessary than balancing the federal government's budget.
1.) b - decreasing government purchases and increasing taxes 2.) incorrect
1.) Which of the following is the largest liability of a typical bank? a - Treasury bills b - deposits c - loans d - reserves 2.) Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves? a - the required reserve ratio b - the cash to deposit ratio c - the simple deposit multiplier d - the quantity equation
1.) b - deposits 2.) a - the required reserve ratio
1.) Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals: a - $180 million b - $200 million c - $1.8 billion d - $2 billion 2.) Velocity is defined as... a - V = M + P + Y b - V = M / (P x Y) c - V = (P x Y) / M d - V = M x P x Y
1.) c - 3 x 600mil = $1.8 billion 2.) c - V = (P xY)/M
An article in the Wall Street Journal in 2017 noted that: "China now has one of the highest [required reserve] ratios in the world, economists say, even though many businesses are starved of credit..." 1.) What does the article mean by Chinese businesses being starved for credit? a - when Chinese businesses are starved of credit, it means they are not profitable b - being starved for credit means that Chinese businesses are holding excess cash c - being starved for credit means Chinese businesses cannot get loans d - this would indicate that Chinese businesses must pay high interest rates on their loans 2.) Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for credit? Briefly explain. a - yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans b - no, this would indicate that Chinese banks must store more reserves at the central bank instead of the vault c - probably not, since there is no correlation between banks' willingness to make loans and the required reserve ratio d - no, this would indicate that Chinese banks are making more loans to households instead of businesses
1.) c - being starved for credit means Chinese businesses cannot get loans. 2.) a - yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.
Economist Mark Thoma has written, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name implies." 1.) Automatic stabilizers are a - changes in the money supply that occur automatically when money demand changes b - budgetary cuts that occur automatically at the end of the fiscal year if there is a deficit c - government spending and taxes that automatically increase or decrease along with the business cycle d - changes in business taxes that occur when the economy slows down 2.) Two examples of automatic stabilizers in the U.S. are a - social security payments and the proportional income tax system b - unemployment insurance payments and the progressive income tax system c - the proportional income tax system and student loan subsidies d - social security payments and the regressive income tax system 3.) Automatic stabilizers can reduce the severity of a recession because, during a recession, a - unemployment payments rise and tax connections fall, providing more spending ability to push the economy back to full employment b - student loan subsidies rise and tax collections fall, providing more spending ability to push the economy back to full employment. c - social security payments and student loan subsidies rise, providing more spending ability to push the economy back to full employment. d - social security payments rise and tax collections fall, providing more spending ability to push the economy back to full employment.
1.) c - government spending and taxes that automatically increase or decrease along with the business cycle. 2.) b - unemployment insurance payments and the progressive income tax system. 3.) a - unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment.
Briefly explain whether an expansionary fiscal policy will cause each of the following variables to increase or decrease: 1.) Real GDP... a - not affect real GDP because potential GDP won't change b - decrease real GDP by decreasing long-run aggregate supply c - increase real GDP by increasing aggregate demand d - increase real GDP by increasing short-run aggregate supply 2.) The unemployment rate... a - decrease the unemployment rate by increasing production b - increase the unemployment rate by decreasing employment c - decrease the unemployment rate by decreasing the labor force d - increase the unemployment rate by increasing wages 3.) The price level... a - increase the price level because less is supplied b - decrease the price level because inflation falls c - increase the price level because more is demanded d - decrease the price level because more is supplied
1.) c - increase real GDP by increasing aggregate demand. 2.) a - decrease the unemployment rate by increasing production. 3.) c - Increase the price level because more is demanded.
1.) A monetary policy change that causes a decrease in interest rates will result in... a - a downward movement along the aggregate demand curve b - an upward movement along the aggregate demand curve c - the aggregate demand curve shifting to the right d - the aggregate demand curve shifting to the left 2.) A ________ __ ________ would cause a similar shift in the aggregate demand curve.
1.) c - the aggregate demand curve shifting to the right 2.) decrease in taxes
An opinion column in the New York Times noted that "private borrowers cannot create money from thin air" as the Federal Reserve can. 1.) Does the government create money by printing currency? a - no, banks create money through the Treasury Department b - yes, this is the primary way that banks create money c - yes, but banks create the majority of the money supply by making loans d - no, banks create money by funding credit card companies 2.) A central bank can "create money" by buying bonds because... a - by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply b - the bonds are sold to the Federal Reserve which converts the funds to currency c - the central bank is the only entity that can print money d - they pay for the bonds with paper currency
1.) c - yes, but banks create the majority of the money of the money supply by making loans. 2.) a - by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply.
1.) Very high rates of inflation are called... a - inflationary gap b - acceleration c - stagflation d - hyperinflation 2.) Governments sometimes allow hyperinflation to occur because... a - when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation. b - when governments want to spend more than they collect in taxes, private company bonds are sold to the public at a higher interest rate than GDP growth rate, often resulting in hyperinflation. c - when governments want to spend more than they collect in taxes, the Fed engages in expansionary fiscal policy, resulting in a rising interest rate, often resulting in hyperinflation. d - when governments want to spend more than they collect in taxes, government purchases increases are held back until a new tax can be imposed on the general public, often resulting in hyperinflation.
1.) d - hyperinflation 2.) a - when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system changed fundamentally during the boom. . . . [The] non-bank financial system grew to be very large. . . . [The] institutions in this parallel financial system [are] vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks. 1.) What did Geithner mean by the "non-bank financial system"? a - buyers and sellers of stocks and bonds in asset markets that are outside of the banking system. b - banks that are outside of the Federal Reserve System and thus not subject to ordinary banking regulations. c - credit unions, savings and loans, and other thrift institutions that are not classified as commercial banks but still take deposits and make loans. d - money market mutualfunds, hedgefunds, and other financial firms that raise money from investors and provide it to firms and households. 2.) What is a "classic type of run"? a - many depositors simultaneously decide to withdraw their money from a bank b - many banks simultaneously decide to issue mortgage-backed securities, driving down their price. c - many investors decide to sell funds at the same time, which runs down the price or value of the asset. d - many investors decide to purchase funds at the same time, which runs up the price or value of the asset. 3.) Why would deposit insurance provide the banking system with protection against runs? a - deposit insurance guarantees all deposits, and thus there is no incentive to withdraw funds. b - to be covered by deposit insurance, depositors must agree not to withdraw all their funds without notice. c - deposit insurance guarantees that banks cannot go out of business by losing deposits. d - since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
1.) d - money market mutualfunds, hedgefunds, and other financial firms that raise money from investors and provide it to firms and households. 2.) a - many depositors simultaneously decide to withdraw their money from a bank 3.) d - since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
1.) In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be ________. 2.) In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be ________.
1.) inflation 2.) recession
Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account. Wells Fargo Assets Liabilities Reserves +$100,000 Deposits $100,000 If the required reserve ratio is 0.10, or 10 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as a result of this transaction is $________.
100,000 x 0.10 = 10,000 -> 100,000 - 10,000 = 90,000
The United States is divided into ________ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of ________ members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a ________ year renewable term as the chairman.
12; 7; 4
If the money supply is growing at a rate of 4 percent per year, real GDP (real output) is growing at a rate of 0 percent per year, and velocity is constant, what will the inflation rate be?
4-0 = 4%
Suppose the economy enters a recession. If government policymakers -Congress, the president, and members of the Federal Reserve - do not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run? i. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run.
Statement ii is correct.
If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows: a - Inflation Rate = Growth rate of the money supply - Growth rate of real output b - Inflation Rate = Growth rate of the money supply + Growth rate of velocity c - Inflation Rate = Growth rate of the money supply + Growth rate of velocity d - Inflation Rate = Growth rate of the money supply + Growth rate of real output
a - Inflation rate = Growth rate of the money supply - Growth rate of real output
In the static aggregate demand - aggregate supply model, and increase in the corporate income (profit) tax will in the short run lead to ________ in real GDP and ________ in the price level. a - a decrease; a decrease b - an increase; and increase c - an increase; a decrease d - a decrease; an increase
a - a decrease; a decrease
In the static aggregate demand - aggregate supply model, an increase in the expected future price level (an increase in inflationary expectations) will in the short run lead to ________ in real GDP and ________ in the price level. a - a decrease; an increase b - a decrease; a decrease c - an increase; an increase d - an increase; a decrease
a - a decrease; an increase
In the static aggregate demand - aggregate supply model, a decrease in interest rates will in the short run lead to ________ in real GDP and ________ in the price level. a - an increase; an increase b - a decrease; an increase c - an increase; a decrease d - a decrease; an increase
a - an increase; an increase
In the static aggregate demand - aggregate supply model, an increase in government purchases will in the short run lead to _________ in real GDP and ________ in the price level. a - an increase; an increase b - a decrease; an increase c - an increase; a decrease d - a decrease; a decrease
a - an increase; an increase
The economic definition of money is: a - any asset that people are generally willing to accept in exchange for goods and services b - a good that has intrinsic value c - anything authorized by the government to be used in an exchange d - anything of value owned by a person or a firm
a - any asset that people are generally willing to accept in exchange for goods and services
How does the dynamic model of aggregate supply and aggregate demand explain inflation? a - by showing that if total spending in the economy grows faster than total production, prices will rise b - by showing that increases in labor productivity usually lead to increases in prices c - by showing that if total production in the economy grows faster than total spending, prices will rise d - none of the above
a - by showing that if total spending in the economy grows faster than total production, prices will rise
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________. a - contractionary; fall; fall b - contractionary; rise; fall c - expansionary; rise; fall d - expansionary; rise; rise
a - contractionary; fall; fall
The sale of Treasury securities by the Federal Reserve will, in general, a - decrease the quantity of reserves held by banks b - not change the money supply c - not change the quantity of reserves held by banks d - increase the quantity of reserves held by banks
a - decrease the quantity of reserves held by banks.
The required reserves of a bank equal its ________ the required reserve ratio. a - deposits multiplied by b - loans divided by c - deposits divided by d - loans multiplied by
a - deposits multiplied by
Assume that the economy is in long-run equilibrium in Year 1, and that in Year 2 the normal conditions occur and that the curves shift the way they typically shift in the dynamic aggregate demand - aggregate supply model. In addition to what normally occurs in the dynamic model in Year 2, also assume that foreign real GDP decreases moderately. The moderate decrease in foreign real GDP in Year 2 will cause the unemployment rate to... a - increase, but will not cause a recession b - decrease, and will cause a recession c - increase, and will cause a recession d - decrease, but will not cause a recession
a - increase, but will not cause a recession
Assume that the economy is in long-run equilibrium in Year 1, and that in Year 2 the normal conditions occur and that the curves shift the way they typically shift in the dynamic aggregate demand - aggregate supply model. In addition to what normally occurs in the dynamic model in Year 2, also assume that household wealth decreases moderately from a decline in housing prices and stock prices. The moderate decrease in household wealth in Year 2 will cause the unemployment rate to ________ and the growth rate of real GDP to ________ from what they would have been in Year 2. a - increase; decrease b - increase; increase c - decrease; increase d - decrease; decrease
a - increase; decrease
In the basic aggregate demand and aggregate supply model, which of the following would cause inflation? A decrease in... a - interest rates b - household wealth c - government purchases d - firms' expectations of future profitability of investment spending
a - interest rates
Firms in the shadow banking system were more vulnerable than commercial banks to "bank" runs because the shadow banking firms were ________ highly leveraged and held a ________ portion of mortgage-backed securities than commercial banks. a - more; higher b - more; lower c - less; lower d - less; higher
a - more; higher
Budget deficits... a - occur when government spending exceeds tax revenue, and increase during recessions and wars. b - occur when tax revenue exceeds government spending, and increase during recessions and wars. c - occur when tax revenue exceeds government spending, and decrease during recessions and wars. d - occur when government spending exceeds tax revenue, and decrease during recessions and wars.
a - occur when government spending exceeds tax revenue, and increase during recessions and wars.
Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic? a - required reserves b - bank checking account balances would decrease c - bank total reserves would decrease d - individual banks would have to shrink the value of loans they made
a - required reserves would increase
The government budget constraint states that government spending (government purchases plus transfer payments) equals a - tax revenue plus the change in bonds plus the change in the money supply b - tax revenue plus the change in bonds c - tax revenue d - the change in bonds plus the change in the money supply
a - tax revenue plus the change in bonds plus the change in the money supply
In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by... a - the establishment of the Federal Deposit Insurance Corporation b - the Federal Reserve System conducting open market operations c - establishing a fractional reserve system of banking d - increasing the required reserve ratio to 100%
a - the establishment of the Federal Deposit Insurance Corporation
The government budget constraint shows that a government has ________ way(s) to finance a budget deficit, and the/these way(s) is/are a - two; borrowing by issuing bonds and printing money b - one; borrowing by issuing bonds c - one; printing money d - two; collecting taxes and borrowing by issuing bonds
a - two; borrowing by issuing bonds and printing money.
A newspaper article contains the statement: "Income is only one way of measuring wealth." Do you agree that income is a way of measuring wealth? a - wealth is the stock of money and income adds to that stock b - income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts c - income measures wealth because wealth is equal to the income that is not spent d - wealth can be measured by income since wealthy individuals have high incomes
b - income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts
By increasing the interest rate on bank reserves deposited at the Fed, the Fed can ________ the level of excess reserves banks are willing to hold, thereby ___________ bank lending. a - increase; increasing b - increase; decreasing c - decrease; increasing d - decrease; decreasing
b - increase; decreasing
Assume that the economy is in long-run equilibrium in Year 1, and that in Year 2 the normal conditions occur and that the curves shift the way the typically shift in the dynamic aggregate demand - aggregate supply model. In addition to what normally occurs in the dynamic model in Year 2, also assume that oil prices increase moderately. The moderate increase in oil prices in Year 2 will cause the unemployment rate to ________ and the inflation rate to ________ from what they would have been in Year 2. a - increase; decrease b - increase; increase c - decrease; decrease d - decrease; increase
b - increase; increase
What are the largest asset and the largest liability of a typical bank? a - reserves are the largest asset and deposits are the largest liability of a typical bank. b - loans are the largest asset and deposits are the largest liability of a typical bank. c - loans are the largest liability and deposits are the largest asset of a typical bank. d - cash in its vault is the largest asset and bonds are the largest liability of a typical bank.
b - loans are the largest asset and deposits are the largest liability of a typical bank
Which of the following best describes how healthy banks can become insolvent during a bank panic? a - a single bank sells deposits to meet liquidity needs, causing the price of the deposits to fall and decreasing the value of the bank's remaining deposits. b - multiple banks sell assets to meet liquidity needs, causing the price of the assets to fall and decreasing the value of the bank's remaining assets. c - a single bank sells assets to meet liquidity needs, causing the price of the assets to fall and decreasing the value of the bank's remaining assets. d - multiple banks sells deposits to meet liquidity needs, causing the price of the deposits to fall and decreasing the value of the bank's remaining deposits
b - multiple banks sell assets to meet liquidity needs, causing the price of the assets to fall and decreasing the value of the bank's remaining assets.
Firms in the shadow banking system were more vulnerable than commercial banks to "bank" runs because in the shadow banking system, unlike the commercial banking system, there was... a - more state government regulation b - no federal deposit insurance c - federal deposit insurance d - more federal government regulation
b - no federal deposit insurance
Bank panics have largely disappeared in the United States because... a - banks are now required to hold a larger fraction of deposits as reserves b - of deposit insurance c - bank loans are more closely monitored by the Federal Reserve d - of low interest rates
b - of deposit insurance.
The major assets on a bank's balance sheet are its... a - loans and checking and savings account deposits b - reserves, loans, and holdings of securities c - checking and savings account deposits d - reserves and checking and savings account deposits
b - reserves, loans, and holdings of securities
If the central bank can act as a lender of last resort during a banking panic, banks can... a - borrow more and more money from the central bank, and this will lower its reserves and decrease the public's faith in the banking system. b - satisfy customer withdrawal needs and eventually restore the public's faith in the banking system. c - call in their loans to their customers and eventually restore the public's faith in the banking system. d - encourage the public to borrow directly from the central bank, and this will worsen the banking panic.
b - satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
Who determines monetary policy? a - the president and the Federal Reserve b - the Federal Reserve c - the president d - the president and Congress
b - the Federal Reserve
The position of the long-run aggregate supply (LRAS) curve is determined by... a - the price level and aggregate demand. b - the number of workers, the amount of capital, and the available technology. c - consumption, investment, government purchases, and net exports. d - the price level, the available technology, and "sticky" prices.
b - the number of workers, the amount of capital, and the available technology.
The quantity theory of money is better able... a - to explain the natural rate of unemployment in the long run b - to explain the inflation rate in the long run c - to explain the full employment in the long run d - to explain the inflation rate in the short run
b - to explain the inflation rate in the long run.
Bank reserves include... a - vault cash and loans to customers b - vault cash and deposits with the Federal Reserve c - customer checking accounts and vault cash d - loans to bank customers and deposits with the Federal Reserve
b - vault cash and deposits with the Federal Reserve
In the basic aggregate demand and aggregate supply model, a decrease in foreign real GDP in BRIC nations would in the short run lead to ________ in the unemployment rate and ________ in the price level. a - a decrease; a decrease b - a decrease; an increase c - an increase; a decrease d - an increase; an increase
c - an increase; a decrease
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply? a - reserve requirements b - open market operations c - changing income tax rates d - discount policy
c - changing income tax rates
To increase the money supply, the Federal Reserve could... a - raise the discount rate b - increase the interest rate it pays on reserves c - conduct an open market purchase of Treasury securities d - raise the required reserve ratio
c - conduct an open market purchase of Treasury securities.
What would be the appropriate monetary policy if the economy is in a short-run equilibrium below potential GDP? a - decrease income taxes b - increase foreign real GDP c - decrease interest rates d - increase interest rates
c - decrease interest rates
The adjustment of the economy to potential real GDP in the long run from a level of real GDP below potential real GDP occurs as nominal wages ________, shifting the short-run aggregate supply curve to the ________. a - rise; right b - fall; left c - fall; right d - rise; left
c - fall; right
The purchase of Treasury securities by the Federal Reserve will, in general, a - decrease the quantity of reserves held by banks b - not change the quantity of reserves held by banks c - increase the quantity of reserves held by banks d - not change the money supply
c - increase the quantity of reserves held by banks.
In the basic aggregate demand - aggregate supply model a decrease in government purchases will cause in the short run the unemployment rate to... a - decrease; but will not cause a recession b - increase, but will not cause a recession c - increase, and will cause a recession d - decrease, and will cause a recession
c - increase, and will cause a recession
Assume that the economy is in long-run equilibrium in Year 1, and that in Year 2 the normal conditions occur and that the curves shift the way they typically shift in the dynamic aggregate demand - aggregate supply model. In addition to what normally occurs in the dynamic model in Year 2, also assume that oil prices increase moderately. The moderate increase in oil prices in Year 2 will cause the unemployment rate to... a - decrease, and will cause a recession b - decrease, but will not cause a recession c - increase, but will not cause a recession d - increase, and will cause a recession
c - increase, but will not cause a recession
If the Fed buys U.S. Treasury securities, then this... a - increases reserves, causes banks to reduce their loans, and increases the money supply b - decreases reserves, causes banks to reduce their loans, and increases the money supply c - increases reserves, encourages banks to make more loans, and increases the money supply d - decreases reserves, causes banks to reduce their loans, and decreases the money supply
c - increases reserves, encourages banks to make more loans, and increases the money supply.
As a lender of last resort, a central bank like the Federal Reserve makes loans to "banks" that have... a - bad deposits b - become insolvent c - liquidity problems d - bad loans
c - liquidity problems
In the basic AD-AS model, a decrease in the aggregate demand curve would in the long run lead to ________ in real GDP rate and ________ in the price level. a - no change; no change b - an increase; an increase c - no change; a decrease d - an increase; no change
c - no change; a decrease
According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur? a - the discount rate will increase b - the nominal interest rate will decrease c - nominal GDP will increase d - the price level will decrease
c - nominal GDP will increase
Why do few economists argue that it would be a good idea to balance the federal budget every year? a - To keep a balanced budget during a recession, taxes would have to decrease and government expenditures would have to increase, which would further reduce aggregate demand and deepen the recession. b - To keep a balanced budget during an expansion, taxes would have to increase and government expenditures would have to decrease, which would increase aggregate demand and lead to inflation. c - To keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession. d - To keep a balanced budget during an expansion, taxes would have to decrease and government expenditures would have to increase, which would increase aggregate demand and decrease inflation.
c - to keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession.
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 excess reserves increase by... a - $2,000 b - $50,000 c - $10,000 d - $8,000
d - $8,000
Using the Aggregate Demand - Aggregate Supply model, which of the following would cause a recession? a - a shift to the right of the aggregate demand curve b - a movement up along the aggregate supply curve c - a shift to the right of the aggregate supply curve d - a shift to the left of the aggregate demand curve
d - a shift to the left of the aggregate demand curve
Using the Aggregate Demand - Aggregate Supply model, which of the following would cause inflation? a - a movement down along the aggregate demand curve b - a shift to the right of the aggregate supply curve c - a shift to the left of the aggregate demand curve d - a shift to the left of the aggregate supply curve
d - a shift to the left of the aggregate supply curve
A central bank like the Federal Reserve in the United States can help banks survive a bank run by... a - raising the discount rate b - printing money c - increasing the required reserve ratio d - acting as the lender of last resort
d - acting as the lender of last resort
If in Year 1 the price level was 100 and real GDP was $20 trillion and in Year 2 the price level was 105 and real GDP was $21 trillion, then the predominant change that occurred in Year 2 was... a - a decrease (shift to the left) in short-run aggregate supply b - a decrease in aggregate demand c - an increase (shift the right) in short-run aggregate supply d - an increase in aggregate demand
d - an increase in aggregate demand
In the basic (static) AD-AS model, a decrease in foreign real GDP will in the short run lead to ________ in unemployment and ________ in the price level. a - an increase; a decrease b - a decrease; an increase c - a decrease; a decrease d - an increase; an increase
d - an increase; an increase
Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the money supply? a - sell U.S. Treasury bills b - raise the reserve requirement c - raise the discount rate d - decrease the interest rate it pays on reserves
d - decrease the interest rate it pays on reserves.
In the basic aggregate demand and aggregate supply model, which of the following would cause a recession? A decrease in... a - interest rates b - oil prices c - income taxes d - firms' expectations of future profitability of investment spending
d - firms' expectations of future profitability of investment spending
The four main monetary policy tools used by the Federal Reserve to manage the money supply are... a - open market operations, the exchange rate of the dollar against foreign currencies, tax rates, and government purchases b - tax rates, exchange rates, government purchases, and government transfer payments c - interest rates, tax rates, exchange rates, and government spending d - open market operations, discount policy, reserve requirements, and interest on reserves
d - open market operations, discount policy, reserve requirements, and interest on reserves.
To have growth without inflation, which of the following must be true? a - AD must decrease to reduce inflationary pressure b - there must be no change in SRAS c - potential GDP must remain constant d - there must be no change in AD e - AD, SRAS, and LRAS must increase by the same amount
e - AD, SRAS, and LRAS must increase by the same amount
Which of the following is a major difference between the AD-AS model and the dynamic AD-AS model? The dynamic AD-AS model assumes a - AD only includes consumption, investment, and government purchases, while the AD-AS model assumes AD includes consumption, investment, government purchases and net exports. b - the SRAS is stable and will not shift, while the AD-AS model assumes the SRAS an only change with an exogenous event such as oil price changes. c - the economy does not experience long-run growth, while the AD-AS model assumes there is constant inflation in the economy d - potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.
d - potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.
The maturity mismatch that banks face refers too the banks having ________ deposits and ________ loans. a - short-term; short-term b - long-term; long-term c - long-term; short-term d - short-term; long-term
d - short-term; long-term
How do banks create money? a - banks buy bonds in the open market and gain reserves; this excess reserve holding increases the money supply. b - when there is a decrease in checking account deposits, banks lose reserves and reduce their loans, and the money supply expands. c - banks sell bonds in the open market and lose reserves; the excess cash holding by households increases the money supply. d - when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands
d - when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands
