ECO Review 3
The purchasing power of money and the price level vary
inversely
The Federal Reserve System
is basically an independent agency.
In the diagram, a shift from AS3 to AS2 might be caused by an increase in
productivity
The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits
and reserves of commercial banks both decrease.
Refer to the diagram of the market for money. The vertical money supply curve Sm reflects the fact that
the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
Checkable deposits are classified as money because
they can be readily used in purchasing goods and paying debts.
When the reserve requirement is increased:
the excess reserves of member banks are reduced
The public debt is the amount of money that
the federal government owes to holders of U.S. securities.
Which of the diagrams for the U.S. economy best portrays the effects of a decrease in the availability of key natural resources?
b
Currency in circulation is part of
both M1 and M2.
Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,
government should undertake neither expansionary nor contractionary fiscal policy.
The determinants of aggregate supply
include resource prices and resource productivity.
In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to
increase aggregate demand.
An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the
multiplier effect.
The aggregate demand curve
shows the amount of real output that will be purchased at each possible price level.
The aggregate supply curve
shows the various amounts of real output that businesses will produce at each price level.
The equilibrium price level and level of real output occur where
the aggregate demand and supply curves intersect.
Open-market operations refer to
the purchase or sale of government securities, as well as collateralized money loans, by the Fed.
Most modern banking systems are based on
fractional reserves.
The crowding-out effect suggests that
government borrowing to finance the public debt increases the real interest rate and reduces private investment.
Given a fixed upsloping AS curve, a rightward shift of the AD curve will
increase both the price level and real output.
In the diagram, a shift from AS2 to AS3 might be caused by a(n)
increase in business taxes and costly government regulation.
In the diagram, a shift from AS1 to AS3 might be caused by a(n)
increase in the prices of imported resources.
Discretionary fiscal policy refers to
intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
Contractionary fiscal policy is so named because it
is aimed at reducing aggregate demand and thus achieving price stability.
The economy's long-run aggregate supply curve
is vertical.
A decline in investment will shift the AD curve to the
left by a multiple of the change in investment.
Graphically, cost-push inflation is shown as a
leftward shift of the AS curve.
An increase in the money supply will
lower interest rates and increase the equilibrium GDP.
The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits
of commercial banks are unchanged, but their reserves increase.
Which of the following is a tool of monetary policy?
open-market operations
In 2018, the U.S. public debt was about
$21.5 trillion.
The aggregate supply curve (short run)
slopes upward and to the right.
A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are
$5,000.
A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are
$50,000 and $250,000, respectively.
If the monetary multiplier is 6, then the reserve ratio must be
0.167
In the diagram, the economy's long-run aggregate supply curve is shown by line
1
The commercial banking system has excess reserves of $200,000. Then new loans of $800,000 are made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be
25 percent.
In the diagram, the economy's short-run AS curve is line ___, and its long-run AS curve is line ___.
2; 1
If the required reserve ratio were 15 percent, the value of the monetary multiplier would be
6.67
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by
A and B.
Refer to the diagram, in which Qf is the full-employment output. Contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at
AD3.
The central authority of the U.S. banking system is the
Board of Governors of the Federal Reserve.
The total demand for money will shift to the left as a result of
a decline in nominal GDP.
Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves
are $20,000.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Cost-push inflation is depicted by
b
One of the strengths of monetary policy relative to fiscal policy is that monetary policy
can be implemented more quickly.
Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank
cannot safely lend out more money.
The largest component of the money supply (M1) is
checkable deposits.
In the United States, the money supply (M1) includes
coins, paper currency, and checkable deposits.
An expansionary monetary policy may be less effective than a restrictive monetary policy because
commercial banks may not be able to find good loan customers.
If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement
contractionary fiscal policy.Correct
The sale of government bonds by the Federal Reserve Banks to commercial banks will
decrease aggregate demand.
Cost-push inflation is characterized by a(n)
decrease in aggregate supply and no change in aggregate demand.
A rightward shift of the AD curve in the very steep upper part of the short-run AS curve will
increase the price level by more than real output.
When the required reserve ratio is decreased, the excess reserves of banks are
increased and the multiple by which the commercial banking system can lend is increased.
A contraction of the money supply
increases the interest rate and decreases aggregate demand.
If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by
increasing government spending by $4 billion.
The short-run aggregate supply curve represents circumstances where
input prices are fixed, but output prices are flexible.
Expansionary fiscal policy is so named because it
is designed to expand real GDP.
A rightward shift in the aggregate supply curve is best explained by an increase in
productivity
The primary purpose of the legal reserve requirement is to
provide a means by which the monetary authorities can influence the lending ability of commercial banks.
The purpose of a restrictive monetary policy is to
raise interest rates and restrict the availability of bank credit.
If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by
reducing government expenditures by $20 billion.
Recessions have contributed to the public debt by
reducing national income and therefore tax revenues.
An increase in net exports will shift the AD curve to the
right by a multiple of the change in net exports.
Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of new money that the banking system could create is about
$660 million.
Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of
$80,000.
The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is consistent with the bank having
$90,000 in checkable deposit liabilities and $32,000 in reserves.
The Board of Governors of the Federal Reserve has ____ members.
7
Which of the following best describes the cause-effect chain of an expansionary monetary policy?
An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is the
Federal Open Market Committee (FOMC).
In the U.S. economy, the money supply is controlled by the
Federal Reserve System.
Refer to the diagram of the market for money. The equilibrium interest rate is
I2.
Money market deposit accounts are included in
M2 only.
Which one of the following is true about the U.S. Federal Reserve System?
There are 12 regional Federal Reserve Banks.
The public debt is held as
Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
The securities held as assets by the Federal Reserve Banks consist mainly of
Treasury bills, Treasury notes, and Treasury bonds.
With cost-push inflation, there will be
a decrease in real GDP.
In the diagram, a shift from AS1 to AS2 might be caused by
a decrease in the prices of domestic resources.
The fundamental objective of monetary policy is to assist the economy in achieving
a full-employment, noninflationary level of total output.
Money functions as
a store of value, a unit of account, and a medium of exchange.
An appropriate fiscal policy for severe demand-pull inflation is
a tax rate increase.
The purpose of an expansionary monetary policy is to shift the
aggregate demand curve rightward.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in productivity is depicted by
b
In a fractional reserve banking system,
banks can create money through the lending process.
Which of the following is the basic economic policy function of the Federal Reserve Banks?
controlling the supply of money
Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.
decrease; increase
Discretionary fiscal policy will stabilize the economy most when
deficits are incurred during recessions and surpluses during inflations.
Fiscal policy refers to
deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.
Which one of the following is presently a major deterrent to bank panics in the United States?
deposit insurance
The reserves of a commercial bank consist of
deposits at the Federal Reserve Bank and vault cash.
Excess reserves refer to the
difference between actual reserves and required reserves.
Maximum checkable-deposit expansion in the banking system is equal to
excess reserves times the monetary multiplier.
The amount that a commercial bank can lend is determined by its
excess reserves.
If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift
rightward by $50 billion at each price level.
Graphically, demand-pull inflation is shown as a Multiple Choice
rightward shift of the AD curve along an upsloping AS curve.
The equilibrium rate of interest in the market for money is determined by the intersection of the
supply-of-money curve and the total-demand-for-money curve.
Other things equal, if there is an increase in nominal GDP,
the interest rate will rise.
