ECON 201 Final Exam

For the multiple deposit expansion process described in this table, what is the maximum amount of loans that the Second Guaranty Bank can make if it observes the same reserve ratio as First Guaranty Bank? Deposits = $200,000 Loans = $184,000

$169,280

If the Fed increases bank reserves by $5,000 and the banking system has a reserve ratio of 1/10, what is the change in the money supply?

$50,000

Based on only the information provided, M1 in this country amounts to

(Currency+checkable deposits+demand deposits)

Suppose the Federal Reserve (Fed) decides the current money supply of $3.2 trillion is too low, and that an increase of $600 billion is necessary. Assume the current reserve ratio is 0.1. The change in reserves necessary to achieve the $600 billion increase is _____________

60 billion

Who is more likely to spend more time searching for a well run, safe bank: a depositor living in a country with government-run deposit insurance or a depositor living in a country without government-run deposit insurance? A depositor will spend more time searching for a safe bank if there is no government-run deposit insurance. A depositor will spend more time searching for a safe bank if there is government-run deposit insurance.

A depositor will spend more time searching for a safe bank if there is no government-run deposit insurance.

Which of the following will cause consumption spending to increase? A) an increase in expected future income B) an increase in the price level C) a general decline in housing prices D) an increase in interest rates

A) an increase in expected future income

A recession increases the number of recipients of unemployment benefits.

Automatic stabalizer

Which describes the role of automatic stabilizers in the economy?

Automatic stabilizers have a similar impact as discretionary fiscal policy but occur automatically, without action by the government. Automatic stabilizers increase aggregate demand during recessions and reduce aggregate demand during expansions.

Do government-run central banks and deposit insurance both increase moral hazard problems, both decrease moral hazard problems, or do they push in different directions when it comes to moral hazard? Both institutions decrease moral hazard problems. Both institutions increase moral hazard problems. These institutions push in different directions with respect to moral hazard problems.

Both institutions increase moral hazard problems.

Which of the following will increase aggregate demand in the United States? A) an increase in the price level. B) an increase in the value of the dollar. C) an increase in government purchases D) an increase in interest rates.

C) an increase in government purchases

Investment spending will increase when A) firms become more pessimistic about earning future profits. B) the corporate income tax increases. C) business cash flow increases. D) the interest rate rises.

C) business cash flow increases.

What are the four components of Aggregate Demand?

Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

When housing prices decrease, household wealth will _____ and consumption will _____. A) increase; increase C) decrease; increase B) increase; decrease D) decrease; decrease

D) decrease; decrease

__________ is defined as currency plus checkable deposits.

M1

__________ is defined as currency, checkable deposits, savings deposits, money market mutual funds, and small‑time deposits.

M2

___________ is defined as currency and total reserves held at the Fed.

The Monetary base

Who is more likely to take bigger risks: a trapeze artist with a safety net underneath or a trapeze artist without a safety net? The artist without the net will likely take bigger risks. The artist with the net will likely take bigger risks.

The artist with the net will likely take bigger risks.

Who is more likely to take bigger risks with his deposits: a bank CEO in a country where there is a lender of last resort or a bank CEO in a country where there is no lender of last resort? The bank CEO will take bigger risks if there is no lender of last resort. The bank CEO will take bigger risks if there is a lender of last resort.

The bank CEO will take bigger risks if there is a lender of last resort.

Which of the following statements is TRUE? a) People would be more likely to invest their savings in bank alternatives if the reserve ratio is 100%. b) The money multiplier tells us how much deposits expand with each dollar decrease in reserves. c) If banks kept a 100% reserve ratio, the money multiplier would equal 10. d) With a 100% reserve ratio, the interest rate on bank deposits would likely go up.

a) People would be more likely to invest their savings in bank alternatives if the reserve ratio is 100%

Which of the following are the most liquid assets? a) Reserves held by banks at the Fed c) checkable deposits b) Demand deposits d) savings deposits

a) Reserves held by banks at the Fed

Economic growth increases personal and corporate income, increasing tax payments.

automatic stabilizers

An increase in taxes will ________ consumption spending, and a decrease in transfer payments will ________ consumption spending. a) increase; increase c) increase; decrease b) decrease; decrease d) decrease; increase

b) decrease; decrease

Net exports usually _______________ when the U.S. economy is in a recession and ______________ when the U.S. economy is expanding. a) increase; increase c) increase; decrease b) decrease; decrease d) decrease; increase

c) increase; decrease

What is the largest component of Aggregate Demand?

consumption

If interest rates in the U.S. increase significantly over a short period of time, we should expect to see consumption spending to increase and investment spending to decrease. consumption spending and investment spending to decrease. consumption spending to decrease and investment spending to increase. consumption spending and investment spending to increase.

consumption spending to increase and investment spending to decrease.

Suppose Warren Buffet deposits $20 million into his checking account at Wells Fargo Bank. If the reserve requirement ratio is .1 what is the maximum change in money supply? a) -$200 million c) $200 million b) -$180 million d) $180 million

d) $180 million

Which of the following tools are available to the U.S. Federal Reserve Bank (the Fed)? a) The federal funds rate b) Loans c) Payments of interest on reserves d) All of the above.

d) All of the above.

If the value of the U.S. dollar increases relative to the euro (a foreign currency), exports from the U.S. will _________________ and net exports for the U.S. will ________________. decrease; decrease decrease; increase increase; increase increase; decrease

decrease; decrease

A law is enacted that increases government spending on health‑care programs.

discretionary spending

Legislators increase the generosity of unemployment benefits.

discretionary spending

Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing? real business cycle policy monetary policy fiscal policy growth policy

fiscal policy

If housing prices in the U.S. were to increase significantly, we should expect to see consumers' wealth ___________________ and consumption spending to __________________. increase; decrease increase; increase decrease; decrease decrease; increase

increase; increase

Suppose the government decreases taxes. What will happen to disposable income and consumer spending? 1 DISPOSABLE INCOME CONSUMER SPENDING

increase; increase

Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a: shock to the LRAS curve. real shock. shock to aggregate demand. change in expected inflation that shifts the SRAS curve.

shock to aggregate demand.