ECON EXAM 2 DENNIS PLOTT ECON 202
Imagine that Sandra Clayton deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the Scenario. As a result of Sandra's deposit, Bank A's reserves immediately increase by (A) $2,000.(B) $8,000.(C) $10,000. (D) $50,000.(E) None of the above.
$10,000
Imagine that Sandra Clayton 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 Sandra Clayton's deposit, Bank A's required reserves increase by (A) $2,000. (B) $8,000.(C) $10,000.(D) $50,000. (E) None of the above.
$2,000
Imagine that Sandra Clayton 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 Sandra's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of (A) $2,000.(B) $8,000.(C) $10,000.(D) $50,000. (E) None of the above.
$50,000
Imagine that Sandra Clayton 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 Sandra's deposit, Bank A's excess reserves increase by (A) $2,000.(B) $8,000. (C) $10,000.(D) $50,000.(E) None of the above.
$8,000
If the federal government's expenditures are less than its tax revenues, then (A) a budget surplus results. (B) a budget deficit results. (C) the budget is balanced. (D) No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays. (E) None of the above.
(A) a budget surplus results.
Social Security is a "pay-as-you-go" system, meaning that payments to current retirees are paid (A) from taxes collected from current workers. (B) from taxes collected from retired workers. (C) as long as the government had funds available. (D) as the government collected revenues from tariffs and excise taxes in the years Social Security payments were made. (E) None of the above.
(A) from taxes collected from current workers.
The tax multiplier (A) is negative. (B) is larger in absolute value as compared to the government spending multiplier. (C) is a measure of how much taxes will fall when income is falling. (D) is always less than one. (E) None of the above.
(A) is negative.
Potential GDP refers to the level of (A) real GDP in the long-run. (B) nominal GDP in the long-run. (C) real GDP in the short-run. (D) nominal GDP in the short-run. (E) None of the above
(A) real GDP in the long-run.
Which of the following provides health-care coverage to people age 65 and over? (A) Medicaid (B) Medicare (C) Social Security (D) Health-Aid (E) None of the above.
(B) Medicare
Fiscal policy refers to changes in (A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. (B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. (C) federal taxes and purchases that are intended to fund the war on terrorism. (D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives. (E) All of the above.
(B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
Automatic stabilizers refer to (A) the money supply and interest rates that automatically increase or decrease along with the business cycle. (B) government spending and taxes that automatically increase or decrease along with the business cycle. (C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives. (D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. (E) None of the above.
(B) government spending and taxes that automatically increase or decrease along with the business cycle
The multiplier effect refers to the series of (A) autonomous increases in consumption spending that result from an initial increase in induced expenditures. (B) induced increases in consumption spending that result from an initial increase in autonomous expenditures. (C) autonomous increases in investment spending that result from an initial increase in induced expenditures. (D) induced increases in investment spending that result from an initial increase in autonomous expenditures. (E) None of the above.
(B) induced increases in consumption spending that result from an initial increase in autonomous expenditures.
Full-employment GDP is also known as (A) realized GDP. (B) potential GDP. (C) cyclical GDP. (D) balanced-budget GDP. (E) None of the above.
(B) potential GDP
Government transfer payments include which of the following? (A) interest on the national debt (B) grants to state and local governments (C) Social Security and Medicare programs (D) national defense (E) Both A and D
(C) Social Security and Medicare programs
Which of the following is an example of discretionary fiscal policy? (A) An increase in unemployment insurance payments during a recession. (B) An increase in income tax receipts with rising income during an expansion. (C) The tax cuts passed by Congress in 2001 to combat the recession. (D) A decrease in food stamps issued during an expansion or boom. (E) None of the above.
(C) The tax cuts passed by Congress in 2001 to combat the recession.
Which of the following is considered a negative supply shock? (A) Increasing immigration in the economy causes the labor supply to rise. (B) An improvement in technology. (C) An increase in unemployment. (D) An unexpected decrease in the refining capacity for oil. (E) None of the above.
(D) An unexpected decrease in the refining capacity for oil.
Congress and the president carry out fiscal policy through changes in (A) interest rates and the money supply. (B) taxes and the interest rate. (C) government purchases and the money supply. (D) government purchases and taxes. (E) None of the above.
(D) government purchases and taxes
The long-run aggregate supply curve (A) has a negative slope. (B) has a steep but positive slope. (C) is horizontal. (D) is vertical. (E) None of the above.
(D) is vertical.
Crowding out refers to a decline in as a result of an increase in . (A) tax revenues; unemployment (B) government purchases; tax rates (C) government purchases; private expenditures (D) private expenditures; government purchases (E) None of the above.
(D) private expenditures; government purchases
The federal government debt equals (A) tax revenues minus government spending.(B) government spending minus tax revenues.(C) the accumulation of past budget deficits.(D) the total value of U.S. Treasury securities outstanding. (E) None of the above.
(D) the total value of U.S. Treasury securities outstanding
The federal government debt equals (A) tax revenues minus government spending. (B) government spending minus tax revenues. (C) the accumulation of past budget deficits. (D) the total value of U.S. Treasury securities outstanding. (E) None of the above.
(D) the total value of U.S. Treasury securities outstanding.
Which of the following is considered contractionary fiscal policy? (A) Congress increases the income tax rate to slow down inflation. (B) Congress increases defense spending. (C) Legislation removes a college tuition deduction from federal income taxes. (D) The New Jersey legislature cuts highway spending to balance its budget. (E) All of the above.
Congress increases the income tax rate to slow down inflation.
Autonomous expenditure is a type of expenditure that does not depend on (A) wealth. (B) expectations .(C) rates. (D) GDP. (E) None of the above.
GDP.
You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The Chairperson of the CEA tells you that he believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. He wants to know what policy to pursue to increase aggregate output by $300 billion. The best estimate she has for the MPC is 0.8. Which of the following policies should you recommend? (A) Increase government purchases by $60 billion. (B) Increase government purchases by $150 billion. (C) Cut taxes by $60 billion. (D) Cut taxes by $60 billion and to increase government purchases by $60 billion. (E) None of the above.
Increase government purchases by $60 billion.
_________of unemployment during make it easier for workers to _________wages. (A) High levels; a recession; negotiate higher (B) Low levels; an expansion; negotiate higher (C) Low levels; a recession; accept lower (D) High levels; an expansion; accept lower (E) None of the above.
Low levels; an expansion; negotiate higher
The M2 measure of the money supply equals (A) savings account balances plus small-denomination time deposits plus traveler's checks. (B) savings account balances plus small-denomination time deposits plus non-institutional money market fund shares. (C) M1 plus savings account balances plus small-denomination time deposits. (D) M1 plus savings account balances plus small-denomination time deposits plus non-institutional money market fund shares. (E) None of the above.
M1 plus savings account balances plus small-denomination time deposits plus non-institutional
If central banks (e.g., Bank of England) decided to include virtual currency (e.g., Bitcoin) in its measure of the money supply, what would be the effect on M1 and M2? (A) M1 would rise. (B) M1 would fall. (C) M1 would rise and M2 would remain constant. (D) M2 would rise but M1 would remain constant. (E) M2 would fall but M1 would remain constant.
M1 would rise
When Mexico experiences a period of high inflation and Mexicans lose confidence in their peso as a store of value, which of the following would be most likely to occur? (A) The demand for pesos would increase. (B) The buying power of the peso would increase. (C) The value of foreign currencies would depreciate relative to the peso. (D) Mexicans would use a different currency as a medium of exchange. (E) None of the above.
Mexicans would use a different currency as a medium of exchange.
If the tax multiplier is −1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) (A) a $133.3 billion increase in GDP (B) a $300 billion increase in GDP (C) a $30 billion increase in GDP (D) a $133.33 billion decrease in GDP (E) None of the above.
None of the above
Imagine that Sandra Clayton 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 Sandra's deposit, Bank A can make a maximum loan of (A) $2,000.(B) $10,000.(C) $20,000.(D) $50,000. (E) None of the above.
None of the above.
Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic? (A) Bank total reserves would decrease. (B) Required reserves would increase. (C) Bank checking account balances would decrease. (D) Individual banks would have to shrink the value of loans they made. (E) All of the above.
Required reserves would increase
Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? (A) Output will decrease. (B) Prices will increase. (C) Unemployment will rise. (D) Short-run aggregate supply will shift to the right. (E) None of the above.
Short-run aggregate supply will shift to the right.
National debt is held as (A) bank deposits in U.S. banks. (B) Federal Reserve Notes. (C) U.S. Notes. (D) Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds. (E) None of the above.
Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds
True, False, or Uncertain: If the U.S. government passed a law requiring the Federal budget to be balanced, then economic expansions would lead to increased inflationary pressure; ceteris paribus. (A) True. (B) False.(C) Uncertain.
True
Which of the following would increase the size of the government purchases multiplier? (A) an increase in the tax rate (B) an increase in the quantity of imports purchased by households from an increase in income (C) a decrease in the amount of consumption spending by households from an increase in income (D) a decrease in the amount saved by households from an increase in income (E) None of the above.
a decrease in the amount saved by households from an increase in income
The statement, "My iPhone is worth $700" represents money's function as (A) a medium of exchange. (B) a unit of account. (C) a store of value. (D) a standard of deferred payment. (E) None of the above.
a unit of account.
A bank will consider a car loan to a customer___________ and a customer's checking account to be______________ . (A) a liability; an asset (B) an asset; a liability (C) a liability; a liability (D) an asset; an asset (E) None of the above.
an asset; a liability
A change in consumption spending caused by income changes is____________ change in spending, and a change in government spending that occurs to improve roads and bridges is _____________change in spending. (A) an induced; an autonomous (B) an expansionary; a contractionary (C) an autonomous; an induced (D) a contractionary; an expansionary (E) None of the above.
an induced; an autonomous
Commodity money (A) has value independent of its use as money. (B) has little to no value independent of its use as money (C) is backed by a valuable commodity such as gold. (D) can be used to purchase commodities, but not services. (E) None of the above.
as value independent of its use as money
If people speculate that a run on one bank will cause a run on all banks in the financial system, and this speculation proves accurate, then the financial system would experience what is known as a (A) commodity crisis. (B) securitization meltdown. (C) bank panic. (D) institutional death spiral. (E) None of the above.
bank panic.
The largest proportion of M1 is made up of (A) currency. (B) checking account deposits. (C) traveler's checks. (D) savings account deposits. (E) time deposits.
checking account deposits
The M1 measure of the money supply equals (A) paper money plus coins in circulation. (B) currency plus checking account balances. (C) currency plus checking account balances plus traveler's checks. (D) currency plus checking account balances plus traveler's checks plus savings account balances. (E) None of the above.
currency plus checking account balances plus traveler's checks.
Which of the following is counted as a liability for a bank? (A) customer deposits (B) bank reserves (C) securities (D) bank loans (E) None of the above.
customer deposits
An increase in the money supply will (A) increase the interest rate. (B) decrease the interest rate. (C) have no affect on the interest rate. (D) decrease the equilibrium quantity of money in the economy. (E) None of the above.
decrease the interest rate.
Unemployment insurance are payments made to unemployed workers. Typically workers are paid for no more than 26 weeks. In December 2012, the federal government passed legislation that would extend the payments to a maximum of 73 weeks. This extension is an example of (A) automatic fiscal policy. (B) discretionary fiscal policy. (C) non-needs spending. (D) contractionary fiscal policy. (E) None of the above.
discretionary fiscal policy
The ratio of the increase in_________ to the increase in_____________ is called the multiplier. (A) equilibrium nominal GDP; autonomous expenditure (B) equilibrium real GDP; autonomous expenditure (C) autonomous expenditure; equilibrium real GDP (D) induced expenditure; equilibrium real GDP (E) None of the above.
equilibrium real GDP; autonomous expenditure
The interest rate that banks charge other banks for overnight loans is the (A) prime rate. (B) discount rate. (C) federal funds rate. (D) Treasury bill rate. (E) None of the above.
federal funds rate.
Federal government purchases as a percentage of GDP (A) have risen since the early 1950s. (B) have fallen since the early 1950s. (C) have remained roughly the same since the early 1950s. (D) rose from the early 1950s until the mid 1980s, and then fell. (E) None of the above.
have fallen since the early 1950s.
If net taxes fall by $80 billion, we would expect (A) the government deficit to fall by $80 billion. (B) household saving to rise by $80 billion. (C) household saving to rise by less than $80 billion. (D) household saving to fall by more than $80 billion. (E) None of the above.
household saving to rise by less than $80 billion.
If Congress wanted to counteract the effects of a recession it could (A) increase tax rates. (B) increase taxes by a fixed amount. (C) increase government purchases. (D) decrease defense spending. (E) Both A and D
increase government purchases.
During a recession, automatic stabilizers cause the Federal deficit to (A) decrease. (B) either increase or decrease. (C) remain unchanged. (D) increase. (E) None of the above.
increase.
Ceteris paribus, an increase in the interest rate, (A) decreases the opportunity cost of holding money. (B) increases the opportunity cost of holding money. (C) decreases the percentage yield of holding money. (D) increases the percentage yield of holding money. (E) None of the above.
increases the opportunity cost of holding money.
The largest source of federal government revenue in 2016 was (A) sales taxes. (B) corporate income taxes. (C) individual income taxes. (D) payroll taxes to fund Social Security and Medicare programs. (E) None of the above.
individual income taxes
When the government runs a budget deficit, we would expect to see that (A) private saving will fall. (B) investment will fall. (C) a budget surplus will occur. (D) public (government) saving is positive. (E) None of the above.
investment will fall
The federal funds rate (A) is determined administratively by the Fed. (B) is determined by the supply of and demand for bank reserves. (C) is determined directly by household demand for funds (D) is determined directly by firm demand for funds (E) None of the above.
is determined by the supply of and demand for bank reserves
People hold money as opposed to financial assets because money (A) earns interest. (B) is perfectly liquid. (C) earns no interest. (D) earns a higher return than other financial assets. (E) None of the above.
is perfectly liquid
Fiat money has (A) little to no intrinsic value but is backed by the quantity of gold held by the central bank. (B) little to no intrinsic value and is authorized by the central bank or governmental body. (C) value, because it can be redeemed for gold by the central bank. (D) a great intrinsic value that is independent of its use as money. (E) None of the above.
little to no intrinsic value and is authorized by the central bank or governmental body.
Which of the following is an asset for a bank? (A) deposits of its customers (B) short-term borrowing (C) shareholders' equity (D) loans (E) None of the above.
loans
Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should (A) lower government purchases by an amount less than $200 billion. (B) lower government purchases by $200 billion. (C) raise taxes by $200 billion. (D) lower taxes by $200 billion. (E) raise taxes by more than $200 billion.
lower government purchases by an amount less than $200 billion
Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion. To move the economy back to potential GDP, Congress should (A) lower taxes by an amount less than $500 billion. (B) raise government purchases by $500 billion. (C) raise government purchases by more than $500 billion. (D) lower taxes by $500 billion. (E) None of the above.
lower taxes by an amount less than $500 billion.
A commercial bank like BMO Harris Bank creates money by (A) printing paper money. (B) earning profits. (C) selling corporate bonds. (D) making loans. (E) None of the above.
making loans
Which of the following assets is most liquid? (A) money (B) bond (C) savings account (D) stock (E) None of the above.
money
If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 billion, then the economy (A) must be at potential real GDP. (B) must be below potential real GDP. (C) must be above potential real GDP. (D) could be below or above potential real GDP. (E) None of the above.
must be below potential real GDP
Credit card balances are (A) part of M1. (B) part of M2. (C) part of M3. (D) not part of the money supply. (E) None of the above.
not part of the money supply.
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) bank loans are more closely monitored by the Federal Reserve. (C) of low interest rates. (D) of deposit insurance. (E) None of the above.
of deposit insurance
Public saving in the economy can be increased by (A) lowering taxes. (B) raising government spending. (C) raising taxes. (D) raising transfer payments. (E) None of the above.
raising taxes
Before the Great Depression of the 1930s, the majority of government spending took place at the ____________and after the Great Depression the majority of government spending took place at the _______________ . (A) state and local levels; federal level (B) local level; federal level (C) federal level; state and local levels (D) federal level; state level (E) None of the above.
state and local levels; federal level
If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then (A) the MPC is 0.5. (B) the MPC is 0.75. (C) the MPC is 0.8. (D) the MPC is 0.9. (E) None of the above.
the MPC is 0.8.
Long-run macroeconomic equilibrium occurs when (A) the aggregate demand curve intersects the short-run aggregate supply curve. (B) the aggregate demand and short-run aggregate supply curves intersect at a point on the long-run aggregate supply curve. (C) structural and frictional unemployment equal zero. (D) output is above potential GDP. (E) None of the above.
the aggregate demand and short-run aggregate supply curves intersect at a point on the long-run aggregate supply curve
Where the aggregate demand curve and the short-run aggregate supply curve intersect (A) the long-run aggregate supply curve must also intersect at the same point. (B) inflation must be increasing. (C) structural and frictional unemployment equal zero. (D) the economy is in short-run macroeconomic equilibrium. (E) None of the above.
the economy is in short-run macroeconomic equilibrium.
For the federal deficit to be lowered, (A) the federal government must decrease its spending and increase net exports. (B) the federal government's expenditures must be lower than its tax revenue. (C) the Federal Reserve must raise interest rates and lower the required reserve ratio. (D) the Federal Reserve must reduce the money supply. (E) the federal government must increase taxes, but increase expenditure by more.
the federal government's expenditures must be lower than its tax revenue
The gross public (national) debt was approximately $6 trillion in 2002 and approximately $16 trillion in 2012. These numbers definitely indicate that in the 10 years between 2002 and 2012 (A) the government had budget deficits that totaled about $10 trillion. (B) the government had budget deficits of about $10 trillion per year. (C) government outlays increased by about $1 trillion per year.(D) government receipts decreased by about $1 trillion per year. (E) None of the above.
the government had budget deficits that totaled about $10 trillion
The use of fiscal policy to stabilize the economy is limited because (A) changes in government spending and tax rates have a small effect on aggregate demand. (B) changes in government spending and tax rates have a small effect on interest rates. (C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. (D) the Internal Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code. (E) None of the above.
the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.
If stricter immigration laws are imposed and many foreign workers in the United States are forced to go back to their home countries, (A) the long-run aggregate supply curve will shift to the right. (B) the long-run aggregate supply curve will shift to the left. (C) we will move up along the long-run aggregate supply curve. (D) we will move down along the long-run aggregate supply curve. (E) the short-run aggregate supply curve will shift to the right.
the long-run aggregate supply curve will shift to the left.
The process of an economy adjusting from a recession back to potential GDP in the long-run without any government intervention is known as (A) monetary policy (B) the self-correcting mechanism. (C) "releasing sticky prices." (D) fiscal policy. (E) None of the above.
the self-correcting mechanism
The fastest growing category of government expenditure is (A) grants to state and local governments. (B) defense spending. (C) transfer payments. (D) government purchases. (E) None of the above.
transfer payments
Bank reserves include (A) vault cash and deposits with the Federal Reserve. (B) loans to bank customers and deposits with the Federal Reserve. (C) vault cash and loans to bank customers. (D) customer checking accounts and vault cash. (E) deposits with the Federal Reserve and holdings of securities.
vault cash and deposits with the Federal Reserve.
