ECON Exam 3

In a progressive tax system, if a person moves from one income bracket to a higher income bracket: A. both the marginal tax rate and average tax rate will be higher B. both the marginal tax rate and average tax rate will be lower C. the marginal tax rate will be lower and the average tax rate will be higher D. the marginal tax rate will be higher and the average tax rate will be lower

both the marginal tax rate and average tax rate will be high

Paying a higher interest rate on reserves held at the Fed will tend to: A. have an ambiguous effect on the money supply B. not change the money supply C. decrease the money supply D. increase the money supply

decrease the money supply

Currently the Social Security program pays out _______ it collects in taxes. A. more than B. less than C. significantly less than D. about the same as

more than

Who actually bears the burden of the FICA tax? A. mostly employees B. mostly employers C. employees and employers in equal amounts D. congress

mostly employees

The Federal Reserve's major tool(s) to control money supply is (are): A. open market operations and paying interest on reserves B. paying interest on reserves C. changing the reserve ratio D. open market operations

open market operations and paying interest on reserves

The money you pay into social security goes to: A. an individual account B. a trust that earns interest to help pay your benefits C. pay current beneficiaries D. the investment fund of your choice

pay current beneficiaries

The entire US tax system is moderately: A. flat B. regressive C. progressive D. value-added

progressive

Which is not a function of the Federal Reserve? A. providing loans to small businesses B. regulating the US money supply C. serving as the lender of last resort D. regulating the US financial system

providing loans to small businesses

As a result of an increase in the growth rate of the money supply: A. both the real GDP and the inflation rate increase only in the short run B. real GDP growth increases in both the short run and the long run, and the inflation rate increases only in the short run C. real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run D. real GDP growth increases only in the long run, and the inflation rate increases only in the short run.

real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run

If you pay an average tax rate of 25% on your salary of $20,000 and your neighbor pays an average tax rate of 10% on his salary of $300,000, the tax system is: A. progressive B. flat C. regressive D. proportional

regressive

In addition to monetary policy, the Fed also has the power to: A. control the mortgage market B. oversee treasury transactions C. regulate banks D. monitor the housing market

regulate banks

Increase uncertainty causes the AD curve to: A. Become flatter B. shift inward C. shift outward D. become steeped

shift inward

The single item on which the US government spent the most in 2017 was: A. foreign aid B. defense C. social security D. Interest on debt

social security

The Federal Reserve can shift the economy by shifting: A. the AD, SRAS, and LRAS curves B. the SRAS curve C. the AD curve D. the LRAS curve

the AD curve

An open market operation occurs when: A. banks increase the reserve ratio B. the Fed enforces regulations on the banking industry C. the Fed buys or sells government bonds D. banks loan funds to one another

the Fed buys or sells government bonds

Assume that the economy is initially at point Y in the graph. If the Fed takes the appropriate action with monetary policy, but overestimates how serious the recession is, then: A. the LRAS curve would shift left B. the Fed would take the economy to point X C. the Fed would fail to stimulate the economy and it would remain at point Y D. the Fed would overshoot and the economy would move to point W

the Fed would overshoot and the economy would move to point W

Foreign aid constitutes about _______ of the US federal spending budget. A. 1% B. 5% C. 10% D. 40%

1%

If the federal government spends 12% of GDP and collects revenues of 10% of GDP, what is the deficit as a percentage of GDP? A. 1% B. 2% C. 11% D. 12%

2%

If the reserve ratio is 4%, the money multiplier is: A. 16 B. 4 C. 25 D. 20

25

In a fractional reserve banking system, banks only hold a fraction of their: A. deposits as reserves B. monetary base C. currency as reserves D. loans as reserves

deposits as reserves

A reduction in the rate of inflation is called: A. reversing course B. Volcker's regret C. Disinflation D. deflation

Disinflation

(T or F) Credit cards are included only in the M2 definition of the money supply.

False

(T or F) Monetary policy is more effective at combating real shocks than AD shocks.

False

Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will: A. decrease by $1,000 B. Increase by $400 C. decrease by $400 D. Increase by $1,000

Increase by $1,000

Government spending on "interest on the debt" refers to: A. interest paid to owners of government debt held by the public B. interest charged by the US government for US foreign aid to other countries C. spending by the US government on education and highways D. interest charged by the US government on loans to states for education programs

Interest paid to owners of government debt held by the public

This economy initially begins at point A and a negative supply shock takes it to point Y. If the Fed reacts by increasing money growth by 9%, this would take the economy to: A. Point A B. Point B C. Point X D. Point V

Point V

______ refers to the Federal Reserve's purchase of longer-term government bonds or other securities. A. An open market purchase B. Quantitative easing C. Quantitative tightening D. An open market sale

Quantitative easing

The Fed loaned money to AIG because it was concerned about: A. the liquidity of this insurance company B. moral hazard on the part of this insurance company C. the market demands being placed on this insurance company D. Systematic risk, because AIG's bankruptcy would put other financial institutions at risk of insolvency

Systematic risk

Bitcoin (among others) is a form of money (at least was planned to be one). What is the main difference between the US dollar and currencies such as bitcoin? A. Bitcoin is not printed on paper B. Bitcoin changes its value, and US dollar does not C. There is no central bank in charge of Bitcoin D. US dollar is not used on black markets

There is no central bank in charge of Bitcoin

(T or F) At the time the Federal Reserve must make a decision, the actual state of the economy may be unknown.

True

(T or F) If the fed increase the amount of bank reserves by $100 million, the total money supply will increase by more than $100 million.

True

(T or F) It is possible that coffee will be used as money one day.

True

(T or F) Uncertainty drives people away from investment projects.

True

The paper currency circulated in the United States is called: A. a United States note B. a bank note C. an American note D. a Federal Reserve note

a Federal Reserve note

The marginal tax rate is the tax rate paid on an: A. average amount of income B. additional dollar of income C. average amount of spending D. additional dollar of spending

additional dollar of income

Money is best defined as: A. only the amount we spend in a given period B. the total amount of fixed assets we own C. anything that is widely accepted means of payment D. anything that has high nominal value

anything that is widely accepted means of payment

If the Federal Reserve overstimulates the economy by increasing money growth too much, then inflation will: A. make long-term planning and contracting easier B. create arbitrary redistributions of wealth C. make price signals easier to interpret D. bring the economy into a recession

create arbitrary redistributions of wealth

If a central bank wishes to reduce inflation, it should announce its intentions and follow through with them, thereby using _________ monetary policy. A. visible B. integral C. credible D. authoritative

credible

How can the Fed offset a positive shock to aggregate demand? A. increase the growth rate of the money supply B. decrease the growth rate of the money supply C. decrease the growth rate of government spending D. increase the growth rate of government spending

decrease the growth rate of the money supply

To reduce inflation in response to a negative real shock, the Federal Reserve would: A. decrease the money growth rate, which would lower both the inflation rate and economic growth rate B. decrease the money growth rate, which would increase both the inflation rate and economic growth rate C. increase the money growth rate, which would lower both the inflation rate and the economic growth rate D. increase the money growth rate, which would increase both the inflation rate and the economic growth rate

decrease the money growth rate, which would lower both the inflation rate and the economic growth rate

When the federal reserve buys bonds, the supply curve for bonds: A. shifts inward B. does not shift C. sometimes shifts inward and sometimes shifts outward D. shifts outwards

does not shift

The Medicare program offers health care benefits for the: A. elderly and disabled B. poor and disabled C. unemployed D. disabled only

elderly and disabled

Reserves held by banks are mainly held in the form of: A. currency B. checkable deposits C. electronic claims D. savings accounts

electronic claims

If the Fed wants short-term interest rates to rise, it could: A. carry out open market purchases B. issue a directive for banks to raise interest rates C. engage in monetary contraction D. but T-bills

engage in monetary contraction

In the short run, if the Fed responds to a negative real shock by raising the growth rate of the money supply, inflation will be: A. lower than the rate without responding to the negative shock B. higher than the rate without responding to the negative shock C. the same as the rate without responding to the negative shock D. lower or higher than the rate without responding to the negative shock, depending on the size of the money supply growth

higher than the rate without responding to the negative shock

If the total liabilities of Bank A are less than its total assets, but its short-term liabilities are greater than its short term assets, Bank A is: A. both illiquid and insolvent B. illiquid, but solvent C. both liquid and solvent D. liquid, but insolvent

illiquid, but solvent

When a negative real shock hits the economy, in the absence of any monetary intervention: A. both inflation and real growth will decrease B. inflation increases, but real growth decreases C. inflation decreases, but real growth increases D. both inflation and real growth will increase

inflation increases, but real growth decreases

Of the following, which is the smallest component of US federal government spending: A. defense B. social security C. unemployment and welfare D. interest payments on government debt

interest payments on government debt

Holding reserves is costly for banks because: A. it forces banks to pay for ATMs B. the Fed charges banks interest on reserves C. it leads to the risk of bank robberies D. it leads to fewer profits

it leads to fewer profits

Which of the following is the least liquid asset? A. recyclable grocery bags B. knowledge of how to use social media C. a mortgage on a house D. a checkable deposit

knowledge of how to use social media

Which concept describes the ease with which an asset can be quickly converted to money without losing its value? A. moral hazard B. opportunity cost C. solvency D. liquidity

liquidity

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between too: A. high a rate of growth or too low a rate of inflation B. high a rate of growth or too high a rate of inflation C. low a rate of growth or too low a rate of inflation D. low a rate of growth or too high a rate of inflation

low a rate of growth or too high a rate of inflation

Bank notes are issued by: A. the leading financial institutions of the United States B. private banks and the federal reserve C. investment houses and banks D. the Federal Reserve only

the Federal Reserve only

What part of the money supply does the fed have direct control over? A. the monetary base B. M1 C. the monetary base plus M1 D. M2

the monetary base

When the Fed sells government bonds in the open market: A. the monetary base increases and interest rates decrease B. both the monetary base and interest rates decrease C. both the monetary base and interest rates increase D. the monetary base decreases and interest rates increase

the monetary base decreases and interest rates increase

The average tax rate is: A. the tax rate paid on an additional dollar of income B. higher on people with lower incomes C. the total tax divided by the total income D. a separate income tax code begun in 1969 to prevent the rich from paying income taxes

the total tax divided by the total income

The member of the Board of Governors of the Federal Reserve have 14-year nonrenewable terms, thus: A. they are somewhat insulated from the political process B. the New York Federal Reserve Bank President can serve only 14 years on the Federal Open Market Committee C. the chairman of the Board of Governors also has a 14-year term D. every president of a Federal Reserve regional bank will serve at least 14 years on the Board of Governors

they are somewhat insulated from the political process

What is the purpose of the Fed's structure? A. to keep the private sector out of the monetary policy-making arena B. to make sure all states are given equal access to monetary policy decisions C. to give the US president as many tools as possible to regulate the economy D. to keep the power of the Fed dispersed

to keep the power of the Fed dispersed

Workers bear at least a majority, if not all, of the burden of the employers' share of FICA and Medicare tax payments because the: A. workers would have earner lower wages without the tax payments B. workers would have earned the same wages as those without the tax payments C. employers will force the workers to pay the taxes at the end of the year D. workers would have earned higher wages without the tax payments

workers would have earner higher wages without the tax payments