Econ Exam 4 practice quiz

Answer the next question based on the following consolidated balance sheet for the commercial banking system. Assets Liabilities + Net Worth Reserves $50,000 Checkable deposits $120,000 Loans 75,000 Stock shares 130,000 Securities 25,000 Property 100,000 If the reserve requirement is 15% and the table above represents the balance sheet for the whole commercial banking system rather than a single bank, then loans and deposits could expand by a maximum of approximately $120,000. $213,333. $333,500. $415,373.

$213,333.

A commercial bank has required reserves of $60 million and the reserve ratio is 20%. How much are the commercial bank's checkable-deposit liabilities? $120 million $900 million $300 million $1,200 million

$300 million

Use the following graph to answer the next question. #7 In the graph, Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6% rate of interest. If the supply of money increases as shown, then the asset demand for money will increase by $75. $125. $200. $325.

$75.

Use the following graph to answer the next question. #5 Suppose the economy is currently in equilibrium at output level Q2, but full-employment output is at level Q1. If the government fails to enact fiscal policy and no other conditions change, the eventual price level will most likely be closest to P0. P1. P2. P3.

P3.

Which of the following government actions would be considered expansionary fiscal policy? Reducing tariffs on imports Balancing the federal budget Asking the Federal Reserve to reduce interest rates Passing a personal tax credit for the purchase of a new automobile

Passing a personal tax credit for the purchase of a new automobile

Which of the following functions does the Federal Reserve System not perform? Issuing the paper currency in the economy. Providing banking services to the general public. Providing financial services to the Federal government. Lending money to banks and thrifts.

Providing banking services to the general public.

Use the following graphs to answer the next question. #14 In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary, full-employment level of real GDP? Decrease the reserve requirement. Decrease the discount rate. Sell government securities in the open market. Make no change in monetary policy.

Sell government securities in the open market.

Use the following graph to answer the next question. #15 The economy is at equilibrium at point C, which is below potential output. What fiscal policy would increase real GDP? Shift aggregate demand to the right by increasing taxes. Shift aggregate demand to the left by decreasing taxes. Shift aggregate demand to the left by decreasing government purchases. Shift aggregate demand to the right by increasing government purchases.

Shift aggregate demand to the right by increasing government purchases.

Which of the following statements is true? The Federal Reserve sets the federal funds rate. The Federal Reserve sets the target for the federal funds rate, and then uses the reserve requirement to push banks toward that target. The Federal Reserve does not set the federal funds rate, but it influences it through the use of its open-market operations. The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.

The Federal Reserve does not set the federal funds rate, but it influences it through the use of its open-market operations.

Which of the following will increase commercial bank reserves? The purchase of government bonds in the open market by the Federal Reserve Banks. A decrease in the reserve requirement. An increase in the discount rate. An increase in the federal funds rate.

The purchase of government bonds in the open market by the Federal Reserve Banks.

Which of the following institutions does not provide checkable-deposit services to the general public? commercial banks savings and loan associations U.S. Treasury credit unions

U.S. Treasury

When successfully implemented, contractionary fiscal policy will cause a downward movement along the aggregate demand curve. an upward movement along the aggregate demand curve. a leftward shift of the aggregate demand curve. a rightward shift of the aggregate demand curve.

a leftward shift of the aggregate demand curve.

If you use $1,000 to purchase silver coins, which you plan to keep in a safe, you are using money as bank reserves a unit of account. a medium of exchange. a store of value.

a medium of exchange.

Financial markets pay close attention to changes in the federal funds rate because these changes _____. directly affect a large volume of loans indicate commercial bank lending policies directly affect the interest payments on the national debt affect other interest rates in the economy

affect other interest rates in the economy

The Federal Reserve System regulates the money supply primarily by controlling the production of coins at the U.S. mint. altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. altering the reserves of commercial banks, largely through sales and purchases of government bonds. restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.

altering the reserves of commercial banks, largely through sales and purchases of government bonds.

Suppose the government of a country wants to increase the aggregate demand of its economy by $10 billion at all price levels. However, it currently has a balanced budget with no surplus and is unwilling to borrow money to finance fiscal policy. The government could still accomplish its goal by increasing government purchases by ________ and increasing taxes by $10 billion. $5 billion $10 billion $15 billion. $20 billion.

$10 billion

Use the following graph to answer the next question. In the graph, Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4%, the asset demand for money would be $125. $175. $200. $225.

$200.

When the Fed acts as a "lender of last resort," like it did in the financial crisis of 2007-2008, it is performing its role of controlling the money supply. setting the reserve requirements. being the bankers' bank. providing for check clearing and collection.

being the bankers' bank.

To reduce the federal funds rate, the Fed can ______. buy government bonds from the public increase the discount rate increase the reserve ratio sell government bonds to commercial banks

buy government bonds from the public

The main function of the Federal Reserve System is to serve as the fiscal agent for the federal government. set reserve requirements of banks. clear checks from member banks. control the money supply.

control the money supply.

To keep high inflation from eroding the value of money, monetary authorities in the United States create token money that is less than its intrinsic value. make paper money legal tender for the payment of debt. establish insurance on checkable deposit accounts. control the supply of money in the economy.

control the supply of money in the economy.

The Federal Reserve System performs many functions but its most important one is issuing currency. controlling the money supply. providing for check clearing and collection. acting as fiscal agent for the U.S. government.

controlling the money supply

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment is called expansionary fiscal policy. contractionary fiscal policy. crowding out. the business cycle.

crowding out

The M1 measure of money consists of the sum of currency and travelers' checks. currency, checking deposits, and travelers' checks. currency, checking deposits, and savings deposits. checking deposits and travelers' checks.

currency, checking deposits, and travelers' checks.

Automatic stabilizers in the economy tend to fully offset irregular swings in real GDP. magnify somewhat the irregular swings in real GDP. dampen the irregular swings in real GDP. overcompensate for the irregular swings in real GDP.

dampen the irregular swings in real GDP.

Use the following graphs to answer the next question. #6 In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output of Qf in the economy, the Fed should try to _____. decrease aggregate demand by increasing the interest rate from 2% to 4% decrease aggregate demand by increasing the interest rate from 4% to 6% increase aggregate demand by decreasing the interest rate from 4% to 2% increase the level of investment spending from $120 billion to $150 billion

decrease aggregate demand by increasing the interest rate from 4% to 6%

If the Board of Governors of the Federal Reserve System increases the reserve requirement, this change will _____. increase the excess reserves of member banks and thus increase the money supply increase the excess reserves of member banks and thus decrease the money supply decrease the excess reserves of member banks and thus decrease the money supply decrease the excess reserves of member banks and thus increase the money supply

decrease the excess reserves of member banks and thus decrease the money supply

Use the following graphs to answer the next question. #1 In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output of Qf in the economy, the Fed should _____. decrease the interest rate from 10% to 8% decrease the interest rate from 8% to 6% decrease the interest rate from 6% to 4% increase investment spending from $30 billion to $60 billion

decrease the interest rate from 8% to 6%

The primary tools the government uses for contractionary fiscal policy are tax reductions and government purchase increases. tax increases and government purchase reductions. tax reductions and government purchase reductions. tax increases and government purchase increases.

tax increases and government purchase reductions.

Monetary policy is determined by ______. the president and her economic advisors the central bank (the Fed) Congress the World Bank

the central bank (the Fed)

When a commercial bank borrows from a Federal Reserve Bank, _____. the supply of money automatically increases it indicates that the commercial bank is unsound financially the commercial bank's lending ability is increased the commercial bank's reserves are reduced

the commercial bank's lending ability is increased

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve requirement is 20%, then the effect will be to reduce _____. excess reserves by $8 million excess reserves by $200 million the money supply by potentially $200 million the money supply by potentially $400 million

the money supply by potentially $200 million

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here? An increase in government purchases and taxes A decrease in government purchases and taxes A decrease in government purchases and an increase in taxes An increase in government purchases and a decrease in taxes

A decrease in government purchases and an increase in taxes

Use the following graph to answer the next question. #7 What combination would most likely cause a shift from AD1 to AD3? An increase in taxes and an increase in government purchases A decrease in taxes and an increase in government purchases An increase in taxes and a decrease in government purchases A decrease in taxes and a decrease in government purchases

An increase in taxes and a decrease in government purchases

The most important among the Federal Reserve district banks in conducting monetary policy is the Boston bank. Chicago bank. New York bank. San Francisco bank.

New York bank.

If the Federal Reserve System buys government securities from commercial banks and the public, then _____. commercial bank reserves will decline commercial bank reserves will be unaffected it will be easier to obtain loans at commercial banks the money supply will contract

it will be easier to obtain loans at commercial banks

When output is below the full employment level of real GDP, the Federal Reserve banks should ______. raise the discount rate raise the federal funds rate sell bonds lower the reserve ratio

lower the reserve ratio

The purpose of a contractionary monetary policy is to ______. alleviate recessions raise interest rates and restrict the availability of bank credit increase aggregate demand and GDP increase investment spending

raise interest rates and restrict the availability of bank credit

The multiple by which the commercial banking system can expand the supply of money is equal to the ratio of actual reserves to required reserves. reciprocal of the federal funds rate. reciprocal of the reserve ratio. ratio of required reserves to actual reserves.

reciprocal of the reserve ratio.

Assume that the full-employment level of output is $500, and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $450 and at the price level of 100 current aggregate demand is $410. If the government wants to move the economy back to the full-employment level of output and the MPC is 0.75, then it should reduce taxes by $90 increase taxes by $90. reduce taxes by $30. increase taxes by $30.

reduce taxes by $30.

Contractionary fiscal policy tends to ________ consumption because it may reduce ________ reduce; savings. increase; savings. reduce; disposable income. increase; disposable income.

reduce; disposable income.

When the reserve requirement is increased, the excess reserves of member banks are _____. reduced, but the multiple by which the commercial banking system can lend is unaffected reduced and the multiple by which the commercial banking system can lend is increased increased and the multiple by which the commercial banking system can lend is increased reduced and the multiple by which the commercial banking system can lend is reduced

reduced and the multiple by which the commercial banking system can lend is reduced

Cash held by a bank in its vault is a part of the bank's reserves. liabilities. money supply. net worth.

reserves.

Which of the following varies directly with the interest rate? the opportunity cost of holding money the transactions demand for money the asset demand for money the level of investment

the opportunity cost of holding money

Payments made by the government that do not require an exchange of economic activity in return are also known as government spending. transfer payments. built-in stabilizers. fiscal multipliers.

transfer payments.

When a banker records how many dollars each of his borrowers owes the bank, money is serving as a store of value. unit of account. medium of exchange. legal tender.

unit of account.

Use the information in the following table to answer the next question. M Supply M Demand Interest Rate Investment (at interest rate shown) $400 $600 2% $700 400 500 3 600 400 400 4 500 400 300 5 300 400 200 6 200 The equilibrium interest rate in this economy is _____. 3% 4% 5% 6%

4%

How many members can serve on the Board of Governors of the Federal Reserve System? 7 9 12 14

7

Which of the following fiscal policy changes would be the most contractionary? A $40 billion increase in taxes A $10 billion increase in taxes and a $30 billion cut in government purchases A $20 billion increase in taxes and a $20 billion cut in government purchases A $30 billion increase in taxes and a $10 billion cut in government purchases

A $10 billion increase in taxes and a $30 billion cut in government purchases

Use the following figure to answer the next question. #4 The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation? Shift aggregate demand by increasing taxes. Shift aggregate demand by decreasing taxes. Shift aggregate supply by increasing taxes. Shift aggregate demand by increasing government purchases.

shift aggregate demand by increasing taxes.

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _____. prime rate short-term rate discount rate federal funds rate

discount rate

Crowding out may occur because ________ fiscal policy usually involves the government ________ money. expansionary; lending expansionary; borrowing contractionary; lending contractionary; borrowing

expansionary; borrowing

When personal savings rates are ________, it takes ________ change in government purchases to have a given amount of impact of real GDP. unstable; more unstable; less higher; more higher; less

higher; more

The impact of monetary policy on investment spending may be weakened _____. because of the Treasury's desire for high interest rates if the rate at which dollars are spent changes in the same direction as the money supply Incorrect if the investment demand curve shifts to the right during inflation and to the left during recession if the investment demand curve is very flat

if the investment demand curve shifts to the right during inflation and to the left during recession

It is costly to hold money because deflation may reduce its purchasing power. in doing so, one sacrifices interest income. bond prices are highly variable. the rate at which money is spent may decline.

in doing so, one sacrifices interest income

If government expenditures are increased by $50 billion, assuming all other factors stay constant, we would expect the initial impact of the increased spending to cause real GDP to stay constant. increase by less than $50 billion. increase by $50 billion. increase by more than $50 billion.

increase by $50 billion.

Assume that the full-employment level of output is $600 and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $550 and, at the price level of 100, current aggregate demand is $450. If the government wants to move the economy back to the full-employment level of output and the MPC is 0.9, then it should increase government purchases by $150. increase government purchases by $50. increase government purchases by $15. increase government purchases by $5.

increase government purchases by $15.

Assume that the full-employment level of output is $500, and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $450 and, at the price level of 100, current aggregate demand is $400. If the government wants to move the economy back to the full-employment level of output and the MPC is 0.75, then it should reduce government purchases by $100. increase government purchases by $100. reduce government purchases by $25. increase government purchases by $25.

increase government purchases by $25.

Use the following diagram to answer the next question. #15 Assume the economy is initially at the full employment level of real GDP. If there is a decrease in gross investment, the Fed should _____. increase money demand decrease money demand decrease the money supply increase the money supply

increase the money supply

Suppose that the demand for money increases as people anticipate upcoming economic problems. To offset this increase in money demand, the Fed should ______ the money supply, which would put ______ pressure on nominal interest rates. decrease; downward decrease; upward increase; downward increase; upward

increase; downward