Econ Final Exam

What are the three basic functions of money?

A medium of exchange, a unit of account, and store of value

Many public capital goods are complementary to private capital goods.

True

The chairperson of the Federal Reserve Board is selected by the

U.S. president and confirmed by the Senate.

Excess reserves are equal to

actual reserves minus required reserves.

If the annual interest payments on the debt sharply increased as a percentage of the GDP

the government would have to use more tax revenues for interest or go deeper into debt

The long-run fiscal imbalance in the Social Security retirement system is the result of

an aging population and declining worker-beneficiary ratio.

The purchase of a new house is considered to be an investment because a new house is

an income generating aspect

Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008 because they resulted in

an increase in demand for housing and a rapid increase in home prices that was unsustainable.

For a person who wants to preserve the size of government, the fiscal options for ending a recession include

an increase in government spending

Excess reserves

can be lent out, increasing the money supply.

The major categories of firms that make up the U.S. financial services industry include

commercial banks, thrifts, insurance companies, and securities related firms

The Consumer Price Index (CPI) is constructed by

comparing the value of a "market basket" of goods that consumers typically purchase to the value of the basket in a base year.

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again

The Federal Reserve Board of Governors

coordinates policies for the 12 Federal Reserve Banks

Between 1980 and 2007, the bank and thrift share of the financial services market

declined substantially.

Comparing market values over time has the

disadvantage that prices change over time.

Three main types of consumption expenditures are

durable goods, non-durable goods, and services

Hyperinflation might lead to a severe decline in total output if

everyone starts speculating and searching for ways to avoid inflation

The Social Security trust fund

includes assets held by these programs to help pay for future projected tax revenue shortfalls

The nominal interest rate

minus the inflation rate is the real interest rate

Social Security is a "pay-as-you-go" plans. This means that

most of the current revenues from the Social Security tax are paid to current Social Security retirees

Changes in inventories are included as part of investment spending because anything produced by a business that has

not been sold during the accounting period is something in which the business has invested.

The face value of a coin is greater than its intrinsic value because

otherwise people would sell it for its intrinsic value

An asset on a bank's balance sheet is something

owned by the bank, whereas a liability is something owed by the bank

Rapid inflation can undermine money's ability to perform its functions. For example, in runaway inflation

people revert to barter because money fails as a medium of exchange

Suppose foreigners spend $7 billion on American exports in a given year and Americans spend $5 billion on imports from abroad in the same year.

+$2 billion

A political business cycle happens because

politicians are more interested in reelection than in stabilizing the economy.

Recent productivity acceleration has been

positively influenced by global competition, which has expanded market possibilities for both consumers and producers.

Recent productivity acceleration has been

positively influenced by information technology because it connects information in all parts of the world with information seekers.

Demand-pull inflation occurs when

prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.

Since at least 1995 the majority of increases in U.S. real GDP are from

productivity growth

Mortgage backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because they

reduced the risk exposure, or cost, that banks faced after issuing these subprime loans, and encouraged this type of lending

Inflation

reduces the purchasing power of the dollar.

The crowding-out effect is the

reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending

The Federal Reserve requires that commercial banks have reserves because

reserves provide the Fed a means of controlling the money supply.

The major assets on a commercial bank's balance sheet include

reserves, securities, loans, and vault cash.

The categories of financial firms have become more blurred as these firms are trying to

retain their market share

More labor inputs can explain

some of the increases in U.S. real GDP during the last 50 years or so.

The United States has an unemployment compensation program that provides income for those out of work.

still a problem because the unemployment compensation program merely gives the unemployed enough funds for basic needs.

If inventories declined by $1 billion during 2012, then $1 billion would be

subtracted from both gross private domestic investment and gross domestic product.

The Bureau of Labor Statistics (BLS) would calculate the rate of inflation in year 5 by

subtracting the CPI of year 4 from the CPI of year 5, and then dividing by the CPI of year 4.

In requesting a tax cut in the early 1960s, President Kennedy said, "It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise tax revenues in the long run is to cut tax rates now." This statement recognizes that

tax cuts increase production, GDP, and tax revenues

The Federal Open Market Committee (FOMC) includes

the Board of Governors members and 5 of the 12 presidents of the Federal Reserve Banks, of which the president of the New York Fed has a permanent voting seat.

When economists say that the Federal Reserve Banks are central banks, this means that

the policies are coordinated by the Federal Reserve Board of Governors.

When economists say that the Federal Reserve Banks are quasi-public banks, this means that

they are a blend of private ownership and public control

When economists say that the Federal Reserve Banks are bankers' banks, this means that

they perform the same functions for banks as banks perform for the public.

What tends to happen to real GDP, unemployment, and inflation during these phases?

1. During recessionary phase, GDP falls, unemployment rises, and inflation falls 2. During expansionary phases, GDP rises, unemployment falls, and inflation rises

What are the four supply factors of economic growth?

1. The quality and quantity of natural resources 2. The level of technology 3. The stock of capital goods 4. The quality and quantity of human resources

How many recessions has the U.S. experienced since 1950?

10 recessions

How long did the longest recession last?

18 months duration.

Why did the budget surpluses of 2000 and 2001 give way to a series of budget deficits in 2002?

Budget deficits in 2002 were due to the recession and tax cuts Deficits increased substantially in 2008 because of the fiscal stimulus after the financial collapse

Built in, or automatic stabilizers

Built in, or automatic stabilizers work by changing tax revenue and government payouts so that GDP changes are reduced

The major claims on a commercial bank's balance sheet are

Checkable deposits

Which two of the following financial institutions offer checkable deposits included within the M1 money supply?

Commercial banks and thrift institutions

What is the largest component of M1?

Currency

Which of the components of M1 is legal tender?

Currency

Which of the following items is not included in either M1 or M2?

Currency held by banks

What are the components of the M1 money supply?

Currency in circulation and checkable deposits

Why is the debt as a percentage of GDP more relevant than the total debt?

Debt as a percentage of GDP measures the economy's ability to manage debt

Deflation/Inflation

Deflation means that the price level is falling, whereas with inflation, overall prices are rising.

As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced nations

False

Immigration has slowed economic growth in the United States

False

Technological advance, which to date has played a relatively small role in U.S. economic growth, is destined to play a more important role in the future.

False

The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.

False

What are three types of unemployment?

Frictional, structural, and cyclical``

Which of the following are included in the functions of the Federal Reserve System?

Issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks

Unemployment is seen by some as undesirable. Are all three types of unemployment undesirable?

No, frictional unemployment is expected in the economy.

What near-monies are included in M2 money supply?

Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances

What are the two primary phases of the business cycle?

Recession and Expansion

TARP is the

Troubled Asset Relief Program funded with general tax revenue and the issuance of government debt.

An internally held public debt is like a debt of the left hand owed to the right hand.

True

Rearrange the following contributors to the growth of productivity in descending order of their quantitative importance: economies of scale, quantity of capital, improved resource allocation, education and training, and technological advance.

Technological advance, quantity of capital, education and training, economies of scale, and improved resource allocation

What was the most severe recession in terms of real output?

The 1974-1975 recession.

How does unanticipated inflation hurt creditors and help borrowers?

The creditors are hurt as the receive dollars of lesser value from borrowers

How can anticipating the inflation make these effects less severe?

The effects are made less severe by adjusting nominal interest

As a percentage of GDP, the total U.S. public debt held by the public was larger in 2010 than it was in 1990.

True

What is the efficiency factor?

The level of economic efficiency and full employment needed to reach full production potential

What is the demand factor?

The level of purchases needed to maintain full employment

Distinguish between the total U.S. debt and the debt held by the public.

Total U.S. debt is the total amount of money owned by the federal government to all security holders, and the debt held by the public is a portion of U.S. debt

For a person who thinks the public sector is too large, the fiscal options for ending recession would include

a cut in taxes

Which of the following are included or excluded in this year's GDP? a. The services of a commercial painter in painting his home in his spare time: b. An auto dealer's sale of a new car to a nonbusiness customer: c. The money received by Smith when she sells her biology textbook to a used-book buyer: d. The publication and sale of a new economics textbook: e. A $2 billion increase in business inventories: f. The government purchases of newly produced aircraft:

a. excluded b. included c. excluded d. included e. included f. included

Net exports are a country's exports of goods

and services less its imports of goods and services

Net worth is equal to

assets minus liabilities

A balance sheet must always balance because the sum of

assets must equal the sum of liabilities plus net worth.

Compared to a decade ago, there are

fewer bank firms

Three examples of products or services that can be simultaneously consumed by many people include

films, ebooks, and television programs.

Government loans create moral hazard because there is a tendency

for financial services firms to take on greater risks because they assume they are at least partially insured against losses

Refinancing of the public debt might drive up real interest rates because

government borrowing to finance the debt increases demand for funds and competes with private borrowing.

The higher level of sales greatly reduces the per-unit cost of the product of an information product because there are

high start-up costs but low marginal costs

Economists include only final goods in measuring GDP for a particular year because

if intermediate goods were counted, then multiple counting would occur.

U.S. exports and imports each affect domestic production because

imports are subtracted from U.S. GDP and exports are added.

The problem of time lags in enacting and applying fiscal policy is that

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed

The government's fiscal policy options for moving the economy out of a recession include

increasing government spending, decreasing taxes, or both

The broad options for fixing the long-run Social Security problem include

increasing the retirement age, subjecting a larger portion of total earnings to the Social Security tax, and reducing benefits for wealthy retirees.

The purchasing power of the dollar is

inversely related to the price level

American International Group (AIG) exacerbated the financial crisis of 2007-2008 by

issuing billions of dollars of collateralized default swaps that had embedded mortgage-loan risk.

When measuring GDP for a particular year, economists exclude the value of used furniture bought and sold because

it was counted in GDP in some previous year.

Labor productivity greatly rises as the firm sells more units of an information product or service because

learning from the information simultaneously can increase worker output potential

The Federal Open Market Committee (FOMC)

votes on the Fed's monetary policy and directs the purchase or sale of government securities.

The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers

who were more likely to default on their loans.