Econ Final

The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit is the bank required to keep in reserves? a. $1,000?

$200

Suppose that the consumption function is C = $500 + 0.8* YD, where YD is disposable income. The marginal propensity to save is?

0.2.

If the multiplier equals 4, then the marginal propensity to save must be equal to?

0.25.

Use Figure above: Consumption and Disposable Personal Income. The slope of the consumption function is?

0.50

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your marginal propensity to consume is?

0.6

Which of the following was an important point emphasized in Keynes's influential work? I. In the short run, shifts in aggregate demand affect aggregate output. II. Animal spirits are an important determinant of business cycles. III. In the long run we're all dead

1, 2, and 3.

If the multiplier equals 4, then the marginal propensity to save must be equal to?

1/4

T/F If the Fed buys bonds in the open market, the money supply decreases.

F

T/F Subprime lending is lending at interest rates that are less than the prime rate.

F

T/F The Federal funds rate is the interest rate between the Fed and banks.

F

T/F The money multiplier equals 1/(1 - R), where R represents the reserve ratio.

F

T/F There is a positive relationship between the quantity of investment spending and the interest rate.

F

The marginal propensity to consume (MPC) equals the change in _____ divided by the change in _____?

consumer spending; disposable income.

Given the consumption function c = $16,000 + 0.5yd , if individual household current disposable income is $20,000, individual household consumer spending will equal?

$26,000.

If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is?

$30,000.

Scenario: First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds (the minimum reserve ratio is 20 percent). Refer to the information for First National Bank provided in the Scenario: First National Bank. Given the bank's minimum reserve ratio, how much can the bank issue in loans?

$4 million

Refer to Table: Balance Sheet. If the reserve ratio is 25%, deposits are?

$80,000.

If a bank has assets equal to $100 million dollars, according to practice with a 7 percent reserve requirement, its liabilities should NOT exceed?

$93 million

According to the Figure: Fiscal Policy I, suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, then?

AD2 will shift to the right, causing an increase in the price level and an increase in real GDP.

Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E2 and the central bank chooses to buy bonds?

AD2 will shift to the right, creating an inflationary gap.

T/F An increase in the demand for loanable funds increases the equilibrium interest rate and decreases the equilibrium level of saving.

F

T/F Currency in the United States today is commodity-backed money.

F

T/F Expansionary monetary policy works by decreasing consumption, allowing other sectors of the economy to spend more.

F

If government spending exceeds tax revenues, which of the following is necessarily true? There is a I. positive budget balance. II. budget deficit. III. recession.

II only

The reserve requirement is 20 percent, and Dave deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. According to this scenario, which is an accurate description of the bank's balance sheet immediately after the deposit?

Reserves increase by $1000, and demand deposits increase by $1000.

T/F A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.

T

T/F An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

T

T/F Banks cannot influence the money supply if they are required to hold all deposits in reserve.

T

T/F Commodity-backed money is a medium of exchange with no intrinsic value, whose ultimate value is guaranteed by a promise that it can be converted into valuable goods.

T

T/F Expectations of an improving economy will generally cause an increase in investment by shifting the loanable funds demand curve to the right.

T

T/F If banks temporarily don't have sufficient funds to pay their depositors, they can borrow the needed funds at the Federal Reserve discount window.

T

T/F If the Fed decreases reserve requirements, the money supply will increase.

T

T/F M2 is both larger and less liquid than M1.

T

T/F The crowding-out effect is the negative effect of government budget deficits on private investment spending.

T

T/F The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate, the Fed provides banks with a greater incentive to borrow from it.

T

T/F The fraction of customer deposits that a bank holds as reserves is known as the reserve ratio.

T

T/F When the value of money is on the vertical axis, the money supply curve is vertical and shifts right if the Federal Reserve buys bonds.

T

All scenarios are associated with government budget deficits EXCEPT?

The total amount of borrowing decreases.

Because money is an asset that can be traded for goods and services, we say that it is?

a medium of exchange.

In the classical model of the price level?

both the short-run and long-run aggregate supply curves are vertical.

Which of the following is a government transfer program? 1 Social Security 2 Medicare/Medicaid 3 unemployment insurance 4 food stamps 5 all of the above

all of the above.

Which of the following is a reason to be concerned about persistent budget deficits? 1 crowding out 2 government default 3 the opportunity cost of future interest payments 4 higher interest rates leading to decreased long-run growth 5 all of the above

all of the above.

Which of the following changes would be the most likely to reduce the size of the money multiplier?

an increase in cash holding by consumers. (unknown)

Which of the following will increase the supply of loanable funds?

an increase in perceived business opportunities.

Which of the following will decrease the demand for money?

an increase in the availability of ATMs

Suppose the economy is in an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to?

decrease government purchases.

A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and a _____ equilibrium interest rate?

decrease; higher

Refer to the Figure: The Money Supply and Aggregate Demand. Panel (b) illustrates what happens when the Federal Reserve decides to _______ the money supply and _______ interest rates?

decrease; raise

Which of the following is a fiscal policy that is appropriate to combat inflation?

decreasing government spending.

Long-term interest rates and short-term interest rates?

don't always move closely together.

The effect of a government deficit on the economy is?

expansionary.

The interest rate is 5 percent in the market for loanable funds. Investors wish to borrow $100 million and savers wish to save $125 million at this interest rate. We would expect the interest rate to?

fall, as there is a surplus of loanable funds

When banks make loans to each other, they charge the?

federal funds rate.

Investment spending?

fluctuates more than consumption.

If interest rates are at the zero lower bound?

monetary policy is ineffective.

According to the Figure: Short-Run Equilibrium, if the economy is at equilibrium at Y1 and P1, the appropriate policy to return the economy to potential output would be a(n)?

increase in taxes.

According to the Figure: Crowding Out, the demand for loanable funds curve DLF1 will shift to DLF2 when there is a(n)?

increase in the government budget deficit.

If the Fed purchases U.S. Treasury bills from a commercial bank, what happens to bank reserves and the money supply?

increase, increase.

If the Fed decreases the reserve requirement from 10% to 5%, the money multiplier will _____ and the money supply will most likely _____?

increase; increase

To _______ the money supply, the Federal Reserve could ________?

increase; lower the reserve requirements

The money multiplier and the required reserve ratio are?

inversely related.

In countries with rapidly growing economies, like China and India, the demand for loanable funds is _______ and interest rates are _______ than in countries with slowly growing economies?

larger; higher

U.S. Treasury bills are a(n)?

liability of the U.S. government but an asset to the Federal Reserve.

A cut in taxes will have the most effect on aggregate demand if it is given to?

people with a high marginal propensity to consume.

The classical model of the price level is most applicable in?

periods of high inflation

The classical model of the price level is most applicable in?

periods of high inflation.

An increase in interest rates on business loans will change _____ investment spending?

planned

Which of the following is NOT a role of the Federal Reserve System?

printing currency (Federal Reserve notes).

An increase in the marginal propensity to consume (MPC)

raises the value of the multiplier

A sale of Treasury bills by the Federal Reserve _____ interest rates and _____ the money supply?

raises; reduces

Which financial asset belongs to M2 but not to M1?

savings account

If the Federal Open Market Committee engages in an open market purchase, it will shift the money _____ curve to the _____?

supply; right.

The main difference between the classical model of the price level and Keynesian economics is that?

the classical model assumes a vertical short-run aggregate supply curve.

When the Fed makes a loan to a commercial bank, it charges?

the federal funds rate.

The slope of a family's consumption function is equal to?

the marginal propensity to consume.

If there is a shortage of loanable funds, then?

the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.

The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds?

upward; savers; decreasing