ECON

A

One advantage of inflation targeting over the Taylor rule is that with inflation targeting, because the public knows the target in advance, uncertainty is reduced. A) True B) False

A

One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap. A) True B) False

B

Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their reelection because: A) the expansionary monetary policy is used to finance the political campaigns. B) the political benefits are immediate and the economic costs are delayed. C) the Phillips curve is horizontal in the long run. D) the opportunistic seignorage gains are very large.

D

Politicians may accept moderate inflation in an election year, since the _____ in aggregate _____ serves to _____. A) increase; supply; decrease employment B) decrease; supply; increase employment C) decrease; demand; increase output D) increase; demand; increase employment

A

Social insurance programs are: A) government programs intended to protect families against economic hardships. B) private insurance policies to protect families from hardships caused by government actions. C) private insurance policies that cover gaps in government-provided health care. D) programs to help unemployed people have a social life.

A

Before the Revolutionary War, clamshells were used by some of the European settlers as commodity money. A) True B) False

B

Contractionary fiscal policy includes: A) decreasing taxes. B) increasing taxes. C) increasing the money supply. D) increasing government expenditures.

A

Discretionary fiscal policy is the direct result of deliberate actions by policy makers rather than an automatic adjustment. A) True B) False

A

Government payments to households for which no good or service is provided in return are called: A) transfer payments. B) government purchases. C) consumption expenditures. D) investment expenditures.

B

Now that fast food places such as McDonald's are accepting credit card payments, the: A) demand for money has increased. B) demand for money has decreased. C) demand for money has not been affected. D) supply of money has increased, as some cash is unused.

C

The inflation tax is the effect on the public of: A) the higher tax paid by individuals whose incomes are indexed to inflation. B) the sales taxes paid during periods of inflation. C) the reduction in the value of money caused by inflation. D) the higher prices consumers pay due to inflation.

C

Which of the following is NOT an example of government purchases of goods and services? A) a federal prosecutor's salary B) new pavement for interstate highway I-95 C) a surgeon's bill reimbursed under the Medicare program D) equipping U.S. air marshals with electroshock weapons

C

"Tuition at State University this year is $8,000." Which function of money does this statement best illustrate? A) store of value B) medium of exchange C) unit of account D) means of deferred payment

A

Included in the M2 definition of money are checkable bank deposits. A) True B) False

B

Money is any asset that: A) the government says is money. B) can easily be used to purchase goods and services. C) has a positive value. D) the government says is money and that has a positive value.

A

Money is anything that: A) serves as a medium of exchange for goods and services. B) can be converted to silver with relatively little loss in value. C) can be converted to gold with relatively little loss in value. D) is traded in the stock market.

A

A change in _____ does NOT shift the money demand curve. A) the interest rate B) the price level C) banking technology D) real GDP

B

A change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP. A) True B) False

A

A change in taxes shifts the aggregate demand curve by less than a change in government spending for goods and services and has a smaller effect on real GDP. A) True B) False

B

A government might want to increase aggregate demand to: A) close an inflationary gap. B) close a recessionary gap. C) reduce prices. D) reduce employment.

A

According to the liquidity preference model, the supply and demand for money determine the interest rate. A) True B) False

A

All assets that are included in M1 are also included in M2. A) True B) False

A

All of the following are roles of money EXCEPT a: A) measure of wealth. B) medium of exchange. C) unit of account. D) store of value.

A

All of the following are sources of state and local revenue EXCEPT: A) social insurance taxes. B) property taxes. C) sales taxes. D) income taxes.

B

Among the assets of a bank are: A) customers' deposits. B) loans. C) customers' borrowings. D) deposits and loans.

A

An increase in government spending for goods and services is an autonomous increase in aggregate demand. A) True B) False

A

An individual who decides to hold money instead of other assets: A) is giving up the interest that other assets could have earned. B) is likely to be subject to money illusion. C) is not affected by unanticipated inflation. D) can maintain a higher standard of living.

B

An inflation rate of 5% will increase the purchasing power of $1 to $1.10. 1*.05= 1.05 A) True B) False

D

An inflationary gap occurs when: A) prices are too low. B) real output is too low. C) potential output exceeds actual output. D) actual output exceeds potential output.

C

Money is: A) paper money and coins but not checks. B) currency and stocks. C) anything that can easily be used to buy goods and services. D) None of the answers is correct.

B

Commodity money is: A) whatever the government has decreed is money. B) a good used as a medium of exchange that has other uses. C) money used for commodity futures trading. D) whatever people accept as money.

B

Congress sets the target federal funds rate, but it is the Fed's responsibility to achieve the target rate through purchases and sales of reserves. A) True B) False

C

Contractionary fiscal policy includes: A) increasing government purchases. B) increasing government transfers. C) raising tax rates. D) decreasing money growth.

A

During a liquidity trap: A) monetary policy is ineffective, since nominal interest rates cannot fall below zero. B) the money market is in disequilibrium. C) the only tool that the Federal Reserve finds effective is expansionary monetary policy. D) nominal interest rates will rise regardless of what policy the Federal Reserve pursues.

D

Disinflation is costly to the economy if _____ is forced on the economy, _____, and _____. A) deflation; employment decreases; aggregate output falls B) increasing inflation; unemployment decreases; aggregate price level increases C) stagflation; unemployment increases; inflation increases D) a recession; unemployment increases; aggregate output falls

B

Disinflation means a decrease in: A) prices. B) the rate of inflation. C) aggregate supply. D) the money supply.

B

Disinflation: A) entails eliminating inflation in an economy. B) policy is likely to plunge the economy into a major recession. C) occurs as a result of policy makers' attempts to correct a major recession. D) results in a fall in the unemployment rate.

A

Inflation targeting occurs when the central bank sets an explicit goal for the inflation rate and uses monetary policy to hit that goal. A) True B) False

A

Economists call the revenue generated by the government's right to print money: A) seignorage. B) monetary policy. C) fiscal policy. D) reserve policy.

C

Expansionary fiscal policy: A) increases long-run aggregate supply. B) decreases long-run aggregate supply. C) increases aggregate demand. D) decreases aggregate demand.

A

Expansionary monetary policy decreases interest rates and increases aggregate demand. A) True B) False

A

Fiscal policy is the use of taxes, government transfers, or government purchases to shift the aggregate demand curve. A) True B) False

B

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion. A) True B) False

A

Hyperinflation is often a result of a government trying to pay for its spending by using the inflation tax. A) True B) False

D

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is: A) zero. B) 0.02%. C) 1%. D) 2%.

C

If an administration pursues expansionary policy before an election to bring down unemployment, it can: A) produce inflation only if the real interest rate is zero to begin with. B) lower people's expectations about inflation through a sense of false complacency. C) produce inflation if the targeted rate of unemployment is too low. D) produce disinflation if the expansionary monetary policy is unanticipated.

B

If an economy finds itself in a liquidity trap: A) consumers are trapped by an abundance of liquidity and are spending abundantly. B) the economy is trapped by the inability of monetary policy to reduce nominal interest rates further. C) money markets are trapped in a state of continuous disequilibrium. D) monetary authorities cannot stop nominal interest rates from rising.

A

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should increase taxes by more than $40 billion. A) True B) False

A

If the Fed sells $250 million of Treasury bills to commercial banks, the banks pay with their reserves. A) True B) False

C

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____. A) increase government purchases; AD; left B) increase transfer payments; AS; right C) increase tax rates; AD; right D) increase government purchases; AD; right

B

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, money demanded is _____ than money supplied. A) less than B) greater than C) equal to D) It is impossible to predict which is greater, money demanded or money supplied.

B

If the inflation rate is 3% this year, the demand for money will increase by 6% this year. A) True B) False

A

If the money supply grows by 4% and the real money supply is $100 billion, real seignorage is: A) $4 billion. 100*.04 B) $25 billion. C) $400 billion. D) $2.5 trillion.

B

If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is: A) $5 billion. B) $15 billion. 300*.05 C) $60 billion. D) $1,500 billion.

C

If the real money supply is $500 billion and the money supply grows by 2%, then real seignorage is: A) $25 trillion. B) $1 trillion. C) $10 billion. 500*.02 D) $1 billion.

D

If you transfer $1,000 from your savings account to your checking account: A) M1 decreases by $1,000, and M2 increases by $1,000. B) M1 increases by $1,000, and M2 decreases by $1,000. C) M1 and M2 don't change. D) M1 increases by $1,000, but M2 doesn't change.

A

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy. A) G; C and I B) T; G and C C) C; X and M D) I; G and T

A

Included in M1 are: A) checkable bank deposits. B) savings deposits. C) U.S. Treasury bills. D) demand deposits, savings deposits, and U.S. Treasury bills.

A

Long-term interest rates apply to financial assets that mature a number of years in the future. A) True B) False

B

Spending for Medicare and Medicaid accounts for approximately _____ of federal spending. A) 10% B) 20% C) 30% D) 40%

B

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: A) decrease government purchases. B) decrease taxes. C) decrease government transfers. D) increase real interest rates.

B

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: A) lower tax rates. B) decrease government purchases. C) increase the investment tax credit. D) lower the real interest rate.

D

Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account: A) M1 increases by $50. B) M2 increases by $50. C) M1 and M2 both increase by $50. D) there is no change in M1 or M2.

C

The 2009 U.S. stimulus was a(n) _____ fiscal policy that _____ aggregate demand. A) expansionary; increased B) expansionary; decreased C) contractionary; increased D) contractionary; decreased

A

The 2009 U.S. stimulus was an expansionary fiscal policy that increased aggregate demand. A) True B) False

A

The Federal Reserve System is the _____ for the United States. A) central bank B) government-owned bank C) U.S. Treasury bank D) social insurance system

C

The Federal Reserve reports on two main monetary aggregates: A) M2 and total debt. B) M1 and currency held by banks. C) M1 and M2. D) M1 and total stock purchases.

C

The central bank of the United States is called the: A) Congressional Budget Office. B) Internal Revenue Service. C) Federal Reserve System. D) Federal Deposit Insurance Corporation.

B

The demand curve for money will shift to the right because of a: A) fall in the interest rate. B) rise in real GDP. C) rise in the interest rate. D) fall in real GDP.

D

The discount rate is the interest rate the Federal Reserve charges on loans to: A) consumers. B) the federal government. C) state governments. D) banks.

C

The double coincidence of wants problem can be solved by: A) more resources. B) more production. C) money. D) economic growth.

B

The federal government's largest source of revenue is: A) property taxes. B) personal income and corporate profit taxes. C) sales taxes. D) social insurance taxes.

A

The interest earnings one gives up to hold more liquid assets are: A) an opportunity cost. B) a transaction cost. C) an asset of the company. D) a liability of the company.

B

The largest source of federal tax revenues is: A) property taxes. B) personal income taxes. C) corporate income taxes. D) sales taxes.

A

The monetary base is the sum of: A) reserves held by the banks and currency in circulation. B) checkable bank deposits and bank reserves. C) savings deposits and currency in circulation. D) checkable bank deposits and currency in circulation.

A

The narrowest definition of money EXCLUDES: A) currency in the vault at the bank. B) traveler's checks. C) currency in circulation. D) checkable bank deposits.

`C

The opportunity cost of holding money is: A) zero. B) the interest rate when someone uses a credit card. C) the difference between interest rates on monetary assets and on nonmonetary assets. D) the discount rate.

D

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in: A) the interest rate. B) output. C) wages only. D) the aggregate price level.

A

The short-run Phillips curve shows: A) a direct relationship between unemployment and inflation. B) an inverse relationship between unemployment and inflation. C) consequences of the misperceptions theory. D) the optimal level of employment.

A

The size of the multiplier increases as the size of the marginal propensity to consume increases. A) True B) False

D

The slope of the demand curve for money is: A) vertical. B) horizontal. C) positive. D) negative.

C

The store-of-value function of money is: A) necessary and distinctive. B) not necessary but distinctive. C) necessary but not distinctive. D) not necessary and not distinctive.

B

The zero lower bound for interest rates is the target that the Taylor rule sets. A) True B) False

B

To balance its budget, the government of Zimbabwe borrowed large amounts of money in world markets. A) True B) False

A

To close a recessionary gap, the central bank could adopt an expansionary economic policy. A) True B) False

A

To increase the money supply, the central bank could make open-market purchases. A) True B) False

C

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. As a result, before the early 1980s: A) the opportunity costs of keeping funds in checking accounts was zero. B) the opportunity costs of keeping funds in checking accounts was lower. C) the opportunity costs of keeping funds in checking accounts was higher. D) people kept money under their mattress.

B

We hold money to: A) earn interest. B) reduce transaction costs. C) increase transaction costs D) protect our purchasing power.

C

What distinction did Zimbabwe achieve in June 2008? A) It was the first African nation to become a democracy. B) It ended apartheid. C) It had the world's highest inflation rate. D) It had the world's highest unemployment rate.

B

When a central bank prints money to pay government debts, causing rising prices that erode the purchasing power of money held by the public, it is called a(n) _____ tax. A) payroll B) inflation C) currency D) budget

B

When economists state that there is a zero bound on nominal interest rates, they mean that: A) the real interest rate cannot go below zero. B) the nominal interest rate cannot go below zero. C) the real interest rate can very well be negative. D) the nominal interest rate can always go below zero.

B

When faced with a recessionary gap, the government can increase taxes and cut spending to close it. A) True B) False

A

When the Fed buys $100 billion of Treasury bills from commercial banks, the monetary base increases by $100 billion. A) True B) False

B

When the economy is developing an inflationary gap, the Fed should increase the money supply to decrease interest rates. A) True B) False

B

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____. A) falls; falls; falls B) falls; falls; rises C) rises; falls; falls D) rises; falls; rises

B

When workers and firms become aware of a rise in the general price level: A) they will not do anything, because they know they are powerless to counter any economic changes. B) they will incorporate higher prices into their expectations. C) firms with sticky prices will ultimately adjust their prices downward. D) they will agree to renegotiate wage contracts downward.

B

When you are using money to purchase a new MP3 player, money is serving as a: A) store of value. B) medium of exchange. C) unit of account. D) double coincidence of wants.

D

When you buy a ticket to the rodeo, you are using money as mainly a(n): A) expander of economic activity. B) store of value. C) factor of production. D) medium of exchange.

A

Which of the following assets is the MOST liquid? A) a $50 bill B) a $50 gift certificate C) 100 shares of stock D) an economics textbook

D

Which of the following is NOT a tool of fiscal policy? A) changing tax rates B) government transfers C) government purchases of goods and services D) changes in the money supply

C

Which of the following is NOT considered one of the three chief characteristics of money? A) It serves as a medium of exchange. B) It acts as a store of value. C) It is a highly illiquid asset. D) It is a unit of account.

C

Which of the following is a government transfer? A) wages paid to U.S. senators B) purchases of tanks for the army C) Social Security payments to retired auto workers D) payments to contractors for repairs on interstate highways

D

Which of the following is an expansionary fiscal policy? A) an increase in the money supply that decreases interest rates B) an increase in taxes that reduces the budget deficit and decreases consumption C) a decrease in government spending D) an increase in unemployment benefits

A

Which one of the following is NOT included in M1? A) savings deposits B) checkable bank deposits C) currency D) traveler's checks

A

_____ depicts a trade-off between unemployment and inflation. A) The Phillips curve B) Keynes's law C) The multiplier D) The Friedman curve