Macro CH 27, 28, 30

Depending on the state of the economy, it is sometimes better for the government to either cut or increase taxes. Illustrate what happens to the aggregate demand curve when the government decides to cut taxes.

Cutting taxes is a form of expansionary fiscal policy, which shifts the aggregate demand curve to the right.

In practice, the estate tax applies to all people who leave inheritances to their beneficiaries, no matter how large or small.

False The government imposes an estate and gift tax on people who pass large amounts of assets to the next generation—either after death or during life in the form of gifts. According to the Center on Budget and Policy Priorities, in 2015 the estate tax applied only to those leaving inheritances of more than $5.43 million and thus applies to only a tiny percentage of extremely wealthy individuals.

Which of the following is an investment option in which the deposits of many investors are pooled together and invested in a safe way?

money market fund A money market fund is an investment option in which the deposits of many investors are pooled together and invested in a safe way.

Revenues for state and local governments come primarily from __________.

property taxes, sales taxes, and revenue shared by the federal government The main revenue sources for state and local governments are sales taxes, property taxes, and revenue passed along from the federal government, but many state and local governments also levy personal and corporate income taxes, as well as impose a wide variety of fees and charges. The specific sources of tax revenue vary widely across state and local governments. Some states rely more on property taxes, some on sales taxes, some on income taxes, and some more on revenues from the federal government.

Up until which decade did the debt/GDP ratio reveal a fairly clear pattern of federal borrowing?

1970s Until the 1970s, the debt/GDP ratio revealed a fairly clear pattern of federal borrowing. The government ran up large deficits and raised the debt/GDP ratio in World War II, but from the 1950s to the 1970s the government ran either surpluses or relatively small deficits, and so the debt/GDP ratio drifted down.

Which description best fits the definition of bank run?

A bank run is a situation in which depositors race to the bank to withdraw their deposits for fear that otherwise those deposits would be lost.

The T-account below represents assets and liabilities for a bank. Use the T-account to calculate the bank's net worth.

A bank's net worth is calculated by subtracting liabilities from assets: Net Worth=Assets−Liabilities Assets=$8 million+$2 million+$4 million=$14 million Liabilities=$14 million Net Worth=$14 million−$14 million=$0 million

The T-account below represents assets and liabilities for a bank. Use the T-account to calculate the bank's deposits.

A bank's net worth is calculated by subtracting liabilities from assets: Net Worth=Assets−Liabilities Let $X=Deposits Assets=$9 million+$6 million+$5 million=$20 million Liabilities=$X million Net Worth=$8 million=$20 million−$X million Solve for $X=Deposits $X million=$20 million−$8 million=$12 million

A personal income tax based on a persons income or salary. An individual income tax is a tax on an individual's annual income. It is a personal income tax.

A budget deficit is a financial situation in which the federal government spends more money than it receives in taxes in a given year.

If the federal government spends $1.4 trillion more dollars than it collects in tax revenue, what occurs?

A budget deficit. A budget deficit is when the federal government spends more money than it receives in taxes in a given year.

Which of the following correctly defines "corporate income tax"?

A corporate income tax is a tax based on corporate profits.

A decrease in the supply of loanable funds will cause what?

A decrease in the supply of loanable funds will cause interest rate to rise. Contractionary policy reduces the amount of loanable funds in the economy. As with all goods, greater scarcity leads a greater price, so the interest rate, or the price of borrowing money, rises.

Define individual income tax.

A personal income tax based on a persons income or salary. An individual income tax is a tax on an individual's annual income. It is a personal income tax.

What is a "regressive tax"?

A regressive tax is a tax that requires people with higher incomes to pay a smaller share of their income in tax than people with lower incomes.

Which of the following statements is true?

A state that gives too many tax breaks may not generate enough revenue to balance the budget. States that reduce taxes too much have seen their revenues decline.

Which of the following examples illustrates the danger of countercyclical monetary policy?

Aggressive expansionary monetary policy causes the economy to overshoot potential GDP and swing into an inflationary gap. High interest rates implemented by the Fed to reduce inflation cause the economy to go into a recession. Monetary policy should be countercyclical; that is, it should act to counterbalance the business cycles of economic downturns and upswings. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins.

Why do higher interest rates reduce aggregate demand?​

All of the above. When contractionary monetary policy is implemented, interest rates increase, causing the "price" of a loan to increase and leading economic actors to reduce their expenditures.

What is an "excise tax"?

An excise tax is a tax on specific goods, usually gasoline, tobacco, and alcohol.

How does an excise tax differ from other taxes?

An excise tax is levied on goods. An excise tax is a tax on a specific good, such as gasoline, tobacco, or alcohol.

Move the aggregate demand curve to show what happens to the equilibrium price level and real GDP after the government increases taxes.

An increase in income and business taxes reduces spending by households and businesses in the economy. This is a form of contractionary fiscal policy, and hence, the aggregate demand curve shifts to the left, leading to a lower equilibrium real GDP and a lower price level.

Which of the following components are used to calculate M1? Select all that apply.

Currency Traveler's checks M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks.

_______ explains the ability for customers to withdraw bank's liabilities in the short term while customers repay its assets in the long term.

Asset-liability time mismatch The risk of an unexpectedly high level of loan defaults can be especially difficult for banks because a bank's liabilities, namely it customers' deposits. Customers can withdraw funds quickly but many of the bank's assets like loans and bonds will only be repaid over years or even decades. This asset-liability time mismatch—the ability for customers to withdraw bank's liabilities in the short term while customers repay its assets in the long term—can cause severe problems for a bank. For example, imagine a bank that has loaned a substantial amount of money at a certain interest rate, but then sees interest rates rise substantially.

_____ are similar to loans in that they are guaranteed future payments to the bank, making them ________.

Bonds; assets Bonds are a common mechanism for borrowing used by the federal and local government, private companies, and nonprofit organizations. Bonds are an asset for banks similarly to loans because they are guaranteed future payments to the bank.

As a general statement, conservatives and Republicans prefer to see expansionary fiscal policy carried out by tax cuts, while liberals and Democrats prefer that the government implement expansionary fiscal policy through spending increases. In a bipartisan effort to address the extreme situation presented by the Great Recession of 2008-2009, the Obama administration and Congress passed an $830 billion expansionary policy in early 2009 involving both tax cuts and increases in government spending. Illustrate what impact this decision had on the aggregate demand curve.

Both tax cuts and increased government spending shift the aggregate demand curve to the right.

By adjusting the aggregate demand curve, show how the equilibrium point is affected by contractionary fiscal policy.

Contractionary fiscal policy reduces the overall spending in the economy, which reduces aggregate demand. This reduces both the real GDP and the price level in equilibrium.

Which of the following is the correct components of state and local revenues in the US?

Corporate taxes, individual income taxes, property taxes, revenue from federal government, sales taxes and other Revenue sources for state and local governments in the United States is: corporate taxes, individual income taxes, property taxes, revenue from federal government, sales taxes and other.

Which of the following is the best definition of the term "countercyclical"?

Countercyclical means moving in the opposite direction of the business cycle of economic downturns and upswings.

What term is best defined as a checkable deposit in a bank that is available by making a cash withdrawal or writing a check?

Demand deposit A demand deposit is a checkable deposit in a bank that is available by making a cash withdrawal or writing a check.

Of the following, which are actions most closely associated with countercyclical monetary policy?

During an economic boom, interest rates should be kept high. When the economy slows down, the federal reserve should buy financial assets from commercial banks. Monetary policy should be countercyclical; that is, it should act to counterbalance the business cycles of economic downturns and upswings. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins.

The economy is booming, and the government wants to make it grow even faster. Show what happens when expansionary fiscal policy is applied.

Expansionary fiscal policy shifts the AD curve rightward, raising the price level as well as real GDP in equilibrium.

M1 is calculated by adding together time deposits, savings deposits, and M2 money supply.

FALSE M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.

A demand deposit is an investment option in which the deposits of many investors are pooled together and invested in a safe way.

False Ademand depositis a checkable deposit in a bank that is available by making a cash withdrawal or writing a check.

A person who moves to a different town and buys a new house the same size as the old one can expect to pay the same amount of property taxes on both houses.

False Property tax rates are set by each local government therefore the property taxes may be different.

The Federal Open Market Committee is composed of seven members of the Board of Governors and 4 publicly elected members of Congress.

False The FOMC is composed of the seven members of the Board of Governors, the president of the New York Federal Reserve Bank, and four regional Federal Reserve bank presidents who serve on a rotating basis.

The U.S. government can set interest rates by controlling the money supply.

False The U.S. federal government is not responsible for controlling the money supply. The federal government is responsible for determining fiscal policy, not monetary policy. It is the Federal Reserve, which is the central bank of the U.S. (and not a part of the government), that controls the interest rates and the money supply.

An increase in excess reserves will result in an increase in the money multiplier.

False The money multiplier will depend on the proportion of reserves that the Federal Reserve Band requires banks to hold. Additionally, a bank can also choose to hold extra reserves. Remember, the formula for money multiplier is change in money supply divided by excess reserves. As excess reserves grow, the money multiplier will shrink. The more money the bank chooses to hold, the less money they are earning.

The budget deficits starting in 2002 then tugged the debt/GDP ratio ______, with a big jump when the recession took hold in 2008-2009. Select the best response to fill in the blank.

Higher. The budget deficits starting in 2002 then tugged the debt/GDP ratio higher—with a big jump when the recession took hold in 2008-2009.

Illustrate what happens to the aggregate demand curve when the government decides to increase payroll taxes.

Increasing payroll taxes is a form of contractionary fiscal policy, which lowers the overall spending. Hence, aggregate demand decreases.

Suppose the Fed is worried about the inflationary potential of the economy and acts to slow it down by selling government bonds. What is the most likely outcome?

Interest rates rise and money supply contracts. When the economy is overheating (inflating), the Fed typically sells bonds. This takes money out of the economy, which contracts the money supply and drives up interest rates. The economy eventually slows.

Which of the following define the term bank capital?

It is the difference between a bank's assets and its liabilities. It is a bank's net worth. Bank capital is the difference between a bank's assets and its liabilities. It is also called net worth. Regulation requires banks to have positive net worth so that they remain solvent.

_____ is a measure of how quickly a financial asset can be used.

Liquidity Liquidity refers to how quickly you can use a financial asset to buy a good or service.

Which of the following is an example of countercyclical monetary policy posing a danger of overreaction?

Loose monetary policy seeking to end a recession goes too far and triggers inflation. Tight monetary policy seeking to reduce inflation goes too far and begins a recession. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins.

Why are changes in reserve requirements usually small?

Loosening requirements too much would create a danger of banks being unable to meet the demand for withdrawals. A sudden demand that all banks increase their reserves would be extremely disruptive and difficult to comply with. Changes in reserve requirements have large impacts on banks. Loosening requirements too much would create a danger of banks being unable to meet the demand for withdrawals, because the temptation would be to loan out too much money, and the oversupply of cash that results could cause inflation.

What term is best defined as the money supply that includes only currency and checking accounts in banks, and to a lesser degree, traveler's checks?

M1 money supply M1 money supply is defined as the money supply that includes only currency and checking accounts in banks, and to a lesser degree, traveler's checks.

M2 is calculated by adding together time deposits, savings deposits, and ___________. Select all that apply.

M1 money supply money market mutual funds M2 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks, otherwise known as M1, and less liquid monies including time deposits, certificates of deposits, and money market funds.

Which of the following is the money supply that includes currency, checkable deposits, traveler's checks, savings deposits, money market funds, and certificates of deposit?

M2 money supply M1 and M2 money have several definitions, ranging from narrow to broad. M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.

Which description best fits the definition of M2 money supply?

M2 money supply is the money supply that includes currency, checking accounts in banks, traveler's checks, savings deposits, money market funds, and certificates of deposit. M2 money supply is the money supply that includes currency, checking accounts in banks, traveler's checks, savings deposits, money market funds, and certificates of deposit.

Which of the following is the definition of net worth?

Net worth is the excess of the asset value over and above the amount of the liability.

Illustrate only what happens to the aggregate demand curve after the government increases after-tax profits by cutting business taxes.

Raising after-tax profits via cutting business taxes is a form of expansionary policy. This increases investment spending, and thus shifts the aggregate demand curve to the right.

Which of the following are responsibilities of the U.S. Federal Reserve?

Regulate the banking system to protect bank depositors. Set the value of currency. The Federal Reserve is responsible for regulating all or part of the nation's banking system in order to protect bank depositors and insure the health of a bank's balance sheet.

Small Bank holds reserves of $50 million. The Fed sells Small Bank $20 million in bonds. What will Small Bank do if it wants to maintain reserves of $50 million?

Small Bank will halt loans or slow down the rate of new loans until the desired reserve level is attained. When the Fed sells $20 million in bonds to Small Bank, Small's reserves decrease from $50 million to $30 million. To restore the reserve level to the desired $50 million, Small Bank will halt or slow the rate of new loans and add the stream of payments being made on prior loans to its reserves.

Which of the following progressions is correct?

The Fed buys government bonds, money is injected into the market, there is an increase in the money supply, and the Federal Funds rate decreases. Think of the Fed as external from the market. When the Fed purchases government bonds, it is removing bonds from the market and injecting money in place of the bonds. This injection increases the money supply in the market, and therefore, the federal funds rate will decrease because there is a lower demand for reserves among banks.

Which of the following is not true of the U.S. Federal Reserve System?

The Fed is a part of the U.S. government. The purpose of the long and staggered terms is to insulate the Board of Governors as much as possible from political pressure so that governors can make policy decisions based only on their economic merits. Additionally, except when filling an unfinished term, each member only serves one term, further insulating decision-making from politics. The Fed's policy decisions do not require congressional approval, and the President cannot ask for a Federal Reserve Governor to resign as the President can with cabinet positions.

Your bank has a reserve requirement of 0.2. If you deposit $675 into your bank account and that results in an increase in excess reserves of $540, then what is the maximum possible change in the money supply from your initial deposit?

The change in money supply (M1) is found by dividing the amount of excess reserves by the reserve requirement. Applying the money multiplier formula, we see that the total change in the money supply will be: M1=1reserve requirement×excess reserves=10.2×$540=$5400.2=$2,700

Connolly Bank has a reserve requirement of 8%. Your mom deposits her most recent paycheck into her bank account at Connolly Bank, which results in an increase in excess reserves of $500. What is the maximum possible change in the money supply from this deposit?

The change in money supply (M1) is found by dividing the amount of excess reserves by the reserve requirement. Applying the money multiplier formula, we see that the total change in the money supply will be:1reserve requirement×excess reserves = 10.08×$500=12.5×$500=$6,250

If you deposit a tax rebate into your bank account which results in an increase in excess reserves of $700 and if the reserve requirement is 0.40, then what is the maximum possible change in the money supply?

The change in money supply (M1) is found by dividing the amount of excess reserves by the reserve requirement. Applying the money multiplier formula, we see that the total change in the money supply will be:1reserve requirement×excess reserves = 10.4×$700=2.5×$700=$1,750

Of the following, which are true of state and local taxes?

The main revenue sources for state and local governments are sales taxes, property taxes, and revenue passed along from the federal government. State and local governments collect taxes imposed on business firms. State and local taxes have been rising as a share of GDP over the last few decades to keep up with increases in spending. The main sources of state and local revenues, revenue from the federal government, property taxes, individual income taxes, and corporate income taxes. The specific sources of tax revenue vary widely across state and local governments.

If the reserve requirement is 0.08, what is the money multiplier? Assume banks hold no excess reserves and consumers hold no cash. Round your answer to two decimal places.

The money multiplier (MM) determines the maximum increase in loans that can be made assuming banks hold no excess reserves and there are no cash holdings in the economy. If these assumptions are true, then the money multiplier formula is MM=1RR, where RR is the required reserve ratio. In this case, since RR=0.08, MM=10.08=12.5.

What is the money multiplier if the reserve requirement is 0.3 and banks hold no excess reserves and consumers hold no cash?

The money multiplier (MM) determines the maximum increase in loans that can be made assuming banks hold no excess reserves and there are no cash holdings in the economy. If these assumptions are true, then the money multiplier formula is MM=1RR, where RR is the required reserve ratio. In this case, since RR=0.12, MM=10.3=3.33.

A central bank is an institution that conducts a nation's monetary policy and regulates its banking system.

True A central bank is an institution that conducts a nation's monetary policy and regulates its banking system.

If banks hold no excess reserves and there are no cash holdings, then the money multiplier is equal to 12.2. What must the reserve requirement be? Round your answer to the nearest thousandth.

The money multiplier (MM) determines the maximum increase in loans that can be made assuming banks hold no excess reserves and there are no cash holdings in the economy. If these assumptions are true, then the money multiplier formula is MM=1RR, where RR is the required reserve ratio. To find the reserve requirement, manipulate the money multiplier formula to RR=1MM. In this case, the reserve requirement is equal to 112.2 or 0.082.

If the money multiplier is equal to 7.5 and banks hold no excess reserves and consumers hold no cash, then calculate the reserve requirement. Round your answer to the nearest thousandth.

The money multiplier (MM) determines the maximum increase in loans that can be made assuming banks hold no excess reserves and there are no cash holdings in the economy. If these assumptions are true, then the money multiplier formula is MM=1RR, where RR is the required reserve ratio. To find the reserve requirement, manipulate the money multiplier formula to RR=1MM. In this case, the reserve requirement is equal to 17.5 or 0.133.

Higher interest rates lead to a lower willingness of consumers to borrow money on big ticket items. Shift the aggregate demand (AD) curve on the graph below to show the impact of higher interest rates on the economy.

Tight or contractionary monetary policy that leads to higher interest rates (r) and a reduced quantity of loanable funds (M) will reduce two components of aggregate demand (AD). Business investment (I) will decline because it is less attractive for firms to borrow money, and even firms that have money will notice that, with higher interest rates, it is relatively more attractive to put those funds in a financial investment than to make an investment in physical capital. In addition, higher interest rates will discourage consumer borrowing (C) for big-ticket items like houses and cars. A decrease in aggregate demand is illustrated by a leftward shift of the aggregate demand (AD) curve. A decrease of the AD curve causes GDP to decrease. As total production decreases, firms' per unit costs fall, leading to a decrease in their prices and thus the price level (P).

Which of the following are reasons for bank regulation?

To prevent excessively risky behavior by banks To prevent bank runs The purpose of bank regulation is to prevent bank runs, financial crisis, and the loss of depositors' money, as well as to protect the integrity of the financial system and to prevent excessively risky bank behavior.

A progressive tax collects a greater share of income from those with high incomes than from those with low incomes.

True A progressive tax is defined as a tax that collects a greater share of income from those with high incomes than from those with low incomes.

When you make a purchase on a credit card, it is considered a short term loan.

True Although you can make a purchase with a credit card, the financial institution does not consider it money but rather a short term loan from the credit card company to you. When you make a credit card purchase, the credit card company immediately transfers money from its checking account to the seller, and at the end of the month, the credit card company sends you a bill for what you have charged that month. Until you pay the credit card bill, you have effectively borrowed money from the credit card company.

Bonds are considered an asset to banks because banks will receive a stream of payments on bonds in the future.

True Bonds are a common mechanism for borrowing used by the federal and local government, private companies, and nonprofit organizations. Bonds are an asset for banks similarly to loans because they are guaranteed future payments to the bank.

The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens.

True Monetary policy should be countercyclical; that is, it should act to counterbalance the business cycles of economic downturns and upswings. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction.

Show what happens to the aggregate demand curve when the government decides to reduce its spending on roads and bridges.

When the government lowers its spending, it is employing a contractionary fiscal policy. This lowers the overall spending in the economy, which reduces the aggregate demand. Both equilibrium real GDP and the price level will fall.

Which of the following is true for this graph?

all of the above Monetary policy which is countercyclical will act to counterbalance the business cycles of economic downturns and upswings. In this graph, the economy is experiencing an inflationary gap. The appropriate countercyclical monetary policy is contractionary policy, which is illustrated to cause a shift of the aggregate demand to the left, reducing the price level and the equilibrium real GDP.

M2 is calculated by adding together time deposits, certificate of deposits, savings deposits, and ___________.

all the above M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits. In other words, "all of the above."

What term is best defined as an item of value owned by a firm or an individual?

asset An asset is an item of value owned by a firm or an individual.

Of the following, who sets the discount rate?

board of Governors of the Federal Reserve System

As a firm becomes more established, who will be more likely to provide financial capital to the firm?

both bondholders and shareholders When a firm becomes at least somewhat established, other outside investors who do not know the managers personally, like bondholders and shareholders, are more willing to provide financial capital to the firm.

When government spending exceeds tax revenues, what is the term given to the difference?

budget deficit When a government spends more than it takes in in revenues, it is running a deficit.

What term is best defined as an institution that conducts a nation's monetary policy and regulates its banking system?

central bank A central bank is an institution that conducts a nation's monetary policy and regulates its banking system.

Which of the following require the depositor to commit to leaving their investment in the bank for a certain period of time in exchange for higher interest rates?

certificate of deposit Time deposits and certificate of deposit accounts are both accounts that the depositor has committed to leaving in the bank for a certain period of time in exchange for a higher rate of interest.

The following graph illustrates a shift of the aggregate demand curve to the left. It can be caused by:

contractionary monetary policy countercyclical monetary policy Monetary policy which is countercyclical will act to counterbalance the business cycles of economic downturns and upswings. In this graph, the economy is experiencing an inflationary gap. The appropriate countercyclical monetary policy is contractionary policy, which is illustrated to cause a shift of the aggregate demand to the left, reducing the price level and the equilibrium real GDP.

Which term refers to moving in the opposite direction of the business cycle of economic downturns and upswings?

countercyclical "Countercyclical" means moving in the opposite direction of the business cycle of economic downturns and upswings.

Which of the following is a potential issue of countercyclical monetary policy?

countercyclical policy poses a danger of overreaction Monetary policy should be countercyclical; that is, it should act to counterbalance the business cycles of economic downturns and upswings. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins.

An instruction to the user's bank to transfer money directly and immediately from a bank account to a seller is called a ________.

debit card A debit card, like a check, is an instruction to the user's bank to transfer money directly and immediately from your bank account to the seller. It is important to note that in our definition of money, it is checkable deposits that are money, not the paper check or the debit card

Excess money holding will __________ the money multiplier.

decrease The money multiplier depends on people re-depositing the money that they receive in the banking system. If people instead store their cash in safe-deposit boxes or in shoeboxes hidden in their closets, then banks cannot recirculate the money in the form of loans. Central banks have an incentive to assure that bank deposits are safe because if people worry that they may lose their bank deposits, they may start holding more money in cash, instead of depositing it in banks, and the quantity of loans in an economy will decline.

When individuals choose to hold excess money, the money multiplier will ________.

decrease The money multiplier depends on people re-depositing the money that they receive in the banking system. If people instead store their cash in safe-deposit boxes or in shoeboxes hidden in their closets, then banks cannot recirculate the money in the form of loans. Central banks have an incentive to assure that bank deposits are safe because if people worry that they may lose their bank deposits, they may start holding more money in cash, instead of depositing it in banks, and the quantity of loans in an economy will decline.

Which of the following is a strategy that increases the quantity of loans and lowers interest rates?

expansionary monetary policy A loose or expansionary monetary policy is a strategy that leads to lower interest rates and a higher quantity of loanable funds will tend to increase business investment and consumer borrowing for big-ticket items. This happens as a result of an increase in the supply of money. An increase in supply decreases prices and increases quantity.

When the Central Bank uses ___________________, aggregate demand shifts outward (to the right).

expansionary monetary policy Fiscal policy, whether through changes in spending or taxes, shifts the aggregate demand outward in the case of expansionary fiscal policy and inward in the case of contractionary fiscal policy. If recession threatens, the central bank uses an expansionary monetary policy to increase the money supply, increase the quantity of loans, reduce interest rates, and shift aggregate demand to the right.

Suppose that the economy is in a recessionary gap. The appropriate countercyclical monetary policy is

expansionary monetary policy Monetary policy should be countercyclical; that is, it should act to counterbalance the business cycles of economic downturns and upswings. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins.

The following graph illustrates a shift of the aggregate demand curve to the right. It can be caused by:

expansionary monetary policy countercyclical monetary policy Monetary policy which is countercyclical will act to counterbalance the business cycles of economic downturns and upswings. In this graph, the economy is experiencing a recessionary gap. The appropriate countercyclical monetary policy is expansionary policy, which is illustrated to cause a shift of the aggregate demand to the right, increasing both price level and equilibrium GDP.

Tax policy is the only fiscal policy tool available to influence the path of the economy over time.

false Fiscal policy is the use of government spending and tax policy to influence the path of the economy over time. Therefore, both government spending and tax policy are considered fiscal policy tools.

Which of the following is the specific interest rate targeted in open market operations?

federal funds rate The specific interest rate targeted in open market operations is the federal funds rate. The name is a bit of a misnomer since the federal funds rate is the interest rate that commercial banks charge making overnight loans to other banks. As such, it is a very short term interest rate, but one that reflects credit conditions in financial markets very well.

A decrease in the supply of loanable funds will __________ interest rates and __________ quantity demanded of loanable funds.

increase; decrease A contractionary monetary policy will shift the supply of loanable funds to the left from the original supply curve, causing interest rates to increase and quantity demanded to decrease.

A bank could have a negative net worth if __________.

it has an unexpected increase in the amount of loans that are not repaid A well-run bank will assume that a small percentage of borrowers will not repay their loans on time, or at all, and factor these missing payments into its planning. Remember, the calculations of the banks' expenses every year include a factor for loans that borrowers do not repay, and the value of a bank's loans on its balance sheet assumes a certain level of riskiness because some customers will not repay loans. Even if a bank expects a certain number of loan defaults, it will suffer if the number of loan defaults is much greater than expected, as can happen during a recession.

Which of the following statements is true for the scenario illustrated in the below graph?

it illustrates countercyclical monetary policy it can be caused by a tightening of the money supply, also known as contractionary monetary policy Monetary policy which is countercyclical will act to counterbalance the business cycles of economic downturns and upswings. In this graph, the economy is experiencing an inflationary gap. The appropriate countercyclical monetary policy is contractionary policy, which is illustrated to cause a shift of the aggregate demand to the left, reducing the price level and the equilibrium real GDP.

How did the federal budget behave during the 2008-2009 recession?

it went into a deep deficit The budget was briefly in surplus in the late 1990s, before heading into deficit again in the first decade of the 2000s—and especially deep deficits in the 2008-2009 recession.

Which of the following is an institution that provides short-term emergency loans in conditions of financial crisis?

lender of last resort A lender of last resort is an institution that provides short-term emergency loans in conditions of financial crisis.

Identify which of the following expense could be on the budget of the city of San Francisco.

libraries Local governments in large cities include libraries in their budgets.

The _________ of an investment is determined by how easy it is to sell an asset at any given time.

liquidity Liquidity refers to how quickly you can use a financial asset to buy a good or service.

The Fed should ________________ monetary policy in a recession and ______________ it when inflation is high.

loosen; tighten Monetary policy should be countercyclical; that is, it should act to counterbalance the business cycles of economic downturns and upswings. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins.

Federal debt is the ______ of annual budget deficits and surpluses? Select the correct response to fill in the blank.

sum Federal debt is the sum of annual budget deficits and surpluses. Annual deficits do not always mean that the debt/GDP ratio is rising. During the 1960s and 1970s, the government often ran small deficits, but since the debt was growing more slowly than the economy, the debt/GDP ratio was declining over this time. In the 2008-2009 recession, the debt/GDP ratio rose sharply.

Which of the following is an account that the depositor has committed to leaving in the bank for a certain period of time in exchange for a higher rate of interest?

time deposit A time deposit is an account that the depositor has committed to leaving in the bank for a certain period of time in exchange for a higher rate of interest.