Macro Exam #3 Questions

Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If Sarah deposits $5,000 in cash in her checking account, the money supply can potentially increase by an additional: a- $20,000. b- $1,000. c- $25,000. d- $5,000.

a- $20,000. 4,000/ 0.2 = 20,000

Which of the following statements about Federal Reserve Earnings is NOT correct? a- The Federal Reserve, as the central bank of the U.S., does NOT make any earnings. b- Federal Reserve Earnings contribute to the tax revenue by the Federal Government. c- The Federal Reserve remits its earnings to the Treasury Department after providing all of its necessary expenses. d- The Federal Reserve makes interest income from the assets it holds.

a- The Federal Reserve, as the central bank of the U.S., does NOT make any earnings.

If the Fed increases the reserve requirement from 5% to 10%, the money multiplier will _____ and the money supply will most likely _____. a- decrease; decrease b- decrease; increase c- increase; decrease d- increase; increase

a- decrease; decrease

Reducing taxes in response to a recession is an example of _____ policy. a- fiscal b- monetary c- consumption d- investment

a- fiscal

Suppose the required reserve ratio increased from 10% to 20%. This would: a- reduce the money multiplier from 10 to 5. b- increase the amount of excess reserves available. c- not change the money multiplier. d- increase the money multiplier from 5 to 10.

a- reduce the money multiplier from 10 to 5.

The federal government's LARGEST source of revenue is: a- social insurance taxes. b- property taxes. c- personal income taxes. d- sales taxes.

c- personal income taxes.

Suppose that U.S. debt is $7.5 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $3.5 trillion. At the end of the fiscal year, the debt is: a- $7.5 trillion. b- $6 trillion. c- $10.5 trillion. d- $9 trillion.

b- $6 trillion.

The Bank of Japan (BOJ), the central bank of Japan, introduced a negative interest rate (-0.1%) policy as part of its quantitative and qualitative monetary easing (QQE) program in January 2016. This policy has been in effective since then. What can we conclude from this policy? a- Japanese currency has been more valuable. b- This policy has been used to boost lending in order to boost the economy of Japan. c- The inflation must have been terrible in Japan. d- This policy is try to tighten lending in order to improve financial stability.

b- This policy has been used to boost lending in order to boost the economy of Japan.

The discount rate is the interest rate the Federal Reserve charges on loans to: a- consumers. b- banks. c- the federal government. d- state governments.

b- banks.

To lower the short-term interest rate, the Federal Reserve can: a- sell Treasury bills b- buy Treasury bills c- tell the banks to make more loans d- tell the banks to make fewer loans

b- buy Treasury bills

Suppose the required reserve ratio is 5% and a depositor withdraws $2,000 from her checkable deposit. The money supply will eventually _____ if the banking system does NOT hold any excess reserves. a- decrease by $2,000 b- decrease by $38,000 c- decrease by $4,500 d- none of the other choices is correct..

b- decrease by $38,000 2,000/0.05= 40,000 40,000 - 2,000 = 38,000

The larger the amount of outstanding public debt: a- the more spending the government can afford. b- the larger the fraction of the federal budget deficit that must be devoted to interest payments. c- The other answers are all wrong. d- the lower the tax revenue the government must collect.

b- the larger the fraction of the federal budget deficit that must be devoted to interest payments.

When the Federal Reserve decreases bank's reserves through an open-market operation: a- deposits increase, currency in circulation increases, and the monetary base remains the same. b- the monetary base decreases, loans decrease, and the money supply decreases. c- the monetary base decreases, the money multiplier decreases, and the money supply increases. d- loans increase, the federal funds rate rises, and the discount rate rises.

b- the monetary base decreases, loans decrease, and the money supply decreases.

Banks can lend money because: a- there is a high demand for commodity money. b- they know not everyone wants their deposits back at the same time. c- they have so much to lend. d- they don't know how much cash they have in their vault.

b- they know not everyone wants their deposits back at the same time.

Government payments to households for which no good or service is provided in return are called: a- consumption expenditures. b- transfer payments. c- investment expenditures. d- government purchases.

b- transfer payments.

If the marginal propensity to consume is 0.9, then the government spending multiplier is: a- 1.11. b- 0.1. c- 10. d- 9.

c- 10. 1/(1-0.9) = 10

Which example does NOT illustrate government transfers? a- Medicaid-paid prescription drugs for low-income individuals b- a Social Security disability pension c- a reimbursement of personal income tax withheld from wages d- unemployment insurance

c- a reimbursement of personal income tax withheld from wages

What can the federal government do to finance a deficit? a- increase purchases of goods and services b- cut taxes c- borrow funds d- increase transfer payments

c- borrow funds

Expansionary monetary policy does NOT increase: a- GDP and the price level. b- aggregate demand. c- interest rates. d- consumption spending.

c- interest rates.

When the Fed increases the reserve requirement, banks lend _____ of their deposits, which leads to a(n) _____ in the money supply. a- more; decrease b- less; increase c- less; decrease d- more; increase

c- less; decrease

A $100 million increase in government spending increases equilibrium GDP by: a- zero. b- $100 million. c- more than $100 million. d- less than $100 million.

c- more than $100 million.

If the marginal propensity to save is 0.25, and the government increases its purchases of goods and services by $100 million, then real GDP increases by: a- $133 million. b- $25 million. c- $2,800 million. d- $400 million.

d- $400 million. 100/0.25 = 400

Suppose a bank has excess reserves of $500 and the reserve ratio is 20%. If Andy deposits $5,000 of cash in his checking account and the bank lends $2,500 to Molly, the bank can extend an additional loan up to ______. a- $5,000. b- none of the other choices is correct. c- $1,500. d- 2,000.

d- 2,000.

Suppose that a bank receives a $5,000 deposit and the reserve ratio is 25%. Based on this deposit alone, the bank can lend out: a- $4,500 b- 4,000 c- 3,500 d- 3,750

d- 3,750

Which function is one that pertains to the Federal Reserve System? I. collecting corporate income tax II. determining the interest rate III. monitoring individual's credit activities a- III only b- I and II c- I, II, and III d- II only

d- II

The difference between a budget deficit and government debt is that: a- a deficit harms the economy, whereas debt improves the economy. b- a deficit is measured as of a particular time, whereas debt is measured over time. c- debt is the amount by which government spending exceeds tax revenues, whereas a deficit is the sum of money the government owes. d- a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

d- a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

If banks were required to keep 100% of deposits in reserves, they could: a- make more deposits. b- use excess reserves for loans c- make more loans d- all the other choices are wrong.

d- all the other choices are wrong.

Which factor is an expansionary fiscal policy? a- an increase in taxes that reduces the budget deficit and decreases consumption b- an increase in the money supply that decreases interest rates c- a decrease in government spending d- an increase in unemployment benefits

d- an increase in unemployment benefits

Fiscal policy that decreases aggregate demand is: a- balanced. b- supplemental. c- expansionary. d- contractionary.

d- contractionary.

If the marginal propensity to save is 0.25 and government purchases of goods and services decrease by $30 billion, real GDP will: a- decrease by $150 billion. b- decrease by $30 billion. c- increase by $22.5 billion. d- decrease by $120 billion.

d- decrease by $120 billion.

Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. After the withdrawal, reserves _____, and checkable deposits _____. a- increase by $8,000; decrease by $8,000 b- decrease by $1,600; decrease by $1,600 c- increase by $1,600; decrease by $1,600 d- decrease by $8,000; decrease by $8,000

d- decrease by $8,000; decrease by $8,000

Monetary policy that lowers the interest rate is called _____ because it _____. a- contractionary; aims to head off inflation b- expansionary; increases short-run aggregate supply c- contractionary; reduces saving and increases consumption d- expansionary; increases aggregate demand

d- expansionary; increases aggregate demand

Suppose that the Federal Reserve were to buy $100 million of U.S. Treasury bills. The money supply would: a- increase by $100 million. b- stay the same. c- decrease by $100 million. d- increase by more than $100 million.

d- increase by more than $100 million.

Expansionary monetary policy _____ the money supply, _____ interest rates, and _____ consumption and investment spending. a- increases; increases; increases b- decreases; decreases; decreases c- decreases; increases; decreases d- increases; decreases; increases

d- increases; decreases; increases

If overall spending declines and thus the economy contracts, the government could counter this by: a- raising tax rates. b- decreasing government transfers. c- decreasing government spending. d- increasing government spending.

d- increasing government spending.

If it looks as if a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the: a- open market and borrow money there b- congress to borrow funds c- Federal Reserve and borrow money at the discount rate d- other member banks and borrow money at the federal funds rate

d- other member banks and borrow money at the federal funds rate

A cut in taxes will have the most effect on aggregate demand if it is given to: a- people with a low marginal propensity to consume. b- everyone in the economy. c- those who hold a large amount of wealth. d- people with a high marginal propensity to consume.

d- people with a high marginal propensity to consume.

Suppose that the Federal Reserve sells Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates. a- increase; lower; lower b- increase; raise; lower c- reduce; increase; lower d- reduce; reduce; raise

d- reduce; reduce; raise

The national debt _____ when the federal government incurs a _____. a- rises; surplus b- falls; deficit c- stays the same; surplus d- rises; deficit

d- rises; deficit

When a bank lends excess reserves to a customer: a- this does not affect the money supply. b- the money supply is decreased. c- it has the same effect as when one customer writes a check to another customer at a different bank. d- the money supply is increased.

d- the money supply is increased.