Macro Exam 4

Suppose the reserve ratio is 25%, then the money multiplier is

4.

Which of the following statements is true?

An increase in the money supply lowers the equilibrium rate of interest.

Budget and trade deficits are NOT linked. (T/F)

False

Interest paid on externally held debt does not pose a burden on our economy. (T/F)

False

In the U.S., the institution that is charged with determining the size of the monetary base and with regulating the banking system is the:

Federal Reserve.

Which of the following statements describes an implication of the crowding-out effect?

If the funds from deficit spending are used on public investment, then the crowding-out effect may be lessened.

Which of the following is NOT considered one of the three chief functions (roles) of money?

It is a highly illiquid asset.

The primary difference between M1 and M2 is that:

M2 includes savings deposits and time deposits, but M1 does not.

Economists in favor of the functional finance approach to balancing the federal budget believe that the first priority of lawmakers is to keep the economy at full employment with stable prices, not balancing the federal budget. (T/F)

True

Externally held debt is debt held by foreign entities and individuals. (T/F)

True

Internally held debt is the portion of the national debt held by American banks, corporations, mutual funds, pension plans, and individuals. (T/F)

True

The crowding-out effect of deficit spending results from selling government bonds to the public—increasing interest rates, decreasing private investment, and bequeathing a potentially less productive economy to future generations. (T/F)

True

The generational imbalance (GI) measure estimates how much of the fiscal imbalance for a given policy will be shifted to future generations. (T/F)

True

The public (or national) debt is the total accumulation of all past deficits and surpluses. (T/F)

True

Trying to annually balance the federal budget during a recession may worsen the economy. (T/F)

True

An example of a double coincidence of wants is:

a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired.

Which of the following does NOT cause the money demand curve to shift?

a change in the interest rate

A decrease in the supply of money, with no change in demand for money, will lead to_______ in the equilibrium quantity of money and _______ in the equilibrium interest rate.

a decrease; an increase

Commodity money is:

a good used as a medium of exchange that has other uses.

All of the following are roles of money, EXCEPT:

a measure of wealth.

Fiat money is:

a medium of exchange which has alternative economic uses.

In the long run, changes in the money supply:

affect only the price level but they do not change aggregate output.

A reduction in interest rates due to an increase in the money supply will shift:

aggregate demand to the right.

An increase in the money supply causes ______ in output in the short run, and _______ in output in the long run.

an increase; no change

The interest earnings one gives up to hold more liquid assets are:

an opportunity cost.

Money is:

anything that can easily be used to buy goods and services.

The money multiplier and the required reserve ratio are:

are inversely related.

An economy that lacks a medium of exchange is a(n):

barter system.

The Federal Reserve System is the _______ for the United States.

central bank

Included in the M1 definition of the money supply is:

checking account deposits.

Money that has value apart from its use as money is:

commodity money.

The Federal Reserve is able to have an impact on financial crises because the Fed:

conducts monetary policy.

Economists who favor a functional finance approach to the budget:

consider a surplus or deficit a secondary concern.

If the economy is experiencing an inflationary gap, the Fed should conduct ______ monetary policy to ______ aggregate demand.

contractionary; decrease

Which of the following would NOT fit the economist's definition of money?

credit cards

The main objective of contractionary monetary policy is to:

decrease aggregate demand.

Improvements in banking and information technology have:

decreased the demand for money.

The fact that a larger number of stores in the United States have found it economical to accept credit cards has:

decreased the demand for money.

Monetary policy that lowers the interest rate is called ________ because it ________.

expansionary monetary policy; increases aggregate demand

Other things equal, an increase in the interest rate leads to a:

fall in investment and consumer spending.

If at the current interest rate the demand for money is $100 billion and the supply of money is $200 billion, then the interest rate will:

fall.

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.

falls; falls; rises

When banks borrow and lend reserves from other banks, they are participating in the ______ market.

federal funds

Money that the government has ordered be accepted as money is:

fiat money.

The U.S. dollar is an example of:

fiat money.

Proponents of the functional finance approach to balancing the federal budget believe that the:

first priority of lawmakers is to keep the economy at full employment with stable prices.

The liquidity trap occurs when all of the following happen EXCEPT:

fiscal policy becomes ineffective.

A reserve requirement ratio is the:

fraction of deposits that the bank is required to hold.

The reserve ratio is the:

fraction of deposits the banks hold in their vaults plus their deposits at the Federal Reserve.

Which of the following measures will NOT lessen the crowding-out effect?

improvements in pay schedules of government employees

If the Federal Reserve wants to discourage banks from borrowing directly from the Fed and thus decrease the monetary base, the Fed would likely:

increase the discount rate.

Suppose the Fed buys bonds. We can expect this transaction to:

increase the money supply, raise bond prices, and lower interest rates.

If the federal reserve wants to lower the interest rate, it will:

increase the money supply.

To _______ the money supply, the Fed could ________.

increase; conduct open-market purchases

If the interest rate on CDs increases from 5% to 10%, the opportunity cost of holding money will ______ and the quantity demanded of money will ______.

increase; decrease

To _______ the money supply, the Fed could ________.

increase; lower the reserve requirements

Suppose the reserve ratio is 20%. If Holly deposits $1,000 of cash into her checking account and her bank lends $600 to Freda, the money supply:

increases by $600.

In the long run, an increase in the quantity of money:

increases prices but not long-run output.

Expansionary monetary policy:

increases the money supply, decreases interest rates, and increases consumption and investment.

The money demand curve shows the relationship between the:

interest rate and the nominal quantity of money demanded.

Federal funds are:

loans between banks.

Banks create money when they:

make loans.

A bank run occurs when:

many bank depositors are trying to withdraw their funds from the bank all at one time.

All of the following are responsibilities of the Fed EXCEPT:

mint bills and coins.

The _______ multiplier is equal to _______ .

money; 1 divided by the required reserve ratio

(Figure: Money Market I) If the money market is initially in equilibrium at point E and the central bank sells bonds, then the interest rate will:

move toward point H.

(Figure: Money Market I) If the money market is initially in equilibrium at point E and the central bank buys bonds, then the interest rate will:

move toward point L.

The slope of the demand curve for money is:

negative.

The amount of money that people demand is:

negatively related to the interest rate.

The tool of monetary policy that involves the Fed's buying and selling of government bonds is:

open-market operations.

To change the money supply, the Fed most frequently uses:

open-market operations.

The cyclically balanced budget is a budget that is balanced:

over the course of an entire business cycle.

Suppose the Fed has set a target for the federal funds rate. If initially the equilibrium interest rate happens to be higher than the target interest rate, then the Fed should:

purchase treasury bills in the open market, increase money supply, shift the supply of money curve to the right, and lower the interest rate to the target rate.

(Figure: Money Market II) Equilibrium in this money market will occur at interest rate _______ and quantity of money _______.

r1; Q1

A sale of bonds by the Fed:

raises interest rates and reduces the money supply.

Suppose the Fed sells bonds. We can expect this transaction to:

reduce the money supply, reduce bond prices, and increase interest rates.

Public choice theorists primarily examine the:

relationship between economics and political decision making.

The major tools of monetary policy available to the Federal Reserve System include:

reserve requirements, open-market operations, and the discount rate.

The existence of banks:

results in the money supply being larger than the amount of currency in circulation.

If at the current interest rate the demand for money is $300 billion and the supply of money is $200 billion, then the interest rate will:

rise.

In the crowding-out effect of deficit spending, the supply of bonds sold on the market ______, bond prices ______, interest rates ______, and private investment ______.

rises; fall; rise; drops

(Figure: Short-Run Determination of the Interest Rate) If the money supply is currently at MS1 and the central bank chooses to buy bonds, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

supply of loanable funds from S1 to S2 and a lower interest rate.

When an individual decides to hold money instead of other assets:

that individual is giving up the interest that could have been earned by holding other types of assets.

Which of the following is designed to protect depositors from a bank run by insuring all deposits up to $250,000?

the FDIC

Monetization of the debt occurs when:

the Fed buys bonds from the federal government.

Public choice theory looks at each of the following issues EXCEPT:

the influence of special interest groups.

The demand curve for money will NOT shift as a result of a change in:

the interest rate.

The opportunity cost of holding money is:

the interest rate.

If one year the interest rate on 1-month Treasury bills was 2.5% and the next year the interest rate on 1-month Treasury bills was 2%, one could conclude that:

the opportunity cost of holding money decreased.

If the money supply increases by 10%, in the long run:

the price level increases by 10%.

A liquidity trap is a situation in which:

using expansionary monetary policy is not effective because, the nominal interest rate is almost zero.

Which of the following measures can mitigate the productivity effects of crowding out?

using the funds for public investment

The money supply curve is:

vertical.