Macroeconomics

Suppose a bank's deposit liabilities increase by $10 million. If the required reserve ratio is 20 percent, bank reserves will increase by

$2 million

Suppose a bank's deposit liabilities increase by $1 million. If the required reserve ratio is 20 percent, the the resulting final changes in the bank balance sheet will show bank reserves increasing by

$200,000

When Tom's income is $20,000, he spends $18,000 and when his income increases to $30,000, he spends $23,000. His MPC is

.5

Suppose that at the target inflation rate of 2.5 percent the nominal interest rate is 4 percent. This means that at the target inflation rate, the central bank wants the real interest rate to equal

1.5 percent

The Federal Reserve System is divided into how many districts?

12

The Federal Reserve System was established in

1913

Since ____, the U.S. federal government has been running a budget deficit

2002

When the unemployment rate is equal to the natural unemployment rate, capacity utilization is usually close to

80 percent

The Federal Reserve serves as

A bank to other banks

Which of the following best explains the slope of the AD curve?

A change in inflation causes the real interest rate to change, which results in a change in spending

Which of the following would cause the Fed to lower interest rates?

A decrease in investment

Assume the Fed has complete control over the money supply. If the demand for money were greater than the supply of money, we would expect

A decrease in the quantity of money demanded and an increase in the rate of interest

Suppose, for a certain economy, real and potential GDP are initially equal. Then government purchases permanently increase. Compared to the baseline, we would expect to see, in the long run,

A decrease in the sum of consumption, investment, and net exports

A commercial bank is

A financial intermediary

As a measure of money, M1 emphasizes the use of money as

A medium of exchange

Over the period 1973 through 1991, for the largest developed economies in the world, there has been

A positive correlation between the growth rate of money and the rate of inflation

The negative correlation between inflation and unemployment is observed because

A rightward shift of the AD curve will reduce unemployment in the short run and increase inflation in the long run

The short-run effect of an increase in government purchases is

A rightward shift of the aggregate demand curve and movement along the inflation adjustment line

If Congress controlled central bank decisions, it would have

A short-run incentive to raise the target rate of inflation

State and local government expenditures are

About two-thirds as much as the federal government's expenditures

According to current U.S. monetary policy, the Fed

Adjusts the money supply so it intersects money demand at the chosen interest rate

In a boom year,

Aggregate demand has increased

When the Fed increases the federal funds rate,

All other interest rates increase

The 45-degree line identifies

All possible equilibrium points

Which of the following would cause the AD curve to shift to the right?

An increase in social security payments

Which of the following would cause the AD curve to shift to the left?

An increase in tax rates

All else held equal, an increase in the amount of transactions (goods and services purchased) in the economy results in

An increase in the demand for money

If real GDP depends only on capital, labor, and technology, an increase in the money supply will lead to

An increase in the price level

Assume the Fed has complete control over the money supply. If the demand for money were less than the supply of money, we would expect

An increase in the quantity of money demanded and a decline in the rate of interest

The short run is usually

Around one year

The equation for the real interest rate indicates that, other being things equal,

As inflation decreases, the real interest rate will rise

If taxes became more progressive, we would expect that whenever there was an economic fluctuation

Automatic changes in taxes would become more stabilizing

Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the medium run as a result of the change in spending?

B

When tax revenues are equal to spending, there is a

Balanced budget

The discount window enables the Fed to

Be a lender of last resort

If the nominal interest rate exceeds the rate of inflation, the real interest rate will

Be greater than zero

In practice, discretionary fiscal policy has

Been unsuccessful in offsetting recessions or booms

The debt to GDP ratio

Began to increase again in 2002

If a federal budget in which expenditures exceed revenue is enacted, the federal government will

Borrow money from the private sector

Financial intermediation is the bringing together of

Borrowers and lenders

If the Fed increases reserves in the banking system,

Both deposit and currency holdings will increase

When tax revenues are less than spending, there is a

Budget deficit

To increase bank reserves, the Fed will

Buy bonds from banks

Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the short run as a result of the change in spending?

C

A decrease in tax rates

Can lead to an increase in potential GDP

Which of the following would a real business cycle theorist emphasize as a primary cause of economic fluctuations?

Changes in technology

Banks are referred to as intermediaries because they

Channel funds from depositors to borrowers

If government purchases decrease, in the short run

Consumption will fall and net exports will increase as income falls

The long-run interest rate effect of decreased government purchases is that

Consumption, investment, and net exports are all higher

The long-run overall effect of decreased government purchases is that

Consumption, investment, and net exports are all higher

On the issue of central bank independence, evidence shows that

Countries with lower average rates of inflation have more independent central banks

M1 consists of

Currency plus checking deposits plus travelers' checks only

The debt to GDP ratio measures

Debt as a percentage of nominal GDP

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Y, then at the end of the day the amount of reserves held by Bank Y can

Decrease by $2 million

Open market sales will

Decrease money supply and the quantity of money demanded

A lower real interest rate in the United States relative to the rest of the world will tend to

Decrease the value of the dollar and increase net exports

M1 includes

Demand deposits and currency in circulation

If the Fed determines the amount of money in circulation, the interest rate is determined by the

Demand for money

The text defines economic fluctuations as

Departure of the economy from its long-term growth trend

The formula that shows the relationship between reserves and deposits is

Deposits=1/reserve ratio x reserves

When Paul Volcker first started to head the Fed, the Federal Reserve began a policy of

Disinflation

When interest rates increase,

Expenditures decrease

Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the long run as a result of the change in spending?

F

If the economy is in a recession, inflation will be ____, and the Fed will want to ____ the interest rate in order to ____ real GDP.

Falling; decrease; increase

True or False, social security, Medicare, and Medicaid are expected to remain relatively constant in coming years

False

The symbol G used throughout the text stands for

Federal plus state and local government purchases of goods and services

Between 1979 and 1985 the rate of inflation

Fell from over 10 percent to around 4 percent

Which of the following would be a direct result of real GDP being above potential GDP?

Firms would raise their prices and there would be a subsequent rise in inflation

If the marginal propensity to consume declines, then

For any given change in income, there will be a smaller change in consumption

The long run is usually

Four to five years or more

If real GDP depends only on capital, labor, and technology, a higher growth rate in the money supply will lead to

Higher inflation

Throughout history, higher money growth has been associated with

Higher inflation

Velocity, V, measures

How frequently money is used

Suppose the economy is initially in equilibrium, and real and potential GDP are equal. Now, suppose export orders increase. Under these circumstances

If the countercyclical fiscal policy response is made correctly, the new equilibrium will in the long run have a lower rate of inflation than if no response had been made.

The consumption function shows the relationship between consumption and

Income

Which of the following statements best describes what is meant by a spending balance?

Income and spending are the same, and people's consumption is described by the consumption function

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank INF, the amount of deposits held by the entire banking system will ultimately

Increase by $100 million

If foreigners decide to increase their purchases of U.S.-made goods by $15 million, real GDP will

Increase by more than $15 million

An increase in government spending will

Increase real GDP in the short run

To reduce the size of economic fluctuations, the government could

Increase spending during a recession and decrease spending during an expansion

A reduction in real interest rates will cause the demand for new homes to

Increase, which results in an increase in investment expenditures

The long-run effects of an increase in government purchases are that interest rates will ____, inflation will ____, and real GDP will ____

Increase; increase; remain unchanged

According to the consumption function, as income increases, consumption

Increases by a smaller amount

When government purchases decrease, the short-run effect can be described as the period of time when

Inflation is constant

Which of the following is probably the most sensitive to changes in real interest rates?

Investment

When interest rates decrease,

Investment, consumption, and net exports will increase, causing expenditures to increase

By having a Central Bank, our country

Is able to achieve centralized policy goals concerning our money supply

In the long run, an increase in the money supply

Is expected to lead to an increase in nominal GDP

If the Fed has fixed the interest rate,

It must conduct open market sales when money demand decreases

Suppose the Fed engages in a policy to reduce the inflation rate for any given level of real GDP. This would be depicted by a(n)

Leftward shift of the monetary policy line

The fact that taxes and government spending change whenever the state of the economy changes results in

Less severe recessions and booms

The interest rate that banks pay to depositors is

Less than the interest rate that borrowers pay to banks

If real GDP is below potential GDP,

Long-run equilibrium will be achieved once inflation has stopped declining

If the Fed believes that real GDP is below potential GDP, it will

Lower interest rates to shift the AD curve to the right

Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the short run we would expect

Lower unemployment

The quantity equation is written as

MV = PY

A higher value of the domestic currency

Means more expensive exports and cheaper imports

Which of the following is not an automatic stabilizer?

Military expenditures

The Fed prefers to focus on the interest rate rather than growth in the money supply because

Money demand is too volatile

The Phillips curve reflects a

Negative correlation between the inflation rate and the unemployment rate

Real interest rates and investment are

Negatively correlated because higher real interest rates make borrowing by firms more costly

The demand for money is

Negatively related to the interest rate and positively related to the volume of transactions

Which of the following cycles lies at the heart of the money multiplier process?

New deposits cause new loans which cause new deposits which cause new loans...

If the slope of the monetary policy rule line is 2, then when inflation rises by 1 percent, the

Nominal interest rate rises by 2 percent.

What happens to the Fed's balance sheet when it buys $10 billion in government securities?

None of these

The IA line does not shift in the short run because

Of expectations and staggered wage and price adjustment

The buying and selling of government bonds by the central bank is known as

Open market operations

Proponents of real business cycle theories argue that economic fluctuations are a response to changes in

Potential GDP

At the end of a recession

Potential GDP is greater than real GDP

If the Fed believes that real GDP is above potential GDP, it will

Raise interest rates to shift the AD curve to the left

When inflation is rising, the Fed will

Raise nominal interest rates to reduce aggregate demand

Monetary policy that attempts to increase the rate of inflation is called a

Re-inflation

The aggregate demand curve shows the relationship between

Real GDP and inflation

In the short run, when government purchases fall, income and hence consumption fall, so

Real GDP falls by more than the fall in government purchases

Countercyclical fiscal policy is risky because

Real GDP is likely to be close to potential GDP by the time the policy takes effect.

The structural budget surplus is the size of the budget surplus when

Real and potential GDP are equal

Disposable income is the income that households

Receive in wages, dividends, and interest payments plus transfers they may receive from the government minus any taxes they pay to the government

If inflation increases, the central bank acts to raise interest rates in order to

Reduce real GDP

One year-ahead-forecasts for real GDP

Reflect what forecasters believe will happen to the different spending components of real GDP

The short-run effects of an increase in government purchases are that inflation will ____, and real GDP will ____

Remain unchanged; increase

One of the main liabilities on the Fed's balance sheet is reserves. Which of the following is the best definition of that item?

Reserves are deposits that banks hold at the Fed

If the Fed's actions cause a bank's reserves to increase, we know the bank will have an incentive to convert the new reserves into loans and bonds because

Reserves earn virtually zero interest

An increase in government purchases

Results in a higher rate of inflation in the long run

Which of the following types of taxes provide the least revenue for the federal government?

Sales taxes

What is not counted as part of M1?

Savings deposits

If the Fed attempts to decrease the amount of deposits that banks hold, it can

Sell government bonds in an open market operation

When the Fed wants to raise nominal interest rates, it

Sells government bonds

If government expenditures decrease, the expenditure line will

Shift down in a parallel direction

If real interest rates increase, the expenditure line

Shifts down in a parallel way

The expenditure line

Slopes upward because consumption depends positively on income

Which of the following is an automatic stabilizer?

Social security payments, Unemployment compensation, Taxes, Welfare payments

Some Americans were reluctant to establish the Federal Reserve System because

Some Americans deeply distrusted centralized power

Along the 45-degree line,

Spending equals income

The "Fed" is the nickname for

The Central Bank of the U.S

The chair of the Board of Governors of the Federal Reserve is appointed by and confirmed by

The President and the Senate

If the Fed purchases $15 million worth of government bonds from Bank X, initially

The amount of Bank X's deposits at the Fed will increase by $15 million

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Zip,

The amount of loans or bonds must decrease by $18 million by the end of the day

If the Fed sells $15 million worth of government bonds to Bank A, then initially

The amount of reserves held by Bank A will decrease by $15 million

When the Fed increases reserves by buying a government bond from a bank,

The amount of reserves in the banking system will increase by the amount of the bond purchase

Which of the following is an appropriate definition of the target inflation rate?

The central bank's goal for the average rate of inflation over the long run

Suppose a government has $4,000 billion of debt. This year, real GDP is $8,000 billion, the tax rate is 30 percent, and government spending is $2,000 billion. Which of the following is true?

The debt will decrease by $400 billion.

If firms decide to decrease their purchases of U.S.-produced goods,

The decrease in investment will cause U.S. income to decrease, which will cause consumption to decrease

The real rate of interest is

The difference between the stated interest rate and the expected rate of inflation

The interest rate on loans banks pay when they borrow from the Fed is called

The discount rate

The total amount of outstanding loans owed by the federal government is known as

The federal debt

When the Volcker disinflation began,

The federal funds rate had risen above 20 percent

The voting members of the FOMC are

The governors of the Federal Reserve Board and 5 of the 12 Federal Reserve district bank presidents

The long-run effect of a decrease in government purchases can be described as the period of time when

The inflation adjustment line intersects the aggregate demand curve at the level of potential GDP

An increase in lump-sum taxes results in

The intercept of the expenditure line decreasing

The slope of the consumption function is equal to

The marginal propensity to consume

Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed purchases $10 million of government securities from a private securities dealer. Then,

The maximum amount that deposits can increase will be $200 million

Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed sells $10 billion of government securities to Bank A. As a result,

The maximum amount that deposits in the economy will decrease is $200 million

Economists refer to the sum of all currency plus reserves on the Fed's balance sheet liabilities as

The monetary base

The central bank's monetary policy rule shows that

The nominal interest rate must increase by more than the increase in inflation

When the rate of interest falls,

The opportunity cost of money decreases, and the quantity of money demanded increases

When the rate of interest increases,

The opportunity cost of money increases, and the quantity of money demanded declines

A progressive tax system implies that

The proportion of income paid to taxes rises as income increases and falls as income decreases

The relationship between money and nominal GDP in the economy is summarized by

The quantity equation of money

Which of the following is the best measure of the effects of interest rates on aggregate expenditure?

The real interest rate

Many of the current controversies about money pertain to

The short-run effect the Fed has on real GDP

The Keynesian multiplier measures

The short-run impact of an initial change in spending on real GDP

What do economists mean when they refer to the "size" of the Fed's balance sheet?

The sum of all the assets on its balance sheet

Suppose people are holding $100 million of currency, total deposits in the banking system are $2,000 million, and bank reserves are $400 million. In this case,

The supply of money is $2,100 million

Which of the following does not occur when real GDP rises above potential GDP?

The unemployment rate rises above the natural unemployment rate

During the period known as the Volcker disinflation

The unemployment rate rose to 10.8 percent, real GDP fell below potential GDP, investment and net exports declined, the real interest rate rose

If capacity utilization is 98 percent,

The unemployment rate will be below the natural rate of unemployment

In order for the aggregate demand (AD) curve to be downward-sloping,

There has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate

Suppose the expenditure line is given by the equation E = 800 + .75Y, and output is equal to 3,000. Which of the following is true?

There is an incentive for firms to increase output.b.Spending is less than income

The AD-AI analysis in conjunction with the Phillips curve relationship shows that

There is no long-run gain from expansionary monetary policy

For the largest developed economies during the 1990s,

There was not enough variation in the rate of inflation to test the quantity equation because inflation was low for all these countries

The main rationale for central bank independence is that

This independence prevents the government from engaging in policies that, though beneficial in the short run, are harmful in the long run

Which of the following is the largest component of federal government expenditures?

Transfer payments

True or False, A deficit is projected for the U.S. federal tax revenues and expenditures for 2020

True

True or False, Based on presidential elections in 1980 and 1992, there is no longer strong evidence supporting the existence of a political business cycle.

True

True or False, If there is a budget deficit, the government must borrow to pay for the excess spending

True

True or False, It is customary to pay a higher interest rate on a loan than you would receive on your savings account from the same bank

True

True or false, A change in government purchases affects GDP, which is the same as income. The change in income affects consumption

True

True or false, A change in income causes consumption to change, and a change in consumption will cause income to change

True

True or false, A federal deficit adds to the federal debt

True

True or false, It is generally agreed that an increase in the money supply will not cause real GDP to increase in the long-run, but economists disagree regarding whether an increase in the money supply can cause a short-run increase in real GDP.

True

True or false, bonds are a bank asset consisting of money in the bank

True

True or false, commercial banks have deposit accounts at the Federal Reserve

True

True or false, open market sales by the Fed trigger a sequence of bond sales by banks as the banks replenish their reserves to the necessary levels.

True

True or false, the lower the reserve ratio, the greater the money multiplier because loans increase by a larger amount at each stage of the money multiplier process.

True

True or false, when a private individual buys a bond from another private individual, reserves are transferred from one commercial bank to another, but there is not a change in the overall level of reserves in our banking system.

True

True or false, when commercial banks deposit reserves into their official reserve account at the Fed, the Fed can make loans to private individuals because of fractional reserve banking.

True

True or false, when the Fed buys a bond, new reserves are injected into the commercial bank of the individual selling that bond, so that the overall level of reserves in the banking system increases.

True

A rise in world real interest rates relative to U.S. interest rates

Will cause international investors to decrease their demand for dollar-denominated assets

Automatic stabilizers refer to

taxes and government spending that change automatically whenever the state of the economy changes