Macroeconomics Exam 3

In an economy, it costs $1,500 to produce 2,000 units of output. If the costs increase to $2,500, then the per unit cost of production will have increased from

$0.75 to $1.25.

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

$10 billion

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out

$200,000

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. If the original balance sheet was for the commercial banking system, rather than a single bank, loans and checkable deposits could have been expanded by a maximum of

$25000

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of

$40,000

Based on the given table, at equilibrium in the given market for money, the total amount of money demanded is

$460

Refer to the table. Money supply M2 for this economy is

$480

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of

$5,000

Answer the question on the basis of the information in the table. The amount of investment that will be forthcoming in this economy at equilibrium is

$500

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The level of productivity is

2

If the MPC is 0.6, the multiplier will be

2.5

Answer the question on the basis of the information in the table. The equilibrium interest rate in this economy is

4 percent

Refer to the diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD3

Which of the diagrams for the U.S. economy best portrays the effects of a decrease in the availability of key natural resources?

B

Which of the diagrams for the U.S. economy best portrays an improvement in expected rates of return on investment?

C

Which of the diagrams for the U.S. economy best portrays the effects of a substantial reduction in government spending?

D

In the U.S. economy, the money supply is controlled by the

Federal Reserve System.

The paper money used in the United States is

Federal Reserve notes.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

Which of the following statements is true?

The Federal Reserve does not set the federal funds rate, but historically has influenced it through the use of its open-market operations.

Money is "created" when

a bank grants a loan to a customer.

Federal Reserve Notes in circulation are

a liability as viewed by the Federal Reserve Banks.

An appropriate fiscal policy for severe demand-pull inflation is

a tax rate increase

A restrictive monetary policy is designed to shift the

aggregate demand curve leftward.

The Federal Reserve System regulates the money supply primarily by

altering the reserves of commercial banks, largely through sales and purchases of government bonds.

The multiplier effect means that

an increase in investment can cause GDP to change by a larger amount.

The total demand for money curve will shift to the right as a result of

an increase in nominal GDP

Which of the following would not shift the aggregate supply curve?

an increase in the price level

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

and reserves of commercial banks both decrease.

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the

budget surplus.

One of the strengths of monetary policy relative to fiscal policy is that monetary policy

can be implemented more quickly.

The MPC can be defined as that fraction of a

change in income that is spent.

Open-market operations change

commercial bank reserves but not the size of the monetary multiplier.

Which of these pairs of financial institutions are most alike in terms of their main lines of business?

commercial banks and thrifts

State and local governments are limited in their ability to respond to recessions because of

constitutional and other requirements to balance their budgets.

When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession, such actions are design to be

countercyclical

Which one of the following is presently a major deterrent to bank panics in the United States?

deposit insurance

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the

discount rate

The immediate determinants of investment spending are the

expected rate of return on capital goods and the real interest rate.

Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to

fall by 2 percentage points.

Overnight loans from one bank to another for reserve purposes entail an interest rate called the

federal funds rate

The interest rate that banks charge one another on overnight loans is called the

federal funds rate.

Prices and wages tend to be

flexible upward but inflexible downward.

If the dollar appreciates relative to foreign currencies, then

foreign buyers will find U.S. goods become more expensive.

Most modern banking systems are based on

fractional reserves

The crowding-out effect of expansionary fiscal policy suggests that

government spending increases at the expense of private investment.

The determinants of aggregate supply

include resource prices and resource productivity.

Checkable deposits are

included in M1

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will

increase U.S. imports and decrease U.S. exports.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to

increase aggregate demand

Other things equal, a reduction in personal and business taxes can be expected to

increase both aggregate demand and aggregate supply.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should

increase government expenditures by $50 billion.

If the Fed wants to discourage commercial bank lending, it will

increase the interest paid on excess reserves held at the Fed.

An economist who favored expanded government would recommend

increases in government spending during recession and tax increases during inflation.

Refer to the graph. If the price level is initially at P1, then the economy will adjust by

increasing output produced

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by

increasing taxes by $20 billion.

The price of government bonds and the interest rate received by a bond buyer are

inversely related.

The multiplier applies to

investment, net exports, and government spending.

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability.

The crowding-out effect tends to be stronger when the economy

is at, or close to, full employment.

The amount of money reported as M2

is larger than the amount reported as M1

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy

is not subject to the timing problems of discretionary policy.

A fractional reserve banking system

is susceptible to bank "panics" or "runs."

The fractional reserve system of banking started when goldsmiths began

issuing paper receipts in excess of the amount of gold held

When loans are repaid at commercial banks,

money is destroyed.

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the

multiplier effect.

Firms whose central business is providing individual account shares of a group of stocks, bonds, or both are known as

mutual fund companies.

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

open-market operations

Which of the following monetary policy tools was introduced in 2008?

paying interest on excess reserves held at the Fed

The political business cycle refers to the possibility that

politicians will manipulate the economy to enhance their chances of being reelected.

The primary purpose of the legal reserve requirement is to

provide a means by which the monetary authorities can influence the lending ability of commercial banks.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to

reduce government expenditures or increase taxes

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may

reduce worker morale and work effort and thus lower productivity.

When required reserves exceed actual reserves, commercial banks will be forced to have borrowers

repay loans

A major advantage of the built-in or automatic stabilizers is that they

require no legislative action by Congress to be made effective.

The reserve ratio refers to the ratio of a bank's

required reserves to its checkable-deposit liabilities.

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to

sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks.

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right.

The aggregate supply curve (short run)

slopes upward and to the right.

The greater is the marginal propensity to consume, the

smaller is the marginal propensity to save.

The asset demand for money is most closely related to money functioning as a

store of value

The federal budget deficit is found by

subtracting government tax revenues from government spending in a particular year.

A fall in labor costs will cause aggregate

supply to increase.

The equilibrium rate of interest in the market for money is determined by the intersection of the

supply-of-money curve and the total-demand-for-money curve.

An economist who favors smaller government would recommend

tax cuts during recession and reductions in government spending during inflation.

When the economy is at full employment,

the actual and the cyclically adjusted budgets will be equal.

The purchase of government securities from the public by the Fed will cause

the money supply to increase.

Which of the following tools of monetary policy has not been used since 1992?

the reserve ratio

When the Fed sells bonds to the bank and the public, the expected result is that

the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur.

One timing problem in using fiscal policy to counter a recession is the "implementation lag" that occurs between the

time fiscal action is taken and the time that the action has its effect on the economy.

The real-balances, interest-rate, and foreign purchases effects all help explain

why the aggregate demand curve is downsloping.