practice exam 4, econ 224

Janet Yellen is:

chair of the Board of Governors of the Federal Reserve System.

All of the following factors will shift the money demand curve EXCEPT:

changes in the interest rate.

The tools of conducting monetary policy include:

changes in the required reserve requirement.

Loans of reserves from one bank to another are made in the _____ market.

federal funds

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

federal funds

A statement of spending that flows into and out of the country for purchases of assets during a particular period is the nation's:

financial account.

Short-term interest rates apply to financial assets due within:

one year.

The Federal Reserve affects interest rates by:

open market operations that shift the money supply curve.

A tariff imposed on U.S. imports into Japan tends to _____ U.S. producers and _____ Japanese producers.

penalize; benefit

A country's balance of payments on financial account is the difference between the country's sales of assets to foreigners and its purchases of assets from foreigners during a given period. true or false

true

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 20%. Then Andy deposits $1,000 of cash in his checking account and the bank lends $600 to Molly. That bank can lend an additional:

$1,000

(Problem 6d) Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps it in his wallet. If every time the bank decreases its loans, checkable bank deposits fall by the amount of the loan and the bank maintains a reserve ratio of 20%, by how much will the money supply contract in response to a withdrawal of $400?

$1,600

Monetary policy affects both the aggregate price level and output in the long run. True or False

False

The Heckscher-Ohlin model cannot explain United States-Mexico trade, since the United States has more labor and more land than Mexico. True or False

False

While the United States generally follows a policy of free trade, this is true particularly for agriculture and textiles, in which all restrictions on international trade have been removed. True or False

False

Which of the following would supply dollars in the foreign exchange market? I. Americans who want to buy U.S. goods, services, and assets II. Americans who want to buy European goods, services, and assets III. Europeans who want to buy U.S. goods, services, and assets

II only

In terms of dollar costs, in the United States the three primary transfer payments are:

Social Security, Medicare, and Medicaid.

(Problem 6b) Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps it in his wallet. If the bank maintains a reserve ratio of 10%, how will the bank respond to the withdrawal? Assume that the bank responds to insufficient reserves by reducing the amount of deposits it holds until its level of reserves satisfies its required reserve ratio. The bank reduces its deposits by calling in some of its loans, forcing borrowers to pay back these loans by taking cash from their checking deposits (at the same bank) to make repayment.

The bank will have to reduce its deposits by $3,600.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result?

The economy will move into a recession.

(Problem 14b) How did or would the following affect the current public debt of the U.S. government? How would each affect the implicit liabilities of the U.S. government? The age at which retired persons can receive full Social Security benefits is raised to age 70 for future retirees.

This would have no effect on the debt and decrease the implicit liabilities.

A change in the U.S. balance of payments on financial account generates an equal and opposite reaction in the balance of payments on current account. True or False

True

One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap. True or False

True

Bonds of the U.S. government that mature in less than a year are called:

U.S. Treasury bills.

money is:

an asset that can be easily used to purchase goods and services.

If the Federal Reserve conducts an open market purchase, holding everything else constant, in the long run there will be:

an increase in the aggregate price level.

Fiscal policies that require no government action but that are expansionary when the economy contracts and contractionary when the economy expands are known as:

automatic stabilizers.

Scenario: Money Supply Changes The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. Look at the scenario Money Supply Changes. As a result of the withdrawal, required reserves _____ by _____.

decrease; $500

(Problem 10) According to the European Central Bank website, the treaty establishing the European Community "makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment." If price stability is the only goal of monetary policy, consider how monetary policy would be conducted during recessions. If a recession is the result of a demand shock, the central bank should engage in:

expansionary policy.

(Problem 3b) The table available at http://www.treasurydirect.gov/instit/annceresult/annceresult.htm shows the results of auctions of Treasury bills. Use the information to answer the following question. Go to the website of your favorite bank and look for the interest rate for six-month CDs. Would you expect the rate to be higher, lower, or the same as that on 26-week Treasury bills?

higher

Economists argue that money is neutral:

in the long run, but money does affect the price level.

Consider an economy that is facing a recessionary gap. The Federal Reserve decides to use expansionary monetary policy to close that gap. As a result of this policy, in the short run the money supply will _____, the interest rate will _____, investment and consumption spending will _____, and real GDP will _____.

increase; fall; increase; increase

An expansionary fiscal policy either _____ government spending or _____ taxes.

increases; decreases

An individual who decides to hold money instead of other assets:

is giving up the interest that other assets could have earned.

The multiplier effect of changes in government transfers is:

less than the multiplier effect of a change in government spending.

Federal funds are:

loans between banks.

The government budget balance equals taxes _____ purchases _____ transfers.

minus; minus

Suppose the Federal Reserve 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 Federal Reserve should _____ Treasury bills in the open market, _____ the money supply, shift the supply of money curve to the _____, and _____ the interest rate to the target rate.

purchase; increase; right; lower

Suppose that the budget deficit of a country remains level for five years. The federal debt will:

rise.

Which model states that nations that are abundant in a factor will have a comparative advantage in a good whose production is intensive in that factor?

the Heckscher-Ohlin model

Suppose that the United States and European Union are the only trading partners in the world. If the European Union imposes some import tariffs on U.S. goods, we would expect:

the demand for the dollar to decrease, depreciating the dollar.

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should decrease government purchases of goods and services by $40 billion. true or false

true

If the government were required to balance the budget during a recession, it would have to increase taxes and decrease government spending. true or false

true