Practice Final Topics 10-12

The economic definition of money

any asset that people are generally willing to accept in exchange for goods and services

When money is acting as a store of value, it allows an individual to

transfer dollars, and therefore purchasing power, into the future

When the economy is experiencing an expansion automatic stabilizers will cause

transfer payments to decrease and tax revenues to increase

Two examples of automatic stabilizers in the US are

unemployment insurance payments and the progressive income tax system

automatic stabilizers can reduce the severity of a recession because, during a recession

unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment

If the Fed believes the inflation rate is about to increase it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left

If the Fed believes the economy is about to fall into recession it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right

Additionally, the federal funds rate is

very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ____ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ____U.S. Treasury securities

buys Sells

Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?

changing income tax rates

Which of the following is not a function of money

commodity

Congress passed legislation to create the Federal Reserve System in 1913 in order to

end the instability created by bank panics by acting as a lender of last resort

The U.S. dollar can best be described as

fiat money

Real GDP

increase real GDP by increasing aggregate demand

the price level

increase the price level because more is demanded

Why is the Fed sometimes said to have a "dual mandate". The Fed is said to have a "dual mandate" because

maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946

Which of the following would be the least desirable candidate to be a good medium of exchange?

milk

Which one of the following is not one of the policy tools the Fed uses to control the money supply?

moral suasion

An increase in interest rates affects aggregate demand by

shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level

How does the quantity theory provide an explanation about the cause of inflation?

the quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation

What is the relationship the federal funds rate falling and the money supply increasing?

to decrease the federal funds rate, the Fed must increase the money supply

how does lowering the target for the federal funds rate "pour money" into the banking system?

to increase the money supply, the Fed buys bonds on the open market, which increases bank reserves

How do the banks "create money"?

when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands

Suppose you deposit $1300 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.10? The change in checking deposits is equal to:

13000

Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account Asset Liabilities Reserves +100000 Deposits 100000 If the required reserve ratio is 0.15, or 15 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as a result of this transaction is

85000

Which one of the following is not the formula for the quantity theory of money?

M*Y=P*V

Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet.

You bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100

Which of the following is NOT a function of money

acceptability

As the interest rate increases

consumption, investment, and net exports decrease; aggregate demand decreases

An attempt to reduce inflation requires _____ fiscal policy, which causes real GDP to ____ and the price level to ___

contractionary fall fall

The most important role of the Federal Reserve in today's U.S. economy is

controlling the money supply to pursue economic objectives

The unemployment rate

decrease the unemployment rate by increasing production

What is fiscal policy?

fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives

Automatic stabilizers are

government spending and taxes that automatically increase or decrease along with the business cycle

Money is an imperfect standard of deferred payment because ____________ causes the value of money to decrease over time.

inflation

Budget deficits

occur when government spending exceeds tax revenue and increase during recessions and wars

Which one of the following is not one of the monetary policy goals of the Fed?

reduce income inequailty

Which tool is the most important?

the Fed conducts monetary policy principally through open market operations

Monetary policy is defined as

the actions the Federal Reserve takes to manage the money supply and interest rates

An asset would be usable as a medium of exchange for all of the following reasons except

the asset should be a commodity that has intrinsic value

who is responsible for fiscal policy?

the federal government controls fiscal policy

The federal funds rate is

the interest that banks charge each other for overnight loans

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?

yes because fiscal policy and monetary policy are separate things