test 3
39. The combined cost of Social Security and Medicare programs was what percent of U.S. GDP in 2008? A. 7.6 B. 12.4 C. 17.2 D. 2.9
A
11. Other things equal, an improvement in productivity will: A. shift the aggregate demand curve to the left. B. shift the aggregate supply curve to the left. C. shift the aggregate supply curve to the right. D. increase the price level.
C
62. 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: A. $1 million. B. $1.2 million. C. $200,000. D. $800,000.
C
73. If the quantity of money demanded exceeds the quantity supplied: A. the supply-of-money curve will shift to the left. B. the demand-for-money curve will shift to the right. C. the interest rate will rise. D. the interest rate will fall.
C
80. Other things equal, if the supply of money is reduced: A. the demand for money will increase. B. the interest rates will fall. C. bond prices will fall. D. investment spending will increase.
C
53. The members of the Federal Reserve Board: A. serve seven-year terms. B. are appointed by the American Economic Association. C. are elected by votes of the 12 presidents of the Federal Reserve Banks. D. are appointed for 14-year terms.
D
59. Refer to row 2 in the above table. The number appropriate for space X is: A. $20,000. B. $60,000. C. $200,000. D. $100,000.
D
10. The shape of the immediate-short-run aggregate supply curve implies that: A. total output depends on the volume of spending. B. increases in aggregate demand are inflationary. C. output prices are flexible, but input prices are not. D. government cannot bring an economy out of a recession by increasing spending.
A
14. Graphically, demand-pull inflation is shown as a: A. rightward shift of the AD curve along an upsloping AS curve. B. leftward shift of the AS curve along a downsloping AD curve. C. leftward shift of AS curve along an upsloping AD curve. D. rightward shift of the AD curve along a downsloping AS curve.
A
17. If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium: A. output would necessarily rise. B. output would necessarily fall. C. price level would necessarily fall. D. price level would necessarily rise.
A
19. The group of three economists appointed by the President to provide fiscal policy recommendations is the: A. Council of Economic Advisers. B. Joint Economic Committee. C. Bureau of Economic Analysis. D. Federal Reserve Board of Governors.
A
21. If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by: A. increasing government spending by $4 billion. B. increasing government spending by $40 billion. C. decreasing taxes by $4 billion. D. increasing taxes by $4 billion.
A
25. An appropriate fiscal policy for severe demand-pull inflation is: A. an increase in government spending. B. depreciation of the dollar. C. a reduction in interest rates. D. a tax rate increase.
A
5. Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.: A. aggregate demand curve would shift to the right. B. aggregate supply curve would shift to the left. C. aggregate supply curve would shift to the right. D. aggregate demand curve would shift to the left.
A
6. Which one of the following would not shift the aggregate demand curve? A. a change in the price level B. depreciation of the international value of the dollar C. a decline in the interest rate at each possible price level D. an increase in personal income tax rates
A
63. Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction: A. the supply of money is increased by $5,000. B. the supply of money declines by the amount of the loan. C. a claim has been "demonetized." D. the Metro Bank acquires reserves from other banks.
A
64. If we both have checking accounts in the same commercial bank and I write a check in your favor for $200, the bank's: A. balance sheet will be unchanged. B. reserves and checkable deposits will both decline by $200. C. liabilities will decline by $200, but its net worth will increase by $200. D. assets and liabilities will both decline by $200.
A
83. Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks? A. loans to commercial banks B. Federal Reserve Notes in circulation C. Treasury deposits D. reserves of commercial banks
A
88. If the Fed were to reduce the legal reserve ratio, we would expect: A. lower interest rates, an expanded GDP, and a higher rate of inflation. B. lower interest rates, an expanded GDP, and a lower rate of inflation. C. higher interest rates, a contracted GDP, and a higher rate of inflation. D. higher interest rates, a contracted GDP, and a lower rate of inflation.
A
95. The Federal funds rate is the interest rate that _______ charge(s) ______. A. banks; other banks. B. the Fed; commercial banks. C. banks; their best corporate customers. D. banks; on federal student loans.
A
97. To reduce the Federal funds rate, the Fed can: A. buy government bonds from the public. B. increase the discount rate. C. increase the prime interest rate. D. sell government bonds to commercial banks
A
98. Refer to the above diagram for the Federal funds market. If the Fed wants the Federal funds rate to be i1, what quantity of reserves do they need to make available to banks? A. Qf1. B. Qf2. C. Qf3. D. It cannot be determined with the information given.
A
15. In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by: A. a reduction in the price level. B. the increased availability of entrepreneurial talent. C. an increase in business taxes. D. the real-balances, interest-rate, and foreign purchases effects.
B
23. The effect of a government surplus on the equilibrium level of GDP is substantially the same as: A. a decrease in imports. B. an increase in saving. C. an increase in consumption. D. an increase in investment.
B
27. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: A. increase government expenditures by $100 billion. B. increase government expenditures by $50 billion. C. reduce taxes by $50 billion. D. reduce taxes by $200 billion.
B
3. If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes: A. the output effect. B. the foreign purchases effect. C. the real-balances effect. D. the shift-of-spending effect.
B
31. Which of the following best describes the built-in stabilizers as they function in the United States? A. The size of the multiplier varies inversely with the level of GDP. B. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
B
37. Which of the following did not contribute directly to the Great Recession? A. Crisis in the mortgage lending market. B. Bursting of the Dot.Com stock market bubble. C. Freezing credit markets. D. Pessimism originating from financial market turmoil.
B
40. To say money is socially defined means that: A. money has been defined in a Constitutional amendment. B. whatever performs the functions of money extremely well is considered to be money. C. the money supply includes all public and private securities purchased by society. D. society, acting through Congress, specifies what shall be included in the money supply.
B
46. The difference between M1 and M2 is that: A. the former includes time deposits. B. the latter includes small-denominated time deposits, non-checkable savings accounts, money market deposit accounts, and money market mutual fund balances. C. the latter includes negotiable government bonds. D. the latter includes cash held by commercial banks and the U.S. Treasury.
B
49. Other things equal, an excessive increase in the money supply will: A. increase the purchasing power of each dollar. B. decrease the purchasing power of each dollar. C. have no impact on the purchasing power of the dollar. D. reduce the price level.
B
50. The basic policy-making body in the U.S. banking system is the: A. Federal Open Market Committee (FOMC). B. Board of Governors of the Federal Reserve. C. Federal Monetary Authority. D. Council of Economic Advisers.
B
52. The Board of Governors of the Federal Reserve has ____ members. A. 5 B. 7 C. 9 D. 14
B
60. Refer to row 3 in the above table. The number appropriate for space Y is: A. $24,000. B. $32,000. C. $48,000. D. $96,000.
B
69. If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are: A. zero. B. $1,000. C. $2,000. D. $500.
B
71. The transactions demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.
B
79. Other things equal, if there is an increase in nominal GDP: A. the demand for money will decrease. B. the interest rate will rise. C. bond prices will rise. D. consumption spending will fall.
B
82. The above data suggest that the amount of money that society wishes to hold as an asset: A. varies directly with the interest rate. B. varies inversely with the interest rate. C. varies inversely with nominal GDP. D. is independent of the interest rate.
B
85. The purchase of government securities from the public by the Fed will cause: A. commercial bank reserves to decrease. B. the money supply to increase. C. demand deposits to decrease. D. the interest rate to increase.
B
89. Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier? A. open market operations B. the reserve ratio C. the discount rate D. the federal funds rate
B
90. The discount rate is the interest: A. rate at which the central banks lend to the U.S. Treasury. B. rate at which the Federal Reserve Banks lend to commercial banks. C. yield on long-term government bonds. D. rate at which commercial banks lend to the public.
B
99. Refer to the above diagram for the Federal funds market. If the Fed wants the Federal funds rate to fall from i1 to i2, it can use open market operations to: A. increase the demand for Federal funds. B. increase the supply of Federal funds. C. decrease the supply of Federal funds. D. decrease commercial bank reserves
B
100. Refer to the above diagram for the Federal funds market. If the Fed supplies $300 billion in reserves, the equilibrium Federal funds rate is: A. 6.0 percent. B. 5.5 percent. C. 5.0 percent. D. undeterminable with the information given.
C
13. The short-run aggregate supply curve represents circumstances where: A. both input and output prices are fixed. B. both input and output prices are flexible. C. input prices are fixed, but output prices are flexible. D. input prices are flexible, but output prices are fixed.
C
2. The interest-rate effect suggests that: A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D. an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.
C
20. Discretionary fiscal policy refers to: A. any change in government spending or taxes that destabilizes the economy. B. the authority that the President has to change personal income tax rates. C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy. D. the changes in taxes and transfers that occur as GDP changes.
C
24. Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward: A. an equality of tax receipts and government expenditures. B. an excess of tax receipts over government expenditures. C. an excess of government expenditures over tax receipts. D. a reduction of subsidies and transfer payments and an increase in tax rates.
C
30. A major advantage of the built-in or automatic stabilizers is that they: A. simultaneously stabilize the economy and reduce the absolute size of the public debt. B. automatically produce surpluses during recessions and deficits during inflations. C. require no legislative action by Congress to be made effective. D. guarantee that the Federal budget will be balanced over the course of the business cycle.
C
4. Which of the following is incorrect? A. As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise. B. As the price level falls, the demand for money declines, the interest rate declines, and interest-rate sensitive spending increases. C. When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending. D. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level.
C
44. In defining money as M1, economists exclude time deposits because: A. the intrinsic value of time deposits is nil. B. the purchasing power of time deposits is much less stable than that of checkable deposits and currency. C. they are not directly or immediately a medium of exchange. D. they are not recognized by the Federal government as legal tender.
C
54. Which of the following is the basic economic policy function of the Federal Reserve Banks? A. holding the deposits or reserves of commercial banks B. acting as fiscal agents for the Federal government C. controlling the supply of money D. the collection or clearing of checks among commercial banks
C
57. When the receipts given by goldsmiths to depositors were used to make purchases: A. the gold standard was created. B. existing banking laws were violated. C. the receipts became in effect paper money. D. a fractional reserve banking system was created.
C
58. Which of the following describes the identity embodied in a balance sheet? A. Net worth plus assets equal liabilities B. Assets plus liabilities equal net worth C. Assets equal liabilities plus net worth D. Assets plus reserves equal net worth
C
66. Banks create money when they: A. allow loans to mature. B. accept deposits of cash. C. buy government bonds from households. D. sell government bonds to households.
C
67. The Federal funds market is the market in which: A. banks borrow from the Federal Reserve Banks. B. U.S. securities are bought and sold. C. banks borrow reserves from one another on an overnight basis. D. Federal Reserve Banks borrow from one another.
C
72. The asset demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.
C
84. When a commercial bank borrows from a Federal Reserve Bank: A. the supply of money automatically increases. B. it indicates that the commercial bank is unsound financially. C. the commercial bank's lending ability is increased. D. the commercial bank's reserves are reduced.
C
92. Suppose that, for every 1-percentage point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will: A. increase by $1 billion and the money supply will increase by $5 billion. B. decline by $1 billion and the money supply will decline by $10 billion. C. increase by $1 billion and the money supply will increase by $10 billion. D. increase by $10 billion and the money supply will increase by $100 billion.
C
93. Which of the following tools of monetary policy is considered the most important on a day-to-day basis? A. the discount rate B. the reserve ratio C. open market operations D. the term auction facility
C
96. Which of the following statements is true? A. The Federal Reserve sets the Federal funds rate. B. The Federal Reserve sets the target for the Federal funds rate, and then uses the reserve ratio to push banks toward that target. C. The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations. D. The Federal Reserve will set a higher target for the Federal funds rate if pursuing an expansionary monetary policy.
C
26. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should: A. increase government expenditures by $80 billion. B. reduce government expenditures by $40 billion. C. reduce taxes by $40 billion. D. reduce taxes by $80 billion.
D
41. Money functions as: A. a store of value. B. a unit of account. C. a medium of exchange. D. all of these.
D
43. The paper money used in the United States is: A. National Bank Notes. B. Treasury Notes. C. United States Notes. D. Federal Reserve Notes.
D
45. Money market deposit accounts are included in: A. M1 only. B. M2 only. C. neither M1 nor M2. D. both M1 and M2.
D
51. The Federal Open Market Committee (FOMC) is made up of: A. the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks. B. the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank. C. the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers. D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.
D
55. Banks lost money during the mortgage default crisis because: A. of defaulted loans to investors in mortgage-backed securities. B. they held mortgage-backed securities they had purchased from investment firms. C. homebuyers defaulted on mortgages held by the banks. D. of all of these reasons.
D
56. The goldsmith's ability to create money was based on the fact that: A. withdrawals of gold tended to exceed deposits of gold in any given time period. B. consumers and merchants preferred to use gold for transactions, rather than paper money. C. the goldsmith was required to keep 100 percent gold reserves. D. paper money in the form of gold receipts was rarely redeemed for gold.
D
61. Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank: A. can safely lend out $500,000. B. can safely lend out $5 million. C. can safely lend out $50,000. D. cannot safely lend out more money.
D
68. The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of: A. the MPS. B. its actual reserves. C. its excess reserves. D. the reserve ratio.
D
7. An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the: A. net export effect. B. wealth effect. C. real-balances effect. D. multiplier effect.
D
86. Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply: A. contracts and commercial bank reserves increase. B. expands and commercial bank reserves decrease. C. contracts and commercial bank reserves decrease. D. expands and commercial bank reserves increase.
D
87. Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change? A. the required reserve ratio will increase B. the money supply will decrease C. the deposits of commercial banks will decline D. commercial bank reserves will increase
D
91. A commercial bank can add to its actual reserves by: A. lending money to bank customers. B. buying government securities from the public. C. buying government securities from a Federal Reserve Bank. D. borrowing from a Federal Reserve Bank.
D
94. Which of the following monetary policy tools was introduced in December 2007? A. the discount rate B. the Federal funds rate C. open-market operations D. the term auction facility
D
1. The aggregate demand curve: A. is upsloping because a higher price level is necessary to make production profitable as production costs rise. B. is downsloping because production costs decline as real output increases. C. shows the amount of expenditures required to induce the production of each possible level of real output. D. shows the amount of real output that will be purchased at each possible price level.
D
101. Refer to the above diagram for the Federal funds market. If the Fed supplies $200 billion in reserves, the equilibrium prime interest rate is: A. 6.0 percent. B. 5.5 percent. C. 5.0 percent. D. undeterminable with the information given.
D
102. To increase the Federal funds rate, the Fed can: A. buy government bonds from the public. B. decrease the discount rate. C. decrease the prime interest rate. D. sell government bonds to commercial banks.
D
12. The determinants of aggregate supply: A. are consumption, investment, government, and net export spending. B. explain why real domestic output and the price level are directly related. C. explain the three distinct ranges of the aggregate supply curve. D. include resource prices and resource productivity.
D
18. Prices and wages tend to be: A. flexible both upward and downward. B. inflexible both upward and downward. C. flexible downward, but inflexible upward. D. flexible upward, but inflexible downward.
D
22. If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by: A. reducing government expenditures by $12 billion. B. reducing government expenditures by $60 billion. C. increasing taxes by $15 billion. D. increasing taxes by $20 billion.
D
