Test 3: Macroeconomics

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is _______ policy.

Supply-side fiscal

A tight monetary policy includes:

The Fed sells bonds in open market

If a bond has a face value of $1,000 and has a 10% coupon rate, how much is the bond worth after interest rates increase to 5%?

$2,000

Sami deposits $200 cash into his checking account. The reserve requirement is 10%. What is the change in the bank's required reserves?

$20

How much does a government need to spend additionally to close a $20 trillion recessionary gap given marginal propensity to consume = 0.8?

- $4 trillion - we need to find the spending multiplier by: 1-MPC - 1 - 0.8 = 0.2 - 1/0.2= 5 (spending multiplier) - $20 trillion/5= $4 trillion

M2 includes:

- M1 - savings deposits - money market deposits - money market mutual funds - all of the above

The Federal Reserve System includes:

- The Board of Governors, which has 7 numbers and each serving a 14-year term - 12 regional banks across the nation - The Federal Open Committee, which oversees open market operations - ALL OF THE ABOVE ^

What is the primary function of a central bank?

- conduct monetary policy - provide bank service to commercial banks, depository institutions, and the federal government - ensure that the financial system is stable - ALL OF THE ABOVE

How can the Fed raise the federal funds rate?

- increase discount rate - increase reserve requirement - sells bond in open market - ALL OF THE ABOVE

Which of the following is the Fed MOST likely to use to deal with a macroeconomic problem?

- open market operations

What role(s) are fulfilled by financial institutions?

- reducing information costs - reducing transaction costs - diversifying assets to reduce risk - all of the above

Assume that Empathy State Bank is fully loaned up. The bank's reserve ratio is:

0.10 - reserve ratio = reserves/deposits - (2500 + 7500)/100,000 = 0.10

Monetary policy is LEAST effective in reversing

Supply-push inflation (supply shock)

If inflation is 3%, the target inflation rate is 2%, and the economy is 3% below its long-run output, what is the Fed funds target rate using the Taylor rule?

4%

In a cashless society, the reserve requirement is 20%, and excess reserve banks choose to hold 5%, the potential money multiplier is ________, and the leakage-adjusted money multiplier is

5;4

Which of the following is true of a central bank that employs inflation targeting?

A target rate of annual inflation is maintained by expanding or contracting the money supply.

Which of the following is NOT a way the government can finance its deficit?

Buying bonds from the Federal Reserve

When current output Is beyond potential output, the Federal Reserve (the Fed) is likely to enact _______ and the federal government is likely to enact _________

Contractionary monetary policy; contractionary fiscal policy

Automatic stabilizers include all of these EXCEPT

Education spending

A central bank can use ________ and a central government can use __________ to shift aggregate demand curve to the right.

Expansionary monetary policy; expansionary fiscal policy

Bonds price and interest rate move in the same direction.

False

In September 2009, the Fed was waiting for a pattern of economic improvement in the data before winding down its bond purchases. This wait for a signal about the economy's condition is known as decision lag.

False

One of the monetary policy goals is to promote economic growth with low inflation.

False

The fractional reserve banking system does NOT allow customers to withdraw all of their money from their banks at once.

False

Timing lags affect monetary policy more than fiscal policy.

False

If the reserve requirement is 20%, then a $10 increase in deposits means that the money supply:

Has the potential to increase by $50

The graph that plots hypothetical tax revenues at various income tax rates is commonly called the _____ Curve.

Laffer

Suppose the government runs a budget deficit. What happens to loanable funds and interest rates?

Loanable funds fall and interest rates rise

The ______ is the sum of past ______ less surpluses.

National debt; budget deficits

In the equation of exchange, if M = $6 trillion, V = 4 and P = 3, then

Real GDP = $8 trillion

Which of the following is mandatory spending?

Social security

Suppose the Federal Reserve raises interest rates. Which situation would MOST likely trigger such a policy move?

The economy is producing beyond its potential GDP

Which statement correctly describes the sequence that explains how an expansionary monetary policy impacts an economy?

The policy lowers interest rates; lower interest rates increase investment; higher investment increases aggregate demand, which impacts output and the price level

If policymakers wish to use fiscal policy to reduce inflation, which statement is more accurate?

The way to lower the inflation rate is ro decrease aggregate demand, which causes a rise in unemployment

Bond sales represent a large fraction of government finance in the United States.

True

Fiat money has no intrinsic value, while commodity money has intrinsic value.

True

Government debt could crowd out consumption and investment if the government finances its debt by selling bonds.

True

If Jack withdraws $1000 cash from his checking account, the bank's assets decrease by $1000 and its liabilities decrease by $1000.

True

Most of the tax revenue of the U.S. government forms from income taxes.

True

Which economists believe that because the economy will always self-adjust, intervention is unnecessary?

classical economists

The provisions, members of the Federal Reserve Board serve 14-year terms and cannot be reappointed, help ensure that the Federal Reserve is free to take the long view and not be overly influenced by short-term political considerations.

True

When people use money to exchange for goods and services, money is used as

a medium of exchange

According to ________________, in the long run, changes in the money supply will NOT change the output.

all of the above

A tight fiscal policy includes:

higher taxes and lower spending

A barter system tends to work only

in primitive economies without money

Which statement refers to a characteristic of the quantity theory of money?

it is a product of the classical school of economics

Which asset is MOST liquid?

money

The Federal Reserve mainly use _________ and rarely use _________ to influence money supply.

open market operations; the reserve requirement

One argument against using taxation to pay off the public debt is that it will redistribute wealth from:

poorer people who do not own bonds to richer bondholders.

The time used by the government to recognize trends in the data is called:

recognition lag

Which of the following entitle owners to a share of profits?

stocks

Select the statement that best defines required reserves.

the amount of reserves a bank must keep on deposit at the Fed or in the vault on a given deposit

If the Federal Reserve decides to increase the money supply

the federal funds rate will fall

If monetary policy is loose, which will NOT occur?

the value of the dollar will rise

Policymakers should use monetary policy and fiscal policy to counter business cycles.

true

Which of the following is NOT a component in the equation of exchange in classical economics?

unemployment rate