Test 4

Shifts in monetary policy will

stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.

The discount rate is the interest rate

the Federal Reserve charges banking institutions for borrowing its funds

The Federal Reserve System is owned by

the banks that are members of the Federal Reserve System

The primary source of earnings of commercial banks is income derived from

the use of deposits to extend loans and undertake investments.

When individuals and businesses are permitted to trade freely over a larger market area,

they will be able to produce a larger output and consume a more diverse bundle of goods.

Compared to a barter economy, using money increases efficiency by reducing

transaction costs

The equation of exchange states that

velocity multiplied by money supply equals real output times the price level.

Measured in 1990 dollars, the GDP per person of the world was $667 in 1820. By 2003, the world's income per person had risen to

$6,516, nearly ten times the level of 1820.

Regional Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of

$900

The "rule of 70" is a simple rule

(70 divided by the growth rate) that approximates the number of years it will take for income to double at various growth rates.

Which of the following reduced the demand stimulus effects of the Fed's low interest rate policy pursued during, and after, the financial crisis of 2008-2009?

A reduction in the velocity of money.

Why do political instability and insecure property rights retard economic growth?

All of the above are correct.

Which of the following contributed to the financial crisis of 2008?

All of the above.

Which of the following is important if a country is going to achieve and sustain high rates of economic growth?

All of the above.

What is meant by the expression, "There is too much money chasing too few goods"?

An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.

If the Fed raises the discount rate, what happens to reserves and the money supply?

Both decrease.

Which of the following is an important ingredient of efficient economic organization?

Competitive markets.

Which of the following is true for the world as a whole?

During the 800 years between 1000 and 1800, the increases in both world income per person and life expectancy at birth were small, but both of these indicators have increased sharply during the past 200 years.

The velocity of money is

GDP divided by the money supply.

Which of the following contributed to the dramatic rise in housing prices between 2002 and mid-year 2006?

Government policy made credit for housing abundant and easily available.

Which of the following is true?

Growth of output is necessary for the growth of income.

Which of the following policies would be most likely to reduce the efficiency of a country's economic organization?

Imposition of tariffs and other barriers limiting international trade.

"Every major contraction in the U.S. economy has either been created or greatly exacerbated by monetary instability. Every major inflation has been caused by monetary expansion." Which of the following economists made this statement?

Milton Friedman

Which of the following will discourage investment?

Monetary instability.

Which of the following will be most likely to contribute to the growth of a less-developed country?

Secure property rights and low marginal tax rates.

Which of the following is an important ingredient for the achievement of efficient economic organization?

Secure property rights and political stability.

A shift to a more expansionary monetary policy will

Stimulate output and employment, but only after a time lag that is generally long and variable.

Which of the following contributed to the strong auto sales and soaring housing prices during 2002-2004?

The Fed's low-interest rate policy during the period

Which of the following would be most likely to encourage capital formation in a less-developed country?

The expectation that property rights will be highly secure in the years ahead.

In a market economy, what determines whether an entrepreneur will continue in business or terminate the production of a new product?

The profit or loss of the business.

Which of the following is true regarding the per person income of the world during the past 1000 years

The world's income per person changed very little during the 800 years prior to 1813, but it has increased by nearly tenfold during the past 200 years.

Which of the following is true regarding the per person income of the world during the past 1000 years?

The world's income per person changed very little during the 800 years prior to 1813, but it has increased by nearly tenfold during the past 200 years.

What has happened to the world's economy over the past 200 years?

There has been economic growth, less poverty, and longer life spans.

An increase in real per capita income will generally lead to

a cleaner environment and more time for recreation.

If the Federal Reserve sells bonds, the short-run effects will be

a decrease in the money supply and higher real interest rates.

The Fed's sale of U.S. government securities in its open market operations constitutes

a restrictive policy because it lowers the amount of total reserves in the banking system.

As the Fed increased the volume of loans to financial institutions in response to the 2008 financial crisis, this resulted in

a vast increase in the monetary base and the excess reserves of the commercial banking system.

If the Federal Reserve increases its bond purchases, the short-run effects will be

an increase in the money supply and lower real interest rates.

If people decide to hold less money as currency and more as checking deposits, this will most likely cause

an increase in the money supply.

The velocity of money is the

average number of times a dollar is used to buy goods and services included in GDP.

If the required reserve ratio were decreased,

both the money supply and the outstanding loans of banks would tend to increase.

If the Federal Reserve wanted to expand the money supply in order to increase output, it should

buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise.

Which of the following will be classified as a liability on the balance sheet of a commercial bank?

checking deposits of customers

Other things constant, if the Fed decreased the discount rate,

commercial banks probably would reduce their excess reserves and be more willing to extend additional loans.

The replacement of older products by newer improved ones is called

creative destruction.

Open-market purchases by the Fed make the money supply

decrease, which tends to decrease the value of money.

Commercial banks can borrow reserves directly from the Fed at the

discount rate.

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

does not change the money supply.

If the Federal Reserve wants to increase the availability of money and credit, it can

encourage banks to increase their prime lending rate

Which of the following is a driving force underlying economic growth?

entrepreneurial discovery and production of improved products

Demographic changes that increase the number of people in the lending phase (approximately age 50 to 75) and fewer in the borrowing phase (under age 50), would tend to

expand the supply of loanable funds and push interest rates downward.

A system that permits banks to hold less than 100 percent of their deposits as reserves is called a

fractional reserve banking system

A barter economy is one in which

goods are traded directly for other goods.

Which of the following is most important if the living standards of people residing in a country are going to improve?

growth of per capita GDP

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will

increase and the money supply will eventually increase.

During the past 1000 years, the income per person of the world has

increased by approximately tenfold during the past 200 years, but there was only a small increase during the 800 years prior to 1800.

During the past 200 years, income per person has

increased far more rapidly in both developed and less developed countries than during the centuries prior to 1800.

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions

increases the money supply by $800

The successful introduction and adoption of a new product or process is called

innovation

The M1 money supply

is composed of assets that reflect the medium of exchange function of money.

The Fed is institutionally independent. A major advantage of this is that monetary policy

is not controlled by politicians.

Which of the following assets can a commercial bank count as reserves?

its vault cash and deposits with the Fed

If the long-run equilibrium of an economy is disrupted by an unexpected shift to a more expansionary monetary policy, the policy shift will

lead to a higher rate of unemployment in the short run.

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

lower interest rates, increase in aggregate demand, and an expansion in output.

The main purpose of the Fed is to

maintain the proper functioning of our money system.

Investment in both physical and human capital tends to enhance economic growth because it generally

makes it possible for individuals to produce more goods and services per hour worked.

Money is used as a unit of account. This means

money is used to measure the exchange value and costs of goods, services, assets and resources.

According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

prices

The primary cause of inflation is

rapid expansion of the money supply.

If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will

reduce the size of the deposit expansion multiplier.