copy of practice exam 4
21) When cash is withdrawn from a checkable-deposit account at a bank: A) The money supply M1 decreases B) The money supply M1 increases C) The money supply M1 does not change but its composition changes D) The composition of money supply M1 does not change
c
19) What is one significant consequence of fractional reserve banking? A) Banks hold a portion of their deposits in gold B) Banks can serve the withdrawals of all their depositors C) Banks can only lend an amount equal to its deposits D) Banks are vulnerable to "panics" or "bank runs"
d
13) When a banker records how many dollars each of his borrowers owes the bank, money is serving as a: A) Unit of account B) Legal tender C) Medium of exchange D) Store of value
a
14) Money in the U.S. is essentially debt of: A) The Federal Reserve System and the banks B) Businesses and the Federal Reserve System C) Businesses and the banks D) The national and local governments
a
16) The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily for: A) Setting the Fed's monetary policy and directing the purchase and sale of government securities B) Issuing currency and acting as the fiscal agent for the Federal government C) Maintaining cash reserves that can be used to settle international transactions D) Supervising banks to make sure that markets are open to all and remain competitive
a
17) When the Fed acts as a "lender of last resort", like it did in the financial crisis of 2007-2008, it is performing its role of: A) Being the bankers' bank B) Providing for check clearing and collection C) Setting the reserve requirements D) Controlling the money supply
a
22) A decrease in the interest rate will cause a(n): A) Increase in the amount of money held as an asset B) Decrease in the amount of money held as an asset C) Increase in the transactions demand for money D) Decrease in the transactions demand for money
a
26) If bond prices decrease, then the: A) Interest rate increases B) Interest rate decreases C) Transactions demand for money will decrease D) Transactions demand for money will increase
a
27) The conduct of monetary policy in the United States is the main responsibility of the: A) Federal Reserve System B) U.S. Treasury C) Office of Management and Budget D) Bureau of Economic Analysis
a
28) The interest rate that banks charge one another for the loan of excess reserves is the: A) Federal funds rate B) Discount rate C) Interest on reserves D) Prime interest rate
a
6) The goal of expansionary fiscal policy is to increase: A) Real GDP B) Unemployment C) The price level D) Aggregate supply
a
8) Which combination of fiscal policy actions would most likely offset each other? A) Increase taxes and government spending B) Increase taxes, but make no change in government spending C) Decrease taxes and increase government spending D) Decrease government spending, but make no change in taxes
a
10) If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the: A) Unemployment rate is low B) Economy's MPC is small C) Economy's MPS is small D) Economy's MPS is large
b
12) The functions of money are to serve as a: A) Determinant of consumption, investment, and government spending B) Unit of account, store of value, and medium of exchange C) Resource allocator, method for accounting, and means of income distribution D) Factor of production, exchange, and aggregate supply
b
18) The fractional reserve system of banking started when goldsmiths began: A) Charging people who deposited their gold B) Issuing paper receipts in excess of the amount of gold held C) Using deposited gold to produce products for sale to others D) Accepting deposits of gold for safe storage
b
30) According to the Taylor rule, if the inflation rate is one percentage point below the target of 2%, then the Fed should: A) Lower the real federal funds rate by one percentage point B) Lower the real federal funds rate by half of a percentage point C) Raise the real federal funds rate by one percentage point D) Raise the real federal funds rate by half of a percentage point
b
4) Discretionary fiscal policy is often initiated on the advice of the: A) Congressional Budget Office B) Council of Economic Advisers C) Federal Reserve Board D) Joint Economic Committee
b
11) In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by: A) $10 billion B) $40.50 billion C) $20 billion D) $31.25 billion
c
2) When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is: A) Automatic Fiscal Policy B) Active Federal Policy C) Discretionary Fiscal Policy D) Active Monetary Policy
c
20) In essence, which of the following groups "creates" money? A) Depositors when they deposit or withdraw money from their banks B) Firms when they pay workers their wages and salaries C) Banks' loan officers when they grant loans D) Consumers when they go shopping
c
29) According to the Taylor rule, if the target rate of inflation for the Fed is two percent and real GDP rises by one percent above potential GDP, then the Fed should: A) Lower the real federal funds rate by half of a percentage point B) Raise the real federal funds rate by one percentage point C) Raise the real federal funds rate by half of a percentage point D) Lower the real federal funds rate by one percentage point
c
1) When the Federal government uses taxation and spending actions to stimulate the economy it is conducting: A) Employment policy B) Incomes policy C) Fiscal policy D) Monetary policy
c
31) Which of the following best describes what occurs when monetary authorities sell government securities? A) There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP B) There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP C) There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP D) There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP
c
5) If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n): A) Nondiscretionary fiscal policy B) Supply-side fiscal policy C) Contractionary fiscal policy D) Expansionary fiscal policy
c
24) An increase in the money supply is likely to reduce: A) Nominal income B) The general price level C) Money demand D) Interest rates
d
25) Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks? A) Required reserve ratio B) Issuing currency C) Check collection D) Open-market operations
d
3) When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ________ fiscal policy: A) Discretionary B) Cyclical C) Implicit D) Nondiscretionary
d
34) The purpose of an expansionary monetary policy is to increase: A) The inflation rate B) Interest rates C) The GDP-gap D) Real GDP
d
The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective? A) Selling government securities and lowering the discount rate B) Selling government securities and raising the discount rate C) Buying government securities and raising the reserve ratio D) Buying government securities and lowering the discount rate
d