eco chapter 8, 9, 10,11, 12,13
If the recessionary gap is $200 billion and the multiplier is 5, what is the total increase in GDP needed to reach full employment?
$1 trillion
How much will $200 in new spending change equilibrium income if the marginal propensity to save is 0.2?
$1,000
How much interest will be earned on $900 at 10% interest over nine years? Assume compounding interest.
$1,222.15
If the spending multiplier is 6 and new spending is $200, then total spending will increase by
$1200
What is the interest earned during year five, if the year one starting value is $900 at 10% interest? Assume compounding interest.
$131.77
How much will $200 in new spending change equilibrium income if the marginal propensity to consume is 0.5?
$400
If the marginal propensity to consume is 0.9 and taxes are increased by a lump sum of $100 billion, what will be the reduction in income?
$900 billion
An investor purchased a share of stock for $100 and had a return on investment of −5%. What was the selling price of the share of stock?
$95
Suppose investment declines by $300. By how much will equilibrium income change if the marginal propensity to save is 0.2?
-1500
Suppose investment declines by $300. By how much will equilibrium income change if the marginal propensity to save is 0.5?
-600
What is Kyle's marginal propensity to save if his saving increases by $200 after receiving a $1,000 increase in salary?
0.2
According to the full aggregate expenditures model, if investment is $1 trillion, government spending is $4 trillion, taxes are $4 trillion, and net exports are $0, what is savings?
1
How much will $200 in new spending change equilibrium income if the marginal propensity to consume is 0.8?
1,000
The money multiplier is equal to
1/reserve requirement.
If the inflationary gap is $100 billion and the multiplier is 2, what is the reduction in aggregate spending needed to reach full employment?
100 b
In which year was interest on public debt as a percentage of GDP the highest?
1990
What is the spending multiplier if the marginal propensity to consume is 0.5?
2
The U.S. monetary base increased dramatically beginning in
2008
_____ refers to the real GDP that firms will produce at various price levels.
Aggregate Supply
Under which Federal Reserve chairman did the highest increase in inflation occur?
Arthur Burns
What does it mean that the income tax is progressive?
As income increases, the income tax rate increases.
In which of these is a risk-averse investor MOST likely to invest?
CDs
Which of these summarizes the roles of the president and Congress in conducting monetary policy?
Congress and the president do not play a role in carrying out monetary policy.
In the United States, fiscal policy is enacted by
Congress.
_____ is spending by individuals and households on both durable goods and nondurable goods.
Consumption
_____ fiscal policy involves adjusting government spending and/or tax policies to move the economy toward full employment by stimulating economic output or mitigating inflation.
Discretionary
Which of these statements about fiat money is correct?
Fiat money is legal tender by government decree.
Monetary policy would be involved in which of these scenarios? I. Raising the money supply II. Congress lowering the budget deficit III. The Federal Reserve raising interest rates
I and III
If the money multiplier increased, what probably happened to the reserve requirement?
It decreased.
What happens to the money multiplier when the reserve requirement increases from 10% to 12%?
It decreases.
When the federal government pays off debt to the Federal Reserve, what happens to the quantity of money in circulation?
It decreases.
If the money multiplier decreases from 10 to 8, what must have happened to the reserve requirement?
It increased from 10% to 12.5%.
Which of these is true of the Federal Reserve System?
It is subject to oversight from Congress.
Which of these must be true of fiat money?
It must be divisible.
In May 2011, China ordered many of its banks to increase the amount they hold in reserves. It was the fifth increase that year. What would you expect to be true about the money multiplier as a result?
It was decreasing.
Which of these is NOT a reason that lower interest rates lead to higher aggregate demand?
Lower interest rates cause U.S. bonds to become more attractive to foreign investors, leading to an >increase< in the value of the U.S. dollar in foreign exchange markets. U.S. products become more expensive relative to foreign products, and imports increase.
Which of these is the correct expression for the equation of exchange in the classical quantity theory of money? (M is the supply of money, V is the velocity of money, P is the price level, and Q is the economy's real output level.)
M × V = P × Q
A Wall Street Journal story in October 2008 reported that inmates in federal prisons could use packaged mackerel fillets (called macks) to obtain goods and services, such as haircuts (the barber charged two macks). Some prisons provide lockers in which inmates can store their macks. Macks could be considered a form of money in prison because macks serve as a
Macks serve all the functions listed.
Which of these programs is NOT discretionary spending?
Medicare
Which of these is advisable with respect to holding credit card debt?
Never miss a minimum payment.
_____ is/are the buying and selling of U.S. government securities.
Open market operations
According to the wealth effect, what will happen to output demanded when aggregate price levels increase?
Output demanded will decrease.
In the long run, what happens to the aggregate price level when the Fed increases the discount rate?
The aggregate price level falls.
What happens to the amount of funds demanded in the loanable funds market when the interest rate increases?
The amount of loanable funds demanded decreases.
What happens to the amount of funds supplied to the loanable funds market when the interest rate decreases?
The amount of loanable funds supplied decreases.
_____ is demonstrated when the price of a product falls, causing consumers to purchase more of the product because they substitute it for other higher-priced goods.
The substitution effect
Which of these is the correct expression for the velocity of money using the equation of exchange in the classical quantity theory of money? (M is the supply of money, V is the velocity of money, P is the price level, and Q is the economy's real output level.)
V = (P × Q) ÷ M
Which of these is a true statement?
When the aggregate price level increases, this causes net exports to fall.
Which of these is a description of an automatic stabilizer of the business cycle?
When the economy is in decline, transfer payments increase.
In a situation referred to as insolvent
a bank's liabilities exceed its assets.
The Fed defines M2 as _____, including _____ and money market mutual fund accounts.
a broader definition of money; savings deposits
Which of these would cause a leftward shift of the investment demand curve?
a buildup of inventories on hand
Which of these approaches to federal finance would restrict spending or raise taxes when the economy is booming, then use those surpluses to offset the deficits that occur during recessions?
a cyclically balanced budget
Which of these will cause a movement up along the aggregate demand curve?
a decrease in household purchasing power brought about by a higher price level
Which of these scenarios would be most likely to cause the shift in the demand of loanable funds from D0 to D1, shown in the following diagram?
a decrease in investment tax credits
In the aftermath of the recent financial crisis, critics of the Federal Reserve's actions argued that printing money would result in high rates of inflation. Inflation, however, failed to rise significantly. Which of these could explain this situation?
a decrease in velocity
When the economy is in a recession and the government takes action to stimulate it, the most likely result is
a government budget deficit.
Which of these instruments has the HIGHEST expected return?
a high-return bond
Members of the Board of Governors have historically been
academic economists.
Commercial banks typically do not have sufficient reserves to
act as a lender of last resort.
Which of these would cause a rightward shift of the investment demand curve?
an improvement in business expectations
According to the Laffer curve, an increase in tax rates will lead to
an increase, a decrease, or no change in tax revenue.
If the reserve ratio is greater than the reserve requirement, excess reserves
are greater than zero.
If the reserve requirement is less than the reserve ratio, excess reserves
are greater than zero.
The main reason independent central banks are better at fighting inflation than politically controlled banks is because they
are less likely to be influenced by short-term political pressures that engage in excessive expansionary monetary policy.
If the reserve ratio is less than the reserve requirement, excess reserves
are negative.
If a customer deposits $500 cash in a checking account, the bank's
assets increase.
Annually balancing the budget would
be incompatible with countercyclical policy.
When was the annually balanced budget concept the prevailing theory among economists?
before the 1930s
In the loanable funds market model, the demand curve represents
borrowers.
How do banks create money?
by making loans
Expanding the budget for research grants and scholarships will
cause the long-run aggregate supply curve to shift to the right.
Which of these is NOT an example of a financial intermediary?
central banks
Legislators debate the appropriate course of action to address the recession. This debate lasts several quarters. This is a description of the _____ lag.
decision
When the aggregate price level increases in Japan, what happens to exports from Japan?
decrease
The graph shows a Laffer curve. A movement from point c to b indicates a(n)
decrease in tax rates.
Reducing tax rates may result in all of these, EXCEPT
decreases in aggregate supply because market prices are higher.
Which of these is a monetary policy meant to reduce interest rates and stimulate the economy?
easy money
Which of these is NOT mandatory spending?
education
The aggregate demand curve is downward-sloping due to the
effect of prices on interest rates.
If the reserve ratio is equal to the reserve requirement, excess reserves
equal zero.
If the reserve requirement is equal to the reserve ratio, excess reserves
equal zero.
e. The maximum amount of reserves available for loans
excess
Easy money is
expansionary monetary policy.
Loose monetary policy is
expansionary.
Which of these would decrease the amount of money a family spends?
expectations of lower prices
Which of these appears in the full aggregate expenditures model but not in the simple aggregate expenditures model?
exports
In February 2009, Congress approved a $787 billion stimulus package. By March 30, 2011, $633.5 had been spent. This illustrates _____ lag.
implementation
The Fed determines a course of action to address the recession. It takes nearly a year for banks and financial markets to respond to this policy. This is an example of the _____ lag.
implementation
The _____ lag is the time required to turn fiscal policy into law and then eventually affect the economy.
implementation
Which of these will cause the supply of loanable funds to shift?
incentives to save
Which of these was NOT one of the conditions that helped create the perfect storm that led to the financial meltdown?
increased spending on investment capital that led to a capital bubble
When the reserve requirement decreases, the money multiplier
increases
Which of these is a contractionary fiscal policy?
increasing taxes
The Fed has recently talked about minimizing the risk of inflation. Which of these tools would accomplish this?
increasing the discount rate
About 85% of federal government revenue in 2018 came from
individual income taxes and payroll taxes.
Economists at the Bureau of Economic Analysis are busy collecting data for the quarterly growth estimates, which will indicate the health of the economy. The time spent collecting this data and generating reports is the _____ lag.
information
As money is deposited and loaned out repeatedly, the
initial amount of money can repeatedly generate new deposits and loans.
As a percentage of the federal government budget, mandatory spending
is larger than discretionary spending.
The federal funds rate target in 2010 was
just over zero.
What is the main goal of inflation targeting?
keeping inflation levels near 2%
If a customer deposits $500 cash in a checking account, the bank's
liabilities increase by $500.
When banks choose not to loan all of their excess reserves, the actual money multiplier is reduced because the reduction in
loans circulates less money back through the banking system.
Teaser rates refer to
low interest rates offered by lenders for a short period of time.
The Federal Reserve Act mandates monetary policies that will
maintain high employment.
Which of these is a criterion member nations had to satisfy prior to joining the Eurozone?
maintaining total debt of less than 60% of GDP
Which of these is NOT a criterion member nations had to satisfy prior to joining the Eurozone?
maintaining unemployment rates of no higher than 5%
The _____ is equal to the change in consumption due to a given change in income.
marginal propensity to consume
The _____ is the change in saving associated with a given change in income.
marginal propensity to save
Barbara just purchased a car for $14,000. This is an example of which function of money?
medium of exchange
The 1973 oil crisis was a _____ shock.
negative supply
About how long is the information lag?
one to six months
Money market deposit accounts are included as part of
only M2.
The Fed buying government bonds is
quantitative easing.
Which of these is a supply-side fiscal policy?
reduction in tax rates
Which of these will NOT cause the supply of loanable funds to shift?
regulations
b. The amount of funds banks must, by law, hold in reserve
required
The Fed decides to decrease the proportion of deposits that banks must hold from 1% to zero. Which monetary policy tool is it using?
reserve requirements
c. The amount a bank has on hand to fulfill the cash demands of its customers and the reserve requirements of the Fed
reserves
In the loanable funds market model, the supply curve represents
savers
The loanable funds market model describes the financial market for
saving and investment.
In which of these is a risk-averse investor MOST likely to invest?
savings accounts
An increase in spending on human capital should
shift the long-run aggregate supply curve to the right.
An increase in spending on infrastructures should
shift the long-run aggregate supply curve to the right.
In much of 2011, rising commodity prices (particularly corn, copper, and cotton) were in the news. The effect of these higher commodity prices on the economy would be illustrated by a _____ short-run aggregate supply curve.
shift to the left of the entire
"Cloud" technology means that firms can store their data "in the cloud" instead of on servers that they would have to own and maintain. The effect of this on the economy would be illustrated by a _____ short-run aggregate supply curve.
shift to the right of the entire
If productivity increases, this would cause the _____ curve to shift to the _____.
short-run aggregate supply; right
The _____-run aggregate supply curve is _____ sloped.
short; positively
What is mandatory spending?
spending authorized by permanent laws
What is a vesting period?
the minimum number of years a worker must be employed before the company's contribution to a retirement account becomes permanent
What is aggregate supply?
the real GDP that firms will produce at various price levels
Which part of government finance is called monetized debt?
the sale of bonds to the Federal Reserve
What is the decision lag?
the time it takes Congress and the administration to decide on a policy once a problem is recognized
What is the decision lag?
the time it takes the Federal Reserve Board to decide on a policy once a problem is recognized
The Federal Reserve Act of 1913 tasked the central bank with which of these purposes?
to furnish an elastic currency
The Federal Reserve Act of 1913 tasked the central bank with which of these purposes?
to provide for the establishment of Federal Reserve Banks
What is a reason several members of the European Union, including the United Kingdom, Sweden, and Denmark, chose not to adopt the euro?
to retain independent monetary policy
Economists who favor the functional finance approach to the federal budget believe that
whether the budget is in deficit or surplus is a secondary concern.
As baby boomers keep retiring in coming years, it is likely that fiscal imbalance will
worsen
The AD/AS model can explain how changes in the money supply
would affect the aggregate demand curve.
Suppose investment declines by $300. By how much will equilibrium income change if the marginal propensity to consume is 0.8?
−$1,500
An investor purchased a share of stock for $100 and had a return on investment of 140%. What were the earnings after selling the stock?
$140
What is the interest earned during year five, if the year one starting value is $1,000 at 10% interest? Assume compounding interest.
$146.41
What would be the price of a perpetuity bond that has a $100 interest payment and a 5% yield?
$2,000
Which of these events would be most likely to cause the shift from AD0 to AD1 in the diagram, which depicts the U.S. economy?
the Vietnam War in the 1960s
What is a surplus?
the amount by which annual tax revenues exceed government expenditures
The Federal Reserve System is
the central bank of the United States
The amount by which annual government spending exceeds tax revenue is called
the deficit.
What is public choice theory?
the economic analysis of public and political decision making
In the long run, classical economists saw no use for monetary policy because
the economy would self-correct to equilibrium in the long run.
Which of these scenarios would be most likely to cause the shift in the demand of loanable funds from D0 to D1, shown in the following diagram?
the expansion of business regulations
What is the interest earned during year 10, if the year 1 starting value is $900 at 10% interest? Assume compounding interest.
$212.22
How much will $200 in new spending change equilibrium income if the marginal propensity to save is 0.75?
$266
According to the full aggregate expenditures model, if government spending is $2 trillion, exports are $2 trillion, savings is $1 trillion, taxes are $2 trillion, and imports are $4 trillion, what is investment?
$3 trillion
According to the full aggregate expenditures model, if investment is $5 trillion, government spending is $2 trillion, savings is $4 trillion, and net exports are $1 trillion, what are taxes?
$4 trillion
If the marginal propensity to consume is 0.8 and taxes are increased by a lump sum of $100 billion, what will be the reduction in income?
$400 billion
How much money can be created if the initial deposit is $5,000 and the required reserve ratio is 10%?
$50,000
An investor purchased a share of stock for $100 and sold it for $140 per share. What is the return on investment?
40%
An investor purchased a share of stock for $100 and sold it for $105 per share. What is the return on investment?
5
How much will $200 in new spending change equilibrium income if the marginal propensity to consume is 0.2?
250
What is the potential money multiplier if the reserve requirement is 33.3%?
3
According to the full aggregate expenditures model, if government spending is $4 trillion, business investment is $3 trillion, and taxes are $3 trillion, how much is savings in a closed economy?
4
During the period before 1776, tobacco was used in the Chesapeake colonies (in what is now the United States) to make payments, even to pay fines and taxes. Consider tobacco leaves as an example of commodity money: Which of these problems would it be most likely to have?
It was not durable.
Suppose the euro depreciated against the U.S. dollar, meaning that its value in terms of dollars decreased. How would this affect aggregate demand in the United States?
It would cause the aggregate demand curve to shift to the left.
France is known to have a relatively inflexible labor market. In February 2000, France instituted a new policy. Any hours worked beyond 35 in a week were considered overtime (previously, the policy was that overtime was over 40 hours per week). What was the likely effect on France's short-run aggregate supply curve?
It would cause the short-run aggregate supply curve to shift to the left.
Suppose the cost of labor were to increase. How would that affect short-run aggregate supply?
It would cause the short-run aggregate supply curve to shift to the left.
What is likely to happen to short-run aggregate supply if workers expect higher inflation in the near future?
It would cause the short-run aggregate supply curve to shift to the left.
_____ is a measure of the present value of all projected future revenues compared to the present value of projected future spending.
Fiscal sustainability
In order to keep the budget at equilibrium, the formula _____ is used.
I + G + X = S + T + M
What would be the likely effect of government actions that would decrease the concentration of industries?
It would cause the short-run aggregate supply curve to shift to the right.
In 2011, analysts were predicting increases in the aggregate price level in India. How would this affect exports from India?
Its exports would decrease.
Which city does NOT have a regional Federal Reserve Bank?
Los Angeles
All else remaining equal, if the amount of demand deposits increases, this will increase the size of
M1 and M2.
e. The maximum amount of reserves available for loans
none
Enter the values of reserves, excess reserves, and required reserves. Reserves: $ Excess reserves: $ Required reserves: $
Reserves: $5000 Excess reserves: $4500 Required reserves: $500
Which of these was the largest federal government expenditure in 2018?
Social Security
In 2018, more than 40% of federal government spending was on
Social Security, Medicare, and Medicaid.
Which of these makes it difficult to maintain a cyclically balanced budget?
The business cycle takes time to define because of lags, making it difficult to enforce such a rule in practice.
Which of these is NOT suggested by public choice analysis?
The government is a benevolent actor looking out for the best interests of its citizens.
_____ is demonstrated when the price of a given product falls, resulting in money being freed up, allowing consumers to afford more of all goods.
The income effect
Which of these events would be most likely to cause the shift from SRAS0 to SRAS1 in the diagram, which depicts the U.S. economy?
the 1973 oil shocks
How are the quantity of funds supplied in the loanable funds market and the interest rate related?
They are positively related.
What would happen to interest rates if the quantity of money increased?
They would decrease.
The _____ is the percentage of income that is saved.
average propensity to save
In the long run, the aggregate supply curve is
a vertical line at full-employment output.
President Reagan implemented a policy of supply-side economics, what did this mainly entail?
decreasing marginal tax rates
Which of these will NOT help the government pay for a rising budget deficit?
decreasing private saving
Which of these is a liability for a bank?
deposits made by a firm
Tax cuts implemented to encourage people to spend their tax savings and businesses to invest is an example of _____ fiscal policy.
discretionary
The term "discretionary fiscal policy" includes changes in
discretionary spending.
If a Chinese firm owns U.S. Treasury bonds, this debt is considered _____ debt.
externally held
Many countries decide to adopt another country's currency because they
face an economic crisis or uncontrollable inflation.
Aggregate demand is the total output of _____ at different price levels.
goods and services purchased
The Federal Open Market Committee oversees the buying and selling of
government securities.
In which of these is a risk-tolerant investor MOST likely to invest?
growth stocks
In which of these is a risk-tolerant investor MOST likely to invest?
high-return bonds
In a liquidity trap, a(n) _____ in the money supply does not result in a decrease in _____ rates.
increase; interest
The Fed is worried about rising unemployment. Which of these tools would it use if it wanted to lower unemployment?
lower the discount rate
When the Fed intends to increase the amount people consume or increase the amount businesses invest for building new stores and factories, it would _____ interest rates by engaging in _____ monetary policy.
lower; expansionary
Which function of money provides the solution to the problem of needing a double coincidence of wants for trade to occur?
medium of exchange
The process by which a country's money supply is controlled is a part of _____ policy.
monetary
If the reserve requirement is greater than the reserve ratio, excess reserves are
negative
The collapse of the housing market in 2008 was a _____ shock.
negative demand
Suppose Congress enacts a new Medicare benefit and finances it by raising payroll taxes such that each year's additional outlay is matched by additional revenue. Would this be considered fiscally sustainable?
no, this is still a pay-as-you go plan, which shifts the burden to future generations
a. The amount of interest the bank must charge on a loan
none
d. The amount of reserves the bank owes to other banks
none
Which tool gives the Federal Reserve the most power to conduct monetary policy?
open market operations
According to the diagram, which of these shifts indicate a government decreasing income taxes to combat the effects of cost-push inflation on employment?
point b to point c
Because many input costs are sticky in the short run, the short-run aggregate supply curve is
positively sloped.
In the market for loanable funds, the _____ is measured on the horizontal axis, and the_____ is measured on the vertical axis.
quantity of loanable funds; price of the funds
After looking over the past six months' worth of data, the Federal Reserve believes the economy is trending toward a recession. This is an example of _____ lag.
recognition
In September 2010, the National Bureau of Economic Research announced that the recession that began in December 2007 ended in June 2009. This illustrates _____ lag.
recognition
Financial institutions
reduce transactions costs.
During the Great Depression, some people would withdraw all of their cash from the bank and hide it under their mattress rather than risk losing it. This is an example of which function of money?
store of value
Which of these is NOT an injection of spending into the economy?
taxes
Which of these will NOT cause the supply of loanable funds to shift?
technological advancements
