Econ 101 Final
The Federal Reserve includes: [Check all that apply]
12 Regional Federal Reserve Districts; A Board of Governors; The Federal Open Market Committee
Using Figure 1, how would the Aggregate Expenditure Schedule be defined from a Keynesian perspective?
C + I + G + (X - M)
A vertical AS curve means that changes in GDP will be caused by
changes in aggregate demand.
The neoclassical long-run aggregate supply curve implies ________ wages and prices and a ________ relationship between aggregate prices and wages.
completely flexible; positive
In describing what adaptive expectations means to a friend, you explain that in order to make their economic condition forecasts, agents ________.
consider only current information and ignore the past
During recessionary times it can be hard to coordinate lower wages for workers because of the ________.
coordination argument
Which type of depository institution is considered safest?
credit unions
M1, the narrowest of the Fed's money supply definitions include(s)
currency in circulation.
If a government reduces tax rates in order to increase the level of aggregate demand, what type of fiscal policy is being used?
discretionary and expansionary
In the neoclassical zone of the aggregate supply curve
prices and wages are completely flexible
An open market operation decreases the money supply when the Federal Reserve
sell bonds to banks, which decreases bank reserves
If the Fed wants to decrease the quantity of money in the economy, it can
sell bonds.
A country's government should ________ when inflation begins to climb to unacceptable levels in the economy.
shift aggregate demand to the left by using contractionary fiscal policy
Aggregate demand is more likely than aggregate supply to ________ in the short run.
shift substantially
A reduction in government spending through a new budget would
shift the aggregate demand left as it falls and reduce the Gross Domestic Product at the new equilibrium
Unlike the neoclassical approach to the economy, the Keynesian approach focuses on sticky prices and aggregate demand. This focus is advantageous for understanding the reason cyclical unemployment and recessions occur, as these fluctuations take place in the ________ -run.
short
Fill in the blanks. According to the Keynesian perspective, the government ________ play a role in managing the macroeconomy ________.
should; when the aggregate demand does not match the aggregate supply
If Pablo deposits $5000 cash into his checking account and his bank operates with a required reserve ratio of 20 percent, how much will the money supply (M1) expand?
$20,000
Assume the following macroeconomic variable (in $ billion) for an economy: Y = national income = Aggregate Expenditures Aggregate Expenditures = Consumption + Investment + Government Spending + Net Export Assuming that the full employment level in $5,500 billion, determine the change in government spending needed to reach full employment.
$220
If a bank has $500 million dollars in deposits and has a 12 percent reserve ratio, how much can the bank lend?
$440 million
The required reserve ratio for Julie's bank is 10 percent. If Julie deposits $5,000 cash into her checking account, what amount of new money could the bank create when it lends out the reserves from Julie's deposit?
$45,000
Suppose the level of potential GDP is $6,000 billion, but the equilibrium level of GDP is $7,500 billion. If the marginal propensity to consume is 0.67, how much should government spending be decreased to eliminate the inflationary gap?
$500 billion
How many regional Federal Reserve banks are there in the U.S. who primarily support banks and the economy within their respective districts?
12
Consider the following information in the table below. Income (Y) 1700 1830 1960 2090. Imports (M) 425 457.5 490 522.5. Given this data, what is Marginal Propensity to Import (MPI)?
0.25
Consider the following information in the table below. Income (Y) 1200 1360 1520 1680. Imports (M) 420 476 532 588. Given this data, what is Marginal Propensity to Import (MPI)?
0.35
Consider the following information in the table below. Income (Y) 1000 1250 1500 1750. Consumption (C) 690 852.5 1015 1177.5. Savings (S) 310 397.5 485 572.5. Consider the following consumption function: C = 70 + 0.5*Y What is the MPC?
0.5
Consider the following information in table below. Income (Y)1600 1800 2000 2200. Consumption (C) 1060 1180 1300 1420. Savings (S) 540 620 700 780. Given this data, what is Marginal Propensity to Consume (MPC)? Given this data, what is the level of autonomous consumption? Given this data, what is Marginal Propensity to Save (MPS)?
0.6; 100; 0.4
Suppose spending increases by $10 million resulting in a $100 million increase in real GDP. What would be the multiplier?
10
Suppose that MPC is equal to 0.9.What is the spending multiplier?
10
Consider the following information in the table below. Income (Y) 1700 1830 1960 2090. Imports (M) 425 457.5 490 522.5. Suppose that the level of income is $1700 and the tax rate is 0.25 %.Given this data, what is the level of disposable income?
1275
Suppose the MPC is 60%, what is the spending multiplier?
2.5
Suppose McDonalds Corporation deposits $5 million cash in its bank account. If the reserve requirement is 15 percent, the total change in the money supply, after all rounds of lending in the banking system are completed, will be ________.
28.3 million
Suppose that the amount of taxes in Slovenia is equal to 1700. Suppose that the government expenditures are equal to 1400 (All numbers in billions of domestic currency) Given this data, what can you say about Slovenia's budget? What is the size of Slovenia's surplus?
300
A government annually collects $210 billion in tax revenue and allocates $70 billion to military spending. What percentage of this government's budget is spent on its military?
33%
Consider the following information in the table below. Income (Y) 1000 1250 1500 1750. Consumption (C) 690 852.5 1015 1177.5. Savings (S) 310 397.5 485 572.5. Given this data the consumption function can be written as: C =_ + _ Y
40; 0.65
Consider the following information in the table below. Income (Y) 1000 1250 1500 1750. Consumption (C) 690 852.5 1015 1177.5. Savings (S) 310 397.5 485 572.5. Consider the following consumption function: C = 70 + 0.5*Y What is the level of autonomous consumption?
70
Consider the following information in the table below. Income (Y) 1200 1360 1520 1680. Imports (M) 420 476 532 588. Suppose that the level of income is $1200 and the tax rate is 0.4 %.Given this data, what is the level of disposable income?
720
The marginal propensity to consume (MPC) will always be ________.
<1
The marginal propensity to save (MPS) will always be ________.
<1
If you were a bank regulator which of the following banks you reviewed would cause concern and warrant a deeper evaluation?
A bank that holds the minimum amount of assets in reserves, holds the vast majority of its total assets in the form of loans to just one particular industry and another small share of its assets held in the form of mortgages to domestic home purchasers
Which of the following scenarios illustrates a different market other than the financial market for money?
A child's lemonade stand where she charges $1 cash per glass.
Which of the following examples would not be considered participation in a financial market?
A neighborhood watch service that charges by the day
Which one of the following government policies could be described as a neoclassical response to a recession?
Abolish labor unions
If the economy is operating below the natural rate of unemployment, then the economy is typically operating___ potential GDP.
Above
Which of these statements is correct regarding what a stock market crash would typically do to actual GDP versus potential GDP?
Actual GDP would fall below potential GDP.
According to Keynes, recessions are caused by a drop in aggregate demand that falls below potential GDP. What kind of intervention would NOT involve the government or the federal reserve to adjust the macroeconomy?
Adjustment of sticky wages and prices
If a macroeconomy experiences an increase in the money supply and an increase in aggregate demand, what monetary policy is the Central Bank following?
An expansionary monetary policy
In the scenario where the Central Bank creates policies which increase the money supply, it is following what type of monetary policy?
An expansionary policy
In the scenario where the Central Bank creates policies which increase the money supply but the aggregate demand is unchanged, is created by following what type of monetary policy?
An expansionary policy.
Central bank policy requires all banks to hold 10% of deposits as reserves. Pacific Bank policy prevents it from holding excess reserves. Suppose banks cannot trade any of the bonds they already have. If the central bank decides to lower the reserve requirement to 9%, which of the following will result?
An increase Pacific's ability to make loans.
According to the graph which statement is true?
An increase in AE0 to AE1 creates a new equilibrium
Which of the following Federal Reserve bank actions would reduce the supply of money?
An open market sale of U.S. Treasury securities
Which of the following would be an example of a discretionary and expansionary fiscal policy?
Approval of a new spending bill by congress
What types of things can cause loan defaults for banks which could lead to bankruptcies?
Asset-liability time mismatch
Why are banks considered financial intermediaries?
Because banks link borrowers of loans with savers who deposit money.
Neoclassical economists have a tendency to put more emphasis on long-term growth than on fighting recession. Why is this the case?
Because over the long run, recessions end.
Which one of the following government policies could be described as a Keynesian response to a recession?
Borrow from the public to finance increase spending on social welfare programs.
Suppose interest rates increase. As a result of this, what will happen to consumption (C) and investment (I)?
Both C and I will decrease
Suppose interest rates decrease. As a result of this, what will happen to consumption (C) and investment (I)?
Both C and I will increase
Suppose the Fed increase discount rate. As a result of this policy, what will happen to price level and GDP in the short run?
Both price level and GDP will decrease
Suppose the Fed increase required reserve ratio. As a result of this policy, what will happen to price level and GDP in the short run?
Both price level and GDP will decrease
Suppose the Fed decreases required reserve ratio. As a result of this policy, what will happen to price level and GDP in the short-run?
Both price level and GDP will increase
If the Fed wishes to conduct expansionary monetary policy, it should
Buy T-bills
Ceteris paribus, a reduction in the federal funds rate affects car loan rates in the following manner
Car loan rates will decrease.
Banks act as financial intermediaries by doing which of the following?
Converting household savings into business investments in which savings appear as a liability on the bank's balance sheet
If a person owns stock in a corporation, what do they own?
Corporate stock represents ownership in a firm.
When the housing market crashed in 2007 and home sales and prices fell, Keynesian economists might have predicted a
Decrease in consumption expenditure, as household wealth improved
If the Fed wishes to conduct expansionary monetary policy, it should
Decrease the discount rate
Over half of M1 is made up of what components?
Demand deposits and other checking accounts
Suppose an economy is defined by the following: C = 136 + 0.9 (Yd). The (Yd) in this algebraic equation represents the ________.
Disposable income
Which of the following are amongst the main single categories of local government spending?
Education, Highways, Hospitals and Healthcare
What is included in bank supervision?
Ensuring bank net worth remains positive, setting restrictions on investments and minimum reserve requirements.
Which of the following statements is correct?
Federal Reserve intervention reflects its goals for inflation, unemployment, and economic growth
Under Keynesian economics, recessions happen when aggregate demand (I.e. total expenditure) falls below ________ and ________.
Full employment; potential GDP
Which of the following statements is true?
Holding money when it could instead be in an interest bearing account is an opportunity cost to the holder
Suppose that the amount of taxes in the US is equal to 1900. Suppose that the government expenditures are equal to 1800 (All numbers in billions of domestic currency) Given this data, what can you say about the US's budget?
In the US they have a budget surplus.
The consumption function is a graphical relationship between ________.
Income and consumer spending
What is the reason behind why the multiplier effect exists?
Income is changed when there is a change in spending, which generates further spending.
Keynesian economics argues that recessions are basically caused by
Insufficient aggregate demand
Suppose the Fed increases discount rate. As a result of this policy, what will happen to the interest rates?
Interest rate will increase
Suppose the Fed sells T-bills. As a result of this policy, what will happen to the interest rates?
Interest rates will increase
A small multiplier effect would likely lead to what kind of recession?
Less severe
The Keynesian model focuses more on short-term fluctuations caused by business cycles and the neoclassical model focuses more on ________.
Long run determinants of output and employment
From a neoclassical point of view, the government should focus on____.
Long-term growth
The basic measure of money used by economists in the U.S. is ________?
M1
The most liquid source of money is ________.
M1
Aggregate Expenditure (AE) as the sum of expenditures on all final goods and services at a given price level so AE = C + I + G + NX or (X-M). The upward slope of AE will be determined by each of these factors except ________.
Marginal propensity to export
Which of the following are major components of US federal government spending?
Medicare and social security expenditures
Which of the following statements is correct?
Monetary policy has an indirect impact on aggregate demand
Suppose that the amount of taxes in Norway is equal to 1000. Suppose that the government expenditures are equal to 1800 (All numbers in billions of domestic currency) Given this data, what will happen to Norway's national debt?
National debt will increase.
What type of economic viewpoint puts an emphasis on long run economic performance?
Neoclassical
If the consumption function is C = 34 + 0.7y and disposable income decreases by $50, what will happen to autonomous consumption?
Nothing
Which of the following scenarios may compel the Federal Reserve bank to reduce its discount rate? [Hint: it's more than one.]
Over-leveraged banks experience a run on deposits that are unable to cover it without sufficient ability to borrow directly from the Fed; Falling demand in the federal funds market has driven interest rates in that market below the discount rate
Which one of the following statements best represents the Keynesian Perspective?
People's demand determines what is built.
Considering the figure, what is the location of macro equilibrium, where aggregate expenditure is equal to national income?
Point b
What is one of the cornerstones on which neoclassical economics is built?
Prices and wages will adjust in a flexible manner.
What does a Keynesian analysis of economics assume?
Prices are sticky.
Keynes' Law is most consistent with which of the following statement?
Recessions are caused by a negative "shock" to aggregate demand
Expansionary fiscal policy might include which of the following?
Reduction of taxes or increased government spending.
If the Fed wishes to conduct contractionary monetary policy, it should
Sell T-bills
Since aggregate demand is defined as spending on domestic goods and services, then an increase in U.S. imports would ________ aggregate demand.
Subtract from
An economy operating under SAY's law can adequately be described as
Supply-driven
Which of the following statements about TARP is correct?
TARP encourages risky behavior on the part of large banks and other large corporate entities that the Fed saved from bankruptcy
Which of the following government policies is a neoclassical response to an economic recession?
Terminating labor unions.
The ________ is responsible for monitoring the money supply and the general stability and safety of the U.S. banking system.
The Federal Reserve
This graph shows the initial macro equilibrium in the Income-Expenditure model. You can see the original equilibrium at Y = $6,000. What do you think would be the effect of an increase in investment expenditure?
The aggregate Expenditure line will shift up.
Select the following statement that most accurately reflects the banking system?
The banking system leaves a fraction of its deposits in reserves and loans or invest the remainder.
Which of the following statements is correct?.
The episodes of major Federal Reserve bank actions during the past 40 years suggest that improved accuracy of projected inflation or unemployment would help the Fed avoid recessions or periods of high inflation entirely
How does an economist know if the economy is experiencing an inflationary gap?
The equilibrium level of GDP is greater than potential GDP.
Assume that the only source of revenue for the government is income tax. With government spending totaling $93 and a total of $127 collected in tax revenue, which of the following correctly states the position of the government's budget?
The government has a budget surplus of $34 billion.
Which of the following is an example of a government fiscal policy?
The government recently reduced corporate tax rates
The country of Bratislaka hired Gudurn to assist with government policies regarding the macroeconomy. Gudrun is a neoclassical economist and makes all decisions based on those economic philosophies. What policies will Gudrun tell the government to enact in order to foster a health economy?
The government should keep inflation low and maintain low tax levels over the long run.
The simplest example of a rate of return is an interest rate. Consider Figure 1. Demand and Supply for Borrowing Money with Credit Cards. When the demand for loanable funds exceeds the supply of loanable funds, what happens to the interest rate?
The interest rate will rise
Given that investment expenditure is not affected by national income, what can we say about the graph showing investment expenditure (on the vertical axis) as a function of national income (on the horizontal axis)?
The investment function can be drawn as a horizontal line.
Why are all financial markets, either directly or indirectly, linked?
The link is due to each financial market being both a source of borrowed funds and a destination for saving
If you were to explain to a friend how the macroeconomy would be influenced by neoclassical policies, which of the following statements would be the correct explanation?
The macroeconomy has flexible prices and wages and it is self correcting and not in need of governmental intervention for correction.
Suppose the public suddenly decides that private sector banks are too risky to trust its money with. How might this be represented on the diagram of Figure 1 and what happens to private investment as a result?
The money demand curve shifts to the right. the money supply curve remains in place but interest rates rise along it, reducing private investment
Suppose the Federal Reserve Bank increases the reserve ratio. Which of the following would be the best representation of this policy on the money market equilibrium in Figure 1 above?
The money supply curve shifts to the left and money demand falls along the investment demand curve
In Figure 1, the supply curve for loanable funds slopes upward in interest rates. How would the supply curve appear if savings were fixed instead of being a function of interest rates, and how would this impact interest rates relative to an upwards sloping supply curve if the investment demand function shifted its position?
The money supply curve would be vertical
The reserve requirement is extremely important to money creation. This requirement is defined as which of the following?
The percentage of a bank's deposits that it is required to maintain as reserves
Money creation in the United States results from which of the following?
The process of multiple banks' lending out deposits.
Which of the following is an example of a bank liability?
The savings account interest payment.
Which of the following statements about government spending is true?
The shares of social security and health care spending in GDP have grown steadily since the 1960's.
When considering the spending multiplier, which of the following statements is not true?
The spending multiplier gets bigger as the MPS rises.
What does the FDIC ensure?
There are adequate loanable funding resources to grow the economy by ensuring they are available to investors to generate economic activity.
Which one of the following statements about a certificate of deposit (CD) is correct?
There is an early withdrawal penalty.
What do goods like gasoline, tobacco, and alcohol typically have in common?
They are all subject to government excise taxes.
How does a person get to become a member of the Fed's Board of Governors?
They are appointed by the president and approved by the senate
In an economy that is relatively unstable or more subject to negative influences out of its control (negative shocks) than other economies around the globe, how might the central bank set its reserve requirements relative to international averages?
They would be higher than the international average
How would a balanced budget amendment change the effect of automatic stabilizer programs?
They would lose flexibility because spending could not increase unless funds were there.
Which number is higher?
U.S. federal debt.
When does a budget surplus occur?
When government tax revenues exceed government spending
Of the following statements, which is inaccurate for explaining the expenditure multiplier effect?
When the expenditure multiplier changes GDP does not change.
In 2017, the federal government spent $4 trillion but collected $3.3 trillion in taxes, therefore in 2017, the US government accumulated
a budget deficit of $700 billion
An example of a bank asset is ________.
a loan made out to a customer
In macroeconomics, ________ denotes the relationship between the price level and the total quantity of output or the real GDP companies produce to sell.
aggregate supply (AS)
Keynes believed that the government should ________ to get the economy out of recession:
decrease taxes and/or increase government spending.
The economy moves between recessions (high unemployment), and inflationary times causing inflationary problems. According to the Keynesian economic view, during a briskly productive economy which causes inflation and prices to rise, contractionary fiscal policies should be used. These type of policies include ________.
decreased government spending and tax increases
Savings banks and credit unions are both examples of which of these?
depository institutions
If the Central Bank observes aggregate demand weakening it will undertake
expansionary monetary policy.
Of the following examples of securities, which example is excluded from being a security?
fiat money
Increasing the sophistication of the financial payments system benefits banks mostly because ________.
households will need to hold less of their wealth in the form of cash and will be able to leave more in banks from where it can be loaned out for profit
The owner of a firm who forms expectations about the future of economic conditions rationally would ________ when increased demand is anticipated.
immediately raise prices but not output
If the Fed wishes to conduct contractionary monetary policy, it should
increase discount rate
A midwest bank with new managers and loan officers loaned out large amounts on very risky home loans. The bank sold off some of its real estate assets, but did not have enough to cover its liabilities when the majority of the loans defaulted. The bank is now considered
insolvent.
If an economy was in a recession and the government decided to use a supply side policy to address it, the government would most likely
institute cutting taxes rather than increasing spending by the government
Suppose the Fed buys T-bills. As a result of this policy, what will happen to the interest rates?
interest rates will decrease
If a bank goes bankrupt, then its assets are worth ________ than its liabilities.
less
Banks are financial intermediaries because they
link savers who deposit money and borrowers who seek loans.
An example of a ________ is when the changes in prices happen often enough to cause customers and consumers to be confused or angry.
menu cost
The M2 measure of money include(s)
money market funds.
Banks that go bankrupt have a ________ net worth.
negative
The independence in decision-making of the US Federal Reserve Bank's Board of Governors is critical since
otherwise they may be vulnerable to political pressures
Which of the following makes up the largest share of federal tax revenues comes?
payroll taxes (for Social Security & Medicare)
The M2 measure of the money supply is defined as currency
plus savings accounts and other timed deposits, CDs and money market funds, and is larger in sum than M1.
An interest rate is the ________ and the reward for lending money.
price of borrowing money
Keynes argued that the ________ was unable to keep the economy at full employment. As a result, ________ should take an active role in managing the economy.
private sector; government
If banks kept no reserves at all, they would
probably fail, since without any reserves they would not be able to cover any request for withdrawals
Which of the following is excluded from the Federal Reserve Bank's crucial role?
producing profits
An argument to promote research and development in technology is that it will
promote economic growth in the long run.
An increase in taxes will ________ consumption spending as it relates to the function of national income.
reduce
A contractionary or tight monetary policy
reduces borrowing
Pak's income and federal income tax contributions are in the table below. Based on the numbers above, the federal income tax in Pak's country is:
regressive
Corporate stock ________.
represents ownership in a firm.
If the Fed increases the discount rate, then
reserves will decrease in the banking system
A decrease in taxes will shift the AD curve to the ________, while a decrease in government expenditure will shift the curve to the ________.
right; left
If the Federal Reserve bank raises reserve requirements, interest rates are likely to ________ and the supply of money will ________.
rise; decrease
Besides education, what other areas within its borders is a state responsible for funding?
roads, parks, police and fire protection, libraries
Financial assets are also called ________ while examples include ________.
securities; stocks, bonds, and bank deposits
A liability in a bank's T-account is
something the bank owes someone else.
Keynesians believe the economy is characterized by recessions and inflationary booms which can cause unemployment and inflationary concerns. The solutions to a recession causing unemployment is expansionary fiscal policy in the form of ________.
tax cuts and increased government spending
From a neoclassical perspective, which of the following would most likely be viewed as an element that undermines long-run productivity growth in the economy?
tax cuts on business capital investment
Keynesians believe the economy is characterized by recessions and inflationary booms which can cause unemployment and inflationary concerns. The solutions to a boom causing inflation (high price levels) is contractionary fiscal policy in the form of ________.
tax increases and decreased government spending
The Federal Reserve Chairperson is tasked with providing the US Congress with regular policy updates. It is known that such testimony can move global equity and bond markets up or down primarily because ________.
the U.S. economy is so large and its currency so prevalent on the global market that the effects of Fed policy will impact wealth and income around the globe
After 2008, the reasoning for the Fed to undertake quantitative easing was because ________.
the demand for loanable funds remained stagnant even as the federal funds rate was at historic lows.
According to Keynesian economics, an increase in government purchases it causes a shift in the aggregate demand curve to the right by an amount equal to
the increase in government purchases times the expenditure multiplier
What will happen to the money supply if the Fed increases the reserve requirement?
the money supply will decrease
One of the main reasons for the bank failures of 2007-2009 is ________.
the overuse of subprime loans
Which of the following statement is likely to be true?
the purchase of bonds by the Federal Reserve Bank is an expansionary monetary policy in part because the Federal Reserve Bank is a large player in the bond market and can influence bond prices
If real GDP is greater than potential GDP then
the unemployment rate is low and the price level is rising
Credit unions considered safer than savings bank because ________.
they are non profit
The debate between Keynesian and neoclassical economists is largely about
timing.
A key function of a bank is
to be an intermediary between savers and borrowers.
Which of the following is NOT a risk of quantitative easing?
unemployment
Suppose the price of a product is expressed by Cowrie shell which are a mollusk shell found mainly off the Maldives Islands in the Indian Ocean. Then the cowries would serve as a ________.
unit of account
Which of the following is considered a Federal Reserve monetary policy tool?
varying the discount rate
The neoclassical long-run aggregate supply curve is vertical at the potential level of output because ________.
wages and prices adjust quickly to changes in demand.
An increase in the Federal Funds rate implies that credit conditions are ________.
worsening
If you purchase a good or service with credit it means that
your total debt in increasing
Suppose the Fed increased required reserve reation. As a result of this policy, what will happen to the Aggregate Demand (AD)?
AD will shift to the left
Suppose the Fed sells T-bills. As a result of this policy, what will happen to the Aggregate Demand (AD)?
AD will shift to the left
Suppose the Fed decreases required reserve ratio. As a result of this policy, what will happen to the Aggregate Demand (AD)?
AD will shift to the right
The graph identifies the increase in expenditures as the vertical increase from
AE0 to AE1
Which of the following is true?
AE=GDP=Y=C + I+ G + (X-M)
Which of the following stories describe the crowding out effect?
After the large government deficit financed through borrowing, less funds are available for private lending, and Luis, a builder, just secures a new loan for a new crane with an interest rate of 5% which is higher than the rate on his previous loan (3%)
Let's analyze the effects of an increase in investment on the macro equilibrium. We've established that the AE line shifts up, as shown here in the graph. Once the AE line shifts, but before national income (Y) adjusts, what is the relationship between aggregate expenditure and national income?
Aggregate expenditure is greater than national income.
If the economy is at macro equilibrium, then ________.
Aggregate expenditure will equal GDP/national income
Which of the following stories illustrates the supply side view of the economy?
All are consistent with the supply side view of the economy
________ are a form of tax or spending rules that can affect aggregate demand in the economy without any changes in legislation.
Automatic stabilizers
Looking at the figure above, the reason why the consumption function line does not start at zero is due to ________.
Autonomous consumption
Which of the following aggregate expenditure components is not impacted by real income?
Autonomous expenditures
Aggregate Expenditure
C + I + G + (X - M)
Which of the following statements is correct?
Central Bank intervention reflects its goals for inflation, unemployment and economic growth.
Which calculation for the multiplier is the correct description of the equation?
Change in real GDP/change in autonomous expenditure
According to neoclassical theory, with a vertical AS curve, changes in GDP will be caused by
Changes in physical and human capital
What is the definition of credit?
Credit is a way to purchase goods or services now when you cannot afford to pay for it all at once with cash.
According to Keynes, a variety of factors affect consumption expenditure including ________.
Disposable income and consumer confidence
Financial markets are where ________.
Firms can borrow to fund capital projects
What happens to firms in an economy that are to the right side of the macroeconomic equilibrium?
Firms will respond by decreasing their level of production and GDP will fall
Based on the Keynesian perspective, if the government decides to cut taxes, increase spending, or a mixture of both, then the economy is probably in a recession, and needs to
Increase aggregate demand
Along the upward sloping portion of the real aggregate supply curve, an increase in total expenditure would:
Increase real GDP, but not the price level.
________ means that consumers make decisions across time about when they will consuming goods, including money, either in the future or at the present time.
Intertemporal decision making
According to Keynes, business investment is the most volatile component of aggregate demand because
It is closely tied to confidence and expectations
What is true about a T-account?
It is used to separate the assets and liabilities of a firm
Of the following descriptions, which characteristic is a true statement about money?
It must represent value
Identify one of the key functions of a bank.
It serves as an intermediary between borrowers and savers.
What happens to the GDP gap when the economy is experiencing a bust, or recession?
It tends to be positive.
If a government expands its fiscal policy to raise equilibrium output, what will happen in the long term, according to the neoclassical view of the economy?
It will not work because the flexible prices will eventually choke off any increase in aggregate demand.
If a country experienced a natural disaster which wiped out a quarter of its capital stock, what would happen in the long run to its potential GDP according to the neoclassical approach?
It would fall in the short-term and then rise back to pre-disaster levels in the long-term as investment spending recovered.
The country of South Wales experienced a tsunami which wiped out half of its capital stock. What will happen, according to neoclassical perspective, to the country's potential GDP?
It would fall in the short-term and then rise back to pre-tsunami levels in the long-term.
If an earthquake destroyed half the capital stock of a country, what would happen to its potential GDP?
It would fall temporarily then return to pre-earthquake levels.
[Select] would advocate for increased government spending in times of recession while [Select] would advocate against budget deficit as they trigger the crowding out effect and depress investment
Keynesians; Neoclassicals
When the aggregate supply curve (macro) is flatter than the market supply curve for labor (micro) or goods and services (micro) making the price-levels not fall then this is an example of a(n) ________.
Macroeconomic externality
Say's law is most consistent with which of the following policy responses to a recession?
Provide subsidies for investment
We've established that an increase in investment expenditure shifts the aggregate expenditure line up and creates a situation where aggregate expenditure is greater than income. You can see this in the graph since point AE1 is above point Y0 at the current level of national income. In other words, customers of domestic goods and services are buying at a faster rate than businesses are producing. How does this bring the economy to the new macro equilibrium?
Since aggregate expenditure is greater than national income, businesses increase production to meet this demand, causing GDP (national income) to rise.
What makes all financial markets linked directly or indirectly?
Since financial markets are both sources of funding and destinations for savings, all financial markets are substitutes for each other
Which of the following are the main single categories of government spending?
Social security payments, Interest payments on the government debt, Healthcare and Defense Spending
Who is responsible for monitoring the money supply and the general stability and safety of the U.S. banking system?
The Federal Reserve
Which of the following statements is true?
The Federal Reserve Bank has indirect and imperfect control over interest rates
Which of the following is an example of Say's law?
The automotive industry, in order to create more output, need to focus on increasing production rather than demand.
How much money can a bank loan out, and make money on, of the banks' newly received deposits?
The bank can loan out only up to the amount of its excess reserves.
Which of the following aptly describes the mission of the Federal Reserve Bank?
The banking industry's private bank.
Which of the following types of government spending are tied to investment?
The federal government funds grants for medial research towards diabetes in the amount of $20 million
What is NOT a great advantage to financial investors for using banks?
The high interest rates received when compared to other investments
For the slope (steepness of the line) of the consumption function to change, ________ would have to increase or decrease.
The marginal propensity to consume
Say that Fed policy requires all banks to hold 8% of deposits in reserves. If Ventura Bank does not hold any excess reserves and the Fed increases the reserve requirement to 10%, what will be the result?
The money supply in the economy decreases.
What will happen to the money supply if the Fed decreases the reserve requirement?
The money supply will decrease.
The owner of a national construction company has been watching current economic changes. They have gathered historical data from their company's business experiences through up and down markets and have decided on a plan to follow as demand changes over the next year, three years and five year plan, with alternative options based on past data. Why is the owner making these type of decisions for the long-run?
The owner is using adaptive expectation reasoning to change important aspects of the company to be ready for future demands as the long-term economy shifts.
Which of the following transactions would be considered using credit?
Using financial aid to pay for school this semester
In an economy where the money supply and aggregate demand have been decreased by the Central Bank, you know that the Central Bank is using
a contractionary monetary policy.
Which of the following can the government use as a tool of fiscal policy if it wants to increase the level of real GDP in the economy?
a cut in taxes
Assume that the federal government of country ABC planned on spending 15 billion Lira (name of their currency) and expected tax revenue of 16 billion Lira in 2016. If the economy of ABC grows at a higher rate than expected (other things equal), the government's annual budget should see
a greater surplus
Financial contagion may results in lost integrity in the entire financial system. To prevent this from happening, the Fed may
act as the lender of last resort to make short-term emergency loans, as needed.
In making a prediction about future product price, a firm that rejects current information about prices and instead relies exclusively on an average of past values of prices is said to exhibit ________.
adaptive expectations
A ________ is a graph of an upward-sloping curve representing the relationship between the aggregate price level and the quantity of output produced by businesses.
aggregate supply curve graph
Banks are the backbone of the economy when it comes to money. When the banking system receives new deposits, banks can make new loans and thus increase the supply of money in circulation by ________.
an amount greater than the new deposits
In order to increase the level of aggregate demand in the economy, the government can use ________ in the form of ________.
an expansionary fiscal policy; an increase in government spending
Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in
an increase in price level.
The state of Montana has a balanced budget law runs a budget deficit. What are the state's options to correct a deficit?
an increase in taxes
Which of the following factors do not shift the aggregate demand curve?
an increase in the price level
If the Fed lowers the reserve requirement, then the results will be
an increase the availability of credit.
A private bank that systematically engages in making risky loans to borrowers runs
an increased probability of facing a bank run by depositors
Which of the following is NOT considered a type of business investment expenditure?
apartment buildings
From a banks perspective, demand deposits are considered a(n) ________.
asset
A well-run bank will ________.
assume some borrowers will not repay their loans on time
If the Federal Reserve Bank did not exist, economic transactions would ________.
be less efficient and more costly
The Fed is more likely to raise the discount rate when the economy is ________.
booming
If a debit card is used for a purchase it is like using
cash.
Suppose that an economy experiences a fall in business confidence which has led to less investment expenditure and lower levels of output. Keynesian analysis in the short-run predicts that the fall in aggregate demand will ________, while the Neoclassical view says ________ in the long-run.
cause higher unemployment; there will be full employment
The M2 money supply consists of everything in the M1 money supply, savings deposits and which of the following?
certificates of deposit
An example of a transaction that would be considered a financial asset includes ________.
charging on a credit card
The goal of the government of Swansia last year was to increase the level of aggregate demand by reducing tax rates. What fiscal policy type did Swansia use?
discretionary and expansionary
Since neoclassical theory is based on a supplier driven economy, recessions are best addressed by ________.
doing nothing
Equilibrium in financial markets occurs at an interest rate where the quantity of loanable funds demanded is
equal to the quantity of loanable funds supplied
Inflation is not a concern in the Keynesian zone of the aggregate supply curve due to
excess capacity in the labor market, the intermediate goods market, and raw materials market
During the early 1980s, the economy was coming out of a recession and unemployment was high. In an effort to fix this, the Fed followed a path of
expansionary monetary policy and lowered interest rates
When the interest rate in an economy decreases, it is likely the result of either a/an ________ or a/an ________.
expansionary practice; open market purchase of securities by the Fed.
When the supply of loanable funds shifts its position to the right, interest rates will ________ because loanable funds will be ________.
fall; less scarce
Consider the following statement and indicate if it is true, false or uncertain. "A sale of bonds held by a private bank to another private bank will have the exact same impact on the supply of money as a sale directly to the Federal Reserve Bank."
false
What is NOT an example of a security?
fiat money
What type of policies does a Keynesian economist say need to be used to influence the economy to correct for unemployment and inflation?
fiscal policies
In the neoclassical view of the economy, expansionary fiscal policy cannot work to raise equilibrium output because
flexible prices will eventually choke off any increase in aggregate demand.
Which of the following is NOT an important role of the Federal Reserve Bank?
generating profits
From a neoclassical viewpoint, government should focus less on
government stimulus spending.
In comparison with an expenditure module, the multiplier effect produces a great change in GDP and therefore its value is ________.
greater than one
Since the change in GDP is a greater change than in the expenditure model the multiplier has a value ________.
greater than one
A 20% drop in payroll taxes would have a [Select] Greater Smaller impact than a 20% corporate income tax on [Select] state and local government budgets. the Federal Government budget.
greater; the Federal Government Budget
According to the Keynesian perspective, reasons for an increase in aggregate demand include
increase in foreign demand for net exports.
An argument to promote capital deepening is that it will
increase productivity and economic growth in the long run.
In order to ________ the money supply, government should ________ bonds in open market operations.
increase; buy
If an increase in consumer confidence leads to increased purchases by consumers using credit cards then the demand for loanable funds will ________ and cause interest rates to ________.
increase; rise
During the 2009 recession, the number of households eligible for food stamps
increased and the additional spending helped lessen the recession
From a neoclassical view, which of the following is least important?
increasing aggregate demand to fight unemployment
Which of the following is least important according to the neoclassical viewpoint?
increasing aggregate demand to fight unemployment
An expansionary monetary policy affects aggregate demand
indirectly, by lowering interest rates and increasing the available quantity of loans, which stimulates spending.
The Central bank views unemployment just as important as ________.
inflation
Monetary policy should be conducted mindful of the tradeoff between ________.
inflation and unemployment
Suppose the Fed decreases discount rate. As a result of this policy, what will happen to the interest rates?
interest rates will decrease
Consumers must choose whether they prefer to consume goods, including money, now or in the future. This is known as:
intertemporal decision making.
Say's Law:
is widely held to be more accurate in the long run rather than the short term.
Changing reserve requirements is relatively rare because
it can be extremely costly to private sector banks
What happens to the money supply if the Fed raises the discount rate?
it decreases
While the role of "lender of last resort" supports banking system credibility, the problem with such a commitment is that
it encourages excessive risk taking by bank managers in their choice of loans
Which of the following is true about fiat money?
it has little value except as money
If the Federal Reserve Bank decides to reduce the discount rate it is likely that
it is pursuing a pro-growth policy
A bank's T-account includes liabilities which are
items of value the bank owes to someone else.
The ease with which an asset can be used to buy a good or service is the asset's
liquidity.
Fiat money has ________ value and is ________.
little; declared by a government to be the legal tender of a country
Typically, a bank's assets include ________.
loans, treasury securities, and reserves
A contractionary fiscal policy by a government may result in which of the following?
lower interest rates
If the Fed ultimately wants to lower interest rates in the economy, then it should
lower the discount rate
If the Fed ultimately wants to lower interest rates in the economy, then it should
lower the discount rate.
Banks create money through which of the following processes?
making loans
Since Keynesian theory says that the economy is driven by aggregate demand, Keynesian policy should be directed at ________.
managing aggregate demand to correct a supply-demand imbalance
The double coincidence of wants can be solved by using money as a ________.
means of payment
The ________ perspective tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment.
neoclassical
Which of the following is likely to lead to economic growth in the long term?
new highways to serve new neighborhoods and business parks
Neoclassical economists would view expansionary fiscal policy to stimulate aggregate demand as ________ and/but ________.
not effective; not useful
During a recession, what is a traditional tool used by the Fed to boost the economy?
open market operations
What tool might the Fed use to boost the economy during a recession?
open market operations
Deposit insurance was created in the 1930s to
promote the credibility and safety of banks as a place to store one's money and therefore support the link between savers and borrowers
Ari's income and federal income tax contributions are in the table below. What is the federal income tax in Ari's country?
proportional.
Astor's income and federal income tax contributions are in the table below. What is the federal income tax in Astor's country? 2016 Taxable Income $75,000 Federal Income Tax Payment $9000 2017 Taxable Income $84,000 Federal Income Tax Payment $10,750
proportional.
The banking sector is critical to the health of a market economy because it
provides the key connection between savers and borrowers that facilitates the flow of capital to income and employment generating activities
One mission of the Federal Reserve Bank can be aptly described as ________.
providing banking services to commercial banks
Aggregate demand is influenced by the government in through what significant ways?
raising or lowering tax rates; decreasing or increasing spending
An economy that operates at its maximum potential level of output can improve its living standards only if ________.
technology improves.
The congress of the country of Pi is debating budget issues and decides to cancel $10 billion in infrastructure projects that aimed to modernize the power grid (electricity) and $5 billion in medical research and development in order to balance the budget. An argument against a balanced budget rule would be
that efficiency derived from a renewed power grid and the advances in the medical field were forgone
During the Great Recession, the direct targeting of long-term interest rates by the Federal Reserve Bank implies that private bank lending
was limited by overly restrictive credit requirement and was therefore suppressing economic activity
Credit can also be called a debt instrument because________ and an example is ________.
you are borrowing money you do not have right now; a HELOC
