Econ 220 Exam #3 2

If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate ________ and the quantity of reserves ________. A) falls; increases B) rises; increases C) rises; does not change D) falls; decreases E) rises; decreases

E

If the Fed wants to fight recession, it will ________ the federal funds rate in order to ________. A) raise; increase aggregate demand B) raise; decrease aggregate supply C) raise; increase aggregate supply D) lower; increase aggregate supply E) lower; increase aggregate demand

E

Monetary policy goals include i. maximum employment. ii. stable prices. iii. moderate long-term interest rates. A) i only B) ii only C) i and iii only D) i and ii only E) i, ii, and iii

E

The federal budget A) is required to balance by law. B) can have a surplus but not a deficit. C) can have a deficit but not a surplus. D) can have a deficit or a surplus but cannot be balanced. E) can have a deficit, a surplus, or a balance.

E

Which of the following is a monetary policy goal? i. keeping the inflation rate low ii. attaining maximum employment iii. keeping the long-term interest rate at a moderate level A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii

E

Automatic stabilizers include A) changes in induced taxes and changes in needs-tested spending. B) increases or decreases of tax rates and changes in needs-tested spending. C) changes in induced taxes and changes in discretionary spending. D) changes in discretionary spending and changes in needs-tested spending. E) changes in the federal funds interest rate brought about by Fed policy.

A

Equilibrium in the market for bank reserves determines the A) federal funds rate. B) inflation rate. C) price level. D) 30-year Treasury bond rate. E) exchange rate.

A

If the Fed sells U.S. government securities, A) the federal funds rate rises. B) the U.S. Treasury gains some revenue. C) the U.S. Treasury loses some revenue. D) banksʹ reserves increase. E) None of the above answers is correct.

A

If the Fed wants to fight inflation, it will ________ the federal funds rate in order to ________. A) raise; decrease aggregate demand B) raise; decrease aggregate supply C) raise; increase aggregate supply D) lower; increase aggregate supply E) lower; decrease aggregate demand

A

In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases. A) cut taxes B) raise taxes C) cut government expenditure on goods and services D) raise interest rates E) decrease the quantity of money

A

The crowding out effect refers to the ________ from ________ in the governmentʹs budget deficit. A) decrease in investment; an increase B) decrease in employment; an increase C) decrease in consumption; an increase D) increase in consumption; an increase E) increase in investment; an increase

A

The economy is at the equilibrium shown as point a in the above figure. To restore the economy to potential GDP, the Fed should A) buy government securities and thereby increase aggregate demand. B) sell government securities and thereby increase aggregate demand. C) sell government securities and thereby decrease aggregate demand. D) buy government securities and thereby decrease aggregate demand. E) buy government securities and thereby increase aggregate supply.

A

The interest rate banks charge each other on loans of reserves is called the A) federal funds rate. B) coupon rate. C) required reserve rate. D) discount rate. E) real interest rate.

A

The main goals of monetary policy include all of the following EXCEPT A) keeping the long term nominal interest rate equal to the real interest rate plus the inflation rate. B) keeping the inflation rate low. C) keeping the unemployment rate close to the natural unemployment rate. D) attaining the maximum sustainable growth of potential GDP. E) keeping the long-term interest rate at a moderate level.

A

Which of the following is a potential monetary policy instrument for the Fed? A) federal funds rate B) loanable funds C) inflation rate D) real interest rate E) profit rates

A

Discretionary fiscal policy is defined as fiscal policy A) left to the discretion of military authorities. B) initiated by an act of Congress. C) initiated by a Presidential proclamation. D) triggered by the state of the economy. E) with multiplier effects.

B

Fiscal policies that move the economy toward potential GDP without a change in policy are called A) routine stabilizers. B) automatic stabilizers. C) spending stabilizers. D) economic stabilizers. E) GDP stabilizers.

B

How could an expansionary fiscal policy increase real GDP and lower the price level? A) if aggregate supply decreases more than aggregate demand increases B) if aggregate supply increases more than aggregate demand increases C) if the aggregate supply increases equals the aggregate demand increase D) if aggregate supply decreases more than aggregate demand decreases E) if aggregate supply decreases less than aggregate demand decreases

B

If the Fed bases its monetary policy on judgments of its policymakers about the current needs of the economy, it is following A) a monetary base instrument rule. B) discretionary policy. C) an inflation targeting rule. D) wait-and-see policy. E) a money targeting rule.

B

If the Fedʹs policies aim to increase aggregate demand, the Fed must fear A) inflation. B) recession. C) stagflation. D) a supply shock that decreases potential GDP. E) a supply shock that increases aggregate supply.

B

Ignoring any supply-side effects, to close a recessionary gap of $100 billion with a government expenditure multiplier of 5, the government could A) increase government expenditure on goods and services by $100 billion. B) increase government expenditure on goods and services by $20 billion. C) raise taxes by $100 billion. D) raise taxes by more than $20 billion. E) decrease government expenditure on goods and services by $20 billion.

B

In the short run, if the Fed wants to raise the federal funds rate, it A) instructs large commercial banks to sell government securities in the open market. B) instructs the New York Fed to sell government securities in the open market. C) tells large commercial banks to raise their interest rates. D) instructs the New York Fed to sell government securities in the foreign exchange market. E) instructs the New York Fed to buy government securities in the open market.

B

In the short run, when the Fed raises the federal funds rate, A) the real interest rate is unchanged so investment and consumption expenditure are not changed. B) the real interest rate temporarily increases, thereby decreasing investment and consumption expenditure. C) the real interest rate temporarily falls, thereby increasing investment and consumption expenditure. D) investment and consumption expenditure increase, thereby raising the real interest rate temporarily. E) the real interest rate temporarily increases, thereby decreasing investment and increasing consumption expenditure.

B

Maintaining the growth of the money supply at a constant rate is an example of A) discretionary policy. B) a money targeting rule. C) a money demand rule. D) an inflation targeting rule. E) a nominal GDP targeting rule.

B

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? i. government expenditure on goods and services and taxes ii. the government budget deficit or surplus iii. changes in the federal funds rate A) i and ii B) iii only C) i and iii D) ii and iii E) ii only

B

An economy is at a short-run equilibrium as illustrated in the above figure. An appropriate fiscal policy option to move the economy to full employment is to increase A) government expenditure and move the economy to a full-employment equilibrium at point c. B) tax rates and move the economy to a full-employment equilibrium at point c. C) government expenditure and move the economy to a full-employment equilibrium at point b. D) tax rates and move the economy to a full-employment equilibrium at point b. E) lower the interest rate by increasing the quantity of money and move the economy to a full-employment equilibrium at point b. Graph 2

C

An example of automatic fiscal policy is A) Congress passing a tax rate reduction package. B) the federal government expanding spending at the Department of Education. C) expenditure for unemployment benefits increasing as economic growth slows. D) the Federal Reserve reducing interest rates as economic growth slows. E) a change in taxes that has no multiplier effect.

C

Automatic stabilizers are defined as A) actions taken by the President without Congressional consent to stabilize the economy. B) actions taken by an act of Congress to stabilize the economy. C) policy that stabilizes without the need for action by the government. D) discretionary policy taken to stabilize the economy. E) policy that has no multiplier effects.

C

Discretionary fiscal policy is a fiscal policy action, such as A) an interest rate cut, initiated by an act of Congress. B) an increase in payments to the unemployed, initiated by the state of the economy. C) a tax cut, initiated by an act of Congress. D) a decrease in tax receipts, initiated by the state of the economy. E) an increase in the quantity of money.

C

If the economy is in an equilibrium with real GDP less than potential GDP, a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services. A) raising; increasing B) raising; decreasing C) cutting; increasing D) cutting; decreasing E) raising; not changing

C

If the government uses fiscal policy to close a recessionary gap, government A) expenditure must be increased by more than the gap because of the government expenditure multiplier. B) taxes must be cut by more than the gap because of the tax multiplier. C) expenditure can be increased by less than the gap because of the government expenditure multiplier. D) taxes can be raised by less than the gap because of the tax multiplier. E) taxes must be raised by more than the gap because of the tax multiplier.

C

In the short run, when the Fed increases the federal funds rate, A) there is no effect on investment because investment depends on the real interest rate. B) the real interest rate falls and investment increases. C) the real interest rate rises and investment decreases. D) the real interest rate is unaffected but investment still decreases. E) the real interest rate rises and investment does not change.

C

Suppose the economy is in an equilibrium in which real GDP is less than potential GDP. To increase real GDP, the government can use a fiscal stimulus of A) increasing taxes only. B) decreasing government expenditure only. C) decreasing taxes and/or increasing government expenditure. D) decreasing government expenditure and simultaneously increasing taxes. E) increasing the quantity of money.

C

The Fed raises the interest rate when it A) fears recession. B) wants to increase the quantity of money. C) fears inflation. D) wants to encourage bank lending. E) cannot change the quantity of money.

C

Which of the following is NOT an alternative rule for monetary policy? A) a monetary base instrument rule B) a money targeting rule C) a natural unemployment rate targeting rule D) a nominal GDP targeting rule E) an inflation rate targeting rule

C

An example of automatic fiscal policy is A) an interest rate cut, initiated by an act of Congress. B) an increase in the quantity of money. C) a tax cut, initiated by an act of Congress. D) a decrease in tax revenues, triggered by the state of the economy. E) any change in the interest rate, regardless of its cause.

D

Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic A) taxes and expenditure. B) discretionary taxes and expenditure. C) government. D) stabilizers. E) discretionary policy.

D

Discretionary monetary policy is monetary policy that is based on A) the judgment of Congress about the current needs of the economy. B) a rule that allows no discretion in how policymakers respond to the state of the economy. C) the ups and downs of the stock market. D) the judgment of the monetary policymakers about the current needs of the economy. E) rules that depend upon the state of the economy.

D

To change the federal funds rate, the Fed A) tells banks how much to charge. B) coordinates with banks on establishing the new rate. C) increases or removes money from the stock market. D) uses open market operations to change the quantity of reserves. E) changes the income tax rate on interest income.

D

To shift the RS curve rightward as illustrated, the Fed has ________ government securities in the open market. The Fed will undertake this type of policy if it is concerned about ________. A) sold; inflation B) bought; inflation C) sold; recession D) bought; recession E) None of the above answers are correct.

D