Econ Chapter 9-12 Quizzes

In the federal penitentiary at Lompoc, California, inmates used packages of mackerel to buy items such as haircuts at the prison barber shop and laundry services. What function do these packages of mackerel serve?

They functioned as money.

A) It refers to a discretionary policy that is triggered when actual output is not equal to potential output to improve the economy's performance. B) It refers to a stabilization program that keeps inflation in check automatically. C) It refers to any government program that tends to reduce fluctuations in GDP automatically. D) It refers to a government program that is automatically triggered when the economy enters a recession. C) It refers to any government program that tends to reduce fluctuations in GDP automatically.

What is an automatic stabilizer?

A financial institution that accepts deposits, makes loans, and offers checking accounts is

a commercial bank

A bond is

a debt instrument, that is, the issuer has taken out a loan.

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, an open market purchase would cause

a shift of the aggregate demand curve from AD1 to AD2.

(Exhibit: The Money Market) If the interest rate is above the equilibrium rate, there will be

an excess supply of money and the interest rate will fall.

(Exhibit: The Bond Market) A movement from S1 to S2, means there was

an increase in borrowing

(Exhibit: A Shift in Money Supply) What could have caused the money supply curve to shift from S1 to S2?

an open market purchase conducted by the Fed

(Exhibit: Monetary Policy 1) To shift the demand curve from D1 to D2, the Fed will be

buying bonds in the open market which increases the money supply.

(Exhibit: Economic Adjustments) If the economy is at point c, the Federal Reserve can close the output gap

by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand.

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap

by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand.

(Exhibit: Monetary Policy 2) By shifting the supply curve from S1 to S2, the Fed is attempting to

contract the economy by increasing interest rates.

(Exhibit: Monetary Policy 2) By shifting the supply curve from S1 to S2, the Fed is exercising

contractionary monetary policy in order to increase interest rates.

Which of the following is an example of a bank's reserves?

deposits with the Federal Reserve

Any reserves that banks hold in excess of required reserves are called

excess reserves.

(Exhibit: Monetary Policy 1) By shifting the demand curve from D1 to D2, the Fed is attempting to

expand the economy by decreasing interest rates.

(Exhibit: Monetary Policy 1) By shifting the demand curve from D1 to D2, the Fed is exercising

expansionary monetary policy to lower interest rates.

Money that some authority has declared legal tender is called

fiat money

A system in which banks hold reserves whose value is less than the sum of claims on those reserves is called

fractional reserve banking.

(Exhibit: A Shift in Money Demand) Which of the following could cause the demand curve to shift from D2 to D1?

greater preferences by consumers for holding money

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the

implementation lag.

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c,

it is in a recessionary gap.

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

lowering the reserve requirement to encourage banks to create loans.

Financial markets are

markets where funds accumulated by one group are made available to another group.

The rational expectations hypothesis suggests that

people use all available information to make forecasts about future economic activity and adjust their behavior to these forecasts.

A country's exchange rate is the

price of its currency in terms of another currency.

The demand curve for money curve shows, all other things unchanged, the

quantity of money demanded at each interest rate.

(Exhibit: The Money Market) In equilibrium the interest rate is

r1 and the quantity of money is Q1

The quantity of reserves that banks must hold against deposits is called

required reserves.

Toward the end of 2008, the U.S. economy was characterized by all of the following except

rising inflation.

(Exhibit: Monetary Policy 2) By shifting the supply curve from S1 to S2, the Fed will be

selling bonds in the open market which decreases the money supply.

Money is any item that

serves as a medium of exchange for goods and services.

According to the text, in many respects, the single most powerful economic policymaker in the United States is

the Federal Reserve.

Currency rates of exchange are determined by

the demand and supply of the currency.

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap by buying bonds. In the bond market,

the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.

The interest rate on a bond is

the difference between the face value and the bond price, expressed as a percentage of the bond price.

Which of the following is an interest rate that the Fed has targeted in the last several years?

the federal funds rate

The delay between the time a policy is enacted and the time the policy has its effect on the economy is called

the impact lag.

(Exhibit: The Money Market) The vertical money supply curve implies that

the money supply is determined by the Federal Reserve.

The lag in realizing that a macroeconomic problem exists is called

the recognition lag.

(Exhibit: Economic Adjustments) If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,

the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.

What are the three motives for holding money?

the transaction motive, the speculative motive, and the precautionary motive

When people hold money to make anticipated purchases of goods and services, they are exercising the _______ demand for money.

transactions

(Exhibit: Components of the Money System) The difference between M1 and M2 amounts to

$1,275 billion

(Exhibit: Balance Sheet of the Alpha-Beta Bank) What is the value of the bank's total reserves?

$100 million

(Exhibit: Balance Sheet of the Alpha-Beta Bank) What is the value of the bank's net worth?

$200 million

(Exhibit: Balance Sheet of the Alpha-Beta Bank) If the required reserve ratio is 10%, what is the amount of excess reserves held by Alpha-Beta Bank?

$40 million

(Exhibit: Balance Sheet of the Alpha-Beta Bank) If the required reserve ratio is 10%, what is the value of the bank's required reserves?

$60 million

(Exhibit: Fed Buys Bonds) As a result of Sheila's deposit, Perez Bank can increase its loans by

$90,000

A) establish a consumption tax to encourage savings B) increase government spending C) loosen environmental regulations to lower businesses cost of production D) raise interest rates B) increase government spending

(Exhibit: Fiscal Policy 1) In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do?

A) a contractionary fiscal policy involving reductions in government spending and decreases in income tax rates B) a contractionary fiscal policy involving reductions in government spending and increases in income tax rates C) an expansionary fiscal policy involving increases in government spending and increases in income tax rates D) an expansionary fiscal policy involving increases in government spending and decreases in income tax rates B) a contractionary fiscal policy involving reductions in government spending and increases in income tax rates

(Exhibit: Fiscal Policy Options) If the aggregate demand curve is AD2, which of the following is the most appropriate discretionary fiscal policy to pursue?

A) the government orders a one-time surcharge of 10% to be added to individual income tax liabilities. B) the government raises business taxes. C) the Federal Reserve sells bonds on the open market. D) the government orders a cut in withholding rates designed to increase disposable income and boost consumption. D) the government orders a cut in withholding rates designed to increase disposable income and boost consumption.

(Exhibit: Fiscal Policy Options) Suppose the aggregate demand curve is AD2. All of the following events would more likely bring the economy back to the natural rate of unemployment except

A) lower taxes to encourage people to work more. B) reductions in investment tax credits to stimulate capital formation. C) tax increases to encourage more people to work. D) increased transfer payments to help the unemployed. A) lower taxes to encourage people to work more.

(Exhibit: Supply-Side Economics) If the economy is initially at Y1, supply-side economists would advocate

A) the aggregate demand curve to shift to the right. B) the short-run aggregate supply curve to shift to the right. C) the aggregate demand curve to shift to the left. D) the short-run aggregate supply curve to shift to the left. B) the short-run aggregate supply curve to shift to the right.

. (Exhibit: Fiscal Policy 1) Assume that the economy is initially at Y1. A nonintervention policy would result in the restoration of potential output by allowing the

A) an inflationary gap. B) a recessionary gap. C) equilibrium at full employment. D) a short-run and a long-run equilibrium. B) a recessionary gap.

. (Exhibit: Fiscal Policy 1) The economy is initially at output level Y1 and there is

A) is the difference between total government revenues and government expenditures. B) is the sum of all past federal deficits plus any surpluses. C) is the sum of all past federal deficits less any surpluses. D) grows when government spending increases C) is the sum of all past federal deficits less any surpluses.

. The national debt

(Exhibit: The Bond Market) Given a face value of $1,000, a price of $900, and quantity of Q 1, the interest rate on the bond is

11.1%

(Exhibit: The Bond Market) Following the increase in supply from S1 to S2, at a price of $850, what is the interest rate?

17.6%

A) rebate on payroll taxes. B) education tax credits. C) unemployment insurance benefits. D) an interest rate cut. D) an interest rate cut.

All of the following are instruments of fiscal policy except

The Federal Reserve System was created by the

Federal Reserve Act of 1913

A) automatic fiscal policy. B) discretionary fiscal policy. C) fiscal policy. D) supply-side policy. C) fiscal policy.

Government tax and expenditure policies that affect real GDP are called

Which of the following are primary functions of a central bank? I. act as a regulator of banks II. issue government bonds III. set monetary policy IV. regulate dividend payments by corporations

I and III

The Federal Reserve System I. is the central bank for the United States. II. is a United States government owned bank. III. is a branch of the Treasury of the United States.

I only

A) automatic fiscal policy. B) discretionary fiscal policy. C) expansionary monetary policy. D) supply-side fiscal policy. B) discretionary fiscal policy.

In late 2008, the U.S. government extended unemployment insurance benefits for seven additional weeks, in recognition of the growing unemployment problem. This extension is an example of

Which of the following is not a function of the Federal Reserve System?

It determines tax levels in conjunction with the U.S. Treasury.

What is velocity of money?

It is the number of times the money supply is spent to obtain the goods and services that make up GDP during a particular time period.

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by:

M × V = P × Y

The Fed's narrowest measure of money supply is

M1

A) unilateral payments. B) transfer payments. C) gifts. D) income redistribution payments. B) transfer payments.

Medicaid, welfare payments, and Temporary Assistance to Needy Families are classified as

(Exhibit: Fed Buys Bonds) Once the full impact of the Fed's open market purchase and Sheila's deposit worked its way through the banking system, what is the maximum change on the money supply as a result of these two events?

Money supply rises by $1,000,000

A) inter-temporal fiscal accounting. B) generational accounting. C) long-term debt assessment technique. D) fiscal stabilization tool. B) generational accounting.

One method of assessing the degree to which current fiscal policies affect future generations is through a device called

A) transfer payments. B) government purchases. C) consumption expenditures. D) investment expenditures. A) transfer payments.

Payments to households that do not require anything in exchange are called

A) consumption B) gross private investment C) government purchases D) public investment C) government purchases

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

A) dividend taxes. B) payroll taxes. C) corporate profits taxes. D) earned income taxes. B) payroll taxes.

Taxes assessed on firms and employees on wages and salaries earned are called

(Exhibit: A Shift in Money Demand) What happens in the bond market as a result of the shift in the money demand curve from D1 to D2?

The demand for bonds increases.

(Exhibit: A Shift in Money Supply) What happens in the bond market as a result of the shift in the money supply curve from S1 to S2?

The demand for bonds increases.

A) its total revenues are equal to its total expenditures. B) its total revenues are less than its total expenditures. C) its total revenues are greater than its total expenditures. D) the money supply is less than total expenditures. A) its total revenues are equal to its total expenditures.

The government has a balanced budget if

A) its total revenues are equal to its total expenditures. B) its total revenues are less than its total expenditures. C) its total revenues are greater than its total expenditures. D) the money supply is less than total expenditures. B) its total revenues are less than its total expenditures.

The government has a budget deficit if

A) its total revenues are equal to its total expenditures. B) its total revenues are less than its total expenditures. C) its total revenues are greater than its total expenditures. D) the money supply is less than total expenditures. C) its total revenues are greater than its total expenditures.

The government has a budget surplus if

A) I only B) I and II only C) I and III only D) I, II, and III B) I and II only

The government purchases component of aggregate demand includes I. all purchases by government agencies of goods and services produced by firms. II. direct production by government agencies themselves. III. government expenditures on transfer payments.