ECON EXAM 3

54. If the required reserve ratio is 25 percent, the money multiplier is A) 4. B) 16. C) 20. D) 25.

A) 4.

57. A decrease in money supply growth will cause the A) AD curve to shift inward. B) SRAS curve to shift inward. C) Solow growth curve to shift inward. D) price level to rise. E) None of the above.

A) AD curve to shift inward.

36. Which of the following is a tool that can be used by the Federal Reserve to change the money supply? I.open market operations II.lending to banks and other financial institutions III.interest on reserves A) I, II, and III B) I only C) II only D) I and III only

A) I, II, and III

32. Consider the money multiplier that includes cash holding by the public and excess reserves held by the bank. An increase in the excess reserves, for a given monetary base, will result in A) a decrease in M1. B) a increase in M1. C) a decrease in the currency to deposit ratio. D) an increase in the currency to deposit ratio. E) an increase in the monetary base

A) a decrease in M1.

76. When prices are slow to adjust to economic shocks as in the New Keynesian model and people decide to hold more cash because of a decrease in consumer confidence would cause A) a decrease in both the growth rate of output and inflation. B) a decrease in the growth rate of output and an increase in the inflation rate. C) an increase in the growth rate of output and a decrease in the inflation rate. D) an increase in both the growth rate of output and inflation.

A) a decrease in both the growth rate of output and inflation.

64. Monetary policy is used to stabilize the economy by changing factors that shift the A) aggregate demand curve. B) short-run aggregate supply curve. C) Solow growth curve. D) aggregate demand, short-run aggregate supply, and Solow growth curves. E) Public opinion

A) aggregate demand curve.

30. The money multiplier (MM) is the A) amount that the money supply expands with each dollar increase in the monetary base. B) overnight lending rate from one major bank to another. C) ratio of deposits to reserves. D) ratio of reserves to deposits. E) None of the above.

A) amount that the money supply expands with each dollar increase in the monetary base.

22. In the New Keynesian model, suppose the Fed reacts to an economic shock and quickly restores the economy to the Solow growth rate. The shock most likely A) an aggregate demand shock. B) a real shock. C) a productivity shock. D) all the answers are correct.

A) an aggregate demand shock.

100. In response to a negative supply shock, a temporary increase in government spending will likely result in A) an increase in inflation and an increase in output growth. B) a decrease in inflation and an increase in output growth. C) a decrease in inflation and output growth going back to its potential level. D) an increase in inflation only. E) None of the above.

A) an increase in inflation and an increase in output growth.

77. When the government conducts fiscal policy to stabilize (dynamic) aggregate demand, it makes up for a decrease in %ΔC with A) an increase in%ΔG. B) a decrease in %ΔNX . C) an increase in %ΔM. D) a decrease in%ΔV. E) None of the above

A) an increase in%ΔG.

42. If the Fed wants to increase the money supply, it will ______ Treasury securities. A) buy B)sell C) hold D) issue

A) buy

68. (Figure: Monetary Policy) Assume that the economy is initially at Point Y. In the best case scenario, the Fed will A) increase money supply to take the economy to Point X. B) decrease money supply to take the economy to Point W. C) increase money supply to take the economy to Point W. D) decrease money supply to take the economy to Point X.

A) increase money supply to take the economy to Point X.

10. All else held equal, when the Federal Reserve makes an open market purchase, the money supply: A) increases. B) decreases. C) remains constant. D) becomes difficult to predict.

A) increases.

15. During the 1970s, the Fed often reacted to negative oil shocks by increasing the money supply and focusing on: A) increasing long-run growth in the economy. B) reducing inflation. C) increases unemployment. D) raising employment and short-run economic growth. E) None of the answers are correct.

A) increasing long-run growth in the economy.

75. What are the three main sources of funds for the U.S. federal government? A) individual income taxes, corporate income taxes, and Social Security and Medicare taxes B) interest on government bonds, corporate income taxes, Social Security and Medicare taxes C) interest on government bonds, individual income taxes, Social Security and Medicare taxes D) interest on government bonds, individual income taxes, corporate income taxes

A) individual income taxes, corporate income taxes, and Social Security and Medicare taxes

102. The problem with the 2008 stimulus package that gave people tax rebates was that A) most people saved their tax rebates B) most people spent their tax rebates C) the rebates were too large given the economic shock D) None of the answers are correct

A) most people saved their tax rebates

9. The tool the Federal Reserve uses most frequently to influence the money supply is A) open market operations B) discount rate lending and term auction facility C) required reserve ration and payment of interest on reserves D) federal funds lending

A) open market operations

93. Social Security is run on a ______ basis. A) pay-as-you-go B) contract C) trust fund D) prepaid

A) pay-as-you-go

13. (Figure: Negative Supply Shock) In the New Keynesian model, where prices are slow to adjust, assume this economy initially begins at point Aand suppose that a negative supply shock takes the economy to point Y. If the Fed reacts by increasing spending growth by 3%, this would take the economy to: A) point X. B) point V. C) point B. D) point A.

A) point X.

81. A negative real shock causes the Solow growth curve to A) shift inward. B) shift outward. C) become flatter. D) become steeper.

A) shift inward.

18. The group that formulates and implements monetary policy is _____________. A) the Federal Open Market Committee (FOMC). B) the Board of Governors. C) the Federal Reserve Operating Board. D) the United States Treasury.

A) the Federal Open Market Committee (FOMC).

3. The Federal Reserve can influence the economy by shifting: A) the dynamic AD curve. B) the SRAS curve. C) the Solow growth curve. D) All of the answers are correct.

A) the dynamic AD curve.

37. The Federal Reserve has direct control over A) the monetary base. B) M1. C) M2. D) checkable deposits.

A) the monetary base.

90. The marginal tax rate is A) the tax rate paid on an additional dollar of income. B) higher on people with higher incomes. C) the total tax payment divided by total income. D) a separate income tax code begun in 1969 to prevent the rich from paying income taxes.

A) the tax rate paid on an additional dollar of income.

50. When facing a real shock, a central bank will encounter a dilemma that forces it to choose between A) too low a rate of growth or too high a rate of inflation. B) too high a rate of growth or too low a rate of inflation. C) too low a rate of growth or too low a rate of inflation. D) too high a rate of growth or too high a rate of inflation.

A) too low a rate of growth or too high a rate of inflation.

97. The best type of negative shock for fiscal policy to respond to is a negative shock to A)aggregate demand. B) short-run aggregate supply. C) the Solow growth curve. D) inflation.

A)aggregate demand.

53. Which of the following is NOT a function of the Federal Reserve? A) serving as the lender of last resort B) regulating the U.S. financial system C) regulating the U.S. money supply D) providing loans to small businesses

D) providing loans to small businesses

61. Faced with declining consumer confidence, politicians are on the fence about whether to implement policies based on the advice of economists or to make decisions on the basis of Tarot card readings. What would happen during the period in which they are making up their minds about which strategy to pursue? A) %ΔV would rise. B) %ΔV would fall. C) %ΔY would rise. D) %ΔP would rise. E) p would rise.

B) %ΔV would fall.

45. Quantitative easing occurs when the A) Fed sells long-term securities. B) Fed buys long-term securities. C) government lowers income and other taxes. D) government raises income and other taxes.

B) Fed buys long-term securities.

73. ______ is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. A) Business policy B) Fiscal policy C) Monetary policy D) Trade policy

B) Fiscal policy

28. What would be the likely outcome if the Federal Reserve decided to lower the required reserve ratio? A) The money multiplier would increase and M1 would shrink. B) The money multiplier would increase and M1 would expand. C) The money multiplier would decrease and M1 would shrink. D) The money multiplier would decrease and M1 would expand. E) None of the above

B) The money multiplier would increase and M1 would expand.

6. The monetary base (MB) refers to: A) currency. B) currency plus (total) reserves. C) currency plus checkable deposits. D) currency, savings deposits, money market mutual funds, and small time deposits.

B) currency plus (total) reserves.

82. An increase in government spending can reduce real GDP growth if A) most government spending is used to reduce the national debt. B) decreases in private spending more than offset the increase in government spending. C) taxes do not increase enough to finance the increase in government spending. D) the credibility of the government is too high.

B) decreases in private spending more than offset the increase in government spending.

99. The multiplier concept is important because it shows A) why fiscal policy is always effective. B) how small changes in government spending may have large impacts on overall output. C) how changes in taxes are multiplied into larger government revenues. D) why decreases in the tax rate may actually increase tax revenues overall.

B) how small changes in government spending may have large impacts on overall output.

74. To fight a recession, the federal government can A) increase taxes. B) increase its spending. C) increase interest rates. D) decrease the discount rate.

B) increase its spending.

58. In the case of a negative shock to aggregate demand, the central bank should A) decrease the rate of growth in the money supply to control inflation. B) increase the rate of growth in the money supply to restore spending growth. C) decrease the rate of growth in the price level to keep real growth high. D) answers B and C are correct. E) do nothing.

B) increase the rate of growth in the money supply to restore spending growth.

46. Shortly after September 11, 2011, the Federal Reserve A) decreased its lending to banks. B) increased its lending to banks. C) decreased its lending to individuals. D) increased its lending to individuals.

B) increased its lending to banks.

71. Before the turn of the century, there was a concern about how computers would function in the next "century". In response to the heightened uncertainty surrounding Y2K, the Federal Reserve A) decreased its lending to banks. B) increased its lending to banks. C) decreased its lending to individuals. D) increased its lending to individuals.

B) increased its lending to banks.

11. If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by: A) decreasing money supply to spur the economy out of the recession. B) increasing money supply, which may lower real interest rates and encourage borrowing. C) increasing government expenditures to spur the economy out of the recession. D) decreasing corporate taxes to encourage firms to increase their spending.

B) increasing money supply, which may lower real interest rates and encourage borrowing.

44. When the Fed lowers the federal funds rate, A) both interest rates and the money supply increase. B) interest rates decrease but the money supply increases. C) interest rates increase but the money supply decreases. D) both interest rates and the money supply decrease.

B) interest rates decrease but the money supply increases.

26. Discount rate lending occurs when the Federal Reserve A) buys and sells government bonds. B) lends reserves directly to banks. C) provides reserves to banks through auction. D) buys corporate bonds in lagging sectors of the economy.

B) lends reserves directly to banks.

29. The reserve ratio (RR) is the A) amount the money supply expands with each dollar increase in reserves. B) overnight lending rate from one major bank to another. C) ratio of deposits to reserves. D) ratio of reserves to deposits. E) Answers C and D are correct.

D) ratio of reserves to deposits.

43. The federal funds rate is the A) interest rate banks pay when they borrow directly from the Fed. B) overnight lending rate from one major bank to another. C) interest rate on short-term Treasury securities. D) ratio of reserves to deposits.

B) overnight lending rate from one major bank to another.

20. When the Fed wants to increase interest rates, it: A) instructs banks across the nation that they must raise their rates. B) sells bonds in the open market. C) buys bonds in the open market. D) adjusts the fractional reserve ratio.

B) sells bonds in the open market.

96. An increase in government spending causes A) the aggregate demand curve to shift to the left. B) the aggregate demand curve to shift to the right. C) an upward movement along the aggregate demand curve. D) a downward movement along the aggregate demand curve.

B) the aggregate demand curve to shift to the right.

40. Open market operations refer to A) the buying and selling of stocks in the stock market. B) the buying and selling of government bonds by the Fed. C) decisions by the Fed to raise or lower interest rates. D) decisions by the Fed to increase or decrease the money multiplier.

B) the buying and selling of government bonds by the Fed.

85. Other things being equal, a decrease in government spending growth causes: A) the dynamic AD curve to shift to the right. B) the dynamic AD curve to shift to the left. C) the Solow growth curve to shift to the right. D) the Solow growth curve to shift to the left.

B) the dynamic AD curve to shift to the left.

23. Suppose following the events at last week's Boston Marathon people decide to hold more currency. In particular, suppose individuals decide tohold more cash (and less checkable deposits) and banks decide to hold more excess reserves. In order to "offset" the economic impact, we might expect the Federal Reserve to _________________. A) require banks to charge lower interest rates on loans. B)increase the monetary base. C) increase the public's holdings of money market mutual funds. D) conduct an open market sale.

B)increase the monetary base.

52. The period of time from the early 1980s through the 2006 was a period when business cycle fluctuations were less extreme. During this time period, the Federal Reserve targeted the interest rate and, for the most part, fiscal policy did not attempt to offset economic shocks. This period is often referred to as A) the Great Recession. B) the Great Moderation. C) the Contemplation Moderation. D) the Great Contemplation. E) the Era of Recession Mitigation.

B)the Great Moderation.

72. Most of the increase in planned spending over the next 50 years comes from A) defense. B) Social Security. C) Medicare and Medicaid. D) foreign aid.

C) Medicare and Medicaid.

38. If the average reserve ratio in the banking system is 20 percent and the Fed increases bank reserves by $100,000, what will be the total potential increase in the money supply? A) $100,000 B) $120,000 C) $500,000 D) $2 million

C) $500,000

5. Why are debit cards not listed as money? A) Because they perform the same function as checks, and checks are counted as money. B) Debit cards cannot be used for payments at most stores. C) Debit cards draw on checkable deposits, which are already counted as money. D)Not all banks issue debit cards.

C) Debit cards draw on checkable deposits, which are already counted as money.

88. The reason why some people are concerned about higher inflation in the future in the United States is because I. the increased growth of the monetary base in the United States II. the fear that velocity will fall more rapidly in the future III. the decline in the number of working age workers IV. the concern that the Federal Reserve may have to print money to pay the debt A) I and II are correct B) I and III are correct C) I and IV are correct D) II and III are correct E) II and IV are correct F) all are correct

C) I and IV are correct

25. Which of the following tools can the Federal Reserve use to control the money supply? I.open market operations II.discount lending III.the term auction facility IV.paying interest on reserves A) I and II only B) I, II, and IV only C) I, II, III, and IV D) I, II, and III only

C) I, II, III, and IV

8. The Federal Reserve's major tools to control the money supply are: I.open market operations. II. discount rate lending and the term auction facility. III. required reserve ratio and payment of interest on reserves. IV. federal funds lending. A) I and II only B) III and IV only C) I, II, and III only D) I, II, III, andIV

C) I, II, and III only

63. If initially, %ΔM = 5%, %ΔV = 3%, %ΔP = 2%, and %ΔY = 6% and because of economic uncertainty %ΔV falls to 1%, what should the Fed do? A) Raise %ΔY to 8% to offset the decrease in B) Lower %ΔM to 3% so that %ΔM -%ΔV stays constant at 2%. C) Raise %ΔM to keep %ΔM + %ΔV constant at 8%. D) Quietly raise %ΔM without telling anyone, as only unexpected inflation is expansionary. E) Lower %ΔP to keep real GDP growth constant.

C) Raise %ΔM to keep %ΔM + %ΔV constant at 8%.

2. Suppose the Federal Reserve's objective was to maintain price stability. In the Real Business Cycle Model, where prices are fully flexible, how would the Federal Reserve respond to a positive technology shock? A) They would raise the reserve requirement. B) They would raise the discount rate. C) They would buy bonds. D) Since the Federal cannot influence inflation, they would not respond.

C) They would buy bonds.

47. If the Federal Reserve wished to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be A) an increase in government spending growth. B) a tax cut. C) an increase in money supply growth. D) a lower goal for inflation.

C) an increase in money supply growth.

49. In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of A) the real shock only. B) the increased money supply growth only. C) both the real shock and the increased money supply growth. D) some reason other than the real shock and the increased money supply growth.

C) both the real shock and the increased money supply growth.

67. In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of A) the real shock only. B) the increased money supply growth only. C) both the real shock and the increased money supply growth. D) some reason other than the real shock and the increased money supply growth. E) None of the above.

C) both the real shock and the increased money supply growth.

7. M2 includes: A) currency. B) currency plus deposits. C) currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits. D) None of the above

C) currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits.

79. To slow down an economy from overheating and having too much inflation the federal government can A) conduct an open market sale. B) reduce the federal funds rate C) decrease government spending. D) purchase more goods from foreign producers. E) None of the above

C) decrease government spending.

65. During the Great Recession, banks increased their desire to hold excess reserves and individuals decided to hold more cash. As a result of this, the money multiplier ____________ and the Federal Reserve _________ the monetary base to increase in order to boost aggregate demand. A) increase, increase B) increase, decrease C) decrease, increase D) decrease, decrease E) None of the above.

C) decrease, increase

78. Crowding out is the ______ in private spending that occurs when government ______ spending. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases

C) decrease; increases

95. If the economy were operating in a recession, the most appropriate fiscal policy would be to A) decrease government spending in order to balance the budget. B) decrease both government spending and taxes. C) increase government spending and cut taxes, thus running a higher budget deficit. D) increase government spending and increase taxes in order to keep the budget balanced.

C) increase government spending and cut taxes, thus running a higher budget deficit.

66. In the real business cycle model, where prices adjust quickly to economic shocks, a real economic shock that shifts the Solow growth curve to the right, the Federal Reserve will be able to maintain constant ___________ by _______________ the monetary base. A) real GDP growth, increasing B) realGDP growth, decreasing C) inflation, increasing D) inflation, decreasing E) There is insufficient information to answer the question.

C) inflation, increasing

94. Fiscal policy A) is the decrease in private spending that occurs when government increases spending. B) occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut they save it to pay future taxes. C) is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. D) is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations.

C) is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.

21. If the objective of the central bank is to maintain price stability and maximum real GDPgrowth, monetary policy is: A) equally effective in dealing with real shocks and aggregate demand shocks. B) more effective in dealing with real shocks than with aggregate demand shocks. C) less effective in dealing with real shocks than with aggregate demand shocks. D) totally ineffective in dealing with real shocks or aggregate demand shocks.

C) less effective in dealing with real shocks than with aggregate demand shocks.

34. Which concept describes the ease with which an asset can be quickly converted into money without losing its value? A) solvency B) opportunity cost C) liquidity D) moral hazard

C) liquidity

1. Which of the following is not a duty performed by the Federal Reserve System? A) create money B) manage the borrowing and issuing of bonds for the U.S. Treasury C) manage the federal budget deficit D) act as a bank for large commercial banks

C) manage the federal budget deficit

24. The dual mandate refers to the Fed's objective of ___________ and ____________. A) low spending, low taxes B) low spending, low inflation C) maximum growth, low inflation D) low taxes, maximum growth E) low inflation, low taxes

C) maximum growth, low inflation

101. Fiscal policy will be less effective at offsetting shocks to A) drops in velocity B) the dynamic aggregate demand C) negative supply side shocks D) increases in consumer confidence

C) negative supply side shocks

83. The money you pay into Social Security goes to: A) an individual account. B) a trust that earns interest to help pay your benefits. C) pay current beneficiaries. D) the investment fund of your choice.

C) pay current beneficiaries.

39. The monetary base consists of currency A) plus checkable deposits. B) plus checkable and savings deposits. C) plus total reserves held at the Fed. D) with the inclusion of coins.

C) plus total reserves held at the Fed.

41. Which of the following is NOT one of the three major tools the Fed uses to control the money supply? A) discount rate lending and the term auction facility B) open market operations C) printing paper money D) requiring member banks to hold a higher fraction of deposits as reserves

C) printing paper money

86. The tax rebate of 2008 had a relatively small impact because taxpayers primarily used the rebate to: A) purchase their annual Christmas gifts. B) take vacations. C) reduce their debts. D) All of the answers are correct.

C) reduce their debts.

62. Sometimes economists and analysts worry about the Federal Reserve over-stimulating the economy because such overstimulation will lead to A) rising unemployment. B) hypertension. C) rising inflation. D) instability of the Solow growth curve. E) declining output.

C) rising inflation.

69. (Figure: Monetary Policy) Assume that the economy is initially at Point Y. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend, A) the Fed action would be magnified and the economy would move to Point X. B) the Fed action would be nullified and the economy would remain at Point Y. C) the Fed action would be partially effective and the economy would move to Point Z. D) the Solow growth curve would shift to the left.

C) the Fed action would be partially effective and the economy would move to Point Z.

19. An open market operation occurs when: A) banks loan funds to each other. B) banks increase the reserve ratio. C) the Fed buys or sells government bonds. D) the Fed enforces regulations on the banking industry.

C) the Fed buys or sells government bonds.

12. The Fed's job in manipulating monetary policy is made harder by the fact that: A) monetary authorities do not have a good understanding of how monetary policy works. B) monetary policy is usually pulling the economy in the opposite direction from fiscal policy. C) the Fed has to operate in real time and information on recessions usually becomes available with a lag. D) monetary policy is hardly ever effective in influencing business fluctuations.

C) the Fed has to operate in real time and information on recessions usually becomes available with a lag.

91. The average tax rate is A) the tax rate paid on an additional dollar of income. B) higher on people with higher incomes. C) the total tax payment divided by total income. D) a separate income tax code begun in 1969 to prevent the rich from paying income taxes.

C) the total tax payment divided by total income.

31. Using the simple money multiplier assume that a bank keeps one-eighth (1/8) of their deposits in the form of reserves and the Fed credits Alex's bank account with $8,000, how much does the money supply increase? A) $1,000 B) $8,000 C) $16,000 D) $64,000 E) There is not enough information to answer this question.

D) $64,000

92. U.S. government spending on Social Security, defense, Medicare, and Medicaid makes up almost A) 25 percent of federal government spending. B) 33 percent of federal government spending. C) 50 percent of federal government spending. D) 67 percent of federal government spending

D) 67 percent of federal government spending

4. The Federal Reserve is the: A) federal government's bank. B) U.S. central bank. C) banker's bank in the U.S. D) All of the answers are correct.

D) All of the answers are correct.

14. The Federal Reserve's dual mandate refers to the Fed's main objectives I. to maintain price stability II. to maintain balanced budgets III. to oversee the Treasury IV. to maintain economic growth that is consistent with full-employment A) I and II are correct B) I and III are correct C) I, II, and III are correct D) I and IV are correct E) III and IV are correct F) II and III are correct

D) I and IV are correct

17. Examples of the Federal Reserve increasing the money supply to offset (potential) shifts in the dynamic aggregate demand schedule include I. because of fears of Y2K II. after 9/11/2001. III. after the collapse of subprime mortgage market and during the great recession. A) I and II only B) I and III only C) II and III only D) I, II, and III E) None of the above

D) I, II, and III

35. The Federal Reserve I. clears all checks. II. makes monetary policy. III. supervises the banking sector. A) I only B) I and II only C) II and III only D) I, II, and III

D) I, II, and III

16. Why is monetary policy not fully effective in combating a negative supply shock? A) The Fed has no tools with which to stimulate an economy after the Solow growth curve shifts to the left. B) When countering a negative supply shock, Fed action will cause deflation. C) When countering a negative supply shock, Fed action will raise unemployment. D) When countering a negative supply shock, Fed action will raise inflation.

D) When countering a negative supply shock, Fed action will raise inflation.

55. Which of the following shocks can the Fed deal with most effectively? A) a major oil shock B) a shock to the Solow growth curve C) a shock that shifts the short-run aggregate supply curve D) a shock to aggregate demand E) electrical.

D) a shock to aggregate demand

33. In response to a negative economic shock, we would expect banks to ____________ reserves, the currency-to deposit ratio to __________ and M1 to ____________. A) decrease, decrease, fall. B) increase, decrease, fall. C) increase, increase, fall. D) decrease, decrease, increase. E) increase, decrease, increase. F) decrease, decrease, fall.

D) decrease, decrease, increase.

27. The goal of an open market purchase by the Federal Reserve is to A) reduce bank reserves and increase the money supply. B) increase bank reserves and reduce the money supply. C) reduce bank reserves and reduce the money supply. D) increase bank reserves and increase the money supply. E) None of the above.

D) increase bank reserves and increase the money supply.

51. To restore growth and reduce unemployment in the economy, the Federal Reserve would A) decrease the money growth rate, which will lower both the inflation rate and economic growth rate. B) decrease the money growth rate, which will increase both the inflation rate and economic growth rate. C) increase the money growth rate, which will lower both the inflation rate and economic growth rate. D) increase the money growth rate, which will increase both the inflation rate and economic growth rate.

D) increase the money growth rate, which will increase both the inflation rate and economic growth rate.

89. Which of the following accounts for the largest source of tax receipts for the U.S. federal government? A) excise tax B) corporate income tax C) social Security tax D) individual income tax

D) individual income tax

70. The Fed uses each of the following to control the money supply EXCEPT A) open market operations. B) discount rate lending. C) paying an interest rate on bank reserves held at the Fed. D) prime interest rate lending. E) The Fed uses all of theses

D) prime interest rate lending.

80. Suppose that the unemployed are mostly construction workers by profession. Which government spending project will most effectively target unused labor resources? A) increasing teacher quality B) investing in research on solar energy C) better funding for medical care for the elderly D) renovating the nation's highway system

D) renovating the nation's highway system

98. Expansionary fiscal policy to stimulate the economy may be less effective when A) the effects of fiscal policy can often be offset by monetary policy. B) government spending is a relatively small portion of GDP. C) government spending does not directly affect aggregate demand. D) taxes or increased borrowing to fund spending reduce aggregate demand.

D) taxes or increased borrowing to fund spending reduce aggregate demand.

84. Even if the United States experiences no more recessions and the federal government spends nothing extra on any particular program, its expenditures will still rise because: A) unemployment benefits will rise. B) the government has committed to increasing Medicare payments for the next three decades. C) it will receive less foreign aid in the future. D) the population is aging and thus Social Security and Medicare payments will rise.

D) the population is aging and thus Social Security and Medicare payments will rise.

48. Which of the following describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? A) The Open Market Committee needs two-thirds approval from the 12 regional banks before conducting monetary interventions. B) All monetary policies before being implemented are subject to approval by Congress. C) The Fed's control of the money supply is incomplete and subject to uncertain lags. D) The effects of monetary policy often offset those of fiscal policy. E) All of the above.

E) All of the above.

56. Compared to fiscal policy, which type of lag tends to be shorter for monetary policy? I. Recognition lag. II. Implementation lag. III. Decision lag. A) I, II, and III B) I only C) II only D) I and II only E) II and III only

E) II and III only

87. In the New Keynesian model, a fiscal policy that could "offset" a drop in consumer or producer confidence is a I. An increase in the money supply. II. A reduction in taxes rates or tax rebates III. An increase in government spending. A) I only B) II only C) III only D) I and III only E) II and III only

E) II and III only

60. In the model where prices are slow to adjust, if the Fed adheres to a strict "money growth rule" of 6 percent (that is, they keep %ΔM at 6 percent no matter what), what happens if there is an increase in consumer and business confidence? A) Inflation, real GDP growth, and employment all decrease. B) Inflation increases, but real growth and employment decrease. C) Inflation and employment increase, but real growth decreases. D) Real growth and employment increase, but inflation decreases. E) Inflation, real growth, and employment all increase.

E) Inflation, real growth, and employment all increase.

59. Which of the following is a reason it might be hard for the Fed to restore aggregate demand in the face of a shock to aggregate spending? A) The Fed might run out of money. B) Banks usually don't do what the Fed demands of them. C) The Fed has limited ability to influence the factors of production. D) The economy responds to the Fed's actions with no lag. E) The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

E) The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.