Econ Exam 3 Part 1
If the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent, Okun's law says that the output gap is _____ and the economy is ina(n) _____. A) -8 percent; recession B) 8 percent; recession C) -4 percent; recession D) 4 percent; expansion
A) -8 percent; recession
Suppose that the inflation rate last year was 2 percent. According to adaptive expectations, inflation this year is expected to be: A) 2 percent. B) 2 percent plus the real interest rate. C) 2 percent minus the real interest rate. D) There is not enough information provided to determine expected inflation
A) 2 percent.
The money supply is affected by: I. changes in the monetary base. II. changes in a bank's currency-deposit ratio. III. the speed of money printing presses. A) I and II B) I only C) III only D) I and II
A) I and II
Household consumption includes: I. purchases of goods. II. home purchases. III. purchases of services. A) I and III B) I only C) II only D) I and II
A) I and III
The subprime mortgage crisis became apparent to policymakers in ________ and the president and Congress didn't enact a fiscal stimulus until ________. This is anexample of a long ________. A) Summer 2007; February 2008; inside lag B) Summer 2007; Fall 2007; outside lag C) January 2008; May 2008; inside lag D) Summer 2007; October 2008; outside lag
A) Summer 2007; February 2008; inside lag
During a recession, unemployment is ____ the natural rate of unemployment and the output gap is ______. A) above; negative B) above; positive C) below; negative D) below; positive
A) above; negative
Potential output depends on ________ and ________. A) available resources; the level of technology B) labor; capital stocks only C) the current level of technology; unexpected shocks D) the unemployment rate; inflation rates
A) available resources; the level of technology
Canada experienced an economic slowdown in the most recent recession because: A) consumer spending fell in the United States. B) an increase in interest rates in the United States drove up interest rates in Canada. C) Canada's exports to the United States increased. D) U.S. imports from Canada increased
A) consumer spending fell in the United States.
If the real interest rate rises, there is an incentive for ________ and makes it ________, which causes ________. A) households to save; more expensive for firms to finance new capital purchases; aggregate expenditure to fall. B) households to purchase homes; less expensive for firms to finance new capital purchases; aggregate expenditure to rise. C) firms to buy new capital goods; less expensive for households to buy new goods; aggregate expenditure to rise. D) firms to hire more workers; more expensive for households to borrow; the natural rate of unemployment to fall
A) households to save; more expensive for firms to finance new capital purchases; aggregate expenditure to fall.
Okun's law demonstrates: A) how firms hire more workers during economic booms, and lay off workers during recessions. B) the trade-off between inflation and unemployment. C) that when inflation is expected to rise, nominal interest rates will also rise. D) that when U = U*, the output gap is positive.
A) how firms hire more workers during economic booms, and lay off workers during recessions.
The principle that monetary policy cannot permanently impact real variables is called: A) long-run money neutrality. B) the-ineffectiveness-of-money principle. C) the long-run Phillips curve. D) policy ineffectiveness.
A) long-run money neutrality.
Discount loans are generally: A) made only in emergency circumstances. B) made on a daily basis under normal circumstances. C) required by the rules of the Federal Reserve. D) made only to investment banks.
A) made only in emergency circumstances.
To maintain the target federal funds rate, the Fed conducts ________ to ensure that the supply of ________ equals demand. A) open-market operations; overnight loans B) discount loans; deposits C) discount loans; reserves D) sterilized intervention; dollars
A) open-market operations; overnight loans
The "normal" level of output an economy can produce is called: A) potential output. B) full-capacity output. C) maximum output. D) carrying capacity
A) potential output.
Which of the following are reasons why banks might change their lending policies? A) risk perception B) changes in weather C) an increase in the price of oil D) a decrease in the price of raw materials
A) risk perception
From 1960 to 2007, the NBER has identified ________ recessions. A) seven B) three C) twelve D) nine
A) seven
During the financial crisis of 2007-2009, the Fed adopted the emergency lending policy of: A) the Term Auction Facility. B) commercial paper issuance. C) discount window lending. D) bank reserve restrictions.
A) the Term Auction Facility.
If Europe goes into recession, A) the U.S. aggregate expenditure curve would shift left. B) the U.S. aggregate expenditure curve would shift right. C) the U.S. federal funds rate would rise. D) U.S. inflation would rise
A) the U.S. aggregate expenditure curve would shift left.
The unemployment rate is at its natural rate when: A) the economy is producing at potential output. B) the unemployment rate is 4 percent. C) the economy is producing at its maximum output. D) labor is working a 40-hour workweek.
A) the economy is producing at potential output.
Currency in circulation plus reserves equals: A) the monetary base. B) M1. C) M2. D) open-market operations
A) the monetary base.
The output gap is: A) the percentage difference between the actual level of output and potential output. B) the difference between the actual level of output and potential output. C) the actual level of output divided by the natural rate of output. D) zero
A) the percentage difference between the actual level of output and potential output.
According to the unemployment Phillips curve: A) unemployment and inflation are negatively related. B) as unemployment rises, inflation rises. C) when unemployment is at the natural rate, actual inflation exceeds expected inflation. D) unemployment and inflation are not related at all.
A) unemployment and inflation are negatively related
Monetary policy is usually neutral in the long run. But, in recent years, some economists have considered that monetary policy can have long-run impacts on ____because it _____. A) unemployment; increases the natural rate of unemployment B) output; increases potential output C) inflation; increases the price level D) exports; reduces the exchange rate
A) unemployment; increases the natural rate of unemployment
If the natural rate of unemployment is 4 percent and the actual rate of unemployment is 5 percent, Okun's law states that the output gap is ________ and the economy isin a(n) ________. A) 2 percent; economic boom B) -2 percent; recession C) -0.5 percent; recession D) -1 percent; recession
B) -2 percent; recession
The Fed increases the monetary base by: I. lending through the Term Auction Facility. II. lending to banks through the discount window. III. increasing interest rates. A) I only B) I and II only C) I and III only D) I, II, and II
B) I and II only
________ is(are) the monetary tool used most by the Fed. A) Changing the reserve rate B) Open-market operations C) Changing the discount rate D) Offering larger discount loan
B) Open-market operations
Suppose that Congress enacts legislation that increases income taxes. Which of the following will result? A) The aggregate expenditure curve shifts to the right. B) The aggregate expenditure curve shifts to the left. C) There is an upward movement along the aggregate expenditure curve in the northwest direction. D) There is an downward movement along the aggregate expenditure curve in the southeast direction.
B) The aggregate expenditure curve shifts to the left.
According to the output Phillips curve with adaptive expectations and supply shocks, inflation can fall because of: A) a positive output gap. B) a decrease in the price of raw materials. C) an increase in wages. D) an increase in the price of energy.
B) a decrease in the price of raw materials.
The text book and the NBER do not define recessions in the same way. The NBER defines a recession as ____ and the book defines it as ______. A) two quarters of negative economic growth; potential output below actual output B) a period when output falls substantially; a negative output gap C) a period when output rises more slowly than optimal; a positive output gap D) a period when output falls substantially; unemployment above its natural rate
B) a period when output falls substantially; a negative output gap
An increase in the price of raw materials is considered a(n) _____ supply shock and pushes inflation ____. A) beneficial; up B) adverse; up C) beneficial; down D) adverse; down
B) adverse; up
Short-run fluctuations in an economy's output are called: A) growth bursts. B) business cycles. C) output gaps. D) recessions
B) business cycles.
If the Fed wishes to conduct an expansionary open-market operation, it: A) auctions money through the Term Auction Facility. B) buys bonds from a dealer. C) loans money to a bank from the discount window. D) prints money
B) buys bonds from a dealer.
An economy ________ produce more than potential output ________. A) cannot; because potential output is the maximum level of output B) can; by labor working overtime C) can never; because the economy is always producing efficiently D) will; in the long run
B) can; by labor working overtime
To expand the monetary base, the Fed will: A) conduct open-market sales. B) conduct open-market purchases. C) raise the discount rate. D) lower the required reserve rate.
B) conduct open-market purchases.
If the Fed wishes to keep the money supply constant when the money multiplier decreases, it will ________. This is called a ________. A) lower the discount rate; defensive open-market operation B) conduct open-market purchases; defensive open-market operation C) conduct open-market sales; defensive open-market operation D) conduct closed market sales; money market sterilization
B) conduct open-market purchases; defensive open-market operation
When the real interest rate increases, consumption _____ and investment ______. A) decreases; increases. B) decreases; decreases C) increases; increases D) increases; decreases
B) decreases; decreases
According to the aggregate expenditure/Phillips curve model, if interest rates rise, then output ____ and if output rises, inflation _____. A) falls; falls B) falls; rises C) rises; rises D) rises; falls
B) falls; rises
If consumer confidence falls, the AE curve would shift to the ________, and it is likely the central bank would ________. A) right; increase interest rates to cause an increase in output B) left; decrease interest rates to keep output constant C) left; reduce household income taxes D) right; wait a year and see if another expenditure shock shifts the AE curve bac
B) left; decrease interest rates to keep output constant
To combat ____ problems, the Fed started ____ during the 2008 financial crisis. A) solvency; closing down commercial banks B) liquidity; paying interest on reserves C) liquidity; reducing reserve requirements D) inflation; reducing the money supply
B) liquidity; paying interest on reserves
According to the principle of long-run monetary neutrality, in the long run monetary policy affects which of the following variables? A) real GDP B) nominal interest rates C) real interest rates D) technology
B) nominal interest rates
The acronym NAIRU stands for the: A) nonaccelerating interest rate of unemployment. B) nonaccelerating inflation rate of unemployment. C) natural aggregate inflation rate of unemployment. D) nonaccruing investment relative to unemployment
B) nonaccelerating inflation rate of unemployment.
Which of the following can the Fed use to control the money supply? A) directly change the money multiplier B) open-market operations C) print money D) increase bank capita
B) open-market operations
Which of the following include the Fed's tools for controlling the money supply? A) changes in the number of Federal Reserve regional banks B) open-market operations C) changes in the number of voting members of the FOMC D) the number of traveler's checks the Federal Reserve allows banks to process
B) open-market operations
Which of the following is the preferred tool used by the Fed to control the money supply? A) changes in the discount rate B) open-market operations C) changes in reserve requirements D) changes in interest paid on reserve
B) open-market operations
Each regional Federal Reserve Bank is: A) entirely owned by the U.S. government. B) owned by commercial banks in the district. C) controlled only by the commercial banks in the district. D) Answers b and c are correct.
B) owned by commercial banks in the district.
The normal rate of output is called (the) ________, and the corresponding unemployment rate is the ________. A) full capacity output; normal rate B) potential output; natural rate C) normal rate; potential rate D) natural rate; potential rate
B) potential output; natural rate
Suppose the Fed lends $500 to a commercial bank. As a result of this transaction, __________ and __________. A) deposits increase by $500; the monetary base increases by $500 B) reserves increase by $500; the monetary base increases by $500 C) currency increases by $500; the money supply increases by $500 D) reserves increase by $500; the money supply increases by $50
B) reserves increase by $500; the monetary base increases by $500
Bond traders and the public in general can forecast future changes in the federal funds rate based on: A) the most recent change in the Dow Jones Index. B) speeches made by Fed officials suggesting their opinions about the economy and their views on monetary policy. C) the net change in the price of U.S. Treasury bonds. D) the consumer confidence index.
B) speeches made by Fed officials suggesting their opinions about the economy and their views on monetary policy.
Suppose the Fed targets the interest rate. If the demand for money curve shifts to the left, A) the Fed would increase the money supply to keep the interest rate fixed. B) the Fed would decrease the money supply to keep the interest rate fixed. C) the interest rate increases. D) the money supply will remain constant.
B) the Fed would decrease the money supply to keep the interest rate fixed.
The oldest monetary policy tool used by the Fed is: A) open-market operations. B) the discount loan. C) the Term Auction Facility loan. D) printing money
B) the discount loan
According to the output Phillips curve with adaptive expectations, the change in inflation depends on: A) the unemployment gap. B) the output gap. C) the interest rate spread. D) the investment gap
B) the output gap.
The Federal Reserve System is divided into ________ districts. A) four B) twelve C) eight D) six
B) twelve
According to the Board of Governors in August 2008, reserves equaled $44 billion, currency in circulation equaled $777 billion, and checking deposits were $300billion. The monetary base was ________ and the M1 money supply was ________. A) $1,077 billion; $821 billion B) $1,077 billion; $344 billion C) $821 billion; $1,077 billion D) $821 billion; $821 billion
C) $821 billion; $1,077 billion
Banks that are members of the Fed purchase stock in the Federal Reserve banks in their district and receive a dividend equal to: A) 2 percent annually. B) the discount rate. C) 6 percent annually. D) the federal funds rate
C) 6 percent annually
The Board of Governors of the Federal Reserve System is composed of ____ members and it is located in ______. A) 7; New York B) 12; Washington D.C. C) 7; Washington D.C. D) 5; New York
C) 7; Washington D.C
Which of the following is not an expenditure shock. A) a change in consumer sentiment B) a tax increase C) a change in the nominal interest rate D) foreign business cycles
C) a change in the nominal interest rate
According to the Federal Reserve Board of Governors in December 2010, reserves equaled $1 trillion, currency in circulation equaled $978 billion, and checkingdeposits were $241 billion. What was the money multiplier? A) about 2.41 B) about 0.24 C) about 0.62 D) about 4.15
C) about 0.62
Suppose you take $50 from your wallet and you deposit it into your checking account. As a result: A) the monetary base rises. B) the monetary base falls. C) currency in circulation decreases. D) reserves of the banking system decrease
C) currency in circulation decreases.
Direct loans made to member banks by the Fed are called: A) federal fund loans. B) the Term Auction Facility loans. C) discount loans. D) repo loans
C) discount loans.
When actual output exceeds potential output, the economy experiences a(n) _____, where the output gap is _____. A) recession; negative B) recession; positive C) economic boom; positive D) economic boom; negative
C) economic boom; positive
If the Fed conducts countercyclical policy during an economic downturn it may cause a(n) ________ because of ________. A) recession; Engel's Law B) deflation; the Darby effect C) economic boom; time lags D) recession; rational expectations
C) economic boom; time lags
Kenneth Kuttner examined how monetary policy surprises affected interest rates by: A) investing in the futures market and comparing his results with results predicted by theory. B) subtracting the rate of inflation from the nominal interest rate to obtain a measure of inflation expectations. C) examining how unexpected changes in short-term rates affected long-term rates. D) measuring the difference in the long-term rate and the short-term rate between 1989 and 2000.
C) examining how unexpected changes in short-term rates affected long-term rates.
Which of the following is/are component(s) of aggregate expenditure? A) the daily volume of the New York Stock Exchange B) the stock of U.S. government bonds C) government purchases D) purchases of stock
C) government purchases
According to the Phillips curve, when output is above potential, _____ marginal costs push inflation _____ expected inflation. A) lower; above B) lower; below C) higher; above D) higher; below
C) higher; above
If the Fed targets money supply, an increase in money demand will: A) increase the interest rate as money supply adjusts. B) reduce the nominal interest rate because money supply will rise more than the change in demand. C) increase the interest rate because the money supply is fixed. D) increase the money supply.
C) increase the interest rate because the money supply is fixed.
When the Fed expands its balance sheet, it ____ its ____. A) increases; vault cash B) decreases; liabilities C) increases; assets D) decreases; assets
C) increases; assets
According to the output Phillips curve, if the output gap is zero: A) the inflation rate is zero. B) inflation is above expected inflation. C) inflation equals expected inflation. D) inflation is below expected inflation.
C) inflation equals expected inflation
The federal funds rate is the: A) percentage of total deposits that must be held as a federal fund. B) interest rate that the Fed charges member commercial banks. C) interest rate that banks charge each other for overnight loans. D) the percentage of total loans a bank has that are made to the Fed.
C) interest rate that banks charge each other for overnight loans
We can interpret the monetary base as the: A) total value of bonds in an economy. B) total value of assets in an economy. C) liabilities of the Fed to the private sector. D) value of bank reserves.
C) liabilities of the Fed to the private sector.
Economic growth is the ________ change in ________. A) short-run; maximum output B) short-run; potential output C) long-run; potential output D) short-run; carrying capacity
C) long-run; potential output
The instrument the Fed uses most often to change the monetary base is: A) printing money. B) discount loans. C) open-market operations. D) Term Auction Facility loans.
C) open-market operations.
The unemployment rate is the: A) percentage of the population out of work but not seeking jobs. B) percentage of the total population without jobs. C) percentage of the labor force without jobs. D) number of unemployed persons in an economy.
C) percentage of the labor force without jobs.
The Fed was criticized for ____ in the early 1980s because the policy led to _____. A) increasing reserve requirements; higher interest rates B) setting an interest rate target; unstable money supply C) setting a monetary target; unstable interest rates D) increasing the money supply, high inflation
C) setting a monetary target; unstable interest rates
When the federal government reduces infrastructure expenditures, aggregate expenditure ________, and holding the real interest rate constant, inflation will ________. A) shifts right; increase by shifting the Phillips curve upward B) shifts left; remain constant C) shifts left; decrease by moving downward along the Phillips curve D) shifts right; increase by moving upward along the Phillips curve
C) shifts left; decrease by moving downward along the Phillips curve
Consider the monetary transmission mechanism. When the federal funds rate decreases: A) longer-term interest rates increase. B) asset prices, like stock prices, decline. C) the exchange rate depreciates. D) net exports decrease
C) the exchange rate depreciates.
When banks' reserves are lower than their deposits: A) the money multiplier is less than 1. B) the reserve-deposit ratio is greater than 1. C) the monetary base exceeds the money supply. D) All of the answers are correct
C) the monetary base exceeds the money supply.
Along the aggregate expenditure curve, the level of output in the short run is determined by: A) expectations. B) the inflation rate. C) the real interest rate. D) supply shocks.
C) the real interest rate.
The Fed largely stopped setting reserve requirements as a way to affect the money supply because: A) the widespread use of ATMs made reserves less important than before. B) the introduction of sweep programs increased required reserves automatically. C) the reserve requirement was not binding because bank reserves routinely exceeded the required amount. D) banks failed to increase reserves to meet the requirement, so the policy was ineffective
C) the reserve requirement was not binding because bank reserves routinely exceeded the required amount.
Aggregate expenditure reflects total spending in an economy by: A) firms. B) households. C) local, state, and federal governments. D) All of the answers are correct
D) All of the answers are correct
Which of the following is/are condition(s) for long-term economic growth? A) capital accumulation B) technology innovation C) labor force growth D) All of the answers are correct
D) All of the answers are correct
The reason(s) for banks to voluntarily increase their excess reserves is(are) the: A) use of sweep programs. B) growth of ATMs. C) reduction of reserve requirements. D) All of the answers explain the reason
D) All of the answers explain the reason
Government spending includes all of the following except: A) military jets. B) salaries of government workers. C) roads. D) All of these are included in government spending.
D) All of these are included in government spending.
When the Fed increases the federal funds target rate: I. it increases the asymmetric information problem. II. asset prices fall. III. firms invest less in new capital. A) I and II B) II and III C) I and III D) I, II, and III
D) I, II, and III
If M stands for the money supply, B stands for the monetary base, D for deposits, and m for the money multiplier, which of the following expressions is correct? A) B = m M B) M = m (B + D) C) M = m / B D) M = m X B
D) M = m X B
The president of the Federal Reserve Bank of ________ always sits on the FOMC. A) Philadelphia B) Washington, DC C) Chicago D) New York
D) New York
During an economic boom, which of the following does not tend to happen? A) Firms raise prices faster than usual. B) High production increases firms' marginal cost. C) Workers push for wage increases. D) Unemployment tends to rise.
D) Unemployment tends to rise.
Empirical evidence about the effect of wealth on consumption expenditures estimate that a $1.00 increase in wealth leads to approximately: A) a $1.30 increase in consumption. B) a $0.75 decrease in consumption. C) a $0.20 decrease in consumption. D) a $0.04 increase in consumption
D) a $0.04 increase in consumption
Which of the following would shift the aggregate expenditure curve for Mexico to the left? A) an increase in the nominal interest rate by the U.S. central bank B) a U.S. expansion C) an increase in the nominal interest rate by the Mexican central bank D) a decrease in confidence of Mexican consumers
D) a decrease in confidence of Mexican consumer
Economists Mark Gertler and Simon Gilchrist tested the theory that _______ is a bigger problem for small firms than for large firms by _______. A) inflation; measuring how quickly prices responded to increases in the money supply B) hysteresis; testing how sticky wages were to collective bargaining agreements C) moral hazard; comparing default rates of small firms versus those of large firms D) asymmetric information; examining how inventories responded to interest rate increases
D) asymmetric information; examining how inventories responded to interest rate increases
During the financial crisis of 2007-2009, the money multiplier was ___ 1.0 because banks ____. A) above; decreased their lending B) below; increased their lending C) above; increased their lending D) below; decreased their lending
D) below; decreased their lending
During the Great Depression, to counter the ________ in the money multiplier the Fed should have ________ to maintain a constant money supply. A) fall; increased the discount rate B) rise; increased the monetary base C) rise; decreased the federal funds rate D) fall; increased the monetary base
D) fall; increased the monetary base
Some economists believe that persistent high unemployment can drive up the natural rate of unemployment through a phenomenon known as _____, which was aproblem in ____ in the 1980s. A) contractionary monetary policy; Japan B) the inflation-unemployment trade-off; the United States C) contagion; Latin America D) hysteresis; Europe
D) hysteresis; Europe
If you withdraw $500 from an ATM and put it in your pocket, this ____ currency in circulation and _____ the monetary base. A) reduces; reduces B) increases; increases C) has no effect on; reduces D) increases; has no effect on
D) increases; has no effect on
Interest rates that affect aggregate expenditure are mainly: A) intermediate rates. B) short-term rates. C) very short-term rates. D) intermediate and long-term rates
D) intermediate and long-term rates
The regulation that stipulates the minimum level for a bank's reserve-deposit ratio is called the: A) vault cash stipulation, or VCS. B) minimum reserve ratio. C) fractional reserve prerequisite. D) reserve requirement
D) reserve requirement
The natural rate of unemployment is lowest in: A) Greece. B) France. C) Germany. D) the United States
D) the United States
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