Econ Final

During the financial crisis of 2008-2010, the Fed

increased its purchases of securities and other financial assets and extended more loans, which expanded the monetary base.

The government is pursuing an expansionary fiscal policy if it

increases government spending and/or reduces taxes

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.

Which of the following assets can a commercial bank count as reserves?

its vault cash and deposits with the Fed

If the long-run equilibrium of an economy is disrupted by an unexpected shift to a more expansionary monetary policy, the policy shift will

lead to an increase in the general level of prices in the short run, but in the long run, its primary impact will be an expansion in real output.

The new classical model implies that substitution of debt for tax financing

leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates.

In an economy in which velocity is constant and real output grows at an average rate of 3 percent per year, a 5 percent average rate of growth in the money supply would result in a

low (approximately 2 percent) rate of inflation

Money is used as a unit of account. This means

money is used to measure the exchange value and costs of goods, services, assets and resources.

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because

real interest rates will fall, stimulating business investment and consumer purchases.

According to modern analysis, what is the link between the long-run growth rate of the money supply and inflation?

there is a strong, positive link between rapid money growth and inflation

If fiscal policy is going to exert a stabilizing impact on the economy, it must be

timed correctly

If the multiplier is 2, then an additional $1,000 in investment will result in a:

$2,000 increase in income.

Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a

$500 million increase in the money supply.

Which of the following is the best definition of money?

Anything generally accepted as payment for goods or repayment of debt

Which of the following is part of the synthesis view of fiscal policy?

Automatic stabilizers help reduce the fluctuations in aggregate demand and output.

The sale of government securities by the Fed will cause

decrease in both the monetary base and the money supply.

As debit cards become more popular, individuals will reduce their holdings of currency. Other things constant, how will this impact the money supply?

Because more money is held as deposits at banks, the money supply will expand.

Which of the following would cause the actual deposit expansion multiplier to be less than its potential?

Both a and b

The 1930s were a period of

Depressed economic conditions and prolonged high rates of unemployment.

According to the monetarists, which of the following is true?

Instability in the money supply is the primary cause of economic instability.

Which economist made the following statement: "Every major contraction in the U.S. economy has either been created or greatly exacerbated by monetary instability. Every major inflation has been caused by monetary expansion."

Milton Friedman

Which of the following provides the best explanation of why money is valuable?

Money is valuable because it is scarce relative to the demand for the services it provides

Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited.

What happens in the economy illustrated in Figure 11-4 if government purchases increase by the amount necessary to achieve full employment?

The AD curve shifts to the right, the price level increases, and long-run equilibrium is achieved.

When the Fed sells Treasury Bonds on the open market, it will tend to

decrease the money supply and raise interest rates.

Which of the following was true of the actions of the Federal Reserve in response to the recession of 2008?

The Fed introduced several new procedures for the conduct of monetary policy and substantially increased bank reserves as the recession worsened

Which of the following tends to reduce bank failures as the result of bank runs by depositors

The Federal Deposit Insurance Corporation

If the government owes $15.0 trillion and then borrows $900 billion more this year, this leads to

a debt of $15.9 trillion and a deficit of $900 billion

The type of banking system under which banks are required to hold only a portion of their assets in reserve against the checking deposits of their customers is called

a fractional reserve banking system.

If policy makers wanted to use both monetary and fiscal policy to stimulate demand and reduce a high rate of unemployment, which of the following would be most appropriate?

a larger budget deficit and the purchase of securities in the open market

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend

a reduction in taxes, without any offsetting reduction in government expenditures

If a fiscal policy change is going to exert a stabilizing impact on the economy, it must

add demand stimulus during a slowdown but restraint during an economic boom.

If people decide to hold less money as currency and more as checking deposits, this will most likely cause

an increase in the money supply.

If changes in monetary policy are going to help stabilize the economy, they must

be properly timed

Other things constant, if the Fed decreased the discount rate,

borrowing from the Fed will tend to increase and the money supply will tend to expand.

It will be difficult to institute fiscal policy in a stabilizing manner because politicians will find

budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion.

If the Fed fears an economic downturn, it would be most likely to

buy additional bonds in order to reduce the federal funds rate.

In the United States, the money supply (M1) consists of

coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.

Monetary policy pushed interest rates to historically low levels during 2002-2004, but was more restrictive during 2005-2006. Economic analysis indicates that this policy

contributed to the boom and bust of the housing market, and thereby the instability of this era.

People are likely to want to hold more money if the interest rate

decreases making the opportunity cost of holding money fall.

Changes in government spending and/or taxes as the result of legislation, is called

discretionary fiscal policy

The primary tool of fiscal policy is

federal budget

A balanced budget is present when

government revenues equal government expenditures

Which of the following would decrease the size of a federal budget deficit?

growth in real GDP

New classical economists believe that an increase in deficit financing by the government will

increase savings.

The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the

required reserve ratio

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,

several months will typically pass before the shift in policy exerts much impact on output and employment.

According to the Keynesian view, the rapid increase in government spending and large budget deficits in response to the recession of 2008-2009

stimulated the recovery process and provided the foundation for strong long-term growth of real GDP.

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?

the crowding-out effect

The modern synthesis view of fiscal policy stresses

the difficulties involved in timing fiscal policy changes so they will exert a stabilizing impact on the economy.

During normal times, the multiplier effect of an increase in government spending financed by taxes will be

weakened by an offsetting reduction in spending due to the higher taxes.

Money is

whatever is generally accepted in exchange for goods and services