ECON Final

The Federal Reserve System was established by the Federal Reserve Act of: A: 1913. B: 1933. C: 1945. D: 1955.

A: 1913.

How many members can serve on the Board of Governors of the Federal Reserve System? A: 7 B: 9 C: 12 D: 14

A: 7

Which line in the graph would best illustrate the asset demand for money curve? A: Line 1 (negative) B: Line 2 (vertical) C: Line 3 (positive) D: Line 4 (horizontal)

A: Line 1 (negative)

Refer to the graph, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then Sm2 will shift to: A: Sm3 and the interest rate will be 4 percent. B: Sm3 and the interest rate will be 8 percent. C: Sm1 and the interest rate will be 8 percent. D: Sm1 and the interest rate will be 4 percent.

A: Sm3 and the interest rate will be 4 percent.

Which of the following is not considered a legitimate concern of a large public debt? A: bankruptcy of the federal government B: disincentives created by higher taxes C: crowding out of private investment D: increased income inequality

A: bankruptcy of the federal government

The MPC can be defined as the: A: change in consumption divided by the change in income. B: change in income divided by the change in consumption. C: ratio of income to saving. D: ratio of saving to consumption.

A: change in consumption divided by the change in income.

In the aggregate expenditures model of the economy, a downward shift in aggregate expenditures can be caused by a: A: decrease in government spending or an increase in taxes. B: decrease in taxes or an increase in government spending. D: decrease in interest rates or a decrease in taxes. C: decrease in saving or an increase in government spending.

A: decrease in government spending or an increase in taxes.

The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except: A: exchange rate. B: discount rate. C: interest on reserves. D: open-market operations.

A: exchange rate.

An expansionary fiscal policy is shown as a: A: rightward shift in the economy's aggregate demand curve. B: movement along an existing aggregate demand curve. C: leftward shift in the economy's aggregate supply curve. D: leftward shift in the economy's aggregate demand curve.

A: rightward shift in the economy's aggregate demand curve.

What "backs" the money supply of the United States? A: the U.S. government's ability to keep the value of money relatively stable B: the amount of gold the U.S. government has on deposit at its banks C: the fact that currency is issued by the Federal Reserve System D: the fact that the intrinsic value of coins in circulation is greater than their face value

A: the U.S. government's ability to keep the value of money relatively stable

Refer to the graph. If the supply of money was $200 billion, the interest rate would be: A: 1 percent. B: 2 percent. C: 3 percent. D: 4 percent.

B: 2 percent.

Which of the following will not occur when the economy is at its equilibrium GDP level? A: Aggregate expenditures = GDP. B: Inventories will be zero. C: Saving equals planned investment. D: There are no unplanned changes in inventories.

B: Inventories will be zero.

Which line in the graph would best illustrate the transactions demand for money curve?: A: Line 1 (negative) B: Line 2 (vertical) C: Line 3 (positive) D: Line 4 (horizontal)

B: Line 2 (vertical)

Which of the following best describes what occurs when monetary authorities sell government securities? A: There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP. B: There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP. C: There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP. D: There is an increase in the size of commercial bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP.

B: There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP.

Which of the following may shift the consumption schedule upward? A: an increase in disposable income B: a decrease in interest rates C: a significant decrease in stock prices D: a decrease in people's ability to borrow

B: a decrease in interest rates

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the: A: transactions demand for money. B: asset demand for money. C: creation of fiat money. D: use of money as a medium of exchange.

B: asset demand for money.

The amount by which government expenditures exceed revenues during a particular year is the: A: public debt. B: budget deficit. C: full employment. D: GDP gap.

B: budget deficit.

The Federal Reserve System performs many functions, but its most important one is: A: issuing currency. B: controlling the money supply. C: providing for check clearing and collection. D: acting as fiscal agent for the U.S. government.

B: controlling the money supply.

The amount that a commercial bank can lend is determined by its: A: required reserves. B: excess reserves. C: outstanding loans. D: outstanding checkable deposits.

B: excess reserves.

Other things equal, a decrease in the real interest rate will: A: expand investment and shift the AD curve to the left. B: expand investment and shift the AD curve to the right. C: reduce investment and shift the AD curve to the left. D: reduce investment and shift the AD curve to the right.

B: expand investment and shift the AD curve to the right.

Two basic determinants of investment spending are: A: consumer spending and government spending. B: expected returns and real interest rates. C: general price level and the level of output. D: domestic trade and international trade.

B: expected returns and real interest rates.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will: A: increase the amount of U.S. real output purchased. B: increase U.S. imports and decrease U.S. exports. C: increase both U.S. imports and U.S. exports. D: decrease both U.S. imports and U.S. exports.

B: increase U.S. imports and decrease U.S. exports.

The crowding-out effect of expansionary fiscal policy suggests that: A: tax increases are paid primarily out of saving and therefore are not an effective fiscal device. B: increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. C: it is very difficult to have excessive aggregate spending in the U.S. economy. D: consumer and investment spending always vary inversely.

B: increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

In the accompanying graph, which of the following would shift the investment demand curve from ID2 to ID1? A: rising real interest rates B: increasing business taxes C: lower acquisition cost of capital goods D: higher expected rates of return on investment

B: increasing business taxes

The economy's long-run aggregate supply curve: A: slopes upward and to the right. B: is vertical. C: is horizontal. D: slopes downward and to the right.

B: is vertical.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to: A: reduce government expenditures and taxes by equal-size amounts. B: reduce government expenditures or increase taxes. C: increase government expenditures or reduce taxes. D: reduce unemployment compensation benefits.

B: reduce government expenditures or increase taxes.

A rightward shift of the investment demand curve will A: shift the investment schedule downward. B: shift the investment schedule upward. C: decrease the quantity of investment. D: decrease the real rate of interest.

B: shift the investment schedule upward.

Other things equal, if the required reserve ratio was lowered,: A: banks would have to reduce their lending. B: the size of the monetary multiplier would increase. C: the actual reserves of banks would increase. D: the federal funds interest rate would rise.

B: the size of the monetary multiplier would increase.

When aggregate expenditure is greater than GDP, then there will be an: A: unplanned increase in inventories and GDP will increase. B: unplanned decrease in inventories and GDP will increase. C: unplanned increase in inventories and GDP will decrease. D: unplanned decrease in inventories and GDP will decrease.

B: unplanned decrease in inventories and GDP will increase.

The relationship between the MPS and the MPC is such that: A: MPC − MPS = 1. B: MPS/MPC = 1. C: 1 − MPC = MPS. D: MPC − 1 = MPS.

C: 1 − MPC = MPS.

In the accompanying graph, which of the following would shift the investment demand curve from ID2 to ID3? A: greater inventories of capital goods B: higher business taxes on capital goods C: a more rapid rate of technological progress D: lower expected rates of return on investment in capital goods

C: a more rapid rate of technological progress

The interest-rate effect suggests that: A: a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B: an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C: an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D: an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

C: an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

Members of the Federal Reserve Board of Governors are: A: appointed by Congress to staggered 14-year terms. B: selected by the Federal Open Market Committee for 4-year terms. C: appointed by the president to staggered 14-year terms. D: selected by each of the Federal Reserve banks for 4-year terms.

C: appointed by the president to staggered 14-year terms.

In a fractional reserve banking system,: A: bank panics cannot occur. B: the monetary system must be backed by gold. C: banks can create money through the lending process. D: the Federal Reserve has no control over the amount of money in circulation.

C: banks can create money through the lending process.

The Federal Reserve System of the United States is the country's: A: financial adviser. B: comptroller or accountant. C: central bank. D: deposit insurance provider.

C: central bank.

If the Fed buys government securities from commercial banks in the open market,: A: the Fed gives the securities to the commercial banks and increases the banks' reserves. B: the Fed gives the securities to the commercial banks and decreases the banks' reserves. C: commercial banks give the securities to the Fed, and the Fed increases the banks' reserves. D: commercial banks give the securities to the Fed, and the Fed decreases the banks' reserves.

C: commercial banks give the securities to the Fed, and the Fed increases the banks' reserves.

The aggregate demand curve is: A: vertical under conditions of full employment. B: horizontal when there is considerable unemployment in the economy. C: downsloping because of the interest-rate, real-balances, and foreign purchases effects. D: downsloping because production costs decrease as real output rises.

C: downsloping because of the interest-rate, real-balances, and foreign purchases effects.

Saving is $15 billion at the $125 billion equilibrium level of output in a closed, private economy. Actual investment must be: A: less than saving B: greater than saving. C: equal to $15 billion. D: equal to $125 billion.

C: equal to $15 billion.

In the accompanying graph, which of the following would shift the investment demand curve from ID2 to ID1? A: a falling real interest rate B: a rising real interest rate C: increasing operating costs for capital goods D: decreasing operating costs for capital goods

C: increasing operating costs for capital goods

Discretionary fiscal policy refers to: A: any change in government spending or taxes that destabilizes the economy. B: the authority that the president has to change personal income tax rates. C: intentional changes in taxes and government expenditures made by Congress to stabilize the economy. D: the changes in taxes and transfers that occur as GDP changes.

C: intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Contractionary fiscal policy is so named because it: A: involves a contraction of the nation's money supply. B: necessarily reduces the size of government. C: is aimed at reducing aggregate demand and thus achieving price stability. D: is expressly designed to expand real GDP.

C: is aimed at reducing aggregate demand and thus achieving price stability.

Graphically, cost-push inflation is shown as a: A: leftward shift of the AD curve. B: rightward shift of the AS curve. C: leftward shift of the AS curve. D: rightward shift of the AD curve.

C: leftward shift of the AS curve.

Which one of the following is a tool of monetary policy often used by the Fed for altering the reserves of commercial banks? A: issuing currency B: check collection C: open-market operations D: required reserve ratio

C: open-market operations

A lower real interest rate typically induces consumers to: A: save more. B: buy fewer imported goods. C: purchase more goods that are bought using credit. D: purchase fewer goods that are bought without using credit.

C: purchase more goods that are bought using credit.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should: A: encourage personal saving by increasing the interest rate on government bonds. B: decrease government expenditures. C: reduce tax rates and/or increase government spending. D: discourage private investment by increasing corporate income taxes.

C: reduce tax rates and/or increase government spending.

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to: A: reduce inflation. B: save the banking industry. C: stimulate the economy. D: improve the savings rate.

C: stimulate the economy.

The public debt is the amount of money that: A: state and local governments owe to the federal government. B: Americans owe to foreigners. C: the federal government owes to holders of U.S. securities. D: the federal government owes to taxpayers.

C: the federal government owes to holders of U.S. securities.

Which group aids the Board of Governors of the Federal Reserve System in conducting monetary policy? A: U.S. Treasury B: U.S. Congress C: Federal Advisory Council D: Federal Open Market Committee

D: Federal Open Market Committee

Which of the following best describes the built-in stabilizers as they function in the United States? A: The size of the multiplier varies inversely with the level of GDP. B: Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C: Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D: Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

D: Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

What function is money serving when you use it when you go shopping? A: a store of value B: a unit of account C: a medium of deferred payment D: a medium of exchange Correct

D: a medium of exchange Correct

If product prices were stated in terms of marbles, then marbles would be functioning primarily as: A: fiat money. B: legal tender. C: a store of value. D: a unit of account.

D: a unit of account.

An increase in investment and government spending can be expected to shift the: A: aggregate expenditures curve downward and the aggregate demand curve leftward. B: aggregate expenditures curve upward and the aggregate demand curve leftward. C: aggregate expenditures curve downward and the aggregate demand curve rightward. D: aggregate expenditures curve upward and the aggregate demand curve rightward.

D: aggregate expenditures curve upward and the aggregate demand curve rightward.

Which of the following would not shift the aggregate supply curve? A: an increase in labor productivity B: a decline in the price of imported oil C: a decline in business taxes D: an increase in the price level

D: an increase in the price level

The U.S. public debt: A: refers to the debts of all units of government—federal, state, and local. B: consists of the total debt of U.S. households, businesses, and government. C: refers to the collective amount that U.S. citizens and businesses owe to foreigners. D: consists of the historical accumulation of all past federal deficits and surpluses.

D: consists of the historical accumulation of all past federal deficits and surpluses.

The intersection of the aggregate demand and aggregate supply curves determines the: A: productivity level in the economy. B: shape of the aggregate demand curve. C: per-unit cost of production in the economy. D: equilibrium level of real domestic output and prices.

D: equilibrium level of real domestic output and prices.

In a recessionary expenditure gap, the equilibrium level of real GDP is: A: less than planned aggregate expenditures. B: greater than planned aggregate expenditures. C: greater than full-employment GDP. D: less than full-employment GDP.

D: less than full-employment GDP.

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,: A: m = R − 1. B: R = m/1. C: R = m − 1. D: m = 1/R.

D: m = 1/R.

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the: A: net export effect. B: wealth effect. C: real-balances effect. D: multiplier effect.

D: multiplier effect.

The use of a credit card is most similar to: A: paying with a check. B: an ACH (automatic clearinghouse) transaction. C: purchasing a certificate of deposit. D: obtaining a short-term loan.

D: obtaining a short-term loan.

The most important determinant of consumer spending is: A: the level of household borrowing. B: consumer expectations. C: the stock of wealth. D: the level of income.

D: the level of income.