ECON MID #2

224. When a bank lends excess reserves to a customer: A) this does not affect the money supply. B) the money supply is increased. C) the money supply is decreased. D) it has the same effect as when one customer writes a check to another customer at a different bank.

B) the money supply is increased.

176. If the tax rate is 0.1 and the MPC is 0.5: A) the multiplier is equal to 2. B) the multiplier is equal to 1.8. C) the multiplier is equal to 2.1. D) the multiplier is equal to 1.

B) the multiplier is equal to 1.8.

213. Decisions about monetary policy are made by: A) the president and Congress. B) the President's Council of Economic Advisors. C) the Federal Open Market Committee. D) representatives of banks that are members of the Federal Reserve System.

C) the Federal Open Market Committee.

189. Bank reserves are: A) the fraction of deposits kept in gold with the Federal Reserve. B) the deposits lent to finance illiquid investments. C) the fraction of deposits kept in the form of very liquid assets. D) gold kept in the bank's vault.

C) the fraction of deposits kept in the form of very liquid assets.

89. The long-run supply curve illustrates how the aggregate output supplied is: A) positively related to the aggregate price level. B) negatively related to the aggregate price level. C) unrelated to the aggregate price level. D) a one-to-one correspondence with the aggregate price level.

C) unrelated to the aggregate price level.

196. Bank runs in the United States during the 1930s had a large negative impact on the economy because: A) capital requirements prevented bank managers from taking additional lending risks. B) the reserve ratio was set too high. C) the Federal Reserve system did not exist at the time. D) the loss of confidence at one bank quickly extended to other banks.

D) the loss of confidence at one bank quickly extended to other banks.

57. When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This is known as the _____ effect and is a reason why the _____ curve slopes _____. A) interest rate; aggregate demand; downward B) wealth; aggregate demand; downward C) interest rate; investment demand; downward D) wealth; short-run aggregate supply; upward

D) wealth; short-run aggregate supply; upward

182. Commodity money is: A) whatever the government has decreed is money. B) a good used as a medium of exchange that has other uses. C) money used for commodity futures trading. D) whatever people accept as money.

B) a good used as a medium of exchange that has other uses.

65. Suppose that consumer assets and wealth decrease in real value. How will this affect the aggregate demand curve? A) The aggregate demand curve shifts to the left. B) There will be a movement upward along the fixed aggregate demand curve. C) There will be a movement downward along the fixed aggregate demand curve. D) The aggregate demand curve shifts to the right.

A) The aggregate demand curve shifts to the left.

93. Which of the following is TRUE with respect to the short-run aggregate supply and the long-run aggregate supply? A) The economy can be on both curves simultaneously. B) If the economy is on the short-run aggregate supply curve, it cannot also be on the long-run aggregate supply curve. C) If the economy is on the long-run aggregate supply curve, it cannot also be on the short-run aggregate supply curve. D) The economy can never be in a position where it rests on both curves simultaneously.

A) The economy can be on both curves simultaneously.

119. Social insurance programs are: A) government programs intended to protect families against economic hardships. B) private insurance policies to protect families from hardships caused by government actions. C) private insurance policies that cover gaps in government-provided health care. D) programs to help unemployed people have a social life.

A) government programs intended to protect families against economic hardships.

114. If the government increases spending in the short run, this will: A) increase aggregate output and aggregate price levels. B) increase aggregate output, but lead to a decrease in aggregate price levels. C) decrease both aggregate output and aggregate price levels. D) decrease aggregate output, but increase aggregate price level.

A) increase aggregate output and aggregate price levels.

227. Suppose an economy uses a checkable deposits only monetary system and it has a required reserve ratio of 20%. If the central bank in this economy conducts an open market purchase of $5 million Treasury bills, this will potentially: A) increase the money supply by $25 million. B) decrease the money supply by $25 million. C) increase the money supply by $10 million. D) decrease the money supply by $10 million.

A) increase the money supply by $25 million.

69. If the Fed increases the quantity of money in circulation: A) interest rates decrease, investment increases, and the aggregate demand curve shifts to the right. B) interest rates increase, investment increases, and the aggregate demand curve shifts to the right. C) interest rates decrease, investment increases, and the aggregate demand curve shifts to the left. D) interest rates increase, investment decreases, and the aggregate demand curve shifts to the left.

A) interest rates decrease, investment increases, and the aggregate demand curve shifts to the right.

200. Banks create money when they: A) make loans. B) take deposits. C) hold excess reserves. D) pay withdrawals to depositors.

A) make loans.

88. In the long run, the aggregate price level has: A) no effect on the quantity of aggregate output. B) a positive effect on the quantity of aggregate output. C) a negative effect on the quantity of aggregate output. D) an impact on aggregate output but no impact on employment.

A) no effect on the quantity of aggregate output.

107. In the long run, inflationary and recessionary gaps are self-correcting because, eventually: A) nominal wages rise in order to close an inflationary or fall in order to close a recessionary gap. B) the government applies the right combination of fiscal and monetary policies. C) the multiplier compensates the negative supply or demand shocks. D) nominal wages rise in order to close a recessionary gap and fall to close an inflationary gap.

A) nominal wages rise in order to close an inflationary or fall in order to close a recessionary gap.

117. If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then, in the long run, one will find: A) nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP. B) nominal wages will rise shifting the AD curve to the right and restoring real GDP to its potential level. C) nominal wages will fall and the SRAS curve will shift right bringing the economy back to its potential real GDP. D) nominal wages will fall shifting the AD curve to the left and bringing the economy back to its potential real GDP.

A) nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP.

79. Profit per unit equals: A) price per unit minus cost per unit. B) price per unit divided by cost per unit. C) cost per unit minus price per unit. D) price per unit minus the nominal wage rate.

A) price per unit minus cost per unit.

199. The existence of banks: A) results in the money supply being larger than the amount of currency in circulation. B) inhibits the creation of money. C) makes the money supply equal to the amount of currency in circulation. D) results in the money supply being less than the amount of currency in circulation.

A) results in the money supply being larger than the amount of currency in circulation.

80. The short-run aggregate supply curve slopes upward because of: A) wage and price stickiness. B) wage and price flexibility. C) increasing technology. D) a reduction in resource availability at higher price levels.

A) wage and price stickiness.

83. Nominal wages are "sticky" because: A) wages are slow to rise in the short run when there are labor shortages and slow to fall even when there is significant level of unemployment. B) wages remain fixed in the long run thereby increasing the profitability of the firms. C) wages are slow to fall in the short run when there are labor shortages and slow to rise even when there is significant level of unemployment. D) in the long run all wages become adjusted for inflation.

A) wages are slow to RISE in the short run when there are labor shortages and slow to FALL even when there is significant level of unemployment.

160. Congress increases personal income tax rates in order to balance the budget. Which of the following is likely to result? A) Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand. B) Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand. C) Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand. D) Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.

B) Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand.

76. The SRAS curve is upward sloping because: A) a higher aggregate price level leads to lower output as costs of production increase. B) a higher aggregate price level leads to higher output since most production costs are fixed in the short run. C) a lower aggregate price level leads to higher output since production costs tend to fall in the short run. D) a lower aggregate price level leads to higher profit and higher productivity.

B) a higher aggregate price level leads to higher output since most production costs are fixed in the short run.

116. A negative supply shock often results in: A) a leftward shift of the AD curve. B) an increase in the aggregate price level and a decrease in aggregate output. C) no change in the price level. D) a drop in the unemployment level.

B) an increase in the aggregate price level and a decrease in aggregate output.

106. If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result will be: A) a recessionary gap. B) an inflationary gap. C) cyclical unemployment. D) long-run equilibrium.

B) an inflationary gap.

195. A bank run can break a bank because: A) borrowers default on their loans, and the bank's assets become worthless. B) banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss. C) depositors' panic spreads to borrowers, who want to take additional loans from the bank. D) the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury bonds.

B) banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.

218. A firm uses financial leverage when it: A) replaces labor with capital. B) borrows money from a bank to enlarge a factory. C) raises the price of a product when demand is inelastic. D) gets a volume discount from a supplier.

B) borrows money from a bank to enlarge a factory.

225. When a bank borrows from the Federal Reserve, it pays the: A) required reserve ratio. B) discount rate. C) federal funds rate. D) prime rate.

B) discount rate.

169. When the budget is in deficit, the government generally: A) raises taxes. B) increases the public debt. C) sells public assets like national parks. D) decreases military spending.

B) increases the public debt.

191. Among the assets of a bank are: A) deposits. B) loans. C) borrowings. D) deposits and loans.

B) loans.

5. All of the following are responsibilities of the Federal Reserve EXCEPT to: A) control the monetary base. B) mint bills and coins. C) oversee and regulate the banking system. D) set the discount rate.

B) mint bills and coins.

118. All of the following are sources of federal tax revenue EXCEPT: A) the personal income tax. B) sales taxes. C) social insurance taxes. D) the corporate profits tax.

B) sales taxes.

81. The _____ curve shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied in the economy. A) aggregate demand curve B) short-run aggregate supply curve C) aggregate spending curve D) long-run aggregate supply curve

B) short-run aggregate supply curve

82. An increase in the aggregate price level will increase: A) short-run aggregate supply. B) the quantity of aggregate output supplied in the short run. C) aggregate demand. D) the quantity of aggregate output demanded.

B) the quantity of aggregate output supplied in the short run.

159. If the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, the income expenditure model would predict that real GDP will increase by: A) $100 billion. B) $750 billion. C) $400 billion. D) $300 billion.

C) $400 billion.

212. (Scenario: Monetary Base and Money Supply) By how much can checkable bank deposits increase? A) $100 billion B) $250 billion C) $500 billion D) $1,650 billion

C) $500 billion

103. Potential real GDP is equal to $10,000 and the current level of real GDP is equal to $9,000. The output gap is therefore equal to: A) -90% B) -110% C) -10% D) 10%

C) -10%

201. Which of the following would be the initial effect if an individual made a $10,000 cash deposit in a bank? A) The money supply would rise by $10,000. B) The money supply would fall by $10,000. C) The money supply would not be affected by the deposit. D) The money supply would fall but by less than the $10,000 deposit.

C) The money supply would not be affected by the deposit.

98. Unexpectedly rising commodity prices lead to: A) a positive supply shock. B) a positive demand shock. C) a negative supply shock. D) a negative demand shock.

C) a negative supply shock.

120. Which of the following is NOT an example of government purchases of goods and services? A) a federal prosecutor's salary in a lawsuit against Halliburton B) new pavement for interstate highway I-95 C) a surgeon's bill reimbursed under the Medicare program D) equipping U.S. air marshals with electroshock weapons

C) a surgeon's bill reimbursed under the Medicare program

97. Stagflation may result from: A) an increase in the supply of money. B) a decrease in the supply of money. C) an increase in the price of imported oil. D) a decrease in the price of imported oil.

C) an increase in the price of imported oil.

179. "Tuition at State University this year is $8,000." Which function of money does this statement best illustrate? A) as a store of value B) as a medium of exchange C) as a unit of account D) as a means of deferred payment

C) as a unit of account

123. A change in taxes or a change in government transfers affects consumption through a change in: A) autonomous consumption. B) the marginal propensity to save. C) disposable income. D) government spending.

C) disposable income.

64. As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n): A) increase in short-run aggregate supply. B) decrease in the quantity of aggregate output supplied in the short run. C) increase in aggregate demand. D) decrease in the quantity of aggregate output demanded.

C) increase in aggregate demand.

166. The stability pact, signed by many of the European countries that adopted the euro, limited each member nation's deficit to 3% of GDP. This: A) enhanced the ability of each of the member countries to conduct fiscal policy. B) enhanced the ability of each of the member countries to conduct monetary policy. C) limited each member country's ability to use fiscal policy. D) did away with budget deficits all together.

C) limited each member country's ability to use fiscal policy.

139. To close a recessionary gap by employing fiscal policy, the government could: A) increase national savings so that the interest rate falls. B) lower the annual income exempt from paying the personal income tax. C) lower the corporate income tax rate. D) lower the amount of unemployment insurance benefits.

C) lower the corporate income tax rate.

96. A natural disaster that destroys part of a country's infrastructure is a type of _________ and therefore shifts the _________ to the _________. A) negative demand shock; aggregate demand curve; right B) negative supply shock; aggregate demand curve; left C) negative supply shock; short-run aggregate supply curve; left D) negative demand shock; long-run aggregate supply curve; left

C) negative supply shock; short-run aggregate supply curve; left

105. The intersection of an economy's aggregate demand and long-run aggregate supply curves: A) determines its equilibrium real GDP in both the long run and the short run. B) determines its equilibrium price level in both the long run and the short run. C) occurs at the economy's potential output. D) occurs at high levels of cyclical unemployment.

C) occurs at the economy's potential output.

104. In the long run (as the economy self-corrects), an increase in aggregate demand will cause the price level to _______ and potential output to _______ . A) rise; increase B) fall; decrease C) rise; remain stable D) fall; remain stable

C) rise; remain stable

155. If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by: A) $40 million. B) $50 million. C) $200 million. D) $250 million.

D) $250 million.

115. When wages rise: A) AS shifts left and aggregate price levels falls. B) AS shifts right and the aggregate output level falls. C) AS shifts right and the aggregate price level rises. D) AS shifts left and the aggregate price level rises.

D) AS shifts left and the aggregate price level rises.

164. Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If current real GDP is $850, which of the following policies would bring the economy to potential output? A) Decrease government spending by $50 billion. B) Increase government spending by $50 billion. C) Decrease government transfers by $50 billion. D) Decrease government spending by $10 billion.

D) Decrease government spending by $10 billion.

156. If the government spends an extra $5 billion on goods and services: A) GDP will go up by $5 billion. B) GDP will remain unchanged. C) GDP will increase by less than $5 billion. D) GDP will increase by more than $5 billion.

D) GDP will increase by more than $5 billion.

165. Economists believe that the budget should be balanced each fiscal year. Is this correct? A) Yes, a budget should be balanced annually, otherwise persistent budget deficits can cause havoc in the economy. B) Yes, as the law states that both the federal and state government budgets should always be balanced. C) Yes, since the balanced budget multiplier is larger, hence it makes the economy grow faster. D) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

D) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

121. Which of the following is NOT an example of government transfers? A) Medicaid-paid prescription drugs for low-income individuals B) unemployment insurance C) a Social Security disability pension D) a reimbursement of personal income tax withheld from wages

D) a reimbursement of personal income tax withheld from wages

63. If prices are constant, but there is an increase in the value of financial assets: A) aggregate supply shifts to the left. B) aggregate supply shifts to the right. C) aggregate demand shifts to the left D) aggregate demand shifts to the right.

D) aggregate demand shifts to the right.

175. The 2009 American Recovery and Reinvestment Act was an example of: A) an automatic stabilizer. B) a contractionary government policy. C) a contractionary monetary policy. D) an expansionary fiscal policy.

D) an expansionary fiscal policy.

137. Which of the following is an expansionary fiscal policy? A) an increase in the money supply that decreases interest rates B) an increase in taxes that reduces the budget deficit and decreases consumption C) a decrease in government spending on the space program D) an increase in unemployment benefits

D) an increase in unemployment benefits

167. What can the federal government do to finance a deficit? A) cut taxes B) increase spending C) reduce interest rates D) borrow funds

D) borrow funds

62. Which of the following factors cannot shift the aggregate demand curve? A) changes in expectations B) changes in wealth C) changes in stock market indices D) changes in the price level

D) changes in the price level

87. In the long run, nominal wages are: A) sticky downward but flexible in an upward direction. B) sticky upward but flexible in a downward direction. C) sticky in both an upward and downward direction. D) flexible because contracts and informal agreements are renegotiated in the long run.

D) flexible because contracts and informal agreements are renegotiated in the long run.

223. The existence of deposit insurance: A) can increase the possibility of bank runs. B) often makes banks more accountable for their actions and less likely to engage in risky behavior. C) essentially serves the same function as a fractional reserve system. D) leads depositors to be less inclined to monitor bank operations.

D) leads depositors to be less inclined to monitor bank operations.

90. The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called: A) real GDP. B) Keynesian GDP. C) structural GDP. D) potential output.

D) potential output.

102. If membership falls in labor unions and unions become less popular, then: A) production costs will increase, SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level. B) production costs will fall, there will be a downward movement along SRAS, equilibrium GDP will increase and aggregate price level will fall. C) production costs will not change, AD will shift to the right, increasing equilibrium GDP and aggregate price level. D) production costs will fall, SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.

D) production costs will fall, SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.

86. A general increase in wages will result in the: A) aggregate demand curve shifting to the right. B) aggregate demand curve shifting to the left. C) short-run aggregate supply curve shifting to the right. D) short-run aggregate supply curve shifting to the left.

D) short-run aggregate supply curve shifting to the left.