Exam 3 Macroeconomics

Suppose the Federal Reserve sells bonds. We can expect this transaction to:

b) reduce the money supply, reduce bond prices, and raise interest rates.

A rise in interest rates due to a decrease in the money supply will _______ aggregate demand.

b) reduce

If the currency in circulation is $100 million, checkable bank deposits are $500, savings deposits are $300 million, and travelers' checks are $10 million, then the M1 money supply is:

a) $610 million

Refer to the information in the figure. In 1982, the cyclical unemployment rate was approximately:

a) 4%.

Refer to the information in the figure Monetary Policy I. If the economy is initially at E1 and the central bank chooses to sell bonds, then:

a) AD1 will shift to the left, increasing an existing recessionary gap.

Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000. Which of the following would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75?

a) Decrease spending by $100 billion

Consider the following statements. Which one is correct?

a) Discretionary fiscal policy indicates deliberate action by policy makers.

The federal funds rate is the interest rate at which:

a) banks borrow from other banks with excess reserves.

According to the liquidity preference model, a _________ in the money supply shifts the money supply curve to the _________ and increases the equilibrium interest rate.

a) decrease; left

An increase in government transfers is an example of ________ because it ________.

a) expansionary fiscal policy; shifts the aggregate demand curve to the right, increasing aggregate output

During a recessionary gap:

a) holding everything else constant, the budget deficit would increase.

If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:

a) inflation will increase.

The government has a budget surplus if:

a) its total revenues are greater than its total expenditures.

Contractionary fiscal policy includes:

a) raising tax rates.

A contractionary fiscal policy is one that:

a) reduces aggregate demand by decreasing government purchases.

Suppose inflationary expectations increase due to a rising inflation rate. The Phillips curve will:

a) shift up.

The Phillips curve shows:

b) an inverse relationship between unemployment and inflation.

Included in the M1 definition of money are:

b) checkable bank deposits.

Refer to the information in the figure Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y2, monetary policy should be:

b) contractionary.

When government spending results in persistent deficits that necessitate borrowing, thereby leading to a reduction in private investment, it is referred to as:

b) crowding out.

The largest source of federal tax revenues is:

b) personal income taxes.

Refer to the information in the figure. If the money supply is at MS2 and the central bank sells bonds, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

b) supply of loanable funds from S2 to S1, which raises the interest rate.

Suppose that the reserve ratio is 10% when the Fed buys $25,000 worth of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply.

c) $250,000

Refer to the information in the figure. In 1982, the actual unemployment rate was approximately:

c) 10%.

If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is:

c) 25%.

Which of the following is likely to be TRUE if actual output is equal to potential output?

c) The actual unemployment rate is equal to the natural rate of unemployment.

An inflationary gap can be closed with:

c) a decrease in government purchases.

The accompanying graph shows the current short-run equilibrium in the economy. Appropriate fiscal policy action in this situation would be:

c) a decrease in transfer payments.

Which of the following financial assets belongs to M2 but not to M1?

c) a savings account

Expansionary monetary policy increases all of the following EXCEPT:

c) interest rates.

If government decides to print money to finance a deficit:

c) people who hold money will be penalized as inflation increases

Which of the following was not one of the powers granted to the Federal Reserve when it was created in 1913?

c) the power to prepare the federal budget

In 1958, which of the following economists came up with a theory regarding the trade-off between unemployment and inflation?

d) A. W. Phillips

Which of the following actions would allow banks to lend out more money?

d) a decrease in the discount rate

According to the Phillips curve, when actual real GDP is _________ potential output, the price level _________ and the unemployment rate falls.

d) above; increases

If the aggregate demand curve is AD′:

d) an expansionary fiscal policy may be warranted.

If the Federal Reserve intended to encourage investment and expand the economy, it would _______ government bonds, _______ the money supply, and _______ interest rates. This is shown in panel _______.

d) buy; increase; lower; (a)

An increase in expected inflation will affect the short-run Phillips curve:

d) by shifting it upward, as a result the actual rate of inflation at any given unemployment rate will also be higher when the expected inflation rate is higher.

Expansionary fiscal policy includes:

d) decreasing taxes.

Buying a ticket to a football game with a $20 bill means money is functioning as a:

d) medium of exchange

If workers expect a lower rate of inflation, the short-run Phillips curve will:

d) shift down.

A major problem with bank runs is that they:

d) spread to other banks.

When the unemployment rate increases, the budget:

d) tends to move into deficit.

A trade-off between unemployment and inflation is depicted by:

d) the Phillips curve.