macro exam 3
Which statement is TRUE? A.The effectiveness lag associated with monetary policy is likely to be near zero. B.It may be difficult for the Fed to print enough money to have a noticeable effect on the economy. C.By the time fiscal policy is in place, it is likely that macroeconomic conditions may have changed entirely. D.Monetary policy has no recognition lag.
/// A
_____ is a significant reduction in the rate of inflation, while _____ is a reduction in the level of prices. A.Disinflation; deflation B.Deflation; disinflation C.Disinflation; stagflation D.Stagflation; deflation
/// B
If the Fed credits Alex's checking account with $8,000 and Alex's bank decides to keep the entire $8,000 in the form of reserves instead of lending it out, how much does the money supply increase? A.$8,000 B.$1,000 C.$0 D.$64,000
/// C
Reserves held by banks are mainly held in the form of: A.checkable deposits. B.currency. C.savings accounts. D.electronic claims.
/// C
An economy in which the central bank overstimulates aggregate demand will suffer from: A.inflation. B.deflation. C.unemployment. D.increases in money supply.
A
Bank A has $100 million in deposits, $15 million in required reserves, and $85 million in loans. Bank A's reserve ratio is: A.15%. B.10%. C.75%. D.20%.
A
Ben Bernanke was _____ during the financial crisis of 2008. A.Chairman of the Federal Reserve B.Chairman of the President's Council of Economic Advisors C.Vice President of the United States D.Secretary of the U.S. Treasury
A
Fiscal policy: A.is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. B.is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations. C.is the decrease in private spending that occurs when government increases spending. D.occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut they save it to pay future taxes.
A
The United States currently has a net _____ with the rest of the world. A.trade deficit B.balance of payments deficit C.exchange rate deficit D.capital deficit
A
When the Fed responds to a negative spending shock by increasing the money supply, it is using: A.a discretionary policy. B.a policy rule. C.its political power. D.its credibility.
A
Which of the following would cause the AD curve to shift to the left? A.increased growth in imports B.lower growth rate of output C.higher government budget deficits D.lower taxes
A
With a floating exchange rate, an increase in the U.S. interest rate will cause: A.capital to flow into the United States, an increase in the demand for dollars, and an appreciation of the dollar. B.an appreciation of the dollar. C.capital to flow into the United States. D.an increase in the demand for dollars.
A
A decrease in spending growth will cause the economy's aggregate demand curve to: A.become steeper .B.shift to the left. C.shift to the right. D.become flatter.
B
An appreciation of the Mexican peso would most likely be a result of: A.a decrease in Mexican imports in the United States. B.an increase of foreign investment in Mexico. C.a decrease in Mexican exports to the United States. D.an increase in the supply of pesos.
B
In the short run, an increase in the money supply tends to increase employment because: A.both exports and imports increase. B.exports only increase. C.government spending increases. D.imports only increase.
B
Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? A.The effects of monetary policy always offset those of fiscal policy. B.The Fed's control of the money supply is incomplete and subject to uncertain lags. C.All monetary policies must be approved by Congress before being implemented. D.The Fed has too much data to sort through quickly.
B
Which is the MOST credible monetary policy action? A.The central bank makes policy actions in secret to avoid speculation. B.The central bank announces its policy in public and sticks with the policy over time. C.The central bank does nothing to the economy regardless of any economic shock. D.The central bank attempts to confuse the public by changing its policy stance frequently.
B
In what way are monetary and fiscal policies similar? A.Both involve a multiplier effect. B.They are both effective when the economy suffers from real shocks. C.They both target aggregate demand to overcome business fluctuations. D.Neither involves a lag.
C
When the Fed lowers the Federal Funds rate: A.interest rates increase but the money supply decreases. B.both interest rates and the money supply increase. C.interest rates decrease but the money supply increases. D.both interest rates and the money supply decrease.
C
Which of the following real shocks would likely have the largest impact on U.S. GDP? A.a decrease in the price of grain B.a severe drought in the Midwest C.a reduction in the overall supply of oil D.a major hurricane that hits the Gulf coast
C
Which of the following would be recorded as a debit in the U.S. current account? A.United States exports $5 million in corn to Canada. B.American citizens go to sub-Saharan Africa to teach reading to young students. C.British financial investments in the United States pay higher dividends. D.The United States buys $1 million in British government bonds.
C
All else held constant, an increase in U.S. exports will cause the U.S. current account to: A.move in a negative direction. B.become more volatile. C.remain unchanged. D.move in a positive direction.
D
If the exchange rate between the U.S. dollar and the euro is $1 for €0.75, then the price of €1 is: A.$0.75. B.$1. C.$1.75. D.$1.33.
D
In the United States, federal government expenditures must be approved by the: A.president of the United States. B.Senate. C.House of Representatives. D.House of Representatives, the Senate, and the president of the United States.
D
In the basic model that includes the AD and LRAS curves only, an increase in aggregate demand: A.decreases the inflation rate, but not the growth rate. B.increases the inflation rate and the growth rate. C.decreases the inflation rate and increases the growth rate. D.increases the inflation rate, but not the growth rate.
D
Tight monetary policy results in a long period of disinflation and high unemployment if: A.the monetary policy is credible. B.market confidence is high. C.prices are flexible. D.nominal wages are sticky.
D
To reduce the money supply in the economy, the Fed would: A.carry out open market purchases. B.carry out open market sales and/or lower the discount rate. C.carry out open market purchases and/or lower the discount rate. D.increase the discount rate.
D
Under Paul Volcker, the Fed reduced the inflation rate in the early 1980s by more than10 percentage points, causing: A.GDP growth rise to 6% and consumer confidence to grow. B.housing prices to soar and interest rates to remain high. C.unemployment to decrease. D.a severe recession to take place.
D
When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence? A.Interest rates continue to rise. B.Growth stays positive. C.Inflation remains high. D.Unemployment is high.
D
When the Federal Reserve conducts monetary policy, the Federal Reserve usually focuses on: A.the discount rate. B.M1. C.M2. D.the Federal Funds rate.
D
When the government sells bonds, some of the funds that would have gone to private investments go to the government. This situation is called: A.funneling. B.under bidding. C.overcrowding. D.crowding out.
D
_____ and _____ are some of the most important aggregate demand shifters, and _____ is one of the Federal Reserve's most powerful tools. A.Interest rate; exchange rate; currency control B.Money; resources; the money supply C.Exports; imports; the exchange rate D.Fear; confidence; market confidence
D
If wages are not as flexible as prices in the AD-AS model, an increase in money growth will lead to:
an increase in inflation and in the profits of firms.
Many economists blame the severity of the Great Depression on:
poor monetary policy conducted by the Federal Reserve
The short-run aggregate supply curve shows the _____ relationship between the inflation rate and real growth during the period when prices and wages are _____.
positive; sticky
For a given aggregate demand curve, the specified rate of spending growth is the growth rate of money:
supply plus growth in velocity
Since people will always come to expect the actual inflation rate in the long run, the expected inflation rate is found graphically where the:
/// AD curve intersects the SRAS curve.
A nominal GDP rule requires the Fed to: A.keep the rate of money growth constant. B.keep the money supply constant. C.adjust interest rates in the opposite direction of real GDP growth. D.adjust the money supply enough to make up for changes in velocity.
/// B
Economist Milton Friedman called for a policy rule that keeps the growth rate of the money supply at 3% because: A.the economy's long-run potential growth rate is 3%. B.spending shocks on average are 3% of real GDP. C.real shocks on average are 3% of real GDP. D.the money supply has grown on average at 3% historically.
A
As the recession continued in early 2009, consumer confidence most likely: A.became too difficult to calculate accurately. B.decreased. C.remained constant. D.increased.
B
One way the government can use fiscal policy to fight a recession is to: A.spend less money. B.cut taxes. C.reduce welfare subsidies. D.increase Social Security payments.
B
(Figure: Oil Market Diagrams) Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts what happened in the market for oil during the 1973 OPEC oil crisis? A.Panel C B.Panel B C.Panel D D.Panel A
/// C
When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists. A.a solvency crisis B.moral hazard C.liquidity risk D.systemic risk
/// D
On a given aggregate demand curve, if the rate of spending growth is 10% and the growth rate of the money supply is 2%, then the velocity of money must be growing at: A.5%.B.8%.C.20%.D.12%.
/// D. 12%
(Figure: Aggregate Demand) Point A on this aggregate demand curve represents a real GDP growth rate of:
5%
A low saving rate in the United States is one possible reason for the U.S.: A.current account deficit, capital account surplus, and trade deficit. B.capital account surplus. C.current account deficit. D.trade deficit.
A
An increase in the banking system's willingness to lend will cause the money multiplier to: A.increase. B.become difficult to predict. C.decrease. D.remain unchanged.
A
As a result of a positive shock to : A.inflation and output growth increase in the short run, but in the long run they return to the rates before the shock. B.inflation and output growth decrease in the short run, but in the long run they return to the rates before the shock. C.inflation and output growth increase in both the short run and the long run. D.inflation increases and output growth decreases in the short run, but in the long run they return to the rates before the shock.
A
Disinflation in the 1980s was a result of: A.leftward shifts in the aggregate demand curve due to money supply reductions. B.leftward shifts in the LRAS curve due to negative real shocks. C.leftward shifts in the aggregate supply curve due to sticky wages and prices. D.rightward shifts in the LRAS curve due to positive real shocks.
A
Fiscal policy is MOST effective if: A.the economy is hit by a shock to aggregate demand. B.most resources are fully employed.C .taxpayers care about how fiscal policy is financed. D.nominal wages and prices are totally flexible.
A
How did the housing boom of 1997-2006 increase aggregate demand? A.It created more jobs and increased wages in the construction sector. B.Interest rates increased to keep pace with housing demand. C.Higher interest rates created a boom in the banking sector. D.More consumers saved, so they could afford the higher housing prices.
A
How do budget deficits lead to trade deficits? A.Budget deficits lead to higher interest rates, which lead to net capital outflow, which leads to currency appreciation, thus reducing net exports. B.Budget deficits lead to lower interest rates, which lead to net capital inflow, which leads to currency appreciation, thus reducing net exports. C.Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency depreciation, thus reducing net exports. D.Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency appreciation, thus reducing net exports.
A
In the long run, with a floating exchange rate, changes in _____ will have an impact on the real exchange rate. A.neither the U.S. money supply nor the foreign country's money supply B.the U.S. money supply only C.the foreign country's money supply only D.both the U.S. money supply and the foreign country's money supply
A
Open market operations refer to: A.the buying and selling of government bonds by the Fed. B.decisions by the Fed to raise or lower interest rates. C.decisions by the Fed to increase or decrease the money multiplier. D.the buying and selling of stocks in the stock market.
A
Portfolio investment takes place in the United States when foreigners: A.buy U.S. stocks and bonds. B.buy U.S. exports. C.construct new business plants in the United States. D.shift bank deposits into the United States. from other countries.
A
Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short-run increase in inflation by: A.increasing taxes so that the AD curve shifts back to AD1. B.increasing government spending so that the AD curve shifts further out to AD5. C.increasing government spending so that the AD curve shifts back to A D1.D.increasing taxes so that the AD curve shifts further out to AD5.
A
Ricardian equivalence: A.is less significant when consumers deem tax cuts or rebates as permanent. B.has not occurred in the United States. C.will occur more when consumers practice consumption smoothing. D.does not occur when a political administration is set to change.
A
Suppose the Fed carries out an open market purchase and credits the account of a bank by $160,000. Further suppose that the reserve ratio (RR) is 10%. By how much is the money supply expected to change? A.$1.6 million B.$16 million C.$1.76 million D.$160,000
A
The money multiplier is greater than one because banks: A.hold only a fraction of deposits as reserves. B.do not lend any of deposits out as loans .C.hold the entire amount of deposits as reserves. D.borrow loans from the Federal Reserve.
A
To offset the effect of negative growth in money velocity (), the central bank should: A.increase the growth rate of the money supply. B.apply a policy that reduces the growth in money velocity. C.apply a policy that stabilizes the growth in money velocity. D.decrease the growth rate of the money supply.
A
When a negative shock to aggregate demand occurs, the inflation rate will: A.decrease. B.remain the same. C.be automatically adjusted by the Fed. D.increase.
A
Which could be sources of funding for a government that wants to increase government expenditures? A.both taxes and borrowing B.borrowing only C.taxes only D.neither taxes nor borrowing
A
Which is NOT a function of the Federal Reserve? A.providing loans to small businesses B.regulating the U.S. financial system C.regulating the U.S. money supply D.serving as the lender of last resort
A
Which statement is TRUE regarding the effects of monetary policy when a real shock occurs? A.Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate. B.Monetary policy can always be used to simultaneously achieve a high real growth rate and lower the inflation rate. C.Monetary policy can be used only to change the inflation rate, but not the real growth rate. D.Monetary policy can be used only to change the real growth rate, but not the inflation rate.
A
_____ are usually _____ in developing countries because of lower wages and immigration laws that prevent the free movement of labor. A.Services; less expensive B.Goods; more expensive C.Services; more expensive D.Goods; less expensive
A
If the Fed was concerned about the economy falling into recession, it might try to stimulate the economy by: A.raising the interest rate paid on reserves. B.purchasing additional government securities. C.conduct open market sales. D.raising the discount rate.
B
If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate, which of the following is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation? A.Keep the growth rate of the money supply constant while lowering interest rates. B.No monetary policy can achieve this goal. C.Increase the growth rate of the money supply. D.Decrease the growth rate of the money supply.
B
Sustained inflation: A.can never occur. B.requires ongoing increases in the money supply. C.can occur as a result of changes in . D.can occur as a result of changes in .
B
To reduce inflation in response to a negative real shock, the Federal Reserve would: A.increase the money growth rate, which would lower both the inflation rate and economic growth rate. B.decrease the money growth rate, which would lower both the inflation rate and economic growth rate. C.increase the money growth rate, which would increase both the inflation rate and economic growth rate. D.decrease the money growth rate, which would increase both the inflation rate and economic growth rate.
B
What happened to the price level between 1929 and 1932? A.It did not change. B.Deflation reached 10%. C.Inflation reached 20%. D.Inflation hovered around 5%.
B
When falls, the aggregate demand curve: A.shifts to the right. B.shifts to the left. C.becomes steeper. D.becomes flatter.
B
Which of the following best describes the conditions during the Great Depression? A.Real GDP growth was high while inflation was negative. B.Both real GDP growth and inflation were negative .C.Both real GDP growth and inflation were historically high. D.Real GDP growth was negative while inflation was very high.
B
Which of the following is NOT a constraint on trade that prevents prices from being fully equalized across borders? A.Some goods cannot be shipped at all. B.The qualities of goods sold in different countries vary. C.The costs of transportation for some goods can be significant. D.Governments may tax or otherwise restrict trade to an extent that hinders market exchange.
B
A savings glut in other countries is one possible reason for the U.S.: A.capital account surplus. B.trade deficit. C.current account deficit, capital account surplus, and trade deficit. D.current account deficit.
C
An increase in _____ will shift the SRAS curve. A.actual inflation, but not expected inflation B.both actual inflation and expected inflation C.expected inflation, but not actual inflation D.neither actual inflation nor expected inflation
C
An increase in expected inflation will cause the economy's long-run aggregate supply curve to: A.shift outward. B.become steeper. C.remain unchanged. D.shift inward.
C
During a recession, consumers hold more money by cutting back on their spending, resulting in _____ in inflation and _____ in real growth. A.a decrease; an increase B.an increase; an increase C.a decrease; a decrease D.an increase; a decrease
C
Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a: A.shock to the LRAS curve. B.real shock. C.shock to aggregate demand. D.change in expected inflation that shifts the SRAS curve.
C
If instead of buying short-term Treasury securities the Fed decides to purchase the country's supply of paper clips, the money supply: A.will contract. B.will not change. C.will expand. D.might expand or contract.
C
If the Central Bank of China decides to hold more dollars as reserves, the: A.dollar will depreciate. B.dollar's value will remain unchanged. C.dollar will appreciate. D.dollar's value will become more unpredictable.
C
In the short run, a decrease in consumption growth will cause the real GDP growth to: A.become unpredictable. B.remain unchanged. C.decrease. D.increase.
C
The Fed's job in manipulating monetary policy is made harder by the fact that: A.monetary policy is hardly ever effective in influencing business fluctuations. B.monetary authorities do not have a good understanding of how monetary policy works. C.the Fed operates in real time and information on recessions becomes available with a lag. D.monetary policy is usually pulling the economy in the opposite direction from fiscal policy.
C
The disinflation experiment reduced inflation in the United States, but at the cost of: A.deflation .B.high inflation. C.high unemployment. D.an increase in the long-run growth rate of the economy.
C
The possibility that the failure of one bank affects the performance of other banks is called: A.credit risk. B.a liquidity crisis. C.systemic risk. D.moral hazard.
C
Using a graph of the AD and long-run aggregate supply curves, the Internet revolution of the 1990s caused: A.both real growth and inflation to increase. B.both real growth and inflation to decrease. C.real growth to increase and inflation to decrease. D.real growth to decrease and inflation to increase.
C
When countries have severe debt problems: A.it makes no difference for fiscal policy. B.they can continue to borrow forever without any adverse consequences. C.expansionary fiscal policy can reduce real growth. D.fiscal policy is an especially good idea.
C
Which of the following explains why a budget deficit can cause a trade deficit? A.An increase in the budget deficit lowers domestic interest rates, resulting in a capital account deficit and a depreciation of the currency. B.An increase in the budget deficit raises domestic interest rates, resulting in a current account surplus and an appreciation of its currency. C.An increase in the budget deficit raises domestic interest rates, resulting in a capital account surplus and an appreciation of the currency. D.An increase in the budget deficit lowers domestic interest rates, resulting in a current account deficit and a depreciation of the currency.
C
Which of the following transactions can be classified as foreign direct investment for the United States? A.The purchase of a Maserati GranTurismo from a Maserati dealer in New Jersey. B.A Korean businessman, living in South Korea, purchases stock on the NYSE. C.A Beijing antique dealer opens a store in downtown New York City. D.A Bangladeshi-American purchases a home in Dhaka, Bangladesh.
C
A country can adopt a fixed exchange rate system through: A.engaging in trade with other countries. B.allowing a freely functioning foreign exchange market. C.removing the asset backing of its currency. D.setting up a currency union.
D
According to the AD-AS model, if the economy is initially at its long-run potential growth rate, then a temporary increase in the growth rate of investment spending will cause: A.an increase in the inflation rate in the long run. B.no effect on real growth rate or inflation in the short run. C.an increase in the real growth rate in the long run. D.an increase in both the inflation and real growth rates in the short run.
D
According to the text, the consensus about the effects of the 2009 fiscal stimulus was that: A.the spending on infrastructure created many new permanent jobs. B.most state governments did not benefit from the stimulus program. C.the massive government spending programs almost completely crowded out private spending. D.a lot of the tax cuts did not turn into consumer spending.
D
If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable? A.raise taxes B.cut taxes C.increase government spending D.No government action can achieve those goals.
D
If the reserve ratio is 10%, then a $100 increase in bank deposits can potentially lead to: A.a decrease of $1,000 in the money supply. B.an increase of $90 in the money supply. C.a decrease of $90 in the money supply. D.an increase of $1,000 in the money supply.
D
In a fractional reserve banking system, banks hold only a fraction of their: A.currency as reserves. B.monetary base. C.loans as reserves. D.deposits as reserves.
D
President Obama's fiscal policy response to the 2008 recession involved changes in: A.neither government spending nor taxation. B.government spending only. C.taxation only. D.both taxation and government spending.
D
Suppose the federal government gives taxpayers a tax rebate financed by borrowing. If taxpayers use the tax rebate to pay off their debts, total spending will: A.decrease. B.first increase and then decrease. C.increase. D.remain unchanged.
D
The Federal Reserve is the: A.federal government's bank. B.banker's bank in the United States. C.U.S. central bank. D.federal government's bank, central bank, and banker's bank in the United States.
D
The _____ is the sum of the balance of trade, net income on capital held abroad, and net transfer payments. A.capital account B.national account C.balance of payment D.current account
D
The capital account measures: A.how the value of a country's exports exceeds the value of its imports. B.the economic transactions between residents of one country and residents of the rest of the world. C.net income on capital held abroad and net transfer payment. D.changes in foreign ownership of domestic assets.
D
Which institution usually has the most influence over aggregate demand in the United States? A.the Senate Banking Committee B.the Comptroller of the Currency C.the U.S. Department of the Treasury D.the Federal Reserve
D