Macro - Practice Test 3

If a bank has deposits of $100,000, loans of $80,000, cash on hand of $10,000, and $10,000 on deposit at the Federal Reserve, then its reserve ratio is:

20%.

If the required reserve ratio is 25%, and the money supply increases by $100,000, then the initial reserve injection by the Federal Reserve was:

25,000

An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

an increase; an increase

Contractionary monetary policy causes _____ in interest rates in the short run and _____ in interest rates in the long run.

an increase; no change

A $100 million increase in government spending increases equilibrium GDP by:

more than $100 million.

Contractionary fiscal policy includes:

raising tax rates.

An increase in government spending, all things equal, will cause the aggregate demand curve to:

shift to the right.

If inflation increases from 2% to 5%, the money demand curve will:

shift to the right.

A general increase in wages will result primarily in the _____ curve shifting to the _____.

short-run aggregate supply; left

All else equal, if the required reserve ratio falls:

the money multiplier increases.

Government payments to households for which no good or service is provided in return are called:

transfer payments.

A negative supply shock often results in:

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

An increase in energy prices will:

decrease short-run aggregate supply.

Assume that the marginal propensity to consume is 0.8 and that potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output, the government should:

decrease spending by $10 billion.

The reserve requirement is 10%, and Olga withdraws $3,000 for travel money from her checking account. Assume that banks do not hold excess reserves and that the public holds only checkable bank deposits, that is, no currency. As a result of the withdrawal, excess reserves _____ by _____.

decrease; $2,700

Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. As a result of the withdrawal, loans _____ by _____.

decrease; $4,800

If policy makers want to decrease real GDP by $100 billion, and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____.

decrease; $40 billion

If the Federal Reserve wanted to increase the money supply, it could _____ the required reserve ratio, _____, and _____ bonds on the open market.

decrease; decrease the discount rate; buy

According to the liquidity preference model, if the Federal Reserve increases the money supply, the equilibrium interest rate _____, which leads to a(n) _____ in the quantity demanded of nonmonetary interest-bearing financial assets.

falls; increase

If a government runs large budget deficits over consecutive years, with the public debt growing _____ GDP, the ratio of debt to GDP will _____.

faster than; increase

Currency in the United States today is _____ money.

fiat

Changes in aggregate demand can be caused by changes in:

government spending.

If the economy is at potential output, and the Fed increases the money supply, in the short run, real GDP will likely:

increase

A shift to the right of the short-run aggregate supply curve may be caused by a(n):

increase in productivity.

In a checkable-deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 could increase the total amount of bank deposits by up to:

$20,000.

The reserve requirement is 20%. Oleg receives $2,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. What is the maximum possible expansion in the money supply as a result of this initial deposit?

$8,000

The reserve requirement is 20%. Oleg receives $2,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $2,000 deposit can the bank lend out?

1,600

If a bank has deposits of $10,000 and reserves of $5,000, and the reserve requirement is 20%, its excess reserves are $_____.

3,000

If policy makers want to decrease real GDP by $100 billion, and the marginal propensity to consume is 0.6, they should decrease government purchases of goods and services by $_____ billion.

40

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5

As the opportunity cost of holding money changes from _____% to _____%, the quantity of money demanded _____.

5; 3; increases

The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit can the bank lend out?

800

If monetary aggregates were ranked from most liquid to least liquid, the order would be:

M1 and M2.

An example of a double coincidence of wants is:

a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired.

A high demand for money (as in Japan) would result from:

a low crime rate and a widespread lack of capacity to accept noncash payments.

Commodity-backed money is:

a medium of exchange with no intrinsic value.

A recessionary gap occurs if:

actual aggregate output is less than potential output.

If the required reserve ratio rises:

banks must keep a larger share of each deposit in reserve.

Financial intermediaries involved in shadow banking typically:

borrow money short term and lend or invest long term.

Changes in the budget balance may result from _____.

changes in economic policy or fluctuations in the economy

If an economy is operating at an aggregate output level above potential output, the Federal Reserve may:

conduct an open market sale.

A(n) _____ monetary policy is appropriate during a(n) _____.

contractionary; expansion

If the economy is at potential output, and the Fed decreases the money supply, in the short run, the price level will likely:

decrease

Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. Immediately after the withdrawal, reserves _____, and checkable deposits _____.

decrease by $6,000; decrease by $6,000

If aggregate output is above potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

decrease government purchases; AD ; left

If interest rates rise, there will be a(n):

decrease in aggregate demand.

Demand shocks do NOT include a(n):

decrease in commodity prices.

A decrease in the supply of money with no change in the demand for money will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

decrease; rise

If, during 2019, the interest rate on one-month Treasury bills was 1.5%, and during 2020, it was 1%, the opportunity cost of holding money, assuming a constant inflation rate:

decreased

As aggregate demand declined from 1929 to 1933, during the Great Depression, the GDP deflator:

decreased by 26%.

A change in taxes shifts the aggregate _____ curve by _____ than a change in government purchases of goods and services and has a smaller effect on real GDP.

demand; less

An increase in interest rates _____ the demand for money.

does not affect

During the Great Depression, the United States underwent a movement _____ along the short-run aggregate supply curve; during the 1979 oil crisis, the United States underwent a _____ shift of the short-run aggregate supply curve.

down; leftward

If Medicaid is expanded to cover a greater percentage of the population:

implicit liabilities will increase.

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

expansionary

If the Fed decreases the reserve requirement from 10% to 5%, the money multiplier will _____, and the money supply will most likely _____.

increase; increase

According to the concept of monetary neutrality, _____ in the money supply _____ real GDP _____ the price level.

increases; do not change; but do raise

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the real GDP is $700 billion, _____ government spending by _____ would bring the economy to potential output.

increasing; $20 billion

Firms and businesses hold some of their assets in the form of money because:

it allows them to make purchases directly.

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

less than

An asset is _____ if it is easily convertible into cash with little or no loss of value.

liquid

Changes in the money supply have no _____ effects on the interest rate because when the _____ changes, the demand for money changes to offset the short-run changes in the money supply.

long run; price level

Generally, the more liquid an asset is, the:

lower its rate of return.

Expansionary monetary policy will _____ interest rates and _____ savings in the short run.

lower; increase

Banks create money when they:

make loans.

If banks were required to keep 100% of deposits in reserves, they could:

make no loans.

Expansionary fiscal policies

make the budget surplus smaller.

An expansionary fiscal policy:

may include decreases in taxes.

An increase in the price of imported oil leads to a _____ shock.

negative supply

Assuming that the reserve requirement is greater than zero, if it looks as if a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:

other member banks and borrow money at the federal funds rate.

Examples of fiscal policy do NOT include:

reducing the money supply to raise the interest rate.

If the economy is at potential output, and the Fed decreases the money supply, in the long run, real GDP will likely:

remain the same.

An example of an automatic stabilizer that takes effect when the economy contracts is a:

rise in government transfers as more people receive unemployment insurance benefits.

Consider an economy that already has a sizable budget deficit. If the economy faces a major downturn, most economists agree, the government should:

stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining.

Decisions about monetary policy are made by:

the Federal Open Market Committee.

Changes in _____ will not shift the aggregate demand curve.

the price level

Aggregate demand will decrease if:

the public becomes more pessimistic.

If government spending increases and taxes decrease:

the public debt will increase.

An increase in the aggregate price level will increase:

the quantity of aggregate output supplied in the short run.

Because revenue from personal income taxes automatically decreases as disposable income decreases, a recession causes:

the size of the multiplier to increase.

According to the liquidity preference model, _____ money determines the interest rate.

the supply of and demand for

Banks are illiquid because:

their loans are less liquid than their deposits.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $700 billion:

there is a recessionary gap.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If GDP is $850 billion:

there is an inflationary gap.