Macro Test 3

If the average reserve ratio in the banking system is 20 percent and the Fed increases bank reserves by $100,000, what will be the total potential increase in the money supply? a. $100,000 b. $120,000 c. $500,000 d. $2 million

$500,000

If the required reserve ratio is 25 percent, the money multiplier is a. 4 b. 16 c. 20 d. 25

4

U.S. government spending on Social Security, defense, Medicare, and Medicaid makes up almost a. 25 percent of federal government spending b. 33 percent of federal government spending c. 50 percent of federal government spending d. 67 percent of federal government spending

67% of government spending

The Federal Reserve (choose all that apply) a. Clears all checks b. Makes monetary policy c. Supervises the banking sector

Clears all checks Makes monetary policy Supervises the banking sector

The monetary base (MB) refers to: a. Currency b. Currency plus (total) reserves c. Currency plus checkable deposits d. Currency, savings deposits, money market mutual funds, and small time deposits.

Currency plus total reserves

M2 includes: a. Currency b. Currency plus deposits c. Currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits d. None of the above

Currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits

The best type of negative shock for fiscal policy to respond to is a negative shock to a. Aggregate demand b. Short-run aggregate supply c. The Solow growth curve d. Inflation

Aggregate demand

The Federal Reserve is the: a. Federal government's bank b. U.S. central bank c. Banker's bank in the U.S. D) All of the answers are correct

All of the answers are correct

In the New Keynesian model, suppose the Fed reacts to an economic shock and quickly restores the economy to the Solow growth rate. The shock most likely a. An aggregate demand shock b. A real shock c. A productivity shock d. All the answers are correct

An aggregate demand shock

Expansionary fiscal policy to stimulate the economy may be less effective when a. The effects of fiscal policy can often be offset by monetary policy b. Government spending is a relatively small portion of GDP c. Government spending does not directly affect aggregate demand d. Taxes or increased borrowing to fund spending reduce aggregate demand

Taxes or increased borrowing to fund spending reduce aggregate demand

An open market operation occurs when: a. Banks loan funds to each other b. Banks increase the reserve ratio c. The Fed buys or sells government bonds d. The Fed enforces regulations on the banking industry

The Fed buys or sells government bonds

The Fed's job in manipulating monetary policy is made harder by the fact that: a. Monetary authorities do not have a good understanding of how monetary policy works b. Monetary policy is usually pulling the economy in the opposite direction from fiscal policy c. The Fed has to operate in real time and information on recessions usually becomes available with a lag d. Monetary policy is hardly ever effective in influencing business fluctuations.

The Fed has to operate in real time and information on recessions usually becomes available with a lag

Which of the following describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? a. The Open Market Committee needs two-thirds approval from the 12 regional banks before conducting monetary interventions b. All monetary policies before being implemented are subject to approval by Congress c. The Fed's control of the money supply is incomplete and subject to uncertain lags d. The effects of monetary policy often offset those of fiscal policy

The Fed's control of the money supply is incomplete and subject to uncertain lags

The group that formulates and implements monetary policy is _____________. a. The Federal Open Market Committee (FOMC) b. The Board of Governors c. The Federal Reserve Operating Board d. The United States Treasury

The Federal Open Market Committee

The period of time from the early 1980s through the 2006 was a period when business cycle fluctuations were less extreme. During this time period, the Federal Reserve targeted the interest rate and, for the most part, fiscal policy did not attempt to offset economic shocks. This period is often referred to as a. The Great Recession b. The Great Moderation c. The Contemplation Moderation d. The Great Contemplation e. The Era of Recession Mitigation

The Great Moderation

An increase in government spending causes a. The aggregate demand curve to shift to the left b. The aggregate demand curve to shift to the right c. An upward movement along the aggregate demand curve d. A downward movement along the aggregate demand curve

The aggregate demand curve to shift to the right

In the New Keynesian model, a fiscal policy that could "offset" a drop in consumer or producer confidence is a (choose all that apply) a. An increase in the money supply. b. A reduction in taxes rates or tax rebates c. An increase in government spending

A reduction in tax rates or tax rebates An increase in government spending

In response to a negative supply shock, a temporary increase in government spending will likely result in a. An increase in inflation and an increase in output growth b. A decrease in inflation and an increase in output growth c. A decrease in inflation and output growth going back to its potential level d. An increase in inflation only

An increase in inflation and an increase in output growth

If the Federal Reserve wished to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be a. An increase in government spending growth b. A tax cut c. An increase in money supply growth d. A lower goal for inflation

An increase in money supply growth

Examples of the Federal Reserve increasing the money supply to offset (potential) shifts in the dynamic aggregate demand schedule include (choose all that apply) a. Because of fears of Y2K b. After 9/11/2001 c. After the collapse of subprime mortgage market and during the great recession

Because of fears of Y2K After 9/11/2001 After the collapse of subprime mortgage market and during the great recession

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of a. The real shock only b. The increased money supply growth only c. Both the real shock and the increased money supply growth d. Some reason other than the real shock and the increased money supply growth

Both the real shock and the increased money supply growth

If the Fed wants to increase the money supply, it will ______ Treasury securities. a. Buy b. Sell c. Hold d. Issue

Buy

Why are debit cards not listed as money? a. Because they perform the same function as checks, and checks are counted as money b. Debit cards cannot be used for payments at most stores c. Debit cards draw on checkable deposits, which are already counted as money d. Not all banks issue debit cards.

Debit cards draw on checkable deposits, which are already counted as money

Quantitative easing occurs when the a. Fed sells long-term securities b. Fed buys long-term securities c. Government lowers income and other taxes d. Government raises income and other taxes

Fed buys long-term securities

The multiplier concept is important because it shows a. Why fiscal policy is always effective b. How small changes in government spending may have large impacts on overall output c. How changes in taxes are multiplied into larger government revenues d. Why decreases in the tax rate may actually increase tax revenues overall

How small changes in government spending may have large impacts on overall output

If the economy were operating in a recession, the most appropriate fiscal policy would be to a. Decrease government spending in order to balance the budget b. Decrease both government spending and taxes c. Increase government spending and cut taxes, thus running a higher budget deficit d. Increase government spending and increase taxes in order to keep the budget balanced.

Increase government spending and cut taxes, thus running a higher budget deficit

Suppose following the events at last week's Boston Marathon people decide to hold more currency. In particular, suppose individuals decide to hold more cash (and less checkable deposits) and banks decide to hold more excess reserves. In order to "offset" the economic impact, we might expect the Federal Reserve to _________________. a. Require banks to charge lower interest rates on loans b. Increase the monetary base c. Increase the public's holdings of money market mutual funds d. Conduct an open market sale

Increase the monetary base

To restore growth and reduce unemployment in the economy, the Federal Reserve would a. Decrease the money growth rate, which will lower both the inflation rate and economic growth rate b. Decrease the money growth rate, which will increase both the inflation rate and economic growth rate c. Increase the money growth rate, which will lower both the inflation rate and economic growth rate d. Increase the money growth rate, which will increase both the inflation rate and economic growth rate

Increase the money growth rate, which will increase both the inflation rate and economic growth rate

Before the turn of the century, there was a concern about how computers would function in the next "century". In response to the heightened uncertainty surrounding Y2K, the Federal Reserve a. Decreased its lending to banks b. Increased its lending to banks c. Decreased its lending to individuals d. Increased its lending to individuals

Increased its lending to banks

Shortly after September 11, 2011, the Federal Reserve a. Decreased its lending to banks b. Increased its lending to banks c. Decreased its lending to individuals d. Increased its lending to individuals

Increased its lending to banks

All else held equal, when the Federal Reserve makes an open market purchase, the money supply: a. Increases b. Decreases c. Remains constant d. Becomes difficult to predict.

Increases

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by: a. Decreasing money supply to spur the economy out of the recession b. Increasing money supply, which may lower real interest rates and encourage borrowing c. Increasing government expenditures to spur the economy out of the recession d. Decreasing corporate taxes to encourage firms to increase their spending

Increasing money supply, which may lower real interest rates and encourage borrowing

Which of the following accounts for the largest source of tax receipts for the U.S. federal government? a. Excise tax b. Corporate income tax c. Social Security tax d. Individual income tax

Individual income tax

When the Fed lowers the federal funds rate, a. Both interest rates and the money supply increase b. Interest rates decrease but the money supply increases c. Interest rates increase but the money supply decreases d. Both interest rates and the money supply decrease

Interest rates decrease but the money supply increases

Fiscal policy a. Is the decrease in private spending that occurs when government increases spending b. 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 c. Is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations d. Is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations

Is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations

If the objective of the central bank is to maintain price stability and maximum real GDP growth, monetary policy is: a. Equally effective in dealing with real shocks and aggregate demand shocks b. More effective in dealing with real shocks than with aggregate demand shocks c. Less effective in dealing with real shocks than with aggregate demand shocks d. Totally ineffective in dealing with real shocks or aggregate demand shocks

Less effective in dealing with real shocks than with aggregate demand shocks

The Federal Reserve is often said to operate under a dual mandate. The dual mandate refers to a. Low taxes and stable interest rates b. Maximum employment and solvency protection c. Maximum employment and price stability d. Price stability and stable interest rates

Maximum employment and price stability

The dual mandate refers to the Fed's objective of ___________ and ____________. a. Low spending, low taxes b. Low spending, low inflation c. Maximum growth, low inflation d. Low taxes, maximum growth e. Low inflation, low taxes

Maximum growth; low inflation

The problem with the 2008 stimulus package that gave people tax rebates was that a. Most people saved their tax rebates b. Most people spent their tax rebates c. The rebates were too large given the economic shock d. None of the answers are correct

Most people saved their tax rebates

Fiscal policy will be less effective at offsetting shocks to a. Drops in velocity b. The dynamic aggregate demand c. Negative supply side shocks d. Increases in consumer confidence

Negative supply side shocks

The tool the Federal Reserve uses most frequently to influence the money supply is a. Open market operations b. Discount rate lending and term auction facility c. Required reserve ration and payment of interest on reserves d. Federal funds lending

Open market operations

The Federal Reserve's major tools to control the money supply are (choose all that apply): a. Open market operations b. Discount rate lending and the term auction facility c. Required reserve ratio and payment of interest on reserves d. Federal funds lending

Open market operations Discount rate lending and the term auction facility Required reserve ratio and payment of interest on reserves

Which of the following is a tool that can be used by the Federal Reserve to change the money supply? (choose all that apply) a. Open market operations b. Lending to banks and other financial institutions c. Interest on reserves

Open market operations Lending to banks and other financial institutions Interest on reserves

The federal funds rate is the a. Interest rate banks pay when they borrow directly from the Fed b. Overnight lending rate from one major bank to another c. Interest rate on short-term Treasury securities d. Ratio of reserves to deposits

Overnight lending rate from one major bank to another

Social Security is run on a ______ basis. a. Pay-as-you-go b. Contract c. Trust fund d. Prepaid

Pay as you go

The money you pay into Social Security goes to: a. An individual account b. A trust that earns interest to help pay your benefits c. Pay current beneficiaries d. The investment fund of your choice

Pay current beneficiaries

The monetary base consists of currency a. Plus checkable deposits b. Plus checkable and savings deposits c. Plus total reserves held at the Fed d. With the inclusion of coins

Plus total reserves held at the Fed

The Fed uses each of the following to control the money supply EXCEPT a. Open market operations b. Discount rate lending c. Paying an interest rate on bank reserves held at the Fed d. Prime interest rate lending e. The Fed uses all of theses

Prime interest rate lending

Which of the following is NOT one of the three major tools the Fed uses to control the money supply? a. Discount rate lending and the term auction facility b. Open market operations c. Printing paper money d. Requiring member banks to hold a higher fraction of deposits as reserves

Printing paper money

Which of the following is NOT a function of the Federal Reserve? a. Serving as the lender of last resort b. Regulating the U.S. financial system c. Regulating the U.S. money supply d. Providing loans to small businesses

Providing loans to small businesses

During the 1970s, the Fed often reacted to negative oil shocks by increasing the money supply and focusing on: a. Increasing long-run growth in the economy b. Reducing inflation c. Increases unemployment d. Raising employment and short-run economic growth

Raising employment and short-run economic growth

The tax rebate of 2008 had a relatively small impact because taxpayers primarily used the rebate to: a. Purchase their annual Christmas gifts b. Take vacations c. Reduce their debts d. All of the answers are correct

Reduce their debts

When the Fed wants to increase interest rates, it: a. Instructs banks across the nation that they must raise their rates b. Sells bonds in the open market c. Buys bonds in the open market d. Adjusts the fractional reserve ratio

Sells bonds in the open market

Open market operations refer to a. The buying and selling of stocks in the stock market b. The buying and selling of government bonds by the Fed c. Decisions by the Fed to raise or lower interest rates d. Decisions by the Fed to increase or decrease the money multiplier

The buying and selling of government bonds by the Fed

The Federal Reserve can influence the economy by shifting: a. The dynamic AD curve b. The SRAS curve c. The Solow growth curve d. All of the answers are correct

The dynamic AD curve

Other things being equal, a decrease in government spending growth causes: a. The dynamic AD curve to shift to the right b. The dynamic AD curve to shift to the left c. The Solow growth curve to shift to the right d. The Solow growth curve to shift to the left

The dynamic AD curve to shift to the left

The reason why some people are concerned about higher inflation in the future in the United States is because (choose all that apply) a. The increased growth of the monetary base in the United States b. The fear that velocity will fall more rapidly in the future c. The decline in the number of working age workers d. The concern that the Federal Reserve may have to print money to pay the debt

The increased growth of the monetary base in the United States The concern that the Federal Reserve may have to print money to pay the debt

The Federal Reserve has direct control over a. The monetary base. b. M1. c. M2. d. Checkable deposits.

The monetary base

Even if the United States experiences no more recessions and the federal government spends nothing extra on any particular program, its expenditures will still rise because: a. Unemployment benefits will rise b. The government has committed to increasing Medicare payments for the next three decades c. It will receive less foreign aid in the future d. The population is aging and thus Social Security and Medicare payments will rise

The population is aging and thus Social Security and Medicare payments will rise

The marginal tax rate is a. The tax rate paid on an additional dollar of income b. Higher on people with higher incomes c. The total tax payment divided by total income d. A separate income tax code begun in 1969 to prevent the rich from paying income taxes

The tax rate paid on an additional dollar of income

The average tax rate is a. The tax rate paid on an additional dollar of income b. Higher on people with higher incomes c. The total tax payment divided by total income d. A separate income tax code begun in 1969 to prevent the rich from paying income taxes

The total tax payment divided by total income

Suppose the Federal Reserve's objective was to maintain price stability. In the Real Business Cycle Model, where prices are fully flexible, how would the Federal Reserve respond to a positive technology shock? a. They would raise the reserve requirement b. They would raise the discount rate c. They would buy bonds d. Since the Federal can not influence inflation, they would not respond

They would buy bonds

The Federal Reserve's dual mandate refers to the Fed's main objectives (choose all that apply) a. To maintain price stability b. To maintain balanced budgets c. To oversee the Treasury d. To maintain economic growth that is consistent with full-employment

To maintain price stability to maintain economic growth that is consistent with full employment

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between a. Too low a rate of growth or too high a rate of inflation b. Too high a rate of growth or too low a rate of inflation c. Too low a rate of growth or too low a rate of inflation d. Too high a rate of growth or too high a rate of inflation

Too low a rate of growth or too high a rate of inflation

Why is monetary policy not fully effective in combating a negative supply shock? a. The Fed has no tools with which to stimulate an economy after the Solow growth curve shifts to the left b. When countering a negative supply shock, Fed action will cause deflation c. When countering a negative supply shock, Fed action will raise unemployment d. When countering a negative supply shock, Fed action will raise inflation

When countering a negative supply shock, Fed action will raise inflation