Macro Test 3

All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually

fall

A decline in the real interest rate will shift the investment-demand curve to the right. t/f

false

According to the Taylor rule,

if inflation rises by 1 percentage point above its target, then the Fed should raise their targeted interest rate by 1.5 percentage points.

Benefits from international trade are based on differences in the following areas, except

income levels

If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will

increase the interest rate and reduce the price level, assuming it is flexible downward.

A protective tariff will

increase the price and sales of domestic producers.

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then, other things equal,

investment will take place until i and r are equal.

If the slope of the consumption schedule is 0.75, then the slope of the saving schedule

is 0.25.

As it relates to international trade, dumping

is the practice of selling goods in a foreign market at less than cost.

The "eurozone"

is the subset of the EU that uses a common currency.

Which line in the graph would best illustrate the supply of money curve?

line 2

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. Suppose that consumption decreased by $2 billion at each level of DI in each of the three countries. We can conclude that the

marginal propensity to consume will remain unchanged in each of the three countries.

Which one of the following is a tool of monetary policy used by the Fed for altering the interest rates of bonds?

open-market operations

Refer to the graphs. Terryville has a comparative advantage in producing

product A.

The reason the Fed is set up as an independent agency of government is to

protect it from political pressure.

A maximum limit set on the amount of a specific good that may be imported into a country over a given period of time is called a

quota.

Refer to the given graph. A movement from b to a along C1 might be caused by a(n)

recession

If households consume less at each level of disposable income, they are

saving more

The Federal Open Market Committee (FOMC)

sets policy on the sale and purchase of government bonds by the Fed.

In an economy, for every $10 million increase in disposable income, saving increases by $2 million. It can be concluded that the

slope of the consumption schedule is 0.8.

Which of the following items are included in money supply M2 but not M1?

small time deposits

A tariff is a

tax.

If there is a decrease in disposable income in an economy, then

the APC rises and the APS falls

An inflation rate of 8 percent would erode the purchasing power of the dollar by

7.4 percent.

Which of the following is correct?

APC + APS = 1.

The tables give production possibilities data for two countries, Alpha and Beta, which have populations of equal size.

Beta is more efficient than Alpha both in catching fish and in producing chips.

In response to the zero lower bound problem,

the Fed pursued quantitative easing.

The consumption schedule is such that

the MPC is constant and the APC declines as income rises

NAFTA established a free-trade area and eliminated trade barriers between

the United States, Mexico, and Canada.

Checkable deposits include

the deposits held by banks and thrifts on which checks can be written.

Which of the following arguments for trade protection is based on the premise that a nation should have a wide enough range of domestic industries to be self-sufficient if necessary?

the diversification-for-stability argument

(Last Word) "Toppling Dominoes" (adopted from Art Buchwald's article "Squaring the Economic Circle") is a humorous description of

the multiplier.

In 2018, the United States became a net exporter of oil. t/f

true

The United States has a trade surplus in services.

true

If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule

will shift downward.

Which of the following is a valid counterargument against using tariffs to protect high wages from cheap foreign labor?

Wage rates in a nation are largely determined by productivity, not trade tariffs.

Which of the following is a likely result of imposing tariffs to increase domestic employment?

an increase in the possibility of retaliatory tariffs

The members of the Federal Reserve Board

are appointed for 14-year terms.

If disposable income decreases from $1,800 to $1,500 and MPC = 0.75, then saving will

decrease by $75.

The accompanying table shows the output (either machines or wine) that each unit of input in France and Germany can produce. We see that

Germany has a comparative advantage in producing wine.

Michelle transfers $4,000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?

M1 stays the same and M2 stays the same

Refer to the given diagram, which shows consumption schedules for economies A and B. We can say that the

MPC is greater in A than in B.

Refer to the diagram, which pertains to two nations and a specific product. Point G is the

domestic price for the nation represented by lines GB and GD.

In order for mutually beneficial trade to occur between two otherwise isolated nations,

each nation must have a comparative advantage in at least one product.

One major advantage of money serving as a medium of exchange is that it allows society to

escape the complications of barter.

What is the principle of comparative advantage?

Comparative advantage is a situation in which a person or country can produce a specific product at a lower opportunity cost in terms of other types of output foregone than some other person or country; the basis for specialization and trade. The principle of comparative advantage shows that it is advantageous for a country to specialize and trade with other countries even if it is less productive (in the engineering sense) in all economic activities relative to other nations. A nation with an absolute disadvantage in all products can also benefit from trade just as long as it has a comparative advantage in at least one product (which in practice is always the case).

Paper money (currency) in the United States is issued by the

Federal Reserve System.

Which of the following is included as part of the M1 money supply?

$200,000 balance in the checking account of Main Street Trading Corp.

Refer to the accompanying graph, where Sd and Dd are the domestic supply and demand curves for a product. The world price of the product is $6. If the market is open to international trade but there is a tariff of $2 per unit imposed, the total government revenue generated by the tariff would be

$80.

Assume the Fed reduces interest rates by buying government bonds in the open market, but banks do not make more loans because economic conditions are bad. This situation is a problem of

"You can lead a horse to water, but you can't make it drink."

Refer to the given table. The value of the dollar in year 3 is

$1.25

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be

$10 billion.

If there is a 2 percent unemployment gap and the inflation rate is 1 percent, then according to the Taylor rule, the Fed should make their target interest rate

0.5 percent.

What is the slope of the consumption schedule or consumption line for a given economy?

1 − MPS

If the MPS is only half as large as the MPC, the multiplier is

3

1 + MPS = MPC

False, MPC+MPS=1

As it relates to Federal Reserve activities, the acronym FOMC describes the

Federal Open Market Committee.

Which of the following statements about quantitative easing is most accurate?

Quantitative easing refers to the Fed's use of open-market operations to buy hundreds of billions of dollars' worth of long-term bonds.

Describe the three key entities in the Federal Reserve System and their functions.

The Board of Governors consists of seven members that are appointed by the president for 14-year terms. They supervise and control the money and banking system. The 12 Federal Reserve Banks are quasi-public banks and act as a banker's bank in each of their designated regions. They collectively act as the central bank of the United States by setting monetary policy and regulating the private banking system under the direction of the Board of Governors. The Federal Open Market Committee (FOMC) is a 12-member group that consists of the seven Board of Governors members, the president of the New York Federal Reserve Bank, and four other presidents of Federal Reserve Banks, each serving on a one-year rotating basis. The FOMC meets regularly to direct the purchase and sale of government securities in the open market.

How do long terms for appointments benefit the Federal Reserve's Board of Governors?

The long-term appointments provide the board with continuity, experienced membership, and independence from political pressures that could result in inflation.

An asset's liquidity refers to its ability to be

a means of payment.

When economists say that money serves as a medium of exchange, they mean that it is

a means of payment.

Refer to the diagram. Assume that for the entire business sector of a private closed economy there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. Which of the lines on the diagram represents these data?

b

In the accompanying diagrams, solid lines are production possibilities curves, and the dashed lines are trading possibilities curves. The opportunity cost of producing a

beer in West Lothian is 0.5 pizza.

The investment-demand curve will shift to the left as the result of

business pessimism about future economic conditions.

Money supply M1 does not include the currency held by

commercial banks.