Macro Test 4- Chapters 15, 16, 17, 18

illiquid bank

bank with short-term liabilities that are greater than its short-term assets

fractional reserve banking

banks hold only a fraction of deposits on reserves, lending the rest

implementation lag

bureaucracies must implement the plan

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) $1,000 (b) $64,000 (c) $8,000 (d) $0

c) $8,000

A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. If someone earns $75,000, what is that person's marginal tax rate? (a) 10% (b) 15% (c) 20% (d) 13.3%

c) 20%

An increase in the money supply typically affects the economy with a lag that varies in time from: a) 1 to 2 months. b) 18 to 36 months. c) 6 to 18 months. d) 3 to 6 months.

c) 6 to 18 months

The main cause of higher government spending in the future will be: (a) unemployment insurance and welfare spending. (b) spending on roads, bridges, and infrastructure. (c) Medicare, Medicaid, and Social Security. (d) national defense and foreign aid.

c) Medicare, Medicaid, and Social Security.

What demographic change in the United States will cause government spending to increase in the next 50 years? a) Immigration will increase. b) Women will have fewer children. c) The population older than 65 will grow. d) The population will be younger.

c) The population older than 65 will grow.

If the Fed sells $200 million in government bonds, the total money supply will: (a) decrease by exactly $200 million. (b) not change. (c) decrease by more than $200 million. (d) decrease by less than $200 million but more than $0 million.

c) decrease by more than $200 million

In the long run, a negative real shock will cause the inflation rate to: a) remain unchanged. b) become more difficult to predict. c) increase. d) decrease.

c) increase

20. The marginal tax rate is the: (a) minimum tax rate paid on income in the United States. (b) tax rate paid on capital gains. (c) tax rate paid on each additional dollar earned. (d) average tax rate paid on all earned income.

c) tax rate paid on each additional dollar earned.

monetary policy rule

no matter what, money stays constant (Mv=PY) -requires constant v, in recessions, v falls rapidly--P/Y must fall

moral hazard

occurs when banks and other financial institutions take on too much risk, hoping that the Fed and regulators will later bail them out

liquidity crisis

occurs when banks are illiquid

solvency crisis

occurs when banks become insolvent

How to "deflate" bubble?

only monetary policy option is to reduce demand for all goods (AD)

federal funds rate

overnight lending rate from one major bank to another

Temporary Aid for Needy Families (TANF)

payments to poor households with children

quantitative easing

purchases of long-term securities by the Fed

to increase money supply, Fed ____ government bonds, and bank reserve ____

purchases; increases

How do we pay for Baby Boomers?

raised retirement age, raised taxes, lowered benefits

systematic risk

risk that the failure of one financial institution can bring down other institutions as well

quantitative tightening

sales of long-term securities by the Fed

to decrease money supply, Fed ___ government bonds, and bank reserve ___

sells; decreases

nominal GDP rule

should keep spending growth constant (Mv)

Earned Income Tax Credit

subsidizes the poor depending on how much they earn

term auction facility

-with discount rate, Fed sets interest rate (price) and sees how many banks want to borrow -the Fed sets quantity of money to inject into money supply and lets banks "bid" on loans

limits to fiscal policy

1) Crowding out 2) "Drop in the Bucket" 3) Timing 4) Real shocks

Fed's 3 main responsibilities

1) ability to issue money 2) government's bank -maintains the bank account and manages borrowing of the U.S. treasury 3) banker's bank -large private banks keep their own account at the Fed -manages the nation's payment system

evaluation/adjustment lag

did the plan work?

legislative lag

Congress must propose and pass a plan

Why do people think we will go bankrupt?

Demographics (social security, medicare)

M2

M1 +savings deposits, money market mutual funds, and small time deposits (M1 + illiquid assets)

Suppose you are a married person with one child but your whole family earns less than $20,000 a year. Which of the following will supplement your income? a) Earned Income Tax Credit b) alternative minimum tax c) Federal Insurance Contribution Act d) Social Security

a) Earned Income Tax Credit

A nominal GDP rule says _____ should always grow at a constant rate. a) Mv b) P c) YR d) M

a) Mv

Which is an example of quantitative easing by the Federal Reserve? a) The Fed purchases $50,000 worth of long-term government bonds. b) The Fed raises the money multiplier. c) The Fed lowers interest rates. d) The Fed purchases $100,000 worth of short-term government bonds.

a) The Fed purchases $50,000 worth of long-term government bonds

When the government conducts fiscal policy, it makes up for a decrease in c with: a) an increase in G . b) a decrease in YR . c) a decrease in NX . d)an increase in M.

a) an increase in G

To increase the money supply in the economy, the Fed would: a) carry out open market purchases and/or lower the discount rate. b) carry out open market sales. c) increase the discount rate. d) carry out open market sales and/or raise the reserve ratio.

a) carry out open market purchases and/or lower the discount rate.

What monetary policy philosophy is against tying the hands of the central bank? a) discretion b) rules c) inclination d) prudence

a) discretion

Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will: a) increase by $1,000. b) increase by $400. c) decrease by $1,000. d) decrease by $400.

a) increase by $1,000

To offset the effect of negative growth in money velocity (Mv), the central bank should: a) increase the growth rate of the money supply. b) apply a policy that stabilizes the growth in money velocity. c) apply a policy that reduces the growth in money velocity. d) decrease the growth rate of the money supply.

a) increase the growth rate of the money supply.

Some economists argue that the Fed should commit to keeping + fixed at a particular value, say 5%. How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock? a) increase ; do nothing b) increase ; decrease c) decrease ; increase d) increase ; increase

a) increase; do nothing

The time necessary for Congress to propose and pass a fiscal policy plan is called the: a) legislative lag. b) effectiveness lag. c) implementation lag. d) recognition lag.

a) legislative lag

Debt held outside the U.S. government is called the: (a) national debt held by the public. (b) debt-to-GDP ratio. (c) debt to foreign investor holdings. (d) total U.S. national debt.

a) national debt held by the public.

The time necessary to determine that an economic problem exists is called the: a) recognition lag. b) legislative lag. c) implementation lag. d) effectiveness lag.

a) recognition lag

When c falls, the aggregate demand curve: a) shifts to the left. b) becomes flatter. c) shifts to the right. d)becomes steeper.

a) shifts to the left

Tyler owes $100,000, but he owns Mexican Amati paintings that he could sell immediately for $80,000 or within a few months for $120,000. If these are all the assets and liabilities that Tyler has, Tyler is: (a) solvent but illiquid. (b) solvent and liquid. (c) insolvent and illiquid. (d) insolvent but liquid.

a) solvent but illiquid

The Federal Reserve can influence the economy by shifting: a) the AD curve. b) the SRAS curve. c) the LRAS curve. d) the AD, SRAS, and LRAS curves.

a) the AD curve

19. The largest source of revenue for the U.S. federal government is: (a) the individual income tax. (b) Social Security and Medicare taxes. (c) excise taxes, such as taxes on gasoline and alcohol. (d) the corporate income tax.

a) the individual income tax

The time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called the: a) adjustment lag. b) legislative lag. c) recognition lag. d) effectiveness lag.

b) legislative lag

multiplier effect

additional increase in AD caused when expansionary fiscal policy (increase in gov spending) increases income and consumer spending

national debt held by the public

all federal debt held by individuals, corporations, and governments other than the US Federal government

money multiplier

amount the money supply expands with each dollar increase in reserves (MM= 1/RR)

deficit

annual difference between federal spending and revenues

bubbles

arise when the price of the asset exceeds the fundamental value of the asset

liquid asset

asset that can be used for payments or, quickly and without loss of value, can be converted into an asset that can be used for payments (ex: cash)

If the reserve ratio is 4%, the money multiplier is: a) 16. b) 25. c) 0. d) 4.

b) 25

Which is not included in the U.S. money supplies M1 and M2? (a) savings deposits (b) bond mutual funds (c) checkable deposits (d) currency in circulation

b) bond mutual funds

Which of these would help a government fight a recession? a) paying down the national debt b) cutting taxes c) cutting spending d) raising taxes

b) cutting taxes

In the long run, a negative real shock will cause output growth to: a) increase. b) decrease. c) remain unchanged. d) become more difficult to predict.

b) decrease

The primary tools of fiscal policy are: a) government expenditure and money supply. b) government expenditure and taxation. c) taxation and interest rates. d) money supply and money demand.

b) government expenditure and taxation

The time necessary for government bureaucracies to carry out a fiscal policy plan is called the: a) legislative lag. b) implementation lag. c) recognition lag. d) effectiveness lag.

b) implementation lag

In the absence of monetary intervention following a negative shock to aggregate demand: a) inflation and real growth will decrease, but nominal wage growth will stay the same. b) inflation, real growth, and nominal wage growth will all decrease. c) inflation will increase, real growth will decrease, and nominal wage growth will stay the same. d) inflation will decrease, but real growth and nominal wage growth will increase.

b) inflation, real growth, and nominal wage growth will all decrease.

Government spending on "interest on the debt" refers to: a) spending by the U.S. government on education and highways. b) interest paid to owners of government debt held by the public. c) interest charged by the U.S. government on loans to states for education programs. d) interest charged by the U.S. government for U.S. foreign aid to other countries.

b) interest paid to owners of government debt held by the public

In the absence of any policy intervention, when −→C falls the result will be: (a) lower inflation and higher real growth. (b) lower inflation and real growth. (c) higher inflation and real growth. (d) higher inflation and lower real growth.

b) lower inflation and real growth

The annual difference between federal spending and revenues is called the: (a) national debt. (b) national deficit. (c) debt held by the public. (d) debt-to-GDP ratio.

b) national deficit

The Federal Funds rate is the: (a) interest rate on short-term Treasury securities. (b) overnight lending rate on loans from one major bank to another. (c) interest rate banks pay when they borrow directly from the Fed. (d) ratio of reserves to deposits.

b) overnight lending rate on loans from one major bank to another.

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

b) pay current beneficiaries.

Which is NOT a function of the Federal Reserve? a) serving as the lender of last resort b) providing loans to small businesses c) regulating the U.S. money supply d) regulating the U.S. financial system

b) providing loans to small businesses

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.

b) the aggregate demand curve to shift to the right.

insolvent bank

bank with liabilities greater than their assets

automatic stabilizers

change in fiscal policy stimulate AD in a recession without the need for explicit action by policymakers

monetary base (MB)

currency and total reserves held at the Fed

M1

currency plus checkable deposits (liquid assets)

A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. If someone earns $75,000, what is that person's average tax rate? (a) 20% (b) 10% (c) 15% (d) 13.3%

d) 13.3%

The maximum amount of time that a person can receive welfare payments is _____ during a lifetime. a) 25 years b) 10 years c) 2 years d) 5 years

d) 5 years

The main difference between M1 and M2 is that: a) M1 includes some less liquid assets in addition to the assets in M2. b) M2 includes more liquid assets in addition to the assets in M1. c) M1 includes more liquid assets in addition to the assets in M2. d) M2 includes some less liquid assets in addition to the assets in M1.

d) M2 includes some less liquid assets in addition to the assets in M1.

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock? a) The economy responds to the Fed's actions with no lag. b) Banks usually don't do what the Fed demands of them. c) The Fed might run out of money. d) The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

d) The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

Bill Clinton's administration experienced a federal budget surplus. Which of the following is therefore correct? a) The federal budget was still in deficit, but the deficit was smaller in amount than in previous years. b) The national debt reached record high levels. c) Government expenditure was no longer counted as part of the federal budget. d) The national debt held by the public decreased.

d) The national debt held by the public decreased.

Which of the following statements about the Social Security program is correct? a) The earlier you retire, the greater the benefits you receive from the Social Security system. b) On average, retirees in the United States receive about $8,000 per month in Social Security payments. c) Your Social Security withholdings from your paychecks are deposited into an account for you. d) Women, who generally live longer than men, benefit more from the system.

d) Women, who generally live longer than men, benefit more from the system.

One of the Fed's greatest powers is its ability to: a) help stabilize commodity prices. b) always keep a nation on its LRAS curve. c) perfectly control the supply of M1 and M2. d) boost market confidence.

d) boost market confidence

To increase the money supply in the economy, the Fed would: (a) carry out open market sales. (b) increase the discount rate. (c) carry out open market sales and/or raise the reserve ratio. (d) carry out open market purchases and/or lower the discount rate.

d) carry out open market purchases and/or lower the discount rate

Automatic stabilizers are: (a) not very effective fiscal policy. (b) subject to significant lags. (c) a result of the United States' regressive tax system. (d) changes in fiscal policy that stimulate aggregate demand in a recession without the need for explicit action by policymakers.

d) changes in fiscal policy that stimulate aggregate demand in a recession without the need for explicit action by policymakers.

Which of the following limits the effectiveness of fiscal policy? a) the big bucket effect b) the multiplier effect c) free riding behavior d) crowding out

d) crowding out

When c falls, the LRAS curve: a) becomes flatter. b) shifts to the left. c) shifts to the right. d) does not move.

d) does not move

The time necessary for a fiscal policy plan to have an impact is called the: a) implementation lag. b) recognition lag. c) legislative lag. d) effectiveness lag.

d) effectiveness lag

If the total liabilities of Bank A are less than its total assets but its short-term liabilities are greater than its short-term assets, Bank A is: a) both liquid and solvent. b) both illiquid and insolvent. c) liquid, but insolvent. d) illiquid, but solvent.

d) illiquid, but solvent

To reduce the money supply in the economy, the Fed would: a) carry out open market purchases and/or lower the discount rate. b) carry out open market purchases. c) carry out open market sales and/or lower the discount rate. d) increase the discount rate.

d) increase the discount rate

Some economists argue that the Fed should commit to keeping −→M + −→v fixed at a particular value, say 5%. How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock? (a) increase ; increase (b) increase ; decrease (c) decrease ; increase (d) increase ; do nothing

d) increase; do nothing

The Federal Reserve's major tool(s) to control the money supply is(are): a) discount rate lending. b) paying interest on reserves. c) open market operations. d) open market operations, discount rate lending, and paying interest on reserves.

d) open market operations, discount rate lending, and paying interest on reserves.

The U.S. Social Security tax (FICA) is an example of a: a) lat tax. b) progressive tax. c) proportional tax. d) regressive tax.

d) regressive tax

Which refers to the decrease in private spending when government spending increases? (a) the automatic stabilizing effect (b) the timing effect (c) the multiplier effect (d) the crowding out effect

d) the crowding out effect

medicare

healthcare for elderly

medicaid

healthcare for poor and disabled

capital gains

income gained from appreciation of an asset

______in AD results in ____ inflation

increase; high

bonds and interest rates are _____ related

inversely

lender of last resort

loans money to banks and other financial institutions when no one else will

Unemployment Insurance

makes payment to those out of work -not restricted to the poor

open market operations

the buying and selling of U.S. government bonds on the open market

crowding out

the decrease in private spending that occurs when government increases spending

discount rate

the interest rate banks pay when they borrow directly from the Fed

What is the Fed?

the national bank of the U.S. government

effectiveness lag

the plan takes time to work

recognition lag

the problem must be recognized

reserve ratio

the ratio of reserve to deposits

marginal tax rate

the tax rate paid on an additional dollar of income

average tax rate

total tax payment divided by total income

When do banks want to borrow from the "discount window"?

when banks are insolvent and/or illiquid

money

widely accepted form of payment including: 1) currency- paper bills and coins 2) total reserves held by banks at the Fed (not for public) 3) checkable deposits 4) savings deposits, money market mutual funds, and small time deposits