Macroeconomic test #2

3. Banks can hold deposits at the Federal Reserve. Balances in these accounts can be used by banks to meet their reserve requirements, but the Fed pays no interest on these deposits. True OR False

FALSE

10. Just after the terrorist attack on September 11, 2001, the Fed stood ready to lend financial institutions funds. When the Fed did this, it was acting in its role of lender of last resort. True OR False

TRUE

2. The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate, the Fed provides banks with a greater incentive to borrow from it. True or False

TRUE

2. When the Soviet Union began breaking up in the late 1980s, cigarettes began replacing the ruble as the medium of exchange even though the ruble was legal tender. The cigarettes provide an example of commodity money. True OR False

TRUE

2. When the value of money is on the vertical axis, the money supply curve is vertical and shifts right if the Federal Reserve buys bonds. True OR False

TRUE

3. Demand deposits are balances in bank accounts that depositors can access by writing a check or using a debit card. True OR False

TRUE

4. M2 is both larger and less liquid than M1. True OR False

TRUE

5. The Federal Reserve was created in 1913 after a series of bank failures in 1907. True OR False

TRUE

12. Which list ranks assets from most to least liquid? a. Currency, cars, bonds b. Currency, bonds, cars c. Cars, currency, bonds d. Cars, bonds, currency

b. Currency, bonds, cars

21. The slope of the demand for loanable funds curve represents the a. positive relation between the interest rate and investment. b. negative relation between the interest rate and investment. c. positive relation between the interest rate and saving. d. negative relation between the interest rate and saving.

b. negative relation between the interest rate and investment.

1. If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of goods and services. True OR False

TRUE

6. Members of the Board of Governors are appointed by the president of the U.S. and confirmed by the U.S. Senate. True OR False

TRUE

8. Banks cannot influence the money supply if they are required to hold all deposits in reserve. True False

TRUE

9. Assuming banks hold no excess reserves, an increase in the reserve requirement increases reserves and decreases the money supply. True OR False

TRUE

List---------------Amount Dollars kept in coffee cans and wallets--------------------------$150 Savings accounts-----$300 Credit card limits------$200 Checking accounts----$350 Small time deposits-----$75 Restricted retirement accounts- -------------------------$175 Money market mutual funds--$400 4. Calculate the money stock M2 for this economy. a. $1,275 b. $1,450 c. $1,475 d. $1,650

a. $1,275

Problems 3-4. The table contains information about the values of monetary and nonmonetary assets in an economy. List---------------Amount Dollars kept in coffee cans and wallets--------------------------$150 Savings accounts-----$300 Credit card limits------$200 Checking accounts----$350 Small time deposits-----$75 Restricted retirement accounts- -------------------------$175 Money market mutual funds--$400 3. Calculate the money stock M1 for this economy. a. $800 b. $875 c. $975 d. $1,000

a. $800

23. If the government instituted an investment tax credit, then which of the following would be higher in equilibrium? a. Saving and the interest rate b. Saving but not the interest rate c. The interest rate but not saving d. Neither saving nor the interest rate

a. Saving and the interest rate

13. Which of the following statements is correct? a. The expected future profitability of a corporation influences the demand for its stock. b. When a corporation sells stock as a means of raising funds it is engaging in debt finance. c. The owners of bonds sold by the Microsoft Corporation are part owners of that corporation. d. A corporation is paid every time its shares of stock are traded on organized stock exchanges.

a. The expected future profitability of a corporation influences the demand for its stock.

Problems 24-25. The figure depicts a supply-of-loanable-funds curve and two demand-for loanable-funds curves. 24. What is measured along the horizontal axis of the graph? a. The quantity of loanable funds b. The size of the government budget deficit or surplus c. The interest rate d. Private saving

a. The quantity of loanable funds

14. If an economy uses silver as money, then that economy's money a. is commodity money. b. has no intrinsic value. c. is fiat money. d. has no store of value.

a. is commodity money.

1. The source of the supply of loanable funds a. is saving and the source of demand for loanable funds is investment. b. is investment and the source of demand for loanable funds is saving. c. and the demand for loanable funds is saving. d. and the demand for loanable funds is investment.

a. is saving and the source of demand for loanable funds is investment.

21. When the Fed conducts open-market purchases, a. it buys U.S. Treasury securities, which increases the money supply. b. it buys U.S. Treasury securities, which decreases the money supply. c. it borrows money from member banks, which increases the money supply. d. it lends money to member banks, which decreases the money supply.

a. it buys U.S. Treasury securities, which increases the money supply.

5. If the bank faces a reserve requirement of 6 percent, what are the amounts of required reserves and excess reserves? a. required reserves are $12,000 and excess reserves are $18,000. b. required reserves are $18,000 and excess reserves are $12,000. c. required reserves are $12,000 and excess reserves are $30,000. d. required reserves are $18,000 and excess reserves are $30,000.

a. required reserves are $12,000 and excess reserves are $18,000.

2. Other things the same, a higher interest rate induces people to a. save more, so the supply of loanable funds slopes upward. b. save less, so the supply of loanable funds slopes downward. c. invest more, so the supply of loanable funds slopes upward. d. invest less, so the supply of loanable funds slopes downward.

a. save more, so the supply of loanable funds slopes upward.

17. In a closed economy, private saving is a. the amount of income that households have left after paying for their taxes and consumption. b. the amount of income that businesses have left after paying for the factors of production. c. the amount of tax revenue that the government has left after paying for its spending. d. always equal to investment.

a. the amount of income that households have left after paying for their taxes and consumption.

5. When the money supply curve shifts from MS1 to MS2, a. the equilibrium value of money increases. b. the equilibrium price level increases. c. the supply of money has increased. d. the demand for goods and services will increase.

a. the equilibrium value of money increases.

Problems 18-20. Assume the following information for an imaginary, closed economy. Category In Dollars GDP $170,000 Taxes $29,000 Government Purchases $34,000 National Saving $17,000 20. For this economy, private saving amounts to GDP = tax + consumption a. $12,000. b. $22,000. c. $17,000. d. −$22,000.

b. $22,000.

GDP = $19 trillion, C = $13 trillion, G = $2.5 trillion, and the budget deficit = $1.2 trillion. 3. What is the amount of private saving? a. $3.5 trillion b. $4.7 trillion c. $6.0 trillion d. $17.7 trillion

b. $4.7 trillion

GDP = $19 trillion, C = $13 trillion, G = $2.5 trillion, and the budget deficit = $1.2 trillion. 1. What is the amount of public saving? a. $1.2 trillion b. -$1.2 trillion c. $1.3 trillion d. -$1.3 trillion

b. -$1.2 trillion explanation: public savings = investment 19 = 13 + 2.5 + I

Problems 4-5. The following table shows the balance sheet of the First Bank of Roswell. The First Bank of Roswell Assets ----------------------Liabilities Reserves: $30,000----------Deposits: $200,000 Loans: $170,000 4. The ratio of reserves to deposits is called the reserve ratio. What is the reserve ratio for the First Bank of Roswell? a. 8% b. 15% c. 85% d. 667%

b. 15%

Problems 24-25. The figure depicts a supply-of-loanable-funds curve and two demand-for loanable-funds curves. 25. Which of the following events would shift the demand curve from D1 to D2? a. The government goes from running a budget deficit to running a budget surplus. b. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories. c. A change in the tax laws encourages people to consume less and save more. d. A change in the tax laws encourages people to consume more and save less.

b. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories.

5. Which of the following events would shift the supply curve from S1 to S2? a. In response to tax reform, firms are encouraged to invest more than they previously invested. b. In response to tax reform, households are encouraged to save more than they previously saved. c. Government goes from running a balanced budget to running a budget deficit. d. Any of the above events would shift the supply curve from S1 to S2.

b. In response to tax reform, households are encouraged to save more than they previously saved.

15. Which of the following is included in M2? a. Credit cards b. Money market mutual funds c. Corporate bonds d. Large time deposits

b. Money market mutual funds

10. When the government budget deficit rises, national saving is reduced, interest rates rise, and investment falls. True and False

true

5. By definition, government purchases and taxes are zero for a closed economy. True or False

False

6. In a closed economy, investment must be equal to private saving. True or False

False

9. An increase in the budget deficit shifts the demand for loanable funds to the right. True or False

False

1. If the Fed buys bonds in the open market, the money supply decreases. True or False

Correct! False

1. Commodity money cannot be used as a unit of account. True OR False

FALSE

7. Fractional reserve banking is a system where banks must hold an amount of cash based on a percentage of their loans. True OR False

FALSE

1. When economists refer to investment, they mean the purchasing of stocks and bonds and other types of saving? True or False

False

2. The sale of either stocks or bonds to raise money is known as equity finance. True or False

False

3. Index funds are usually outperformed by mutual funds that are actively managed by professional money managers. True or False

False

4. All financial intermediaries are financial institutions, but not all financial institutions are financial intermediaries. True or False

True

7. If, for an imaginary closed economy, investment amounts to $10,000 and the government is running a $2,500 deficit, then private saving must amount to $12,500. True or False

True

8. Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left. True or False

True

Problems 11-25. (Multiple Choice Questions) 11. The following table describes what traders in a small economy want versus what they have. Which, if any, pairs of traders has a double coincidence of wants? Trader-------------- Has------------- Wants Aaliyah------------an apple--------a grapefruit Jelani=============A carrot---------a tomato Dalton-------------a grapefruit ---an apple Malika-------------a zucchini------ a carrot a. Only Jelani with Malika b. Only Aaliyah with Dalton c. Jelani with Malika, and Aaliyah with Dalton d. Jelani with Aaliyah, and Malika with Dalton

b. Only Aaliyah with Dalton

Problems 3-5. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. 3. What is measured along the vertical axis of the graph? a. The tax rate b. The interest rate c. The quantity of public saving d. The quantity of loanable funds

b. The interest rate

3. When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, the money demand curve slopes a. upward, because at higher prices people want to hold more money. b. downward, because at higher prices people want to hold more money. c. downward, because at higher prices people want to hold less money. d. upward, because at higher prices people want to hold less money.

b. downward, because at higher prices people want to hold more money.

2. What are the components of M2? a. everything in M1 and small time deposits b. everything in M1, small time deposits, and balances at money market mutual funds c. demand deposits, savings deposits, and small time deposits d. currency, demand deposits, savings deposits, and small time deposits

b. everything in M1, small time deposits, and balances at money market mutual funds

16. Consider a closed economy. What remains after paying for consumption and government purchases is a. national disposable income. b. national saving. c. public saving. d. private saving.

b. national saving.

13. You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______. a. store of value, medium of exchange, unit of account b. store of value, unit of account, medium of exchange c. medium of exchange, unit of account, store of value d. medium of exchange, store of value, unit of account

b. store of value, unit of account, medium of exchange

GDP = $19 trillion, C = $13 trillion, G = $2.5 trillion, and the budget deficit = $1.2 trillion. 2. What is the amount of taxes (precisely, taxes minus transfer payments)? a. $1.2 trillion b. -$1.2 trillion c. $1.3 trillion d. -$1.3 trillion

c. $1.3 trillion

20. A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank, what is the value of the money supply? a. $50 b. $100 c. $150 d. $200

c. $150

GDP = $19 trillion, C = $13 trillion, G = $2.5 trillion, and the budget deficit = $1.2 trillion. 4. What is the amount of national saving? a. $1.2 trillion b. $2.5 trillion c. $3.5 trillion d. $4.7 trillion

c. $3.5 trillion

GDP = $19 trillion, C = $13 trillion, G = $2.5 trillion, and the budget deficit = $1.2 trillion. 5. What is the amount of investment? a. $1.2 trillion b. $2.5 trillion c. $3.5 trillion d. $4.7 trillion

c. $3.5 trillion

Problems 16-17. The information in the following table pertains to the hypothetical economy of Florencial. Type of Money---------------------------Amount (Billions of dollars) Large time deposits-------------------------120 Small time deposits-------------------------80 Demand deposits--------------------------300 Savings deposits----------------------------50 Government bonds-------------------------65 Money market mutual funds---------------200 Currency------------------------------------150 Credit card balances-----------------------300 Miscellaneous categories of M2------------30 16. What is the M1 money supply in Florencial? a. $705 billion b. $570 billion c. $500 billion d. $585 billion

c. $500 billion

Type of Money---------------------------Amount (Billions of dollars) Large time deposits-------------------------120 Small time deposits-------------------------80 Demand deposits--------------------------300 Savings deposits----------------------------50 Government bonds-------------------------65 Money market mutual funds---------------200 Currency------------------------------------150 Credit card balances-----------------------300 Miscellaneous categories of M2------------30 17. What is the M2 money supply in Florencial? a. $1,300 billion b. $580 billion c. $810 billion d. $950 billion

c. $810 billion

19. Which of the following statements regarding the Federal Open Market Committee is correct? a. Only the five voting regional Fed presidents attend the meetings. b. All regional Fed presidents attend and vote at the meetings. c. All regional Fed presidents attend the meetings, but only five get to vote. d. Regional Fed presidents may neither attend nor vote the meetings.

c. All regional Fed presidents attend the meetings, but only five get to vote.

14. Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct? a. Because they have the same term to maturity, the interest rates should be the same. b. Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate. c. Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate. d. It is not possible to say if one bond has a higher interest rate than the other.

c. Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.

What types of assets must be included in M1? a. currency only b. currency and demand deposits only c. currency, demand deposits, and other liquid deposits d. currency, demand deposits, and other liquid deposits excluding money market deposit accounts

c. currency, demand deposits, and other liquid deposits

Problems 18-20. Assume the following information for an imaginary, closed economy. Category In Dollars GDP $170,000 Taxes $29,000 Government Purchases $34,000 National Saving $17,000 19. This economy's government is running a budget is? (taxes-government purchases) a. surplus of $5,000. b. deficit of $12,000. c. deficit of $5,000. d. surplus of $12,000.

c. deficit of $5,000. explanation: 29,000 - 34,000 = -5,000

22. If there is a surplus of loanable funds, then the quantity of loanable funds demanded is a. greater than the quantity of loanable funds supplied and the interest rate will rise. b. greater than the quantity of loanable funds supplied and the interest rate will fall. c. smaller than the quantity of loanable funds supplied and the interest rate will fall. d. smaller than the quantity of loanable funds supplied and the interest rate will rise.

c. smaller than the quantity of loanable funds supplied and the interest rate will fall.

Problems 18-20. Assume the following information for an imaginary, closed economy. Category In Dollars GDP $170,000 Taxes $29,000 Government Purchases $34,000 National Saving $17,000 18. For this economy, investment amounts to (national saving = I) a. $5,000. b. $29,000. c. $34,000. d. $17,000.

d. 17,000 explanation investment = national savings

Use the following diagram to solve Problems 4-5. 4. If the money supply curve is represented by MS1, what is the equilibrium price level? a. 1/4 b. 1/2 c. 2 d. 4

d. 4

12. Which of the following statements about the term of a bond is correct? a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment. b. The term of a bond is determined entirely by its credit risk. c. The term of a bond is determined entirely by how much sales commission the buyer of the bond pays when they purchase the bond. d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

18. Which of the following is correct? a. The Federal Reserve has 14 regional banks. The Board of Governors has up to 12 members who serve 7-year terms. b. The Federal Reserve has 14 regional banks. The Board of Governors has up to 7 members who serve 14-year terms. c. The Federal Reserve has 12 regional banks. The Board of Governors has up to 12 members who serve 7-year terms. d. The Federal Reserve has 12 regional banks. The Board of Governors has up to 7 members who serve 14-year terms

d. The Federal Reserve has 12 regional banks. The Board of Governors has up to 7 members who serve 14-year terms

4. What is measured along the horizontal axis of the graph? a. The tax rate b. The interest rate c. The quantity of public saving d. The quantity of loanable funds

d. The quantity of loanable funds

15. Financial intermediaries are a. the same as financial markets. b. individuals who make profits by buying a stock low and selling it high. c. a more general name for financial assets such as stocks, bonds, and checking accounts. d. financial institutions through which savers can indirectly provide funds to borrowers.

d. financial institutions through which savers can indirectly provide funds to borrowers.

11. At the broadest level, the financial system moves the economy's scarce resources from a. the rich to the poor. b. financial institutions to business firms and government. c. households to financial institutions. d. savers to borrowers.

d. savers to borrowers.