Macroeconomics Exam 4 Review

The Federal Reserve System is the ___ for the United States

Central Bank

The difference between a budget deficit and government debt is that:

a deficit is an amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes

The reserve ratio is defined as the ratio of:

bank reserves to customers' checkable bank deposits.

Monetary Policy affects aggregate demand through changes in:

consumer and investment spending

Among the liabilities of banks are:

customers' deposits

The main objective of contractionary monetary policy is to:

decrease aggregate output

The guarantee by the FDIC to reimburse bank customers up to $250,000 per deposit in the event of bank problems is called:

deposit insurance

The reserve ratio is the fraction of its

deposits that a bank holds as reserves

Monetary policy that lowers the interest rate is called ___ because it ___

expansionary; increases aggregate demand.

Public debt is:

government debt held by individuals and institutions outside the government

Transfer payments are payments that

governments make to households although the government did not receive a good or service from the household.

When the federal reserve buys treasury bills, this leads to a(n):

increase in the money supply

if the federal reserve wants to lower the interest rate, it will:

increase the money supply

if the federal reserve wants to lower interest rates, it can ___ the money supply by ___ Treasury Bills.

increase; buying

When the budget is in deficit, the government generally:

increases the public debt (do this by issuing bonds and borrowing funds from the public)

Expansionary monetary policy ___ the money supply, ___ interest rates, and ___ consumption and investment spending.

increases; decreases; increases

Expansionary monetary policy does NOT increase

interest rates

Among assets of a bank are

loans

A bank run occurs when:

many bank depositors are trying to withdraw their funds from the bank

The Federal Reserve affects interest rates by:

open market operations that shift the money supply curve

The primary taxes at the U.S. federal level are

personal income taxes, corporate profit taxes, and social insurance taxes.

Which source of tax revenue is the LARGEST one for the U.S. federal government?

personal income taxes.

When the government borrows funds to pay for budget deficits:

private investment spending may be crowded out.

Sales tax, property taxes, and fees of various kinds:

provide revenue for state and local governments

suppose the federal reserve has a set target for the federal funds rate. If initially, the equilibrium interest rate happens to be higher than the target interest rate, then the federal reserve should ___ Treasury bills in the open market, ___ the money supply, shift the supply of money curve to the ___, and ___ the interest rate to the target rate.

purchase; increase; right; lower

The existence of banks

results in the money supply being larger than the amount of currency in circulation.

suppose the budget deficit of a country remains level for five years. The federal debt will:

rise. (deficit adds up to debt)

The national debt _____ when the federal government incurs a _____.

rises; deficit

Sources of federal tax revenue do NOT include:

sales tax

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will _____ Treasury bills in the open market, _____ the supply of money, and _____ the interest rate to the target rate.

sell; decrease; raise

Reserve Requirements (RR)

set the minimum amount of reserves a bank must hold

Sources of state and local revenue do NOT include:

social insurance taxes

In terms of dollar costs, in the United States, the three primary transfer payments are

social security, medicare, and medicaid

a major problem with bank runs is that they

spread to other banks

The larger the amount of outstanding public debt:

the larger the fraction of the federal budget deficit that must be devoted to interest payments.

Banks can lend money because:

they know not everyone wants their deposits back at the same time

Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by:

$400

If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is:

25%

Open market operations are carried out by the Federal Reserve Bank of:

New York

Other things equal, rising interest rates lead to a ___ in investment spending and a ___ in ___ spending.

Fall; Fall; Consumer

In the United States, the institution that is charged with determining the size of the monetary base and with regulating the banking system is:

Federal Reserve

A government can pay off its debts if:

GDP grows faster than the debt

the national debt:

Grows when the government runs a deficit

The Federal Reserve Bank of the United States is:

Part of the U.S. Government (Highly independent, while still part of the gov.)

Bank Reserves are:

The currency held at bank vaults plus bank deposits at the federal reserve

What would be the immediate effect if an individual made a $9,000 cash deposit in a bank?

The money supply would not be effected

Banks don't lend out all of the funds deposited because:

They have to satisfy any depositor who wants to withdraw funds