Macroeconomics Final

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

$40 million.

As shown in Exhibit 9-2, equilibrium GDP is:

$5 trillion.

Assume all banks in the system started with the balance sheet shown in Exhibit 15-4 and the Fed makes a $1,000 open market purchase. The result would be a(n):

$5,000 expansion of the money supply.

Use the aggregate expenditures model and assume the marginal propensity to consume (MPC) is 0.80. An increase in government spending of $1 billion would result in an increase in GDP of:

$5.0 billion.

As shown in Exhibit 8-4, if disposable income is $600, saving is:

$50 billion.

Assume all banks in the system started with balance sheets as shown in Exhibit 15-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

$500,000 expansion of the money supply.

If Y = $100 billion, then C = $50 billion, and I = $60 billion. What will autonomous investment be when Y = $200 billion and C = $100 billion?

$60 billion

Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP?

$75 increase in government spending.

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could expand the money supply by as much as:

$80,000.

In Exhibit 10-5, which one of the following could cause the U.S. aggregate demand curve to move from AD3 to AD2?

A recession in Japan.

Which of the following will shift the consumption function upward?

An increase in consumer wealth.

Which of the following could be expected to shift the aggregate demand curve?

An increase in government spending. Consumption spending decreases. Net exports fall.

Which one of the following will shift the consumption function upward?

An increase in real assets.

Which of the following would cause the money supply in the United States to decrease?

An increase in reserve requirements

Which one of the following changes is consistent with a change in an economy's consumption function from C = $500 billion + 0.80Y to C = $700 billion + 0.80Y?

An increase in wealth.

Within the framework of the aggregate expenditures model, what will happen if an economy is operating at a real GDP greater than full-employment real GDP?

An inflationary gap exists.

Which of the following is not a reason for the downward slope of the aggregate demand curve?

Government spending effect

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

Increased government spending.

In the____________range of the aggregate supply curve, expansionary fiscal policy causes aggregate ___________ to increase, which results in a higher price level and a higher equilibrium level of real GDP.

Intermediate, demand

The difference between M1 and M2 is given by which of the following?

M1 is made up of currency, traveler's checks, and money in checkable accounts, whereas M2 contains M1 plus savings deposits and time deposits.

Who owns the Fed?

Member banks.

Which of the following is an interest-earning asset of banks?

None of these are interest-earning assets of banks.

Which of the following is not a component of the M1 money supply?

Outstanding balances on credit cards.

Which of the following is not counted as part of M1?

Passbook savings deposits.

Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the following?

People's desire to maintain real wealth holdings, the interest rate, and international trade.

Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

Personal income tax revenues. Corporate income tax revenues. Unemployment benefits.

Which of the following is not one of the functions of the Federal Reserve?

Printing currency.

Michelle Martelle, CEO of Michelle Enterprises, has five projects in hand and is considering which, if any, to undertake. Their expected returns are: project A = 12 percent, project B = 7 percent, project C = 10 percent, project D = 9 percent, and project E = 8 percent. If the interest rate is 8.5 percent, which, if any, investment projects will she accept?

Projects A, C and D.

Which of the following is not an automatic stabilizer?

Property tax revenue.

According to classical macroeconomic theory, if real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium?

Real GDP will remain unchanged but the price level will rise.

M1 money includes all but which one of the following?

Savings accounts.

An advocate of supply-side fiscal policy would advocate which of the following?

Subsidies to produce technological advances. Reduction in regulation. Reduction in resource prices. Reduction in taxes.

Which of the following institutions is responsible for supervising the banking system of the United States?

The Federal Reserve System.

Banks that wish to borrow required reserves can turn to the federal funds market.

True

By functioning as a unit of account, money provides a common measurement of the relative value of goods and services.

True

Contractionary fiscal policy is designed to combat demand-pull inflation and consists of a decrease in government spending and/or an increase in taxes.

True

If people become pessimistic about the state of the economy, the consumption function shifts downward.

True

If the marginal propensity to consume is 0.80, the value of the spending multiplier will be 5.

True

In the aggregate expenditures model, if aggregate expenditures (AE) equals $7 trillion and GDP equals $8 trillion, then inventory accumulation equals $1 trillion.

True

Money is said to be liquid because it is immediately available to spend for goods.

True

Supply-side fiscal policies were advocated by the Reagan administration.

True

Supply-siders believe that high tax rates are a disincentive to labor supply.

True

The Federal Reserve's most important function is to change the money supply in order to smooth out the business cycle.

True

The aggregate demand curve shifts due to changes in consumption expenditures, investment expenditures government spending, and net exports.

True

The aggregate supply curve is vertical at the level of real GDP that corresponds to the natural rate of unemployment.

True

Which of the following is the best example of an automatic stabilizer?

Welfare payments.

If a bank that is subject to a 10 percent required reserve ratio has $20,000 in excess reserves, it can make new loans of:

$20,000.

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

$20,000.

In the aggregate expenditures model, assume that the MPC is 0.75. An increase in investment spending of $6 billion would produce an ultimate increase in real GDP of:

$24 billion.

In Exhibit 15-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:

be able to make additional loans worth $200,000.

As shown in Exhibit 8-5, dissaving occurs:

between $0 and $2 trillion disposable income.

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:

both real GDP and the price level will fall.

If the Fed wishes to increase the money supply then it should:

buy government securities on the open market.

If the marginal propensity to save is 0.40, a $20 billion increase in investment spending would cause equilibrium output to:

increase by $50.

A decrease in the required reserve ratio will:

increase commercial bank loans and increase the money supply.

To close a recessionary gap using fiscal policy, the government can:

increase government spending by the size of the gap.

Assume a simplified banking system subject to a 25 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

increases $400,000.

When the Fed purchases government securities, it:

increases banks' reserves and makes possible an increase in the money supply.

The government is pursuing an expansionary policy if it:

increases its spending and/or reduces its tax revenues.

When the Fed buys government securities, it:

increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public.

Expansionary fiscal policy consists of:

increasing government spending.

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:

interest-rate effect.

If a major technological breakthrough occurs, then the:

investment demand curve will shift upward.

If something is a medium of exchange, then it:

is widely accepted as payment for purchases.

In the United States, the purchasing power of money is determined by:

its acceptability.

According to the Keynesian model, an economy will have persistent, high unemployment if:

its total spending is too low.

In the Keynesian model, the larger the marginal propensity to consume, the:

larger the multiplier.

The ease with which an asset can be converted into a medium of exchange is known as:

liquidity

The ease with which an asset can be converted into a medium of exchange is:

liquidity.

The money supply will grow faster through deposit creation when the required reserve ratio is:

low and banks are able to lend out all of their excess reserves.

When the Fed lowers the discount rate, it:

lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.

The fraction of each added dollar of disposable income that is used for consumption is called the:

marginal propensity to consume (MPC).

The change in consumption divided by a change in income is called the:

marginal propensity to consume.

The ratio of a change in consumption to a change in disposable income is the:

marginal propensity to consume.

The change in saving divided by the change in disposable income is the:

marginal propensity to save.

Buying a cup of coffee with a dollar bill represents the use of money as a:

medium of exchange.

The use of a dollar bill to buy a concert ticket represents the function of money as a:

medium of exchange.

An increase in the rate of interest, other things being equal, will cause a(n):

movement upward along the investment demand curve.

Assume that an inflationary gap must be closed by reducing aggregate expenditures. If consumers refuse to cut spending on consumption and producers won't cut demand for investment goods, the President:

must cut government spending.

The conduct of monetary policy is the responsibility of:

the Federal Reserve System.

A recessionary gap can be defined as:

the amount by which aggregate expenditures falls short of the level needed to generate equilibrium real GDP at full employment without inflation.

the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels.

the economy may remain below full employment unless aggregate expenditures increase.

The aggregate demand curve will shift rightward when there is:

the expectation that future consumer income will rise.

The aggregate demand curve indicates the relationship between:

the general price level and the aggregate quantity of goods and services demanded.

When an economy is operating below its potential capacity, Keynesian economists argue that:

the government should cut taxes and/or increase spending in order to stimulate aggregate demand.

The federal funds rate is:

the interest rate on loans made by banks to other banks

Within the framework of the Keynesian model, if aggregate expenditures exceed aggregate output, then:

the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels.

In Exhibit 8-1, when disposable income is increased from $2,000 to $3,000 to $4,000,

the marginal propensity to consume decreases from 0.7 to 0.6.

The required reserve ratio is:

the minimum amount of reserves the Fed requires a bank to hold

M1 refers to:

the most narrowly defined money supply definition. currency held by the public plus checking account balances. the smallest of the money-supply definitions.

For barter exchange to take place,

there has to be a coincidence of wants.

In the aggregate expenditures model, if aggregate expenditures (AE) are greater than GDP, then:

employment increases.

According to the Laffer curve, the federal tax rate affects:

incentive to work. savings. investment. tax revenue.

The money supply known as M2:

includes savings accounts and small denomination time deposits.

Which of the following correctly describes the aggregate supply curve?

A curve that shows the level of real GDP produced at different possible price levels.

At a real GDP of $500 billion in Exhibit 9-4, the economy experiences inventory:

depletion of $250 billion.

The economy shown in Exhibit 9-6 has a recessionary gap of:

$1 trillion.

Suppose the economy is in equilibrium at 9.5 trillion dollars of GDP per year and a price (CPI) level of 125 and the MPC is .80. If full employment GDP is at 10 trillion dollars, according to Keynesian economics, how much should government spending increase?

$100 billion

If the Fed decides to use an open market operation to reduce the money supply by $1 million, and if the money multiplier is 10, then what total amount of Treasury securities must the Fed initially sell?

$100,000.

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

$15,000.

The major protection against sudden mass attempt to withdraw cash from banks is the:

deposit insurance provided by the FDIC.

Assume the Fed purchases a government security from a private dealer and pays with a Fed check of $100,000. If this check is deposited by the dealer in a bank with a 10 percent required reserve ratio, the bank can extend new loans in the amount of:

$90,000.

In Exhibit 8-10, when disposable income is equal to zero, saving is equal to:

-$100

If Y = $500 billion, autonomous consumption = $300 billion, and the marginal propensity to save = 0.20, then saving will equal:

-$200 billion.

If the MPC is .80, what is the value of the tax multiplier?

-4

According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:

0

If your income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:

0.2

As shown in Exhibit 8-5, the marginal propensity to save (MPS) is:

0.50

If income increases from $110,000 to $120,000 and consumption from $108,000 to $114,000, the marginal propensity to consume is:

0.60

Mathematically, the value of the spending multiplier in terms of the marginal propensity to consume (MPC) is given by the formula:

1 / (1 - MPC).

The money multiplier equals:

1 / required reserve ratio.

If the marginal propensity to save (MPS) is 0.10, the value of the spending multiplier is:

10

The required reserve ratio in Exhibit 15-6 is:

10%

Members of the Federal Reserve Board of Governors serve one nonrenewable term of:

14 years.

The members of the Federal Reserve Board of Governors serve:

14-year terms.

The required reserve ratio in Exhibit 15-5 is:

25%

If the MPC is 0.70, then the spending multiplier is equal to:

3.33.

If the marginal propensity to consume (MPC) is 0.75, the value of the spending multiplier is:

4

If the marginal propensity to save (MPS) is 0.25, the value of the spending multiplier is:

4.

If your bank receives a checkable deposit of $20,000 cash, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

4.

In Exhibit 9-8, the value of the spending multiplier is:

4.

If an increase in investment of $50 causes an increase in real GDP of $250, the value of the spending multiplier is:

5.

In Exhibit 8-10, consumption and real disposable income are equal at:

500

Which of the following correctly describes the mechanics of the spending multiplier?

An initial increase in aggregate expenditures, such as an increase in government spending, shifts the aggregate expenditures curve upward vertically. After the expenditures curve shifts upwards, the economy is not in equilibrium because aggregate expenditures now exceed aggregate output, leading to inventory depletion. Real GDP increases in response to inventory depletion, eventually leading to a new higher level equilibrium real GDP.

Which of the following would cause the money supply to increase?

An open market purchase by the Fed. A reduction in the discount rate. A reduction in required ratios.

Which of the following will make the real-world money multiplier smaller than the theoretical formula?

Banks may keep some excess reserves rather than loan it all out.

Which of the following would not appear on the asset side of a commercial bank balance sheet?

Checkable deposits.

If the economy were left on its own without the interference of government or the Fed, it would move toward an equilibrium rate of growth that would produce, with only minor interruptions, full employment without inflation. What school supports this view?

Classical

_________ inflation can be explained by an ________ shift in the aggregate _________ curve.

Cost-push, rightward, supply

Which of the following is not a store of value?

Credit card.

According to Keynes, what is the most important determinant of households' spending on goods and services?

Disposable income.

Which of the following appears on the asset side of a bank's balance sheet?

Excess reserves. Loans. Required reserves.

All banks are required to join the Fed.

False

An open-market purchase by the Federal Reserve withdraws excess reserves from the banking system and causes the money supply to contract.

False

Barter is a system of exchange that does not depend on a coincidence of wants.

False

If autonomous consumption is greater than zero and the marginal propensity to consume is greater than zero, but less than one, the consumption function will first be below and then above the 45 degree line.

False

If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier is 2.

False

If the marginal propensity to consume is 0.80, the value of the spending multiplier will be 4.

False

In the aggregate expenditures model, if aggregate expenditures (AE) are less than GDP, then GDP increases.

False

M2 is actually a smaller amount than M1.

False

The Federal Reserve System is run by the President of the United States.

False

The Keynesian model shows that the economy has a natural tendency toward full employment.

False

The chairman of its Board of Governors is appointed by the president; the Fed operates without independence from the executive branch of the government.

False

The greater the marginal propensity to consume in the economy, the smaller the spending multiplier.

False

The required reserve ratio is required reserves stated as a percentage of the money supply.

False

The total lag for fiscal policy tends to be shorter than the total lag for monetary policy.

False

The government agency that provides insurance for all checkable deposits up to $100,000 in banks choosing its protection is the:

Federal Deposit Insurance Corporation.

Decisions regarding purchases and sales of government securities by the Fed are made by the:

Federal Open Market Committee.

What is the length of the term of the members of the Board of Governors of the Federal Reserve System?

Fourteen years.

A bank's required reserves are either held as vault cash or:

deposited with the Fed.

A banking system that provides people immediate access to their deposits, but that allows banks to hold only a portion of those deposits on reserve, is known as:

a fractional reserve system.

In the classical range of the aggregate supply curve, greater spending for consumer and investment goods results in:

a higher price level.

Because of the automatic stabilizers, a decline in the level of economic activity will cause:

a reduction in tax revenues collected. an increase in government expenditures. a greater budget deficit.

Using the AD-AS model, if consumers and business become more optimistic about the future direction of the economy and increase spending, then:

aggregate demand will increase.

The relationship between aggregate expenditures and disposable income is shown by the:

aggregate expenditures curve.

The Fed's power to set the required reserves of commercial banks:

allows the Fed to control the lending ability of commercial banks and, thereby, control the money supply.

The aggregate supply curve will shift to the right when the:

amount of labor in the society increases.

An increase in the wealth of households, other things remaining the same, can result in ____ the consumption function.

an upward shift in

A movement along the consumption function is caused by a change in:

disposable income.

The marginal propensity to consume (MPC) is computed as the change in consumption divided by the change in:

disposable personal income.

According to the Keynesian aggregate expenditures model equilibrium and full employment:

do not necessarily occur at the same level of real GDP.

In order for barter to occur, traders must have a:

coincidence of wants.

The marginal propensity to consume (MPC) is computed as the change in:

consumption divided by the change in income.

The marginal propensity to consume (MPC) is the slope of the:

consumption function.

At the point where the consumption function crosses the 45-degree line:

consumption is equal to disposable income, and therefore, saving is zero.

For an economy, aggregate demand equals:

consumption plus investment plus government spending plus (exports minus imports).

Given aggregate demand, a decrease in aggregate supply creates:

cost-push inflation.

The M1 definition of the money supply includes:

currency in circulation and checkable deposits.

The demand curve for investment in the economy as a function of interest rates is:

downward sloping.

The real balance effect (wealth effect), the interest rate effect, and the net exports effect all help to explain the:

downward-sloping aggregate demand curve.

As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, net exports are -$0.5 trillion, and GDP is $7 trillion, then GDP will:

decrease by $4 trillion.

A downward movement along the investment demand curve would be caused by a(n):

decrease in the rate of interest.

Use the aggregate expenditures model and assume an economy is in equilibrium at $6 trillion which is $500 billion above full-employment GDP. If the marginal propensity to consume (MPC) is 0.75, full-employment GDP can be reached if government spending:

decreases by $125 billion.

In Exhibit 8-1, when disposable income (Y) is increased from $0 to $1,000 to $2,000, the marginal propensity to consume:

decreases from 0.9 to 0.8.

As the marginal propensity to consume (MPC) decreases, the spending multiplier:

decreases.

Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:

decreasing government spending or increasing taxes.

The Keynesian view stresses that:

demand creates its own demand. there is direct relationship between consumer spending and disposable income. when aggregate expenditures (demand) can be forever less than full-employment output therefore prolonged unemployment will persist.

A downward shift in the consumption function can be caused by:

expectations of higher inflation.

An increase in aggregate supply will cause the price level to:

fall and GDP to rise.

Unemployment compensation payments:

fall during periods of prosperity and thus reduce federal budget deficits.

An increase in the per unit costs of production within an economy will cause the aggregate supply curve to shift to the right.

false

Stagflation means a simultaneous decrease in the unemployment and inflation rates.

false

The Keynesian view is that the aggregate supply curve is vertical.

false

In the vertical segment of the aggregate supply curve,

full employment is achieved.

Classical economic theory predicted that in the long run the economy would experience:

full employment.

When the Fed conducts open market operations, it buys and sells:

government securities.

Stagflation occurs when the economy experiences:

high unemployment and rapid inflation.

Real investment spending is ____ real personal consumption.

highly volatile compared to

The Monetary Control Act of 1980:

none of the above.

In Exhibit 10-8, if aggregate demand shifts from AD4 to AD5, real GDP will:

not change, and the price level will rise from 140 to 170.

Credit cards are:

not money

The buying and selling of government securities by the Fed is known as:

open market operations.

The marginal propensity to consume is defined as the:

proportion of any change in income that is spent on consumption.

In Exhibit 10-6, when the economy moves from a GDP of $1,000 billion to a GDP of $1,100 billion,

real GDP and employment both increase, but only under conditions of price level increases.

Suppose consumers and business decision makers become more optimistic about the future, and aggregate expenditures increase. The most likely result is that:

real GDP and employment rise.

In Exhibit 10-4, point E2 represents:

real GDP below full-employment GDP.

In Exhibit 10-8, if aggregate demand shifts from AD1 to AD2,

real GDP will increase from $3.0 to $4.0, and the price level will remain the same.

Using the aggregate expenditure-output model, assume the aggregate expenditures (AE) line is below the 45-degree line at full-employment GDP. This vertical distance is called a(n):

recessionary gap.

The seven members of the Board of Governors serve 14-year terms to:

reduce political influence.

Consider the Keynesian consumption function. If disposable income is greater than the break-even level of disposable income, then households will be:

saving.

The aggregate supply curve:

shows the level of real GDP produced in the economy at different possible price levels during a period of time. is horizontal in the Keynesian range. is vertical in the classical range.

The concurrent problems of inflation and unemployment are termed:

stagflation.

When the economy is experiencing high inflation and high unemployment at the same time, then it is experiencing:

stagflation.

Advances in technology will shift the aggregate:

supply curve rightward.

Lower taxes on businesses will shift the aggregate:

supply curve rightward.

Bank reserves will increase over time when:

the Fed buys government securities on the open market.

If people expect prices to fall in the future,

they will increase their current levels of consumption by moving up along their consumption functions.

The aggregate demand curve is drawn downward-sloping, because increases in the price level cause decreases in:

total spending (real GDP).

If the economy is experiencing less than full-employment, the Keynesian school recommends that the government:

undertake fiscal policy to stimulate aggregate demand.

In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will be:

unplanned inventory accumulation. a decrease in GDP. a decrease in employment.

In the aggregate expenditures model, an increase in government spending causes a(n):

upward shift in the aggregate expenditures curve.

Which of the following compose the reserves of a commercial bank?

vault cash and deposits of the bank with the Federal Reserve

The pre-Keynesian or classical economic theory viewed the long-run aggregate supply curve for the economy to be:

vertical at the full-employment level of real GDP.

The full employment level of real GDP can be represented on an aggregate supply and demand diagram as a(n):

vertical line