Practice Questions Exam 3

How might deflation set off further deflation?

falling prices my cause people to defer spending in expectation of futher lower prices

The neutral interest rate is the rate at which:

real GDP equals potential GDP.

The marginal tax rate is the:

tax rate you pay if you earn another dollar.

Maturity transformation occurs when banks:

use short-term loans to create long-term loans.

Suppose you have the following statistics for the economy. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. If the Federal Reserve sets the federal funds rate according to the Fed's rule of thumb, then what is the real interest rate?

4.25%

Which of the following is an example of hyperinflation?

An economy experiences inflation of more than 7,500% in one year.

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.

lower; less; decrease

When the Federal Reserve purchases more long-term bonds, this:

lowers long-term bond interest rates

Social Security is an example of:

mandatory spending

Menu costs are the:

marginal costs of adjusting prices

You use your bank debit card to purchase a bottle of soda from the convenience store. What function is the bank performing here?

providing payment services

In late 2008, the Federal Reserve began purchasing billions of dollars' worth of mortgage-backed securities from banks. This was evidence of:

quantitative easing.

If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____.

raise; cool inflationary pressures

If the output gap is positive, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

raise; down

You are the manager of a local bank. Due to unstable financial conditions, savers are worried that your bank may fail. When they show up in large numbers to withdraw their savings, you find that you do not have enough cash to meet the obligations. Where can you turn for a loan if no other bank will lend to you?

the discount window

Social insurance is provided by:

the government

You hear a rumor that your bank is going to collapse. You rush to the bank, along with many other customers, to withdraw your savings. This scenario demonstrates:

the interdependence principle

What is a regressive tax?

those with less income tend to pay a higher share of their income in taxes

Which of the following services are provided by the federal government?

medicare

Why is the discount rate the upper bound for the federal funds rate?

it is set higher than the federal funds rate

In order to lower output, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.

contractionary; lowers; raises

One of the important tasks that banks perform is to:

create long-term loans from short-term deposits.

A budget surplus occurs when:

government revenue exceeds government spending.

____ income taxes and payroll taxes _____ after-tax incomes, which _____ consumption and therefore lower aggregate expenditure.

higher; lower; decrease

Which of the following tasks are performed by banks? (i) Print new money. (ii) Provide zero-interest loans. (iii) Create long-term loans from short-term deposits. (iv) Pool savings from many savers.

iii; iv

When inflation is higher than expected, there is redistribution from:

lenders to borrowers

What kind of interest rate does forward guidance affect?

longer term

In a recessionary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

lower; induce

If the output gap is negative, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

lower; up

How is monetary policy different from fiscal policy?

monetary policy adjusts interest rates,whereas fiscal policy adjust government spending and taxes

If unemployment is below its sustainable level, then the economy is:

operating above capacity, and inflation will likely rise

If unemployment is above its sustainable level, then the economy is:

operating below capacity, and inflation will likely fall

A bank run can happen when:

people believe that a bank run is likely.

sales tax is a tax on:

purchases that is typically a percentage of the purchase price of goods and services.

Who runs the Federal Reserve of the United States?

the chair of the federal reserve

When choosing a new interest rate, the neutral interest rate is an important starting point for the Federal Reserve because it is the rate at which:

there is no unemployment in the economy

You have $5,700 at a local bank. You hear a rumor that the bank is going to fail. You rush over to the bank to withdraw your money and find many other bank customers who all want to withdraw their money from the bank. The scenario described here is a:

bank run

In response to an overheating economy, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.

contractionary; lowers; raises

Which of the following shows the medium of exchange function of money?

daniela goes to the store and purchases roses with U.S. dollars

Tax expenditures are:

special deductions, credits, or exemptions that lower your tax obligations.