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If a bank has deposits of $100,000, loans of $80,000, cash on hand of $10,000, and $10,000 on deposit at the Federal Reserve, then its reserve ratio is:

20%

Contractionary monetary policy causes _____ in interest rates in the short run and _____ in interest rates in the long run.

an increase; no change

Money used to buy a ticket to a football game functions primarily as a:

medium of exchange.

A $100 million increase in government spending increases equilibrium GDP by:

more than 100 millionn

( Figure: A Money Market) Use Figure: A Money Market. The equilibrium interest rate is:

r 3. Correct Answer r 2. r 1. M 0. ​

An increase in government spending, all things equal, will cause the aggregate demand curve to:

shift to the right.

A general decrease in wages will result primarily in the _____ curve shifting to the _____.

short-run aggregate supply; right

Changes in _____ will NOT shift the money demand curve.

the interest rate

All else equal, if the required reserve ratio falls:

the money multiplier increases.

Subprime loans are made:

to buyers who don't meet the standard criteria for obtaining a mortgage.

A recessionary gap occurs when:

aggregate output is below potential output.

A negative supply shock often results in:

an increase in the aggregate price level and a decrease in aggregate output.

If the economy is at potential output, and the Fed decreases the money supply, in the short run, the price level will likely:

decrease.

( Scenario: Money Supply Changes) The reserve requirement is 10%, and Olga withdraws $3,000 for travel money from her checking account. Assume that banks do not hold excess reserves and that the public holds only checkable bank deposits, that is, no currency. As a result of the withdrawal, excess reserves _____ by _____.

decrease; $2,700

( Scenario: Money Supply Changes II) Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. As a result of the withdrawal, loans _____ by _____.

decrease; $4,800

If policy makers want to decrease real GDP by $100 billion, and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____.

decrease; $40 billion

If the Federal Reserve wanted to increase the money supply, it could _____ the required reserve ratio, _____, and _____ bonds on the open market.

decrease; decrease the discount rate; buy

If a government runs large budget deficits over consecutive years, with the public debt growing _____ GDP, the ratio of debt to GDP will _____.

faster than; increase

Currency in the United States today is _____ money.

fiat

Changes in aggregate demand can be caused by changes in:

government spending

( Figure: Policy Alternatives) Use Figure: Policy Alternatives. Assume that the economy depicted in panel (a) is in short-run equilibrium at a real GDP level of Y 1 . The economy will correct itself:

in the short run as wages rise. because the aggregate demand curve shifts. ​ Correct Answer in the long run as wages fall. rapidly, without the use of fiscal policy.

As a result of a decrease in the value of the dollar in relation to other currencies, U.S. imports decrease and exports increase. Consequently, there is a(n):

increase in aggregate demand.

A shift to the right of the short-run aggregate supply curve may be caused by a(n):

increase in productivity.

A 30% increase in the aggregate price level will:

increase money demand by 30%.

An increase in the prices of goods in the short run will:

increase producers' profit per unit.

How much is M1?

$480 billion ​ $325 billion $380 billion Correct Answer $330 billion

Scenario: Money Creation The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. What is the maximum possible expansion in the money supply as a result of this initial deposit?

4,000

If policy makers want to decrease real GDP by $100 billion, and the marginal propensity to consume is 0.6, they should decrease government purchases of goods and services by $_____ billion.

40

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5

As the opportunity cost of holding money changes from _____% to _____%, the quantity of money demanded _____.

5; 3; increases

( Figure: Monetary Policy I) Use Figure: Monetary Policy I. If the economy is initially in equilibrium at E 1 , and the central bank buys Treasury bills, _____ shift to _____ a(n) _____ gap.

AD 1 will; the left, increasing; recessionary SRAS 1 will immediately; left, closing; inflationary SRAS 2 will immediately; right, increasing; inflationary ​ Correct Answer AD 1 will; AD 2 , closing; recessionary

( Figure: AD - AS Model II) Use Figure: AD - AS Model II . When firms decrease their investment spending, in the short run, the _____ curve will shift to the _____.

AD ; right LRAS ; left LRAS ; right Correct Answer AD ; left​

_____ is a medium of exchange with no intrinsic value, whose ultimate value is guaranteed by a promise that it can be converted to valuable goods.

Commodity-backed money

( Figure: The Money Supply and Aggregate Demand) Use Figure: The Money Supply and Aggregate Demand. Panel _____ illustrates what happens when the Fed decides to _____ Treasury bills and _____ the money supply.

Correct Answer (b); sell; decrease (a); sell; increase (b); buy; increase (a); buy; decrease ​

( Figure: Fiscal Policy II) Use Figure: Fiscal Policy II. Suppose that this economy is in equilibrium at E 1 . If there is an increase in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

Correct Answer AD 1 ; left; decrease; decrease AD 2 ; right; decrease; increase ​ AD 2 ; right; increase; increase AD 1 ; left; increase; decrease

( Figure: Fiscal Policy I) Use Figure: Fiscal Policy I. Suppose that this economy is in equilibrium at E 2 . If there is an increase in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

Correct Answer AD 2 ; right; increase; increase AD 1 ; right; decrease; increase ​ AD 1 ; right; increase; increase AD 2 ; left; decrease; decrease

( Figure: AD - AS Model II) Use Figure: AD - AS Model II . If there is a significant increase in government spending, in the short run, the _____ curve will shift to the _____.

Correct Answer AD ; right ​ SRAS ; left AD ; left SRAS ; right

( Figure: Short- and Long-Run Equilibrium II) Use Figure: Short- and Long-Run Equilibrium II. Given the state of the economy depicted in the diagram, what would be an appropriate policy response by the government?

Correct Answer Raise tax rates to close an inflationary gap. ​ Lower tax rates to close an inflationary gap. Increase government spending to close a recessionary gap. Decrease government spending to close a recessionary gap.

( Figure: AD - AS Model I) Use Figure: AD - AS Model I . If the economy is at point X , the appropriate fiscal policy is to:

Correct Answer decrease taxes and increase government spending. decrease the money supply and interest rates. ​ increase taxes and decrease government spending. increase the money supply and interest rates.

____ rates in the 1970s were harmful to S&Ls because they decreased the value of thrifts' long-term mortgages.

High inflation

( Figure: AD - AS Model II) Use Figure: AD - AS Model II . If nominal wages fall, in the short run, the _____ curve will shift to the _____.

LRAS ; right Correct Answer SRAS ; right AD ; right ​ SRAS ; left

If monetary aggregates were ranked from most liquid to least liquid, the order would be:

M1 and M2.

( Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. Which equation measures a recessionary gap?

Y 3 - Y 1 Y 3 - Y 0 ​ Y 3 - Y 2 Correct Answer Y 2 - Y 1

( Figure: Monetary Policy III) Use Figure: Monetary Policy III. The central bank should adopt policies that move aggregate output to:

Y 3 . Y 2 . Y 1 . Correct Answer Y 4 . ​

( Figure: Aggregate Demand) Use Figure: Aggregate Demand. The quantity of output demanded if the price level is 100 is:

`Correct Answer $12 trillion. ​ $9 trillion. $11 trillion. $10 trillion.

An example of a double coincidence of wants is:

a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired.

Commodity-backed money is:

a medium of exchange with no intrinsic value.

(Scenario: Assets and Liabilities of the Banking System) If the required reserve ratio is 6%, and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply? ​ Scenario: Assets and Liabilities of the Banking SystemAssetsLiabilitiesLoans$1,800,000Deposits$2,000,000Reserves$200,000

about $1,333,333

( Figure: Policy Alternatives) Use Figure: Policy Alternatives. In panel (a), if the economy is at an aggregate output of Y 1 and a price level of P 2 , the economy is in:

an inflationary gap. Correct Answer a recessionary gap. long-run equilibrium. ​ neither an inflationary nor a recessionary gap.

( Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. If the economy is in short-run equilibrium at Y 1 in panel (a), the economy is in:

an inflationary gap. full employment. ​ simultaneous short-run and long-run equilibrium. Correct Answer a recessionary gap.

Financial intermediaries involved in shadow banking typically:

borrow money short term and lend or invest long term.

( Figure: The Money Supply and Aggregate Demand) Use Figure: The Money Supply and Aggregate Demand. If the Federal Reserve intended to encourage investment and expand the economy, it would _____ Treasury bills, _____ the money supply, and _____ interest rates. This is shown in panel _____.

buy; increase; raise; (a) ​ sell; increase; lower; (b) Correct Answer buy; increase; lower; (a) buy; decrease; lower; (a)

A shift to the left of the short-run aggregate supply curve may be caused by a(n):

decrease in productivity.

A movement along the aggregate demand curve is caused by a(n):

change in the aggregate price level.

Changes in the budget balance may result from _____.

changes in economic policy or fluctuations in the economy

If an economy is operating at an aggregate output level above potential output, the Federal Reserve may:

conduct an open market sale.

A(n) _____ monetary policy is appropriate during a(n) _____.

contractionary; expansion

An increase in energy prices will:

decrease short-run aggregate supply.

( Scenario: Money Supply Changes II) Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. Immediately after the withdrawal, reserves _____, and checkable deposits _____.

decrease by $6,000; decrease by $6,000

If interest rates rise, there will be a(n):

decrease in aggregate demand.

Demand shocks do NOT include a(n):

decrease in commodity prices.

A decrease in the supply of money with no change in the demand for money will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

decrease; rise

( Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. A movement from AD 1 to AD 3 could be caused by:

decreased government purchases. ​ Correct Answer increased government purchases. decreased government transfers. higher tax rates.

If the economy is at potential output, and the Fed _____ the money supply, the likely result will be a(n) _____ in investment spending and a(n) _____ in consumer spending in the short run.

decreases; decrease; decrease

If banks lack sufficient funds to pay their depositors, they can borrow the needed funds at the Federal Reserve _____.

discount window

( Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. At E 2 , the economy:

faces a recessionary gap. Correct Answer is in long-run equilibrium. faces an inflationary gap. has high unemployment. ​

Assume a decrease in aggregate demand. In the long run, as the economy self-corrects, the price level will _____, and potential output to _____.

fall; remain stable

( Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. At E 1 , the economy:

has low unemployment. ​ faces an inflationary gap. Correct Answer faces a recessionary gap. is in long-run equilibrium.

Government borrowing will not crowd out private investment spending if unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n) _____ in saving at each interest rate.

high; increase; increase

If the economy is at full employment, expansionary fiscal policy is most likely to lead to:

higher inflation.

Examples of fiscal policy do NOT include:

implicit liabilities will increase.

An increase in the money supply will decrease interest rates in the short run but not affect interest rates in the long run because an increase in the money supply will eventually _____ prices and _____ money demand.

increase; increase

According to the concept of monetary neutrality, _____ in the money supply _____ real GDP _____ the price level.

increases; do not change; but do raise

( Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. Y p in panel (b):

indicates a recessionary gap. Correct Answer is potential output. is associated with considerable unemployment. ​ indicates a decrease in aggregate demand.

Deposit insurance:

leads depositors to be less inclined to monitor bank operations.

Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

left; inflationary

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

less than

An asset is _____ if it is easily convertible into cash with little or no loss of value.

liquid

( Figure: Policy Alternatives) Use Figure: Policy Alternatives. The economy in panel (b) is initially in short-run equilibrium at an aggregate output of Y 1 and a price level of P 2 . The economy is in:

long-run equilibrium. ​ Correct Answer a recessionary gap. an inflationary gap. neither an inflationary nor a recessionary gap.

A law requiring the federal budget to be balanced each year would likely:

make business cycles more severe.

Banks create money when they:

make loans.

Expansionary fiscal policies

make the budget surplus smaller.

If a central bank announces an inflation target, it:

may have to sacrifice some control over interest rates.

All else equal, the government's budget balance during an expansion will:

move toward a larger surplus or a reduced deficit.

An increase in the price of imported oil leads to a _____ shock.

negative supply

Examples of fiscal policy do NOT include:

reducing the interest rate by increasing the money supply.

Examples of fiscal policy do NOT include:

reducing the money supply to raise the interest rate.

If the economy is at potential output, and the Fed decreases the money supply, in the long run, real GDP will likely:

remain the same.

In return for injecting capital into banks, the U.S. government received:

shares of stock in the banks.

( Figure: Money Market I ) Use Figure: Money Market I. If the money market is initially in equilibrium at point E , and the central bank sells Treasury bills, then the interest rate will:

shift rightward. ​ remain at r E . Correct Answer move toward r H . move toward r L .

Consider an economy that already has a sizable budget deficit. If the economy faces a major downturn, most economists agree, the government should:

stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining.

( Figure: An Increase in Aggregate Demand) Use Figure: An Increase in Aggregate Demand. At the short-run equilibrium at Y 2 and P 2 :

the LRAS curve will shift to the right. ​ the SRAS will shift to the right. Correct Answer the SRAS curve will shift to the left. unemployment will decrease.

( Figure: An Increase in Aggregate Demand) Use Figure: An Increase in Aggregate Demand. At the short-run equilibrium at Y 2 and P 2 :

the economy is in a recessionary gap. Correct Answer the economy is in an inflationary gap. ​ there is pressure for nominal wages to fall as workers seek to restore lost purchasing power. there is pressure on prices to fall, since aggregate output exceeds potential output.

Aggregate demand will decrease if:

the public becomes more pessimistic.

If government spending increases and taxes decrease:

the public debt will increase.

An increase in the aggregate price level will increase:

the quantity of aggregate output supplied in the short run.

Because revenue from personal income taxes automatically decreases as disposable income decreases, a recession causes:

the size of the multiplier to increase.

According to the liquidity preference model, _____ money determines the interest rate.

the supply of and demand for

Banks are illiquid because:

their loans are less liquid than their deposits.

Government spending will NOT crowd out private spending if:

there is a recessionary gap.