EC 202 exam 3

In real business cycle theory, which of the following is the driving force of macroeconomic instability? A. technology changes and innovation B. changes in expenditures, which impact AD C. bad monetary policy D. uncertainty about risky investment returns

A

Suppose the reserve requirement is 10% and all banks are just barely in compliance (they all have exactly 10% of deposits on hand as reserves). If the Fed increases the reserve requirement, how will this affect the money supply? A. It increases B. It decreases C. It stays the same

B

The Federal Reserve will increase the money supply if it wants to ________ A. Reduce inflation B. Reduce GDP C. Increase GDP

C

Which of the following is an example of expansionary fiscal policy A. The Federal Reserve increases the money supply using open market operations B. Congress passes a law reducing unemployment benefits C, Congress passes a law decreasing income taxes D. Congress cancels plans to build an expensive highway

C

An April 2023 op-ed in the New York Times suggested that the United States is likely headed for a recession. The author noted that lending has decreased and that "there are signs that the observable dip in loans and leases is at least partly due to weak demand" The author also states "When you really have to start worrying is when people don't want to borrow because they see bad times ahead. In that situation, monetary policy becomes less effective; lowering the interest rate to induce borrowing is as useless as pushing on a string, as economists like to say." According to what we learned in class, based on these quotes the author's viewpoint is closest to: A. The mainstream viewpoint B. The monetarist viewpoint C. The real business cycle theory viewpoint D. The self-correction viewpoint

A

Bank of America is $1 billion short of its reserve requirement today. So, it borrows $1 billion from Wells Fargo. The interest rate it pays on this loan is: A. The Federal Funds Rate B. The Discount Rate C. The Equilibrium Interest Rate D. Zero

A

Boeing makes an airplane in the United States and sells it to Spain for 20 million Euros. Boeing then spends 10 million Euros in Italy for computer equipment and pays 10 million Euros in fees to a consulting company in France. What is the total effect on the U.S. balance of payments? A. The current account and the financial account are both unchanged B. The current account increases by 10 million, and the financial account decreases by 10 million C. The current account increases by 20 million. The financial account is unchanged D. The current account decreases by 10 million, and the financial account increases by 10 million

A

Cigarettes have a long history of being used as money in prisons. However, far fewer people smoke now than used to. This has diminished the ability of cigarettes to perform which function of money? A. Medium of exchange B. Unit of account C. Store of value

A

East Lansing Bank practices 100%-reserve-banking and has zero owners equity. Total deposits at the bank equal $1,000. Which of the following must be true? A. The bank has $1,000 cash on hand as reserves B. The bank has loaned out $1,000 C. Total liabilities equal $0

A

In 2020 and 2021, congress authorized "Economic Impact Payments" to most Americans. These payments were direct cash transfers to taxpayers. One criticism of these payments is that they contributed to the high inflation seen in 2022. How would you explain this criticism using the AD and AS framework from class? A. These payments were an example of expansionary fiscal policy, which served to increase consumption and shift AD to the right, which led to an increase in prices B. These payments were an example of expansionary fiscal policy, which served to decrease investment and shift AS to the left, which led to an increase in prices. C. These payments were an example of contractionary fiscal policy, which served to decrease private-sector investing and shift AD to the left, which led to a decrease in GDP D. These payments were an example of expansionary monetary policy. They increased the money supply and caused AD to shift right, which led to an increase in prices

A

Initially, the exchange rate of dollars to Euros is 1 to 1. Then, there is a decrease in the supply of Euros. How does this affect the exchange rate? A. A Euro is now worth more than $1 B. A Euro is now worth less than $1 C. The value of a Euro is unchanged

A

The federal reserve increases the required reserve ratio for banks. What is the effect on the equilibrium interest rate and equilibrium quantity of money? A. Interest rates increase. Quantity decreases B. Interest rates decrease. Quantity increases C. Interest rates increase. Quantity is unaffected D. The effect on the interest rate is ambiguous. Quantity decreases

A

What happens to the exchange rate (price of money) when there is an increase in the demand for a currency? A. The exchange rate increases B. The exchange rate decreases C. The exchange rate remains the same D. None of the above

A

Which of the following is an example of an automatic stabilizer in fiscal policy? A. Unemployment benefit payments are higher during a recession B. Social security taxes are regressive, so they provide contractionary fiscal policy during a recession C. Inflation is lower during a recession, so money is more valuable D. During a period of high inflation, real wages increase, which causes the aggregate supply curve to shift left

A

Which of the following is an example of crowding out in expansionary fiscal policy? A. The government hires new police officers. However, the people hired as police officers were previously working in a manufacturing plant, so the unemployment rate is unaffected B. Congress increases taxes, which means people have less money to spend on consumption C. Government spends $1 billion on a bridge. This bridge makes it easier to transport goods, which leads to an increase in consumption and investment spending D. An increase in government borrowing reduces interest rates, making it easier for companies and consumers to borrow money

A

A new Corvette costs $65,000. The current exchange rate for British pounds is 1.25 USD = 1 GBP. What is the price of a new corvette in British pounds? A. 16,250 pounds B. 52,000 pounds C. 65,000 pounds D. 81,250 pounds

B

According to what we learned in class about fiscal policy, which of the following statements is true? A. An increase in G and an increase in T will both increase GDP B. An increase in G and a decrease in T will both increase GDP C. A decrease in G and an increase in T will both increase GDP D. A decrease in G and a decrease in T will both increase GDP

B

Belize uses a fixed exchange rate, with one Belize dollar equal to one half of a U.S. dollar. There is an increase in U.S. citizens traveling to Belize on vacation. What will the central bank do? A. Buy the country's currency B. Sell the country's currency C. Sell bonds to banks

B

Congress is deciding whether to have a $1 billion increase in spending or a $1 billion tax cut. According to what we learned in class, if the primary goal is to boost aggregate demand, which of the following best explains what the government should do? A. It doesn't matter. The government spending multiplier is equal to the tax multiplier because a tax cut is equivalent to an increase in government spending B. Increase government spending, because with a tax cut, some of the $1 billion will be saved instead of spent (and therefore not serve to increase aggregate demand) C. Cut taxes, because people are better able to spend money efficiently than the government is D. Cut taxes, because the tax multiplier is greater than the government spending multiplier

B

First National Bank owns $1,000 worth of Bitcoin. Then, the value of bitcoin doubles. How does this affect the bank's leverage ratio? A. Leverage ratio increases B. leverage ratio decreases C. Leverage ratio is unchanged

B

First National Bank owns $1,000 worth of Bitcoin. Then, the value of bitcoin doubles. What happens? A. Owners equity doubles B. Owners equity increases by $1,000 C. Liabilities decrease by $1,000 D. Liabilities increase by $1,000

B

How would the Fed pursue expansionary monetary policy using open market operations? A. Sell bonds to banks B. Buy bonds from banks C. Increase the reserve ratio D. Decrease the reserve ratio

B

If interest rates increase in a country with a fixed exchange rate, what will the central bank do? A. Buy the country's currency B. Sell the country's currency C. Engage in contractionary fiscal policy

B

If the Fed decreases the money supply, this shifts the aggregate _____ curve to the ______ A. demand; right B. demand; left C. supply; left D. supply; right

B

In the mainstream view, monetary policy is not very effective during a severe recession. Why? A. Monetary policy only impacts the interest rate, and consumption must increase in order to get out of a recession. B. The liquidity trap prevents monetary policy from causing additional investment spending C. Monetary policy is separated from the political sphere, and the officials in charge do not have the best interest of the people in mind D. Crowding out causes government spending to have no real impact on the economy.

B

The government engages in expansionary fiscal policy, increasing aggregate demand by $10 billion. (This means that the aggregate demand curve shifts $10 billion to the right). As a result, the price level increases and ______________. (Hint: It may help to graph aggregate demand and aggregate supply.) A. GDP decreases by exactly $10 billion B. GDP increases by more than $0 but less than $10 billion C. GDP increases by exactly $10 billion D. GDP increases by more than $10 billion

B

Which of the following is true about the slope of the asset and/or transaction demand for money? A. Transaction demand is a horizontal line because the interest rate is constant B. Asset demand slopes down because, when interest rates are low, the opportunity cost of holding money is low C. Asset demand slopes down because, when interest rates are low, people will want to spend more money on luxury items D. Transaction demand slopes down because when interest rates are low, people will spend less money on essential items

B

Which of the following is true about the slope of the money supply curve A. It slopes up because the quantity supplied increases as the price of money increases B. It is a vertical line because the money supply is determined directly by the Fed, not by interest rates C. It is a vertical line because the supply of money can never be changed D. It slopes up because the Fed can shift the supply to the left or right whenever it wants to

B

Which of the following would be fiscal policy the federal government would use to reduce inflation? A. Increase the money supply B. Increase taxes C. ncrease government spending D. Increase transfer payments to citizens

B

You own $15 in baseball cards. Last week, you borrowed $10 from your friend, spent $7 of it on dinner, and deposited the other $3 in the bank. What is the total value of all of your assets? A. $15 B. $18 C. $22 D. $28

B

A 2011 news article noted that packaged honey buns (the kind you see in vending machines) have become a popular prison currency. Unlike cigarettes, honey buns will go stale. This diminishes the ability of honey buns to function as a A. Medium of exchange B. Unit of account C. Store of value

C

A bank has $100 in reserves, $500 in loans, $300 in deposits, and $200 in debt. Which of the following is true: A. Owners equity is $0 B. The bank is insolvent C. Owners equity is $100 D. Owners equity is $400

C

According to what we learned in class, which of the following statements is most accurate? A. The Federal Reserve sets the federal funds rate. B. The Federal Reserve sets the target for the discount rate and then uses the reserve requirement to push banks toward that target. C. The Federal Reserve does not set the federal funds rate, but it influences it through the use of its open-market operations. D. The Federal Reserve will set a higher target for the federal funds rate if pursuing an expansionary monetary policy.

C

Suppose the transaction demand for money increases. How will this affect the equilibrium interest rate and the equilibrium quantity of money? A. Interest rates are unaffected. Quantity is unaffected B. Interest rates increase. Quantity increases C. Interest rates increase. Quantity is unaffected D. Interest rates increase. The effect on quantity is ambiguous

C

The country of Middleton has a total printed currency of $1,000 and the money supply is $100,000. What is the money multiplier? A. .001 B. 1C. 100 D. 1000

C

Third National Bank has total assets of $10,000 and owners equity of $200. One of its investments increases in value from $1,000 to $2,000. If Third National Bank wants to maintain its leverage ratio of 50:1, how should it respond? A. Increase its equity by $50,000 B. Increase its debt by $1,000 C. Increase its debt by $49,000 D. Increase its debt by $50,000

C

Which of the following best describes the liquidity trap? A. When inflation is high, people will not want to hold cash B. There is a lag between the time when the economy needs intervention and when the Fed actually intervenes C. When the interest rates are very low, further increases to the money supply will not have a significant impact on interest rates D. When interest rates are very high, further decreases to the money supply will not have a significant impact on inflation

C

Which of the following best explains the cause and effect of expansionary monetary policy? A. An increase in the money supply increases the interest rate, which increases investment and shifts aggregate demand to the right B. An increase in the money supply increases the interest rate, which decreases investment and shifts aggregate demand to the left C. An increase in the money supply decreases the interest rate, which increases investment and shifts aggregate demand to the right D. A decrease in the money supply increases the interest rate, which decreases investment and shifts aggregate demand to the right

C

Which of the following viewpoints would be most likely to agree with this statement: "The transfer payments from the U.S. government to taxpayers in 2020 and 2021 did more to hurt the economy than to help it. By the time the money was spent, the recession was over, so the main impact of these transfers was to cause inflation to increase" A. The mainstream viewpoint B. The real business cycle theory viewpoint C. The self-correction viewpoint

C

Emily is an economist whose views are closest to the self-correcting viewpoint. She observes that the economy has slipped into a recession and thinks that this is due to a leftward shift in the demand curve. Emily believes that the proper response to a leftward shift in Aggregate Demand is for the government to do nothing. How does she think the economy will respond in the long run? A. AD will shift back to the right B. There will be no additional shifts to AD or AS C. LRAS will shift left D. AS will shift right

D

If the exchange rate between the British pound and the Japanese yen is 1 GBP = 150 JPY. If a Nintendo Switch costs 300 pounds, what is the price in yen? A. 2yen B. 300 yen C. 450 yen D. 45,000 yen

D

If the money multiplier is 2, and the Fed increases reserves by $10,000, how will this affect the money supply? A. Increase by $5,000 B. Increase by $10,000 C. Decrease by $10,000 D. Increase by $20,000

D

In real business cycle theory, a decrease in GDP is typically caused by A. Aggregate Demand shifting left B. Aggregate Demand shifting right C. Short-run Aggregate Supply shifting right D. Long-run aggregate supply shifting left

D

In which of the following scenarios is Marcus acting as a lender? A. Marcus pays $20 for dinner B. Marcus buys $100 in Google stock C. Marcus takes out $20,000 in student loans D. Marcus puts his paycheck in the bank

D

Second National Bank has total assets of $2,000 and total liabilities of $1,600. What is its leverage ratio? A. 0.8 B. 1.25 C. 4D. 5

D

The United States has a current account _______ and a financial account ______ A. Surplus, surplus B. Surplus, deficit C. Deficit, deficit D. Deficit, surplus

D

The United States has floating exchange rates. Suppose there is an increase in inflation in the United States. What will happen? A. The U.S. central bank will sell U.S. currency so the exchange rate remains constant B. The U.S. central bank will buy Euros so the exchange rate remains constant C. The exchange rate (price of a dollar) will go up D. The exchange rate (price of a dollar) will go down

D

The country of Littleton has total printed currency of $100 and banks have a reserve ratio of 5%. What is the total money supply in Littleton? A. $5B. $100 C. $500 D. $2000

D

The demand curve for British pounds (in terms of U.S. dollars) is ________. A. downward-sloping because a higher dollar price of pounds means British goods are cheaper for Americans B. downward-sloping because a lower dollar price of pounds means British goods are more expensive for Americans C. upward-sloping because a lower dollar price of pounds means British goods are cheaper for Americans D. downward-sloping because a lower dollar price of pounds means British goods are cheaper for Americans

D

The government borrows $1 billion to fund a large tax cut. How does this affect the lendable funds market? A. Supply shifts left B. Supply shifts right C. Demand shifts left D. Demand shifts right

D

The government has decided to spend $100,000 on a new road. The marginal propensity to consume is 80%. What is the total impact on GDP? A. GDP increases by $100,000 B. GDP increases by $80,000 C. GDP increases by $400,000 D. GDP increases by $500,000

D