ecn202

The cyclically balanced budget deficit doesn't fluctuate as much as the actual budget deficit.

True

Which of the following financial assets belongs to M2 but not to M1?

a savings account

Suppose that the economy is operating at potential output and the money supply increases. Aggregate output will _____ potential output, nominal wages will _____, and the SRAS will shift _____.

rise above; rise; leftward

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

rises; deficit

Which of the following combinations of assets is considered to be money?

currency in circulation, checkable bank deposits, and traveler's checks

Included in M2 is (are):

currency in circulation, money market funds, and traveler's checks.

When you buy a ticket to the rodeo, you are using money as mainly a(n):

medium of exchange.

The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.

less than

The federal government's largest source of revenue is:

personal income and corporate profit taxes.

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

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

If the Federal Reserve uses expansionary monetary policy there is a _____ short-run effect on _____, but_____.

positive short-run; real GDP; GDP remains equal to potential GDP in the long run.

The purpose of Regulation Q was to:

prevent banks from paying interest on checking accounts.

Expansionary monetary policy will _____ interest rates and _____ savings in the short run.

raise; increase

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the expenditure multiplier?

2.8

Which of the following assets is the MOST liquid?

a $50 bill

The balance sheet effect is the increase in a firm's net worth due to falling asset prices.

False

The demand for money in Japan is much lower than the demand for money in the United States.

False

When the economy is developing an inflationary gap, the Fed should increase the money supply to decrease interest rates.

False

M2 is made up of:

M1 plus near-moneys.

A central bank is an institution that oversees and regulates the banking system and controls the monetary base.

True

A hedge fund is a relatively unregulated private investment partnership open only to wealthy individuals and institutions.

True

A vicious cycle of deleveraging occurs when sales of assets to cover losses produce negative balance sheet effects on other firms, causing creditors to call in their loans, which forces further sales of assets and further decreases in prices.

True

As the opportunity cost of holding money changes from 5% to 3%, the quantity of money demanded increases.

True

Commodity-backed money is more efficient than commodity money because commodity-backed money ties up fewer resources than commodity money.

True

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 $40 billion.

True

In the short run changes in the money supply change the interest rate, but in the long run changes in the money supply have no effect on interest rates.

True

Money is the most liquid asset in the economy.

True

Taxes increase as GDP rises. This is an example of an automatic stabilizer.

True

Interest rates were low in the United States in 2003 because of:

capital inflows and monetary policy.

A bank run can break a bank because:

banks cannot quickly convert illiquid loans to liquid assets without facing a large financial loss.

A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and a(n) _____ in equilibrium interest rates.

decrease; increase

Given an inflationary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ the interest rate.

decrease; increase

An increase in real aggregate spending will shift the money:

demand curve rightward

A recessionary gap can be closed with:

expansionary fiscal policy.

The effect of a government deficit is:

expansionary.

Public debt is:

government debt held by individuals and institutions outside the government.

Trusts _____ than national banks.

had lower reserve requirements

Since 1964, the budget deficit _____ of GDP.

has never been more than 12%

The supply of euros is controlled by:

the European Central Bank

The Panic of 1907 began when:

the Knickerbocker Trust failed.

The reduction in a firm's net worth from falling asset prices is called:

the balance sheet effect.

If an economy is in long-run equilibrium at its potential output level, this also means:

the money market is in equilibrium.

If banks decide to hold some of their excess reserves instead of lending them all out:

the money multiplier will be less than 1 divided by the required reserve ratio.

Which of the following about bank runs is FALSE?

Bank runs typically happen only to small banks with few financial assets.

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically contractionary when the economy contracts and automatically expansionary when the economy expands.

False

If debt increases faster than GDP, the ratio of debt to GDP will fall.

False

In 2007, the Fed raised its target federal funds rate to prevent unemployment and a recession.

False

The Fed prints money only when it is conducting monetary policy.

False

The main problem facing the government of Greece in 2009 was that it had a large budget surplus.

False

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $850 billion, which of the following policies would bring the economy to potential output?

Increase taxes by $12.5 billion.

Which one of the following statements is FALSE?

The Taylor rule sets the federal funds rate on the basis of only past inflation rates, whereas inflation targeting is based on a target interest rate and business cycles.

The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

True

The promise to pay Social Security benefits to the baby boomers is an example of the implicit liabilities of the U.S. government.

True

The purpose of Regulation Q, which prevented banks from paying interest on checking accounts, was to prevent unhealthy competition between banks.

True

When a person deposits money in a bank, it is:

a liability and an asset for the bank.

In the long run, changes in the money supply _____ the aggregate price level and _____ aggregate output.

affect; do not affect

Which of the following is an expansionary fiscal policy?

an increase in unemployment benefits

The Federal Open Market Committee has decided that the federal funds rate should be 0.5% rather than the current rate of 1.25%. The appropriate open market action is to _____ Treasury bills to _____ money _____.

buy; increase; supply

The main objective of contractionary monetary policy is to:

decrease aggregate demand

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

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; expansionary; increase

When the Fed decreases the discount rate, banks are likely to _____ their lending and the money supply _____.

increase; increase

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

left; inflationary

Banks create money when they:

make loans

To decrease the money supply, the central bank could:

make open-market sales.

Monetary neutrality implies that in the long run:

monetary policy does not affect the level of economic activity.

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

more than $100 million.

When the Fed decreases the reserve requirement, banks lend _____ of their deposits, which leads to a(n) _____ in the money supply.

more; increase

The demand for money is higher in Japan than in the United States because:

most stores in Japan do not accept credit cards.

Because of the role of automatic stabilizers and discretionary fiscal policy, the historical record of the United States since 1970 shows that the budget tends to:

move into a deficit during recessions.

When nominal wages increase, the short-run aggregate supply curve:

shifts to the left

. If the money supply decreases by 5%, in the long run:

the price level drops by 5%.

The money multiplier is equal to:

the ratio of the money supply to the monetary base.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If GDP is $850 billion:

there is an inflationary gap.

Which of the following is an automatic stabilizer?

unemployment compensation payments