Econ 1015 Midterm 3

____________ economists were laissez-faire in their policy recommendations, having faith that the economy would self-correct without government intervention.

Classical

If banks have a required reserve ratio of 25%, and one bank is currently holding $10,000 in excess reserves, what would be the maximum possible change to the money supply if the bank loans out all of the excess reserves?

$40,000

bank has excess reserves of $1,000,000 and makes a new loan for $500,000. If the bank faces a 10 percent required reserve ratio, by how much will the money supply increase when the loan is made?

$5,000,000

If your income increases by $1,200 and you consume only $360 of it, your marginal propensity to consume would be equal to

( 360 / 1200) = 0.30

If a bank has a required reserve ratio of 25 percent and there is $10,000 in new deposits, what is the maximum amount of loans that can be made by this bank?

($10,000 x .25) = 2,500 10,000 - 2,500 = $7,500

With a reserve requirement of 5% and an initial deposit of $400, what is the maximum amount of money creation?

($400 x .05) = 20 x 400 = $8,000

If your marginal propensity to consume is 0.4 and you get an additional $300 in income, you would spend ________ on consumption.

(.4 x 300) = $120

Suppose you are offered a job with Amazon upon graduation. Your starting salary will be $70,000, which will put you in the 25 percent federal income tax bracket. The total amount of income taxes you pay is $13,530. Your average tax rate is approximately

(13,530/70,000) x 100 = 19.3%

As a result of this deposit, by how much will the bank's required reserves increase?

(25% x $25,000) = $6,250

Suppose currently a bank holds $30 million in reserves and has $200 million in deposits. If the required reserve ratio is 12%, how much excess reserved does the bank have?

(30 million - 200 million x .12 ) = $6 million

Refer to the table to answer the following questions: Checkable deposits $800,500,000 Currency $340,000,000 Traveler's checks $10,000,000 Money market mutual funds. $78,000,000 Small time deposits. $15,000,000 Savings deposits. $252,000,000 What is the value of M2?

(800,500,000 + 340,000,000 + 252,000,000 + 78,000,000) = 1,495,500,000

Using the table, what is the total payroll tax bill (assume zero state and local income taxes) for someone who makes $67,000 per year?

(8700 x .10) + (26,650 x .15) + (31,650 x .25) = $12,780

An economy's potential output is equal to $22 billion, and its current output is equal to $20 billion. If the marginal propensity to consume has a value of 0.9, then the government should increase spending by ________ billion to return the economy to the long-run equilibrium.

.02

If the spending multiplier is 2.5, what is the marginal propensity to consume in the economy?

0.6

People decide to save 20 percent of their incomes. The value of the marginal propensity to consume is ________ and the value of the spending multiplier is ________.

100% - 20% = 80%mpc ms = (1/1-.8) = 5 0.8; 5

he governors of the board of Federal Reserve system are appointed for ____ year term.

14

According to the figure, the amount of private investment after government borrowing is ________ billion.

150-50 = $100 billion

Suppose you are offered a job with Amazon upon graduation. Your starting salary will be $70,000, which will put you in the 22% federal income tax bracket. The total amount of income taxes you pay is $11,285.50. Your average tax rate is approximately

16.1%

he Federal Reserve System was created in

1913

If government revenues in 2000 were $2.0 trillion and government outlays were $1.8 trillion, this means that the federal

2.0 trillion revenues - 1.8trillion outlays = $200 billion budget surplus

The Great Recession began in

2007

The Great Recession ended in

2009

Using the table, what is the marginal income tax rate for someone who makes $67,000 per year?

25%

If your marginal tax rate is 25%, your taxable income is $60,000, and your tax bill is $4,800, then your average tax rate is

8%

Why does the federal debt tend to increase during periods of recession?

Economic activity decreases, which decreases revenues and increases outlays

What was one of the main catalysts of the Great Recession, which began in December 2007?

Falling real estate prices.

Current chair of the Federal Reserve is:

Jerome Powell

The Great Depression led to the creation of what school of thought in economics?

Keynesian

Why do Social Security and Medicare pose problems for the federal government budget?

Life expectancy of retirees is increasing

Which of the following cities does not have the Federal Reserve Bank? A) New York B) Chicago C) St. Louis D) Los Angeles E) Boston

Los Angeles

Suppose you take $500 out of your savings account and put it in your checking account. What is the overall effect on M1 and M2?

M1 rises, and M2 is unchanged.

A while ago, Zandra set aside some cash to give her father as a birthday gift. What will happen when she gives him the cash and he deposits it into his savings account?

M1 will decrease; M2 will be unchanged

If Ann were to convert some of her checkable deposits into a certificate of deposit, which of the following changes would take place?

M1 would decrease; there would be no change in M2.

________ is/are a mandated federal program that funds health care for retired persons.

Medicare

Which of the following is part of mandatory outlays?

Social Security

What is the main reason Keynes believed that the economy won't return to equilibrium after a decrease in AD?

Sticky wages

Which of the following best summarizes the main causes of the Great Recession?

The collapse of housing prices led to decreased wealth and significant problems in the financial markets, as well as a decrease in expected income and a stock market collapse.

Which of the following is true? A) The United States generally has a budget surplus. B) National debt is the same as deficit. C) The national debt is the sum of yearly budget deficits. D) A deficit will occur when revenues exceed outlays.

The national debt is the sum of yearly budget deficits.

________ are payments made to groups or individuals when no good or service is received in return.

Transfer payments

Which of the following would have caused aggregate demand to decrease in the graph, such as occurred during the Great Recession?

a decrease in expected income

During the Great Recession, consumer sentiment in the United States declined, leading to a decrease in consumer spending. Which of the following factors caused this decrease in consumer sentiment?

a decrease in household wealth

Countercyclical fiscal policy involves changing government spending in order to shift the ________ curve, while supply-side fiscal policy involves changing government spending in order to shift the ________ curve.

aggregate demand (AD); long-run aggregate supply (LRAS)

The Laffer curve is intended to show that

as taxes rates rise, tax revenue initially rises but eventually falls.

The Laffer curve shows that

at some specific tax rate, tax revenue is maximized

Typically, the average tax rate for a person is ________ his or her marginal tax rate, because the marginal tax rate applies to ________.

below; the last dollars taxed but not to all income

To increase the money supply, the Federal Reserve could

conduct an open market purchase of U.S. Treasury securities

Generally, ________ public figures tend to stress Region II of the Laffer curve, where tax rate reductions lead to ________ tax revenue. ________ emphasize Region I, where tax rate increases lead to ________ tax revenue. Both regions are important for economic policy.

conservative; increased; Liberals; more

If the economy starting at full-employment output begins to enter into an expansion, one would expect Congress and the president to conduct ________ policy.

contractionary fiscal

According to the Laffer curve, increasing tax rates

could increase or decrease tax revenue.

Classical economists believe savings is _________ and stresses the importance of aggregate _________.

crucial for growth; supply

If government revenues in 2019 were $2.7 trillion and government outlays, including interest on debt, were $3.1 trillion, the federal

debt increased $400 billion

Based on the figure above, what sort of policy is the government likely to pursue in this case if it wants output to equal potential output?

decrease government spending and increase taxes

The sale of existing U.S. Treasury securities by the Federal Reserve will

decrease the money supply.

According to the graph, private investment ________ as a result of crowding-out.

decreased by $25 billion

Which federal budget category's portion of total government outlays has decreased since 1960?

defense

Countercyclical fiscal policy consists of using expansionary fiscal policy

during times of recession and contractionary fiscal policy during times of expansion

Classical economists will generally focus on policies that will

emphasize increasing the LRAS.

Suppose currently economy is producing below its potential GDP. The appropriate policy in this case is ____, which would shift aggregate demand _____.

expansionary; right

Today in the United States, the dollar ($) is:

fiat money

Keynesian economics

focuses on spending, or aggregate demand, as the fundamental factor in the economy

Which of the following is NOT a characteristic of fiat money?

generally acceptable as a medium of exchange

Social Security and Medicare outlays:

have increased in size recently

Which of the following is not one of the three time-lags affecting fiscal policy? A. recognition lag B. hindsight lag C. implementation lag D. impact lag

hindsight lag

An implementation lag happens because

in most nations, one or more governing bodies must approve government spending or new tax policies.

To decrease the money supply, the Federal Reserve could

increase the discount rate

During a recession, the government's budget deficit tends to ________, and the level of the national debt tends to ________.

increase; increase

Assume that in a given year a country takes in $1.2 billion in taxes but spends $2.3 billion. With certainty we can say that the government debt

increased by $1.1 billion.

Which of the following is an example of contractionary fiscal policy?A) decreasing the money supply B) increasing the interest rate C) increasing government spending D) increasing taxes

increasing taxes

Social Security and Medicare spending continue to grow and take up larger shares of the federal budget because life expectancy is ________, the number of people receiving benefits is ________ quickly, and the growth in the number of people paying into the programs is ________.

increasing; increasing; decreasing

The largest source of tax revenue for the federal government comes from ________ taxes.

individual income

The largest source of tax revenue for the government is ________ taxes.

individual income

A recognition lag happens because

it takes time to collect data on the behavior of the economy.

Banks increase the money supply by:

lending out funds to borrowers.

Discount loans are:

loans from the Fed to private banks.

According to classical economists, changes in aggregate demand have little effect on the overall economy, therefore,

long-run aggregate supply is the primary source of economic growth.

The majority of federal spending is comprised of ________ outlays.

mandatory

If the quantity of money in the economy doubled tonight, the result for the economy would be

mixed; we would experience a boost in the short run but inflation in the long run

Which of the following is considered mandatory government spending?

payments to Social Security recipients

Crowding-out occurs when

private spending falls in response to increases in government spending

Income taxes in the United States can be described as:

progressive

Which of the following is an example of an automatic stabilizer? A) Federal Reserve interest rates B) discretionary outlays C) progressive income taxes D) education subsidies

progressive income taxes

Country Z is suffering from the effects of a negative supply shock. If the government's main goal is to return output to potential, then it will ________. If the government's main goal is to maintain low and stable inflation, then it will ________.

pursue expansionary fiscal policy; take no action

As a result of the decrease in aggregate demand and long-run aggregate supply, we can see in the graph that the price level ________, and real gross domestic product (GDP) ________.

remains unchanged; decreases

Which of the following is considered discretionary government spending?

salaries of government employees

Expansionary fiscal policy occurs when the government increases ________, decreases ________, or both to stimulate the economy toward expansion.

spending; taxes

Classical economists believe the economy is inherently __________ and __________ government intervention because prices are __________.

stable; does not need; flexible

Keynesian economists believe prices are _________ and focus on the _________ run.

sticky; short

Which of the following is an example of expansionary fiscal policy? A) increase in taxes B) stimulus package C) increasing the money supply D) lowering interest rates

stimulus package

What function of money is highlighted if someone puts cash under his or her mattress to have on hand for unexpected emergencies?

store of value

Discretionary government spending includes payments made for

the Department of Energy

Classical economists believe that

the economy is inherently stable and self-correcting

If the unemployment rate falls below the natural rate of unemployment (u*),

the government will want to conduct contractionary fiscal policy

Keynesian economists believe the economy is inherently __________ and __________ government intervention because prices are __________.

unstable; needs; sticky

During which of the following situations would the government most likely have an expansionary fiscal policy?

when the unemployment rate is running unusually high

If a bank has a required reserve ratio of 15% and has required reserves of $255,000, how much does the bank hold in deposits?

$1,700,000

An economy's potential output is equal to $2.40 trillion, and its current output is equal to $2.42 trillion. If the marginal propensity to consume has a value of 0.4, then the government should decrease spending by ________ billion to return the economy to the long-run equilibrium.

$12

According to the graph, the amount of private savings after government borrowing shifts the demand for loanable funds is

$150 billion

Imagine that Stella deposits $25,000 in currency (which she had been storing in her closet) into her checking account at the bank. Assume that this institution and others like it have a required reserve ratio of 25%. How much of this deposit can the bank turn around and lend out to borrowers?

$18,750

Wahoo Bank has $800 million in total deposits, $80 million worth of cash in its vault, and $20 million in the bank's account at the Federal Reserve. If the required reserve ratio (rr) is 10%, what is the maximum loan Wahoo Bank can extend while still maintaining the required level of reserves?

$20 million

Wahoo Bank has $800 million in total deposits, $80 million worth of cash in its vault, and $20 million in the bank's account at the Federal Reserve. If the required reserve ratio (rr) is 10%, what is the maximum increase in the money supply the economy can experience if Wahoo were to extend loans while still maintaining the required level of reserves?

$200 million

Imagine that Stella deposits $25,000 in currency (which she had been storing in her closet) into her checking account at the bank. Assume that this institution has a required reserve ratio of 25 percent. As a result of this deposit, by how much will the bank's reserves increase?

$25,000

Suppose the MPC is 0.9. What will the total GDP impact be of a $400 billion increase in government spending [G]?

$4 trillion

According to the figure, which point(s) would see tax revenues decrease if the tax rate increased?

B and C

The formula for the simple money multiplier, mm = 1/rr, assumes that all currency is deposited into banks. What else does the formula assume?

Banks hold no excess reserves.