Econ 110 Test 3
22) On the 45-degree line diagram, for points that lie below the 45-degree line,
b. planned aggregate expenditure is less than GDP.
12) At macroeconomic equilibrium,
b. total spending equals total production.
14) Which of the following is one of the most important benefits of money in an economy?
c. Money makes exchange easier, leading to more specialization and higher productivity.
8) ________ usually increase(s) when the U.S. economy is in a recession and decrease(s) when the U.S. economy is expanding.
c. Net Exports
13) If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will
c. decrease consumption by $7,500.
38) If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then
c. the multiplier is 8.
31) Open market operations refer to the purchase or sale of ________ to control the money supply.
B) U.S. Treasury securities by the Federal Reserve
17) Economies where goods and services are traded directly for other goods and services are called ________ economies.
B) barter
36) To offset the effect of households and firms deciding to hold less of their money in checking account deposits and more in currency, the Federal Reserve could
B) buy Treasury securities.
20) The largest proportion of M1 is made up of
B) checking account deposits.
19) Fiat money has
B) little to no intrinsic value and is authorized by the central bank or governmental body.
28) If the central bank can act as a lender of last resort during a banking panic, banks can
B) satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
1) Which of the following functions of money would be violated if inflation were high?
B) store of value
43) If the marginal propensity to save is 0.4, the multiplier is 2.5.
True
45) Money will fail to serve as a medium of exchange if it ceases to be a store of value.
True
46) When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies that his marginal propensity to consume is 0.85.
True
4) If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is
A) 0.9.
11) ________ consumption is consumption that does not depend upon the level of GDP.
A) Autonomous
5) Which of the following is a true statement about the multiplier?
A) The multiplier rises as the MPC rises.
33) A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.
A) increases; increases
24) Bank reserves include
A) vault cash and deposits with the Federal Reserve.
15) How does a decrease in government spending affect the aggregate expenditure line?
B) It shifts the aggregate expenditure line downward.
25) If the required reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an increase in checking account deposits (including the original deposit) in the banking system as a whole of up to
C) $10,000.
6) A general formula for the multiplier is
C) 1/(MPS)
3) If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then
C) the MPC is 0.8.
10) All of the following are true statements about the multiplier except
D) The multiplier makes the economy less sensitive to changes in autonomous expenditure.
41) Economies cannot function without money.
False
42) If gold is used as money in an economy, the money supply is easy to control.
False
44) Liquidity increases as we move from the M1 to the M2 definition of the money supply.
False
47) Commodity money can be used only as a medium of exchange.
False
48) Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases, and net exports.
False
49) The amount of national income in an economy equals the money supply in an economy.
False
50) When the dollar becomes stronger compared to the Japanese Yen, then the Japanese imports from the U.S. will increase.
False
26) Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?
a. There was an unplanned increase in inventories equal to $2 million.
32) The five most important variables that determine the level of consumption are
a. disposable income, wealth, expected future income, price level, and interest rate
21) The aggregate expenditure model focuses on the ________ relationship between real spending and ________.
a. short-run; real GDP
34) Actual investment spending does not include
a. spending on consumer durable goods.
16) Examples of assets that are included in household wealth would be
a. stocks, bonds, and savings accounts.
40) The slope of the consumption function is equal to
a. the change in consumption divided by the change in disposable income.
37) If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?
b. Inventories will rise, and GDP and employment will decline.
23) The Federal Reserve's narrowest definition of the money supply is
b. M1.
7) If inventories decline by more than analysts predict they will decline, this implies that
b. actual investment spending was less than planned investment spending.
39) If firms are more optimistic that future profits will rise and remain strong for the next few years, then
b. investment spending will rise.
27) In economics, money is defined as
d. any asset people generally accept in exchange for goods and services.
29) The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by
d. the level of aggregate expenditure.
18) John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending,
d. this may benefit the economy in the long run, but could be counterproductive in the short run.
