ECON 202 Final

46) The national debt is the amount A) by which government tax receipts exceed expenditure in a given year. B) of debt outstanding that arises from past budget deficits. C) of government expenditures summed over time. D) by which government expenditure exceeds tax receipts in a given year.

B

49) Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth in the economy. A) decreases; increases C) increases; decreases B) decreases; decreases D) increases; increases

B

53) Suppose that today the actual Federal Funds Rate is 0.40% and the Federal Reserve Bankʹs target for the Federal Funds Rate is 0.25%. What is the Federal Reserve Bank likely to do? A) Engage in open market sales, which will increase the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. B) Engage in open market purchases, which will increase the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. C) Engage in open market purchases, which will decrease the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. D) Engage in open market sales, which will decrease the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. E) None of the above -- Since the Federal Funds Rate is directly set by the Federal Reserve, it will simply lower the rate.

B

56) If the Fed pursues expansionary monetary policy then A) the money supply will decrease, interest rates will fall and GDP will fall. B) the money supply will increase, interest rates will fall and GDP will rise. C) the money supply will decrease, interest rates will rise and GDP will fall. D) the money supply will increase, interest rates will rise and GDP will rise.

B

3) Inflation that is caused by an increase in aggregate demand which is not matched by an increase in aggregate supply is called A) demand-pull inflation. B) demand-push inflation. C) cost-push inflation. D) cost-pull inflation.

A

9) According to money neutrality, if the money supply increases, then (in the long run), A) Nominal GDP will increase B) Real GDP will increase C) Real incomes will increase D) The actual amount of things produced in the economy will increase. E) None of the above

A

22) When a grocery store accepts your $5 bill as payment for bread and milk, the $5 bill serves as a A) standard of deferred payment. C) store of value. B) unit of account. D) medium of exchange.

D

1) The statement ʺThis Dell laptop costs $2,500ʺ illustrates which function of money? A) unit of account C) standard of deferred payment B) store of value D) medium of exchange

A

11) If households in the economy decide to take money out of checking account deposits and put this money into savings accounts this will A) decrease M1 and not change M2. B) decrease M1 and increase M2. C) increase M1 and decrease M2. D) decrease M1 and decrease M2.

A

12) Unexpectedly high inflation causes which of the following? A) Lenders receive a lower real interest rate than they expected. B) Borrowers pay a higher real interest rate than they expected. C) Neither borrowers nor lenders lose. D) Both lenders and borrowers gain. E) More than one of the above is correct.

A

13) Which of the following is INCORRECT regarding tax revenues? 13) A) they increase during recessions B) they are a revenue source in the governmentʹs budget C) they change with changes in the tax rate D) they increase during economic expansions

A

14) If banks do not loan out all their excess reserves then the real world money multiplier is (R is the reserve ratio) A) smaller than 1/R. B) equal to 1/R. C) not related to 1/R. D) larger than 1/R.

A

15) A stock is: A) a financial asset that represents partial ownership of a company. B) an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest. C) a promise by the bond issuer to repay the loan, at a specified maturity date, and to pay periodic interest at a specific percentage rate. D) a payment made periodically to all shareholders of a company.

A

15) Increased government spending is an example of: A) expansionary fiscal policy. C) contractionary monetary policy. B) contractionary fiscal policy. D) expansionary monetary policy.

A

16) A fractional reserve banking system is one in which banks hold less than 100 percent of ________ in reserves. A) deposits B) loans C) securities D) shareholder equity

A

16) In the short run, expansionary fiscal policy ________ the price level and ________ equilibrium real GDP. A) increases; increases B) decreases; decreases C) decreases; increases D) increases; decreases

A

18) If inflation is completely anticipated, A) firms lose because they incur menu costs. C) lenders lose in the economy. B) no one loses in the economy. D) borrowers lose in the economy.

A

19) The presence of automatic stabilizers means that the federal budget deficit is ________ than it otherwise would be in a recession and ________ than it otherwise would be in an expansion. A) larger; smaller C) smaller; smaller B) larger; larger D) smaller; larger

A

2) The primary function of a nationʹs financial system is A) to channel the funds saved by savers to those who wish to borrow those funds. B) to reduce the government's budget deficit. C) to control the amount of inflation in the economy. D) to allow rich people to become richer by exploiting poor people through high interest rates.

A

20) An increase in government spending causes interest rates to _________, which causes investment spending to __________. This is known as ʺcrowding outʺ. A) increase ; decrease B) increase ; increase C) decrease ; increase D) decrease ; decrease E) None of the above are correct

A

20) Which of the following statements about the Federal Reserve is incorrect? A) The members of the Board of Governors are also presidents of the Federal Reserveʹs regional banks. B) The Federal Reserve regulates banks. C) All members of the Board of Governors sit on the Federal Open Market Committee. D) The Federal Open Market Committee makes monetary policy.

A

21) Which of the following is the best explanation of ʺmoral hazardʺ? A) It is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. B) It is the prospect that a party is likely to be at a competitive disadvantage if it engages in socially desirable (i.e. ʺmoralʺ) behavior. C) It is the idea that ʺgood guys finish lastʺ. D) It is the prospect that a party is more likely to engage in socially undesirable (i.e. ʺimmoralʺ) behavior if it is unregulated.

A

26) Decreasing government spending ________ the price level and ________ equilibrium real GDP in the short run. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases

A

26) In the nineteenth century when there were often bank runs caused by crop failures, banks would make relatively fewer loans and hold relatively more excess reserves. By itself, these actions by the banks should have A) decreased both the money multiplier and the money supply. B) increased the money multiplier and the money supply. C) increased the money multiplier and decreased the money supply. D) decreased the money multiplier and increased the money supply.

A

27) In a closed economy, national savings will be: A) lower than private savings if the government runs a deficit. B) higher than private savings if the government runs a deficit. C) equal to private savings if the government runs a deficit. D) lower than private savings if the government runs a surplus.

A

28) An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) decrease; rise; falls B) increase; fall; rises C) decrease; fall; rises D) increase; rise; falls

A

28) Bonds are a ________ liquid asset than other loans because they ________. A) more; are standardized B) less; are standardized C) less; are guaranteed from default by the government D) more; are guaranteed from default by the government

A

29) If in a closed economy real GDP is $30 billion, consumption is $20 billion, and government purchases are $5 billion, what is total savings in the economy? A) $5 billion B) $55 billion C) $45 billion D) $15 billion

A

29) When an economy faces an inflationary gap, an appropriate policy would be to 29) A) decrease government purchases. B) increase the quantity of money. C) decrease taxes. D) increase aggregate demand.

A

30) The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ number of investment projects are profitable, and the ________ the quantity of loanable funds demanded. A) negative; greater; greater B) negative; greater; lesser C) negative; lesser; greater D) positive; lesser; lesser

A

32) Automatic stabilizers are defined as A) policy that stabilizes without the need for action by the government B) discretionary policy taken to stabilize the economy. C) actions taken by the President without Congressional consent to stabilize the economy. D) actions taken by an act of Congress to stabilize the economy.

A

33) If Rob deposits $300 in currency into his savings account at Bank of America, A) M1 decreases. B) M1 does not change. C) M2 decreases. D) M2 increases. E) More than one of the above happens

A

33) The nation of Hyperbole is in a recession, and the government decides to increase taxes and reduce government spending to reduce the growing deficit. This will ________ aggregate demand and will likely ________ real GDP and employment. A) decrease; decrease B) increase; increase C) increase; decrease D) decrease; increase

A

34) In general, stocks are ________ risky than bonds, and have a ________ rate of return. A) more; higher B) less; higher C) more; lower D) less; lower

A

38) A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money? A) store of value B) standard of deferred payment C) unit of account D) medium of exchange

A

40) If the government changed the tax code in a way that simultaneously increased the profitability of investment spending and reduced the incentive to save, then which of the following will happen with certainty? A) increase in the real interest rate B) decrease in the equilibrium quantity of savings C) decrease in the equilibrium quantity of loanable funds D) increase in the equilibrium quantity of loanable funds E) More than one of the above will happen with certainty

A

41) Which of the following policies/events results in an increase in the equilibrium quantity of savings? A) the economy enters an expansion making firms more likely to expand their operations B) there is an increase in social assistance programs from the government that provide payments to the elderly C) the economy enters a recession making firms less likely to expand their operations D) borrowing constraints are lessen making it easier for everyone to qualify for loans E) None of the above

A

42) If the Fed raises the interest rate, this will ________ prices and ________ real GDP in the short run. A) reduce; lower B) increase; lower C) increase; raise D) reduce; raise

A

5) When the economy experiences inflation, people demand a: A) higher quantity of money, shifting the money demand curve rightward. B) lower quantity of money, shifting the money demand curve leftward. C) higher quantity of money, shifting the money demand curve leftward. D) lower quantity of money, shifting the money demand curve rightward.

A

55) Which of the following policies/events results in a decrease in the equilibrium quantity of savings? A) The uncertainty of savers about the future decreases B) The wealth of savers increases C) Both of the above D) None of the above

A

58) Which of the following would definitely increase public savings in the economy? A) a combination of higher taxes and lower government spending B) a combination of lower taxes and higher government spending C) a combination of lower taxes and lower government spending D) a combination of higher taxes and higher government spending

A

59) Consider the following actions and determine whether each is a source of ʺsavingʺ, ʺconsumptionʺ, or ʺinvestmentʺ from a macroeconomic perspective: I. Google issues new bonds. II. Janet buys a new bond issued by Google. III. Janet buys a new computer. A) I is investment, II is saving, and III is consumption B) I is saving, and II and III are consumption C) I is investment, and II and III are saving D) I is saving, II is investment, and III is consumption

A

8) Which of the following is cost of anticipated inflation? A) There will be tax distortions B) Wealth is redistributed from lenders to borrowers C) The buying power of the nationʹs income falls due to the higher prices D) More than one of the above is correct

A

In 2010, the city of Canfield collected $500,000 in taxes and spent $450,000. In 2010, the city of Canfield had a A) budget surplus of $50,000. C) budget surplus of $450,000. B) budget surplus of $5,000. D) budget deficit of $50,000.

A

40) An increase in individual income taxes ________ disposable income, which ________ consumption spending. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases

B

1) You buy a bond issued by General Mills Corporation. You are the ___________ and General Mills is the ____________. A) consumer ; borrower C) borrower ; lender B) lender ; borrower D) lender ; consumer

B

10) The portion of income that is spent on productive inputs, such as factories, machinery, and inventories, is called: A) savings. B) investment. C) loanable funds. D) consumption spending.

B

11) If the real interest rate is 6 percent and the inflation rate is 4 percent, then the nominal interest rate is A) 2 percent. B) 10 percent. C) 5 percent. D) None of the above answers are correct.

B

14) A bank will charge a higher interest rate the: A) shorter is the length of the loan, and the higher the risk of repayment. B) longer is the length of the loan, and the higher the risk of repayment. C) shorter is the length of the loan, and the lower the risk of repayment. D) longer is the length of the loan, and the lower the risk of repayment.

B

15) The reduction in aggregate demand caused by deflation: A) will decrease production and increase prices, causing inflation to adjust the price level. B) further reduces prices, causing a deflationary spiral. C) further reduces prices, causing aggregate supply to shift left back to long-run equilibrium. D) will decrease production and increase prices, causing a deflationary trap.

B

16) Sarah is able to take out a loan for $5000 for one year at an annual interest rate of 10 percent. She would use the loan for an investment project. After calculating her return from the project to be $450, Sarah will: A) lose $450 on net, and should not take out the loan. B) lose $50 on net, and should not take out the loan. C) make $50 on net, and should take out the loan. D) make $450 on net, and should take out the loan.

B

17) If there are multiplier effects, then an increase in government purchases of $200 billion will shift the aggregate demand curve to the right by A) $200 billion. B) more than $200 billion. C) less than $200 billion. D) None of the above are correct. This policy shifts the long run aggregate supply curve.

B

18) If expectations about the future donʹt change at all, then an economic downturn will generally: A) increase savings at a given interest rate and shift the supply curve for loanable funds to the right. B) decrease savings at a given interest rate and shift the supply curve for loanable funds to the left. C) decrease savings at a given interest rate and shift the supply curve for loanable funds to the right. D) increase savings at a given interest rate and shift the supply curve for loanable funds to the left.

B

19) The fact that U.S. citizens expect to receive retirement benefits through Social Security and Medicare pushes their: A) demand for loanable funds further left than it would otherwise be. B) supply of loanable funds further left than it would otherwise be. C) demand for loanable funds further right than it would otherwise be. D) supply of loanable funds further right than it would otherwise be.

B

19) Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to increase the money supply? A) raise the discount rate B) buy U.S. treasury bonds C) lower taxes D) raise the reserve requirement E) More than one of the above is correct

B

21) In the market for loanable funds, the law of supply: A) reflects that more people will choose to save the lower is the interest rate. B) reflects that more people will choose to save the higher is the interest rate. C) reflects that more people will choose to borrow the higher is the interest rate. D) reflects that more people will choose to borrow the lower is the interest rate.

B

21) What is a benefit of giving the government freedom to spend more than they receive in taxes and run a deficit? A) The federal government cannot run a deficit. B) It allows the government to be flexible if something unexpected happens. C) It can make it more difficult for businesses and consumers to borrow. D) There is never a good enough reason to allow public debt.

B

22) During recessions, government expenditure automatically A) falls, because of the progressive income tax system. B) rises, because of programs such as unemployment insurance and Medicaid. C) rises, because of the progressive income tax system. D) falls, because of programs such as unemployment insurance and Medicaid.

B

44) The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ number of investment projects are profitable, and the ________ the quantity of loanable funds demanded. A) negative; greater; lesser C) positive; lesser; lesser B) negative; greater; greater D) negative; lesser; greater

B

24) Government budget deficits are most likely to increase during economic ____________. A) expansions B) recessions

B

25) With a reserve ratio of 50 percent, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of A) $10,000. B) $20,000. C) $50,000. D) $100,000. E) $9,000.

B

27) It is estimated that the tornadoes in Alabama earlier this year caused $645 million of damage in Jefferson County, Alabama alone. Suppose that Ben Gleck, a news analyst on the Coyote News Network, argues that the tornado, while tragic, will have a positive impact on the U.S. economy as it will create jobs for those involved in the clean up and reconstruction, and thus increase the amount of employment in the U.S.. Mr. Gleckʹs argument is an example of A) the crowding out fallacy. C) the missing variables effect. B) the broken window fallacy. D) sound economic reasoning.

B

28) Assume that deposits in a bank equal $200,000, the bank has issued loans equal to $140,000, its actual reserves are $60,000, and of the $60,000 of actual reserves, $20,000 are excess reserves. What is the required reserve ratio? A) 40% B) 20% C) 30% D) 10% E) 5%

B

30) Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to decrease the money supply? A) buy U.S. treasury bonds B) raise the reserve requirement C) lower the discount rate D) raise taxes E) More than one of the above is correct

B

31) Which of the following is correct? A) The Federal Reserve has 12 regional banks. The Board of Governors has 14 members who serve 7-year terms. B) The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms. C) The Federal Reserve has 14 regional banks. The Board of Governors has 12 members who serve 7-year terms. D) None of the above is correct.

B

32) The primary tool the Federal Reserve uses to increase the money supply is A) printing more money. B) buying Treasury securities. C) lowering the required reserve ratio. D) lowering the discount rate.

B

33) A capital outflow occurs when: A) there is a positive difference between capital inflows and capital outflows of a country. B) money saved domestically is invested in another country. C) there is a negative difference between capital inflows and capital outflows for a country. D) money saved in another country finances domestic investment.

B

35) First Union has no excess reserves when a new deposit of $20,000 is made. The reserve ratio is 5 percent. How much can the banking system create in checking account balances? A) $200,000 B) $400,000 C) $20,000 D) $190,000 E) $19,000

B

37) Which of the following would you expect to decrease the equilibrium interest rate? A) there is an increase in social assistance programs from the government that provide payments to the elderly B) a decrease in the profitability of investment projects firms are considering C) an increase in the budget deficit D) a decrease in the percentage of income that households save E) More than one of the above is correct

B

38) If the government uses fiscal policy to close a recessionary gap, government A) spending must be increased by more than the gap because of the government expenditure multiplier. B) spending can be increased by less than the gap because of the government expenditure multiplier. C) taxes can be raised by less than the gap because of the tax multiplier. D) taxes must be cut by more than the gap because of the tax multiplier

B

39) Which of the following best describes how monetary policy affects the macroeconomy? A) The Fed changes interest rates which affects the money supply which shifts the SRAS curve which changes the price level and real GDP. B) The Fed changes the money supply which affects interest rates which shifts the AD curve which changes the price level and real GDP. C) The Fed changes tax rates which shifts the AD curve which changes the price level and real GDP. D) President and the Congress change government spending which shifts the SRAS curve which changes the price level and real GDP. E) President and the Congress change government spending which shifts the AD curve which changes the price level and real GDP.

B

4) If the governmentʹs budget deficit increases, then the ________ curve for loanable funds will shift to the ________ and the equilibrium interest rate will ________. A) supply; right; fall C) supply; left; rise B) demand; right; rise D) demand; left; fall

B

57) If the Fed buys Treasury bills, this will shift the money ____________________, which causes interest rates to ____________. A) demand curve to the left ; decrease B) supply curve to the right ; decrease C) demand curve to the right ; increase D) supply curve to the left ; increase E) supply curve to the left ; decrease

B

6) In financial markets, sellers are people who: A) want to spend money on something of big value in the future, but donʹt know how to save for it. B) have cash on hand and are willing to let others use it, for a price. C) want to spend money on something of value right now, but donʹt have cash on hand. D) have cash promised to them at some future date.

B

60) Assuming all else equal, if there is an increase in the interest rate: A) there will be a movement downward and to the right along the demand for loanable funds curve. B) there will be a movement up and to the left along the demand for loanable funds curve. C) the demand for loanable funds curve shifts to the left. D) the demand for loanable funds curve shifts to the right.

B

61) If Table 12.2 represents all the investments available to the economy, the interest rate is 6 percent, what will be the level of investment in the economy? A) $100 B) $200 C) $300 D) $400 E) $500

B

62) Which model shows us the interaction of savers and borrowers? A) per-worker production function C) new growth theory B) loanable funds model D) the liquidity model

B

7) Adverse selection refers to when: A) one party selects the wrong strategy and they are displeased with their selection. B) one party to a transaction has more information than the other and transactions occur less frequently due to the information asymmetry. C) neither party is willing to be party to a transaction because they donʹt have enough information. D) one party to a transaction has more information than the other and this results in a bargaining dispute.

B

Fiscal policy most directly affects the economy by increasing or decreasing: 3) A) long-run aggregate supply. B) aggregate demand. C) interest rate.

B

10) By making exchange ________, money allows for ________ and higher ________. A) harder; generalization; productivity B) harder; specialization; costs C) easier; specialization; productivity D) easier; specialization; costs

C

14) Suppose the nominal interest rate is 7 percent annually, and you deposit $1,000. Inflation in the economy throughout the year is 7 percent. At the end of the year, you have earned: A) no increase in your savings. B) an increase in your purchasing power. C) no increase in your purchasing power. D) a decrease in your purchasing power.

C

6) The larger is the reserve ratio, the: A) larger is the money multiplier, and the more money will be created in the economy. B) larger is the money multiplier, and the less money will be created in the economy. C) smaller is the money multiplier, and the less money will be created in the economy. D) smaller is the money multiplier, and the more money will be created in the economy.

C

18) The U.S. government generally finances its debt by: A) borrowing directly from very large banks. B) printing money. C) selling U.S. securities. D) borrowing directly from the FED.

C

2) The difference between the nominal interest rate and the real interest rate is the A) unemployment rate. B) GDP growth rate. C) inflation rate. D) money growth rate minus the growth rate of real GDP.

C

20) Which of the following policies/events results in an increase in the equilibrium quantity of loanable funds? A) a decrease in investment spending B) savers feel less uncertainty about the future C) technological progress makes capital more productive D) the economy enters a recession making firms less likely to expand their operations E) More than one of the above

C

6) Why is deflation such a problem for consumption and investment? A) It slows investment while simultaneously increases consumption. B) It causes firms and households to spend more. C) It slows both. D) It increases the rate of both.

C

23) The stimulus strategy behind tax cuts will only be effective if Ricardian equivalence: A) fails to hold, and people save more. B) holds, and people save more. C) fails to hold, and people increase their spending. D) holds, and people increase their spending.

C

23) Which of the following is true of ʺfiat moneyʺ? A) It is backed by the gold standard B) It can only be used to purchase automobiles. C) It has no intrinsic value D) It does not serve well as a medium of exchange E) None of the above is true

C

24) The issuer of a bond is a _____________ and the purchaser of a bond is a ____________. A) lender ; borrower B) lender ; consumer C) borrower ; lender D) consumer ; borrower

C

25) During a recession, what automatically (due to ʺautomatic stabilizersʺ) happens to the governmentʹs budget situation? A) tax revenues do not change ; government spending falls, and the budget deficit gets smaller. B) tax revenues fall, government spending falls, and the effect on budget deficits is ambiguous C) tax revenues fall, government spending increases, and the budget deficit gets larger. D) tax revenues rise ; government spending increases, and the effect on budget deficits is ambiguous

C

26) Public savings in the economy can be increased by A) raising government spending. C) raising taxes. B) lowering taxes. D) raising transfer payments.

C

32) A net capital inflow occurs in open economies where investment is: A) equal to national savings. C) higher than national savings. B) higher than national spending. D) lower than national savings.

C

34) The Board of Governors of the Federal Reserve is A) the collection of the 12 presidents of the Federal Reserve banks. B) a 14-member board, each one serving a seven-year term. C) a seven-member board, each one serving a 14-year term. D) is the group that meets every six weeks to make monetary policy decisions.

C

36) If income is equal to total spending, then in a closed economy, it is equal to: A) consumption minus investment spending. B) savings plus investment. C) consumption plus investment spending. D) savings minus investment.

C

36) If the government reduces expenditures by $30 billion, aggregate demand will A) decrease and potential GDP will decrease. B) increase and potential GDP will increase. C) decrease and real GDP will decrease. D) increase and real GDP will increase.

C

37) Other things equal, which of the following would increase the size of the real -world money multiplier? A) banks become skeptical of the ability of borrowers to repay loans B) the required reserve ratio increases C) banks choose to hold less excess reserves than before' D) the public holds on to more currency than before E) All of the above

C

37) To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the A) budget deficit or surplus as a percentage of government spending. B) budget deficit or surplus as a percentage of tax revenues. C) budget deficit or surplus as a percentage of GDP. D) absolute size of the budget deficit or surplus.

C

4) The opportunity cost of holding money A) decreases when the interest rate decreases, so people desire to hold less of it. B) increases when the interest rate decreases, so people desire to hold less of it. C) decreases when the interest rate decreases, so people desire to hold more of it. D) increases when the interest rate decreases, so people desire to hold more of it.

C

41) Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) lower; lower B) lower; higher C) higher; higher D) higher; lower

C

41) Monetary policy refers to the actions the Federal Reserve takes to manage A) the money supply and income tax rates to pursue its economic objectives. B) government spending and income tax rates to pursue its economic objectives. C) the money supply and interest rates to pursue its economic objectives. D) income tax rates and interest rates to pursue its economic objectives.

C

42) Which of the following would increase public saving (other things equal)? A) an increase in transfers B) an increase in government purchases C) an increase in taxes D) All of the above would increase public saving.

C

43) The money demand curve has a negative slope because A) lower interest rates cause households and firms to switch from money to financial assets (bonds). B) lower interest rates cause households and firms to switch from money to stocks. C) lower interest rates cause households and firms to switch from financial assets (bonds) to money. D) lower interest rates cause households and firms to switch from money to bonds. E) More than one of the above is correct

C

43) Which of the following would you expect to increase the equilibrium interest rate? A) a decrease in the profitability of investment projects firms are considering B) a cultural change that makes people more ʺfuture-orientedʺ and less ʺpresent-orientedʺ C) a decrease in the percentage of income that households save D) the government moves from a budget deficit to a balanced budget E) More than one of the above is correct

C

46) If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will A) fall substantially and investment and consumer spending will fall substantially. B) rise substantially and investment and consumer spending will rise substantially. C) change very little and investment and consumer spending will change very little. D) fall substantially and investment and consumer spending will change very little.

C

46) If the demand for loanable funds increases at the same time that the supply of loanable funds increases, then which of the following will happen with certainty? A) decrease in the real interest rate B) increase in the real interest rate C) increase in the equilibrium quantity of loanable funds D) decrease in the equilibrium quantity of loanable funds E) More than one of the above will happen with certainty

C

47) In the short run, contractionary monetary policy on the part of the Fed results in A) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP. B) an increase in the money supply, an increase in interest rates, and an increase in GDP. C) a decrease in the money supply, an increase in interest rates, and a decrease in GDP. D) an increase in the money supply, a decrease in interest rates, and an increase in GDP.

C

48) An example of automatic fiscal policy is A) the federal government expanding spending at the Department of Education. B) the Federal Reserve reducing interest rates as economic growth slows. C) expenditures for unemployment compensation increasing as economic growth slows. D) Congress passing a tax rate reduction package.

C

50) A decrease in individual income taxes ________ disposable income, which ________ consumption spending. A) decreases; increases C) increases; increases B) decreases; decreases D) increases; decreases

C

50) Consider the following two events: Event I. Because interest rates fall from 5% to 4%, the local bakery decides to borrow more money and buy a new oven. Event II. Because a local bike shop is optimistic about the future of the economy, the shop decides to borrow money and build a new store. In the loanable funds market, Event I is __________________ and Event II is __________________. A) a shift of the demand for loanable funds curve ; a shift of the supply of loanable funds curve B) a shift of the demand for loanable funds curve ; a movement along the demand for loanable funds curve C) a movement along the demand for loanable funds curve ; a shift of the demand for loanable funds curve D) a movement along the supply of loanable funds curve ; a shift of the supply of loanable funds curve

C

51) In comparison to a government that runs a balanced budget, when the government runs a budget deficit, A) household savings will fall. B) the equilibrium interest rate will fall. C) business investment will fall. D) public savings will rise

C

56) Which of the following would you expect to decrease the equilibrium interest rate? A) an increase in the budget deficit B) firms decide to purchase new capital C) an increase in the percentage of income that households save D) an increase in the profitability of investment projects firms are considering E) More than one of the above is correct

C

22) Saving is like: A) selling the right to use someone elseʹs money. B) buying the right to use your money for a time. C) buying the right to use someone elseʹs money. D) selling the right to use your money for a time.

D

8) The market for loanable funds is a market in which: A) borrowers buy and sell loans. B) savers interact to set the interest rate for loans. C) savers supply funds to those who want to borrow for their investment spending needs. D) borrowers supply funds to savers, who want loans for their investment spending needs.

C

Contractionary fiscal policy is so named because it: A) is expressly designed to expand real GDP. B) necessarily reduces the size of government. C) is aimed at reducing aggregate demand. D) involves a contraction of the nationʹs money supply.

C

How does the Federal Reserve increase the Federal Funds Rate? A) The Fed lowers the Discount Rate, which in turn, causes the Federal Funds Rate to rise. B)The Fed simply increases the Federal Funds Rate since it is directly set by the Fed. C)The Fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise. D)The Fed raises the Discount Rate, which in turn, causes the Federal Funds Rate to rise. C)The Fed engages in open market purchases which makes reserves more plentiful, thus causing the Federal Funds Rate to rise.

C

One reason the government enacts fiscal policy instead of waiting for the economy to correct itself 12) is the automatic adjustment: A) means a lower level of potential GDP. B) is generally not supported by government officials. C) can take a very long time. D) will cause permanent unemployment.

C

The idea that if governments cut taxes but not spending, people will not change their behavior, 9) and expansionary policy will have little expansionary effect is known as: A) the invisible hand. C) Ricardian equivalence. B) Keynesian policy. D) Stimulus policy..

C

When an economy is in a recession, discretionary fiscal policy would call for ________, and the automatic stabilizers would ________. A) increasing tax revenues; increase tax rates B) increasing tax rates, lower tax revenues. C) lowering tax rates; lower tax revenues D) increasing tax rates; increase tax revenues

C

13) The fact that there are fewer and fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile is reflected in the: A) upward-slope of the demand curve in the market for loanable funds. B) upward-slope of the supply curve in the market for loanable funds. C) downward-slope of the supply curve in the market for loanable funds. D) downward-slope of the demand curve in the market for loanable funds.

D

13) With a reserve ratio of 20 percent, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of A) $8,000. B) $2,000. C) $20,000 D) $50,000. E) $100,000.

D

13) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 150 to 155. What is the approximate real interest rate you are paying? A) -10% B) 0% C) 10% D) 1.67% E) -3.3%

D

15) Suppose you deposit $2000 into Bank of America and that the reserve ratio is 10 percent. How does this affect the bankʹs balance sheet? A) Required reserves rise by $2000. B) Deposits rise by $1,000. C) Reserves rise by $200. D) Excess reserves rise by $1,800. E) More than one of the above is correct

D

16) Most economists agree that modest inflation is desirable over zero inflation because: A) it allows a margin of error for those deciding on the money supply. B) it helps firms to more easily adjust real wages. C) it allows the Fed to more easily engage in expansionary monetary policy. D) All of these statements are true.

D

17) Good current economic conditions incent people to save ________, and a good outlook on future economic conditions incent people to save ________. A) less; less B) less; more C) more; more D) more; less

D

17) Which of the following is not a tool the Federal Reserve can use to manage the money supply? A) open market operations B) setting reserve requirements for deposits in the banking system C) setting the discount rate of interest. D) changing tax rates

D

17) You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 4%. You should charge a nominal interest rate of A) -6%. B) 6%. C) 10%. D) 14%.

D

18) If the Fed buys U.S. Treasury bonds, then this A) decreases reserves, causes banks to reduce their loans, and increases the money supply. B) decreases reserves, causes banks to reduce their loans, and decreases the money supply. C) increases reserves, causes banks to reduce their loans, and increases the money supply. D) increases reserves, encourages banks to make more loans, and increases the money supply.

D

23) Consider a technological advance which makes capital more productive. In the loanable funds 23) framework, this will lead to an increase in the equilibrium quantity of savings. Which of the following best explains this increase? A) The supply of loanable funds shifts to the right, causing an increase in savings. B) The supply of loanable funds shifts to the left, causing an increase in savings. C) The demand for loanable shifts to the left, putting upward pressure on the real interest rate. This higher real interest rate causes the quantity of loanable funds supplied to increase. D) The demand for loanable funds shifts to the right, putting upward pressure on the real interest rate. This higher real interest rate causes the quantity of loanable funds supplied to increase. E) None of the above. This is a trick question. The equilibrium quantity of loanable funds increases, but the equilbrium quantity of savings does not.

D

25) Which of the following is not one of the key services provided by the financial system? A) liquidity C) connecting savers and borrowers B) risk sharing D) decreasing taxes

D

29) If the reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed buys $10 million dollars of bonds from the public, bank reserves A) increase initially by $1 million and the money supply eventually increases by $10 million. B) decrease initially by $10 million and the money supply eventually decreases by $100 million. C) decrease initially by $1 million and the money supply eventually increases by $10 million. D) increase initially by $10 million and the money supply eventually increases by $100 million.

D

3) Which of the following would increase public saving (other things equal)? A) an increase in taxes B) a decrease in government purchases C) a decrease in government transfer payments D) All of the above would increase public saving. E) None of the above would increase public saving.

D

30) The amount by which government expenditures exceed revenues during a particular year is the: 30) A) GDP gap. B)public debt. C) full employment. D) budget deficit.

D

31) A decrease in taxes should be applied in a situation with A) high demand for goods and services B) Low unemployment C) a inflationary gap D) a recession gap

D

31) If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; left; fall D) demand; right; rise

D

35) In a closed economy, national savings is: A) the sum of public savings plus private savings. B) equal to national investment. C) the sum of the savings of individuals and corporations plus the savings of the government. D) All of these are true.

D

42) If the federal government has a budget deficit, then A) tax receipts and government expenditures are equal. B) tax receipts are falling and government expenditures are rising. C) tax receipts exceed government expenditures. D) government expenditures exceed tax receipts.

D

49) Expansionary fiscal policy will A) shift the aggregate demand curve to the left. B) not shift the aggregate demand curve. C) shift the short-run aggregate supply curve to the left. D) shift the aggregate demand curve to the right.

D

49) The primary tool the Federal Reserve uses to increase the money supply is A) lowering the discount rate. C) lowering the required reserve ratio. B) printing more money. D) buying Treasury securities.

D

5) A financial market is where people trade: A) current claims for future goods. B) current goods for future funds. C) future funds or goods for reduced current risk. D) future claims on funds or goods.

D

5) Which of the following is likely to occur if there is 10% inflation over the next year and it is perfectly anticipated? A) there will not be any ʺmenu costsʺ B) real interest rates will increase by 10% C) wealth will be redistributed from borrowers to lenders D) nominal wages will increase by 10% E) More than one of the above is correct

D

52) The opportunity cost of holding money A) decreases when the interest rate increases, so people desire to hold less of it. B) decreases when the interest rate increases, so people desire to hold more of it. C) increases when the interest rate increases, so people desire to hold more of it. D) increases when the interest rate increases, so people desire to hold less of it.

D

53) Which of the following actions is considered as ʺsavingʺ from a macroeconomic perspective? A) Depositing money in the bank C) Buying a bond B) Buying stock D) All of the above

D

58) Monetary policy refers to the actions the A) President and Congress take to manage government spending and taxes to pursue their economic objectives. B) President and Congress take to manage the money supply and interest rates to pursue their economic objectives. C) Federal Reserve takes to manage government spending and taxes to pursue its economic objectives. D) Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.

D

7) The goal of expansionary monetary policy is to: A) increase interest rates to stimulate the economy. B) increase interest rates to slow down the economy. C) reduce interest rates to slow down the economy. D) reduce interest rates to stimulate the economy.

D

9) An example of a buyer in a financial market would be: A) families putting money away for the future. B) corporations loaning money to other firm. C) students saving for college. D) families buying new houses.

D

A lack of understanding regarding the current state of the economy creates: 11) A) an implementation lag. B) a formulation lag. C) a direction lag. D) an information lag.

D

Keynesian policy: A) refers to policies that actively shift aggregate demand in an effort to reach full employment. B) promotes spending more and taxing less to boost economic activity to potential GDP. C) refers to fiscal policy. D) All of these are true.

D

The process of deciding on and passing fiscal policy legislation creates: 4) A) an information lag. B) a direction lag. C) an implementation lag.

D

When a government runs a deficit A) its debt decreases. C) it must raise taxes B) it must cut spending. D) its debt increases.

D

24) If households in the economy decide to take money out of savings accounts and put this money into checking accounts this will A) not change M1 and not change M2. B) decrease M1 and not change M2. C) increase M1 and decrease M2. D) increase M1 and increase M2. E) None of the above is correct

E

Refer to Figure 12-1. Suppose the economy is at point B. Which of the following is a possible fiscal 1) policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.) A) decrease interest rates B) increase taxes C) increase government spending D) increase the money supply E) More than one of the above

c