Econ Final Exam
What are the three basic functions of money?
A medium of exchange, a unit of account, and store of value
Many public capital goods are complementary to private capital goods.
True
The chairperson of the Federal Reserve Board is selected by the
U.S. president and confirmed by the Senate.
Excess reserves are equal to
actual reserves minus required reserves.
If the annual interest payments on the debt sharply increased as a percentage of the GDP
the government would have to use more tax revenues for interest or go deeper into debt
The long-run fiscal imbalance in the Social Security retirement system is the result of
an aging population and declining worker-beneficiary ratio.
The purchase of a new house is considered to be an investment because a new house is
an income generating aspect
Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008 because they resulted in
an increase in demand for housing and a rapid increase in home prices that was unsustainable.
For a person who wants to preserve the size of government, the fiscal options for ending a recession include
an increase in government spending
Excess reserves
can be lent out, increasing the money supply.
The major categories of firms that make up the U.S. financial services industry include
commercial banks, thrifts, insurance companies, and securities related firms
The Consumer Price Index (CPI) is constructed by
comparing the value of a "market basket" of goods that consumers typically purchase to the value of the basket in a base year.
Expectations of a near-term policy reversal weaken fiscal policy because
consumers may hesitate to increase their spending because they believe that tax rates will rise again
The Federal Reserve Board of Governors
coordinates policies for the 12 Federal Reserve Banks
Between 1980 and 2007, the bank and thrift share of the financial services market
declined substantially.
Comparing market values over time has the
disadvantage that prices change over time.
Three main types of consumption expenditures are
durable goods, non-durable goods, and services
Hyperinflation might lead to a severe decline in total output if
everyone starts speculating and searching for ways to avoid inflation
The Social Security trust fund
includes assets held by these programs to help pay for future projected tax revenue shortfalls
The nominal interest rate
minus the inflation rate is the real interest rate
Social Security is a "pay-as-you-go" plans. This means that
most of the current revenues from the Social Security tax are paid to current Social Security retirees
Changes in inventories are included as part of investment spending because anything produced by a business that has
not been sold during the accounting period is something in which the business has invested.
The face value of a coin is greater than its intrinsic value because
otherwise people would sell it for its intrinsic value
An asset on a bank's balance sheet is something
owned by the bank, whereas a liability is something owed by the bank
Rapid inflation can undermine money's ability to perform its functions. For example, in runaway inflation
people revert to barter because money fails as a medium of exchange
Suppose foreigners spend $7 billion on American exports in a given year and Americans spend $5 billion on imports from abroad in the same year.
+$2 billion
A political business cycle happens because
politicians are more interested in reelection than in stabilizing the economy.
Recent productivity acceleration has been
positively influenced by global competition, which has expanded market possibilities for both consumers and producers.
Recent productivity acceleration has been
positively influenced by information technology because it connects information in all parts of the world with information seekers.
Demand-pull inflation occurs when
prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.
Since at least 1995 the majority of increases in U.S. real GDP are from
productivity growth
Mortgage backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because they
reduced the risk exposure, or cost, that banks faced after issuing these subprime loans, and encouraged this type of lending
Inflation
reduces the purchasing power of the dollar.
The crowding-out effect is the
reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending
The Federal Reserve requires that commercial banks have reserves because
reserves provide the Fed a means of controlling the money supply.
The major assets on a commercial bank's balance sheet include
reserves, securities, loans, and vault cash.
The categories of financial firms have become more blurred as these firms are trying to
retain their market share
More labor inputs can explain
some of the increases in U.S. real GDP during the last 50 years or so.
The United States has an unemployment compensation program that provides income for those out of work.
still a problem because the unemployment compensation program merely gives the unemployed enough funds for basic needs.
If inventories declined by $1 billion during 2012, then $1 billion would be
subtracted from both gross private domestic investment and gross domestic product.
The Bureau of Labor Statistics (BLS) would calculate the rate of inflation in year 5 by
subtracting the CPI of year 4 from the CPI of year 5, and then dividing by the CPI of year 4.
In requesting a tax cut in the early 1960s, President Kennedy said, "It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise tax revenues in the long run is to cut tax rates now." This statement recognizes that
tax cuts increase production, GDP, and tax revenues
The Federal Open Market Committee (FOMC) includes
the Board of Governors members and 5 of the 12 presidents of the Federal Reserve Banks, of which the president of the New York Fed has a permanent voting seat.
When economists say that the Federal Reserve Banks are central banks, this means that
the policies are coordinated by the Federal Reserve Board of Governors.
When economists say that the Federal Reserve Banks are quasi-public banks, this means that
they are a blend of private ownership and public control
When economists say that the Federal Reserve Banks are bankers' banks, this means that
they perform the same functions for banks as banks perform for the public.
What tends to happen to real GDP, unemployment, and inflation during these phases?
1. During recessionary phase, GDP falls, unemployment rises, and inflation falls 2. During expansionary phases, GDP rises, unemployment falls, and inflation rises
What are the four supply factors of economic growth?
1. The quality and quantity of natural resources 2. The level of technology 3. The stock of capital goods 4. The quality and quantity of human resources
How many recessions has the U.S. experienced since 1950?
10 recessions
How long did the longest recession last?
18 months duration.
Why did the budget surpluses of 2000 and 2001 give way to a series of budget deficits in 2002?
Budget deficits in 2002 were due to the recession and tax cuts Deficits increased substantially in 2008 because of the fiscal stimulus after the financial collapse
Built in, or automatic stabilizers
Built in, or automatic stabilizers work by changing tax revenue and government payouts so that GDP changes are reduced
The major claims on a commercial bank's balance sheet are
Checkable deposits
Which two of the following financial institutions offer checkable deposits included within the M1 money supply?
Commercial banks and thrift institutions
What is the largest component of M1?
Currency
Which of the components of M1 is legal tender?
Currency
Which of the following items is not included in either M1 or M2?
Currency held by banks
What are the components of the M1 money supply?
Currency in circulation and checkable deposits
Why is the debt as a percentage of GDP more relevant than the total debt?
Debt as a percentage of GDP measures the economy's ability to manage debt
Deflation/Inflation
Deflation means that the price level is falling, whereas with inflation, overall prices are rising.
As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced nations
False
Immigration has slowed economic growth in the United States
False
Technological advance, which to date has played a relatively small role in U.S. economic growth, is destined to play a more important role in the future.
False
The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.
False
What are three types of unemployment?
Frictional, structural, and cyclical``
Which of the following are included in the functions of the Federal Reserve System?
Issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks
Unemployment is seen by some as undesirable. Are all three types of unemployment undesirable?
No, frictional unemployment is expected in the economy.
What near-monies are included in M2 money supply?
Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances
What are the two primary phases of the business cycle?
Recession and Expansion
TARP is the
Troubled Asset Relief Program funded with general tax revenue and the issuance of government debt.
An internally held public debt is like a debt of the left hand owed to the right hand.
True
Rearrange the following contributors to the growth of productivity in descending order of their quantitative importance: economies of scale, quantity of capital, improved resource allocation, education and training, and technological advance.
Technological advance, quantity of capital, education and training, economies of scale, and improved resource allocation
What was the most severe recession in terms of real output?
The 1974-1975 recession.
How does unanticipated inflation hurt creditors and help borrowers?
The creditors are hurt as the receive dollars of lesser value from borrowers
How can anticipating the inflation make these effects less severe?
The effects are made less severe by adjusting nominal interest
As a percentage of GDP, the total U.S. public debt held by the public was larger in 2010 than it was in 1990.
True
What is the efficiency factor?
The level of economic efficiency and full employment needed to reach full production potential
What is the demand factor?
The level of purchases needed to maintain full employment
Distinguish between the total U.S. debt and the debt held by the public.
Total U.S. debt is the total amount of money owned by the federal government to all security holders, and the debt held by the public is a portion of U.S. debt
For a person who thinks the public sector is too large, the fiscal options for ending recession would include
a cut in taxes
Which of the following are included or excluded in this year's GDP? a. The services of a commercial painter in painting his home in his spare time: b. An auto dealer's sale of a new car to a nonbusiness customer: c. The money received by Smith when she sells her biology textbook to a used-book buyer: d. The publication and sale of a new economics textbook: e. A $2 billion increase in business inventories: f. The government purchases of newly produced aircraft:
a. excluded b. included c. excluded d. included e. included f. included
Net exports are a country's exports of goods
and services less its imports of goods and services
Net worth is equal to
assets minus liabilities
A balance sheet must always balance because the sum of
assets must equal the sum of liabilities plus net worth.
Compared to a decade ago, there are
fewer bank firms
Three examples of products or services that can be simultaneously consumed by many people include
films, ebooks, and television programs.
Government loans create moral hazard because there is a tendency
for financial services firms to take on greater risks because they assume they are at least partially insured against losses
Refinancing of the public debt might drive up real interest rates because
government borrowing to finance the debt increases demand for funds and competes with private borrowing.
The higher level of sales greatly reduces the per-unit cost of the product of an information product because there are
high start-up costs but low marginal costs
Economists include only final goods in measuring GDP for a particular year because
if intermediate goods were counted, then multiple counting would occur.
U.S. exports and imports each affect domestic production because
imports are subtracted from U.S. GDP and exports are added.
The problem of time lags in enacting and applying fiscal policy is that
in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed
The government's fiscal policy options for moving the economy out of a recession include
increasing government spending, decreasing taxes, or both
The broad options for fixing the long-run Social Security problem include
increasing the retirement age, subjecting a larger portion of total earnings to the Social Security tax, and reducing benefits for wealthy retirees.
The purchasing power of the dollar is
inversely related to the price level
American International Group (AIG) exacerbated the financial crisis of 2007-2008 by
issuing billions of dollars of collateralized default swaps that had embedded mortgage-loan risk.
When measuring GDP for a particular year, economists exclude the value of used furniture bought and sold because
it was counted in GDP in some previous year.
Labor productivity greatly rises as the firm sells more units of an information product or service because
learning from the information simultaneously can increase worker output potential
The Federal Open Market Committee (FOMC)
votes on the Fed's monetary policy and directs the purchase or sale of government securities.
The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers
who were more likely to default on their loans.
