ECON MIDTERM #5

In the dynamic AS-AD diagram, a tight monetary policy shifts the a) AD curve to the left. b) AD curve to the right. c) Solow growth rate to the right. d) Solow growth rate to the left.

a) AD curve to the left.

The effective reserve ratio is determined primarily by a) How liquid banks wish to be. b) The size of banks' vaults. c) The number of bank employees. d) How greedy banks wish to be.

a) How liquid banks wish to be.

Which of the following definitions of the money supply is the most expansive? Correct Answer a) M2 b) currency c) M1 d) the monetary base

a) M2

Monetary policy is a ______ means of popping a bubble, because monetary policy ______ push down the price of specific commodities. a) crude; can't b) crude; can c) good; can d) good; can't

a) crude; can't

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising a) inflation. b) output growth. c) Solow growth. d) unemployment.

a) inflation.

The discount rate is the a) interest rate banks pay when they borrow directly from the Fed. b) overnight lending rate from one major bank to another. c) interest rate on short-term Treasury securities. d) ratio of reserves to deposits.

a) interest rate banks pay when they borrow directly from the Fed.

Uncertainty drives people away from a) investment spending and toward more liquid assets. b) less liquid assets and toward more investment spending. c) more liquid assets and toward more investment spending. d) investment spending and toward less liquid assets.

a) investment spending and toward more liquid assets.

The federal funds rate is the a) overnight lending rate from one major bank to another. b) interest rate banks pay when they borrow directly from the Fed. c) ratio of reserves to deposits. d) interest rate on short-term Treasury securities.

a) overnight lending rate from one major bank to another.

Moral hazard occurs when banks and other financial institutions a) take on too much risk, hoping that the Fed and regulators will bail them out. b) hesitate to lend due to concern over excessive risk. c) fail to maintain their assets exceeding the liabilities. d) fail and bring down other institutions in the system.

a) take on too much risk, hoping that the Fed and regulators will bail them out.

The second-largest source of revenue for the U.S. federal government is a) the corporate income tax. b) Social Security and Medicare taxes. c) excise taxes, such as taxes on gasoline and alcohol. d) the individual income tax.

b) Social Security and Medicare taxes.

Which country had the highest military expenditure in 2010? a) China b) United States c) Russia d) North Korea

b) United States

If an increase in government spending of $100 million causes an increase in real GDP of less than $100 million, we call this phenomenon a) crowding in. b) crowding out. c) the multiplier. d) the Ricardian effect.

b) crowding out.

Paying a higher interest rate on reserves held at the Fed will tend to a) increase the money supply. b) decrease the money supply. c) have an ambiguous effect on the money supply. d) not change the money supply.

b) decrease the money supply.

The highest debt-to-GDP ratio in U.S. history occurred a) during the Reagan administration. b) during WWII. c) during the Great Depression. d) in 2009, after the stimulus package was put into place.

b) during WWII.

The multiplier concept is important because it shows a) why fiscal policy is always effective. b) how small changes in government spending may have large impacts on overall output. c) how changes in taxes are multiplied into larger government revenues. d) why decreases in the tax rate may actually increase tax revenues overall.

b) how small changes in government spending may have large impacts on overall output.

The key difference between quantitative easing and a typical open market purchase is that quantitative easing a) involves small-term government securities, while a typical open market purchase involves long-term government securities. b) involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities. c) involves state and local government securities, while a typical open market purchase involves federal government securities. d) does not involve the purchase of government securities, while a typical open market purchase involves the purchase of government securities.

b) involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities.

Discount rate lending occurs when the Federal Reserve a) buys corporate bonds in lagging sectors of the economy. b) lends reserves directly to banks. c) provides reserves to banks through auction. d) buys and sells government bonds.

b) lends reserves directly to banks.

Because the United States has a fractional reserve banking system, banks must hold a) no currency in their vaults. b) less than 100 percent of deposits as reserves. c) 100 percent of deposits as reserves. d) more than 100 percent of deposits as reserves.

b) less than 100 percent of deposits as reserves.

When expansionary fiscal policy increases income and thus consumer spending, the additional increase in AD it causes is called the a) spending effect. b) multiplier effect. c) fiscal effect. d) butterfly effect.

b) multiplier effect.

Government spending as a percentage of GDP in the United States today is a) comparable to countries like Germany, the Netherlands, and Italy. b) one of the smallest among developed countries. c) about average as compared to other developed countries. d) larger than any other developed country in the world.

b) one of the smallest among developed countries.

Moving from a progressive tax system to a flat tax system would most likely a) decrease investment. b) raise taxes for poor and middle-income households. c) lower overall tax revenue. d) raise taxes on the rich.

b) raise taxes for poor and middle-income households.

The reserve ratio (RR) is the a) ratio of deposits to reserves. b) ratio of reserves to deposits. c) overnight lending rate from one major bank to another. d) amount the money supply expands with each dollar increase in reserves.

b) ratio of reserves to deposits.

In addition to monetary policy, the Fed also has the power to a) control the mortgage market. b) regulate banks. c) monitor the housing market. d) oversee Treasury transactions.

b) regulate banks.

Suppose that the unemployed are mostly construction workers by profession. Which government spending project will most effectively target unused labor resources? a) investing in research on solar energy b) renovating the nation's highway system c) better funding for medical care for the elderly d) increasing teacher quality

b) renovating the nation's highway system

The advocates of discretion for the Fed's role think that the Fed's adjustments on average push the economy in the a) wrong direction and lower GDP volatility. b) right direction and lower GDP volatility. c) wrong direction and increase GDP volatility. d) right direction and increase GDP volatility.

b) right direction and lower GDP volatility.

When the Fed sells government bonds in the open market, a) both the monetary base and interest rates decrease. b) the monetary base decreases and interest rates increase. c) the monetary base increases and interest rates decrease. d) both the monetary base and interest rates increase.

b) the monetary base decreases and interest rates increase.

Which of the following provides an automatic stabilizer when the economy is declining? a) regressive tax system b) welfare and transfer programs c) money supply d) government bonds

b) welfare and transfer programs

Which of the following is NOT true of the Federal Reserve System? a) It maintains the bank account of the U.S. Treasury. b) It serves as the bankers' bank. c) It carries out policies passed by the federal government. d) It regulates the nation's money supply.

c) It carries out policies passed by the federal government.

Which of the following is a limitation of monetary policy in stabilizing the economy? a) Central banks have too much control over the money supply. b) Most central bank policymakers are controlled by the government. c) Monetary policy is subject to uncertain lags. d) Central banks have no discretion over policy tools.

c) Monetary policy is subject to uncertain lags.

Open market operations involve the Federal Reserve a) lending reserves directly to banks. b) providing reserves to banks through auction. c) buying and selling government bonds. d) competing with investment banks for treasury securities.

c) buying and selling government bonds.

If the Fed wishes to lower interest rates, it should a)do nothing. b) conduct an open market sale. c) conduct an open market purchase. d) raise the discount rate.

c) conduct an open market purchase.

The crowding out effect of fiscal policy refers to a) the increase in tax revenues as a result of an increase in government spending. b) how more federal government spending affects the sizes of state and local governments. c) the decrease in private spending as a result of higher government spending. d) the decrease in real GDP growth as a result of higher government spending.

c) the decrease in private spending as a result of higher government spending.

Over which of the following definitions of the money supply does the Fed have the most control? a) M2 b) M1 c) the monetary base d) savings deposits

c) the monetary base

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between a) too high a rate of growth or too high a rate of inflation. b) too low a rate of growth or too low a rate of inflation. c) too low a rate of growth or too high a rate of inflation. d) too high a rate of growth or too low a rate of inflation.

c) too low a rate of growth or too high a rate of inflation.

The Fed's power to influence aggregate demand is constrained by a) contracting fiscal policy. b) the president and Congress. c) uncertainty and an inability for everyone to fully understand the complexity of the economy. d) the significant amount of U.S. dollars held in foreign reserves.

c) uncertainty and an inability for everyone to fully understand the complexity of the economy.

A bank becomes insolvent when the a) bank's assets are less than those of other banks. b) bank's assets are greater than its liabilities. c) value of a bank's loans falls so far that the bank can no longer pay back its depositors. d) value of a bank's loans rises so rapidly and exceeds the value of its deposits.

c) value of a bank's loans falls so far that the bank can no longer pay back its depositors.

Quantitative easing occurs when the a) Fed sells long-term securities. b) government lowers income and other taxes. c) government raises income and other taxes. d) Fed buys long-term securities.

d) Fed buys long-term securities.

U.S. currency is printed by the a) The Comptroller of the Currency. b) The President's Council of Economic Advisors. c) The Federal Reserve. d) The U.S. Department of the Treasury.

d) The U.S. Department of the Treasury.

The money multiplier (MM) is the a) ratio of deposits to reserves. b) overnight lending rate from one major bank to another. c) ratio of reserves to deposits. d) amount that the money supply expands with each dollar increase in reserves.

d) amount that the money supply expands with each dollar increase in reserves.

In the case of a negative shock to aggregate demand, the central bank should a) decrease the rate of growth in the money supply to control inflation. b) decrease the rate of growth in the price level to keep real growth high. c) do nothing. d) increase the rate of growth in the money supply to restore spending growth.

d) increase the rate of growth in the money supply to restore spending growth.

The time it takes Congress to propose and pass a plan for fiscal policy is called the a) adjustment lag. b) effectiveness lag. c) recognition lag. d) legislative lag.

d) legislative lag.

Social Security is run on a ______ basis. a) prepaid b) trust fund c) contract d) pay-as-you-go

d) pay-as-you-go