Econ Module 3
Aggregate supply curves are ___________ for low levels of output, and ___________ for high levels of output.
relatively flat; relatively steep
If the Fed sells U.S. government securities to banks, the federal funds rate ________ and banks' reserves ________.
rises; decrease
Which of the following is NOT an asset of banks?
savings deposits
The Fed is concerned that inflation might occur. To help eliminate this possibility, the Fed could ________ government securities to ________ the federal funds rate in the short run.
sell; raise
According to the basic quantity equation of money, if price and output fall while velocity increases, then:
the quantity of money will fall.
Financial intermediaries are institutions that
transfer funds in the form of loans from savers to investors.
A ______________ means that government spending and taxes are equal.
balanced budget
Historically speaking, the U.S. has usually had an annual ____________.
budget deficit
If the country of Tiaola spends $74.8 billion in 2021 while collecting $65.8 billion in tax revenues, the result will be:
budget deficit
The federal budget
can have a deficit, a surplus, or a balance.
Consider the graph below. What type of fiscal policy would be most suitable if an economy is producing at point E0?
contractionary
The process of banks making loans in financial capital markets is intimately tied to the:
creation of money.
An increase in government borrowing can:
crowd out private investment in physical capital.
In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases.
cut taxes
In the U.S., where do depository institutions hold their reserves?
either as vault cash or on reserve at the Federal Reserve district banks
In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to
increase aggregate demand.
Suppose you are analyzing data for an economy in which Ricardian neutrality holds true. If the budget surplus increases by 100, then:
private savings will decrease by 100.
In the diagram, a shift from AS3 to AS2 might be caused by an increase in
productivity
A ___________________ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes.
progressive tax
As a "lender of last resort," the Fed
provides loans to banks experiencing temporary liquidity problems.
Automatic stabilizers are
provisions that cause changes in government spending and taxes without new action by Congress or the President.
The quantity of money in an economy and the ____________ are inextricably intertwined.
quantity of credit for loans
Consider the graph below. What type of fiscal policy would be most suitable if an economy is producing at point E0?
Expansionary (E0 below E1)
The crowding-out effect arises when:
Government borrows in the money market, thus causing an increase in interest rates
Suppose there currently is an inflationary gap. What could the government do to bring the overall price level down?
Increase income taxes.
Crowding out is a decrease in business investment and household consumption caused by:
Increased borrowing by the government
The crowding-out effect suggests that:
Increases in government spending may reduce business investment and household consumption
______________ is the largest single source of federal government revenue, but it still represents less than half of federal tax revenue (49.6% in 2019).
Individual income tax
In an AD-AS model, the point where the economy has excess capacity is called the:
Keynesian zone of the AS curve
The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the:
Legislative lag
The goal of expansionary fiscal policy is to increase:
Real GDP
The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):
Recognition lag
Fiscal policy is enacted through changes in:
Taxation and government spending
Public debt is held as
Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds.
In the diagram, a shift from AS1 to AS2 might be caused by
a decrease in the prices of domestic resources.
In macroeconomics, _________________ describes a situation in which two people each want to exchange some good or service that the other can provide.
a double coincidence of wants
A checking deposit in a bank is considered ________ of that bank.
a liability
A checkable and debitable banking account is
a liability to a commercial bank.
Fiscal policy refers to the
adjustment of government spending and taxes in order to achieve certain national economic goals.
A loan made by a bank is considered ________ of that bank.
an asset
Bank customers can withdraw funds quickly, but many of the bank's assets like loans and bonds will only be repaid over years or even decades. This is often referred to as:
an asset-liability time mismatch
In macroeconomics, _____________________________ describes a situation where a bank's liabilities (deposits) can be withdrawn in the short-term while its assets (loans) are being repaid in the long-term.
an asset-liability time mismatch
Banks can protect themselves against an unexpectedly high rate of loan defaults and against the risk of ____________ by adopting a strategy that will ______________.
an asset-liability time mismatch; diversify its loans
"Supply creates its own demand" is known as
Say's Law
The idea that supply creates its own demand is known as
Says law
In the diagram, a shift from AS2 to AS3 might be caused by a(n)
increase in business taxes and costly government regulation.
_________________ are included in the aggregate amount of MI money currently in circulation.
Traveler's checks
When the Fed takes action to decrease the money supply and increase the interest rate, it is following:
a contractionary monetary policy.
In the diagram, a shift from AS1 to AS3 might be caused by a(n)
increase in the prices of imported resources.
A rightward shift of the AD curve in the very steep upper part of the short-run AS curve will
increase the price level by more than real output.
The short-run aggregate supply curve represents circumstances where
input prices are fixed, but output prices are flexible.
The Federal Deposit Insurance Corporation
insures the deposits held in banks.
As the aggregate price level in an economy rises, ____________________.
interest rates increase
The economy's long-run aggregate supply curve
is vertical.
Which of the following is considered a liability to a bank?
demand deposits
Which of the following is not a bank asset?
deposits
The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the
determinants of aggregate demand.
If Bill performs plumbing upgrades for Alice in exchange for her incorporating his business, then their _________________ will be satisfied.
double coincidence of wants
The Fed raises the interest rate when it
fears inflation
A bank's net worth is positive if its
assets > liabilities
How are the specific interest rates for the lending and borrowing markets determined?
by the forces of supply and demand
An individual who desires the most liquid asset possible will hold
cash
As the aggregate price level in an economy rises, ____________________.
consumer demand decreases
_______________ will often cause monetary policy to be considered counterproductive because it makes it hard for the central bank to know when the policy will take effect?
Long and variable time lags
M2 consists of
M1 plus saving deposits, small time deposits, and money market funds.
The people in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 10% of the deposits as reserves. What is the money multiplier in this economy?
10
If GDP is 3600 and the money supply is 300, what is the velocity?
12
Which category of the money supply would you be contributing to if you invest in money market funds?
M2
The Federal Reserve System includes _____ regional Federal Reserve banks, each of which is responsible for supporting the commercial banks and economy generally in its district.
12
The people in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 5% of the deposits as reserves. What is the money multiplier in this economy?
20
Stealth bank holds deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. The current market value of the bank's loans is $400 million. What is the value of the bank's total liabilities?
600 mill
Assuming a reserve ratio of 20 percent, if a bank receives $100,000 in deposits how much can the bank loan out?
80000
Which of the diagrams for the U.S. economy best portrays the effects of declines in the prices of imported resources?
A (AS1 to AS2, AD constant)
Total planned expenditures is sometimes used to describe _______.
AD
Whether the economy is in a recession is illustrated in the AD/AS model by how close the ____________ is to the potential GDP line.
AD-AS equilibrium
___________________ are economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the ____________.
Neoclassical economists; long run
Which of the diagrams for the U.S. economy best portrays the effects of a dramatic increase in energy prices?
B (AS1 to AS2 right, Ad constant)
Which of the diagrams for the U.S. economy best portrays the effects of a decrease in the availability of key natural resources?
B (AS1 to As2, AD same)
Which of the diagrams for the U.S. economy best portrays the effects of an increase in foreign spending on U.S. products?
C (AS same, AD increases)
Which type of money limits government spending because they are limited in their ability to circulate this type of money?
Commodity-backed currency
Which of the diagrams for the U.S. economy best portrays the effects of a substantial reduction in government spending?
D
______________ are a form of deposits held in banks that are available by making a cash withdrawal or writing a check.
Demand deposits
_______________________ happens when the economy is producing at its potential and unemployment is at the natural rate of unemployment.
Full employment GDP
A decrease in the government's budget surplus will cause the interest rate to:
increase
If a country's economic data shows that private savings equal $350 million, government spending equals $375 million, taxes equal $300, and the trade surplus equals $125 million, then what does investment equal?
150 million
Stealth bank holds deposits of $200 million. It holds reserves of $15 million. It has purchased government bonds worth $75 million. The current value of its loans, if sold at market value, is $130 million. What is the value of the Stealth bank's liabilities?
200 million
If nominal GDP is 2700 and the money supply is 900, what is velocity?
3
Assuming a reserve ratio of 10 percent, if a bank receives $1,000,000 in deposits how much can the bank loan out?
900000
If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):
Contractionary fiscal policy
The crowding-out effect works through interest rates and it tends to:
Decrease the effectiveness of an increase in government spending
Other things equal, a decrease in the real interest rate will
expand investment and shift the AD curve to the right.
Consider the graph below. If the economy is producing at point E0, a(n) __________ gap exists. EO higher than e1
expansionary
When prices of outputs in an economy become sufficiently high causing production to exceed potential GDP, the resulting:
extended production will be unsustainable in the long run.
If the Fed carries out an open market operation and buys U.S. government securities, the federal funds rate ________ and the quantity of reserves ________.
falls; increases
The interest rate banks charge each other on loans of reserves is called the
federal funds rate
When the Federal Reserve announces that it is implementing a new interest rate policy, the ____________________ will be affected?
federal funds rate
Fiscal policy is implemented by
federal government
The primary reason nations use ______ money today is that it doesn't limit how much of their currency they can put into circulation.
fiat
___________ has no intrinsic value, but is declared by a government to be a country's legal tender.
fiat money
Which of the following terms is used to describe the set of policies that relate to government spending, taxation, and borrowing?
fiscal policies
The __________________ in an AD/AS diagram is most relevant to Keynes's Law.
flat portion of the AS curve
Money is any commodity that is
generally accepted as a means of payment.
A reduction in government borrowing can:
give private investment an opportunity to expand.
A ____________________ is one economic mechanism by which government borrowing can crowd out private investment.
higher interest rate
If the price level of what firms produce is rising across an economy, but the costs of production are constant, then:
higher profits will induce expanded production.
The determinants of aggregate supply
include input prices, resource productivity, taxes, and government regulations.
To eliminate an inflationary gap using fiscal policy, the government could
increase taxes.
Since 2009, the U.S.'s debt-to-GDP ratio has _________.
increased
Expansionary fiscal policy involves
increasing government purchases or decreasing taxes.
Higher debt-to-GDP ratios indicate a nation ____ producing enough to pay off its debt, while lower ratios indicate a nation _____ producing enough output to pay down its debt.
is not, is
Why is productivity growth considered to be the most important factor in the AD-AS model?
it shifts the AS curve in the long-term
From an accounting point of view, a checking account should be considered part of a bank's
liabilities
When you buy a Coke, you are using money as a
medium of exchange
Money serves as a
medium of exchange, unit of account, and store of value.
A moderate increase in a budget deficit that leads to a _____________________ is not necessarily a cause for concern.
moderate increase in a trade deficit and a moderate appreciation of the exchange rate
If we look at the federal government budget over the past 40 years we see thatIf we look at the federal government budget over the past 40 years we see that
most years the budget has been in deficit.
In uncertain economic times, ____________________ serves as a way of preserving economic value that can be spent or consumed in the future.
owning gold
The second largest source of federal revenue is the __________.
payroll tax
Historic data indicate that there is usually a ________ relationship between trade deficits and federal government budget deficits.
positive
The term "full employment GDP" is synonymous with which of the following?
potential GDP
By serving as the lender of last resort,
prevent bank failures
Other things equal, an improvement in productivity will
shift the aggregate supply curve to the right.
The aggregate supply curve
shows the various amounts of real output that businesses will produce at each price level.
____________ it the largest single-ticket item of U.S. Government expenditures
social security
Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic
stabilizers.
_________________ results when an economy experiences high unemployment and high inflation at the same time.
stagflation
The ____________________ in an AD/AS diagram is most relevant to Say's Law.
steep portion of the AS curve
To function as money, an item must hold some level of purchasing power over time. In other words, the item must be a(n)
store of value
When we keep part of our wealth in a bank checking account, we are using money as a
store of value.
The government collects tax revenues of $105 million and has $100 million in expenditures. The budget balance is a
surplus of $5 million.
If an economy has a budget deficit of 600, private savings of 2,000, and investment of 800. What is the balance of trade in this economy?
surplus of 600
A ___________________ can lead to disruptive economic patterns and heavy strains on a country's banking and financial system.
sustained pattern of large budget deficits
The government has a budget surplus if
tax revenues are greater than expenditures.
Fiscal policy involves the actions of
taxation and spending in an effort to address inflation and unemployment.
The level of reserves in the monetary system is determined by
the Federal Open Market Committee.
The equilibrium price level and level of real output occur where
the aggregate demand and supply curves intersect
Open market operations are
the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply.
If the Fed sells U.S. government securities,
the federal funds rate rises.
If the Fed buys U.S. government securities,
the federal funds rate will fall.
The period between the recognition of a problem and the implementation of a policy to solve the problem is
the implementation lag.
The federal funds rate is
the interest rate banks charge each other on overnight loans.
When the Fed decides it will sell bonds using open market operations:
the money supply decreases.
When the Fed decides it will buy bonds using open market operations:
the money supply increases.
The public debt is
the total value of all outstanding federal government securities.
A __________________ often results in an outflow of financial capital leaving the domestic economy and being invested in the global economy?
trade surplus
When you see a mansion and think to yourself that it must be worth a million dollars, you are using money to perform which function?
unit of account
According to the quantity theory, if constant growth in the money supply is combined with fluctuating velocity, which of the following is most likely to result?
unpredictable rises and falls in nominal GDP
Say's Law argues that a given _______________ must create an equivalent __________________ somewhere else in the economy.
value of supply; value of demand
