ECON TEST 3

A federal budget deficit a. occurs when government expenditures exceed tax receipts. b. occurs when tax receipts exceed government expenditures. c. occurs when transfer payments exceed tax receipts. d. will always result when Congress and the president cannot agree on expenditures. e. occurs when monetary policy works in the opposite direction of fiscal policy.

A

A rise in MPC makes the total expenditures (TE) curve_____and_____the multiplier. a. steeper; raises b. steeper; lowers c. flatter; raises d. flatter; lowers

A

An example of automatic fiscal policy is a. the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a recession. b. when interest rates automatically fall in a recession. c. Congress passes a law during a recession that automatically extends unemployment benefits for those whose benefits will soon expire. d. a and b e. a, b and c

A

An increased cash leakage_____the required reserve ratio, but it does_____the strength of the money expansion process. a. does not affect; lower b. does not affect; raise c. raises; lower d. raises; raise

A

Here is a consumption function: C = C0 + MPC(Yd). If C0 = $200, then we know that a. if Yd is zero, C will be $200. b. when Yd rises, C rises by $200. c. when Yd falls, C falls by MPC times C0. d. C will always equal C0.

A

Here is a consumption function: C = C0 + MPC(Yd). The C0 term is usually defined as a. autonomous consumption. b. point-zero consumption. c. mandatory consumption. d. propensitory consumption. e. none of the above

A

If households purchase $50,000 worth of consumer goods and firms produce $45,000 worth of consumer goods, then a. inventory changes are -$5,000. b. inventory changes are +$5,000. c. new capital goods expenditures (by firms) are $5,000. d. consumer goods expenditures are $5,000. e. none of the above

A

If income rises from $1,000 to $1,300 and consumption rises from $900 to $1,160, the marginal propensity to consume is percent. a. 87 b. 80 c. 30 d. 13

A

If income rises from $1,000 to $1,800 and consumption rises from $1,200 to $1,500, the marginal propensity to save (MPS) is a. 0.625. b. 0.375. c. 0.400. d. 2.660.

A

If the economy is in an inflationary gap, Keynesian economists are likely to propose which variety of fiscal policy? a. the contractionary variety b. the expansionary variety c. the automatic variety d. none of the above

A

In the history of banking, warehouse receipts refer to receipts a. that goldsmiths once issued acknowledging that they held a customer's gold. b. for storing furniture in a warehouse. c. goldsmiths issued to each other when they borrowed gold. d. for storing food and other perishables in a warehouse.

A

Keynes believed that saving is a. more responsive to changes in income than to changes in interest rates. b. less responsive to changes in income than to changes in interest rates. c. equally responsive to changes in income and to changes in interest rates. d. dependent only on changes in interest rates.

A

Keynes most likely believed that investment is a. dependent on a number of factors, including business expectations. b. mainly determined by changes in interest rates. c. unrelated to business expectations. d. related to business expectations only during recessionary periods.

A

Keynesian macroeconomists believe that the time it takes for falling wages and prices to eliminate a recessionary gap is_____enough to say that the economy is_____. a. long; not self-regulating b. long; self-regulating c. short; not self-regulating d. short; self-regulating

A

Ninth National Bank holds $152,000,000 in checkable deposits and $19,000,000 in reserves. With a required reserve ratio of 11 percent, how much in excess reserves is Ninth National holding? a. $2,280,000 b. $2,090,000 c. $14,630,000 d. $16,720,000

A

Required reserves are the amount of a. reserves a bank must hold against its deposits as mandated by the Federal Reserve. b. cash a bank must hold against its deposits as mandated by the Federal Reserve. c. checkable deposits a bank must hold against all other deposits as mandated by the U.S. Treasury. d. reserves a bank must hold against all its assets as mandated by the Federal Reserve.

A

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $500 million. This is an example of a. incomplete crowding out. b. complete crowding out. c. zero crowding out. d. a and c e. none of the above

A

The U.S. income tax is currently a_____tax. a. progressive b. proportional c. regressive d. proactive

A

The actual change in the money supply as a result of an increase in excess reserves will be less than the maximum change if banks a. do not lend out all of their excess reserves. b. borrow from the Federal Reserve. c. sell some of their government securities to the Federal Reserve. d. lend only their excess reserves.

A

The amount of required reserves a bank holds depends on the a. required reserve ratio. b. demand-deposit ratio. c. excess-reserve ratio. d. currency ratio.

A

The classical economists believed_____determined savings, while Keynes said it was_____. a. interest rates; income b. income; investment c. investment; interest rates d. interest rates; investment

A

The consumption function is a function showing the relationship between consumption and a. disposable income. b. exports. c. interest rates. d. investment.

A

The total expenditure (TE) curve has the same slope as the_____curve. a. C (consumption) b. I (investment) c. G (government purchases) d. NE (net exports)

A

The two major curves or lines in the TE-TP diagram are: a. the total expenditure curve and the 45-degree line. b. the supply and demand curves. c. the total expenditures and national income curves. d. the total production and national income curves.

A

When a bank makes a loan to one of its customers, to the bank the loan is classified as a. an asset. b. a liability. c. neither an asset nor a liability. d. an asset in some cases and a liability in other cases, depending on the type of loan.

A

When the MPC = 0.75, the multiplier is a. 4.00. b. 0.25. c. 1.33. d. 7.50.

A

When total expenditures are greater than total production,_____is produced than households want to buy, which leads to in inventory, which signals firms that they have_____, which causes firms to increase production. a. less; decreases; underproduced b. more; increases; underproduced c. less; increases; underproduced d. more; decreases; overproduced

A

Barter is a. the exchange of money for goods and then the exchange of those goods for money. b. the exchange of money for money, or the exchange of money for stocks and bonds. c. the exchange of goods and services for goods and services without the use of money. d. any exchange, with or without the use of money, in which the participants negotiate (or barter) the price of the goods to be exchanged.

C

Considering both the Keynesian and the aggregate demand-supply frameworks, if households as a group experience an increase in wealth at a given price level, then the TE curve shifts_____, the AD curve shifts_____, and Real GDP_____. a. downward; leftward; decreases b. downward; rightward; decreases c. upward; rightward; increases d. upward; leftward; increases

C

Crowding out results in a decrease in a. transfer payments. b. defense spending. c. private spending. d. government purchases.

C

Fiscal policy refers to a. efforts to balance a government's budget. b. changes in the money supply to achieve particular economic goals. c. changes in government expenditures and taxation to achieve particular economic goals. d. the change in private expenditures that occurs as a consequence of changes in government spending.

C

If a person uses money to buy a pair of shoes, money is functioning as a. a unit of account. b. a store of value. c. a medium of exchange. d. none of the above

C

If autonomous consumption rises by $40 and, as a result, Real GDP rises by $200, then the multiplier is a. 4. b. 5. c. 6. d. 7. e. none of the above B If autonomous consumption rises by $60 and, as a result, Real GDP rises by $300, then the marginal propensity to consume is a. 0.60. b. 0.70. c. 0.80. d. 0.90. e. none of the above

C

If the economy is on the downward-sloping portion of the Laffer curve, a(an)_____in tax rates will_____tax revenues. a. decrease; lower b. increase; raise c. decrease; raise d. decrease; not change e. increase; not change

C

If the multiplier is 4, the MPC must be a. 1/5. b. 1/6. c. 3/4. d. 4/5. e. 2/3.

C

If total production is greater than total expenditures, then business firms a. have underproduced. b. will step up production. c. will lower production. d. will experience decreases in inventory. e. a and b

C

If total production is less than total expenditures, then business firms a. have overproduced. b. will cut back on production. c. will raise production. d. will experience increases in inventory. e. a and d

C

If we graph the consumption function such that it does not start at the origin, this is because we are assuming that a. the MPC is positive. b. the MPS is positive. c. autonomous consumption is positive. d. induced consumption is positive.

C

John Maynard Keynes drew many economists_____the classical belief that a market economy_____regulate itself to avoid periods of excessive unemployment. a. toward; can b. toward; cannot c. away from; can d. away from; cannot

C

Keynes argued that a. monopolistic elements in the economy will prevent an immediate sharp fall in prices as a result of decreasing demand. b. wages and prices are not flexible in a downward direction. c. a and b d. none of the above

C

Keynes believed that a. Say's law would hold in a laissez-faire economy. b. the economy would always be near or on its production possibilities frontier. c. wages and prices are often inflexible in the downward direction. d. the equilibrium level of output will always be at the full-employment level of output.

C

Keynesian economics was developed during the a. late 1800s. b. late 1700s. c. Great Depression. d. Panic of 1907.

C

M2 is comprised of a. small-denomination time deposits + savings deposits + money market accounts. b. small-denomination time deposits + credit cards + money market accounts + gold deposits. c. M1 + small-denomination time deposits + savings deposits + noninstitutional money market mutual funds. d. M1 + small denomination time deposits + credit cards + money market accounts.

C

Money's basic advantage as compared to barter is that a. everybody has money but not everyone has the opportunity to barter. b. a money system relies on a double coincidence of wants. c. money reduces transaction costs. d. money is the only medium you can use to store your wealth.

C

On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line exceeds the vertical distance to the 45-degree line. This Real GDP is_____its equilibrium level, with_____. a. above; TE > TP b. above; TE < TP c. below; TE > TP d. below; TE < TP

C

Reserves held beyond the required amount are called_____reserves. a. redundant b. precautionary c. excess d. surplus

C

Supply-side economists believe reductions in tax rates can a. shift the aggregate demand curve to the left. b. shift the short run aggregate supply curve to the left. c. increase output and lower prices. d. decrease output and lower prices.

C

Suppose Congress increases income taxes. This is an example of a. expansionary fiscal policy. b. expansionary monetary policy. c. contractionary fiscal policy. d. contractionary monetary policy.

C

Suppose the government attempts to stimulate the economy by increasing purchases without increasing taxes. Which of the following statements is most likely to be accepted by someone who believes in crowding out? a. The government's actions will have their intended effect. b. The government's actions will cause businesses to become more optimistic about the economy, and they will increase their output even more than the government had intended. c. The government's actions will raise interest rates, causing decreased investment and consumption, and the economy will not expand as much as the government had intended. d. This is a trick question, because the federal government is required by law to increase taxes by the same amount as it increases expenditures.

C

The AD curve shifts to the left with a_____in government purchases (G) or a_____in taxes. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

C

The crucial assumption underlying the new classical position on the ineffectiveness of fiscal policy is that a. government deficits will increase interest rates. b. government deficits will decrease interest rates. c. people will respond to increases in government deficits by increasing private saving. d. people will respond to increases in government deficits by increasing private consumption. e. a and d

C

The economy is in equilibrium, TP = TE. Then, net exports fall. As a result, the curve shifts_____, inventory levels unexpectedly_____, and business firms_____the quantity of good and services they produce. a. TE; upward; rise; increase b. TP; rightward; rise; decrease c. TE; downward; rise; decrease d. TE; downward; rise; increase e. none of the above

C

The efficiency wage model is an explanation of wage_____and thus a support for_____macroeconomics. a. flexibility; Keynesian b. flexibility; classical c. inflexibility; Keynesian d. inflexibility; classical

C

Which of the following best captures the essence of the new classical view of crowding out? a. Jorge thinks: With a larger budget deficit, I will now save more in order to pay the higher future taxes. b. Ana thinks: The federal government spends more on education, so I don't have to spend as much on education. c. Pham thinks: If taxes go down, my after-tax income rises; I think I'll buy a car. d. Lenny thinks: If the federal government spends more on education, it will be unable to spend as much on national defense.

A

Which of the following illustrates a barter transaction? a. A bushel of oranges is traded for a bushel of apples. b. Someone buys a pizza for the special price of $4. c. someone buys a house for $100,000. d. b and c e. a, b, and c

A

Which of the following illustrates the data lag? a. The economy turns down on January 8, 2004, but policymakers do not figure this out until April 19, 2004. b. Policymakers wait and see what is really going on with the economy. c. Policymakers implement policy X on September 12, 2004, but the effects are not felt until six months later. d. The data lag is illustrated equally well by a, b, and c.

A

Which of the following illustrates the wait-and-see lag? a. Policymakers believe an economic downturn has occurred, but they decide not to take action until they are sure. b. Policymakers are in the process of proposing policy measures to deal with the current economic slowdown. c. Policymakers first learn of the recession when it is five months old. d. Policymakers implement policy X, but it will be a few months before it starts working. e. Policymakers agree to policy X, but it will be at least two months before the policy is implemented.

A

Which of the following statements is false? a. Money is the only good that can or does serve as a store of value. b. In a barter economy, there is no good that serves as a unit of account. c. There are higher transaction costs of making exchanges in a barter economy than in a money economy. d. Money functions as a medium of exchange, unit of account, and store of value.

A

Which tax brings in the most revenue to the federal government? a. the individual income tax b. the corporate income tax c. the payroll (Social Security) tax d. the federal inheritance tax

A

With complete crowding out, an increase in government spending a. is completely offset by a reduction in private spending. b. is matched by an increase in private spending. c. results in an increase in aggregate supply. d. results in an increase in aggregate demand.

A

A federal budget surplus a. occurs when government expenditures exceed tax receipts. b. occurs when tax receipts exceed government expenditures. c. occurs when tax receipts exceed transfer payments. d. occurs when monetary policy works in the opposite direction of fiscal policy. e. is an impossibility.

B

A savings account functions as a. a unit of account. b. a store of value. c. a medium of exchange. d. none of the above

B

According to Keynes, what households plan to save a. always equals what firms plan to invest. b. sometimes equals what firms plan to invest. c. is always greater than what firms plan to invest. d. is always less than what firms plan to invest.

B

According to the Keynesian consumption function, an increase in disposable income will result in a. a decrease in consumption. b. an increase in consumption. c. a decrease in investment. d. an increase in investment.

B

According to the efficiency wage model, firms tend to pay workers a. the market-clearing wage that efficiently equates labor supplied and demanded. b. in excess of the market-clearing wage to provide an incentive for productivity and efficiency. c. less than the market-clearing wage to assure themselves a pool of workers ready to replace workers who quit. d. less than the market-clearing wage to minimize labor cost per unit of production.

B

Consumption and disposable income are a. indirectly related. b. directly related. c. not related. d. sometimes directly and sometimes indirectly related, depending upon whether consumption is planned or unplanned.

B

Elaine's taxable income increases by $1 and her tax payment increases by $0.28. Her marginal tax rate is a. 72 percent. b. 28 percent. c. 44 percent. d. There is not enough information to answer the question.

B

Here is a consumption function: C = C0 + MPC(Yd). If MPC is 0.80, then we know that a. as Yd rises by $1, Co rises by $0.80. b. as Yd rises by $1, C rises by $0.80. c. Yd rises by $0.80. d. as C0 rises by $0.80, Yd rises by $1.

B

How is the multiplier expressed in terms of the MPS? a. 1 - MPS b. 1/MPS c. 1/(1 - MPS) d. 1/(1 + MPS)

B

If an economy consumes 75 percent of any increase in income, then an increase in autonomous investment of $1 billion could result in an increase in Real GDP of as much as a. $1.0 billion.. b. $4.0 billion. c. $5.0 billion. d. $1.8 billion. e. $6.0 billion.

B

If checkable deposits in Bank A total $100 million and the required reserve ratio is 13 percent, then required reserves at Bank A equal a. $87.0 million. b. $13.0 million. c. $8.7 million. d. $1.3 million.

B

If people buy more than has been produced, a. the economy is in equilibrium. b. total expenditures are greater than total production. c. there will be an increase in inventory. d. there will be a decrease in total output.

B

If there is complete crowding out as a result of an increase in government purchases, there will be a. a decrease in aggregate demand. b. no change in aggregate demand. c. an increase in aggregate demand. d. a downward movement along the aggregate demand curve.

B

If total production is greater than total expenditures, a. there will be an increase in saving. b. there will be an increase in inventories. c. firms will increase production. d. firms will increase prices.

B

Keynes assumed consumption is a. inversely related to the rate of interest. b. directly related to disposable income. c. directly related to investment. d. less than disposable income. e. both b and d

B

Keynes believed that a. the internal structure of the economy is extremely competitive and that wage-price flexibility exists. b. monopolistic elements in the economy prevent immediate and sharp price declines in response to falling demand. c. even though there are monopolistic elements in the economy, wage-price flexibility exists. d. in spite of the competitiveness of the economy, wage-price flexibility does not exist.

B

New classical economists believe that an increase in government purchases that produces a government deficit will a. decrease interest rates. b. not change interest rates. c. increase interest rates. d. increase private consumption.

B

On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line is less than the vertical distance to the 45-degree line. This Real GDP is_____its equilibrium level, with_____. a. above; TE > TP b. above; TE < TP c. below; TE > TP d. below; TE < TP

B

Some economists argue that a rise in the interest rate, brought about by a rise in government borrowing in the loanable funds market to finance the deficit, brings in foreign funds in search of the higher interest rate return. This, in turn, dampens the rise in the interest rate. If this is true as far as it goes, there will be_____crowding out than there would be if foreign funds did not flow into the country. a. more b. less c. the same amount of d. none of the above

B

The horizontal investment curve used to derive the TE curve means investment is a. directly related to Real GDP. b. indirectly related to Real GDP. c. independent of Real GDP. d. sometimes directly and sometimes indirectly related to Real GDP, depending upon whether it is planned capital or planned inventory investment.

C

The marginal propensity to consume plus the marginal propensity to save is a. equal to zero. b. greater than zero but less than one. c. equal to one. d. greater than one.

C

The ratio of the change in consumption to the change in income is called the a. marginal utility of consumption. b. average utility of consumption. c. marginal propensity to consume. d. average propensity to consume.

C

The requirement of a "double coincidence of wants" is the chief_____of the_____exchange system. a. advantage; barter b. advantage; monetary c. disadvantage; barter d. disadvantage; monetary

C

The top 1% of taxpayers in the U.S. (those with the highest taxable incomes) pay a. about the same percentage of their incomes in tax as the average U.S. taxpayer. b. a much lower percentage of their incomes in tax than the average U.S. taxpayer. c. a much higher percentage of their incomes in tax than the average U.S. taxpayer. d. about 15 percent of their incomes in income taxes e. a and d

C

When the economy is in equilibrium, a. there are increases in inventory. b. there are decreases in inventory. c. total expenditures equal total production. d. people want to buy more than will be produced.

C

When there is economy-wide equilibrium, there is a tendency for a. total output to rise. b. total output to fall. c. total output to remain unchanged. d. prices to fall. e. prices to rise.

C

Suppose the economy is at a position below the physical production possibilities frontier but above the institutional production possibilities frontier. In response to this situation, Keynesian economists would propose that government enact_____fiscal policy to correct this_____gap by_____government purchases. a. expansionary; inflationary; increasing b. contractionary; inflationary; decreasing c. expansionary; recessionary; increasing d. contractionary; recessionary; decreasing e. contractionary; inflationary; increasing

B

A bank's T-account records a. the assets and liabilities of the bank. b. how much tea the bank holds. c. the changes in the bank's assets and liabilities. d. the changes in the bank's assets only. e. none of the above

C

A unit of account is a. a bank account. b. a savings account. c. a common measurement in which values are expressed. d. the same as a medium of exchange. e. none of the above

C

According to new classical economists, crowding out that results from a budget deficit will a. reduce future taxes. b. increase private consumption. c. increase private saving. d. increase real interest rates.

C

According to the text, the good that emerged as money in World War II POW camps was a. tinned beef b. toilet paper c. cigarettes d. cheese

C

An expansionary fiscal policy will a. always result in a budget deficit. b. always result in a budget surplus. c. sometimes result in a budget deficit. d. never result in a budget surplus. e. More information is necessary to answer this question.

C

Bank A has deposits of $6,000 and reserves of $2,000. If the required reserve ratio is 0.15, the bank has required reserves of a. $4,000. b. $1,100. c. $900. d. $300.

C

Suppose the MPC = 0.60 and government purchases increase by $40 billion. In Keynesian theory, which of the following is true? a. The TE curve shifts downward by $40 billion and Real GDP decreases by $40 billion. b. The TE curve shifts upward by $40 billion, and Real GDP increases by $40 billion. c. The TE curve shifts downward by $40 billion, and Real GDP decreases by $100 billion. d. The TE curve shifts upward by $40 billion, and Real GDP increases by $100 billion.

D

Which of the following statements is false? a. Keynes believed that monopolistic elements in the economy will prevent immediate price declines. b. Keynes believed that during periods of high unemployment, labor unions will prevent wages from falling fast enough to restore full employment. c. Keynes believed that interest rate flexibility will ensure that planned saving is equal to planned investment. d. Keynes did not believe in Say's law.

C

Which statement is consistent with what Keynes believed about consumption and disposable income? a. Consumption depends upon disposable income and falls as disposable income rises. b. Consumption rises by the same amount as disposable income rises. c. Consumption rises by less than disposable income rises. d. Disposable income depends upon consumption.

C

Within the efficiency wage model is the assumption that labor productivity_____the wage rate, so that a firm maximizing its profits_____pay workers an above-market wage rate. a. is independent of; may b. is independent of; will never c. depends on; may d. depends on; will never

C

A balanced budget occurs when a. the national debt is reduced to zero dollars. b. a budget deficit during one year is matched by a budget surplus in the next year. c. transfer payments equal tax receipts. d. government expenditures equal tax receipts. e. the deficit-GDP ratio equals one.

D

A curve showing the relationship between tax rates and tax revenues is called a_____curve. a. Phillips b. Keynesian c. Gaussian d. Laffer

D

A savings deposit is a type of a. time deposit that is payable on demand. b. time deposit that earns interest and allows the depositor to write checks payable to other persons. c. time deposit that does not earn interest but does offer limited check-writing services. d.interest-earning account at a bank or thrift institution in which funds can be withdrawn at any time without a penalty payment. e. checkable deposit that also pays interest.

D

According to new classical economists, an expansionary fiscal policy that increases the size of the budget deficit will a. decrease Real GDP. b. increase Real GDP. c. decrease private saving. d. increase private saving.

D

Any point on a 45-degree line is a. equidistant from the origin. b. closer to the horizontal than the vertical axis. c. closer to the vertical than the horizontal axis. d. equidistant from the two axes.

D

Autonomous consumption is a. the change in consumption that results as a person's (or nation's) income increases or decreases. b. that portion of total consumption that is dependent upon the level of income. c. the steady increase in the consumption of goods and services that automatically occurs as a person grows from a child to an adult. d. that portion of total consumption that is independent of the level of income.

D

Compared to barter, money_____transaction costs, making transactions _____time-consuming. a. increases; more b. increases; less c. reduces; more d. reduces; less

D

Congress cuts income taxes. Is this an example of a demand-side or supply-side fiscal policy action? a. Demand-side, since a cut in taxes can raise consumption and investment. b. Supply-side, since a cut in taxes can shift the SRAS and LRAS curves to the right. c. Neither demand-side nor supply-side, since what happens on the demand-side completely offsets what happens on the supply-side. d. a and b e. There is not enough information to answer the question.

D

Fiscal policy may not work as policymakers intend it to work because of a. crowding out. b. lags. c. the position of the physical production possibilities frontier. d. a and b e. a, b, and c

D

If checkable deposits in Bank A total $320 million and the required reserve ratio is 10 percent, then required reserves at Bank A equal a. $3.2 million. b. $288 million. c. $28.8 million. d. $32 million. e. none of the above

D

If peanuts were widely accepted for purposes of exchange, then a. peanuts would be money. b. peanuts would be less valuable than they are currently. c. we would observe people using peanuts to purchase cars. d. a and c e. a and b

D

In a recessionary gap, the implications of downward wage inflexibility are that there will be a. further leftward shifts of AD that worsen unemployment. b. no further leftward shifts of AD, allowing the shifts in SRAS to close the gap. c. no further leftward shifts of SRAS, allowing the shifts in AD to close the gap. d. no rightward shifts of SRAS, allowing for persistent high unemployment.

D

In which situation are transaction costs most likely to be the lowest? a. Rodney buys antiques; he is currently looking for an eighteenth-century table. b. Cathy is looking for someone who is willing to trade accounting services (in return) for law services. c. Rodriguez wants to buy a house with two master bedrooms. d. Melinda wants to buy a McDonald's Big Mac (she will not be asking for a special order).

D

M1 is comprised of currency held outside banks + checkable deposits + _____. a. credit cards b. savings deposits c. gold d. traveler's checks

D

Reductions in private spending as a result of increased government purchases or borrowing is called a. pushing in. b. rushing forth. c. crowding in. d. crowding out.

D

Reserves equal a. checkable deposits + vault cash + traveler's checks. b. vault cash + currency in the hands of the nonbanking public. c. bank deposits at the Federal Reserve. d. bank deposits at the Federal Reserve + vault cash.

D

Suppose the economy is at a position below the institutional production possibilities frontier. In response to this situation, Keynesian economists would propose that the government should_____purchases, which will cause the aggregate demand curve to shift to the_____, which, in turn, will correct this_____gap. a. decrease; left; inflationary b. increase; right; inflationary c. decrease; right; inflationary d. increase; right; recessionary e. decrease; left; recessionary

D

The larger the marginal propensity to save, a. the smaller the multiplier. b. the larger the multiplier. c. the smaller the change in Real GDP, given a change in autonomous consumption. d. a and c e. none of the above

D

Transaction costs are best defined as the a. various costs of different goods and services. b. cost of one good in terms of another; that is, the price of apples in terms of oranges. c. costs involved in borrowing money from someone, that is, the interest that must be paid for the use of someone else's money. d. costs associated with the time and effort necessary to make an exchange.

D

A "money market deposit account" is a(n) a. checking account that pays no interest. b. bank account with a specified maturity date. c. store of Federal Reserve Notes held in bank vaults to cash checkable deposits on demand. d. checking account created from an automatic transfer from a savings account. e. interest-earning account at a bank or thrift institution that usually has a minimum balance requirement.

E

The economy is in a recessionary gap and a Keynesian economist advocates expansionary fiscal policy. What is a likely reason this economist advocates expansionary fiscal policy? a. The economist believes the economy is stuck in a recessionary gap and crowding out will be complete. b. The economist believes the economy is stuck in a recessionary gap and there will be no crowding out. c. The economist believes that wages are too flexible and that crowding out will be incomplete. d. The economist believes the AD curve is downward-sloping, the SRAS curve is upward- sloping, and prices are flexible. e. none of the above

B

The economy is in equilibrium, TP = TE. Then, autonomous consumption rises. As a result,_____rises, the_____curve shifts_____, inventory levels unexpectedly_____, and business firms_____the quantity of goods and services they produce. a. consumption; TE; downward; fall; increase b. consumption; TE; upward; fall; increase c. consumption; TE; upward; rise; decrease d. investment; TE; upward; fall; increase e. investment; TP; leftward; fall; increase

B

The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates are cut and government purchases are increased. Is a budget deficit inevitable? a. No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) increases tax revenues, and if the increase in tax revenues equals the increase in government purchases there is no deficit. b. Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues. c. No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) decreases tax revenues, and if the decrease in tax revenues is less than the increase in government purchases there is no deficit. d. Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) raises interest rates, and higher interest rates discourage investment spending.

B

The first bankers were a. sheriffs. b. goldsmiths. c. clergy. d. innkeepers. e. economists.

B

Total production a. always equals total expenditures. b. equals total expenditures in equilibrium. c. is always greater than total expenditures. d. is always less than total expenditures.

B

When the MPC = 0.6, the multiplier is a. 0.40. b. 2.50. c. 1.67. d. 6.00.

B

Which of the following is an example of crowding out? a. A decrease in the rate of growth of the stock of money decreases GDP. b. A deficit causes an increase in interest rates, which causes a decrease in investment spending. c. An increase in tariffs causes a decrease in imports. d. A decrease in government housing subsidies causes an increase in private spending on housing.

B

Who would be most likely to agree that "People do not always save more as interest rates rise"? a. a classical economist b. John Maynard Keynes c. an efficiency wage theorist d. a and b e. a, b, and c

B

Your neighbor has knowledge of economics and you would like her to share it with you. You own a car, a CD player and a new pair of running shoes. You wish to make a trade, but the neighbor does not want what you have. The problem can be stated as follows: You are not satisfying the a. rule of transaction costs. b. double coincidence of wants. c. law of marketability. d. terms of a common denominator.

B

Two economists, Smith and Jones, are discussing the currently high unemployment rate. Smith says that something ought to be done quickly because the economy may not be able to restore itself to full employment. Jones says that it is better to take a "hands-off" approach. Which of the following is most likely to be true? a. Smith and Jones are most likely both Keynesian economists with a few minor differences of opinion. b. Smith and Jones are most likely both classical economists with a few minor differences of opinion. c. Jones is likely to be a Keynesian economist and Smith is likely to be a classical economist. d. Smith is likely to be a Keynesian economist and Jones is likely to be a classical economist. e. none of the above.

D

When the MPC = 0.8, the multiplier is a. 0.20. b. 1.25. c. 2.50. d. 5.00. e. 20.00.

D

When the economy is in a recessionary gap, Keynesian economists will often advocate expansionary policy measures. Why? a. Keynesians believe the economy sometimes gets stuck in a recessionary gap and can't get itself out. b. Keynesians believe the economy itself sometimes takes too long to eliminate the recessionary gap and return to full-employment output. c. Keynesians are generally in favor of increasing taxes. d. a and b e. a and c

D

When total production is greater than total expenditures, a. the economy is in disequilibrium. b. there are increases in inventory. c. total output will decrease. d. all of the above

D

When total production is greater than total expenditures,_____is produced than households want to buy, which leads to in inventory, which signals firms that they have_____, which causes firms to cut back production. a. less; decreases; underproduced b. less; increases; overproduced c. more; decreases; underproduced d. more; increases; overproduced

D

Which of the following is not an aspect of Keynesian economics? a. Wages and prices tend to be inflexible downward. b. Supply does not necessarily generate its own demand. c. The interest rate is important in determining the level of investment, but not as important as other variables. d. Unemployment above natural unemployment is always a temporary phenomenon.

D

Which of the following is true? a. Reserves = required reserves - excess reserves. b. Reserves - required reserves = excess reserves. c. Reserves = required reserves + excess reserves. d. b and c e. a and b

D

Which of the following statements is false? a. According to new classical theory, consumption will fall as a result of expansionary fiscal policy. b. According to new classical theory, deficits do not bring higher real interest rates. c. According to new classical economists, individuals translate higher deficits into higher future taxes. d. New classical economists and Keynesians generally have the same view of the effectiveness of expansionary fiscal policy.

D

All other things held constant, lower marginal (income) tax rates a. necessarily increase tax revenues. b. necessarily decrease tax revenues. c. decrease the attractiveness of productive activities relative to leisure and tax- avoidance activities, and shift the SRAS curve rightward. d. do not affect the attractiveness of productive activities relative to leisure and tax- avoidance activities and therefore the SRAS does not shift rightward or leftward. e. increase the attractiveness of productive activities relative to leisure and tax- avoidance activities and shift the SRAS curve rightward.

E

Consider the following five statements: (1) Bigger deficits do not necessarily raise interest rates; (2) Expansionary fiscal policy may cause individuals to save more; (3) Real GDP will always increase by a multiple of the increase in government purchases; (4) People anticipate higher future taxes; (5) There is no crowding out when taxes are cut. Which of the five statements is consistent with the new classical position on fiscal policy? a. 1, 2, and 5 b. 1 and 2 c. 1, 3, and 5 d. 1, 3, and 4 e. 1, 2, and 4

E

Expansionary fiscal policy actions include_____government spending and/or_____taxes, while contractionary fiscal policy actions include_____government spending and/or_____taxes. a. increasing; increasing; decreasing; decreasing b. decreasing; decreasing; increasing; increasing c. increasing; decreasing; increasing; decreasing d. decreasing; increasing; increasing; decreasing e. increasing; decreasing; decreasing; increasing

E

Historically, which of the following goods have evolved into money? a. gold b. salt c. cattle d. cocoa beans e. all of the above

E

Suppose aggregate demand is too low to bring about the Natural Real GDP level. A Keynesian policy prescription would call for a(n)_____to close this recessionary gap. a. increase in government spending b. decrease in government spending c. increase in taxes d. decrease in taxes e. a or d

E

Suppose the economy is at a position below the institutional production possibilities frontier. In response to this situation, Keynesian economists would propose that government_____taxes, which will cause the aggregate demand curve to shift to the_____, which, in turn, will cause Real GDP to_____. a. increase; right; increase b. increase; left; decrease c. decrease; left; decrease d. decrease; right; decrease e. decrease; right; increase

E

The economy is in a recessionary gap, wages are inflexible downward, and there is complete crowding out. Which of the following is consistent with this state of affairs? a. The economy will soon self-regulate and produce Natural Real GDP. b. Expansionary fiscal policy will be effective at removing the economy from the recessionary gap. c. If expansionary fiscal policy is implemented, the AD curve will shift to the right, and eventually the price level and Real GDP will rise. d. b and c e. none of the above

E

To an economist, money is a synonym for which of the following? a. income b. credit c. wealth d. salary e. none of the above

E

To eliminate a recessionary gap, Keynesian theory indicates that government should a. increase taxes. b. decrease taxes. c. increase government purchases. d. decrease government purchases. e. b or c

E

To eliminate an inflationary gap, Keynesian theory indicates that government should a. increase taxes. b. decrease taxes. c. increase government purchases. d. decrease government purchases. e. either a or d

E

Which of the following is a correct listing of money's functions? a. source of credit, value of transaction costs, unit of barter b. medium of barter, medium of exchange, medium of transactions c. unit of barter, unit of account, a unit of income d. store of value, store of exchange, measure of account e. store of value, medium of exchange, unit of account

E

Which of the following is an example of automatic fiscal policy? a. Congress raises taxes. b. Congress lowers taxes. c. Congress increases spending. d. Congress decreases spending. e. none of the above

E

Which of the following statements is consistent with the new classical view of fiscal policy? a. Increases in government purchases lead to bigger deficits, and bigger deficits raise interest rates. b. Crowding out and higher interest rates go together. c. There is zero crowding out. d. Lags call the effectiveness of fiscal policy into question. e. Individuals save more to prepare for higher future taxes.

E

The economy is in a recessionary gap. There is no crowding out and government has correctly estimated that to bring the economy into long-run equilibrium it should raise government purchases by $123 billion. If government purchases are raised by $123 billion, does it follow that the economy will be moved into long-run equilibrium? a. Yes, because all the necessary conditions for effective fiscal policy are present. b. No, because the economy may be self-regulating, and by the time expansionary fiscal policy is effective, the AD curve may intersect the SRAS curve at an inflationary-gap level of Real GDP. c. Yes, because of the validity of the balanced budget theorem. d. No, because of inflexible wages and the fact that the SRAS curve is upward-sloping.

e. none of the above B