economics exam 4

c (Bank supervisors will intervene in a bank's decisionmaking if the bank is not healthy. A bank with a negative net worth is considered grounds for intervention.)

A bank supervisor is likely to intervene in a bank's decision-making under which of these conditions? a The bank loans out all of its excess reserves. b A large number of the bank's shares are sold on the stock market. c The bank has more liabilities than assets. d A large number of the bank's loan applications are rejected.

pushing interest rates up or down

A central bank can have the most direct impact on the unemployment rate by _____.

buy bonds in open market operations

A central bank that wants to increase the quantity of money in the economy will:

allocative efficiency

A country produces two goods: education and weapons of war. It is on its production possibilities frontier. It would like fewer resourses spent on weapons of war and more spent on education. Implementing this preference represents an improvement in _________.

comparative advantage

A country that specializes in one type of production and trades for other goods benefits by taking advantage of ____________.

interest payments

As federal debt increases, ________ also rise, so that the deficit grows even if other government spending is held constant.

moving money from savers to borrowers

Banks faciliate investment by _____.

a widespread decline in the value of their assets

Banks typically come under financial stress because of:

one fifth (18-22%)

Between 1960 and 2000, U.S. government expenditures have represented about what portion of GDP?

credit union

Boeing employees buy a membership into a financial institution, so they essentially own and run this institution. This is an example of a ____________.

makes risky loans

Depositing money in a bank is risky for depositors only if that bank is uninsured and _____.

economic growth

Federal tax revenue increased from 18.1% of GDP in 1994 to 20.8% in 2000. This was largely a result of _____.

commodity

Gold is an example of ____________ money.

M2 includes everything in M1 plus savings and certificates of deposits, as well as money market mutual funds

How does M2 differ from M1?

12 (nominal gdp/velocity)

If GDP is 3600 and the money supply is 300, what is the velocity?

Mexico

If Mexico produces only papayas, they can produce 24 papayas and zero apples. If the U.S. produces only papayas, they can produce 21 papayas and zero apples. Who has absolute advantage in papayas?

Discount Rate

If a commercial bank needs to borrow money from the Federal Reserve Bank, the commercial bank will pay the ___________.

4 (nominal gdp/velocity)

If nominal GDP is 1800 and the money supply is 450, then what is velocity?

the money multiplier and the supply of money in the economy will decrease

If the central bank increases the amount of reserves banks are required to hold from 10% to 20%, then:

expansionary

If the economy is experiencing a recessionary gap, the government should implement what kind of fiscal policy?

contractionary

If the economy is experiencing an inflationary gap, the government should implement what kind of fiscal policy?

It made the Fed unable to use traditional monetary policy tools to fight further rises in unemployment.

In 2009, the Fed reduced the target federal funds rate from 2% to almost 0%. What impact did that have on the Fed's ability to make monetary policy in the future?

specialize in the production of wheat and trade for corn with Country N

In Country M, the opportunity cost of producing 10 bushels of wheat is 5 bushels of corn. In Country N, the opportunity cost of producing 10 bushels of wheat is 15 bushels of corn. If corn and wheat sell for about the same price per bushel, Country M should _____.

40 million ([(1/reserves)xchange in reserves]) (10x4)

In Quahog, there is only one bank that all the people deposit their money in and it holds 10% of the deposits as reserves. If the money multiplier in this economy is 10, and $4 million dollars are deposited, what is the maximum about that the Money Supply can increase to?

It simplifies how people calculate trade-offs.

In its role as a unit of account, money serves what function?

a double coincidence of wants

In macroeconomics, ___________________________ describes a situation in which two people each want to exchange some good or service that the other can provide.

unit of account

In macroeconomics, a _______________ describes the common way in which market values are measured in an economy (Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs).

Amber

In one day, Katie can produce 10 loaves of bread OR she can produce 15 decorated cakes. In one day, Amber can produce 5 loaves of bread OR she can produce 10 decorated cakes. Who has comparative advantage in cake production?

katie

In one day, Katie can produce 10 loaves of bread OR she can produce 15 decorated cakes. In one day, Amber can produce 5 loaves of bread OR she can produce 10 decorated cakes. Who has the absolute advantage in making decorative cakes?

mexico

In the U.S. the opportunity cost of 1 apple is 3 papayas. In Mexico the opportunity cost of 1 apple is 2 papayas. What country has the smallest opportunity cost when producing one more apple?

It increases the number of loan defaults

In which of the following ways can a recession lead to an increase in bank failures?

sets reserve requirements

Policy set by the Fed directly impacts the amount of money a bank may loan out because the Fed _____.

tax cuts and spending increases are popular with others

Politicians tend to favor expansionary fiscal policies over contractionary fiscal policies because _____.

keep interest rates low

Suppose Congress is pursuing an expansionary fiscal policy. A coordinated monetary policy would require the Fed to _____.

absolute advantage

Suppose Country A can produce microchips using fewer productive resources than Country B. Country A has what type of advantage over Country B?

severe inflation

Suppose an economy is operating close to potential GDP, and Congress cuts taxes without making an equivalent cut in spending. This will have which effect in the short run?

progressive

Suppose that gifts were taxed at a rate of 10% for amounts up to $100,000 and 20% for anything over that amount. This tax would be a ________ tax.

It reduces it (1/0.10= 10) (1/0.15= 6.67)

Suppose the Federal Reserve increases the required reserve ratio from 10% to 15%. What effect does this have on the money multiplier?

b (Decreasing the required reserve increases the amount of money that banks can loan out, which increases the size of the money supply.)

Suppose the Federal Reserve lowers the reserve requirement from 15% to 10%. This change would have which of the following effects? a It would deter investment. b It would increase the size of the money supply. c It would raise interest rates. d It would increase the size of budget deficits.

interest rates

Suppose the Federal Reserve raised the required reserve rate. This would lead to an increase in _____.

gdp

Suppose the government enacts an economic stimulus plan that increases the size of the money supply by $1 trillion, but the velocity of money remains unchanged. The stimulus has also increased _____.

higher taxes and lower spending

Suppose the government wanted to address the problem of runaway inflation with discretionary fiscal policy. It would use some combination of ____________.

automatic stabilizers

Suppose there is currently no gap between the standardized employment budget deficit and the actual budget deficit. In this case, the economy is not being impacted by _____.

False

T or F If a married Couple earns $100,000 per year, they will pay 25% of their total income as taxes (the entire $100,000 will be taxed at the rate of 25%).

True

T or F Lowering the reserve requirement is expansionary monetary policy.

true

T or F On a bank's T-account, assets will always equal liabilities plus net worth.

false

T or F Reserve requirements are usually drastically changed while conducting monetary policy.

False

T or F The 12 Presidents of the Federal Reserve Banks are appointed by Congress.

False

T or F The 12 Presidents of the Federal Reserve Regional Banks are always voting members of the FOMC.

false

T or F The Federal Reserve Banking System can conduct Fiscal Policy

true

T or F The most commonly used tool of monetary policy in the U.S. is open market operations.

true

T or F The velocity of circulation "V" is defined as the average number of times a dollar bill circulates in the economy per year.

True

T or F When the Government has to finance its budget deficit by borrowing money, it causes interest rates to rise and therefore the Govt. has to borrow at higher rates and pay more in the long run

True

T/F Any commercial bank can "Create" money through lending if they are in a fractional reserve banking system. i.e. multiplier effect

True

T/F If the money supply does not keep up with production, then the economy will experience deflation.

It decreases bonds by $10 million and increases by reserves $10 million, leaving net worth unchanged.

The Fed buys $10 million in bonds from ABC Bank. How does this affect ABC Bank's T-account balance sheet?

depositors from losing their money

The Federal Deposit Insurance Corporation (FDIC) protects _____

a contractionary monetary policy

The Federal Reserve is likely to address a high inflation rate with ________.

b (The Fed, in addition to conducting monetary policy, provides services for banks, including check clearing.)

The Federal Reserve provides which of these services to banks? a evaluating loan applications b clearing checks c holding required reserves d distributing profits

directly changes the money supply

The Federal Reserve utilizes open-market operations as its primary monetary policy tool because this method ___________.

b (Tariffs used to be a major source of revenue for the federal governent but now represent a tiny portion.)

The federal government gets the LEAST amount of revenue from which of these sources? a payroll taxes b tariffs c individual income taxes d corporate income taxes

false

The macroeconomic equation for the economy is M/V = P/Q.

insulate it from political pressure

The organizational structure of the Federal Reserve is intended to serve which purpose?

10 (1/reserves)

The people in an economy have $10 million. 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?

20 (money multiplier= 1/reserves)

The people in an economy have $10 million. 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?

creation of money

The process of banks making loans in financial capital markets is intimately tied to the:

decreased unemployment

The use of expansionary fiscal policy during a recession is likely to result in _____.

the money supply

The velocity of money would decrease if there were an increase in _____ without any other change in the economy.

each specializes in areas where comparative advantages exist (Nations benefit from trade when they make more of the product in which they have a comparative advantage and trade for the rest.)

Two countries can benefit from trading with each other when _____.

d (The Fed began using quantitative easing after it lowered interest rates to nearly 0%, rendering the traditional tools of monetary policy no longer useable.)

What condition led the Fed to begin using quantative easing? a Congress authorized the Fed to get involved in fiscal policy. b Unemployment and inflation were both rising quickly, rendering traditional monetary policy unusable. c Stagflation rendered pen-market operations practically pointless because banks were neither buying nor selling bonds. d The Fed could no longer reduce interest rates.

3,750 (1/0.08) * 300

What is the maximum change in the money supply if Required Reserves are 8% and there was a $300 increase in Reserves.

the bank's assets and liabilities

What needs to be known to create a T-account balance sheet for a typical bank?

discount rates

What term is used to describe the interest rate charged by the central bank when the central bank makes loans to commercial banks?

contractionary monetary policy

When a Central Bank acts to decrease the money supply and increase the interest rate, it is following:

it negatively affects expansionary monetary policy

When banks hold excess reserves because they don't see good lending opportunities:

the money supply decreases

When the central bank decides it will sell bonds using open market operations:

money supply and interest rates increase

When the central bank reduces the reserve requirement on deposits:

M2

Which category of the money supply would you be contributing to if you invest in money market funds?

keynesian

Which economists believe that the economy is NOT self regulating (the govt. should intervene)

d

Which is not an example of an Asset? (from the bank's point of view) A. Loans U.S. Government Securities B. Loans C. Reserves D. Deposits

savings accounts

Which is not included in M1? checkable deposits (checking accounts and debit cards) savings accounts currency traveler's check

d

Which of the following events would cause interest rates to increase? A. lower tax rates B. open market operation to purchase bonds C. lower reserve requirements D. an increase in the discount rate

b

Which of the following institutions oversees the safety and stability of the U.S. banking system? A. Office of the Comptroller of the Currency B. The Federal Reserve C. Federal Financial Institutions Examination Council D. Federal Funds Committee

c

Which of the following is a traditional tool used by the Fed during recessions? A. quantitative easing B. increase interest rates C. open market operations D. print more coins and paper currency

b

Which of the following terms is used to describe the proportion of deposits that banks are legally required to deposit with the central bank? A. deposit requirements B. reserve requirements C. discount requirements D. monetary requirements

b

Which of the following would be classified in the M1 category of the money supply? A. certificates of deposit B. checkable demand deposits C. savings deposits D. money market deposit

a (The federal government spends about a tenth as much on education as the states do, while the federal government far outspends the states on healthcare, national defense, and Social Security.)

Which of these changes would have a bigger impact on state and local government budgets than on the federal budget? a an increase in the size of the public school population b an increase in the number of veterans using government benefits c an increase in the number of people receiving Social Security benefits

b

Which of these conditions is most likely to push the government to employ a contractionary fiscal policy? a a sharp increase in unemployment b a high inflation rate c rising national debt d rising asset prices

c (Automatic stabilizers stimulate aggregate demand automatically when the economy begins to slump. Unemployment insurance does this.)

Which of these is an example of an automatic stabilizer? a guaranteed student loans b Social Security payments c unemployment insurance d the required reserve ratio

d (A balanced budget amendment would impact only fiscal policy, not monetary policy which has the bigger impact on the size of the money supply.)

Which of these is the best argument against passing a balanced budget amendment? a It would lead to a short-term increase in interest rates. b It would prevent the money supply from growing as the economy grew. c It would raise wages and create inflationary pressures. d It would severely limit the government's ability to fight a recession.

b (Fiscal policy is carried out through the legislative process, so it takes longer to enact, and its effects take some time to unfold.)

Which of these policy recommendations by an economist is likely to involve the largest time lag? a reduce the size of the money supply b cut corporate income tax rates c lower interest rates d slow foreign investment

d (While the impact of monetary policy can be distant, the impact is felt by citizens in very concrete ways. This provides a good reason for monetary policy to be in the hands of elected officials who are apt to be more responsive to the needs of the public than appointed bankers whose concerns might lie elsewhere.)

Which statement is an argument for making monetary policy more democratic than it currently is? a Elected officials understand the economy better than bureaucrats. b The public tends to favor Keynesian policies over neoclassical policies. c Monetary policy needs to be made and changed more quickly than fiscal policy. d Monetary policy decisions directly affect citizens' lives.

a

With respect to measuring the money supply, which of the following terms describes a checking account? A. demand deposits B. demand certificates C. currency deposits D. cash certificates

d

___________ is included within the measure of ___________. A. M2, M1 B. Money supply, money demand C. Money, currency D. M1, M2

bonds

_____________ are a form of financial instrument through which corporations and governments borrow money from financial investors and promise to repay with interest.

Money market funds

__________________ pool the deposits of many investors together and invest them in a safe way like short-term government bonds.

quantitive easing

_________________________ is an innovative and nontraditional method used by the Federal Reserve to "expand the quantity of money and credit" during the recent U.S. recession.

securitized

__________________loans are loans that are bundled together into a financial security than sold to investors.

reserves

___________are funds that the bank keeps on hand that are not loaned out or invested in bonds.