Exam 3

(Table: Statistics for a Small Economy) Refer to the table. The table shows some statistics for a small economy. Using only the information provided, the monetary base amounts to:

$12 million

As of 2014, the U.S. government's debt held by the public was around:

$13 trillion

For each depositor name on an account, the FDIC guarantees up to:

$250,000

Suppose you deposit $1,000 in your checking account. If the reserve ratio is 10%, how much of your deposit can the bank loan out?

$900

The Social Security system is becoming:

less generous

In 2003-2004, the Fed kept the Federal Funds rate:

low, even though the recession had ended.

Which tax rate determines whether it is worth it to work an extra day?

marginal

The tax rate paid on an additional dollar of income is the:

marginal tax rate.

The recession that began in 2001 was:

mild and didn't last long, but employment never recovered.

In the United States, the amount of cash per capita is about $4,000. This figure:

misrepresents actual currency holdings in the United States because a lot of dollars are held outside the country.

What part of the money pyramid does the Fed have direct control over?

monetary base

The amount by which the money supply expands with each additional dollar in reserves is the:

money multiplier

When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists.

moral hazard

The United States spends _____ on defense.

much more than any other country

The Federal Funds rate is the interest rate charged on a(n):

overnight loan from one bank to another.

The money you pay into Social Security goes to:

pay current beneficiaries.

The Social Security system redistributes income from:

people with shorter life expectancies to people with longer life expectancies

Which is NOT a tool that the Federal Reserve can use to influence AD?

printing money

The U.S. income tax system is:

progressive.

Which is NOT a function of the Federal Reserve?

providing loans to small businesses

In a worst-case scenario, the Federal Reserve is least successful at counteracting a negative:

real shock

The extra lending by the Fed during the 2007-2009 recession was done primarily to:

restore liquidity to credit markets.

Who bears the burden of corporate income tax?

shareholders, consumers, and employees

Increased uncertainty will cause the economy's AD curve to:

shift inward

Which asset would you classify as being most liquid?

small-time deposits

The multiplier effect is the:

subsequent consumer spending that increases AD from expansionary fiscal policy.

The risk that the failure of a few large financial institutions can affect the entire financial system is called:

systemic risk

Which country had the highest military expenditure in 2013?

the US

Under a flat tax:

the average tax rate is the same for people with different income levels.

What is the annual difference between federal spending and revenues called?

the deficit

Which rate does the Fed actually set?

the discount rate

Economist Milton Friedman called for a policy rule that keeps the growth rate of the money supply at 3% because:

the economy's long-run potential growth rate is 3%.

The main difference between Medicare and Medicaid is that Medicare covers medical care of:

the elderly, while Medicaid covers medical care of the poor and disabled.

The largest amount of federal dollars goes to which of the following groups?

the eldery

In 1940, Ida May Fuller received the first Social Security check after contributing only $24.75 in Social Security taxes before she retired and lived to be 100 years old. Her case is an example of how:

the first Social Security recipients benefitted much more from the program than will workers entering the program today.

The economy's SRAS curve is:

upward sloping.

The economy's LRAS curve is:

vertical.

In the short run, a monetary contraction leads to increased unemployment because:

wages and prices are sticky.

In the late 1990s, America's economy:

was booming and unemployment was very low.

Foreign aid constitutes about _____ of the U.S. federal budget.

1%

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The marginal tax rate for a person earning $30,000 is:

10%

The average interest rate of government debt in 2014 was about:

2.4%

U.S. housing prices peaked in:

2006

If the reserve ratio is 4%, the money multiplier is:

25

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The average tax rate for a person earning $35,000 is:

4.3%

Monetary policy by the Fed is estimated to take _____ to have an impact on the economy.

6 to 18 months

In the AD-AS diagram, a "tight" monetary policy shifts the:

AD curve to the left.

When consumers spend all of their tax rebate checks, what takes place in the economy?

Aggregate demand shifts to the right.

Who was chair of Federal Reserve System during the financial crisis of 2008?

Ben Bernanke

Why are debit cards not listed as money?

Debit cards draw on checkable deposits, which are already counted as money.

Which does NOT explain why the 1997-2006 housing boom increased aggregate demand?

During the boom, some builders were working 60 or 80 hours a week instead of 40.

Suppose you are a married person with one child but your whole family earns less than $20,000 a year. Which of the following will supplement your income?

Earned Income Tax Credit

When the U.S. Treasury borrows, the borrowing is managed by the:

Federal Reserve

The paper currency circulated in the United States is called:

Federal Reserve note

In the case of a negative shock to aggregate demand, the central bank should:

increase the rate of growth of the money supply to restore spending growth.

Shortly after September 11, 2011, the Federal Reserve:

increased its lending to banks.

Which is NOT true of the Federal Reserve System?

It carries out policies passed by the federal government.

Which definition of money has the greatest value in the money pyramid?

M2

Which statement about individual income taxes in the United States is TRUE?

Marginal tax rates are flatter and lower today than in the past.

If initially, = 5%, = 3%, = 2%, and = 6% and then because of economic uncertainty falls to 1%, what should the Fed do?

Publicly demonstrate a commitment to keep + at 8% by raising .

When consumers save their tax cut for a future tax increase, they are adhering to:

Ricardian equivalence.

Which of the following sources of tax revenues make up more than 90% of all government revenue?

individual income tax, corporate income tax, and Social Security and Medicare taxes

Included among the top 10 nations in the category of military spending are:

Saudi Arabia and France.

The purpose of FICA taxes is to fund:

Social Security Payments

The Fed sets up the Term Auction Facility when it wants to:

inject a certain quantity of reserves into banks.

The Federal Reserve provided a loan to finance J. P. Morgan's purchase of Bear Stearns because Bear Stearns was too:

interconnected with other banks to let fail.

Uncertainty always causes:

investment to decrease.

Disinflation is more painful when the central bank:

is not credible

The Federal Reserve acquires its exclusive powers through its ability to:

issue money

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

A bank will become illiquid if:

it has short-term liabilities that exceed its short-term assets.

Under fractional reserve banking, banks:

hold only a fraction of deposits in reserve, lending the rest.

The world's largest bank customer is:

US Treasury

U.S. currency is printed by the:

U.S. Department of the Treasury.

As market interest rates rise:

a bank's opportunity cost of holding reserves rises.

Deflation is:

a decrease in prices; that is, a negative inflation rate.

Which would typically NOT occur following an increase in the money supply?

a decrease in the overall price level

Disinflation is:

a reduction in the rate of inflation.

Which shock can the Fed deal with most effectively?

a shock to AD

Money is best defined as:

anything that is a widely accepted means of paymen

The reserve ratio is the ratio of bank reserves to:

bank deposits

The discount rate is the interest rate:

banks pay when they borrow directly from the Fed.

Which of the following reduces taxable income?

both deductions and exemptions

President Obama's fiscal policy response to the 2008 recession involved changes in:

both taxation and government spending.

Demand deposits are:

checkable deposits

The Federal Reserve:

conducts monetary policy.

Monetary policy is a _____ means of popping a bubble, because monetary policy _____ push down the price of specific commodities.

crude; can't

M1 refers to:

currency plus checkable deposits.

The monetary base (MB) refers to:

currency plus total reserves held at the Fed.

Which serves as a means of payment in the United States?

currency, checkable deposits, and savings deposits

M2 refers to:

currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits.

In the short run, a decrease in consumption growth will cause the inflation rate to:

decrease

When using fiscal policy to fight a recession, the government will:

decrease taxes and/or increase government expenditures.

Which asset would you classify as being most liquid?

demand deposits

The economy's AD curve is:

downward sloping.

Fiscal policy can BEST be defined as the use of:

government expenditure, borrowing, and taxation to influence the business cycle.

Under a regressive tax, people with higher incomes:

have lower average tax rates.

The average tax rate is:

the total tax payment divided by total income.

The members of the Board of Governors of the Federal Reserve have 14-year nonrenewable terms. Thus:

they are somewhat insulated from the political process.

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between:

too low a rate of growth or too high a rate of inflation