Macro Exam 2, Ch 9-13, Review Questions

Perry deposits $10,000 in his bank account. If the reserve requirement is 15%, how much of this amount can his bank make in new loans?

$8,500

The money multiplier is:

1 divided by the reserve requirement.

There are _____ Regional Federal Reserve Banks; the only Regional Bank president who is a permanent member of the Federal Open Market Committee is based in _____.

12; New York

If the money multiplier is 4, what is the reserve requirement?

25%

The Chair of the Board of Governors is appointed for a _____ renewable term.

4-year

If a country increases the amount of goods it imports but its exports remain unchanged, what happens to AD?

AD shifts left.

If business expectations become less favorable, what will likely happen to the AD curve?

AD shifts left.

If the government raises taxes, what will this do to the AD curve?

AD shifts left.

When the Federal Reserve pursues expansionary monetary policy, which of these happens?

AD shifts right.

What is likely to happen if the government runs a budget surplus?

Additional loanable funds are provided to the market, leading to lower interest rates.

Which of the following would NOT cause a shift in the short-run aggregate supply curve? An increase in resource prices, a decrease in the expected rate of inflation, a major technological advance, or a decrease in real interest rates?

Answer is a decrease in real interest rates

How is money created "out of thin air" by banks?

Banks loan out money that is then redeposited into other banks, creating a cycle.

T or F: Savings account deposits are more liquid than currency.

False

The main policymaking arm of the Fed is the:

Federal Open Market Committee.

Which of the following would most likely cause aggregate demand to decrease?

Income taxes rise to reduce the deficit.

What are the two common measures of the money supply in use today?

M1 and M2

Which statement is NOT true about Social Security?

Payroll taxes for Social Security are a percentage of income, with no income limit.

If the economy is above long-run equilibrium output, what will happen in the long run if SRAS adjusts?

Prices rise and output decreases.

Based on the graph, if households decide to save a larger portion of their income because they fear job loss due to a recession, the loanable funds supply curve will shift from _____ to _____, and the new equilibrium will be at point _____, holding demand constant at D0.

S0; S1; b

In an AD/AS model, if the economy is below its long-run output, what will happen in the long run if the markets are left alone?

SRAS will shift right.

Which of the following acts created the central bank of the United States as we know it today?

The Federal Reserve Act of 1913

Which of these is NOT one of the criteria for a commodity to serve as money?

The commodity must be issued as currency or coin.

Which of the following is a critical dilemma when implementing fiscal policy in reference to timing lags?

The economy may already be in a recovery before fiscal policy is enacted.

Which of the following will NOT shift the aggregate supply curve to the left? An increase in the minimum wage, a decrease in corporate taxes, an increase in the price of crude oil, or an increase in the legislated amount of paid vacation?

a decrease in corporate taxes

In macroeconomics, the long run is:

a period long enough that participants in the economy will have enough time to gain all relevant information and enough time to act correctly on that information.

Buying stock in a company is:

a transfer of ownership rights.

If the ultimate goal of fiscal policy aimed at aggregate supply is achieved, what happens to the aggregate price level and aggregate output?

aggregate price level decreases; aggregate output increases

The real GDP that firms will produce at varying price levels is:

aggregate supply.

If the Fed reduces the money supply:

bond prices fall.

When the Federal Reserve prints money, what does it do with it?

buys bonds to reduce the interest rate

Which of these has the highest liquidity?

cash

Which are the determinants of short-run aggregate supply?

changes in input prices, taxes, and business and inflationary expectations

The long-run aggregate supply curve is most consistent with the _____ school of economic thought.

classical

Which of these is NOT a primary role of financial intermediaries in the market for funds?

collecting taxes on financial transactions

A type of money made from a substance that is also valuable is called:

commodity money.

An economist notices that M1 is rapidly rising. One conclusion she might draw is that:

consumers are preparing to make more purchases.

Reducing government spending, reducing transfer payments, or raising taxes describes which policy?

contractionary fiscal policy

Automatic stabilizers have _____ effects during times of economic prosperity and _____ effects during times of economic downturn.

contractionary; expansionary

The fixed rate of interest on the face value of a bond is known as the:

coupon rate.

Banks:

create money by making loans using the deposits of their customers.

If a government collects $550 billion in taxes and spends $700 billion, it would have a:

deficit of $150 billion.

When investors wish to increase their investment activities by using the market for loanable funds:

demand shifts right.

Which of these is NOT a leakage in money creation? Keeping cash under the mattress, foreigners holding U.S. dollars to diversify risk, banks holding more reserves than required, or depositing a large jar of coins at the bank?

depositing a large jar of coins at the bank

Which of these is NOT part of the financial system?

digital market

Fiat money:

does not necessarily have any intrinsic value but has been declared by a government to be money.

The aggregate demand curve slopes _____ and has _____ on the vertical axis.

downward; the price level

The twin goals of monetary policy are:

economic growth and stable prices.

Which retirement plan does NOT involve individuals managing their accounts by choosing the preferred risk-level of invested assets?

employer-provided pension plans

If the economy is in a recession, the Federal Reserve would most likely pursue _____, which causes interest rates to _____.

expansionary monetary policy; fall

Under which condition would the Fed be most likely to engage in its role as the lender of last resort?

if a lack of confidence in the financial system causes savers to withdraw money from banks

Saving is:

income that is not spent on consumption goods.

Which of the following events causes a decrease in aggregate demand?

increase in taxes

An increase in the incomes of the countries that purchase U.S.-made products will cause a(n) _____ in the _____ U.S.-made products.

increase; aggregate demand for

In the long run, attempts to expand beyond an economy's natural rate of unemployment tend to result in:

increased inflation.

When the Fed buys bonds, its demand _____ the price of bonds, _____ nominal interest rates.

increases; decreasing

The most important measure in determining whether a country's national debt is a significant problem is:

interest paid on the national debt as a portion of GDP.

The price of a bond is equal to:

interest payment divided by yield.

The demand curve for loanable funds represents _____ and is _____.

investors; downward sloping

If an economy is on the vertical portion of the aggregate supply curve, then it:

is at full employment.

An important reason why the Federal Reserve would not want to keep interest rates at 0% forever is that:

it limits the ability of the Fed to use expansionary monetary policy when the next recession occurs.

The main feature of fractional reserve banking is that banks:

keep a portion of deposits in reserves but lend out the rest.

A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output demanded.

left; decrease

Increased taxes will shift the aggregate demand curve to the _____ and _____ output demanded

left; decrease

The financial panic and credit freeze in late 2008 pointed to the Fed's important role as a:

lender of last resort.

Which of the following curves is vertical?

long-run aggregate supply

If the economy is currently operating below long-run output, what should the Federal Reserve do?

lower interest rates from their current level

The money multiplier:

measures the maximum amount the money supply can increase when new deposits enter the banking system

A bond's price and yield:

move in opposite directions.

A _____ is the most difficult for the Federal Reserve to address because it causes both inflation and unemployment to rise.

negative supply shock

In the market for loanable funds, savers are shown:

on an upward-sloping supply curve.

What is the most important function of the Federal Reserve?

open market operations

Which source of short-term borrowing charges the highest average interest rates on unpaid balances?

ordinary credit cards

In economics, investment refers to the:

purchase of new capital goods.

The aggregate demand curve displays:

real GDP demanded at various price levels.

Financial institutions:

reduce information costs, reduce transaction costs, and diversify assets.

In order for the Federal Reserve to raise interest rates, it needs to:

reduce the money supply.

If the government offers an incentive for individuals to save, the supply for loanable funds will shift to the _____ and the real interest rate will _____.

right; decrease

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

The supply curve for loanable funds represents _____ and is _____.

savers; upward sloping

Which of the following is a form of U.S. public debt?

savings bonds

If the Federal Reserve wishes to raise the interest rate, what does it need to do?

sell bonds to banks while reducing the money supply

According to the trade-off between risk and return, which asset would likely have the highest average return on investment over a 20-year period?

shares of stock in social media companies

If an economy is in a recession, what would expansionary fiscal policy do?

shift AD to the right

Economic growth is shown as a:

shift to the right of the long-run aggregate supply curve.

Appointments to the Federal Reserve Board are staggered so that one member's term expires every other year. This provision was enacted to ensure:

stability and continuity on the Board.

What function of money is BEST served by money that can last for hundreds of years?

store of value

A decrease in regulation would cause aggregate:

supply to shift to the right.

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults:

the actual multiplier will fall.

The long-run aggregate supply curve is vertical because:

the economy will gravitate to the position of full employment when all variables are flexible.

If the Federal Reserve decides to increase the money supply:

the federal funds rate will fall.

If the U.S. aggregate price level rises:

the purchasing power of wealth will decrease.

Aggregate supply is:

the real GDP that firms will produce at varying price levels.

About _____ of U.S. currency is held outside the United States.

two-thirds

Social Security and Medicare are considered _____ liabilities and are expected to _____ over the next generation.

unfunded; rise

What are the primary functions of money?

unit of account, medium of exchange, store of value

One reason the amount of real output demanded declines when the aggregate price level rises is the resulting reduction in household wealth, called the:

wealth effect.

When economists warn about the crowding-out effect, they are referring to:

when government borrowing reduces private investment.

Price stickiness refers to:

when prices are slow to adjust to economic shocks

Which of the following would NOT shift the AD curve? The economy improves and people start spending more, interest rates rise, which reduces investment spending, an increase in market power occurs in the airline industry, or the federal budget is reduced to tackle the deficit problem?

Answer is an increase in market power occurs in the airline industry

Which of the following factors would most likely shift the SRAS curve to the right? An increase in industrial regulations to improve worker safety, an increase in the use of truck panels and tails to improve fuel efficiency, the federal government's ending its subsidy program on hybrid car production, or improved consumer expectations in the economy?

Answer is an increase in the use of truck panels and tails to improve fuel efficiency

All of the following programs are considered mandatory spending EXCEPT: Social Security, Medicare, national defense, or interest on national debt

Answer is national defense.

One of the important reasons why many economists prefer monetary policy that uses discretion instead of rules is that it:

allows monetary policy to be used more aggressively when major economic shocks occur.

If AD shifts right as the economy booms, and then SRAS shifts left, what happens to inflation?

It increases.

In a depressed economy with a MPC of 0.75, what effect will a $100 increase in government spending have on equilibrium GDP?

It will raise it by $400

José is putting money for college in a savings account. The bank makes the money available to business borrowers. In essence:

José is supplying loanable funds for business investment.

The fractional reserve banking system:

Makes possible the money creation process, helps to prevent bank runs, and requires banks to hold a portion of their demand deposits in reserves.

Which of the following is NOT true about the Fed's Board of Governors? There are seven members of the Board of GovernorsMembers of the Board of Governors serve one 14-year term. The Board of Governors is located in Washington, D.C. Members of the Board of Governors are elected by voters in the region they serve.

Members of the Board of Governors are elected by voters in the region they serve.

The "wealth effect" refers to the fact that when aggregate price levels rise:

the real value of savings accounts, bonds, and cash declines.

A shift of the long-run aggregate supply curve to the right suggests which of the following?

an increase in productivity

Which of these will cause the supply of loanable funds curve to shift leftward?

an increase in the government deficit

In financial markets, which group best represents the demand side of the market?

borrowers

Financial intermediaries match:

borrowers with savers.

Cash is counted in the money supply as a part of:

both M1 and M2.

Which of these is a liability for a bank?

customers' checking account balances

What is the one major category that separates national debt from public debt?

debt held by other government agencies

Tighter lending standards tend to _____ the money multiplier, making it _____ for the Fed to use its tools effectively.

decrease; harder

Which of these would be the lowest interest rate?

federal funds rate

Institutions that serve as the bridge between savers and borrowers are known as:

financial intermediaries.

In the Keynesian model, the price level is _____; in the aggregate demand and supply model, the price level is _____.

fixed; flexible

A falling aggregate price level _____ demand for a country's exports and therefore _____ output demanded.

increases; increases

Evidence has suggested that borrowing is _____ than taxation by politicians to finance fiscal policy spending, which has led to a(n) _____ of the federal government over the last few decades.

more favored; expansion

The federal funds rate is the interest rate that banks charge other banks for _____ loans.

overnight

Which of the following is NOT considered saving? Making a deposit in a savings account at the bank, buying a share of stock in a computer company, buying a corporate bond, or paying tuition for a college education?

paying tuition for a college education

In the short run, the aggregate supply curve is _____ because input prices are _____.

positively sloped; not completely flexible

Which of these are functions performed by the Federal Reserve Banks and their branches? regulating and supervising member banks distributing coins and currency setting interest rates paid by homeowners

regulating and supervising member banks and distributing coins and currency

The U.S. General Accounting Office (GAO) has concluded that _____ would help the introduction of a dollar coin be successful.

removing the dollar bill from circulation

In the market for loanable funds, what can cause a rise in interest rates?

supply shifting left and demand shifting right

A temporary rise in the price of agricultural crops due to a drought is likely to cause a(n):

decrease in the short-run aggregate supply.

Liquidity refers to:

how quickly, easily, and reliably an asset can be converted into a medium of exchange.

Sometimes the Fed faces conflicting goals and it must emphasize one goal over another. Which of these is a goal of the Fed that might conflict with its goal of full employment?

keeping the price level stable