Macro Final
Contractionary monetary policy: A) increases aggregate demand. B) increases aggregate supply. C) works by discouraging investment spending. D) decreases interest rates.
C
Decisions about monetary policy are made by: A) the President and Congress. B) the President's Council of Economic Advisors. C) the Federal Open Market Committee. D) representatives of banks that are members of the Federal Reserve System.
C
16. (Figure: A Money Market) The accompanying graph shows the money market. In this market, if the current interest rate is r3, we would expect to see the interest rate _____ because there is a ______ of money in the market. A) fall; surplus B) fall; shortage C) rise; surplus D) rise; shortage
A
Because classical economists stressed mostly the long run, they: A) perceived the economy as being mostly self-adjusting. B) favored the use of fiscal policy over monetary policy. C) expected the government to purge the rottenness out of the system. D) favored the use of monetary policy over fiscal policy.
A
Challenges to Keynesian economics included: A) lags in fiscal policy make it less effective. B) the liquidity trap. C) the possibility of a trade-off between inflation and unemployment. D) the usefulness of discretionary fiscal policy.
A
Classical macroeconomics was based largely on the foundation of: A) flexible wages and prices. B) persistent unemployment. C) government intervention in the market. D) Adam Smith's model of imperfectly competitive markets.
A
During the 1940s, 1950s, and 1960s: A) the role of government increased in the economy. B) the role of government decreased in the economy. C) Keynes's ideas were challenged by free-market policies. D) Keynes's views were accepted only by left-wing, socialist economists.
A
Expansionary monetary policy causes _______ in interest rates in the short run and ______ in interest rates in the long run. A) a decrease; no change B) a decrease; a decrease C) no change; a decrease D) no change; no change
A
If the Fed increases the discount rate: A) the money supply is likely to decrease. B) the money supply is likely to increase. C) the money supply is not likely to change. D) the federal funds rate must decrease.
A
If the Federal Reserve wants to discourage banks from borrowing directly from the Fed and thus decrease the monetary base, the Fed would likely: A) increase the discount rate. B) increase the federal funds rate. C) increase the reserve requirement. D) sell U.S. Treasury bills in an open market operation.
A
In a graph of a money demand curve, which of the following variables is plotted on the vertical axis? A) the interest rate on liquid assets, like short-term CDs B) the interest rate on 30-year Treasury bills C) the rate of price inflation D) the rate of return in the stock market
A
In the income-expenditure model, expansionary monetary policy causes: A) a decrease in interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. B) a decrease in interest rates, a decrease in planned investment spending, and an increase in equilibrium GDP. C) an increase in interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. D) an increase in interest rates, a decrease in planned investment spending, and a decrease in equilibrium GDP.
A
Keynesians argued that monetary policy would NOT be effective if: A) there was a liquidity trap. B) the Fed was independent of political pressure. C) other countries did not follow monetary policy similar to that of the United States. D) no one bought bonds when the Fed conducted open-market operations.
A
Milton Friedman's argument was that the Fed, should follow a monetary policy rule: A) where the money supply would grow at a slow and steady rate. B) where the money supply would remain constant. C) where the money supply would grow proportionally with the price level. D) where the money supply would grow at the same rate as the GDP growth rate.
A
Proponents of the theory of rational expectations contend that: A) people make rational forecasts using existing information. B) business cycles are generally caused by shifts in aggregate demand. C) full employment is rarely achieved. D) stickiness of prices is the primary cause of inflation.
A
The Federal Reserve System was created in: A) 1913. B) 1971. C) 1857. D) 1873.
A
The economic view that reducing tax rates will increase the incentives to work and invest, and will ensure a high growth rate of the potential output, is known as: A) supply-side economics. B) demand-side economics. C) new classical economics. D) new Keynesian economics.
A
The federal funds rate is: A) determined in the money market by the supply and demand for money. B) set by Congress. C) determined in the real market by the aggregate supply and aggregate demand curves. D) the interest rate that banks pay when they borrow directly from the Fed.
A
The money velocity equation is stated as: A) M * V = P * Y. B) M * P = V * Y. C) M * Y = V * P. D) M * Y * P = V.
A
The tools of conducting monetary policy include: A) changes in the required reserve requirement. B) changes in the prime rate. C) open market purchases of corporate stock. D) changing tax rates.
A
To _______ the money supply, the Fed could ________. A) increase; lower the reserve requirements B) decrease; lower the discount rate C) increase; raise the federal funds rate D) decrease; conduct open-market purchases
A
Which of the following is NOT one of the reasons that the Japanese tend to keep large amount of cash? A) Banks have invested heavily in credit card technology. B) Japan has a low crime rate. C) Interest rates in Japan have been below 1% since the 1990s. D) Japan's retail sector is dominated by small, mom-and-pop stores that don't use credit card technology.
A
A liquidity trap is a situation in which: A) fiscal policy becomes ineffective because of the high budget deficit. B) monetary policy becomes ineffective because the nominal interest rate is down against zero bound. C) the aggregate price level becomes downwardly sticky. D) increase in government spending drives out planned investment spending.
B
According to rational expectations, monetary policy is: A) always effective. B) effective only if it is unexpected. C) ineffective compared to fiscal policy. D) effective only when fiscal policy accommodates it.
B
All of the following are responsibilities of the Fed EXCEPT: A) control the monetary base. B) mint bills and coins. C) oversee and regulate the banking system. D) set the discount rate.
B
Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect: A) the money demand curve to shift outward. B) the money demand curve to shift inward. C) a downward movement along a fixed money demand curve. D) an upward movement along a fixed money demand curve.
B
If the economy is suffering from a recessionary gap, the Fed should conduct _______ monetary policy by _________ the money supply. a) expansionary; decreasing b) expansionary; increasing c) contractionary; decreasing d) contractionary; increasing
B
New classical economics: A) focused on short-run economic fluctuations. B) returned to the view that shifts in aggregate demand only affect the price level. C) argued that the business cycle is caused by "animal spirits." D) focused on the trade-off between unemployment and inflation.
B
Prior to 1854, the United States was: A) dominated by the manufacturing sector and was subject to price inflexibility. B) dominated by the agricultural sector and was subject to price flexibility. C) constantly plagued by recurrent recessions due to poor government policy. D) constantly plagued by recurrent inflations due to poor central bank policy.
B
Prior to the 1930s, the _____ model of economics dominated economic thinking about how the economy worked. A) Keynesian B) classical C) monetarist D) real business cycle
B
The Money Supply Curve is: a) downward sloping b)vertical c)upward rising d) horizontal
B
The belief that neither monetary nor fiscal policy can reduce unemployment is consistent with which of the following schools of thought? A) Keynesian B) classical C) rational expectations D) modern consensus
B
The fact that the Federal Reserve had to cut the Fed funds rate to only 1% in the early 2000s suggested that the U.S. economy came dangerously close to: A) an inflationary spiral. B) a liquidity trap. C) very high unemployment. D) another recession.
B
The major tools of monetary policy available to the Federal Reserve System include: A) reserve requirements, margin regulations, and moral suasion. B) reserve requirements, open-market operations, and the discount rate. C) open-market operations, margin regulations, and moral suasion. D) the discount rate, margin regulations, and moral suasion.
B
The set of ideas known as the New Keynesian economics states that: A) markets clear in the short run because prices adjust whenever there are surpluses or shortages. B) market imperfections tend to make prices sticky in the short run. C) markets tend to be in equilibrium because of the inherent forces in the economy. D) wage-price inflation is the main problem that most economies face in the short run.
B
The theory of rational expectations contends that policy activism is: A) not warranted, because we don't know enough about the workings of the economy to stabilize it. B) not warranted; the public defeats discretionary policies because everyone expects them, and therefore, their effectiveness is thwarted. C) warranted, because discretionary policies have a strong effect on real output. D) warranted, because expectations are rational only in the short run.
B
When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____. falls; falls; falls falls; falls; rises rises; falls; falls rises; falls; rises
B
Which of the following actions would allow banks to lend out more money? A) an increase in the required reserve ratio B) a decrease in the discount rate C) an increase in the federal funds rate D) an increase in the required reserve ratio coupled with an increase in the federal funds rate
B
Which of the following schools of thought is the MOST likely to advocate the use of fiscal policy in fighting recessions? A) classical macroeconomics B) Keynesian C) rational expectations D) monetarism
B
Which of the following theories is consistent with the notion that the short-run aggregate supply curve may be vertical after all? A) Keynesian theory B) new classical economics C) new Keynesian theory D) real business cycle theory
B
Which one of the following statements is TRUE? A) Keynes treated short-run macroeconomics as a minor issue. B) Keynes emphasized the short-run effects of shifts in aggregate demand on aggregate output, employment, and prices whereas the classical economists focused on the long-run determination of the aggregate price level. C) The classical economists believed that the short-run aggregate supply curve was upward sloping. D) The classical economists emphasized the short-run effects of shifts in aggregate demand on aggregate output, whereas Keynes focused on the long-run determination of the aggregate price level.
B
17. (Scenario: Money and Interest Rates) If the Fed wants to maintain the same federal funds rate, it should: A) increase taxes. B) decrease government spending. C) sell Treasury bills. D) buy Treasury bills.
C
Adam is an economist who believes that in the long run, all prices are flexible and that any increase in the money supply will lead only to inflation, not an increase in aggregate output. Because the economy would self-correct to long-run equilibrium output, there is no role for either fiscal or monetary policy. Adam is best described as a _____. A) supply-side economist B) Keynesian economist C) classical economist D) monetarist
C
An increase in interest rates causes the demand for money to: A) increase. B) decrease. C) stay the same. D) shift to the right.
C
Because in the Keynesian model, prices and nominal wages are _________, the short-run aggregate supply curve is upward sloping and, as a result, an increase in the money supply leads to _________ in the aggregate price level. A) sticky; a less than proportional decrease B) flexible; an equal proportional decrease C) sticky; a less than proportional increase D) flexible; an equal proportional increase
C
Given a recessionary gap, the Fed will use monetary policy to _______ interest rates and _______ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
C
If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the monetary base will: A) increase by $10 million. B) increase by $8 million. C) decrease by $10 million. D) decrease by $50 million.
C
Keynesians believed that the Depression could be cured if: A) monetary policy was focused on the use of a monetary rule. B) fiscal authorities worked at balancing the budget. C) government spent enough to offset the drop in spending in both the consumption and investment sectors. D) expansionary monetary policy was utilized.
C
Milton Friedman was the leading figure in the movement called: A) Keynesianism. B) fiscalism. C) monetarism. D) big government.
C
Open-market operations occur when the Fed: A) buys U.S. Treasury bills from the federal government. B) buys or sells U.S. Treasury bills. C) buys or sells existing U.S. Treasury bills. D) sells U.S. Treasury bills to the federal government.
C
Suppose that the money supply increases by $150 million after the Federal Reserve has engaged in an open market purchase of $50 million. Then the reserve ratio is: A) 0.1. B) 0.5. C) 0.33. D) 0.2.
C
The FOMC does NOT control the: A) discount rate. B) reserve ratio. C) prime rate. D) federal funds rate
C
The amount of money that people demand is: A) positively related to the interest rate. B) independent the interest rate. C) negatively related to the interest rate. D) positively related or negatively related to the interest rate depending on the state of the economy.
C
The current financial crisis began: A) in the information technology sector, where the promise of high earnings did not materialize. B) in the stock market, where irrational exuberance took over practical reasoning. C) in the housing market, where prices skyrocketed and there was no rational foundation for such price increases. D) in the international sector, as U.S. exports fell and imports soared high.
C
To _______ the money supply, the Fed could ________. A) increase; decrease the money multiplier B) decrease; lower the reserve requirements C) increase; conduct open-market purchases D) decrease; lower the discount rate
C
To close a recessionary gap using monetary policy, the Fed should ________ the money supply to ________ investment and consumer spending, and shift the aggregate demand curve to the ________. A) increase; increase; left B) decrease; decrease; left C) increase; increase; right D) decrease; decrease; right
C
Under rational expectations, government policy can be effective: A) if it is rationally thought out before implementation. B) if it is anticipated, so people can make realistic preparations. C) if it surprises people when it occurs. D) whenever the economy reacts rationally to the decision.
C
Monetarists believe that: A) short-run problems are not likely to occur. B) GDP fluctuations will be less pronounced if the Federal Reserve uses discretionary monetary policy. C) price fluctuations are likely to occur in the short or long runs. D) GDP will grow steadily if the money supply grows steadily
D
Which one of the following is true? A) Keynesian macroeconomists focused on the long-run effects of monetary policy on the aggregate price level, ignoring any short-run effects on aggregate output. B) Classical macroeconomists focused on the short-run effects of monetary policy on the aggregate price level, ignoring any long-run effects on aggregate output. C) Classical macroeconomists focused on the long-run effects of monetary policy on the aggregate price level, ignoring any short-run effects on aggregate output. D) Keynesian macroeconomists focused on the long-run effects of fiscal policy on the aggregate price level, ignoring any short-run effects on aggregate output.
C
_______ was a _______ economist who believed that _______ in wages and prices could block adjustments to full employment. A) Adam Smith; British; flexibility B) Milton Friedman; U.S.; inflexibility C) John Maynard Keynes; British; stickiness D) Robert Lucas; U.S.; stickiness
C
According to a Keynesian economist, a recessionary gap should be fixed with: A) a monetary rule. B) supply-side tax cuts to stimulate investment and work. C) decreases in government spending. D) discretionary fiscal policy.
D
According to the loanable funds model, contractionary monetary policy: A) shifts the demand curve for loanable funds to the right. B) shifts the supply curve for loanable funds to the right. C) shifts the demand curve for loanable funds to the left. D) shifts the supply curve for loanable funds to the left.
D
Discretionary fiscal policy may be counterproductive because: A) of the counter cyclical nature of such policies, their effectiveness is sometimes reduced. B) in the short run, only monetary is effective. C) increases in the government budget deficit affect economic growth in the long run. D) of the various lags in fiscal policy, it may take effect when the economy has already recovered.
D
If the reserve ratio is 25%, and the money supply increases by $100,000. The initial reserve injection by Federal Reserve was: A) $2500. B) $10,000. C) $4000. D) $25,000.
D
Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. Which of the following would be the end result of such an action? A) The money supply would stay the same. B) The money supply would decrease by $100 million. C) The money supply would increase by $100 million. D) The money supply would increase by more than $100 million.
D
The Federal Reserve Bank of the United States is: a purely private central bank. a purely public central bank. is part of the U.S. government. is not exactly part of the U.S. government but not really a private institution either.
D
The General Theory of Employment, Interest, and Money was written by: A) Adam Smith. B) Paul Samuelson. C) Joseph Schumpeter. D) John Maynard Keynes.
D
The current consensus affirms that the Great Depression was ended by: A) imposing fiscal discipline and reducing budget deficits. B) following Keynes's analysis regarding the "animal spirits." C) increasing the money supply and lowering the interest rate. D) applying expansionary fiscal policy on a large scale.
D
The discount rate is the interest rate the Fed charges on loans to: A) consumers. B) the federal government. C) state governments. D) banks.
D
The main idea behind monetarism, was that: A) the aggregate output would equal potential output if the money supply grew at a constant rate. B) the aggregate price level would increase proportionally if the money supply grew at a constant rate. C) the government budget would have a deficit if the government spending grew at a constant rate. D) the aggregate output would grow steadily at a constant rate if the money supply also grew at a constant rate.
D
The money demand curve is _________ because a lower interest rate ___________. a) upward-slopping; increases the opportunity cost of holding money b) downward-slopping; increases the opportunity cost of holding money c) upward-slopping; decreases the opportunity cost of holding money d) downward-slopping; decreases the opportunity cost of holding money
D
The three main monetary policy tools are: A) interest rates, taxes, government purchases, and transfers. B) currency, near-moneys, and reserve ratio. C) deposit insurance, discount rate, and money multiplier. D) reserve requirements, the discount rate, and open-market purchases.
D
The tool of monetary policy that involves the Fed's buying and selling of government bonds is: A) moral suasion. B) reserve requirements. C)the discount rate. D)open-market operations.
D
When banks borrow and lend reserves from each other, they are participating in the ______ market. A) subprime mortgage B) long-term capital C) money D) federal funds
D
Which of the following is FALSE? At the time of the Great Depression: A) the measurement of the business cycle was well advanced. B) there was no widely accepted theory on why depressions happened. C) economists recognized that the economy did not always grow smoothly. D) the U.S. economy was primarily agricultural.
D
Which of the following is NOT true about new classical macroeconomics? A) It returned to the classical view that shifts in the aggregate demand curve only affect the aggregate price level, not aggregate output. B) It challenged traditional arguments about the slope of the short-run aggregate supply curve based on the concept of rational expectations. C) It suggested that changes in productivity cause economic fluctuations. D) It embraced the Keynesian notion that changes in aggregate demand may affect aggregate output in the short run.
D
Which of the following was a proponent of supply-side economics? A) Herbert Hoover B) Franklin Roosevelt C) Jimmy Carter D) Ronald Reagan
D
If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the: A) other member banks and borrow at the federal funds rate. B) Fed and borrow at the discount rate. C) open market and borrow money there. D) Congress to borrow funds.
a