Macro test 3

The U.S. government initiates $312 billion in spending stimulus. What is the total amount of new spending in the economy if the MPS = 0.3.

$1,040 billion

Imagine that you deposit $48,000 of currency (previously stored under your mattress) into a checking account at a bank. Assume that this institution has a required reserve ratio of 10%. As a result of this deposit, what is the maximum amount of loans that can be made by all banks in the banking system (i.e. not the total change in bank assets)?

$432,000

If a bank's assets are $600 million and its liabilities are $550 million, then its equity is

$50 million

If the spending multiplier is 5, what is the marginal propensity to consume in the economy?

0.8

If the reserve requirement is 10%, then the potential money multiplier is _____ and the actual money multiplier is _____.

10; equal to or less than 10

The housing bubble occurred from

2004 to 2006.

According to the equation of exchange in the quantity theory of money, what is the level of output if M = 1,000, V = 5, and P = 20?

250

Which of the following is TRUEregarding the short run?

At least one cost is fixed

Which of these is a provision of the Federal Reserve Act or part of subsequent legislation that contributes to the independence of the Fed?

Board members serve one 14-year term, after which they cannot be reappointed.

Under Keynesian economics, __________________ should be used when u < u*.

Contractionary fiscal policy

All of the following are necessarily short-run effects of monetary policy except

Cost-push inflation

Which of the following is NOTan example of an automatic stabilizer?

Federal economic stimulus

If interest rates fall:

Firms are willing to borrow more money because their rates of return have increased.

Which statement(s) is/are TRUE?I. Increasing the reserve requirement would decrease the money supply.II. Decreasing the discount rate would decrease the money supply.III. Buying government bonds would increase the money supply.

I and III only

Suppose a prolonged war in a country destroys 30% of capital stock. In the long run, the price level will ________ as __________.

Increase; both long-run and short-run aggregate supply decrease

1. Suppose new drilling techniques increase the world oil supply. In the long run, output will _________ and the price level will __________.

Increase; decrease

When the Federal Reserve buys U.S. treasury securities, interest rates are effectively ___________, and the supply of money curve shifts __________.

Lowered; rightward.

According to the Laffer curve, the U.S. government could potentially reduce its budget deficit by:

Lowering tax rates

If Anne were to convert some of her checkable deposits into a certificate of deposit (CD), which of the following changes would take place?

M1 would decrease; there would be no change in M2.

Suppose the economy is in full employment long run equilibrium. Then a positive supply shock, caused by a fall in oil prices, hits the economy. A contractionary monetary policy will

Move the economy back to full employment output but at a much lower price level

The Federal fiscal year begins on _____ and ends on _____.

October 1st; September 30th

In the equation of exchange, if M = $1.5 trillion, V = 7, and P = 1.05, then

Q = $10 trillion.

Which of these illustrates the information lag?

Real GDP, an indicator of economic growth, is predicted to increase by 0.1% in July, but the numbers are revised in August to reflect an actual 2% decrease.

Which of the following describes a situation when regulated industries have a strong incentive to influence the decisions of the regulatory body?

Regulatory capture

Mandatory outlays:

Require changing existing laws if those outlays are to be altered.

Which agency does NOT regulate financial markets?

The Council of Economic Advisers (CEA)

The oldest central bank in the world is

The Sveriges Riksbank of Sweden

Which of the following policy statements would a classical economist tend to support?

The government should allow the economy to adjust to changes in aggregate demand on its own, without interference.

In the market for loanable funds, the government simultaneously reduces tax breaks for saving and enlarges investment tax credits for firms. What changes should be expected in the market for loanable funds due to these events?

The interest rate will rise, but there is uncertainty about any change in the amount of borrowed funds.

Which statement correctly describes the sequence that explains how a contractionary monetary policy impacts an economy?

The policy raises interest rates; higher interest rates reduce spending; and lower spending reduces aggregate demand, which impacts output and the price level.

1. If the Federal Reserve increases the money supply to bring down the federal funds rate:

The value of the dollar will decrease in foreign exchange markets.

If the Federal Reserve pursues an expansionary monetary policy

U.S. exports to other countries will rise.

What function of money is highlighted when I am comparing the price of one product to another?

Unit of account

According to monetarist theory

a decrease in the money supply will increase interest rates as portfolios rebalance, leading to a drop in investment and/or consumption spending.

Which of these is considered a supply shock?

an increase in input costs

If the Fed reduces the money supply through the sale of bonds on the open market

bond prices fall

Quantitative easing refers to the process whereby the Federal Reserve

buys longer-term securities and assets to stimulate the economy.

Assume output stays fixed at full employment output. According to the equation of exchange, if velocity increases and the government wants stable prices, the government should

decrease the money supply.

When the economy is at full employment, expansionary fiscal policy results in a new long-run equilibrium at an output level _____ full employment and a _____ price level.

equal to; higher

Public debt held by foreigners is known as _____ debt.

externally held

In a money market with a liquidity trap, an increase in the money supply will

fail to decrease the nominal interest rate

Countries that adopt the dollar as their official currency maintain the ability to conduct independent monetary policy.

false

1. The short-run aggregate supply (SRAS) curve is _______ when prices adjust more slowly, and the SRAS curve is ________ when prices adjust more quickly.

flatter; steeper

If the reserve requirement is 25%, then a $500 increase in deposits means that the money supply

has the potential to increase by $2,000.

Problems can begin to increase when countries with deficits that are a high percentage of their GDP also

have high debt-to-GDP ratios.

If foreign countries like El Salvador abandoned the use of the dollar as their only form of legal currency, the U.S. money multiplier would likely __________.

increase

The federal government can finance its debt by all of these measures EXCEPT a(n)

increase in the federal funds rate.

With a negative supply shock, the Federal Reserve has to decide whether to

increase inflation and decrease unemployment, or decrease inflation and increase unemployment.

As GDP increases, tax revenues _____ and transfer payments _____.

increase; decline

The price of a bond is equal to

interest payment divided by yield.

Crowding out

is driven by higher interest rates generated by government borrowing.

When the interest rate falls, American bonds become _____ attractive to foreign investors, often leading to a(n) _____ in the value of the U.S. dollar in foreign exchange markets.

less; decrease

If the Fed wanted to use all three of its primary tools to increase the money supply, it should

lower the reserve requirement, lower the discount rate, and conduct an open market purchase.

Federal spending that is authorized by permanent laws and does not go through the annual appropriation process is called _____ spending.

mandatory

Suppose the economy is in full employment equilibrium. Then a positive supply shock, caused by a fall in oil prices, hits the economy. A contractionary monetary policy will

move the economy back to full employment output but at a much lower price level.

Automatic stabilizers include all of these EXCEPT

national defense spending.

John, a U.S. taxpayer, buys $5,000 in U.S. savings bonds. When he collects interest on the bonds, who ultimately pays the interest?

other taxpayers like John

Checking account balances are

part of M1 and part of M2.

The supply curve for loanable funds is

positively sloped.

Liquidity refers to how

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

When a financial institution provides a standardized financial product such as a mortgage, it is

reducing transaction costs.

The government can finance a budget deficit by

selling assets

Money is employed as a _____ because it enables people to save the money they earn today and use it to buy goods and services later.

store of value

If monetary policy is tight

the value of the dollar will rise.

A bank's equity appears in its liabilities column because, ultimately, any gains are distributed to shareholders like a liability.

true

Monetarist theory states that in the long run, aggregate supply is vertical and fixed at full employment, and changes in the money supply result directly in changes in the price level.

true

What is the relationship between the real interest rate (r) and private investment spending (I)?

Answers A and B are true: a. When the real interest rate rises, firms are willing to borrow less money. b. When the real interest rate falls, households are willing to borrow more money

Consider the market for loanable funds. If households' expectations about the economy worsen and firms' expectations worsen, the real interest rate will ____ and the quantity will ____.

Decrease; either increase, decrease, or stay the same

Which statement does NOT explain why the actual money multiplier and the potential money multiplier are different?

Foreign deposits in American banks are not counted in the actual money multiplier.

Proper execution of fiscal policy assumes that:

a. Potential output can be gauged accurately b. The spending multiplier can be predicted accurately c. Government agencies avoid coordination failure d. The slope of the short run aggregate supply curve is unaffected by the policy e. All of the above (right answer)

Applying for multiple credit cards at one time

can be bad, because it lowers your credit score.

A negative supply shock causes output to _____ and the price level to _____.

decrease; increase

Suppose the economy enters a recession and income falls more than the demand for loanable funds. In this case, the supply of loanable funds shifts _____ and the equilibrium interest rate _____.

left; rises

All of these actions are performed by the Federal Reserve regional banks EXCEPT

setting reserve requirements.

M1 is more liquid than M2.

true

Anne and Charlie are discussing the best possible fiscal policy to bring the country out of a recession. Charlie wants to see government reduce taxes by $100 billion. Anne prefers to see government spending increase by $100 billion. Whose proposition would have the larger total impact on aggregate demand?

Anne's, because all of the additional government spending will enter the spending stream, while part of a tax cut would be saved and not spent

The supply of loanable funds decreases while the demand for loanable funds remains the same. This would cause

The equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase

If government revenues in 2011 were $2.2 trillion and government outlays were $3.8 trillion

The federal debt increased by $1.6 trillion.

Which of the following refers to a situation where society is "present-biased", choosing immediate gratification despite catastrophic economic outcomes in the future.

collective hyperbolic discounting

According to the crowding-out effect, if the government sells bonds to finance spending, _____ can eventually fall.

consumption and investment

According to the government budget constraint equation, when the government runs a surplus, three things can happen: the money supply _____, the government _____ bonds, or the government _____ assets.

drops; buys back; buys

An individual bank can, at most, lend out all of its

excess reserves.

The two types of reserves are ______________ and ______________.

excess reserves; required reserves

When interest rates rise, exports _____ and imports _____.

fall; rise

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $100,000 bond. The money supply

increases by a maximum of $500,000.

Which of these is likely to lead to higher interest rates?

the end of a government program that provides taxpayers with additional incentives to invest in their retirement plans

If a person borrows $3,000 at 8% annual interest and never makes any payments, how much will the loan balance be after three years?

$3,779.14

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is

$800

A bond issued 10 years ago had a face value of $2,000; a coupon rate of 5%; and a yield of 6% when it was sold last month in the secondary bond market. At what price did the bond sell in the secondary market?

$1,666.67

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. Its current level of total reserves is _____. If the reserve requirement is increased to 25%, the new level of excess reserves would be _____.

$12,000; $2,000

The Fed buys a bond from Joe and deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the maximum amount the money supply can increase?

$6,000

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

4-year

A bond has a face value of $1,000 and an annual interest payment of $44. What is its coupon rate, and what is its yield if it is sold for $1,100 in the secondary market?

4.4% and 4.0%, respectively

8. A bond has a face value of $1,500 and an annual interest payment of $88. What is the coupon rate, and what is its yield if it is sold for $1,300 in the secondary market?

5.87% and 6.77% respectively

Suppose a perpetuity bond with a face value of $1,000 has a 10% coupon rate. If market interest rates fall to 8%, the price of the bond

rises to $1,250.

The quantity of loanable funds supplied by _____ is _____ related to the real interest rate.

savers; positively

If the Federal Reserve decides to increase the money supply

the federal funds rate will fall.

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

two-thirds

The short-run aggregate supply curve is _____ and the long-run aggregate supply curve is _____.

upward sloping; vertical