Macroeconomics Chapters 15, 16, 17, & 18

Which of the following is NOT true of the Federal Reserve System? 1. It carries out policies passed by the federal government. 2. It regulates the nation's money supply. 3. It maintains the bank account of the U.S. Treasury. 4. It serves as the bankers' bank.

1. It carries out policies passed by the federal government.

Government spending in the United States is 1. not likely to fall in the future, given the aging population. 2. likely to fall in the future, given the consciousness of the American people regarding our growing debt. 3. likely to fall in the future, given the cyclical nature of business cycles. 4. not likely to fall in the future, given the rising interest payments on the national debt.

1. not likely to fall in the future, given the aging population.

From 2008 to 2010, U.S. federal government spending increased to about 1. 20 percent of GDP. 2. 25 percent of GDP. 3. 15 percent of GDP. 4. 30 percent of GDP.

2. 25 percent of GDP.

Quantitative easing occurs when the 1. government raises income and other taxes. 2. government lowers income and other taxes. 3. Fed buys long-term securities. 4. Fed sells long-term securities.

3. Fed buys long-term securities.

The second-largest source of revenue for the U.S. federal government is 1. the corporate income tax. 2. the individual income tax. 3. Social Security and Medicare taxes. 4. excise taxes, such as taxes on gasoline and alcohol.

3. Social Security and Medicare taxes.

U.S. currency is printed by 1. The Comptroller of the Currency. 2. The Federal Reserve. 3. The U.S. Department of the Treasury. 4 The President's Council of Economic Advisors.

3. The U.S. Department of the Treasury.

If the Fed wishes to lower interest rates, it should 1. raise the discount rate. 2. conduct an open market sale. 3. conduct an open market purchase. 4. do nothing.

3. conduct an open market purchase.

U.S. currency is printed by the a) The U.S. Department of the Treasury. b) The President's Council of Economic Advisors. c) The Comptroller of the Currency. d) The Federal Reserve.

a) The U.S. Department of the Treasury.

If an increase in government spending of $100 million causes an increase in real GDP of less than $100 million, we call this phenomenon a) crowding out. b) the multiplier. c) crowding in. d) the Ricardian effect.

a) crowding out.

The highest debt-to-GDP ratio in U.S. history occurred a) during WWII. b) during the Great Depression. c) during the Reagan administration. d) in 2009, after the stimulus package was put into place.

a) during WWII.

The multiplier concept is important because it shows a) how small changes in government spending may have large impacts on overall output. b) why fiscal policy is always effective. c) why decreases in the tax rate may actually increase tax revenues overall. d) how changes in taxes are multiplied into larger government revenues.

a) how small changes in government spending may have large impacts on overall output.

The federal funds rate is the a) overnight lending rate from one major bank to another. b) interest rate on short-term Treasury securities. c) ratio of reserves to deposits. d) interest rate banks pay when they borrow directly from the Fed.

a) overnight lending rate from one major bank to another.

Social Security is run on a ______ basis. a) pay-as-you-go b) contract c) prepaid d) trust fund

a) pay-as-you-go

In addition to monetary policy, the Fed also has the power to a) regulate banks. b) control the mortgage market. c) monitor the housing market. d) oversee Treasury transactions.

a) regulate banks

Moral hazard occurs when banks and other financial institutions a) take on too much risk, hoping that the Fed and regulators will bail them out. b) fail to maintain their assets exceeding the liabilities. c) fail and bring down other institutions in the system. d) hesitate to lend due to concern over excessive risk.

a) take on too much risk, hoping that the Fed and regulators will bail them out.

Moral hazard occurs when banks and other financial institutions a) take on too much risk, hoping that the Fed and regulators will bail them out. b) fail to maintain their assets exceeding the liabilities. c) hesitate to lend due to concern over excessive risk. d) fail and bring down other institutions in the system.

a) take on too much risk, hoping that the Fed and regulators will bail them out.

An increase in government spending causes a) the aggregate demand curve to shift to the right. b) an upward movement along the aggregate demand curve. c) a downward movement along the aggregate demand curve. d) the aggregate demand curve to shift to the left.

a) the aggregate demand curve to shift to the right.

As the baby boomer generation retires, Social Security payments will have to increase approximately ______ in order to maintain the level of promised benefits. a) 10 percent b) 40 percent c) 25 percent d) 55 percent

b) 40 percent

In the dynamic AS-AD diagram, a tight monetary policy shifts the a) AD curve to the right. b) AD curve to the left. c) Solow growth rate to the right. d) Solow growth rate to the left.

b) AD curve to the left.

In which U.S. president's term of office did the federal government run a budget surplus? a) Barack Obama b) Bill Clinton c) George W. Bush d) Ronald Reagan

b) Bill Clinton

Most of the increase in planned spending over the next 50 years comes from a) defense. b) Medicare and Medicaid. c) foreign aid. d) Social Security.

b) Medicare and Medicaid.

If the Federal Reserve overstimulates the economy by increasing money growth too much, then inflation will a) make price signals much easier to interpret. b) create arbitrary redistribution of wealth. c) make long-term planning and contracting easier. d) bring the economy into a recession.

b) create arbitrary redistribution of wealth.

In the case of a negative shock to aggregate demand, the central bank should a) do nothing. b) increase the rate of growth in the money supply to restore spending growth. c) decrease the rate of growth in the price level to keep real growth high. d) decrease the rate of growth in the money supply to control inflation.

b) increase the rate of growth in the money supply to restore spending growth.

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising a) Solow growth. b) inflation. c) unemployment. d) output growth.

b) inflation.

The tax rate paid on an additional dollar of income is called the a) last tax rate. b) marginal tax rate. c) average tax rate. d) total tax rate.

b) marginal tax rate.

When expansionary fiscal policy increases income and thus consumer spending, the additional increase in AD it causes is called the a) butterfly effect. b) multiplier effect. c) spending effect. d) fiscal effect.

b) multiplier effect.

Social Security and Medicare primarily transfer wealth to a) the unemployed. b) the elderly. c) children. d) the poor.

b) the elderly.

From 2008 to 2010, U.S. federal government spending increased to about a) 20 percent of GDP. b) 30 percent of GDP. c) 25 percent of GDP. d) 15 percent of GDP.

c) 25 percent of GDP.

Most of the increase in planned spending over the next 50 years comes from a) Social Security. b) foreign aid. c) Medicare and Medicaid. d) defense.

c) Medicare and Medicaid.

Fiscal policy lags a) are generally the same length as monetary policy lags. b) are generally shorter than monetary policy lags. c) are generally longer than monetary policy lags. d) may be shorter or longer than monetary policy lags.

c) are generally longer than monetary policy lags.

Open market operations involve the Federal Reserve a) competing with investment banks for treasury securities. b) providing reserves to banks through auction. c) buying and selling government bonds. d) lending reserves directly to banks.

c) buying and selling government bonds.

If the Fed wishes to lower interest rates, it should a) do nothing. b) conduct an open market sale. c) conduct an open market purchase. d) raise the discount rate.

c) conduct an open market purchase.

Originally the alternative minimum tax was supposed to a) alleviate the tax burden for low-income households. b) help low-income households with more than two children. c) ensure a minimum tax payment among superrich households. d) decrease taxes amongst the middle-class to the minimum level.

c) ensure a minimum tax payment among superrich households.

Fiscal policy refers to the change in a) government regulations that affect the level of market competition. b) interest rates that affect the credit markets. c) government spending or taxes in an attempt to influence the overall economy. d) the money supply in an attempt to raise the standard of living.

c) government spending or taxes in an attempt to influence the overall economy.

Uncertainty drives people away from a) more liquid assets and toward more investment spending. b) less liquid assets and toward more investment spending. c) investment spending and toward more liquid assets. d) investment spending and toward less liquid assets.

c) investment spending and toward more liquid assets.

Which of the following is regarded as a policy rule? a) making policy on the fly b) adjusting policy actions to deal with the nature of the economic shocks c) keeping the money supply growth rate consistent with a given inflation rate d) changing the money supply growth with discretion

c) keeping the money supply growth rate consistent with a given inflation rate

The advocates of discretion for the Fed's role think that the Fed's adjustments on average push the economy in the a) right direction and increase GDP volatility. b) wrong direction and lower GDP volatility. c) right direction and lower GDP volatility. d) wrong direction and increase GDP volatility.

c) right direction and lower GDP volatility.

The risk that the failure of a few large financial institutions can affect the entire financial system is called a) credit risk. b) moral hazard. c) systemic risk. d) solvency risk.

c) systemic risk.

Quantitative easing occurs when the a) government raises income and other taxes. b) government lowers income and other taxes. c) Fed sells long-term securities. d) Fed buys long-term securities.

d) Fed buys long-term securities.

Open market operations occur when the Fed a) changes the rate of interest paid on reserves. b) changes the discount rate on lending to banks. c) sets up the term auction facility. d) buys and sells government bonds.

d) buys and sells government bonds.

Monetary policy is a ______ means of popping a bubble, because monetary policy ______ push down the price of specific commodities. a) good; can b) crude; can c) good; can't d) crude; can't

d) crude; can't

Fiscal policy refers to the change in a) the money supply in an attempt to raise the standard of living. b) interest rates that affect the credit markets. c) government regulations that affect the level of market competition. d) government spending or taxes in an attempt to influence the overall economy.

d) government spending or taxes in an attempt to influence the overall economy.

The key difference between quantitative easing and a typical open market purchase is that quantitative easing a) involves state and local government securities, while a typical open market purchase involves federal government securities. b) involves small-term government securities, while a typical open market purchase involves long-term government securities. c) does not involve the purchase of government securities, while a typical open market purchase involves the purchase of government securities. d) involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities.

d) involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities.

The time it takes Congress to propose and pass a plan for fiscal policy is called the a) effectiveness lag. b) adjustment lag. c) recognition lag. d) legislative lag.

d) legislative lag.

Discount rate lending occurs when the Federal Reserve a) buys and sells government bonds. b) buys corporate bonds in lagging sectors of the economy. c) provides reserves to banks through auction. d) lends reserves directly to banks.

d) lends reserves directly to banks.

Moving from a progressive tax system to a flat tax system would most likely a) raise taxes on the rich. b) decrease investment. c) lower overall tax revenue. d) raise taxes for poor and middle-income households.

d) raise taxes for poor and middle-income households.

The crowding out effect of fiscal policy refers to a) how more federal government spending affects the sizes of state and local governments. b) the increase in tax revenues as a result of an increase in government spending. c) the decrease in real GDP growth as a result of higher government spending. d) the decrease in private spending as a result of higher government spending.

d) the decrease in private spending as a result of higher government spending

Over which of the following definitions of the money supply does the Fed have the most control? a) M1 b) M2 c) savings deposits d) the monetary base

d) the monetary base

When the Fed sells government bonds in the open market, a) the monetary base increases and interest rates decrease. b) both the monetary base and interest rates increase. c) both the monetary base and interest rates decrease. d) the monetary base decreases and interest rates increase.

d) the monetary base decreases and interest rates increase.

In September 2010, after most of the funds from the American Recovery and Reinvestment Act of 2009 had been spent, a) Keynesians were satisfied with the size of the stimulus. b) unemployment had fallen to 4.8 percent. c) the economy had completely recovered. d) unemployment remained at 9.6 percent.

d) unemployment remained at 9.6 percent.