Macroeconomics Exam 4

Which statement is not true about a bank run? - Since the Great Depression, the government has enacted regulations that have eliminated most bank runs. - Fears leading to bank runs can be self-fulfilling. - Bank runs are bad for the bank affected and usually good for the bank's competitors. - Deposit insurance is designed to reduce the risk of bank runs for depository banks. - There was a wave of bank runs during the Great Depression.

Bank runs are bad for the bank affected and usually good for the bank's competitors.---- THIS IS FALSE, THE REST ARE TRUE

a. An economy is facing an inflationary gap. To eliminate the gap, the central bank should pursue ___________ monetary policy. b. Determine how the type of monetary policy that you selected will change each of the following economic indicators.

Contractionary Increases: interest rate Decreases: investment spending, consumer spending, real GDP, aggregate price level

Classify the following statements about the European Central Bank (ECB) as true or false. a. The ECB controls monetary policy in all European countries. b. The ECB is the oldest central bank in the world. c. The ECB regulates the supply of Euros. d. The ECB is relatively insulated from political pressures. e. The Federal Reserve System and the ECB have a similar design and purpose. f. Because of the existence of the ECB, the countries of the European Union do not have national banks.

a. False b. False c. True d. True e. True f. False

When the Fed uses quantitative easing, it is

buying longer-term government debt

Your study partner argues that the distinction between the government's budget deficit and debt is similar to the distinction between consumer savings and wealth. He also argues that if you have large budget deficits, you must have a large debt. In what ways is your study partner correct and in what ways is he incorrect? Your partner is ________ about the similarity between the deficit-debt distinction and the savings-wealth distinction. He is ________ that large budget deficits imply large levels of debt.

correct, incorrect

If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response? What is a likely consequence of this policy?

cut spending equal to the reduction in tax revenue, The negative consequences of the recession are magnified.

If the economy is at potential output, and the Fed decreases the money supply, in the long run, the price level will likely:

decrease

If interest rates rise, there will be a(n)

decrease aggregate demand

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $20 billion, real GDP will:

decrease by $80 billion

If the FED conducts an open-market sale, bank reserves ______, and the money supply is likely to____.

decrease, decrease

Given a recessionary gap, the Federal Reserve will use monetary policy to _____ interest rates and _____ aggregate demand.

decrease, increase

How do automatic stabilizers impact tax revenue and government spending during a recession? Tax Revenue wil _______ and government spending will _____

decrease, increase

A decrease in the supply of money with no change in the demand for money will lead to a(n) _____ in the equilibrium quantity of money and a ______ in the equilibrium interest rate.

decrease, rise

The automatic stabilizer in the government tax revenue that occurs when the GDP falls ____ the multiplier.

decreases

The ____ is the interest rate that the Federal Reserve charges on loans to banks

discount rate

Shadow Banking:

doesn't look like traditional banking but serves similar purposes while posing significantly more risk.

The money demand curve is ______ because the opportunity cost of holding money is ______ related to the interest rate.

downward sloping, positively

Suppose the government increases taxes. What will happen to disposable income and consumer spending? Disposable income ______ Consumer spending will ______

falls, decrease

If a government runs large budget deficits over consecutive years, with the public debt growing _____ GDP, the ratio of debt to GDP will _____

faster than, increase

Currency in the United States today is ______ money

fiat

A contractionary fiscal policy is one that reduces aggregate demand by decreasing:

government purchases

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, the quantity of money demanded is _____ the quantity of money supplied.

greater than.

The cyclically balanced budget is important because it

helps clarify whether the government's taxing and spending are sustainable in the long run.

Given a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because:

in the first round of spending, only $90 billion of the tax cut will be spent, and $10 billion will be saved, while the entire $100 billion of government purchases will be spent.

Suppose the economy is in a recessionary gap. To move aggregate output closer to potential out, the BEST fiscal policy option is to:

increase government purchases

If the economy is at potential output, and the Fed increases the money supply, in the short run, the likely result will be a(n) _____ in investment and a(n) _____ in consumer spending

increase, increase

If Congress imposes a $5 tax on each ATM transaction, the demand for money will likely

increase.

Suppose that the required reserve ratio is 20%. If Saanvi deposits $4,000 in cash in her checking account, and her bank lends $1,000 to Freda, the money supply initially:

increases by $1,000.

Which statement is FALSE? In the long run, monetary policy: a. affects only the aggregate price level b. is neutral c. increases potential output d. does not affect the aggregate output

increases potential output

Suppose you transfer $500 from your savings account to your checking account. With this transaction, M1 ______ and M2______

increases, stays the same

Expansionary fiscal policy includes

increasing government spending

Suppose a bank has excess reserves of $50 and that the reserve ratio is 20%. If Roderick deposits $5,000 in his checking account, and the bank lends $2,500 to Nia, the money supply:

is increased by $2,500

Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

left, inflationary

The multiplier effect of a change in government transfers is:

less than the multiplier effect of a change in government spending.

Generally, the more liquid an asset is, the

lower its rate of return

To expand the money supply, the Federal Reserve would have to:

make an open market purchase of Treasury bills

A bank run occurs when

many bank customers try to withdraw their funds at one time

When you use money to purchase a new car, money serves as a ____

medium of exchange

Fiat money is ____

money backed by a government's decree that it be accepted as a means of payment

The monetary policy tool whereby the Federal Reserve buys and sells government bonds is called

open-market operations

The federal government's LARGEST source of revenue is

personal income and corporate profit taxes

Which tax is the largest source of tax revenue in the United States?

personal/individual income tax

The banking crisis of 1907 that preceded the Great Depression and the banking crisis in 2008 were both caused by:

risky speculation in real estate and the stock market.

If the economy is operating well below potential output, the cyclically adjusted budget balance deficit is ____ than the actual budget balance.

smaller than.

Fiscal policy is conducted by _____ and involves _____

the federal government, government spending and taxes

All else equal, if the required reserve ratio falls:

the money multiplier increases

Monetary policy is similar among wealthy countries because the central banks of most of these countries:

try to keep inflation between 2% and 3% per year

Your roommate is considering purchasing cryptocurrency, as they believe it can be used in place of money. What roles would cryptocurrency need to satisfy in order to be considered and effective type of money?

unit of account, medium of exchange, and store of value

How can the Federal Reserve raise interest rates?

use open market operations to reduce the money supply

Suppose that the public holds 50% of the money supply in currency, that the reserve requirement is 20%, and that banks hold no excess reserves. If a customer deposits $6,000 in her checking account, required reserves will increase by:

$1,200.

First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds. If the minimum reserve ratio is 20%, how much is the bank required to keep in reserves?

$16 million

The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit can the bank lend out?

$800

Suppose that the money supply increases by $150 million after the Federal Reserve engages in an open market purchase of $50 million. The reserve ratio is:

0.33

Which of the scenarios best reflects the meaning of the term inflation targeting?

A central bank is expected to achieve a 3% annual inflation rate.

Why are persistent budget deficits worrisome?

All of these make budget deficits worrisome (Deficits can lead to private investment spending being crowded out, debt places an increased burden on the economy in the future, the likelihood of default increases)

Most macroeconomists believe that it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier. However, a smaller multiplier means that changes in government purchases of goods and services, government transfers, or taxes necessary to close inflationary or recessionary gaps are larger. How can you explain this apparent inconsistency?

Automatic stabilizers dampen the business cycle. Any change in autonomous spending would result in a smaller inflationary or recessionary gap. Although the effect of discretionary fiscal policy would be reduced, the need for discretionary fiscal policy would also be reduced.

The central bank of the United States is called the

Federal Reserve Bank

A government can pay off its debt if

GDP grows faster than the debt

By 1933, banks were able to borrow from: I. he Reconstruction Finance Coporation II. the Federal Reserve System

I and II/ both

In which of the following cases does the size of the government's debt and the size of the budget deficit indicate potential problems for the economy?

Indicates potential problems: c. The government's debt is relatively low, but the government is running a budget deficit to finance the interest payments on the debt. d. The government's debt is relatively high, and the government is running a budget deficit to finance new infrastructure spending. Does not indicate potential problems: a. The government's debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to connect the major cities of the nation. b. The government's debt is relatively high due to a recently ended deficit-financed war, but the government is now running only a small budget deficit.

In a macroeconomics context, what are implicit liabilities? Which of the choices is a significant implicit liability in the United States?

Money that the government has promised to pay in the future, Social Security

The government's budget surplus in Macroland has risen consistently over the past five years. Two government policymakers disagree as to why this has happened. One argues that a rising budget surplus indicates a growing economy; the other argues that it shows that the government is using contractionary fiscal policy. Can you determine which policymaker is correct?

More information is needed to determine which policymaker is correct.

With the CARES Act costing more than $2 trillion and the federal government facing a significant decline in tax revenue, which of the following statements about the effectiveness of fiscal policy is NOT true? (Think about the three claims about fiscal policy effectiveness outlined in the chapter to answer this question.)

The unemployment rate was at a 50-year low before the lockdown. This implies that the economy was beyond full employment, and the CARES Act would lead to crowding out of private spending and private investment spending, and overall reduced private spending in anticipation of higher future taxes.------ THIS ONE IS FALSE

Rather than simply comparing government revenues and tax receipts, analysts are sometimes interested in the "cyclically adiusted" budget balance. What does it mean to consider the cyclically adjusted budget balance?

The cyclically adjusted budget balance accounts for what the budget balance would be in terms of the total value of goods and services produced in an economy at the potential output.

Every year, more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect:

The money demand curve to shift inward

The rise of electronic payment systems has encouraged more peer-to-peer lending programs. These programs connect lenders and borrowers outside the traditional banking system. As the Federal Reserve relies on changes to the money supply through open-market operations and ultimately bank lending, how will a rise of peer-to-peer lending networks affect the Federal Reserve's ability to conduct effective monetary policy?

There will be no difference in the effectiveness of monetary policy.

Banks don't lend out all funds that are deposited because:

They have to satisfy any depositor who wants to withdraw funds

An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. Determine if each scenario would lead to an inflationary or recessionary gap. a. A stock market boom increases the value of stocks held by households, resulting in __________________ b. Firms come to believe that a recession is likely in the near future, leading to _____________ c. Anticipating the possibility of war, the government increases its purchases of military equipment. This added spending resulting ____________ d. Interest rates increase, bringing about spending changes that result in _______

a. an inflationary gap. b. a recessionary gap. c. an inflationary gap. d. a recessionary gap.

Categorize the scenarios as either a discretionary act or the result of automatic stabilizers. a. A recession increases the number of recipients of unemployment benefits. b. A law is enacted that increases government spending on health-care programs. c. Legislators increase the generosity of unemployment benefits. d. Economic growth increases personal and corporate income, increasing tax payments.

a. automatic stabilizers b. discretionary spending c. discretionary spending d. automatic stabilizers

a. If the economy faces an inflationary gap, then policy makers could use __________ fiscal policies to move the economy back to potential output. This will shift the aggregate demand curve to the ______ b. If the economy faces a recessionary gap, then policy makers could use _________fiscal policies to move the economy back to potential output. This will shift the aggregate demand curve to the ________.

a. contractionary, left b. expansionary, right

a. A decrease in real GDP causes a ________ the money demand curve. b. An increase in technology which makes it easier to pay for goods and services without carrying lots of cash causes a _________ the money demand curve. c. A decrease in interest rates causes a ________ the money demand curve. d. An increase in the aggregate price level causes a ________ the money demand curve.

a. leftward shift of b. leftward shift of c. movement along d. rightward shift of

The fiscal programs instituted in response to the Covid pandemic - - the 2020 CARES Act and the 2022 American Rescue Plan - - were huge, amounting in combination to about $4 trillion. Although unemployment temporarily surged in 2020, these plans provided considerable fiscal stimulus. Simultaneously, the global pandemic caused a supply side shock as supply chains experienced delays as households stocked up on basic necessities. In terms of aggregate demand and aggregate supply, explain why this combination may have caused rising inflation. a. The shutdown to control Covid-19 caused a ___________ b. The fiscal stimulus provided through the 2020 CARES Act and 2022 American Rescue Plan led to a _________

a. leftward shift of the AD curve. b. rightward shift of the AD curve

John Maynard Keynes said, "In the long run we are all dead" a. How is this quote consistent with the concept of money neutrality? b. How is it inconsistent?

a. the primary focus should not be on monetary policy in the long run, since it's neutrality does not affect society's welfare in the present. b. monetary policy does have real effects on the economy in the short run, which impacts society's welfare in the present.

When the government decides to increase taxes to fight an inflationary gap, it is:

an example of discretionary fiscal policy

Which fiscal policy would make a budget surplus smaller or a budget deficit larger?

an increase in government purchases of goods and services.

Social Security and Medicare

are implicit liabilities.