EC 202 Exam 3 Launchpad Graded Homework Questions

The federal budget tends to move toward _____ as the economy ____.

deficit; contracts

Discretionary fiscal policy refers to changes in:

government spending or taxes to close a recessionary or inflationary gap.

A positive demand shock leads to:

higher prices and higher employment.

After passage of the American Recovery and Reinvestment Act in 2009 government borrowing _____, and interest rates_____.

increased; remained very low

The largest source of federal tax revenues is:

personal income taxes.

An amount that would equal a particular future value if deposited today at the prevailing interest rate is the:

present value.

In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending was $10 billion. As a result:

private savings were $20 billion.

The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate:

quantity of output demanded by households, businesses, the government, and the rest of the world.

If the economy is at equilibrium below potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.

recessionary; expansionary

Suppose the required reserve ratio increased from 10% to 20%. This would:

reduce the money multiplier from 10 to 5.

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

right; recessionary

When the economy expands, income tax receipts will:

rise, and sales tax revenues will rise.

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____.

rise; remain stable

Assuming that prices remain constant, suppose that consumer assets and wealth lose value. The aggregate demand curve will undergo a:

shift to the left.

The _____ curve shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied when wages and prices are not fully flexible.

short-run aggregate supply

Consider an economy that already has a sizable budget deficit. If the economy is facing a major downturn, the government should:

stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining.

The Federal Reserve controls:

the discount rate, the monetary base, and the reserve ratio.

Suppose that an economy is in an inflationary gap in the short run. In the long run:

the economy's self-correcting mechanism will restore GDP to its potential level.

The Fisher effect states that:

the expected real rate of interest is unaffected by the change in expected inflation.

Bank runs in the United States during the 1930s damaged the economy because:

the loss of confidence at one bank quickly extended to other banks.

Holding everything else constant, if the required reserve ratio falls:

the money multiplier increases.

The short-run aggregate supply curve illustrates:

the positive relationship between the aggregate price level and aggregate output supplied.

A business will be likely to borrow to fund projects if:

the rate of return on the project is at least as high as the interest rate on the loan.

In 2008 the Federal Reserve worried about:

the threat of stagflation, and it had a difficult time stabilizing the economy, as stabilization policies are not very effective in managing negative supply shocks.

Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account:

there is no change in M1 or M2.

Capital requirements for banks serve all of the following purposes EXCEPT:

to reduce deposits.

Government payments to households for which no good or service is provided in return are called:

transfer payments.

An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

an increase; an increase

An important advantage of bonds as a financial asset is that they:

are standardized and therefore are easier to sell than loans.

What can the federal government do to finance a deficit?

borrow funds

Scenario: First National Bank 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. Look at the scenario First National Bank. The bank has liabilities of:

$80 million.

If the required reserve ratio is 10% and the Fed conducts an open market purchase of $100, what is the maximum possible change in the money supply?

$1,000

Suppose a bank faces a 10% required reserve ratio and it has $100 in required reserves. If it is fully loaned out, what is the amount of deposits in this bank?

$1,000

Suppose your grandma sends you $100 for your birthday and you deposit it in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's reserves have increased by _____ and the bank's checkable deposits have increased by _____.

$100; $100

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Look at the scenario Closed Economy S = I. How much is national saving?

$2 trillion

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Look at the scenario Closed Economy S = I. How much is private saving?

$3.5 trillion

Scenario: Holding Cash Suppose that the public holds 50% of the money supply in currency and the reserve requirement is 20%. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit. Look at the scenario Holding Cash. As a result of the deposit, the bank's loans will increase by:

$4,800.

Suppose a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio. If the bank lends the maximum amount of money allowed, then the checkable deposits (including the original deposit) increase by:

$500.

If the currency in circulation is $100 million, checkable bank deposits are $500, savings deposits are $300 million, and traveler's checks are $10 million, then M1 is:

$610 million.

If a one-year project costs $100,000 and is expected to return the firm $105,000, the rate of return of the project is:

5%.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5.

Over the past few decades in the United States, large federal budget deficits most often have been caused by:

a depressed economy.

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Decrease taxes by $25 billion.

Which of the following is NOT an argument AGAINST the use of expansionary fiscal policy?

Government borrowing may reduce the marginal propensity to consume.

Which of the following is a function of the Federal Reserve System? I. conducting fiscal policy II. examining and supervising commercial banks in the Fed regions III. evaluating corporate mergers

II only

In the financial crisis of 2008, which of the following firms failed?

Lehman Brothers, an investment bank

M2 is made up of:

M1 plus near-moneys.

Do economists believe that the budget should be balanced each fiscal year?

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

Which of the following is TRUE with respect to short-run and long-run aggregate supply?

The economy can be on both curves simultaneously.

The difference between a budget deficit and government debt is that:

a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

Aggregate demand will shift to the RIGHT if:

government purchases increase.

If a country has a trade surplus, we can conclude that it also has:

a net capital outflow

For an asset to be considered money, it must be:

able to serve as medium of exchange, standard unit of account, and store of value.

Investment spending in macroeconomics refers to:

adding to physical capital

If the government increases its borrowing, then at every interest rate there is a(n):

additional demand for funds

If _____, expansionary fiscal policy is most likely to crowd out private spending.

aggregate income is $500 billion above its potential level

Money is:

an asset that can be easily used to purchase goods and services.

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger?

an increase in government purchases of goods and services

Which of the following is (are) source(s) of funds for Facebook's investment spending? I. investors who purchase shares of stock in the company II. borrowing from savers

both I and II

Which of the following is considered to be investing in a physical asset?

buying a new factory that produces IBM handheld devices

A change in _____ would cause a shift in the short-run aggregate supply curve.

commodity prices

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy.

contractionary fiscal

Which of the following assets is the MOST liquid?

currency

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will:

decrease by $120 billion.

When the price level decreases, firms in imperfectly competitive markets will:

decrease output and decrease the price.

One reason financial institutions become very large is to:

decrease transaction costs.

Scenario: Money Supply Changes The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. Look at the scenario Money Supply Changes. As a result of the withdrawal, excess reserves _____ by _____.

decrease; $4,500

If the Fed conducts an open-market sale, bank reserves _____ and the money supply is likely to _____.

decrease; decrease

If the Federal Reserve wanted to increase the money supply, it could _____ the required reserve ratio, _____, and _____ bonds on the open market.

decrease; decrease the discount rate; buy

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; expansionary; increase

When the economy is in a recession, tax receipts _____ and unemployment insurance payments _____.

decrease; increase

If there is an increase in the government budget deficit, the _____ loanable funds will _____, interest rates will _____, and the amount of borrowing will _____.

demand for; increase; increase; increase

A change in taxes or a change in government transfers affects consumption through its effect on:

disposable income.

The aggregate demand curve slopes:

downward in part because as the price level falls, the ability of households and firms to borrow cheaply increases.

The demand curve for loanable funds slopes:

downward, because demand is lower when the price to borrow money is higher.

The demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of loanable funds.

downward; investors; increasing

Loans of reserves from one bank to another are made in the _____ market.

federal funds

The U.S. dollar is defined as:

fiat money, because it was established as money by an act of law.

One difference between a closed and an open economy is that:

in the latter, foreign savings complement domestic savings in financing investment spending.

If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:

increase by less than $120 billion.

An increase in the demand for loanable funds would most likely be caused by a(n):

increase in expected business opportunities.

Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _____ by 25 billion arcs.

increase spending

If the price level falls by 10%, the purchasing power of $10,000 will:

increase to $11,000.

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion. Real GDP will _____ by _____.

increase; $160 billion

Suppose the Federal Reserve buys $50 million in Treasury bills from commercial banks. If the reserve ratio is 10%, the monetary supply might eventually _____ by _____.

increase; $500 million

To _____ the money supply, the Federal Reserve could _____.

increase; lower the discount rate

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $700 billion, _____ government spending by _____ would bring the economy to potential output.

increasing; $20 billion

Potential output:

is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible.

One of the shortcomings of fiscal policy is that:

it has time lags, so sometimes it may end up destabilizing the economy.

The short-run aggregate supply curve will shift to the:

left if nominal wages increase.

If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer payments is:

less than 4.

Suppose that Jim just got a $20,000 loan from his credit union to buy a new car. The loan is a _____ for Jim and a _____ for the credit union.

liability; financial asset

A law requiring the federal budget to be balanced each year would likely:

make business cycles more severe.

When a bank deposit is withdrawn and kept as currency, bank reserves decrease and the:

monetary base does not change.

The aggregate supply curve shows the relationship between the aggregate price level and the aggregate:

output supplied.

Most economists believe that a balanced budget requirement would:

undermine the role of taxes and transfers as automatic stabilizers.

"Tuition at State University this year is $8,000." Which function of money does this statement best illustrate?

unit of account

When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____.

wealth; aggregate demand; downward

The cyclically adjusted budget balance is an estimate of:

what the budget balance would be if real GDP were exactly equal to potential output.