ECO 201 Final

D. $2.00.

(CHART)Refer to the table. The value of the dollar in year 4 is: A. $1.50. B. $0.33. C. $0.50. D. $2.00.

B. $130.

(DIAGRAM)Refer to the information. Money supply M2 for this economy is: A. $480. B. $130. C. $490. D. $630.

A. high-interest-rate loans to home buyers with above-average credit risk.

"Subprime mortgage loans" refer to: A. high-interest-rate loans to home buyers with above-average credit risk. B. home-buying loans that charge interest rates below the prime interest rate. C. loans to buyers of homes that are in need of substantial repair. D. loans from the Federal Reserve to home mortgage lenders to support a greater volume of home-buying loans at affordable interest rates.

C. $320 billion

(CHART)Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, there would be assets of: A. $246 billion B. $313 billion C. $320 billion D. $387 billion

B. A decrease in taxes and an increase in government spending

(GRAPH)Refer to the above graph. What combination would most likely cause a shift from AD1 to AD2? A. An increase in taxes and an increase in government spending B. A decrease in taxes and an increase in government spending C. An increase in taxes and no change in government spending D. A decrease in taxes and a decrease in government spending

C. at any level of GDP below $400.

(GRAPH)Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit: A. at all levels of GDP. B. at any level of GDP above $400. C. at any level of GDP below $400. D. only when GDP is stable.

A. Shift aggregate demand by increasing taxes

(GRAPH)Refer to the figure above. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation? A. Shift aggregate demand by increasing taxes B. Shift aggregate demand by decreasing taxes C. Shift aggregate supply by increasing taxes D. Shift aggregate demand by increasing government spending

C. $200

(GRAPH)Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be: A. $125 B. $175 C. $200 D. $225

B. Decrease aggregate demand by increasing the interest rate from 4 to 6 percent

(GRAPH)Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qf in the economy, the Fed should try to: A. Decrease aggregate demand by increasing the interest rate from 2 to 4 percent B. Decrease aggregate demand by increasing the interest rate from 4 to 6 percent C. Increase aggregate demand by decreasing the interest rate from 4 to 2 percent D. Increase the level of investment spending from $120 billion to $150 billion

C. Decrease the money supply from $225 to $150 billion

(GRAPH)Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP? A. Increase the money supply from $75 to $150 billion B. Increase the money supply from $150 to $225 billion C. Decrease the money supply from $225 to $150 billion D. Make no change in the money supply

C. increased the moral hazard problem by limiting losses from bad financial decisions.

40. The various lender-of-last-resort programs implemented by the Fed in response to the financial crisis of 2007 and 2008: A. severely depleted the assets of the Federal Reserve. B. have been little used, and therefore are ineffective. C. increased the moral hazard problem by limiting losses from bad financial decisions. D. were designed to offset the moral hazard created by the TARP and other bailout programs.

B. $8,000

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1000 at a price of $10,000. If the interest rate in the economy is now 12.5% a year and you want to sell the bond, the maximum price that you can get for it is: A. $7,500 B. $8,000 C. $9,750 D. $12,500

A. Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately: A. Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million B. Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million C. Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million D. Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million

B. M1 money supply will not change.

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the: A. M1 money supply will decline. B. M1 money supply will not change. C. M2 money supply will decline. D. M2 money supply will increase.

C. reduces aggregate demand and therefore achieves price stability.

Contractionary fiscal policy is so named because it: A. involves a contraction of the nation's money supply. B. necessarily reduces the size of government. C. reduces aggregate demand and therefore achieves price stability. D. expands real GDP.

B. deficits during recessions and surpluses during periods of demand-pull inflation.

Countercyclical discretionary fiscal policy calls for: A. surpluses during recessions and deficits during periods of demand-pull inflation. B. deficits during recessions and surpluses during periods of demand-pull inflation. C. surpluses during both recessions and periods of demand-pull inflation. D. deficits during both recessions and periods of demand-pull inflation.

C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Discretionary fiscal policy refers to: A. any change in government spending or taxes that destabilizes the economy. B. the authority that the president has to change personal income tax rates. C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy. D. the changes in taxes and transfers that occur as GDP changes.

A. deficits are incurred during recessions and surpluses during inflations.

Discretionary fiscal policy will stabilize the economy most when: A. deficits are incurred during recessions and surpluses during inflations. B. the budget is balanced each year. C. deficits are incurred during inflations and surpluses during recessions. D. budget surpluses are continuously incurred.

B. Decreases and tax revenues increase

Due to automatic stabilizers, when the nation's total income rises, government transfer spending: A. Increases and tax revenues decrease B. Decreases and tax revenues increase C. And tax revenues decrease D. And tax revenues increase

D. because people and businesses will not want to accept it in transactions.

During periods of rapid inflation, money may cease to work as a medium of exchange: A. unless it has been designated legal tender. B. unless it is backed by gold. C. because it is too scarce for everyone to have enough for transactions. D. because people and businesses will not want to accept it in transactions.

D. Taxation and government spending

Fiscal policy is enacted through changes in: A. Interest rates and the price level B. The supply of money and foreign exchange C. Unemployment and inflation D. Taxation and government spending

A. Economy's MPS is small

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the: A. Economy's MPS is small B. Economy's MPS is large C. Economy's MPC is small D. Unemployment rate is low

C. $200 billion.

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be: A. $1,800 billion. B. $600 billion. C. $200 billion. D. $1,200 billion.

A. increasing government spending by $4 billion.

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by: A. increasing government spending by $4 billion. B. increasing government spending by $40 billion. C. decreasing taxes by $4 billion. D. increasing taxes by $4 billion.

C. the interest rate will rise.

If the quantity of money demanded exceeds the quantity supplied: A. the supply-of-money curve will shift to the left. B. the demand-for-money curve will shift to the right. C. the interest rate will rise. D. the interest rate will fall.

C. a unit of account.

If you are estimating your total expenses for school next semester, you are using money primarily as: A. a medium of exchange. B. a store of value. C. a unit of account. D. an economic investment.

B. Federal Reserve System.

In the U.S. economy, the money supply is controlled by the: A. U.S. Treasury. B. Federal Reserve System. C. Senate Committee on Banking and Finance. D. Congress.

C. bundling groups of loans, bonds, mortgages, and other financial debts into new securities.

In the financial industry, "securitization" refers to: A. increasing insurance protection on bank deposits. B. requiring greater down payments on home purchases to reduce mortgage default risk. C. bundling groups of loans, bonds, mortgages, and other financial debts into new securities. D. increasing collateral requirements on loans.

B. the purchase or sale of government securities by the Fed.

Open-market operations refer to: A. purchases of stocks in the New York Stock Exchange. B. the purchase or sale of government securities by the Fed. C. central bank lending to commercial banks. D. the specifying of loan maximums on stock purchases.

B. all depository institutions, that is, all commercial banks and thrift institutions.

Reserves must be deposited in the Federal Reserve Banks by: A. only commercial banks that are members of the Federal Reserve System. B. all depository institutions, that is, all commercial banks and thrift institutions. C. state-chartered commercial banks only. D. federally chartered commercial banks only.

B. the process by which securities exchanges provide credit for personal and business needs apart from traditional bank lending.

The "shadow banking system" refers to: A. the provision of credit through the underground economy when the financial crisis of 2007 and 2008 occurred. B. the process by which securities exchanges provide credit for personal and business needs apart from traditional bank lending. C. the series of illegal financial transactions that precipitated the financial crisis of 2007 and 2008. D. mortgage loans made to homebuyers who are poor credit risks.

B. and reserves of commercial banks both decrease.

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits: A. of commercial banks are unchanged, but their reserves increase. B. and reserves of commercial banks both decrease. C. of commercial banks are unchanged, but their reserves decrease. D. and reserves of commercial banks are both unchanged.

D. consists of the historical accumulation of all past federal deficits and surpluses.

The U.S. public debt: A. refers to the debts of all units of government—federal, state, and local. B. consists of the total debt of U.S. households, businesses, and government. C. refers to the collective amount that U.S. citizens and businesses owe to foreigners. D. consists of the historical accumulation of all past federal deficits and surpluses.

B. is larger than the amount reported as M1.

The amount of money reported as M2: A. is smaller than the amount reported as M1. B. is larger than the amount reported as M1. C. excludes coins and currency. D. includes large ($100,000 or more) certificates of deposit.

B. varies inversely with the rate of interest.

The asset demand for money: A. is unrelated to both the interest rate and the level of GDP. B. varies inversely with the rate of interest. C. varies inversely with the level of real GDP. D. varies directly with the level of nominal GDP.

A. of commercial banks are unchanged, but their reserves increase.

The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits: A. of commercial banks are unchanged, but their reserves increase. B. and reserves of commercial banks both decrease. C. of commercial banks are unchanged, but their reserves decrease. D. and reserves of commercial banks are both unchanged.

B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

The crowding-out effect of expansionary fiscal policy suggests that: A. tax increases are paid primarily out of saving and therefore are not an effective fiscal device. B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. C. it is very difficult to have excessive aggregate spending in the U.S. economy. D. consumer and investment spending always vary inversely.

B. the latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances.

The difference between M1 and M2 is that: A. the former includes time deposits. B. the latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances. C. the latter includes negotiable government bonds. D. the latter includes cash held by commercial banks and the U.S. Treasury.

C. Budget deficit

The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy, then there will be a: A. Trade deficit B. Trade surplus C. Budget deficit D. Budget surplus

C. supply-of-money curve and the total-demand-for-money curve.

The equilibrium rate of interest in the market for money is determined by the intersection of the: A. supply-of-money curve and the asset-demand-for-money curve. B. supply-of-money curve and the transactions-demand-for-money curve. C. supply-of-money curve and the total-demand-for-money curve. D. investment-demand curve and the total-demand-for-money curve.

B. Quantity of money supplied exceeds the quantity of money demanded

The interest rate will fall when the: A. Quantity of money demanded exceeds the quantity of money supplied B. Quantity of money supplied exceeds the quantity of money demanded C. Demand for money increases D. Supply of money decreases

B. the money supply to increase.

The purchase of government securities from the public by the Fed will cause: A. commercial bank reserves to decrease. B. the money supply to increase. C. demand deposits to decrease. D. the interest rate to increase.

A. inversely.

The purchasing power of money and the price level vary: A. inversely. B. directly during recessions but inversely during inflations. C. directly but not proportionately. D. directly and proportionately.

B. their face value is greater than their intrinsic value.

To say that coins are "token money" means that: A. their face value is less than their intrinsic value. B. their face value is greater than their intrinsic value. C. their face value is equal to their intrinsic value. D. they are not legal tender.

A. they are privately owned but managed in the public interest.

To say that the Federal Reserve Banks are quasi-public banks means that: A. they are privately owned but managed in the public interest. B. they deal only with banks of foreign nations and do not have direct business contact with U.S. banks. C. they deal only with commercial banks, and not the public. D. they are publicly owned but privately managed.

C. the commercial bank's lending ability is increased.

When a commercial bank borrows from a Federal Reserve Bank: A. the supply of money automatically increases. B. it indicates that the commercial bank is unsound financially. C. the commercial bank's lending ability is increased. D. the commercial bank's reserves are reduced.

D. they reduced their direct exposure to mortgage default risk, but were still exposed through loans to investors in mortgage-backed securities.

When banks bundled mortgage loans and sold the resulting mortgage-backed securities: A. they insulated the banking system from any risk associated with mortgage defaults. B. they greatly reduced the overall risk of mortgage defaults. C. buyers of these securities assumed all of the risk of mortgage defaults. D. they reduced their direct exposure to mortgage default risk, but were still exposed through loans to investors in mortgage-backed securities.

A. a way to keep wealth in a readily spendable form for future use.

When economists say that money serves as a store of value, they mean that it is: A. a way to keep wealth in a readily spendable form for future use. B. a means of payment. C. a monetary unit for measuring and comparing the relative values of goods. D. declared as legal tender by the government.

A. Increase taxes and government spending

Which combination of fiscal policy actions would most likely offset each other? A. Increase taxes and government spending B. Decrease taxes and increase government spending C. Increase taxes, but make no change in government spending D. Decrease government spending, but make no change in taxes

A. It is backed by gold.

Which of the following does not explain what backs the money supply in the United States? A. It is backed by gold. B. It is widely accepted in transactions. C. It is designated "legal tender" by the federal government. D. It is relatively scarce.

D. A $40 billion tax cut

Which of the following expansionary fiscal policy changes would be most favored by those economists who think that the government is too large and inefficient? A. A $40 billion increase in government spending B. A $20 billion tax cut and $20 billion increase in government spending C. A $10 billion tax cut and $30 billion increase in government spending D. A $40 billion tax cut

A. A $40 billion increase in government spending

Which of the following fiscal policy changes would be the most expansionary? A. A $40 billion increase in government spending B. A $20 billion tax cut and $20 billion increase in government spending C. A $10 billion tax cut and $30 billion increase in government spending D. A $40 billion tax cut

A. Open-market operations.

Which of the following is a tool of monetary policy? A. Open-market operations. B. Changes in banking laws. C. Changes in tax rates. D. Changes in government spending.

A. Bankruptcy of the federal government.

Which of the following is not considered a legitimate concern of a large public debt? A. Bankruptcy of the federal government. B. Disincentives created by higher taxes. C. Crowding-out of private investment. D. Increased income inequality.

B. A $10 billion increase in government spending.

Which of the following represents the most expansionary fiscal policy? A. A $10 billion tax cut. B. A $10 billion increase in government spending. C. A $10 billion tax increase. D. A $10 billion decrease in government spending.

B. Interest rates and bond prices vary inversely.

Which of the following statements is correct? A. Interest rates and bond prices vary directly. B. Interest rates and bond prices vary inversely. C. Interest rates and bond prices are unrelated. D. Interest rates and bond prices vary directly during inflations and inversely during recessions.

C. Prior to the rise in defaults, banks had become lax in their lending practices, resulting in a large number of bad loans.

Which of the following statements is true about the high rate of mortgage defaults that contributed to the financial crisis of 2007 and 2008? A. High interest rates on mortgage loans were the primary cause of defaults. B. The high rate of defaults occurred despite the efforts of government to discourage new home ownership and slow the growth of the housing bubble. C. Prior to the rise in defaults, banks had become lax in their lending practices, resulting in a large number of bad loans. D. The high rate of defaults resulted primarily from the two years of recession preceding the mortgage default crisis.

A. The opportunity cost of holding money

Which of the following varies directly with the interest rate? A. The opportunity cost of holding money B. The transactions demand for money C. The asset demand for money D. The level of investment

A. Commercial banks and thrifts.

Which of these pairs of financial institutions are most alike in terms of their main lines of business? A. Commercial banks and thrifts. B. Insurance companies and mutual fund companies. C. Thrifts and securities firms. D. Pension fund companies and commercial banks.

D. Increase government spending and decrease taxes

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here? A. Increase government spending and taxes B. Decrease government spending and taxes C. Decrease government spending and increase taxes D. Increase government spending and decrease taxes