ECO 201 Test #3

Which of the following is included as part of the M1 money supply?

$200,000 balance in the checking account of Main Street Trading Corp

Refer to the accompanying table. The size of the M2 money supply is

$5,899 billion

What are the limits of the terms of trade between Gamma and Sigma?

1 tea = 1 pot to 1 tea = 3 pots

Refer to the accompanying list. Which items are included in the M2 money supply but not the M1 money supply?

1, 2, and 5

Suppose the Fed wants to increase the money supply by $1,000 billion to drive down interest rates and stimulate the economy. To accomplish this, it could lower the reserve requirement from 20 percent to

12%

If the money supply is $160, the equilibrium interest rate will be

6%

An inflation rate of 8 percent would erode the purchasing power of the dollar by

7.4%

The given data show that

Beta is more efficient than Alpha both in catching fish and in producing chips

The central authority of the U.S. banking system is the

Board of Governors of the Federal Reserve

Discretionary fiscal policy is often initiated on the advice of the

Council of Economic Advisers

The lending ability of commercial banks increases when the

Fed buys securities in the open market

Which group aids the Board of Governors of the Federal Reserve System in conducting monetary policy?

Federal Open Market Committee

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

Its effectiveness was limited by the zero lower bound problem

Which definition(s) of the money supply include(s) only items that are directly and immediately usable as a medium of exchange?

M1

Money market deposit accounts are included in

M2 only

(Last Word) Which of the following is a concern about a central bank going below the zero lower bound and setting negative interest rates to stimulate the economy?

Reduced spending will start a deflationary spiral

Refer to the diagram. Which tax system has the most built-in stability?

T1

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

Which of the following fiscal policy changes would be the most contractionary?

a $10 billion increase in taxes and a $30 billion cut in government spending

During periods of rapid inflation, money may cease to work as a medium of exchange

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

Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy. Assuming that the money multiplier is operating to full effect, to accomplish the desired increase, the Fed could

buy $40 billion of U.S. securities from the banks.

Countries engaged in international trade specialize in production based on

comparative advantage

(Consider This) Which of the following is not part of the M2 money supply?

credit card balances

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should

decrease the interest rate from 6 to 4 percent

Which of the following is a monetary policy intended to rein in inflation?

decrease the money supply to shift the aggregate demand curve leftward

From 2010 to 2015, the actual as well as the cyclically adjusted federal budget deficits as percentages of GDP in the U.S. have

decreased

Suppose the world economy is composed of just two countries: Italy and Greece. Each can produce steel or chemicals, but at different levels of economic efficiency. The production possibilities curves for the two countries are shown in the graphs. The assumption made about the domestic production opportunity costs in both countries is that they are

decreasing

Which of the following historically has not been a significant contributor to the U.S. public debt?

demand-pull inflation

The term trade deficit refers to a situation where

exports are less than imports

When the Federal government uses taxation and spending actions to stimulate the economy, it is conducting

fiscal policy

Assume that a VER (voluntary export restraint) is imposed on an imported product. The difference between the domestic price and the world price is captured by

foreign exporters

The crowding-out effect arises when

government borrows in the money market, thus causing an increase in interest rates

A Federal budget deficit is financed by the

government issuance or sale of Treasury securities

Assume that the MPC is 0.75 and that the price level is "sticky." If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to

increase by $32 billion

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately

increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million

An increase in the money supply is likely to reduce

interest rates

Discretionary fiscal policy is so named because it

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.

The Federal Reserve System

is basically an independent agency

Refer to the given diagram, in which line AB is the U.S. production possibilities curve and AC is its trading possibilities curve. The international exchange ratio between beef and cheese (terms of trade)

is the absolute value of the slope of line AC

In the real world, specialization is rarely complete because

nations normally experience increasing opportunity costs in producing more of the product in which they are specializing

Other things equal, an increase of corporate bonds from $140 billion to $150 billion in the economy would

not change the size of the public debt

The transactions demand for money is least likely to be a function of the

price level

The terms of trade reflect the

ratio at which nations will exchange two goods.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce taxes by $80 billion

Refer to the diagram, where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment and actual GDP are each $400 billion, government can balance its cyclically adjusted budget by

reducing G by $20 billion

Which of the following would not help to relieve the Social Security and Medicare shortfalls?

restricting immigration of skilled working-age adults

TD Ameritrade, Charles Schwab, and Merrill Lynch are all primarily

securities firms

The destabilizing effects of defaulting mortgages quickly spread throughout the financial system because those mortgages were involved in widespread

securitization

If you place a part of your summer earnings in a savings account, you are using money primarily as a

store of value

Fiscal policy is enacted through changes in

taxation and government spending

If the government wishes to increase the level of real GDP, it might reduce

taxes

When the economy is at full employment,

the actual and the cyclically adjusted budgets will be equal

Which of the following is least likely to be a problem for monetary policy?

the administrative lag

To say that "the U.S. public debt is mostly held internally" is to say that

the bulk of the public debt is owned by U.S. citizens and institutions

The public debt is the amount of money that

the federal government owes to holders of U.S. securities

In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of

the liquidity trap

Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. Sd + Q is the product supply curve after an import quota is imposed. The effect of the import quota on domestic price and domestic consumption is

the same as that of a tariff of PtPa

The securities held as assets by the Federal Reserve Banks consist mainly of

treasury bills and bonds

The asset demand for money

varies inversely with the rate of interest

A major difficulty with the argument that trade barriers are necessary because foreign workers are paid low wages is that

wage rates and labor productivity are directly related

Stabilizing a nation's price level and the purchasing power of its money can be achieved

with both fiscal and monetary policy

An increase in the money supply, ceteris paribus, usually

decreases the interest rate and increases aggregate demand

Suppose the domestic price (no-international-trade price) of copper is $1.20 a pound in the United States while the world price is $1.00 a pound. Assuming no transportation costs, the United States wil

import copper

If the Federal Reserve System buys government securities from commercial banks and the public,

it will be easier to obtain loans at commercial banks.

The near-money components of M2 are

less liquid than the M1 components of M2

Lowering the discount rate has the effect of

making it less expensive for commercial banks to borrow from central banks.

Some economists are concerned that the financial rescue provided by the TARP will encourage financial investors and firms to take on greater risks in the future. This is an example of

moral hazard

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has

neither an excess nor a deficiency of reserves

In which of the following situations is it certain that the quantity of money demanded by the public will decrease?

nominal GDP decreases and the interest rate decreases

Refer to the graphs. Terryville has a comparative advantage in producing

product A

The reason for the Fed being set up as an independent agency of government is to

protect it from political pressure

The so-called too-big-to-fail policy has two conflicting sides: on one hand there's the moral hazard problem that it creates, but on the other hand, the Fed must

protect the stability of the banking system

The crowding-out effect from government borrowing to finance the public debt is reduced when

public investment complements private investment

A maximum limit set on the amount of a specific good that may be imported into a country over a given period of time is called a

quota

Differences in production efficiencies among nations in producing a particular good result from

all of these

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,

an increase in the money supply will decrease the rate of interest

Securitization, the process of forming new securities by bundling or slicing up groups of securities like mortgages and bonds, is

a way of reducing risk through diversification

Refer to the graph, which shows the import demand and export supply curves for two nations that produce a certain product. In this two-nation model, the equilibrium world price and quantity will be

A and Q2

Which of the following statements is true?

The Federal Reserve does not set the federal funds rate, but historically has influenced it through the use of its open-market operations

(Consider This) The greatest benefit to an economy from international trade is

the economic power it gives a nation over other countries

When the Fed sells bonds to the bank and the public, the expected result is that

the supply of federal funds will fall, the federal funds rate will rise, and a contraction of the money supply will occur

Refer to the graphs, 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 economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary, full-employment level of real GDP?

sell government securities in the open market