ECO TEST 3

Suppose in 2009 country X had tax revenues of $550 billion and government expenditures of $700 billion. In addition, as of the end of 2008, its national debt was $6.5 trillion. In 2009, country X had a ________ and at the end of 2009 a public debt of __________.

deficit of $150 billion; $6.65 trillion

Suppose a perpetuity bond with a face value of $1,000 has a coupon rate of 8%. If market interest rates rise to 12%, the price of the bond:

falls to $666.67.

Which of the following policies do supply-side economists believe is the best for increasing the standard of living?

increasing investment in capital that boosts worker productivity

In the short run, the aggregate supply curve is ____ because input prices are _____.

positively sloped; not completely flexible

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

If this bank is subject to a reserve requirement of 5%, how much more can it loan out if it wants to be fully loaned up?

$5,000

What is the yield on a bond sold for $1,850 and paying $25.50 in interest annually?

13.8%

The reason bond prices and interest rates are inversely related is that:

the coupon payment is fixed for the life of a bond.

A falling aggregate price level ____ demand for a country's exports and therefore _____ output demanded

increases, increases

What is the amount of this bank's reserves?

$10,000

If the Federal Reserve tries to target inflation near 2%, the inflation rate is 3%, and output is 3% below potential GDP, the target federal funds rate according to the Taylor rule is:

4%.

The _____ is the sum of past _____.

public debt; budget deficits

(Figure: Effects of Policy Shifts) If government spending increases, shifting aggregate demand from _____ to _____, aggregate output will increase from _____ to _____.

AD0; AD1; Q0; Qf

(Figure: Shifts in Aggregate Demand) Starting at the equilibrium point b, if investment or exports increase, the demand curve will shift to _____, thus _____ the price level and _____ real output.

AD1; increasing; increasing

(Figure: Determining SRAS Shifts) Which statement is NOT correct?

An increase in aggregate demand would lead to deflation.

In the equation of exchange, if M = $2 trillion, P = 1.5, and Q = $8 trillion:

the velocity of money (V) = 6.

Which of the following measures is an example of an expansionary fiscal policy?

Increasing unemployment compensation

Which U.S. presidents reduced marginal tax rates to promote work and business risk taking?

Reagan and Kennedy

(Figure: Market for Loanable Funds 2) If households decide to save a larger portion of their income because they fear job loss due to a recession, the loanable funds supply curve will shift from _____ to _____, and the new equilibrium will be at point _____, holding demand constant at D0.

S0; S1; b

During the last financial crisis, the Fed was criticized for overstepping its authority and exercising powers it had not been granted. Which of the following was NOT one of the causes of this criticism of the Fed?

The Fed did not explain why it was taking certain actions.

Which of the following best illustrates the wealth effect?

The Jones family has $50,000 in a bank. Prices in the market rose dramatically, diminishing their purchasing power by $50,000

Which of the following illustrates the information lag?

The economy is predicted to increase at 0.1% in July, but the numbers are revised in August to reflect an actual 2% decrease.

If the Fed pursues an expansionary monetary policy:

U.S. exports to other countries will rise.

What would cause the price level to decrease and employment to increase?

a shift to the right of the SRAS curve

According to the crowding out effect, if the government sells bonds to finance spending, _____ can eventually fall.

consumption and investment

If the reserve requirement is 25%, then a $1 increase in deposits means that the money supply:

has the potential to increase by $4.

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's excess reserves?

$1,125

If the reserve requirement is 10% and a bank initially receives $20,000 in deposits, then the maximum amount of money that the banking system can create is:

$200,000.

Suppose a bank has $1 million in deposits, a reserve requirement of 20%, and bank reserves of $400,000. The bank has excess reserves of:

$200,000.

What is the yield on a bond sold for $1,850 and paying $25.50 in interest annually?

1.38%

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200

5%

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200 is:

5%

As GDP decreases, tax revenues _____, causing a _______ to aggregate demand.

decline; stimulus

_____ involves increasing government spending, increasing transfer payments, and/or decreasing taxes.

expansionary fiscal policy

In Productovia, aggregate demand increases and aggregate supply decreases. Based on the shifts in these two curves, what is a likely outcome?

inflation

Under a cyclically balanced budget, a government should _____ when the economy is growing and _____ when GDP is declining.

raise taxes; raise spending

The Taylor Rule suggests that:

the federal funds target rate should be equal to 2% plus the inflation rate plus one-half the inflation gap plus one-half the output gap.

(Table) From the information in the table, M1 for June 2010 was:

$1,737.4 billion.

If the reserve requirement is 2.5% and a bank initially receives $30,000 in deposits from the Fed, then the maximum amount of money that the banking system can create is:

$1.2 million

Suppose when John's income increased from $10,000 to $15,000, his consumption increased from $3,000 to $4,500. What is the value of his marginal propensity to save?

0.7

If the government raises taxes or increases regulations, the short-run aggregate supply curve will shift from SRAS0 to _____ and the price level will be at _____.

SRAS2; P2

Which of the following lists represents monetary policy actions that are consistent with one another?

sell government bonds, raise reserve requirements, raise the discount rate

Suppose the Treasury sells $10 billion worth of securities to the Social Security Administration and $15 billion to the general public. This sale added ________ billion to gross public debt and ________ billion to the debt held by the public.

$25; $15

Which of the following is the LEAST liquid

Picasso painting

Figure: Determining SRAS Shifts) If there is a decrease in input prices, the short-run aggregate supply curve will shift from SRAS0 to _____ and the price level will become _____.

SRAS1; P1

Starting in long-run equilibrium when the aggregate demand curve is AD0 and the short-run aggregate supply curve is SRAS0, if there is a supply shock, such as a drastic increase in the price of oil, this will cause _____ and a movement to a short-run equilibrium at point _____.

a leftward shift in SRAS2; a

(Figure: Shifts in SRAS and AD) If the economy is at short-run equilibrium point b because of a negative supply shock, the Fed may focus on price stability and enact a restrictive monetary policy, thus shifting the new equilibrium to point _____. As a result of this, the price level would _____ and real output would _____.

a; decrease to the previous level; further decrease

. If the Fed reduces the money supply:

bond prices fall

If the Fed reduces the money supply

bond prices fall

(Figure: Laffer Curve 3) A supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point ______ in the graph

d

If interest rates fall, the burden of a nation's public debt will _____ and it will be _____ difficult to service its debt.

fall; less

A(n) _______ in productivity and a(n) ______ in taxes will shift short-run aggregate supply to the right.

increase, decrease

Which of the following will shift the aggregate supply curve to the right?

increased investment in human capital

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $100,000 bond. The money supply:

increases by a maximum of $500,000.

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $100,000 bond. The money supply:

increases by a maximum of $500,000.

The reward for saving is called _____, and this variable is placed on the _____ axis of the loanable funds market graph.

interest; vertical

An automatic stabilizer

is exemplified by a program such as unemployment compensation.

If a bank has assets of $5 billion and liabilities of $4.8 billion:

its equity equals $200 million.

If a bank has assets of $5 billion and liabilities of $4.8 billion:

its equity equals $200 million. because Assets has to = liabilities + equity

Sometimes the Fed's goals conflict, and the Fed must emphasize one goal over another. Which of the following is a goal of the Fed that might conflict with its goal of full employment?

keeping the price level stable

If oil prices decrease, the short-run aggregate supply curve shifts _____ and output supplied will be _____.

right; increased

Suppose the government implements a policy reducing the rewards earned by savers. In this case the ________ loanable funds shifts _________.

supply; left

The Eurozone was set up in a way that emphasized austerity instead of monetary expansion as a cure for debt because __________ feared inflation.

Germany

Suppose while households are deciding to increase saving, the demand by firms for investment funds falls. In the market for loanable funds the real interest rate will ___ and the quantity of loanable funds will _____.

fall; rise, fall, or stay the same

The budget philosophy closest in spirit to Keynesian economics is:

functional finance.