Econ 102 Final Exam
One of the lessons of the 2018 Financial Crisis is that
Financial markets in different parts of the world are more connected to each other than they used to be
Economic analyses of the Great Recession tell us that fiscal policies don't work to stimulate GDP
false
Economic analyses of the Great Recession tell us that fiscal policies dont work to stimulate GDP
false
If the Fed uses an open market operation to buy government securities, this is an increase in government borrowing
false
The San Francisco Federal Reserve Bank is the only one in the West because San Francisco outbid Sacramento to be its host.
false
US health care is more expensive but the quality is higher- american live longer than the OECD average and we have higher success rates with treatments of major illnesses
false
a decrease in the money supply will have a large effect on the real rate of interest in the long run
false
Banks trade reserves with one another in the:
federal funds market
The costs of breaking up the large banks would depend on whether
fewer services would be provided, thereby reducing the efficiency of the financial system.,there are significant cost savings from having larger institutions. any cost savings would disappear if the bank was forced to reduce its size.
If banks held more in reserve, ______ loans would be made and both M2 and the money multiplier would _______
fewer; fell
interest payments on the federal debt are counted as
government outlays but not government expenditures (G)
Countries that have high money growth for long periods do not grow more rapidly than countries with low money growth. Which of the following best explains this?
high rates of money growth are usually inflationary rather than expansionary
The Federal Open Market Committee (FOMC) votes on:
monetary policy
In general, Keynesian economists think that a $1 increase in G will increase GDP by ____ and Classical economists think that it will increase GDP by _______ (ceteris paribus)
more than a dollar; less than a dollar
Friedman's interpretation of history led him to advocate which of the following economic policies in times of recession?
the government and the federal reserve should do nothing, as activist policies do more harm than good
The official US poverty line is combined pre-tax/subsidy family (household) income of less than approximately ________ per year
$25,000
Which of the countries below have universal health care for all of its citizens?
( ALL OF THEM) france, switzerland, germany, uk
During a supply shock, the price level increases and unemployment increases while during a demand shock (such as an increase in investment), the price level increases and unemployment decreases
...
According to the logic of the wage-price spiral, an increase in wages leads to an increase in prices, which in turn leads to an increase in wages.
....
During and following the 2008 financial crisis there has been a lot of talk about possibly returning to a gold standard as a form of stability in what is now a much less stable--because it is global and beyond domestic control--financial system.
....
The world economy is currently in a period of transition. M2 no longer predicts prices the way that it did. The reasons are complicated and not well understood, including globalization, new financial services, & new methods of financial management.
....
Every time someone makes a deposit in a bank, that individual bank makes a loan in the amount of the initial deposit times
1 minus reserve ratio
Every time someone makes a deposit in a bank, the individual bank makes a loan in the amount of the initial deposit times
1 minus the reserve ratio
During the Great Depression, banks held excess reserves because they were concerned that depositors might be more inclined to withdraw funds from their accounts. At one point, the Fed became concerned about the "excess" reserves and raised the reserve requirements for banks. a. Assuming that banks were holding excess reserves for precautionary purposes, would they continue to hold excess reserves even after reserve requirements were raised? b. After the Fed raised the reserve requirement, the money supply would
A. yes B. decrease
Which of the following ratings has the lowest expectation of default?
AAA
A Mortgage Backed Security (MBS) may have been given the highest bond rating—known as _____- in 2007 if it was made up of home loans that were _____
AAA; geographically diverse
When we say that the Social Security System is "off budget" it means that
ALl of them: social security payments to retirees must come only from Social Security tax collection, social security tax collection cannot be used to pay for other government programs, if more social security taxes are collected than are needed in any on period, that extra revenue goes into a social security trust fund, that is used to make future social security payments
Which of the following will increase the supply of money?
ANSWER: decreasing the reserve requirements NOT CORRECT: selling bonds, increasing the federal funds rate, increasing the discount rate
The Fed can supply funds to the markets in the case of a financial panic because
ANSWER: they are the lender of last resort. NOT CORRECT: more funds are demanded, panic raises interest rates, they control the Treasury
Why is the "fiscal multiplier" smaller than the multiplier for an increase in other components of Aggregate Expenditures?
Because the implication for future tax increases dampens current spending by some firms and households
What do you think might influence the Chairman of the Federal Reserve to disavow an inflationist policy?
Bernanke may have begun to recognize how many important decisions are made in financial markets that depend upon a relatively stable price level.
The Fed thinks it is more valuable to save low rates for when there is a recession even if low rates aren't currently causing inflation
Europe has kept rates lower than in the US and has been experimenting with negative interest rates during recessions
The Secretary of the Treasury who developed the idea of stress tests was Henry Paulson.
FALSE
When us citizens reach retirement age the automatically get free government health insurance through Medicare
False
It's important that counter-cyclical fiscal policy shocks to AD rather than shocks to AS because
If LRAS is falling then an increase in AD will just cause inflation, crowding out, and hurt the trade balance during a downturn
Financial regulation has made it more difficult for banks to extend loans.
In this case, investment will fall so that there could be insufficient aggregate demand.
Technological progress has reduced the prices of capital equipment.
In this case, investment will fall so that there could be insufficient aggregate demand.
The distribution of income has shifted to higher earning individuals who save more than lower earning ones.
In this case, consumption will fall so that there could be insufficient aggregate demand.
The most successful corporations today like Apple or Google do not purchase as many capital goods for their business compared to companies in the past such as railroads or steel plants.
In this case, investment will fall so that there could be insufficient aggregate demand.
Interest rates are close to zero now.
In this case, investment will fall so that there could be insufficient aggregate demand. d
Moral hazard exists when governments rescue banks (bank bailouts) because
Large banks know they are so important to the economy that they will be rescued even if they don't deserve it and have engaged in bad business practices
Suppose the Fed wanted to reduce its balance sheet and decided to sell its mortgage-backed securities instead of its holdings of government bonds. What types of interest rates would you expect to increase?
Mortgage rates, that is, interest rates on loans to buy homes would be expected to increase.
Walter Heller was a forceful advocate of active fiscal policy
TRUE
Keynes's objection to Say's Law was that demand might be less than output for extended periods of time.
TRue
When we say that the Social Security System is "pay as you go" it means that
The contributions of current taxes are used as funds for the benefits of current retirees
Money market mutual funds typically invest in government securities and other financial instruments that can be easily bought and sold. They are not subject to reserve requirements and, in fact, hold minimal reserves. Banks, on the other hand, make loans to businesses for investment purposes. Prior to 2008, banks did not normally earn interest on reserves. Suppose that banks still do not earn any interest on reserves. If there were no reserve requirements for banks, how do you think their reserve holdings would compare to money market mutual funds?
The level of bank reserve holdings would be similar to those held by money market mutual funds since banks can earn more money by keeping reserves at minimal levels.
Interest rates typically fall in a recession because the demand for money decreases when real income falls.
True
Which of the countries below have government-provided health care for all of its citizens?
UK
Of the following countries, where are health care costs most expensive?
USA
quantitative easing
When the bank creates electronic money to purchase assets in order to increase the money supply in the economy
If the government distributes a rebate (as part of a temporary tax cut) to tax payers,
a college student who receives the tax rebate is likely to use the rebate to increase current consumption, since she bases her consumption on current income, but a middle aged married man is likely to save the rebate, since he bases his consumption on permanent or long-term average income.
A Mortgage-Backed Security (MBS) is
a financial asset that consists of many home loams made to many different borrowers
unit of account
a means for comparing the values of goods/services
The OECD is
a multinational group that both studies and promotes research in economic development
From the point of view of money as a store of value, Bitcoins are
a poor store of value because their prices fluctuate too much
Suppose an ATM connected to your own bank is installed right next to your apartment building. a. How will this affect the average amount of currency you carry around with you? b. If you withdraw funds at your ATM only from your checking account, will your action have any effect on total money demand?
a.you will carry less currency since its convenient to leave your money holdings in the bank earning some interest. b. No, if this withdrawal is an action that facilitates your normal level of transactions
Excess reserves held by private US banks are __________ which puts _______________ current inflation and puts ______ on future inflation
above average; downward pressure; upward pressure
. The US Housing and Urban Development (HUD) Moving to Opportunity Experiment demonstrated that
adults in poverty did not benefit economically from moving into more affluent neighborhoods, but their children did
Ceteris paribus, an increase in M2 is an increase in AD because
an increase in M2 is caused by an increase in bank lending, which implies an increase in spending
Frequent-flier miles can be saved with airlines and put toward purchasing future airline tickets or toward seat upgrades. Frequently-flier miles are not money because they
are not a unit of account
Gift cards
are not considered part of the money supply since they have a fixed value paid for in advance.
Traveler's checks are sold by
banks and non-banks and can be used for purchases in any enterprise.
Which of the following is NOT part of Dodd-Frank regulation?
banks can neither buy nor sell Mortgage Backed Securities
If the Fed set an interest rate on reserves close to the market interest rate on commercial loans,
banks would have little incentive to make loans
Suppose the interest rate on a two-year bond was higher than the interest rate on a one-year bond. The market must believe that next year one-year interest rates will
be above the current year's one-year bond rate
If firms become pessimistic (Keynesian "animal spirits") and I falls without a fall in productivity, then we expect wages to _______ in the short run but ________ in the long run
be unchanged; fall
According to the Opportunity Atlas data seen in class, which of the following is NOT generally correlated with low economic opportunities?
being the offspring of an immigrant mother
If GDP is ________ potential output, the economy is in a ________ and wages will tend to decrease.
below; recession
The Federal Reserve arranged for JPMorgan Chase & Co. to....Bear Stearns during the financial crisis in 2008.
buy
A bank's reserves
can be held as deposits with the Federal Reserve, can be held as cash in its vault, are the sum of its excess and required reserves
Economists who believe that the transition from the short run to the long run occurs rapidly do not generally favor using active stabilization policy. This is because if the transition from the short run to the long run occurs quickly, active stabilization policies
can destabilize the economy
People often like to visit flea markets to look for unexpected opportunities. Flea markets also typically use cash. This is an example of the liquidity demand for money because
cash purchases are expected, and cash is the most liquid asset.
To decrease the level of output in the short run, the Fed should:
conduct an open market sale
In recent years, several members of Congress have sponsored bills that would subject the Fed to audits of its monetary policy. This is a form of intensive Congressional oversight. What are the pros and cons of more Congressional oversight of the Fed? Increased oversight can
create pressure to help finance a country's government deficit by creating money
Occasionally, some economists or politicians suggest that the Secretary of the Treasury become a member of the Federal Open Market Committee. This would most likely....the independence of the Federal Reserve.
decrease
Suppose inflation in the United States rose to around 9 percent a year; this would ....the demand for U.S. currency by foreigners.
decrease
Suppose the economy is at full employment and foreign firms close their markets and U.S. firms start to produce less for export. Everything else remains the same. In the short run, U.S. GDP will..... Assuming that exchange rates do not change, in the long run, U.S. prices can be expected to...
decrease; decrease
During the 1980s, U.S. banks made loans to South American countries. Many of these loans turned out to be worthless (they were not repaid). Because of these loans, banks saw their assets...., liabilities..., and owners' equity...
decrease; remain the same; decrease
n recent years, debit cards have become popular. Debit cards allow the holder of the card to pay a merchant for goods and services directly from a checking account. The introduction of debit cards most likely...the amount of currency in the economy.
decreased
dvocates for the housing industry (an industry very sensitive to interest rates) might want to advocate lower government spending for the long term. Which of the following would explain why a decrease in government spending would be desirable for the housing industry in the long run?
decreases in government spending can reduce interest rates and crowd in investment
If the natural rate of unemployment is 5 percent and the actual rate of unemployment is 8 percent, wages and prices will
fall
Given the changes in the location of economic activity that have occurred since the founding of the Federal Reserve, how would the location of the regional banks change if they were allocated by economic activity? The locations of the banks and the branches would be.... since economic activity has geographically shifted. There would probably be more banks in the...., and the....district would be smaller, or have more banks.
different; west; san francisco
Banks borrow from the Fed at the:
discount rate
It's important that counter-cyclical fiscal policy counter shocks to AD rather than shocks to AS because
if LRAS is falling then an increase in AD will just cause inflation, crowding out, and hurt the trade balance during a downturn
Keynesians think that the short-run aggregate supply curve may be relatively flat because
in the short run, prices do not change very much but output may be above, below, or equal to potential output.
Open market sales lead to falling bond prices, which cause interest rates to
increase
an increase in government spending will.... interest rates in the long run
increase
the quantity of money demanded will....as the interest rate falls
increase
An open market purchase will....the supply of money, which will cause the interest rate to.....which will....investment, which results in.....in output.
increase; decrease; increase; an increase
If banks create more loans then it is easier for borrowers to get loans and they can shop around for a low rate
interest rates fall. at the lower interest rate households are less interested in seeking out returns and leave more in the bank Md=M2
net interest will increase when.... rates rise and when the stock of... held by the public increases
interest; debt
"In the long run, we do not have to worry about increased government spending causing crowding out, because the Fed can always increase the money supply to lower interest rates to prevent this." The quote
is erroneous because increases in the money supply do not influence real interest rates in the long run.
If a bank is "too big to fail" that means that
its failure would cause a great deal of damage to the economy
By "too big to fail," he means that if a bank is too big,
its failure would cause extensive financial disruption, forcing the government to bail out the bank
In the aggregate, households appear to have saved most of the fiscal stimulus from the spring and to have increased savings overall. All other things being equal, in the terminology from class this would imply a ________ shift in AD and _______in the AE multiplier.
leftward; decrease
if there is a positive production externality the market will tend to produce.....
less than the efficient amount
Quantitative Easing (QE) is very much like a regular open market operation (OMO). The main difference is that in the case of QE the Fed buys ______ and in an OMO the Fed buys _____
long term assets; short term assets
Mortgage backed security
mortgage-backed securities are bonds backed b mortgage lenders that are created when banks and other mortgage lenders first made mortgage loans, but instead of holding all of those loans as assets on their balance sheets and collecting the monthly mortgage payments, the banks and other mortgage lenders bundled hundreds or thousands of them together and sold them off as bonds - in essence selling the right to collect all the future mortgage payments. the banks obtained a single, up-front cash payment for the bond and the bond buyer started to collect the mortgage payments as the return on the investment
Suppose United States' currency came under attack by speculators and to prevent the value of its currency from falling, the central bank needed to raise interest rates. What would be the side effect of such a policy?
net exports will fall
Which of the following is tasked with ensuring that Americans living in poor neighborhoods have equal access to financial services?
no agency or act ensures that is the case
In 1999, the Internal Revenue Service began to mail out refund checks because of changes in the tax law in 1998. Assuming that taxpayers were not aware that they receive refunds until they completed their income tax statements, the result of the refund would be...in consumption expenditure.
no change
When an economy is experiencing a "liquidity trap," monetary policy to bring the economy back to full employment
no longer works
Suppose you had a large unpaid balance on your credit card and were paying a high rate of interest. You then received a one-time tax rebate from the government and decided to pay down the balance on your credit card. If there were many others like you in the economy, would the tax cut be an effective stimulus?
no, since debt reduction would not stimulate consumption
long-run average income is known as
permanent income
When reserves did not pay interest, banks
preferred to make loans rather than keep reserves
The short run in macroeconomics is the time period over which......to economic conditions.
prices do not adjust
Credit cards are not considered part of the money supply because:
they are a loan which you have to use money to pay for later
Refrigerators and clothing are to some extent durable goods. The decision to purchase a refrigerator is likely to be more sensitive to interest rates than the decision to buy clothing because:
refrigerators are expensive and sometimes payment is financed
Assume a bank owns numerous mortgages, which is packages into a portfolio which it sells to investors. The bank has engaged in
securization
If you strongly believed that the Federal Reserve was going to surprise the markets and increase interest rates, you would want to....bonds.
sell
in an open economy, changes in monetary policy affect both interest rates and exchange rates. Comparing the United States and Switzerland, in which country would monetary policy have a more significant effect on GDP through changes in exchange rates?
switzerland
In 1973, several major companies went bankrupt and were not going to be able to pay interest on their short-term loans. This caused a crisis in the market. There was concern that the short-term credit market would collapse, and that even healthy corporations would not be able to borrow. How did the Fed handle this situation?
the Fed extended additional credit to make sure the economy had plenty of liquidity
When the Fed engages in an Open Market Operation purchasing government securities
the asset side of the balance sheet changes composition from reserves to securities
One problem with commodity money systems and with convertible currency systems like the gold standard is that
the commodity value of the monetary base can fluctuate in a destabilizing way
We measure the opportunity cost of holding money with:
the interest rate
Which principle suggests that the demand for money should increase as prices increase?
the real-nominal principle
Social Security and Medicare are referred to as "entitlement" programs because
the recipients have legal contracts with the government for particular returns on their payments into these programs
Subprime mortgages are home loans made
to borrowers with bad or no credit histories
The Congressional Budget Office (CBO) makes long-run budget deficit projections. Although these projections are based on restrictive and often unrealistic assumptions, the CBO makes these projections
to help guide future fiscal policy
A CDS purchased at the same time an investor buys a bond works like insurance. The lower the bond rating, the higher the risk and the higher the cost of the CDS
true
A Keynesian (AD) recession goes away by itself after AS falls and nominal wages adjust to the fall in the cost of living
true
A crisis on Wall Street becomes a crisis for Main Street (recession, unemployment) because if financial markets fail, then firms can't borrow to build new factories or new stores and households can't borrow to invest in education, etc
true
A tax cut is likely to have a bigger impact on AD if people think that the tax cut is permanent than if they think its temporary
true
A tax cut is likely to have a bigger impact on AD if people think the tax cut is permanent than if they think it is temporary
true
An increase in the money supply causes interest rates to fall, which causes a movement down and along the Investment demand curve, which causes I and AD to both rise, which causes w/p to fall, and both L and GDP to rise if nominal wages are sticky
true
As of December 2017, US corporate tax rates are now very similar to average European tax rates
true
Financial intermediaries are a crucial part of the infrastructure of an economy because they play such an important part in the efficiency and distribution of both the payments system and management of household savings
true
Fiscal policy has a long-run impact on real interest rates (and I) and therefore on exchange rates (and NX) whereas monetary policy has no long run impact on real interest rates (shift in M2 is followed by shift in Md) so monetary policy is long run "neut
true
If a fall in M2 causes the real interest rate to rise in the short run but return to where it started in the long run, then the fall in M2 will cause the dollar to appreciate in the short run (NX down) and return to where it started (NX back up) in the lo
true
If households are rational, forward-looking, and have access to banks, then they should save during economic expansions and borrow (or use their previous savings) during recessions, and the mpc should be close to zero and the expenditure multiplier should
true
In the long run, the level of GDP is determined, in part, by technological progress.
true
Increasing the money supply increases GDP in the short run but causes inflation once wages and prices stop being sticky. Elected officials tend to care more about the short run than the long run and so central bank independence from policy interference is
true
Lenders were so eager to make loans in the housing market in the early 2000's that they made loans to people that would never under normal circumstances have been able to buy a house. That is good but also very risky
true
Low interest rates in the early 2000's both encourage more borrowing in the housing market (cheap mortgages) and more lending in the housing market (returns on making a home loan were better than for making other types of loans)
true
Open market operations can only increase lending to firms and households if banks don't hold it all in reserve
true
So much U.S. currency is in global circulation because it is a safe asset compared to assets denominated in foreign currency.
true
US government borrowing is the highest in the world. As a share of GDP there are only three European countries whose federal -debt-to-GDP ratios are higher than that in the United States. Risks associated with high government borrowing include crowding out
true
When the Money Supply falls, real interest rates rise in the short run, leading to a fall in gross Investment, but in the long run Money Demand also falls at the lower price level and we return to the original real interest rate and level of Investment
true
interest payments on the debt are the fastest growing type of government outlay and will soon exceed spending on either national defense (discretionary spending) or social security
true
one of the most important factors contributing to higher US health care costs mentioned in the article is monopoly pricing in both the health insurance and hospital service markets
true
social security might correct a market failure if people aren't well informed about or well able to manage their own retirement savings
true
the increase in Us health costs relative to the OECD average in part reflects distortions by US tax policy
true
the majority of US households plan to use social security payments to pay for at least half of their retirement (food, rent, medicare etc) expenditures
true
the pay as you go social security funding is threatened both by aging of the population and slow wage growth on taxable labor income
true
the....boosts worker incomes and boosts AD whereas the ....maintains worker incomes and maintains AS
unemployment insurance subsidy; paycheck protection program
Under the CARES Act the PPP offered loan forgiveness to small firms that met certain requirements; the initial loans
were made by private banks, who took on the pandemic loan risk if the borrowers did not end up fulfilling the PPP requirements
If a bank fails a stress test, the Fed
will not let a bank pay dividends to its shareholders
If the required reserve ratio for all banks is 0.2, and Bank A has $30,000 deposits in total and no other equity. Suppose Bank A lends out all its loans to Bank B, what is the maximum amount of loans that Bank B could make from the loans it receives from Bank A?
$19,200
Which of the following is an entitlement program?
ANSWER: social security spending & Medicaid Spending. NOT CORRECT: government investment spending, spending on defense, estate taxes
The US Housing and Urban Development (HUD) Moving to Opportunity Experiment demonstrated that
Adults in poverty did not benefit economically from moving into more affluent neighborhoods but their children did
corporate taxes are the largest component of federal revenue
False
Which of the following is NOT included in M1?
NOT INCLUDED: savings account. INCLUDED: deposits in checking accounts, deposits in checking accounts that pay interest, traveler checks
An increase in the reserve requirement most likely
decreases the money supply, which leads to increased interest rates and a decrease in GDP.
A country's currency will appreciate if:
demand for the country's exports increase
barter
directly exchanging one sets of goods/services for another
If the unemployment rate is above the natural rate, then we expect to see
falling nominal wages, causing the short-run aggregate supply curve to shift down and to the right.
European-style "socialized medicine" is a bigger burden on their government budgets than the US system is on the US federal budget
false
If the Fed uses an open market operation to buy government securities this is an increase in government borrowing
false
President Trump is trying to pressure the Fed to use expansionary monetary policy. No president has ever tried to pressure the Fed before.
false
Social Security is currently under-funded by about 25%, but government still has to repay retirees for their forced savings because it is an Entitlement program
false
Q theory says that all other things being equal, when the level of the stock market is ________, investment spending ________.
high; tends to be high
If the Fed wished to decrease inflation, it could
increase the reserve requirement or conduct an open market sale.
To increase aggregate demand, a government can either... spending or.... taxes.
increase; decrease
The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to
insulate the governors' policy decisions from the influence of presidential elections and politics.
If banks create more loans, then it is easier for borrowers to get loans and they can shop around for a low rate
interest rates fall. At the lower interest rate, households are less interested in seeking out returns and leave more in the bank. Md = M2
Which of the following statements best describe the short-run effects of an increase in excess reserves held by US banks?
interest rates increase and the dollar appreciates
A barter economy differs from money economy in that a barter economy:
involves higher transaction costs
We are in a banking equilibrium if the fraction of each deposit that the bank holds in reserve
is also the fraction that depositors plan to spend in the near-term
A credit default swap
is insurance you can buy to protect a bond-owner in case against risk of default
A Social Security payment to a retiree is
is related to the amount the retiree was forced to save through Social Security payroll taxes during his/her working life
If a firm wants to finance a new project, it can obtain financing by
issuing and selling new shares of stock, selling corporate bonds to the public, using its retained earnings
automation is considered a disruptive technology because
it is a labor-replacing technology rather than a labor-complementing technology
Congress mandated the Joint Tax Committee use dynamic scoring in 2015 for large tax changes. Do you think this made it easier or harder for Congress to cut taxes?
it made it easier to implement tax cuts because it would show less of a deficit
According to the language and theory from class, how is the equilibrium expected real rate of return from making a loan affected by an increase in risk?
it stays the same because nominal rates adjust to cover the higher default risk
Quantitative Easing (QE) is very much like a regular open market operation (OMO). The main difference is that in the case of QE the Fed buys _________ and in an OMO the Fed buys _______
long term assets; short term assets
Inside lags are
longer for fiscal policy than for monetary policy
If increases in defense spending by the government "crowd out" private investment spending, this will lead to
lower levels of real income and wages in the future
In general, Keynesian economists think that a $1 increase in G will increase GDP by ________ and Classical economists think it will increase GDP by ______________ (ceteris paribus)
more than a dollar; less than a dollar
Which of the following is tasked with ensuring that Americans living in poor neighborhoods have equal access to financial services
no agency or act ensures that is the case
Redlining and discriminatory Federal home loan (mortgage) insurance policy continues to impact economic opportunities for people of color in part because
the returns to education for people of color were lower because of locational restrictions, and upward mobility is affected by education, People of color had less wealth accumulation prior to the Fair Housing Act (1968) and passed less wealth down onto their descendants, Segregation of people of color into red-lined "high risk" areas impeded small business development and slowed economic growth in those areas
Which of the following would be associated with an increase in the price of stocks?
there is a decrease in risk
As your annual income increases, the fraction that you pay in income taxes is a higher fraction of every marginal dollar earned, but you don't pay a higher marginal tax rate on the first X dollars earned than does someone who earns only X the whole year
true
Ceteris paribus, if US monetary policy is less expansionary than European monetary policy, then the dollar will appreciate and US NX will fall
true
Counter-cyclical policies try to stimulate AD during Keynesian recessions and they also reduce AD during expansions in order to raise the money to pay for the (previous or future) AD stimulus
true
Examples of market failures that we've seen so far in the course include the Keynesian view that coordination failures keep wages from adjusting in the short run, which makes recessions last longer. This crease a potential role for welfare-improving policy
true
Financial intermediaries are a crucial part of the infrastructure of an economy because they play such an important role in the efficiency and distribution of both the payments system and management of household savings
true
Fiscal policy has a long-run impact on real interest rates (and I) and therefore on exchange rates (and NX) where monetary policy has no long run impact on real interest rates (shift in M2 is followed by a shift in Md) so monetary policy is long run "neutral"
true
If a fall in M2 causes the real interest rate to rise in the short run but return to where is started in the long run, then the fall in M2 will cause the dollar to appreciate in the short run (NX down) and return to where it started (NX back up ) in the long run
true
If households are rational, forward-looking, and have access to banks, then they should save during economic expansions and borrow (or use their previous savings) during recessions, and the mpc should be close to zero and the expenditure multiplier should be close to 1.
true
If policy makers can agree on the source of a particular market failure, they are more likely to agree on what policy to use. Economists can help policymakers think about how to identify sources of market failures and to evaluate the effectiveness of alternatives.
true
Many of the most important roles of government have nothing to do with the state of the business cycle but instead with the provision of public goods such as infrastructure, education, rule of law, the military, environmental regulation, and trade agreements
true
Micro review: If there is a positive externality then the market outcome is less than the efficient outcome because market participants do not "internalize" the external benefit to society. Education subsidies reduce the cost of education which gives market
true
Monetary policy in the period 2017-June 2019 is best described as accomodative
true
Normally government borrowing falls during economic expansions, as government usually raise marginal income tax rates when people can most afford it and as revenue collection automatically increases as GDP goes up. This helps us pay for borrowing that normally occurs in recessions
true
Open market operations can only increase lending to firms and households if banks don't hold it all in reserves
true
Regulators want to keep banks from making too many risky loans, but don't want to stop them from taking on any risk at all, as risky loans can be in new areas of innovation, which is good for economic growth. They are always fine-tuning this regulation.
true
The annual spring "stress tests" of larger US banks are designed to make it less likely that taxpayers will once again have to bail out the US banking system if it turns out that bank portfolios are riskier than regulators expect them to be and there is a recession
true
The top 1% of the income distribution contribute about 40% to overall income tax collection
true
US government borrowing is the highest in the world. As a share of GDP, there are only three European countries whose federal debt-to-GDP ratios are higher than that in the United States. Risks associated with high government borrowing include crowding out
true
When the Money Supply falls, real interest rates rise in the short run, leading to a fall in gross investment, but in the long run money demand also falls at the lower price level and we return to the original real interest rate and level of investment
true
A necessary condition for the classical model to work is that
wages and prices are fully flexible
Under the CARES Act, the PPP offered loan forgiveness to small firms that met certain requirements; the initial loans
were made by private banks, who took on the pandemic loan risk if hte borrowers did not end up fulfilling the PPP requirements
If the real interest rate is 3 percent and the inflation rate is 1 percent, then the nominal interest rate is
4 percent
Which of the following bond ratings is the highest (least risky)?
AAA
Which of the following statements is TRUE?
ANSWER: The rescue of banks that are considered "Too Big To Fail" induces more risky behavior of these banks NOT CORRECT: The credit default swap increases the downside risk from owning the underlying bond, A rise in the interest rate increases the present value of a stock without changing the expected future value of that stock., The spread between the lending rate and the deposit rate is pro-cyclical
Under the Volker Rule (part of Dodd Frank) banks cannot use owner's equity to speculate (bet) against their customers
Correct. They could not use owner's equity to buy a CDS on a bond if they do not themselves own the bond
Assume the Fed decreases the required reserve ratio for banks; in the SHORT RUN this would most likely lead to
The US assets becoming less attractive, so price of US dollars goes down, exchange rate goes down
Here is one unusual fiscal policy: The government would issue time-dated debit cards to each person that had to be spent on goods and services produced only by U.S. firms within a fixed period (say, three months) or become worthless. Suppose the government was considering whether to issue $400 in time-dated debit cards to each household or give each household $400 in cash instead. Which of the following statements regarding the two plans is true?
Time-dated debit cards would have greater immediate impact on consumption spending since they had to be spent within a specific period of time and the higher the value of the MPC, the greater the total impact on spending and income.
Assume there is an increase in government spending; based on Chapter 15 model of the LONG RUN this would most likely lead to
an increase in interest rates and crowding out
medium of exchange
anything that can determine value during the exchange of goods/services
Frequent flier miles can be saved with airlines and put toward purchasing future airline tickets or seat upgrades. Frequent flier miles are not money because they
are not a unit of account
Loans are examples of a bank's
assets
Quantitative Easing is the name attached to the Fed policy of
buying MBS's (and a few other CDO's) rather than the government securities on the open market
All other things being equal, an increase in government borrowing
contributes to a trade deficit (current account deficit) and a capital account surplus
The goal of "Enterprise Zones" in the 1980s and of "Opportunity Zones" in the past few years is to
create tax incentives for firms to create jobs in low-income neighborhoods
In 2000, the Chinese government mandated three one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation. Although consumption spending rose during the vacation period, the data show that consumption fell before and after the vacation by approximately the same amount as spending rose during the vacation. As a result, there was....change in aggregate demand and the overall policy of stimulating the economy through mandated vacations was...
no; not effective
In the long run after a negative AD shock
nominal wages are lower, nominal prices are lower, real wages are where they started
An open market ________ by the Fed increases the money supply, which leads to ________ interest rates and increased GDP.
purchase; decreased
In the U.S., virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a recession, states should.... their spending and perhaps also ....their taxes to balance their budgets.
reduce; increase
an expansionary fiscal policy shifts the aggregate demand curve to the ..., ....prices, and ....real GDP
right; raises; increases
s the population ages and entitlement spending on Social Security and Medicare increase, some have argued that we should just raise taxes to pay for them. The main argument against this solution is that the level of entitlements as a fraction of GDP is predicted to
rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth
Which of the following is most likely to result from an open market sale of bonds on the secondary bond market?
secondary bond market prices decrease and their yields increase
If government borrowing increases the demand for loans enough to put upward pressure on interest rates, we would expect
secondary bond prices to fall and stock prices to fall
As the Federal Reserve ________ bonds, interest rates rise and the price of bonds ________.
sells; falls
The chairman of the Federal Reserve Board of Governors
sits on the Federal Open Market Committee
store of value
something keeping its value if it is stored not spent
The demand for money that arises because holding money over short periods is less risky than holding stocks or bonds is called the
speculative demand for money
Unlike the U.S. federal government, virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a recession,
state budgets go into deficits as tax revenues decline
As inflation rates increase, money becomes less useful as a
store of value
Which of the following is NOT a role of the Federal Reserve Banks?
the Fed raises taxes to offset increases in the money supply
Suppose a family had large credit card debt, which it wished to reduce. Of the two plans, the family would prefer
the cash payments program, since cash could be used to pay off some of the credit card debt.