Econ 201 Test 2 Dogeby

A bank that has liabilities of $180 billion and a net worth of $20 billion must have A) assets of $200 billion. B) excess reserves of $160 billion. C) assets of $180 billion. D) excess reserves of $180 billion.

A

A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are A) $5,000. B) $100. C) $1,000. D) $12,000.

A

According to the Taylor rule, if the unemployment rate is 3.3 percent and there is no inflation gap, the Fed should A) raise the Fed's targeted interest rate by 1 percentage point.B) lower the Fed's targeted interest rate by 1 percentage point.C) lower the federal funds rate by 3.3 percentage points.D) do nothing, as the economy will correct itself.

A

All else equal, when the Federal Reserve Banks engage in an expansionary monetary policy, the interest rates received on government bonds usually A) fall. B) rise. C) remain constant. D) move in the same direction as the bonds' price.

A

Assume that U.S. National Bank has no excess reserves and that the reserve ratio is 20 percent. If U.S. National borrows $5 million from a Federal Reserve Bank through a repo transaction, it can expand its loans by a maximum of A) $5 million. B) $1 million. C) $25 million. D) $0.

A

Assuming the total population is 100 million, the civilian labor force is 50 million, and 43 million workers are employed, the unemployment rate is A) 14 percent. B) 7 percent. C) 57 percent. D) 3 percent.

A

An expansionary monetary policy may be less effective than a restrictive monetary policy because A) the Federal Reserve Banks are always willing to make loans to commercial banks that are short of reserves. B) fiscal policy always works at cross purposes with an expansionary monetary policy. C) changes in exchange rates complicate an expansionary monetary policy more than they do a restrictive monetary policy. D) commercial banks may not be able to find good loan customers.

D

Refer to the table. Money supply M1 for this economy is A) $170.B) $70.C) $100.D) $180.

A $170

Cost-push inflation A) reduces real output .B) increases real output. C) reduces the unemployment rate. D) raises the natural rate of unemployment.

A (reduces real output)

Checkable deposits are A) included in M1. B) not included in either Ml or M2. C) considered to be a near money. D) also called time deposits.

A) included in M1.

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percentage of potential GDP is A) 4 percent.B) 8 percent.C) 10 percent.D) 2 percent.

B

Open-market operations include A) changes in the reserve ratio. B) repos and reverse repos . C) paying interest on excess reserves held at Federal Reserve Banks. D) changes in the discount rate.

B

Refer to the diagram of the market for money. The equilibrium interest rate is A)I1.B)I2.C)I3.D) not determinable without additional information.

B

The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is consistent with the bank having A) $90,000 in outstanding loans and $35,000 in reserves. B) $90,000 in checkable deposit liabilities and $32,000 in reserves. C) $20,000 in checkable deposit liabilities and $10,000 in reserves. D) $90,000 in checkable deposit liabilities and $35,000 in reserves.

B

The Board of Governors of the Federal Reserve has ____ members. A) 5B) 7C) 9D) 14

B

The amount that a commercial bank can lend is determined by its A) required reserves. B) excess reserves. C) outstanding loans. D) outstanding checkable deposits.

B

The difference between M1 and M2 is that A) the former includes time deposits.B) the latter includes small-denominated time deposits, 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.

B

The reserves of a commercial bank consist of A) the amount of money market funds it holds. B) deposits at the Federal Reserve Bank and vault cash. C) government securities that the bank holds. D) the bank's net worth.

B

The table contains information about the hypothetical economy of Scoob. All figures are in millions. The labor force in Scoob is A) 95 million. B) 102 million. C) 105 million. D) 145 million.

B

When a banker records how many dollars each of his borrowers owes the bank, money is serving as A) a store of value. B) a unit of account. C) a medium of exchange. D) legal tender.

B

If the Consumer Price Index was 125 in one year and 120 in the following year, then the rate of inflation was approximately A) 4.0 percent.B) 4.2 percent.C)−4.0 percent.D)−4.2 percent.

C

If the Consumer Price Index was 90 in one year and 100 in the following year, then the rate of inflation was about A) 9 percent.B) 10 percent.C) 11 percent.D) 12 percent.

C

If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the A) frictional unemployment rate is 5 percent. B) cyclical unemployment rate and the frictional unemployment rate together are 5 percent. C) cyclical unemployment rate is 4 percent. D) natural rate of unemployment will eventually increase.

C

In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real income from Year 1 to Year 2? A) It fell by $400. B) It rose by $400. C) It rose by $600. D) It rose by $2,000.

C

Kara voluntarily quit her job as an insurance agent to return to school full time to earn an MBA degree. With degree in hand, she is now searching for a position in management. Kara presently is A) cyclically unemployed.B) structurally unemployed.C) frictionally unemployed.D) not a member of the labor force.

C

Money functions as a store of value if it allows you to A) measure the value of goods in a reliable way. B) make exchanges in a more efficient manner. C) delay purchases until you want the goods. D) increase your confidence in money.

C

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.

C

Refer to the accompanying table. If a bank has $70 million in savings deposits and $49 million in checkable deposits, then its required reserves are A) $4.9 million.B) $35 million.C) $7 million.D) $11.9 million.

A

Refer to the table. The value of the near monies that are part of M2 is A) $350. B) $220. C) $50. D) $360.

A

Suppose a commercial bank has checkable deposits of $60,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves A) are $12,000. B) are $6,000. C) are $600,000. D) cannot be determined from the given information.

A

Suppose a commercial banking system has $40,000 of outstanding checkable deposits and actual reserves of $4,500. If the reserve ratio is 10 percent, the banking system can expand the supply of money by the maximum amount of A) $5,000. B) $44,500. C) $400,000. D) $4,000.

A

Suppose a credit union has checkable deposits of $200,000 and the legal reserve ratio is 10 percent. If the institution has excess reserves of $4,000, then its actual reserves are A) $24,000. B) $16,000. C) $4,000. D) $20,000.

A

Which of the following is the basic economic policy function of the Federal Reserve Banks? A) holding the deposits or reserves of commercial banksB) acting as fiscal agents for the federal governmentC) controlling the supply of moneyD) collecting or clearing checks among commercial banks

C

Which of the following tools of monetary policy is considered the most important on a day-to-day basis? A) the discount rate B) the reserve ratio C) open-market operations D) paying interest on excess reserves

C

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a financial crisis and recession? A) Negative nominal interest rates would stimulate borrowing and spending, increasing aggregate demand. B) Negative interest rates would stimulate so much lending that it would unfairly increase banks' power in the market. C) Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses. D) The Fed would lose the ability to raise the interest rates above zero in the future.

C

Assume the natural rate of unemployment in the U.S. economy is 4 percent and the actual rate of unemployment is 8 percent. According to Okun's law, the GDP gap as a percentage of potential GDP is A) 8 percent.B) 12 percent.C) 4 percent.D) 2 percent.

a

If the natural rate of unemployment was 5 percent, the current unemployment rate was 6 percent, and potential GDP was $4,000 billion, then according to Okun's law the economy would have sacrificed A) $80 billion in output not produced.B) $500 billion in output not produced.C) $600 billion in output not produced.D) $100 billion in output not produced.

a

You are given the following information about the economy: the nominal interest rate = 8 percent, and the real rate of interest = 4 percent. The inflation premium is A) 4 percent.B) 12 percent.C) 8 percent.D) 2 percent.

a

A nation has a population of 260 million people. Of these, 60 million are retired, in the military, institutionalized, or under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the unemployment rate? A) 4 percentB) 6 percentC) 9 percentD) 27 percent

b

All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to A) decrease the money supply. B) increase the money supply. C) foreclose on a failed bank. D) raise interest rates.

b

In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output? A) military goods B) capital goods C) textile products D) agricultural commodities

b

The functions of money are to serve as a A) resource allocator, method for accounting, and means of income distribution. B) unit of account, store of value, and medium of exchange. C) determinant of consumption, investment, and government spending. D) factor of production, exchange, and aggregate supply.

b

According to the Taylor rule, A) for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2-percentage-point gap between potential and actual GDP.B) growth in the money supply should be limited to the long-run average growth rate of real GDP.C) if inflation rises by 1 percentage point above its target, then the Fed should raise their targeted interest rate by one-half a percentage point.D) the rate of money growth should be set at 4 percent per year.

c

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.

c

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

Overnight loans from one bank to another for reserve purposes entail an interest rate called the A) prime rate. B) discount rate. C) federal funds rate. D) treasury bill rate.

c

What is the primary reason that changes in total spending lead to cyclical changes in output and employment? A) Government is unable to respond by changing the amount of money in circulation.B) Changes in total spending cause supply shocks that cause cyclical variation.C) Prices are sticky in the short run.D) Prices are flexible in the long run.

c

A bank that has liabilities of $150 billion and a net worth of $20 billion must have A) excess reserves of $130 billion.B) assets of $150 billion.C) excess reserves of $150 billion.D) assets of $170 billion.

d

If actual GDP is $460 billion and there is a positive GDP gap of $20 billion, potential GDP is A) $440 billion. B) $480 billion. C) $900 billion. D) $20 billion.

A

If both the real interest rate and the nominal interest rate are 3 percent, then the A) inflation premium is zero.B) real GDP must exceed the nominal GDP.C) nominal GDP must exceed the real GDP.D) inflation premium also is 3 percent.

A

If the Fed were to reduce the legal reserve ratio, we would expect A) lower interest rates, an expanded GDP, and a higher rate of inflation. B) lower interest rates, an expanded GDP, and a lower rate of inflation. C) higher interest rates, a contracted GDP, and a higher rate of inflation. D) higher interest rates, a contracted GDP, and a lower rate of inflation.

A

If the natural rate of unemployment is 4.5 percent and the actual unemployment rate is 7.5 percent, then Okun's law indicates that the GDP gap is A) 6 percent. B) 3 percent. C) 4.5 percent. D) 12 percent.

A

The accompanying table contains hypothetical data for an economy. The size of the M1 money supply is A) $1,070 billion. B) $1,000 billion. C) $70 billion .D) $1,670 billion. E) $1,420 billion.

A

Unlike demand-pull inflation, cost-push inflation A) causes the supply of goods and services to decline. B) drives up the price level. C) increases nominal income. D) increases real income.

A

Demand-pull inflation A) occurs when prices of resources rise, pushing up costs and the price level. B) occurs when total spending exceeds the economy's ability to provide output at the existing price level. C) occurs only when the economy has reached its absolute production capacity. D) is also called cost-push inflation.

B

(Consider This) Credit cards are A) the fastest-growing component of the M1 money supply. B) near monies that are part of the M2 money supply but not the M1 money supply. C) not money, as officially defined. D) also known as time deposits.

C

The discount rate is the interest A) rate at which the central banks lend to the U.S. Treasury .B) rate at which the Federal Reserve Banks lend to commercial banks. C) yield on long-term government bonds. D) rate at which commercial banks lend to the public.

B) (rate at which the Federal Reserve Banks lend to commercial banks.)

"Leverage" in finance refers to the A) increase in profits or losses from an investment. B) use of one's own money in an investment. C) use of borrowing money in order to magnify returns from an investment. D) shifting of financial risk onto an insurer.

C

(Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 − 4i, where L is the amount of money demanded, Y is gross domestic product, and i is the interest rate (entered as the percentage in whole numbers). If gross domestic product is $200 and the interest rate is 10 percent, what amount of money will society want to hold? A) 100. B) 160. C) 120. D) 200. E) 144.

C

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks. As a result, commercial bank reserves will A) increase by $10 billion.B) remain unchanged.C) decrease by $2 billion.D) increase by $2 billion.

C

Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result, A) the official unemployment rate will fall. B) the official unemployment rate will rise. C) the official unemployment rate will remain unchanged. D) the size of the labor force will increase.

C

The GDP gap measures the difference between A) NDP and GDP. B) NI and PI. C) actual GDP and potential GDP. D) nominal GDP and real GDP.

C

The basic requirement for an item to function as money is that it be A) backed by precious metals—gold or silver. B) authorized as legal tender by the central government. C) generally accepted as a medium of exchange. D) some form of debt or credit.

C

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be A) 3½.B) 4.C) 5.D) 6.67.

C 5

In which industry or sector of the economy is output least likely to be affected by the business cycle? A) housing construction B) automobile production C) medical services D) capital goods production

C) (medical services)

Banks lost money during the mortgage default crisis because A) of defaulted loans to investors in mortgage-backed securities. B) they held mortgage-backed securities they had purchased from investment firms. C) homebuyers defaulted on mortgages held by the banks. D) of all of these reasons.

D

Currency in circulation is part of A) M1 only. B) M2 only. C) neither M1 nor M2. D) both M1 and M2.

D

Full-time homemakers and retirees are classified in the BLS data as A) employed. B) unemployed. C) part of the labor force. D) not in the labor force.

D

If the actual rate of unemployment is above the natural rate of unemployment, then potential GDP is A) equal to the GDP gap.B) equal to actual GDP.C) less than actual GDP.D) greater than actual GDP.

D

Refer to the given information about a hypothetical economy. The rate of inflation A) is 110 percent. B) is 10 percent. C) is 0 percent. D) cannot be determined from the data.

D

Rising per-unit production costs are most directly associated with A) frictional unemployment. B) structural unemployment. C) demand-pull inflation. D) cost-push inflation.

D

The Federal Reserve System consists of which of the following? A) Federal Open Market Committee and Office of Thrift Supervision B) Federal Deposit Insurance Corporation and Controller of the Currency C) U.S. Treasury Department and Bureau of Engraving and Printing D) Board of Governors and the 12 Federal Reserve Banks

D

The table contains information about the hypothetical economy of Scoob. All figures are in millions. The unemployment rate in Scoob is A) 2.5 percent. B) 3.2 percent. C) 5.0 percent. D) 6.9 percent.

D

Which of the following are liabilities to a bank? A) capital stock and reserves B) property and capital stock C) vault cash and demand deposits D) demand and time deposits

D) (demand and time deposits)

If nominal GDP is $900 billion and, on average, each dollar is spent three times in the economy over a year, then the quantity of money demanded annually for transactions purposes will be A) 2,700 billion B) 900 billion C) 600 billion D) 450 billion E) 300 billion

E