econ 3

What is a budget deficit?

A situation in which total government spending exceeds total government revenue during a specific time period, usually one year.

Which of the following is likely to cause a decrease in the demand for money in an economy? An increase in the cost of exchange of goods An increase in the level of employment A decrease in the opportunity cost of holding money A decrease in interest rates

An increase in the cost of exchange of goods

Which of the following is likely to cause a decrease in the demand for money in an economy? An increase in the level of employment A decrease in the opportunity cost of holding money An increase in the cost of exchange of goods A decrease in interest rates

An increase in the cost of exchange of goods

Which of the following describes a major advantage of automatic stabilizers? They automatically add stimulus during periods of strong demand. They automatically add restraint during periods of recession. They automatically increase optimism about future economic conditions. They institute countercyclical fiscal policy without the delays associated with legislative action.

They institute countercyclical fiscal policy without the delays associated with legislative action.

M1 includes currency (like the bill in Darnell's wallet), traveler's checks, and checkable deposits. M2 includes everything in M1 plus money market deposit accounts, savings account deposits, certificates of deposit (such as Kyoko's CD), and what are called miscellaneous near-monies. Darnell has a $10 bill in his wallet.

M1, M 2

M1 includes currency (like the bill in Darnell's wallet), traveler's checks, and checkable deposits. M2 includes everything in M1 plus money market deposit accounts, savings account deposits, certificates of deposit (such as Kyoko's CD), and what are called miscellaneous near-monies. Jacques has $2,500 in a savings account.

M2

M1 includes currency (like the bill in Darnell's wallet), traveler's checks, and checkable deposits. M2 includes everything in M1 plus money market deposit accounts, savings account deposits, certificates of deposit (such as Kyoko's CD), and what are called miscellaneous near-monies. Kyoko has $7,000 in a six-month certificate of deposit (CD).

M2

Which of the following contributes to making the Federal Reserve an independent policymaking body? Its role is written into the U.S. Constitution. There are 12 Federal Reserve banks. Members of the Board of Governors are appointed for 14-year terms.

Members of the Board of Governors are appointed for 14-year terms.

Which of the following is an expansionary monetary policy adopted by the Fed? Increasing the reserve requirements of commercial banks Purchasing additional U.S. securities and other assets Increasing the interest rate paid on the excess reserves held by commercial banks Extending fewer loans to commercial banks

Purchasing additional U.S. securities and other assets

Suppose an economy is experiencing abnormally high unemployment caused by deficient aggregate demand. According to Keynesian economists, what must be done to reestablish full-employment capacity?

The government should institute expansionary fiscal policy.

Which of the following provide evidence that the Fed implemented an expansionary monetary policy during 2002-2004? Check all that apply. Rapid economic growth The rapid growth of money supply Low inflation Low short-term interest rates

The rapid growth of money supply, Low short-term interest rates

lead to an increase in the M1 money supply in the United States?

The use of interest-earning checking accounts becomes increasingly popular, with many people shifting money from savings account deposits to these accounts.

The Federal Reserve sets the reserve requirement, which banks must meet through deposits at the Fed and cash held at the bank. What do these requirements achieve?

They help to facilitate transfers of funds between banks when a customer from one bank writes a check to a customer of another, They help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash, They help to control the money supply.

According to Keynes, which of the following was true of the U.S. economy during the 1930s?

Total spending was less than full-employment output.

Money growth is closely related to inflation.

True

(medium of exchange, unit of account, store of value) Larry has saved $4,000 in his checking account

store of value

The term crowding-in effect refers to a situation in which a government_______ results in_______ interest rates, causing_______ in private spending on investment and consumer durables.

surplus, lower, an increase

When many households simultaneously try to increase their saving, actual saving may fail to increase because the reduction in consumption and aggregate demand will reduce income and employment. This is referred to as:

the paradox of thrift.

According to classical economists, real output in an economy is determined by factors such as:

the skills of the labor force in the economy.

According to the quantity theory of money, for a given level of nominal gross domestic product (GDP), an increase in the demand for money will cause:

the velocity of money to decrease.

A Keynesian would favor this action because the U.S. economy seemed to operate below its potential capacity, which would justify an increase in government spending financed by borrowing.

true

As Keynesian analysis became more widely accepted, the emphasis on achieving a balanced federal budget declined.

true

Equilibrium occurs when spending on consumption, investment, government purchases, and net exports is equal to total output.

true

If timed incorrectly, discretionary changes in fiscal policy can make the ups and downs of the business cycle worse, not better.

true

Supply-side economics is a long-run, growth-oriented strategy.

true

(medium of exchange, unit of account, store of value) Larry can easily determine that the price of the Super is more than the price of the Duper.

unit of account

When people use money to buy and sell goods and services, money serves as a:

medium of exchange.

The Federal Reserve System regulates the:

money supply in the U.S. economy.

According to the new classical view, a tax cut financed by borrowing will tend to:

offset the expansionary effects of a budget deficit in an economy.

Suppose the price level in a country is constant and the marginal propensity to consume equals 0.50. Equilibrium output goes up by $20 million when investment expenditure in this country increases by:

$10 million.

Kate made a profit of $30,000 from her business last year. She opens a checking account in the Bank of Vanadia and deposits the $30,000 in it. The bank has to maintain a required reserve of 10 percent. The bank decides to use the excess reserves to give loans to local citizens. Peter takes a car loan of an amount that equals the excess reserves held by the Bank of Vanadia. When Peter buys a car using the full amount of the loan, the seller accepts a check and deposits it in First Citizen Bank. Suppose the First Citizen Bank has to keep a required reserve of 20 percent. Then, the excess reserves of the First Citizen Bank is:

$21,600.

Which of the following is likely to be a result of the crowding-out effect in an open economy? A decrease in the economy's net exports A depreciation of the domestic currency An increase in private investment in the economy An outflow of financial capital

A decrease in the economy's net exports

Which of the following is likely to cause entrepreneurs to undertake more investments in an economy? A decrease in aggregate savings in the economy A decrease in the price level in the economy A decrease in the real interest rate in the economy A decrease in the inflationary premium in the economy

A decrease in the real interest rate in the economy

Which of the following issues do most macroeconomists widely agree upon? Check all that apply. Discretionary fiscal policy can be counterproductive because of policy lags. The use of the federal budget as an automatic stabilizer can help smooth business cycle fluctuations. Discretionary fiscal policy is less effective than is implied by the early Keynesian view.

Discretionary fiscal policy can be counterproductive because of policy lags, Discretionary fiscal policy is less effective than is implied by the early Keynesian view, The use of the federal budget as an automatic stabilizer can help smooth business cycle fluctuations

Which of the following is the precautionary motive for holding money? Holding money for buying weekly groceries Holding money for paying house rent Holding money for medical emergencies Holding money for paying monthly utilities

Holding money for medical emergencies

Suppose the Federal Reserve announces that it is lowering its target interest rate by 100 basis points, or 1%. It would achieve this by_________ the__________ .

Increasing, money supply

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. The Fed cannot prevent banks from lending out required reserves. The Fed cannot control the amount of money that households choose to hold as currency. The Fed cannot control whether and to what extent banks hold excess reserves.

The Fed cannot control the amount of money that households choose to hold as currency, The Fed cannot control whether and to what extent banks hold excess reserves.

(medium of exchange, unit of account, store of value) Larry writes a check for $4,000.

medium of exchange

Automatic stabilizers:

are able to shift a budget toward a deficit during a recession and toward a surplus during an economic boom.

If there is a__________ in the growth rate of the money supply, the direction of monetary policy is most likely to be restrictive.

decline

According to supply-side economics, high marginal tax rates in an economy:

decrease the rate of capital formation in the economy.

According to new classical economics, a high tax rate in an economy:

decreases the opportunity cost of leisure of workers in the economy.

A government spending increase can generally begin to impact the economy more rapidly than a tax cut.

false

As predicted by the Keynesian view, the $800 billion spending package put forth by the Obama administration in 2009 succeeded in bringing the economy back to potential output by 2011.

false

It is easy to time fiscal policy changes properly because policy makers are well equipped to forecast economic conditions at least one year into in the future.

false

Other things remaining constant, it is always better to consume as much as possible and save as little as possible.

false

The fewer types of investment that are tax sheltered (i.e., where income is taxed at lower-than-normal rates), the smaller are the supply-side effects of an increase in tax rates (that is, the decrease in output is smallerdue to a tax increase).

false

In the Keynesian model, a tax cut financed by borrowing will result in a(n):

increase in the current consumption of households.

Suppose the hypothetical country of Agraria faced a debt crisis when the government borrowed money from international financial institutions. In order to repay the debt, the government decided to increase the money supply. This caused a(n):

increase in the inflation rate in the country.

According to Keynesians, when an economy is operating below its potential capacity, the government should:

increase its purchases of goods and services.

An expansionary monetary policy:

increases the inflation rate in an economy.

The debt to gross domestic product (GDP) ratio of the United States is not likely to cause major problems as long as:

interest rates remain low.