Econ Exam 4 Review

Discretionary fiscal policy does not require action from Congress.

False

If the Federal Reserve wants to increase the money supply, it should raise the required reserve ratio.

False

In June 2013, the Bank of Japan announced it was continuing its easy money policy through open market operations. The Bank of Japan must have decided to continue to sell securities.

False

___________ are all examples of discretionary spending.

National defense, income security, and veterans benefits

_____ has(have) an impact on both aggregate demand and aggregate supply.

Tax rate reductions

A crowding-out effect occurs when government borrowing raises interest rates and discourages investment spending.

True

A decrease in the reserve ratio will increase excess reserves.

True

A disadvantage of supply-side fiscal policies is that they take longer to work than do demand-side fiscal policies.

True

Examples of discretionary government spending include national defense, transportation, and education.

True

For the economy, it matters whether or not you put your cash in a bank.

True

All of the following are considered expansionary fiscal policies EXCEPT:

a reduction in unemployment compensation.

If the Fed reduces the money supply:

bond prices fall.

An individual bank can, at most, lend out all of its:

excess reserves.

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.

If the Fed wanted to use all three of its primary tools to increase the money supply, it should:

lower the reserve requirement, lower the discount rate, and conduct an open market purchase.

Federal spending that is authorized by permanent laws and does not go through the annual appropriation process is called ________ spending.

mandatory

Automatic stabilizers include all of the following EXCEPT:

national defense spending.

An economy is operating at long-run equilibrium. What is the most likely result of an aggressive expansionary fiscal policy?

no change in long-run GDP and employment

The main tool of monetary policy is:

open market operations.

The Federal Open Market Committee is responsible for:

overseeing the buying and selling of government securities in the open market.

If a bank is subject to a reserve requirement of 15%, then it is required to:

place 15% of its deposits in the account with its regional Federal Reserve bank or the vault.

An increase in taxes:

removes money from the economy's spending stream.

As market interest rates rise, the cost of the public debt:

rises, because the government must make larger interest payments.

The discount rate is:

the rate regional Federal Reserve banks charge depository institutions to borrow reserves.

If the marginal propensity to consume is 0.9, by how much will $100 of government spending increase GDP?

$1,000

The Federal Reserve System was established in:

1913.

If the reserve requirement is 20%, the money multiplier is:

5

Anne and Charlie are discussing the best fiscal policy to bring the country out of a recession. Charlie wants to see government cut taxes by $100 billion. Anne prefers to see government spending increase by $100 billion. Whose prescription would have the larger total impact on aggregate demand?

Anne's, because all of the additional government spending will enter the spending stream, while part of a tax cut would be saved (and not spent)

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

consumption and investment

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

decline; stimulus

In February 2010, the Central Bank of Brazil raised reserve requirements. By raising reserve requirements, Brazil was attempting to:

decrease its money supply.

At Christmas, people tend to draw money out of their checking accounts to pay for Christmas presents. As a result, the money multiplier will:

decrease.

(Figure: Determining Fiscal Policy) The best discretionary fiscal policy option is:

expansionary fiscal policy that leads to full employment.

If Abigail withdraws $300 cash from her checking account, then her bank's assets:

fall by $300, and its liabilities fall by $300.

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

fall; less

Contractionary fiscal policy is typically used to:

fight inflation stemming from an overheated economy.

During an economic expansion, automatic stabilizers:

help to keep the economy from generating inflationary pressures.

The fractional reserve banking system refers to a system in which banks:

hold reserves equal to a fraction of their deposit liabilities.

Expansionary fiscal policy is typically used to __________ aggregate demand in order to ____________.

increase; escape a recession

The Fed announced in September 2013 that it would postpone winding down its monetary stimulus until the economic recovery was stronger. When the Fed does finally begin to reduce bond purchases:

interest rates will rise.

An automatic stabilizer:

is exemplified by a program such as unemployment compensation.

(Figure: Effects of Contractionary Fiscal Policies) Contractionary fiscal policies should:

move the economy to full employment.

All of these actions are performed by the Federal Reserve regional banks EXCEPT:

setting reserve requirements.

Appointments to the Federal Reserve Board are staggered so that one expires every other year. This provision was enacted to ensure:

stability and continuity on the Board.

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:

supply-side fiscal policy.

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is:

$2,000.

Suppose a bank has $1 million in deposits, a reserve requirement of 10%, and bank reserves of $300,000. The bank has excess reserves of:

$200,000

SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. Empathy State Bank Assets Liabilities Vault Cash $2,500 Deposits at the Federal Reserve 7,500 Loans 90,000 Deposits $100,000 If this bank is subject to a reserve requirement of 5%, what is the amount of its excess reserves?

$5,000

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

AD0; AD1; Q0; Qf

The central bank of the United States is:

the Federal Reserve System

Federal Reserve banks are located in all of these cities EXCEPT:

Augusta

A deficit occurs when tax revenues exceed government spending.

False

A tax increase will have less of a direct impact on income, employment, and output than will an equivalent increase in government spending.

False

An advantage of demand-side fiscal policies is that they do not always require tradeoffs between price levels and output, while supply-side fiscal policies sometimes do.

False

An investment tax credit for pharmaceutical research is a demand-side fiscal policy.

False

Annually balancing the federal budget has been the prevailing approach since the 1930s.

False

Discretionary spending is higher than mandatory spending at the federal government level.

False

During a recessionary period, the Federal Reserve should increase the discount rate.

False

In open market operations, the Federal Reserve buys and sells gold on the open market to preserve the value of the dollar.

False

Quantitative easing refers to regular open market operations by the Fed to increase the money supply.

False

If the Federal Reserve decides to increase the money supply:

the federal funds rate will fall.

___________ government spending, ___________ transfer payments, and ________ taxes all increase aggregate demand.

Increasing; increasing; decreasing

__________ are all examples of mandatory spending.

Social Security, interest on the national debt, and Medicare

An investment tax credit for solar energy is a supply-side fiscal policy.

True

Changes in government spending cause income and output to rise or fall by the spending change times the multiplier.

True

Disposable income equals G + T.

True

If a bank does not have enough funds in reserve, it can borrow through either the federal funds market or the discount window.

True

If a bank's assets are $600 million and its liabilities are $550 million, then its equity is $50 million.

True

If a large number of borrowers default on their loans, the bank risks a solvency crisis.

True

In 2007, the Fed reduced the stigma of borrowing from it by auctioning money for banks to borrow.

True

Money leakages make it more difficult to use monetary policy to pull the economy out of a recession.

True

One of the responsibilities of the Federal Reserve bank is to serve as the banker for the U.S. Treasury.

True

Open market operations consist of buying and selling government securities on the open market.

True

The Fed has been reluctant to change the reserve requirement frequently because doing this can contribute to economic instability.

True

The Fed has been successful at keeping the federal funds rate near the target.

True

The Fed works independently of political parties.

True

If a government collects $1,400 in tax revenue and spends $1,600, it has:

a deficit of $200.

If the federal government were required to balance its budget annually:

a recession would lead to higher taxes or reduced spending.