Econ Final

when GDP is rising

tax collections (both income and sales) increasing gov payouts (unemployment and welfare) decrease net taxes rise with GDP-- dampens rise in GDP

when GDP is dropping

tax collections slow down transfer payments rise quickly net taxes decrease soften decline in GDP

"actual" budget

deficit or surplus that results when revenues and expenditures aren't at full employment

federal funds rate v prime interest rate

f IR= banks charge one another on overnight loans to meet reserve requirement **less risky** p IR=charge on loans to customers

what do you do for severe demand pull inflation

1. reduce gov spending 2. taxes 3. combination of two

what does the fed do??

1. set reserve requirements 2. regulate supply of money 3. serve as lender/last resort THE FED DOES NOT ADVISE CONGRESS ON FISCAL POLICY

Which of the following discretionary policies both restrains the growth of government and helps return the economy to full employment? A) A tax cut in a recession B) A tax increase during inflation C) An increase in government spending during a recession D) A decrease in government spending in a recession

A) A tax cut in a recession

The effectiveness of an expansionary fiscal policy will be reduced if: A) increased government borrowing increases interest rates, causing a reduction in private investment. B) it is accompanied by a cut in Social Security taxes as well. C) the price level falls. D) stock prices rise.

A) increased government borrowing increases interest rates, causing a reduction in private investment.

A nation's trading possibilities line: A) lies to the right of its production possibilities line. B) lies to the left of its production possibilities line. C) coincides with its production possibilities line. D) illustrates the decrease in world production associated with specialization and exchange.

A) lies to the right of its production possibilities line.

A decrease in the money supply will: A) raise interest rates, reducing planned investment and GDP. B) raise interest rates, increasing planned investment and lowering GDP. C) reduce interest rates, increasing planned investment and GDP. D) reduce interest rates, reducing planned investment and GDP.

A) raise interest rates, reducing planned investment and GDP.

Suppose the demand for money falls. In order to maintain interest rates at their previous level, the Fed might: A) sell government securities. B) lower the reserve requirement. C) lower the discount rate. D) sell additional reserves through the Term Auction Facility.

A) sell government securities.

Suppose that Canada and Mexico allow their currencies to float. Other things equal, if the Canadian central bank raises Canadian interest rates relative to Mexican rates: A) the Canadian dollar will appreciate relative to the Mexican peso. B) Mexico will be forced to accept policies leading to lower unemployment and higher prices. C) gold will flow into Canada. D) Mexico will be forced to sell official dollar reserves to maintain price stability.

A) the Canadian dollar will appreciate relative to the Mexican peso.

If the exchange rate changes so that fewer Swiss francs are required to buy a Mexican peso, then: A) the franc has appreciated relative to the peso. B) Mexicans will buy more Swiss goods and services. C) the franc has depreciated relative to the peso. D) gold will flow from Mexico to Switzerland.

A) the franc has appreciated relative to the peso.

Assume that SIC, Inc. writes a $50,000 check on its account at Metro National Bank to repay the balance on a loan issued by this bank. The initial result of this transaction is that: A) the money supply declines by $50,000. B) the money supply increases by $50,000. C) the bank's excess reserves will decrease by $50,000. D) the bank's required reserves will increase by $50,000.

A) the money supply declines by $50,000.

what is demand pull inflation

AD outpaces AS inflation rising as real GDP rises and unemployment falls, economy moves along the Phillips curve. too much money chasing too few goods

economy beings in LR equilibrium before price level and real GDP decline simultaneously-- if changes were caused by only one curve shifting those changes are explained by:

AD shifting left (decrease)

Suppose the required reserve ratio is 10% and the banking system initially has no excess reserves. If $20 billion in new currency is deposited into the system, these new deposits will initially create excess reserves of: A) $2 billion. B) $18 billion. C) $20 billion. D) $200 billion.

B) $18 billion.

Use the following to answer the next question: Refer to the table. The size of the M2 money supply is: A) $2,950 billion. B) $4,850 billion. C) $4, 875 billion. D) $6,275 billion.

B) $4,850 billion.

Refer to the graph. Suppose the full-employment level of GDP is Q1, but a significant decline in investment demand has pushed the economy into recession as shown by the decline in aggregate demand to AD2. Currently, output is at Q3 and there is a negative GDP gap (Q3 - Q1) of $100 billion. If the multiplier is 5, which of the following would most likely move the economy back to its full potential? A) A tax cut of $20 billion B) Increased government spending of $20 billion C) A tax cut of $100 billion D) Increased government spending of $100 billion

B) Increased government spending of $20 billion

Suppose the full-employment level of GDP is $250 billion in a hypothetical economy. Currently, aggregate expenditures total $270 billion. Which of the following would be most in accord with appropriate fiscal policy? A) Lower tax rates on corporate income B) Reducing or limiting personal deductions and credits when figuring personal income taxes C) Expanded spending on new domestic security programs D) Decreases in interest rates

B) Reducing or limiting personal deductions and credits when figuring personal income taxes

Which of the following is included in M2 but not M1? A) Currency held by banks B) Small-denominated time deposits (less than $100,000) C) Credit card balances D) Large time deposits (at least $100,000)

B) Small-denominated time deposits (less than $100,000)

Of the following groups, the largest proportion of the total public debt is held by: A) foreign individuals and institutions. B) U.S. government agencies, including the Federal Reserve. C) State and local governments. D) U.S. banks and other financial institutions.

B) U.S. government agencies, including the Federal Reserve.

Which of the following most accurately describes the primary cause of the 2007-2008 U.S. financial crisis? A) A rapid increase in the size of the federal deficit B) Widespread defaults on home mortgages precipitated by banks' lax lending practices C) A sharp reduction in the money supply by the Federal Reserve Bank D) The rapid collapse in the stock market

B) Widespread defaults on home mortgages precipitated by banks' lax lending practices

Built-in stabilizers: A) automatically increase the size of deficits when the economy experiences demand-pull inflation. B) avoid the problems associated with the administrative lag of discretionary fiscal policy. C) automatically produce a budget that is balanced over the business cycle. D) tend to offset the impact of discretionary fiscal policy.

B) avoid the problems associated with the administrative lag of discretionary fiscal policy.

moral hazard

lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.

The Taylor Rule suggests that: A) for each 1 percent increase in inflation above its target rate, the Fed should reduce the real Federal funds rate by ½ percentage point. B) for each 1 percent increase of real GDP above potential GDP, the Fed should raise the real Federal funds rate by ½ percentage point. C) for each 1 percent increase in inflation above its target rate, the Fed should reduce the money supply by 2 percentage points. D) for each 1 percent increase of real GDP above potential GDP, the Fed should increase the money supply by 2 percentage points.

B) for each 1 percent increase of real GDP above potential GDP, the Fed should raise the real Federal funds rate by ½ percentage point.

"Tariffs are needed to protect workers from ruinous competition from low-wage countries." This statement: A) is correct because trade is based on absolute advantage, not comparative advantage. B) is faulty because comparative advantage makes trade mutually beneficial. C) is correct because trade lowers domestic labor productivity and living standards. D) is faulty because wage rates and labor productivity are inversely related.

B) is faulty because comparative advantage makes trade mutually beneficial.

Which of the following exemplifies the crowding-out effect? An increase in government spending: A) is financed by increasing the money supply, reducing interest rates and causing net exports to fall. B) is financed by borrowing, raising interest rates and causing private investment to fall. C) causes taxes to rise automatically, reducing consumption spending. D) causes the price level to rise, reducing net exports.

B) is financed by borrowing, raising interest rates and causing private investment to fall.

The purchasing power of the dollar: A) increases with the rate of inflation. B) is inversely related to the price level. C) is directly related to the supply of money. D) is directly related to the price level.

B) is inversely related to the price level.

Refer to the following: Suppose the interest rate is currently 6% and the Fed determines that investment of $40 is required to reach full employment GDP. To target this outcome, the Fed might: A) sell bonds to the public. B) lower the discount rate. C) raise the reserve requirement. D) auction fewer reserves through the Term Auction Facility.

B) lower the discount rate.

Whenever the Jones family receives change from a purchase, it goes into a jar to be used in the summer as spending money for the family vacation. The primary function served by the money in the jar is: A) standard of value. B) store of value. C) unit of account. D) medium of exchange.

B) store of value.

Hassan deposits $50,000 in a commercial bank that is required to retain 20% in reserve. The deposit increases the lending capacity of the bank by: A) $5,000. B) $10,000. C) $40,000. D) $50,000.

C) $40,000.

Suppose a bank has checkable deposits of $1,000,000 and the legal reserve ratio is 5 percent. If the institution has excess reserves of $5,000, then its actual reserves are: A) $45,000. B) $50,000. C) $55,000. D) $5,000.

C) $55,000.

In the U.S., there are: A) 50 Federal Reserve Districts corresponding to the 50 states. B) 7 Federal Reserve Districts corresponding to the 7 members of the Board of Governors. C) 12 Federal Reserve Districts corresponding to the 12 Federal Reserve Banks. D) 6 Federal Reserve Banks corresponding to the 6 U.S. time zones.

C) 12 Federal Reserve Districts corresponding to the 12 Federal Reserve Banks.

Suppose the exchange rate is currently $1 = 6 Norwegian kroner. If a basket of groceries costs $150 in the U.S. and there is purchasing power parity, the price of this same basket of groceries in Oslo is: A) 25 kroner. B) 450 kroner. C) 900 kroner. D) 1500 kroner.

C) 900 kroner.

Sam draws a $100 check on his account at Bank A which is then deposited in Bank B. When this check is cleared: A) neither Bank A's nor Bank B's deposits or reserves are affected. B) Bank A gains reserves equal to $100 and Bank B gains deposits equal to $100. C) Bank A loses reserves and deposits equal to $100. D) Bank B loses reserves and deposits equal to $100.

C) Bank A loses reserves and deposits equal to $100.

The group responsible for setting policy on buying and selling government securities (bills, notes, and bonds) is the: A) Securities and Exchange Commission. B) U.S. Treasury Board. C) Federal Open Market Committee. D) 12 Federal Reserve Bank presidents.

C) Federal Open Market Committee.

A government agency requires that all agricultural goods entering the country undergo an unduly long inspection process to assure product quality. This is an example of: A) an export subsidy. B) a tariff. C) a nontariff barrier. D) a quota.

C) a nontariff barrier.

If an adverse supply shock initiates an episode of cost-push inflation and the government does nothing in response, there will likely be: A) an increase in real GDP in the short run but not the long run. B) an inflationary spiral. C) a recession. D) a decrease in aggregate demand.

C) a recession.

According to the concept of comparative advantage, specialization and trade between two countries will benefit: A) only the country with the lowest labor costs. B) both countries, provided neither country has an absolute advantage in both goods. C) both countries, provided domestic opportunity costs differ in the two countries. D) only the country with the highest tariff rate.

C) both countries, provided domestic opportunity costs differ in the two countries.

If Nokia (a Finnish telephone manufacturer) purchases a production facility in the U.S., this will be recorded in the U.S. balance of payments as a: A) debit in the current account. B) foreign currency outflow. C) credit in the capital and financial account. D) credit in the reserve account.

C) credit in the capital and financial account.

A single bank can safely increase its total loans by an amount equal to its: A) required reserves. B) total reserves. C) excess reserves. D) total deposits.

C) excess reserves.

Other things equal, a dramatic decrease in the money supply would: A) increase the price level. B) reduce the purchasing power of each dollar. C) increase the purchasing power of each dollar. D) have an ambiguous impact on the purchasing power of each dollar.

C) increase the purchasing power of each dollar.

Writing a check to purchase a new computer is an example of using money primarily as a: A) unit of account. B) standard of value. C) medium of exchange. D) store of value.

C) medium of exchange.

If the intent of the Fed is to increase GDP, it should: A) raise the reserve requirement. B) raise the discount rate. C) purchase government securities in the open market. D) ask banks to reduce their amount of loans outstanding.

C) purchase government securities in the open market.

In Qatar, a worker can produce either one unit of salt or two units of pepper. In Korea, one worker can produce either two units of salt or three units of pepper. Compared to Qatar, Korea has a comparative advantage in the production of: A) both salt and pepper. B) neither salt nor pepper. C) salt. D) pepper.

C) salt.

Comparing the short-run and long-run Phillips curve suggests that: A) there is both a short-run and long-run tradeoff between inflation and unemployment. B) there is neither a short-run nor a long-run tradeoff between inflation and unemployment. C) there is a short-run but not a long-run tradeoff between inflation and unemployment. D) there is a long-run but not a short-run tradeoff between inflation and unemployment.

C) there is a short-run but not a long-run tradeoff between inflation and unemployment.

If aggregate demand increases at a faster rate than long-run aggregate supply: A) the economy will enter a recession. B) the production possibilities curve will shift to the left. C) there will be upward pressure on the price level. D) the Fed will be tempted to lower interest rates.

C) there will be upward pressure on the price level.

Consider the following hypothetical exchange rates: $1 = .50 British pounds; 1 Chinese yuan = $.10. We can conclude that 1 pound trades for: A) 10 yuan. B) 5 yuan. C) 1 yuan. D) 20 yuan.

D) 20 yuan.

Two nations, Delta and Gamma, each produce goods X and Y under conditions of constant costs. Assume that by devoting all of its resources to the production of good X, Delta can produce 100 units of X. By devoting all of its resources to Y, Delta can produce 150 Y. The comparable figures for Gamma are 30 X and 30 Y. We can conclude that: A) Delta has a comparative advantage in both X and Y. B) Gamma has a comparative advantage in both X and Y. C) Delta has a comparative advantage in X and Gamma has a comparative advantage in Y. D) Delta has a comparative advantage in Y and Gamma has a comparative advantage in X.

D) Delta has a comparative advantage in Y and Gamma has a comparative advantage in X.

Which of the following will cause the aggregate demand curve to shift to the left? A) a reduction in interest rates. B) an expansionary monetary policy. C) a reduction in the reserve requirement. D) Fed sales of bonds to the public.

D) Fed sales of bonds to the public.

Which of the following is always entered as a negative number in the U.S. balance of payments? A) Net transfers B) Net investment income C) Goods exports D) U.S. purchases of assets abroad

D) U.S. purchases of assets abroad

Refer to the table. The changes in the budget conditions between 2008 and 2009 best reflect: A) demand-pull inflation. B) a cut in government spending. C) a tax increase. D) an expansionary fiscal policy.

D) an expansionary fiscal policy.

Answer the next question using the following graph: Refer to the graph. If AD1 represents the current level of expenditures and Q2 is the full-employment level of GDP, the government should undertake: A) an expansionary fiscal policy that reduces aggregate demand to AD2. B) an expansionary fiscal policy that reduces aggregate demand to AD3. C) a contractionary fiscal policy that reduces aggregate demand to AD2. D) b. a contractionary fiscal policy that reduces aggregate demand to AD3.

D) b. a contractionary fiscal policy that reduces aggregate demand to AD3.

Money is created when: A) loans are repaid. B) the net worth of the banking system is increased. C) banks exchange some of the state and local bonds in their portfolio for federal government bonds. D) banks make additional loans.

D) banks make additional loans.

A bank temporarily short of required reserves may remedy the situation by borrowing reserves: A) in the bond market. B) in the Federal deposit market. C) from its own depositors. D) in the Federal funds market.

D) in the Federal funds market.

In order to temporarily reduce the unemployment rate below its natural rate, the government could: A) decrease the rate of inflation below peoples' expectations. B) reduce both the trade deficit and the budget deficit. C) raise marginal tax rates and cut wasteful government spending. D) increase the rate of inflation above peoples' expectations.

D) increase the rate of inflation above peoples' expectations.

If a nation's balance on current account is positive and it has neither a deficit nor surplus in its overall balance of payments: A) its imports exceed its exports. B) foreign purchases of its assets exceed its purchases of assets abroad. C) it has a trade deficit. D) it has a capital and financial account deficit.

D) it has a capital and financial account deficit.

Suppose banks are just meeting their reserve requirement of 25% and the Fed sells $30 billion in government securities to commercial banks. The effect of this sale is to: A) increase excess reserves by $30 billion. B) reduce excess reserves by $7.5 billion. C) reduce the potential money supply by $90 billion. D) reduce the potential money supply by $120 billion.

D) reduce the potential money supply by $120 billion.

Two primary assets of the Federal Reserve Banks are: A) securities and Federal Reserve Notes outstanding. B) securities and Treasury deposits. C) Federal Reserve Notes outstanding and reserves of commercial banks. D) securities and loans to commercial banks.

D) securities and loans to commercial banks.

The U.S. money supply is "backed" by: A) gold. B) silver. C) a joint committee of the Federal Deposit Insurance Corporation and the National Credit Union Administration. D) the ability of the government to maintain its value.

D) the ability of the government to maintain its value.

If the current interest rate is below the equilibrium rate: A) the money supply exceeds the quantity of money demanded. B) the money supply will increase and the interest rate will rise. C) the money supply will decrease and the interest rate will rise. D) the interest rate will rise and the quantity of money demanded will decrease.

D) the interest rate will rise and the quantity of money demanded will decrease.

The monetary multiplier is equal to: A) one. B) the inverse of actual reserves minus required reserves. C) the inverse of one minus the required reserve ratio. D) the inverse of the required reserve ratio.

D) the inverse of the required reserve ratio.

Assume the banking system has no excess reserves with a reserve requirement of 20%. The reserve requirement is then dropped to 10%. As a result of this reduction: A) the money multiplier will decrease. B) bank profitability will likely decrease. C) banks will be forced to accumulate reserves by reducing their lending activity. D) the money supply will likely increase.

D) the money supply will likely increase.

If the Fed buys bonds from the public through its open market operations: A) both the price of bonds and the interest rate received by bond holders will increase. B) both the price of bonds and the interest rate received by bond holders will decrease. C) the price of bonds will decrease and the interest rate received by bond holders will increase. D) the price of bonds will increase and the interest rate received by bond holders will decrease.

D) the price of bonds will increase and the interest rate received by bond holders will decrease.

true or fake: SR AS curve reflects inverse relationship between price level and level of real output

FALSE SR AS curve shows direct relationship between price level and level of real output

do wages change in SR

NO they don't respond to price level changes 1. workers unaware of changes, so didn't adjust their demands 2. employees hired under fixed wage contracts economy will adjust in LR equilibrium, SR positive role for stabilization nominal wages in LR are fully responsible to changes in price levels

fiscal policy

approved by both houses and president government adjusts its spending levels and tax rates to monitor and influence a nation's economy

current account

US punch assets abroad US service imports US good exports US net investment income Current accounts + cap and F.A. MUST EQUAL ZEROOOOOOO CA+CFA=0, If imbalance, transfer of assets MUST occur

understanding reserves w/ commercial banks & the fed

assets--> commercial banks--> acts as cash for them liabilities--> fed --> funds it owes, claims banks have against them reserves allow fed to control money supply

what is a cyclically adjusted budget

aka "full employment budget balance" GDP at full potential measures what the fed deficit or surplus would be if economy reached full employment w/ tax and spending policies measures FISCAL policy

understanding foreign currency assets

american exports make: INCREASE in Foreign currency bank deposit holdings DECREASE holdings through US purchase of imports F.C.A. earned through EXPORTS which finance IMPORTS

cost push inflation

caused by an increase in prices of inputs like labor and raw material

when a commercial bank makes a loan, it creates money. when loans are repaid, money is destroyed

creating a loan--> creating checkable deposit C.D. goes up, so does M1 when you pay off a loan, checkable deposit goes down CASH OR RESERVES HELD BY BANK IS NOT A PART OF M1

what can people trade with each other

currently produced goods and services preexisting assets

what fed actions would INCREASE bank lending

fed buys 400 million of treasury stocks from commercial banks fed lowers discount rate from 4 to 2 %

capital financial account

foreign purchase of assets IN USA

deposit insurance

guarantees depositors will always get their money back no incentive to withdrawal fractional reserve bank system: can't pay back all depositors at once

monetary policy goal

help economy reach full employment and non inflationary level of output strength: speedy and flexible 7 member board of gov shorter administrative lag

board of governors

helps stop inflation and makes table prices

crowding out effect

increases interest rate lead to a reduction in private investment spending dampens initial increase of total investment (i.e. gov went from borrowing 50 billion per month to 30 billion bc interest rate went up to 7%) crowding out effect of 20 million

when bond prices go up

interest rates go down

How does a decrease in the reserve requirement affect size of money multiplier

k=1/(1- required reserve ratio) will result in an increase in multiplier b/c each bank holds less reserves and can make more loans implies bank will see an increase in excess reserved after fall in R.R.R. making more loans=increase in potential money creation

what are the 3 functions of money

medium of exchange store of value unit of account

what tax system is most stabilizing to least stabilizing

progressive proportional regressive progressive increases at an increasing rate as income rises, more dampening effect on rising income

how large is budget deficit?

spending-revenue waxwania ex: Producing $600 of real gap G,exp =160 tax revenue =120 so 160-120=40

your economy is experiencing a sharp rise in inflation rate how do you reduce it

to reduce Inflation federal funds rate should be RAISED done through open marketing operations (SELLING BONDS) or increase in reserve ratio or discount rate reduce lending ability but increase real interest rate

how does gov pay interest

use tax revenues or go deeper into debt