Econ final

. The money demand curve is ________. a. vertical b. upward-sloping c. downward-sloping d. horizontal

c

11. Which of the following best explains how the Federal Reserve acts to help prevent banking panics? a. The Fed insures deposits of banks and thus reduces the chance of a panic. b. The Fed regulates asset markets and prevents damaging speculation. c. The Fed acts as a lender of last resort, making loans to banks so they can pay off depositors. d. The Fed can make it illegal to withdraw deposits from banks, preventing bank panics.

c

2. Which of the following pair of variables are monetary policy targets? a. unemployment rate and inflation rate b. interest rate and inflation rate c. money supply and interest rate d. real GDP growth rate and money supply

c

41. If the federal government pursues an expansionary fiscal policy, a. the money supply increases and interest rates fall. b. the money supply decreases and interest rates rise. c. government spending increases and taxes decrease. d. government spending decreases and taxes increase.

c

45. Suppose current real GDP is smaller than potential real GDP by $500 billion. Assume also that the government purchase multiplier is greater than one. To move the economy to potential real GDP, the government should a. increase its government purchases by $500 billion. b. increase its government purchases by more than $500 billion. c. increase its government purchases by less than $500 billion. d. None of the above.

c

The largest category in federal government spending in 2008 was a. interest payments. b. defense spending. c. transfer payments. d. grants to state and local governments.

c

. For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. I t has not targeted t h e money supply at the same time because a. The Fed can target both at the same time, but it has chosen to target the interest rate as it is more reliable as a target. b. The Fed does not have the authority to control both targets. c. Targeting the money supply has been politically unpopular. d. The Fed cannot target both at the same time. It has to choose between targeting an interest rate and targeting the money supply.

d

15. Other things being equal, if there is an increase in interest rates, business investment spending is likely to ________, leading to ________ in the aggregate demand. a. increase; an increase b. increase; a decrease c. decrease; an increase d. decrease; a decrease

d

29. Who is responsible for fiscal policy? a. The Federal Reserve b. State and local governments c. The Federal Reserve and Congress d. Congress and the President

d

22. Which of the following statements is consistent with the economic situation depicted in the figure? a. The economy is in recession and the current real GDP is greater than the potential real GDP. b. The economy is in recession and the current real GDP is smaller than the potential real GDP. c. The economy is in an expansion and the current real GDP is greater than the potential real GDP. d. The economy is in an expansion and the current real GDP is smaller than the potential real GDP.

b

3. Federal government purchases, as a percentage of GDP, a. have risen since the early 1950s. b. have fallen since the early 1950s. c. have remained roughly the same since the early 1950s. d. rose from the early 1950s until the mid 1980s, and then fell.

b

37. Which of the following is the correct definition of a federal budget deficit? a. A deficit is when annual government expenditures are less than tax revenues. b. A deficit is when annual government expenditures are greater than tax revenues. c. A deficit is the accumulated debt owed by the Federal government. d. A deficit equals the total amount of U.S. Treasury securities sold by the Federal Reserve.

b

9. Other things being equal, if the Fed raises the required reserve ratio, a. the money supply decreases and the interest rate falls. b. the money supply decreases and the interest rate rises. c. the money supply increases and the interest rate falls. d. the money supply increases and the interest rate rises.

b

1. Monetary policy refers to the actions the a. Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives. b. Federal Reserve takes to manage government spending and taxes to pursue its economic objectives. c. President and Congress take to manage the money supply and interest rates to pursue their economic objectives. d. President and Congress take to manage government spending and taxes to pursue their economic objectives.

a

10. When the Fed conducts open market sales of Treasury securities, a. the money supply decreases and the interest rate falls. b. the money supply decreases and the interest rate rises. c. the money supply increases and the interest rate falls. d. the money supply increases and the interest rate rises.

b

12. The interest rate applied to overnight loans between commercial banks is called the ________. a. discount rate b. federal funds rate c. nominal interest rate d. real interest rate

b

21. Under the monetary growth rule, the money supply would grow each year at a constant rate equal to the long run growth rate of a. nominal GDP. b. real GDP. c. nominal interest rates. d. real interest rates.

b

28. Fiscal policy refers to changes in a. the money supply and interest rates that are intended to achieve macroeconomic policy objectives. b. federal taxes and purchases that are intended to achieve macroeconomic policy objectives. c. federal taxes and purchases that are intended to fund the war on terrorism. d. state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.

b

3. Among many interest rates in the economy, the interest rate that the Fed targets for purposes of monetary policy is the a. discount rate b. federal funds rate c. nominal interest rate d. real interest rate

b

4. Other things being equal, an increase in the interest rate ________ the opportunity cost of holding money, leading to ________ in the quantity of money demanded. a. increases; an increase b. increases; a decrease c. decreases; an increase d. decreases; a decrease

b

47. The government purchase multiplier is ________ and the tax multiplier is ________. a. positive; positive b. positive; negative c. negative; positive d. negative; negative

b

50. The tax wedge is the difference between the pre-tax and post-tax returns to an economic activity. If the tax wedge (associated with a given economic activity) gets larger, we would expect a. more of that economic activity to occur. b. less of that economic activity to occur.

b

6. Consider the money demand curve. Other things being equal, if there is a decrease in the price level, a. the money demand curve will shift to the right. b. the money demand curve will shift to the left. c. there will be a movement up along the money demand curve. d. there will be a movement down along the money demand curve.

b

9. Which of the following best describes the effect of crowding out in the short run? a. An expansionary fiscal policy first results in a decrease in interest rates. Then the decrease in interest rates increases investment spending. b. An expansionary fiscal policy first results in an increase in interest rates. Then the increase in interest rates decreases investment spending. c. An expansionary monetary policy first results in a decrease in interest rates. Then the decrease in interest rates decreases investment spending. d. An expansionary monetary policy first results in an increase in interest rates. Then the increase in interest rates increases investment spending.

b

20. If the Federal Reserve is late in recognizing a recession and implements expansionary monetary policy after the recession is already over, this could add to inflationary pressures during the next expansion. This would be an example of a. countercyclical policy. b. fiscal policy. c. pro-cyclical policy. d. foreign policy.

c

31. Other things being equal, during an economic recession, federal government tax revenues ________ and transfer payments ________. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

c

19. The Federal Reserve attempts to moderate the swings in real GDP and the price level caused by the business cycle by enacting monetary policy to offset the momentum in the economy. This is called a. countercyclical policy. b. fiscal policy. c. pro-cyclical policy. d. foreign policy

a

23. Given the economic circumstances depicted in the figure, we would expect the Fed a. to conduct open market purchases in order to shift AD to the right. b. to conduct open market purchases in order to shift AD to the left. c. to conduct open market sales in order to shift AD to the right. d. to conduct open market sales in order to shift AD to the left.

a

26. If the Federal Reserve wishes to lower the current price level (or reduce the current inflation rate), it will most likely pursue a(an) ________. a. contractionary monetary policy b. expansionary monetary policy c. contractionary fiscal policy d. expansionary fiscal policy

a

30. Automatic stabilizers refer to a. government spending and taxes that automatically increase or decrease along with the business cycle. b. changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. c. the money supply and interest rates that automatically increase or decrease along with the business cycle. d. changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

a

34. From the 1960s to 2008, transfer payments as a percentage of total government expenditures a. have rapidly increased. b. remained pretty much constant. c. have declined nearly by half. d. have grown very slowly.

a

39. Social Security began as a "pay-as-you-go" system, meaning that payments to current retirees were paid a. from taxes collected from current workers. b. from taxes collected from retired workers. c. as long as the government had funds available. d. as the government collected revenues from tariffs and excise taxes in the years Social Security payments were made.

a

42. Which of the following best describes the likely results of a contractionary fiscal policy? a. Real GDP falls and the price level falls. b. Real GDP falls and the price level rises. c. Real GDP rises and the price level rises. d. Real GDP rises and the price level falls.

a

5. Consider the money demand curve. Other things being equal, if there is an increase in real GDP, a. the money demand curve will shift to the right. b. the money demand curve will shift to the left. c. there will be a movement up along the money demand curve. d. there will be a movement down along the money demand curve.

a

6. Other things being equal, if there is a decrease in interest rates, net exports (NX) are likely to ________, leading to ________ in the aggregate demand. a. increase; an increase b. increase; a decrease c. decrease; an increase d. decrease; a decrease

a

7. The money supply curve is ________. a. vertical b. upward-sloping c. downward-sloping d. horizontal

a

Other things being equal, if there is a decrease in interest rates, household consumption spending is likely to ________, leading to ________ in the aggregate demand. a. increase; an increase b. increase; a decrease c. decrease; an increase d. decrease; a decrease

a

_____ refers to actions taken by the Federal Reserve to increase the money supply and decrease interest rates. a. expansionary monetary policy b. contractionary monetary policy c. expansionary fiscal policy d. contractionary fiscal policy

a

32. After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy? a. Yes. Fiscal policy refers to changes in government spending and taxes. b. Yes. Increases in defense spending are designed to achieve macroeconomic policy objectives. c. No. The increase in defense spending was designed to achieve homeland security objectives. d. No. Fiscal policy refers to changes in interest rates and the money supply.

c

38. The long-term financial situation of which of the following is a cause for concern? a. Medicare, but not Social Security b. Social Security, but not Medicare c. both Social Security and Medicare d. neither Social Security nor Medicare

c

46. The largest federal government budget deficit (as a percentage of GDP) in the 20th century occurred a. during the Great Depression. b. during the recession of 1990-1991. c. during the World War II. d. during the recession of 1981-1982.

c

8. Other things being equal, if the Federal Reserve lowers the discount rate, a. the money supply decreases and the interest rate falls. b. the money supply decreases and the interest rate rises. c. the money supply increases and the interest rate falls. d. the money supply increases and the interest rate rises.

c

The largest source of federal government revenue in 2008 was a. corporate income taxes. b. payroll taxes to fund Social Security and Medicare programs. c. individual income taxes. d. sales taxes.

c

. The multiplier effect refers to the series of a. induced increases in investment spending that result from an initial increase in autonomous expenditures. b. autonomous increases in investment spending that result from an initial increase in induced expenditures. c. autonomous increases in consumption spending that result from an initial increase in induced expenditures. d. induced increases in consumption spending that result from an initial increase in autonomous expenditures.

d

24. Which of the following is true about the Federal Reserve and its ability to prevent recessions? a. The Federal Reserve can realistically eliminate recessions by keeping cyclical unemployment equal to zero. b. The Federal Reserve can realistically eliminate recessions by keeping the inflation rate equal to zero. c. The Federal Reserve cannot realistically influence the economy and has little to no effect on the magnitude and length of recessions. d. The Federal Reserve cannot eliminate recessions, but seeks to keep recessions shorter and milder than they would otherwise be.

d

40. Which of the following spending categories would be included in federal government purchases? a. interest payments b. grants to state and local governments c. transfer payments d. defense spending.

d

44. If a $100 billion tax cut leads to a $300 billion increase in real GDP, the tax multiplier is a. 1/3. b. -1/3. c. 3. d. -3.

d

48. If the federal government attempts to balance the budget during an economic recession, it is likely that a. real GDP will rises toward potential real GDP and the recession will be shorter and milder. b. real GDP will rise toward potential real GDP and the recession will be longer and worse. c. real GDP will fall further below potential real GDP and the recession will be shorter and milder. d. real GDP will fall further below potential real GDP and the recession will be longer and worse.

d

Other things being equal, if the Fed pursues a contractionary monetary policy, the aggregate demand curve shifts ________, resulting in a ________ price level. a. to the right; higher b. to the right; lower c. to the left; higher d. to the left; lower

d

Which of the following lists the likely outcomes of contractionary monetary policy? a. Both real GDP and the price level rise. b. Real GDP rises while the price level falls. c. Real GDP falls while the price level rises. d. Both real GDP and the price level fall.

d