Econ Homeworks

Deposit insurance guarantees that the federal government will reimburse depositors up to ________ in each account in each bank should the banks fail.

$250,000

The Republic Bank has $2 million in deposits and $250,000 in reserves. If the required reserve ratio is 10%, excess reserves are equal to:

$50,000

If the marginal propensity to consume is 0.95, the tax multiplier is:

-19

If the marginal propensity to save is 0.3, the tax multiplier is:

-2.33

Taxes are reduced by $50 billion and income increases by $1,000 billion. The value of the tax multiplier is:

-20

If the MPC is 0.9, then the tax multiplier is:

-9

According to classical economists, an increase in aggregate demand should result in:

-an increase in the price level -no change in the level of real GDP -no reduction in the unemployment rate

Which of the following is a financial intermediary?

-commercial bank -savings and loan association -life insurance company

Which of the following is a function of the Federal Reserve?

-conduct monetary policy -provide a system of check collection and clearing -regulate banks

Which of the following is a determinant of firms' investment and employment decisions?

-cost of capital -expectations of future economic conditions -interest rates

Which of the following would be counted as part of M1?

-demand deposits -traveler's check -currency

Which of the following is an investment (broadly defined)?

-education -purchase of capital equipment -purchase of ownership of a company

Which of the following is NOT a function of the Federal Reserve?

-issue new Treasury bonds -collects taxes -buys mortgages from banks -maintains U.S. exchange rate regime

Which of the following is a function of the district Federal Reserve Banks?

-provide advice on monetary policy -participate in monetary policy decision-making -act as a liaison between the Fed and the banks in their district

In order to provide liquidity to the economy after the September 11, 2001, terrorist attacks against the United States, the Fed:

-purchases government securities in the marketplace -increased the length of the "Federal Reserve float" -increased direct lending to commercial banks

In the most basic model of the economy, equilibrium output is achieved when:

-the C + I line intersects the 45 degree line -C + I equals output -there is no change in inventories

If the consumption function is C = 80 + 0.6Y, then the marginal propensity to consume equals:

0.6

Refer to Table 13.1. First Commercial Bank's total loans equal $ ________.

1,050,000

If C = 500 + 0.5 Y and I = 400, then the equilibrium level of income is:

1,800

As of 2012, banks have been required to keep ________ percent of deposits exceeding $71 million as reserves.

10%

C= 2000 + 0.5(Y-T) T = 200 G = 400 I = 500 The government spending multiplier is:

2

If the money multiplier is 4, the required reserve ratio is:

25%

Assume that the consumption function is C = 200 + 0.8 Y. When Y equals $200, then C equals ________.

360

If the nominal interest rate is 5 percent and the rate of inflation is 1 percent, then the real interest rate is:

4 percent

Assuming no government or foreign sector, if the marginal propensity to consume is 0.8, the multiplier is:

5

Refer to Figure 16.3. The money market will be in equilibrium at an interest rate of:

6%

At an aggregate output level of $600, the unplanned inventory change is: Aggregate Output = 600 Aggregate Consumption = 600 Investment = 50

600-600 = 0 0-50 = -50

How many governors are included in the Board of Governors of the Federal Reserve?

7

The Federal Open Market Committee consists of the:

7 members of the Board of Governors and 5 of the 12 regional bank presidents

Refer to Table 13.3. The required reserve ratio is:

8%

Which choice is true?

A higher interest rate causes lower investment, lower demand, and lower real GDP.

The equilibrium level of aggregate output equals:

Aggregate Output = Aggregate Consumption + Investment

Refer to Figure 15.2. If the economy is currently producing at point A and the Fed decreases the money supply, the economy will move to Point ________ in the short run and to Point ________ in the long run.

D, E

T/F: A Fed sale of government bonds will cause a reduction in the interest rate and an increase in the equilibrium quantity of money.

False

T/F: A liquidity trap is a situation in which interest rates are so high that no one can afford to borrow funds.

False

T/F: All presidents of the 12 district banks of the Federal Reserve can vote during FOMC meetings.

False

T/F: An asset that is difficult to convert into money is considered a liquid asset.

False

T/F: An excess demand for money drives interest rates down.

False

T/F: An increase in the price level increases the speculative demand for money.

False

T/F: An unexpected increase in inventories has a positive effect on future production.

False

T/F: As the economy expands, unemployment rises, and the result is an increase in unemployment benefits.

False

T/F: If autonomous consumption ( Ca) increases, the slope of the consumption function becomes steeper.

False

T/F: If the economy is at full employment equilibrium, an increase in the money supply will cause a higher level of output and an increase in the price level.

False

T/F: If there is inflation, real interest rates will be greater than nominal interest rates.

False

T/F: Refer to Figure 12.2 to answer the question. Series B is a variable that increases when the economy is growing very fast.

False

T/F: The discount rate is the interest rate on loans that commercial banks make to the Fed.

False

T/F: The larger the marginal propensity to consume, the smaller the multiplier.

False

T/F: The money multiplier is represented by 1/(1-reserve ratio).

False

T/F: The speculative demand for money states that in the long run, people hold on to money because it's quicker to make purchases with money than with bonds or stocks.

False

________ is a monetary system in which the money has no intrinsic value. In this system, the money is backed by the government.

Fiat money

Which of the following is true when the US dollar appreciates against the euro?

It takes fewer dollars to buy the euro

Saving account balances are included in:

M2 only

The multiplier-accelerator model was first developed by:

Paul Samuelson

Which of the following statements is correct?

The Fed can change GDP by changing the money supply

A decrease in the discount rate will increase the money supply.

True

T/F: A wage-price spiral can occur if an economy is producing at a level above full employment.

True

T/F: According to the Application, the reason why the problem caused by securitization was exposed was because the housing boom ended.

True

T/F: According to the multiplier-accelerator model, a downturn in real GDP leads to an even sharper fall in investment.

True

T/F: Bank runs are not common today because of deposit insurance.

True

T/F: For a given interest rate, a higher level of output means an increase in the number of transactions and an increase in the demand for money.

True

T/F: Friedman believes that the aggregate supply curve is vertical at the full employment level of output.

True

T/F: If output is less than aggregate planned expenditures, there will be an unplanned decrease in inventories.

True

T/F: Liabilities plus net worth equal assets.

True

T/F: Optimistic expectations about the future increase investment spending because they inflate the price of stock shares.

True

T/F: The government spending multiplier in a closed economy is the same as the government spending multiplier in an open economy, if the marginal propensity to import equals zero.

True

T/F: The interest rate determines the present value of a future payment.

True

T/F: When the level of output is below potential output, the unemployment rate is higher than the natural rate.

True

________ are the largest cost of production for most firms.

Wages

The accelerator theory describes the impact of:

a change in future GDP on investment.

Which of the following is an example of a Federal Reserve action that increases the money supply?

a decrease in the discount rate

Refer to Figure 12.1. Which of the following causes a movement from Point A to Point C?

a decrease in the interest rate

Refer to Figure 16.1. A movement from Point A to Point B can be caused by:

a decrease in the interest rate

Which of the following represents an action by the Federal Reserve that is designed to increase the money supply?

a decrease in the required reserve ratio

A $100 million increase in government spending causes:

a larger change in equilibrium output in a closed economy than in an open economy

A checking deposit in a bank is considered ________ of that bank.

a liability

The process by which changes in wages and prices causing further changes in wages and prices is called:

a wage - price spiral

Whenever the unemployment rate is pushed ________ the natural rate, wages begin to ________, thus pushing ________.

above, fall, down costs

Broadly defined, investments are:

actions that create a cost today but provide benefits in the future

According to Keynes, which of the following determines the level of employment in the economy?

aggregate demand

In the short run, which of the following determines the level of real GDP?

aggregate demand

Which of the following would cause an increase in GDP?

an open market purchase

Commercial banks:

are financial intermediaries that lend funds and accept deposits

The level of consumption in the economy when the level of income is zero is called:

autonomous consumption

If the government collects taxes using a constant income tax rate t, then the adjusted marginal propensity to consume (adjusted MPC) is:

b (1-t)

Even though banks have been required to keep 10 percent of deposits exceeding $71 million as reserves in 2012, the measured multiplier is only between 2 to 3 because:

bank hold excess reserves and people hold some of their loans in cash are both correct

An increase in the marginal propensity to save will:

cause the consumption function to be flatter

Which of the following assets is easiest to make transactions with?

checking deposits

According to the accelerator theory of investment, a decrease in the expected future growth rate of real GDP will cause:

current investment spending to decrease

Suppose that in the United States people begin to spend a smaller fraction of their income on imports. This would cause the multiplier to:

decrease

When the economy is in a recession and the stock market plunges, the interest rates ________ and the bond prices ________.

decrease and increase

Suppose that the required reserve ratio is 0.4. If a customer withdraws $10 million from a bank, then the money supply could potentially:

decrease by $15 million

Which of the following sequence of events follows an increase in taxes?

decrease in aggregate demand, followed by a decrease in real GDP, followed by decrease in money demand, followed by a decrease in real interest rate, and followed by an increase in investment

Suppose the economy is at full employment. An increase in the money supply will ________ in the short run and ________ in the long run.

decrease interest rates, increase the price level

If the Fed wanted to reduce the market interest rate, it could:

decrease the required reserve ratio

Which of the following sequence of events would follow a decrease in the reserve requirement?

decreased interest rate, followed by an increased investment, followed by an increase in aggregate demand, followed by an increase in GDP

Because investment is generally procyclical, it usually ________ when the economy ________.

decreases; is in a recession

Friedman and Keynes:

disagreed on the speed at which wages change

The interest rate that the banks pay to borrow money from the Fed is the:

discount rate

Which of the following is NOT a financial intermediary?

district bank of the Federal Reserve System

Financial intermediaries reduce the risk faced by savers through:

diversification of investment projects

Refer to Figure 16.2. At an interest rate of 8%, there is:

excess supply of money and the interest rate will decline

In order to shorten a recession when the economy is producing below full employment, the monetary authority could:

expand the money supply

If the long-run neutrality of money holds, then an increase in the money supply will ________ investment and output in the long run.

have no effect on

When interest rates are ________, the opportunity cost of holding ________ outside banks is ________.

high, cash, high

A variable is considered procyclical if it moves:

in the same direction as real GDP

Traveler's checks are:

included in M1 and M2

A decrease in the price level will:

increase consumption and increase output demanded

Monetary neutrality implies that an increase in the money supply will:

increase the price level

A depreciation of the U.S. dollar will likely cause U.S. exports to ________ and U.S. imports to ________.

increase, decrease

Nobel laureate Franco Modigliani found that increases in wealth cause:

increases in autonomous consumption

Disposable income:

increases when income increases

Assuming that the economy is in the long run equilibrium at full employment, an expansionary monetary policy ________ the price level and ________ output.

increases, doesn't change

If a economy's planned expenditures turn out to be less than production, then inventories will be:

increasing, prompting firms to decrease production in the future.

Money is an imperfect store of value because of:

inflation

The Fed indirectly controls long-term interest rates by:

influencing market expectations about future short-term interest rates

Though a powerful tool, the reserve requirement is seldomly used by the Fed to control the money supply because:

it causes significant disruptions in the banking system

The required reserve ratio is 10%. If the banks hold excess reserves, then the money multiplier is:

less than 10

Refer to Figure 16.5. Assume the interest rate equals 8%. If the money supply shifts exogenously from MS0 to MS1, what can the Fed do to bring the money market back to equilibrium at MS0?

lower the discount rate

When the economy is in a liquidity trap, the adjustment process without active policy:

may fail because interest rates cannot fall any further

Which of the following would NOT be counted as part of M1?

money market accounts

Assume that the required reserve ratio is 25%. If the Fed buys $5 million worth of government bonds from the public, the maximum change in the money supply is:

more than 5 million

The theory that considers real interest rates and taxes as the important determinants of investment spending is the:

neoclassical theory of investment

If the economy finds itself at a point where planned spending is equal to output, then we will expect to see:

no change in inventories

In the money market, the demand and supply of money determine the equilibrium:

nominal interest rate

Refer to Table 13.4. If First Charter Bank earns a loss of $100,000, then:

owner's equity will decrease by $100,000.

Refer to Figure 11.3 to answer the following questions. Suppose the economy is initially at point d. A decrease in consumer confidence will move the economy back to equilibrium at point:

point a

In theory, the price of a stock equals the:

present value of expected future dividend payments

Assuming that the economy is in the long run equilibrium at full employment, changes in the money supply affect:

price level

Fiscal policy affects the real interest rate through its impact on:

real GDP and money demand

Which of the following assets is the least liquid?

real estate

Firms react to unplanned increases in inventories by:

reducing output

If the quantity of money demanded equals the quantity of money supplied, then the interest rate will:

remain constant

If crowding out occurs in the long run and the government increases spending for infrastructure projects such as roads and bridges, then the additional government spending:

replaces an equivalent amount of private investment

If a firm that chooses to use all of its corporate earnings as dividends, then:

retained earnings equal zero

All else equal, when the Fed purchases government bonds, the money supply curve shifts to the ________ and the equilibrium interest rate ________.

right, falls

An increase in government spending will:

shift the aggregate expenditure line upwards and increase equilibrium output

When generating a political business cycle, a politician chooses lower unemployment in the ________ over inflation and crowding out in the ________.

short run, long run

When you keep your savings in a savings account, you are using money as a(n):

store of value

During the U.S. savings and loan crisis in the 1980s, depositors were saved at the expense of:

taxpayers

One possible explanation for the existence of unemployment is:

that the wage does not adjust immediately to changes in labor demand

The decisions concerning the money supply are made by:

the FOMC

The seven members of the board of governors are appointed to 14-year terms by:

the President of the United States

The boom period of the late 1990s was a good example of:

the Q-theory of investment at work.

According to Say's law:

the act of producing goods and services generates income that is equivalent to the value of goods and services produced enabling buyers to purchase those goods.

The wage-price spiral occurs when:

the economy is producing a level of output above full employment

A monetary system in which gold backs up paper money is called:

the gold standard

The present value of a payment to be received in the future is lower than the nominal value of that payment in the future as long as:

the interest rate is positive

The consumption function describes the relationship between consumption expenditures and:

the level of income

The fraction of additional income that is saved is called:

the marginal propensity to save

When the Fed conducts open market operations, the Fed buys and sells government securities to:

the private sector

A firm sells a corporate bond to:

the public in order to borrow money

Classical economists assumed:

the wage rate adjusts to maintain labor market equilibrium

Refer to Figure 15.1. If the wage rate can easily adjust to clear the market, then if the wage rate is currently at $12:

the wage rate will decline to eliminate the surplus

Active economic policies are more likely to destabilize the economy if:

the wage-price adjustment is quick enough

Refer to Figure 16.1. Which demand for money decreases when income decreases and causes a movement from Point A to Point E?

transactions demand for money