Macro
If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then according to the simple extended AD-AS model, in the long run the economy will: A) Get back to where it started from B) Get stuck with high unemployment C) Experience an inflationary spiral D) Have a higher price level
A) Get back to where it started from
An increase in nominal GDP will: A) Increase the transactions demand and the total demand for money B) Decrease the transactions demand and the total demand for money C) Increase the transactions demand for money but decrease the total demand for money D) Decrease the transactions demand for money but increase the total demand for money
A) Increase the transactions demand and the total demand for money
Fiscal policy refers to the: A) deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level. B) deliberate changes in government spending and taxes to achieve greater equality in the distribution of income. C) altering of the interest rate to change aggregate demand. D) fact that equal increases in government spending and taxation will be contractionary.
A) deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.
In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should: A) increase tax rates and/or reduce government spending. B) discourage personal saving by reducing the interest rate on government bonds. C) increase government expenditures. D) encourage private investment by reducing corporate income taxes.
A) increase tax rates and/or reduce government spending.
The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves: A) is larger the smaller the required reserve ratio. B) is the reciprocal of the bank's actual reserves. C) is directly or positively related to the size of the required reserve ratio. D) will be zero when the required reserve ratio is 100 percent.
A) is larger the smaller the required reserve ratio.
When a commercial bank has excess reserves: A) it is in a position to make additional loans. B) its actual reserves are less than its required reserves. C) it is charging too high an interest rate on its loans. D) its reserves exceed its assets.
A) it is in a position to make additional loans.
A decline in investment will shift the AD curve to the: A) left by a multiple of the change in investment. B) left by the same amount as the change in investment. C) right by the same amount as the change in investment. D) right by a multiple of the change in investment.
A) left by a multiple of the change in investment.
The most likely way the public debt burdens future generations, if at all, is by: A) reducing the current level of investment. B) causing future unemployment. C) causing deflation. D) reducing real interest rates.
A) reducing the current level of investment.
Graphically, demand-pull inflation is shown as a: A) rightward shift of the AD curve along an upsloping AS curve. B) leftward shift of the AS curve along a downsloping AD curve. C) leftward shift of the AS curve along an upsloping AD curve. D) rightward shift of the AD curve along a downsloping AS curve.
A) rightward shift of the AD curve along an upsloping AS curve.
The wealth effect is shown graphically as a: A) shift of the consumption schedule. B) movement along an existing consumption schedule. C) shift of the investment schedule. D) movement along an existing investment schedule.
A) shift of the consumption schedule.
Answer the question on the basis of the following information about a banking system: new currency deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit = $0. Refer to the information. The $40 billion deposit of currency into checking accounts will create excess reserves of: A) $20 billion. B) $32 billion. C) $40 billion. D) $0.
B) $32 billion.
Which of the following represents the most expansionary fiscal policy? A) A $10 billion tax cut. B) A $10 billion increase in government spending. C) A $10 billion tax increase. D) A $10 billion decrease in government spending.
B) A $10 billion increase in government spending.
dam Smith recognized the benefits from trade based on ____, and David Ricardo recognized the benefits from trade based on ____: A) Comparative advantage; resource endowments B) Absolute advantage; comparative advantage C) Absolute advantage; resource endowments D) Comparative advantage; absolute advantage
B) Absolute advantage; comparative advantage
Compared to fiscal policy, monetary policy has a much shorter: A) Recognition lag B) Administrative lag C) Operational lag D) Effects lag
B) Administrative lag
In the long run, if the price level increases, then nominal wages and other input prices: A) Also rise, so firms will reduce their output level B) Also rise, so firms will not change their output level C) Not change, so firms will not change their output level D) Decrease, so firms will increase their output level
B) Also rise, so firms will not change their output level
The Federal Reserve System performs many functions but its most important one is: A) Issuing currency B) Controlling the money supply C) Providing for check clearing and collection D) Acting as fiscal agent for the U.S. government
B) Controlling the money supply
Supply-side economists contend that the system of taxation in the United States: A) Creates incentives to save and invest B) Creates dis-incentives to work C) Generates maximum tax revenue D) Reduces the effects of cost-push inflation
B) Creates dis-incentives to work
The interest rate that banks charge one another for the loan of excess reserves is the: A) Prime interest rate B) Federal funds rate C) Discount rate D) Interest on reserves
B) Federal funds rate
The traditional Phillips Curve shows the: A) Direct correlation between the rate of inflation and the unemployment rate B) Inverse correlation between the rate of inflation and the rate of unemployment C) Direct correlation between the short-run and long-run aggregate supply D) Inverse correlation between the short-run and long-run aggregate supply
B) Inverse correlation between the rate of inflation and the rate of unemployment
The transactions demand for money will shift to the: A) Left when nominal GDP increases B) Left when nominal GDP decreases C) Right when nominal GDP decreases D) Right when the interest rate increases
B) Left when nominal GDP decreases
If the purchasing power of the dollar is falling, then it follows that: A) The price index is falling B) The price index is rising C) Nominal incomes are falling D) Interest rates are rising
B) The price index is rising
The functions of money are to serve as a: A) Resource allocator, method for accounting, and means of income distribution B) Unit of account, store of value, and medium of exchange C) Determinant of consumption, investment, and government spending D) Factor of production, exchange, and aggregate supply
B) Unit of account, store of value, and medium of exchange
An appropriate fiscal policy for a severe recession is: A) a decrease in government spending. B) a decrease in tax rates. C) appreciation of the dollar. D) an increase in interest rates.
B) a decrease in tax rates.
The consumption schedule shows: A) a direct relationship between aggregate consumption and accumulated wealth. B) a direct relationship between aggregate consumption and aggregate income. C) an inverse relationship between aggregate consumption and accumulated financial wealth. D) an inverse relationship between aggregate consumption and the price level.
B) a direct relationship between aggregate consumption and aggregate income.
The MPC can be defined as that fraction of a: A) change in income that is not spent. B) change in income that is spent. C) given total income that is not consumed. D) given total income that is consumed.
B) change in income that is spent.
Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: A) increase government expenditures by $100 billion. B) increase government expenditures by $50 billion. C) reduce taxes by $50 billion. D) reduce taxes by $200 billion.
B) increase government expenditures by $50 billion.
When a bank loan is repaid, the supply of money: A) is constant, but its composition will have changed. B) is decreased. C) is increased. D) may either increase or decrease.
B) is decreased.
The investment demand curve suggests: A) that changes in the real interest rate will not affect the amount invested. B) there is an inverse relationship between the real rate of interest and the level of investment spending. C) that an increase in business taxes will tend to stimulate investment spending. D) there is a direct relationship between the real rate of interest and the level of investment spending.
B) there is an inverse relationship between the real rate of interest and the level of investment spending.
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the non-bank public, this action has the potential to increase money supply by a maximum of: A) $16 billion, but only by $14 billion if the securities are purchased directly from commercial banks B) $14 billion, but by $16 billion if the securities are purchased directly from commercial banks C) $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks D) $14 billion, and by $20 billion if the securities are purchased directly from commercial banks
C) $16 billion, and also by $16 billion if the securities are purchased directly from commercial banks
A reserve requirement of 20 percent means a bank must have $1,000 of reserves if its checkable deposits are: A) $100. B) $1,000. C) $5,000. D) $12,000.
C) $5,000.
Equilibrium in the long run occurs when: A) AD intersects the short-run AS, regardless of output level B) AD intersects the short-run AS, regardless of price level C) AD intersects the short-run and the long-run AS curves at the same point D) The short-run AS curve intersects the long-run AS curve
C) AD intersects the short-run and the long-run AS curves at the same point
If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will: A) Increase the excess reserves of member banks and thus increase the money supply B) Increase the excess reserves of member banks and thus decrease the money supplyC) Decrease the excess reserves of member banks and thus decrease the money supplyD) Decrease the excess reserves of member banks and thus increase the money supply A
C) Decrease the excess reserves of member banks and thus decrease the money supply
An increase in the money supply, ceteris paribus, usually: A) Increases the interest rate and increases aggregate demand B) Increases the interest rate and decreases aggregate demand C) Decreases the interest rate and increases aggregate demand D) Decreases the interest rate and decreases aggregate demand
C) Decreases the interest rate and increases aggregate demand
United States currency has value primarily because it: A) Is legal tender, is generally acceptable in exchange for goods or services, and is backed by the gold and silver of the Federal government B) Is generally acceptable in exchange for goods or services, is backed by the gold and silver of the Federal government, and facilitates trade C) Is relatively scarce, is legal tender, and is generally acceptable in exchange for goods and services D) Facilitates trade, is legal tender, and permits the use of credit cards and near-monies
C) Is relatively scarce, is legal tender, and is generally acceptable in exchange for goods and services
The principle of comparative advantage indicates that mutually beneficial international trade can take place only when: A) Tariffs are eliminated B) Transportation costs are almost zero C) Relative costs of production differ between nations D) A country can produce more of some product than other nations can
C) Relative costs of production differ between nations
Specialization and trade based on comparative advantage allow nations to attain the following results, except: A) Higher combined output B) Higher consumption and standard of living C) Rising total employment D) Consuming combinations of products that are outside their PPCs
C) Rising total employment
Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward: A) an equality of tax receipts and government expenditures. B) an excess of tax receipts over government expenditures. C) an excess of government expenditures over tax receipts. D) a reduction of subsidies and transfer payments and an increase in tax rates.
C) an excess of government expenditures over tax receipts.
The interest-rate effect suggests that: A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.
C) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
The federal funds market is the market in which: A) banks borrow from the Federal Reserve Banks. B) U.S. securities are bought and sold. C) banks borrow reserves from one another on an overnight basis. D) Federal Reserve Banks borrow from one another.
C) banks borrow reserves from one another on an overnight basis.
The investment demand curve will shift to the right as the result of: A) the availability of excess production capacity. B) an increase in business taxes. C) businesses becoming more optimistic about future business conditions. D) an increase in the real interest rate.
C) businesses becoming more optimistic about future business conditions.
Commercial banks create money when they: A) accept cash deposits from the public. B) purchase government securities from the central banks. C) create checkable deposits in exchange for IOUs. D) raise their interest rates.
C) create checkable deposits in exchange for IOUs.
Other things equal, appreciation of the dollar: A) increases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. B) increases aggregate demand in the United States and may decrease aggregate supply by reducing the prices of imported resources. C) decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. D) decreases aggregate demand in the United States and may reduce aggregate supply by increasing the prices of imported resources.
C) decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.
If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by: A) increasing government spending by $25 billion. B) increasing government spending by $80 billion. C) decreasing taxes by $25 billion. D) decreasing taxes by $100 billion.
C) decreasing taxes by $25 billion.
The aggregate demand curve is: A) vertical under conditions of full employment. B) horizontal when there is considerable unemployment in the economy. C) downsloping because of the interest-rate, real-balances, and foreign purchases effects. D) downsloping because production costs decrease as real output rises.
C) downsloping because of the interest-rate, real-balances, and foreign purchases effects.
Contractionary fiscal policy is so named because it: A) involves a contraction of the nation's money supply. B) necessarily reduces the size of government. C) is aimed at reducing aggregate demand and thus achieving price stability. D) is expressly designed to expand real GDP.
C) is aimed at reducing aggregate demand and thus achieving price stability.
The aggregate supply curve: A) is explained by the interest rate, real-balances, and foreign purchases effects. B) gets steeper as the economy moves from the top of the curve to the bottom of the curve. C) shows the various amounts of real output that businesses will produce at each price level. D) is downsloping because real purchasing power increases as the price level falls.
C) shows the various amounts of real output that businesses will produce at each price level.
The Federal Reserve System consists of which of the following? A) Federal Open Market Committee and Office of Thrift Supervision B) Federal Deposit Insurance Corporation and Controller of the Currency C) U.S. Treasury Department and Bureau of Engraving and Printing D) Board of Governors and the 12 Federal Reserve Banks
D) Board of Governors and the 12 Federal Reserve Banks
The M1 money supply is composed of: A) All coins and paper money held by the general public and the banks B) Bank deposits of households and business firms C) Bank deposits and mutual funds D) Checkable deposits and currency in circulation
D) Checkable deposits and currency in circulation
In the long run, demand-pull inflation leads to: A) Higher unemployment and higher price level B) Lower real wages and higher unemployment C) Lower real output and no change in unemployment D) Higher price level and no change in real output
D) Higher price level and no change in real output
Benefits from international trade are based on the following differences, except: A) In resource endowments B) In technological capabilities C) In product quality and other attributes D) In income levels
D) In income levels
A decrease in the interest rate will cause a(n): A) Increase in the transactions demand for money B) Decrease in the transactions demand for money C) Decrease in the amount of money held as an asset D) Increase in the amount of money held as an asset
D) Increase in the amount of money held as an asset
Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed? A) Decreased by $600. B) Increased by $1,800. C) Increased by $600. D) Increased by $1,200.
D) Increased by $1,200.
When the Fed buys government securities in the open market, it: A) Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate B) Increases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate C) Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus increasing the Federal funds rate D) Increases the excess reserves of the banking system, raising excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate
D) Increases the excess reserves of the banking system, raising excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate A
An increase in the money supply is likely to reduce: A) The general price level B) Nominal income C) Money demand D) Interest rates
D) Interest rates
According to the Taylor rule, if the inflation rate is one percentage point below the target of 2%, then the Fed should: A) Raise the real federal funds rate by one percentage point B) Lower the real federal funds rate by one percentage point C) Raise the real federal funds rate by half of a percentage point D) Lower the real federal funds rate by half of a percentage point
D) Lower the real federal funds rate by half of a percentage point
Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate? A) Buy government securities in the open market and increase taxes B) Buy government securities in the open market and decrease taxes C) Sell government securities in the open market and increase government spending D) Sell government securities in the open market and decrease government spending
D) Sell government securities in the open market and decrease government spending
What policy tool of the Federal Reserve relies on bank borrowing to be effective? A) Open-market operations B) Check collection C) The reserve ratio D) The discount rate
D) The discount rate
A bank that has liabilities of $150 billion and a net worth of $20 billion must have: A) excess reserves of $130 billion. B) assets of $150 billion. C) excess reserves of $150 billion. D) assets of $170 billion.
D) assets of $170 billion.
Most modern banking systems are based on: A) money of intrinsic value. B) commodity money. C) 100 percent reserves. D) fractional reserves.
D) fractional reserves.
The determinants of aggregate supply: A) are consumption, investment, government, and net export spending. B) explain why real domestic output and the price level are directly related. C) explain the three distinct ranges of the aggregate supply curve. D) include resource prices and resource productivity.
D) include resource prices and resource productivity.
