Macro Final Practice Questions

Refer to the diagram above, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with A. an expansionary fiscal policy. B. a major recession. C. a contractionary fiscal policy. D. severe demand-pull inflation.

A. an expansionary fiscal policy.

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district. As a result, A. commercial bank reserves are increased by $10,000. B. the supply of money automatically declines by $7,500. C. commercial bank reserves are increased by $7,500. D. the supply of money is automatically increased by $10,000.

A. commercial bank reserves are increased by $10,000.

Investment and interest rates are: A. inversely related B. positively related C. not related D. it depends on the type of investment (economic or financial investment)

A. inversely related

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 Fed does all of the following EXCEPT A. open checking accounts for the public B. lend money to the bank C. issuing money D. clearing checks for banks E. all of the above are functions of the Fed

A. open checking accounts for the public

If the demand for money increases while the supply for money remains unchanged then: A. the interest rate in the market will increase B. the interest rate in the market will decrease C. the interest rate in the market may increase or decrease D. the effect on the interest rate cannot be determined

A. the interest rate in the market will increase

If a bank has $50,000 in excess reserves and the reserve ratio is 10%, then: A. the maximum the bank can safely lend is $50,000 B. the maximum the bank can safely lend is $500,000 C. the maximum the bank can safely lend is $5,000 D. the maximum the bank can safely lend is $5,000,000

A. the maximum the bank can safely lend is $50,000

Other things equal, if the supply of money is reduced, A. the demand for money will increase. B. the interest rates will fall. C. bond prices will fall. D. investment spending will increase.

C. bond prices will fall.

An appropriate fiscal policy for a severe recession is (from a Keynesian economic point of view) 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.

Refer to the diagram. If the aggregate supply curve shifted from AS0 to AS1 and the aggregate demand curve remains at AD0, we could say that A. aggregate supply has increased, equilibrium output has decreased, and the price level has increased. B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased. C. an increase in the amount of output supplied has occurred. D. aggregate supply has increased and the price level has risen to G.

B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.

Fractional reserve banking means that: A. banks keep a fraction of their dollar deposits in gold reserves B. banks keep a fraction of their dollar deposits in reserves C. banks keep a fraction of their net worth in gold reserves D. banks keep a fraction of their net worth in reserves

B. banks keep a fraction of their dollar deposits in reserves

Refer to the diagram above, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to A. do nothing since the economy appears to be achieving full-employment real output. B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility. C. increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level. D. increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1.

B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.

The crowding-out effect of expansionary fiscal policy suggests that A. tax increases are paid primarily out of saving and therefore are not an effective fiscal device. B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. C. it is very difficult to have excessive aggregate spending in the U.S. economy. D. consumer and investment spending always vary inversely.

B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

If a bank has a total of $5,000 in net worth and $4,000 in checkable deposits then: A. its assets must equal $5,000 B. its assets must equal $9,000 C. its assets must equal $4,000 D. its liabilities must equal $9,000

B. its assets must equal $9,000

The most important determinant of consumption and saving is the A. level of bank credit. B. level of income. C. interest rate. D. price level.

B. level of income.

A rightward shift in the aggregate supply curve is best explained by an increase in A. business taxes. B. productivity. C. nominal wages. D. the price of imported resources.

B. productivity.

Excess reserves are: A. reserves that the bank is required to keep with the Fed B. reserves that the bank has in addition to what it is required to keep with the Fed C. reserves that the bank has to keep to cover a portion of its checkable deposits D. reserves that the bank keeps to pay for everyday expenses

B. reserves that the bank has in addition to what it is required to keep with the Fed

A budget deficit exists when: A. taxes are greater than government spending B. taxes are lower than government spending C. consumption is greater than savings D. income is lower than taxes

B. taxes are lower than government spending

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the A. prime rate. B. short-term rate. C. discount rate. D. federal funds rate.

C. discount rate.

Suppose that the economy is currently in full employment and government spending decreases. This will lead to: A. an increase in AD B. an increase in AS. C. a decrease in AD D. a decrease in AS

C. a decrease in AD

A checking account entry is money because it A. is ensured by the Federal Deposit Insurance Corporation. B. has been declared as such by the federal government. C. performs the functions of money. D. can be sold for currency.

C. performs the functions of money.

Which of the following actions by the Fed most likely increase commercial bank lending? A. raising the reserve ratio B. increasing the federal funds rate target C. reducing the interest paid on excess reserves held at the Fed D. selling bonds to commercial banks and the public

C. reducing the interest paid on excess reserves held at the Fed

If aggregate demand decreases then, the price level will ______________, the GDP will _______________, and the unemployment will __________________. A. increase, increase, increase B. increase, decrease, decrease C. remain unchanged, decrease, increase D. decrease, decrease, decrease

C. remain unchanged, decrease, increase

If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift: A. leftward by $50 billion at each price level. B. rightward by $10 billion at each price level. C. rightward by $50 billion at each price level. D. leftward by $40 billion at each price level.

C. rightward by $50 billion at each price level.

An expansionary fiscal policy is shown as a A. leftward shift in the economy's aggregate supply curve. B. movement along an existing aggregate demand curve. C. rightward shift in the economy's aggregate demand curve. D. leftward shift in the economy's aggregate demand curve.

C. rightward shift in the economy's aggregate demand curve.

The federal funds rate is: A. the interest rate at which banks lend money for car loans B. the interest rate at which banks lend money for mortgages C. the interest rate at which banks lend money to other banks D. the interest rate at which banks borrow money from the Fed

C. the interest rate at which banks lend money to other banks

The opportunity cost of holding money A. is zero because money is not an economic resource. B. varies inversely with the interest rate. C. varies directly with the interest rate. D. varies inversely with the level of economic activity.

C. varies directly with the interest rate.

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change? A. The required reserve ratio will increase. B. The money supply will decrease. C. The deposits of commercial banks will decline. D. Commercial bank reserves will increase.

D. Commercial bank reserves will increase.

Which of the components of the M1 measure of money supply are not included in the M2 measure of the money supply: A. Checking deposits B. Currency held by the public C. Checking deposits and currency held by the public D. None of the above is correct

D. None of the above is correct

Other things equal, which of the following would increase the federal funds rate? A. a decrease in loan demand in the federal funds market B. a decrease in the reserve ratio C. Fed purchases of government securities from banks D. a decline in excess reserves in the banking system

D. a decline in excess reserves in the banking system

An asset's liquidity refers to its ability to be A. bought and stored. B. increasing in value over time. C. used and enjoyed. D. a means of payment.

D. a means of payment.

Big Bucks Bank currently holds $20 million in excess reserves. If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to A. use those excess reserves to increase its lending. B. not change its lending activity, as excess reserves are not eligible to receive interest paid on reserve accounts. C. move a portion of those excess reserves into its required reserve account. D. hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend.

D. hold more of those excess reserves in its reserve account at the Fed, reducing the amount it is willing to lend.

When the reserve requirement is increased, A. required reserves are changed into excess reserves. B. the excess reserves of member banks are increased. C. a single commercial bank can no longer lend dollar-for-dollar with its excess reserves. D. the excess reserves of member banks are reduced.

D. the excess reserves of member banks are reduced.

The sale of government securities to the public by the Fed will cause A. commercial bank reserves to increase. B. the money supply to increase. C. checking deposits to increase. D. the interest rate to increase.

D. the interest rate to increase.

If a bank has a total of $100,000 in net worth and the reserve ratio is 20%, then: A. its required reserves are equal to $20,000 B. its required reserves are equal to $100,000 C. its excess reserves are equal to $20,000 D. its excess reserves are equal to $100,000 E. none of the above is correct

E. none of the above is correct