Macroeconomics
Suppose a bank's deposit liabilities increase by $10 million. If the required reserve ratio is 20 percent, bank reserves will increase by
$2 million
Suppose a bank's deposit liabilities increase by $1 million. If the required reserve ratio is 20 percent, the the resulting final changes in the bank balance sheet will show bank reserves increasing by
$200,000
When Tom's income is $20,000, he spends $18,000 and when his income increases to $30,000, he spends $23,000. His MPC is
.5
Suppose that at the target inflation rate of 2.5 percent the nominal interest rate is 4 percent. This means that at the target inflation rate, the central bank wants the real interest rate to equal
1.5 percent
The Federal Reserve System is divided into how many districts?
12
The Federal Reserve System was established in
1913
Since ____, the U.S. federal government has been running a budget deficit
2002
When the unemployment rate is equal to the natural unemployment rate, capacity utilization is usually close to
80 percent
The Federal Reserve serves as
A bank to other banks
Which of the following best explains the slope of the AD curve?
A change in inflation causes the real interest rate to change, which results in a change in spending
Which of the following would cause the Fed to lower interest rates?
A decrease in investment
Assume the Fed has complete control over the money supply. If the demand for money were greater than the supply of money, we would expect
A decrease in the quantity of money demanded and an increase in the rate of interest
Suppose, for a certain economy, real and potential GDP are initially equal. Then government purchases permanently increase. Compared to the baseline, we would expect to see, in the long run,
A decrease in the sum of consumption, investment, and net exports
A commercial bank is
A financial intermediary
As a measure of money, M1 emphasizes the use of money as
A medium of exchange
Over the period 1973 through 1991, for the largest developed economies in the world, there has been
A positive correlation between the growth rate of money and the rate of inflation
The negative correlation between inflation and unemployment is observed because
A rightward shift of the AD curve will reduce unemployment in the short run and increase inflation in the long run
The short-run effect of an increase in government purchases is
A rightward shift of the aggregate demand curve and movement along the inflation adjustment line
If Congress controlled central bank decisions, it would have
A short-run incentive to raise the target rate of inflation
State and local government expenditures are
About two-thirds as much as the federal government's expenditures
According to current U.S. monetary policy, the Fed
Adjusts the money supply so it intersects money demand at the chosen interest rate
In a boom year,
Aggregate demand has increased
When the Fed increases the federal funds rate,
All other interest rates increase
The 45-degree line identifies
All possible equilibrium points
Which of the following would cause the AD curve to shift to the right?
An increase in social security payments
Which of the following would cause the AD curve to shift to the left?
An increase in tax rates
All else held equal, an increase in the amount of transactions (goods and services purchased) in the economy results in
An increase in the demand for money
If real GDP depends only on capital, labor, and technology, an increase in the money supply will lead to
An increase in the price level
Assume the Fed has complete control over the money supply. If the demand for money were less than the supply of money, we would expect
An increase in the quantity of money demanded and a decline in the rate of interest
The short run is usually
Around one year
The equation for the real interest rate indicates that, other being things equal,
As inflation decreases, the real interest rate will rise
If taxes became more progressive, we would expect that whenever there was an economic fluctuation
Automatic changes in taxes would become more stabilizing
Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the medium run as a result of the change in spending?
B
When tax revenues are equal to spending, there is a
Balanced budget
The discount window enables the Fed to
Be a lender of last resort
If the nominal interest rate exceeds the rate of inflation, the real interest rate will
Be greater than zero
In practice, discretionary fiscal policy has
Been unsuccessful in offsetting recessions or booms
The debt to GDP ratio
Began to increase again in 2002
If a federal budget in which expenditures exceed revenue is enacted, the federal government will
Borrow money from the private sector
Financial intermediation is the bringing together of
Borrowers and lenders
If the Fed increases reserves in the banking system,
Both deposit and currency holdings will increase
When tax revenues are less than spending, there is a
Budget deficit
To increase bank reserves, the Fed will
Buy bonds from banks
Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the short run as a result of the change in spending?
C
A decrease in tax rates
Can lead to an increase in potential GDP
Which of the following would a real business cycle theorist emphasize as a primary cause of economic fluctuations?
Changes in technology
Banks are referred to as intermediaries because they
Channel funds from depositors to borrowers
If government purchases decrease, in the short run
Consumption will fall and net exports will increase as income falls
The long-run interest rate effect of decreased government purchases is that
Consumption, investment, and net exports are all higher
The long-run overall effect of decreased government purchases is that
Consumption, investment, and net exports are all higher
On the issue of central bank independence, evidence shows that
Countries with lower average rates of inflation have more independent central banks
M1 consists of
Currency plus checking deposits plus travelers' checks only
The debt to GDP ratio measures
Debt as a percentage of nominal GDP
Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Y, then at the end of the day the amount of reserves held by Bank Y can
Decrease by $2 million
Open market sales will
Decrease money supply and the quantity of money demanded
A lower real interest rate in the United States relative to the rest of the world will tend to
Decrease the value of the dollar and increase net exports
M1 includes
Demand deposits and currency in circulation
If the Fed determines the amount of money in circulation, the interest rate is determined by the
Demand for money
The text defines economic fluctuations as
Departure of the economy from its long-term growth trend
The formula that shows the relationship between reserves and deposits is
Deposits=1/reserve ratio x reserves
When Paul Volcker first started to head the Fed, the Federal Reserve began a policy of
Disinflation
When interest rates increase,
Expenditures decrease
Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the long run as a result of the change in spending?
F
If the economy is in a recession, inflation will be ____, and the Fed will want to ____ the interest rate in order to ____ real GDP.
Falling; decrease; increase
True or False, social security, Medicare, and Medicaid are expected to remain relatively constant in coming years
False
The symbol G used throughout the text stands for
Federal plus state and local government purchases of goods and services
Between 1979 and 1985 the rate of inflation
Fell from over 10 percent to around 4 percent
Which of the following would be a direct result of real GDP being above potential GDP?
Firms would raise their prices and there would be a subsequent rise in inflation
If the marginal propensity to consume declines, then
For any given change in income, there will be a smaller change in consumption
The long run is usually
Four to five years or more
If real GDP depends only on capital, labor, and technology, a higher growth rate in the money supply will lead to
Higher inflation
Throughout history, higher money growth has been associated with
Higher inflation
Velocity, V, measures
How frequently money is used
Suppose the economy is initially in equilibrium, and real and potential GDP are equal. Now, suppose export orders increase. Under these circumstances
If the countercyclical fiscal policy response is made correctly, the new equilibrium will in the long run have a lower rate of inflation than if no response had been made.
The consumption function shows the relationship between consumption and
Income
Which of the following statements best describes what is meant by a spending balance?
Income and spending are the same, and people's consumption is described by the consumption function
Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank INF, the amount of deposits held by the entire banking system will ultimately
Increase by $100 million
If foreigners decide to increase their purchases of U.S.-made goods by $15 million, real GDP will
Increase by more than $15 million
An increase in government spending will
Increase real GDP in the short run
To reduce the size of economic fluctuations, the government could
Increase spending during a recession and decrease spending during an expansion
A reduction in real interest rates will cause the demand for new homes to
Increase, which results in an increase in investment expenditures
The long-run effects of an increase in government purchases are that interest rates will ____, inflation will ____, and real GDP will ____
Increase; increase; remain unchanged
According to the consumption function, as income increases, consumption
Increases by a smaller amount
When government purchases decrease, the short-run effect can be described as the period of time when
Inflation is constant
Which of the following is probably the most sensitive to changes in real interest rates?
Investment
When interest rates decrease,
Investment, consumption, and net exports will increase, causing expenditures to increase
By having a Central Bank, our country
Is able to achieve centralized policy goals concerning our money supply
In the long run, an increase in the money supply
Is expected to lead to an increase in nominal GDP
If the Fed has fixed the interest rate,
It must conduct open market sales when money demand decreases
Suppose the Fed engages in a policy to reduce the inflation rate for any given level of real GDP. This would be depicted by a(n)
Leftward shift of the monetary policy line
The fact that taxes and government spending change whenever the state of the economy changes results in
Less severe recessions and booms
The interest rate that banks pay to depositors is
Less than the interest rate that borrowers pay to banks
If real GDP is below potential GDP,
Long-run equilibrium will be achieved once inflation has stopped declining
If the Fed believes that real GDP is below potential GDP, it will
Lower interest rates to shift the AD curve to the right
Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the short run we would expect
Lower unemployment
The quantity equation is written as
MV = PY
A higher value of the domestic currency
Means more expensive exports and cheaper imports
Which of the following is not an automatic stabilizer?
Military expenditures
The Fed prefers to focus on the interest rate rather than growth in the money supply because
Money demand is too volatile
The Phillips curve reflects a
Negative correlation between the inflation rate and the unemployment rate
Real interest rates and investment are
Negatively correlated because higher real interest rates make borrowing by firms more costly
The demand for money is
Negatively related to the interest rate and positively related to the volume of transactions
Which of the following cycles lies at the heart of the money multiplier process?
New deposits cause new loans which cause new deposits which cause new loans...
If the slope of the monetary policy rule line is 2, then when inflation rises by 1 percent, the
Nominal interest rate rises by 2 percent.
What happens to the Fed's balance sheet when it buys $10 billion in government securities?
None of these
The IA line does not shift in the short run because
Of expectations and staggered wage and price adjustment
The buying and selling of government bonds by the central bank is known as
Open market operations
Proponents of real business cycle theories argue that economic fluctuations are a response to changes in
Potential GDP
At the end of a recession
Potential GDP is greater than real GDP
If the Fed believes that real GDP is above potential GDP, it will
Raise interest rates to shift the AD curve to the left
When inflation is rising, the Fed will
Raise nominal interest rates to reduce aggregate demand
Monetary policy that attempts to increase the rate of inflation is called a
Re-inflation
The aggregate demand curve shows the relationship between
Real GDP and inflation
In the short run, when government purchases fall, income and hence consumption fall, so
Real GDP falls by more than the fall in government purchases
Countercyclical fiscal policy is risky because
Real GDP is likely to be close to potential GDP by the time the policy takes effect.
The structural budget surplus is the size of the budget surplus when
Real and potential GDP are equal
Disposable income is the income that households
Receive in wages, dividends, and interest payments plus transfers they may receive from the government minus any taxes they pay to the government
If inflation increases, the central bank acts to raise interest rates in order to
Reduce real GDP
One year-ahead-forecasts for real GDP
Reflect what forecasters believe will happen to the different spending components of real GDP
The short-run effects of an increase in government purchases are that inflation will ____, and real GDP will ____
Remain unchanged; increase
One of the main liabilities on the Fed's balance sheet is reserves. Which of the following is the best definition of that item?
Reserves are deposits that banks hold at the Fed
If the Fed's actions cause a bank's reserves to increase, we know the bank will have an incentive to convert the new reserves into loans and bonds because
Reserves earn virtually zero interest
An increase in government purchases
Results in a higher rate of inflation in the long run
Which of the following types of taxes provide the least revenue for the federal government?
Sales taxes
What is not counted as part of M1?
Savings deposits
If the Fed attempts to decrease the amount of deposits that banks hold, it can
Sell government bonds in an open market operation
When the Fed wants to raise nominal interest rates, it
Sells government bonds
If government expenditures decrease, the expenditure line will
Shift down in a parallel direction
If real interest rates increase, the expenditure line
Shifts down in a parallel way
The expenditure line
Slopes upward because consumption depends positively on income
Which of the following is an automatic stabilizer?
Social security payments, Unemployment compensation, Taxes, Welfare payments
Some Americans were reluctant to establish the Federal Reserve System because
Some Americans deeply distrusted centralized power
Along the 45-degree line,
Spending equals income
The "Fed" is the nickname for
The Central Bank of the U.S
The chair of the Board of Governors of the Federal Reserve is appointed by and confirmed by
The President and the Senate
If the Fed purchases $15 million worth of government bonds from Bank X, initially
The amount of Bank X's deposits at the Fed will increase by $15 million
Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Zip,
The amount of loans or bonds must decrease by $18 million by the end of the day
If the Fed sells $15 million worth of government bonds to Bank A, then initially
The amount of reserves held by Bank A will decrease by $15 million
When the Fed increases reserves by buying a government bond from a bank,
The amount of reserves in the banking system will increase by the amount of the bond purchase
Which of the following is an appropriate definition of the target inflation rate?
The central bank's goal for the average rate of inflation over the long run
Suppose a government has $4,000 billion of debt. This year, real GDP is $8,000 billion, the tax rate is 30 percent, and government spending is $2,000 billion. Which of the following is true?
The debt will decrease by $400 billion.
If firms decide to decrease their purchases of U.S.-produced goods,
The decrease in investment will cause U.S. income to decrease, which will cause consumption to decrease
The real rate of interest is
The difference between the stated interest rate and the expected rate of inflation
The interest rate on loans banks pay when they borrow from the Fed is called
The discount rate
The total amount of outstanding loans owed by the federal government is known as
The federal debt
When the Volcker disinflation began,
The federal funds rate had risen above 20 percent
The voting members of the FOMC are
The governors of the Federal Reserve Board and 5 of the 12 Federal Reserve district bank presidents
The long-run effect of a decrease in government purchases can be described as the period of time when
The inflation adjustment line intersects the aggregate demand curve at the level of potential GDP
An increase in lump-sum taxes results in
The intercept of the expenditure line decreasing
The slope of the consumption function is equal to
The marginal propensity to consume
Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed purchases $10 million of government securities from a private securities dealer. Then,
The maximum amount that deposits can increase will be $200 million
Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed sells $10 billion of government securities to Bank A. As a result,
The maximum amount that deposits in the economy will decrease is $200 million
Economists refer to the sum of all currency plus reserves on the Fed's balance sheet liabilities as
The monetary base
The central bank's monetary policy rule shows that
The nominal interest rate must increase by more than the increase in inflation
When the rate of interest falls,
The opportunity cost of money decreases, and the quantity of money demanded increases
When the rate of interest increases,
The opportunity cost of money increases, and the quantity of money demanded declines
A progressive tax system implies that
The proportion of income paid to taxes rises as income increases and falls as income decreases
The relationship between money and nominal GDP in the economy is summarized by
The quantity equation of money
Which of the following is the best measure of the effects of interest rates on aggregate expenditure?
The real interest rate
Many of the current controversies about money pertain to
The short-run effect the Fed has on real GDP
The Keynesian multiplier measures
The short-run impact of an initial change in spending on real GDP
What do economists mean when they refer to the "size" of the Fed's balance sheet?
The sum of all the assets on its balance sheet
Suppose people are holding $100 million of currency, total deposits in the banking system are $2,000 million, and bank reserves are $400 million. In this case,
The supply of money is $2,100 million
Which of the following does not occur when real GDP rises above potential GDP?
The unemployment rate rises above the natural unemployment rate
During the period known as the Volcker disinflation
The unemployment rate rose to 10.8 percent, real GDP fell below potential GDP, investment and net exports declined, the real interest rate rose
If capacity utilization is 98 percent,
The unemployment rate will be below the natural rate of unemployment
In order for the aggregate demand (AD) curve to be downward-sloping,
There has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate
Suppose the expenditure line is given by the equation E = 800 + .75Y, and output is equal to 3,000. Which of the following is true?
There is an incentive for firms to increase output.b.Spending is less than income
The AD-AI analysis in conjunction with the Phillips curve relationship shows that
There is no long-run gain from expansionary monetary policy
For the largest developed economies during the 1990s,
There was not enough variation in the rate of inflation to test the quantity equation because inflation was low for all these countries
The main rationale for central bank independence is that
This independence prevents the government from engaging in policies that, though beneficial in the short run, are harmful in the long run
Which of the following is the largest component of federal government expenditures?
Transfer payments
True or False, A deficit is projected for the U.S. federal tax revenues and expenditures for 2020
True
True or False, Based on presidential elections in 1980 and 1992, there is no longer strong evidence supporting the existence of a political business cycle.
True
True or False, If there is a budget deficit, the government must borrow to pay for the excess spending
True
True or False, It is customary to pay a higher interest rate on a loan than you would receive on your savings account from the same bank
True
True or false, A change in government purchases affects GDP, which is the same as income. The change in income affects consumption
True
True or false, A change in income causes consumption to change, and a change in consumption will cause income to change
True
True or false, A federal deficit adds to the federal debt
True
True or false, It is generally agreed that an increase in the money supply will not cause real GDP to increase in the long-run, but economists disagree regarding whether an increase in the money supply can cause a short-run increase in real GDP.
True
True or false, bonds are a bank asset consisting of money in the bank
True
True or false, commercial banks have deposit accounts at the Federal Reserve
True
True or false, open market sales by the Fed trigger a sequence of bond sales by banks as the banks replenish their reserves to the necessary levels.
True
True or false, the lower the reserve ratio, the greater the money multiplier because loans increase by a larger amount at each stage of the money multiplier process.
True
True or false, when a private individual buys a bond from another private individual, reserves are transferred from one commercial bank to another, but there is not a change in the overall level of reserves in our banking system.
True
True or false, when commercial banks deposit reserves into their official reserve account at the Fed, the Fed can make loans to private individuals because of fractional reserve banking.
True
True or false, when the Fed buys a bond, new reserves are injected into the commercial bank of the individual selling that bond, so that the overall level of reserves in the banking system increases.
True
A rise in world real interest rates relative to U.S. interest rates
Will cause international investors to decrease their demand for dollar-denominated assets
Automatic stabilizers refer to
taxes and government spending that change automatically whenever the state of the economy changes