Macroeconomics Exam 3
On a given aggregate demand curve, if the rate of nominal GDP growth is 10% and the growth rate of the money supply is 2%, then the velocity of money must be growing at: A. 12%. B. 20%. C. 8%. D. 5%.
8%
Paying a higher interest rate on reserves held at the Fed will tend to: A. decrease the money supply. B. not change the money supply. C. have an ambiguous effect on the money supply. D. increase the money supply.
A. decrease the money supply.
f the exchange rate between the U.S. dollar and the euro is $1 for €0.75, then the price of €1 is: A. $1.33. B. $1.75. C. $1. D. $0.75.
A. $1.33.
Which of the following is NOT a constraint on trade that prevents prices from being fully equalized across borders? A. The qualities of goods sold in different countries vary. B. Governments may tax or otherwise restrict trade to an extent that hinders market exchange. C. Some goods cannot be shipped at all. D. The costs of transportation for some goods can be significant.
A. The qualities of goods sold in different countries vary.
When a country dollarizes, its monetary policy is controlled by the: A. U.S. Federal Reserve. B. country's federal government. C. country's central bank. D. country's central bank and the U.S. Federal Reserve together.
A. U.S. Federal Reserve.
A significant real shock in an economy can result in: A. a leftward shift of the LRAS, SRAS, and AD curves. B. a leftward shift of the SRAS curve. C. consumer pessimism and a leftward shift of the AD curve. D. a leftward shift of the LRAS curve.
A. a leftward shift of the LRAS, SRAS, and AD curves.
If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be: A. an increase in money supply growth. B. an increase in government spending growth. C. a tax cut. D. a lower goal for inflation.
A. an increase in money supply growth.
An appreciation of the Mexican peso would most likely be a result of: A. an increase of foreign investment in Mexico. B. a decrease in Mexican imports in the United States. C. an increase in the supply of pesos. D. a decrease in Mexican exports to the United States.
A. an increase of foreign investment in Mexico.
The Fed will be most effective at changing the money supply when: A. banks have low reserves and the money multiplier is large. B. banks have high reserves and the money multiplier is large. C. banks have high reserves and the money multiplier is small. D. banks have low reserves and the money multiplier is small.
A. banks have low reserves and the money multiplier is large.
The economist John Maynard Keynes said, "In the long run, we are all _____." A. dead B. old C. tired D. sticky
A. dead
Which tax rate determines whether it is worth it to work an extra day? A. marginal B. average C. payroll (FICA) D. capital gains
A. marginal
Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. A person earning $35,000 pays an income tax of: A. $1,000 B. $1,500 C. $2,000 D. $3,500
B. $1,500
A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. If someone earns $75,000, how much tax does that person pay? A. $15,000 B. $10,000 C. $7,500 D. $5,000
B. $10,000
If tax rates are 10% on income up to $10,000, 20% for income between $10,001 and $20,000, and 30% for income over $20,000, the total tax payment for a person earning $25,000 is approximately: A. $2,000. B. $4,500. C. $2,500. D. $3,000.
B. $4,500.
(Table: Multiple Deposit Expansion) Refer to the table. For the multiple deposit expansion process described in this table, if all banks hold only the required reserves, what is the money multiplier in this country? A. 8 B. 12.5 C. 10 D. 5
B. 12.5
In 2020, the national debt held by the public in the United States was just over ______ trillion dollars. A. 10 B. 18 C. 80 D. 14
B. 18
If tax rates are 10% on income up to $10,000, 20% for income between #10,001 and $20,000, and 30% for income over $20,000, the average tax rate for a person earning $25,000 is: A. 10% B. 18% C. 25% D. 30%
B. 18%
If you were born after 1960, you will not be eligible to draw full Social Security retirement benefits until you reach age: A. 65. B. 67. C. 62. D. 70.
B. 67.
How do budget deficits lead to trade deficits? A. Budget deficits lead to lower interest rates, which lead to net capital inflow, which leads to currency appreciation, thus reducing net exports. B. Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency appreciation, thus reducing net exports. C. Budget deficits lead to higher interest rates, which lead to net capital outflow, which leads to currency appreciation, thus reducing net exports. D. Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency depreciation, thus reducing net exports.
B. Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency appreciation, thus reducing net exports.
Which is a limitation of monetary policy in stabilizing the economy? A. Central banks have too much control over the money supply. B. Monetary policy is subject to uncertain lags. C. Most central bank policymakers are controlled by the government. D. Central banks have no discretion over policy tools.
B. Monetary policy is subject to uncertain lags.
An increase in the capital gains tax will most likely: A. increase investment. B. decrease investment. C. raise the marginal tax rate. D. raise the average tax rate.
B. decrease investment.
The tax rate paid on an additional dollar of income is the: A. higher tax rate. B. secondary tax rate. C. marginal tax rate. D. reserve tax rate.
C. marginal tax rate.
Which of the following is a U.S. current account transaction? A. Buying stock shares of a Canadian company. B. Selling U.S. dollars in exchange for euros. C. A foreign investor's purchase of a manufacturing plant in the United States. D. Selling a computer chip to a resident in Europe.
D. Selling a computer chip to a resident in Europe.
The national debt held by the public is the amount of: A. government debt plus household debt. B. federal debt held by foreign countries. C. government debt at the federal, state, and local levels. D. federal debt held by individuals and organizations outside the federal government.
D. federal debt held by individuals and organizations outside the federal government.
If velocity is constant, the growth rate of the money supply is 2%, and inflation is 3%, then real output growth will be: A. -1%. B. 5%. C. 1%. D. -5%.
-1%.
For an aggregate demand curve with = 10% and = 0%, if inflation is 6%, then real growth is: A. -6%. B. 4%. C. 16%. D. -4%.
4%
(Figure: Aggregate Demand) Point B on this aggregate demand curve represents an inflation rate of: A. 3%. B. 5%. C. 7%. D. 4%.
4%.
When the Fed conducts open market operations to decrease the monetary base, real GDP growth: A. decreases only in the short run. B. increases only in the short run. C. increases in both the short run and the long run. D. decreases in both the short run and the long run.
A. decreases only in the short run.
(Table: The Definition of the Money Supply) Refer to the table. What is the M2 money supply? A. $535 million B. $550 million C. $585 million D. $400 million
A. $535 million
Suppose a high-income individual, subject to a 15% capital gains tax rate, sells 100 shares of Company X for a price of $9 per share (purchased at $10 each) and 500 shares of Company Y for a price of $51 per share (purchased at $50 each). How much in capital gains tax will he pay? A. $60 B. $210 C. $3,690 D. $75
A. $60
The purpose of FICA taxes is to fund: A. Social Security payments. B. presidential campaigns. C. defense expenditures. D. health services for elderly people.
A. Social Security payments.
(Figure: Monetary Policy and Demand Shocks) Refer to the figure. In the figure, assume the initial real growth rate of the economy is 3% when a positive aggregate demand shock shifts the AD curve from AD 1 to AD 4. As a result of the Fed's policy response, the AD curve shifts to AD 3 in the short run. Which of the following is TRUE about the Fed's policy response? A. The Fed responded too much to the shock. B. The Fed was too fast in responding to the shock. C. The Fed provided just the right amount of response to the shock. D. The Fed responded too little to the shock.
A. The Fed responded too much to the shock.
Bill Clinton's administration experienced a federal budget surplus. Which of the following is therefore correct? A. The national debt held by the public decreased. B. Government expenditure was no longer counted as part of the federal budget. C. The federal budget was still in deficit, but the deficit was smaller in amount than in previous years. D. The national debt reached record high levels.
A. The national debt held by the public decreased.
With a floating exchange rate, an increase in the U.S. interest rate will cause: A. capital to flow into the United States, an increase in the demand for dollars, and an appreciation of the dollar. B. an increase in the demand for dollars. C. capital to flow into the United States. D. an appreciation of the dollar.
A. capital to flow into the United States, an increase in the demand for dollars, and an appreciation of the dollar.
When the Fed reacts to a positive aggregate demand shock, which is likely to make the period of disinflation shorter? A. credibility on the part of the Fed B. an increase in the velocity of money C. flexible wages and prices D. higher uncertainty about investment returns
A. credibility on the part of the Fed
In response to a negative spending shock, a condition of lower market confidence makes monetary policy easing: A. less effective in raising real GDP growth. B. more effective in raising real GDP growth. C. lead to increases in both real GDP growth and inflation. D. just as effective in raising real GDP growth as higher market confidence.
A. less effective in raising real GDP growth.
When a foreign business buys stock in a U.S. company, the U.S. capital account will: A. move in a positive direction. B. move in a negative direction. C. remain unchanged. D. become more volatile.
A. move in a positive direction.
The annual difference between federal spending and revenues when it is negative is called the: A. national deficit. B. national debt. C. debt held by the public. D. debt-to-GDP ratio.
A. national deficit.
Assume that the initial real exchange rate for a country and its trading partner is 1:1. If there is inflation in the country, then PPP predicts: A. no significant long run change in the real exchange rate. B. the real exchange rate will fall. C. the real exchange rate will rise. D. the country's currency will appreciate.
A. no significant long run change in the real exchange rate.
Imagine an economy in a recession resulting from a decrease in consumer spending. In the best case scenario, increased government spending to fight the recession would: A. not need to be as large as the initial fall in consumer spending. B. need to be a little more than the initial fall in consumer spending to make up for lost GDP. C. be offset by a decrease in inflation. D. need to be exactly the same amount as the initial fall in consumer spending.
A. not need to be as large as the initial fall in consumer spending.
The U.S. Congressional Budget Office has projected the debt-to-GDP ratio to increase dramatically in the future. One of the major reasons is the: A. projected increasing health-care costs for the aging population. B. projection of a high population growth rate. C. forecast of negative economic growth. D. forecast of a recession.
A. projected increasing health-care costs for the aging population.
A _____ has higher rates on people with lower incomes. A. regressive tax B. flat tax C. progressive tax D. marginal tax
A. regressive tax
The original purpose of the alternative minimum tax was to prevent the: A. rich from not paying income tax. B. rich from paying income tax. C. poor from not paying income tax. D. poor from paying income tax.
A. rich from not paying income tax.
A country can adopt a fixed exchange rate system through: A. setting up a currency union. B. allowing a freely functioning foreign exchange market. C. removing the asset backing of its currency. D. engaging in trade with other countries.
A. setting up a currency union.
Increased uncertainty causes the AD curve to: A. shift inward. B. shift outward. C. become steeper. D. become flatter.
A. shift inward.
Fiscal policy is MOST effective in offsetting the effects of: A. shocks to aggregate demand. B. shocks to the short-run aggregate supply curve. C. shocks to the LRAS curve. D. real shocks.
A. shocks to aggregate demand.
A negative real shock is often amplified, creating short-run aggregate supply and aggregate demand shocks due to: A. sticky wages and prices. B. sticky wages and flexible prices. C. flexible wages and sticky prices. D. flexible wages and prices.
A. sticky wages and prices.
(Figure: Monetary Policy) Refer to the figure. Assume that the economy is initially at point Y in the graph. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend, then: A. the Fed action would be partially effective and the economy would move to point Z. B. the Fed action would be magnified and the economy would move to point X. C. the Fed action would be nullified and the economy would remain at point Y. D. the LRAS curve would shift to the left.
A. the Fed action would be partially effective and the economy would move to point Z.
If the Fed reacts to a series of negative real shocks by raising money growth every time: A. the inflation rate will increase over time. B. deflation will occur. C. the inflation rate will decrease over time. D. the inflation rate will remain unchanged.
A. the inflation rate will increase over time.
When the Fed sells government bonds in the open market: A. the monetary base decreases and interest rates increase. B. both the monetary base and interest rates increase. C. both the monetary base and interest rates decrease. D. the monetary base increases and interest rates decrease.
A. the monetary base decreases and interest rates increase.
The economy is growing at its long-run potential growth rate of 3% with an inflation rate of 4%. If a positive aggregate demand shock occurs and the Fed responds by decreasing money growth, but fails to offset the aggregate demand shock, then in the short run: A. the real growth rate will be higher than 3% and the inflation rate will be higher than 4%. B. the real growth rate will be higher than 3% and the inflation rate will be lower than 4%. C. the real growth rate will be 3%, and the inflation rate will be 4%. D. the real growth rate will be lower than 3%, and the inflation rate will be lower than 4%.
A. the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.
If the exchange rate between the Japanese yen and the dollar was ¥110 = $1 in 2006 and ¥120 = $1 in 2009, then between 2006 and 2009: A. the yen depreciated against the dollar. B. both the yen and the dollar appreciated. C. both the yen and the dollar depreciated. D. the yen appreciated against the dollar.
A. the yen depreciated against the dollar.
The primary concern of economists worried about the crowding out effect is the: A. upward pressure that increased borrowing places on interest rates. B. size of the interest payments on the national debt as compared with GDP. C. debate over future generations. D. growing size of the national debt.
A. upward pressure that increased borrowing places on interest rates.
In the short run, a monetary contraction leads to increased unemployment because: A. wages and prices are sticky. B. wages are sticky, while prices are flexible. C. wages and prices are flexible. D. wages are flexible, while prices are sticky.
A. wages and prices are sticky.
Imagine that a government starts out with the budget surplus. If in the next period the government temporarily runs a budget deficit, what would you expect to happen to aggregate demand? A. AD would stay the same. B. AD would lie on the Solow growth rate. C. AD would increase. D. AD would decrease.
AD would increase.
Which is NOT a means of payment? A. currency B. a credit card account limit C. savings deposits D. checkable deposits
B. a credit card account limit
In the United States, the amount of cash per capita is about $4,000. This figure: A. shows how much currency each American holds in their checking accounts. B. misrepresents actual currency holdings in the United States because a lot of dollars are held outside the country. C. shows how much the world depends on the U.S. monetary system. D. accurately represents the size of the underground economy in the United States.
B. misrepresents actual currency holdings in the United States because a lot of dollars are held outside the country.
The risk that the failure of a few large financial institutions can affect the entire financial system is called: A. moral hazard. B. systemic risk. C. solvency risk. D. credit risk.
B. systemic risk.
Which of the following explains why a budget deficit can cause a trade deficit? A. An increase in the budget deficit raises domestic interest rates, resulting in a current account surplus and an appreciation of its currency. B. An increase in the budget deficit raises domestic interest rates, resulting in a capital account surplus and an appreciation of the currency. C. An increase in the budget deficit lowers domestic interest rates, resulting in a current account deficit and a depreciation of the currency. D. An increase in the budget deficit lowers domestic interest rates, resulting in a capital account deficit and a depreciation of the currency.
B. An increase in the budget deficit raises domestic interest rates, resulting in a capital account surplus and an appreciation of the currency.
If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate, which of the following is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation? A. Decrease the growth rate of the money supply. B. No monetary policy can achieve this goal. C. Increase the growth rate of the money supply. D. Keep the growth rate of the money supply constant while lowering interest rates.
B. No monetary policy can achieve this goal.
_____ are usually _____ in developing countries because of lower wages and immigration laws that prevent the free movement of labor. A. Goods; more expensive B. Services; less expensive C. Goods; less expensive D. Services; more expensive
B. Services; less expensive
What demographic change in the United States will cause government spending to increase in the next 50 years? A. The population will be younger. B. The population older than 65 will grow. C. Immigration will increase. D. Women will have fewer children.
B. The population older than 65 will grow.
Why is monetary policy not fully effective in combating a negative supply shock? A. The Fed has no tools that stimulate an economy after a negative supply shock. B. When countering a negative supply shock, Fed action will raise inflation. C. When countering a negative supply shock, Fed action will raise unemployment. D. When countering a negative supply shock, Fed action will cause deflation.
B. When countering a negative supply shock, Fed action will raise inflation.
Under Paul Volcker, the Fed reduced the inflation rate in the early 1980s by more than10 percentage points, causing: A. housing prices to soar and interest rates to remain high. B. a severe recession to take place. C. unemployment to decrease. D. GDP growth rise to 6% and consumer confidence to grow.
B. a severe recession to take place.
Another form of expansionary fiscal policy in addition to government spending is: A. a welfare program. B. a tax rebate. C. unemployment insurance. D. a subsidy.
B. a tax rebate.
As the government's bank, the Fed does NOT: A. maintain the bank account of the U.S. Treasury. B. approve the transactions involving corporate bonds and stocks. C. manage the borrowing of the U.S. Treasury. D. conduct the issuing, transferring, and redeeming of U.S. Treasury bonds.
B. approve the transactions involving corporate bonds and stocks.
Total tax payments divided by total income is called the: A. marginal tax rate. B. average tax rate. C. total tax rate. D. last tax rate.
B. average tax rate.
Although the Federal Reserve may increase the monetary base, the larger monetary aggregates (M1 and M2) and thus aggregate demand won't increase very much in response if: A. the interest rate is too high. B. banks are slow to lend. C. the tax rate is too high. D. the economy is in recession.
B. banks are slow to lend.
The capital account measures: A. how the value of a country's exports exceeds the value of its imports. B. changes in foreign ownership of domestic assets. C. net income on capital held abroad and net transfer payment. D. the economic transactions between residents of one country and residents of the rest of the world.
B. changes in foreign ownership of domestic assets.
When fiscal policy is funded through taxes, government spending primarily crowds out: A. investment. B. consumer spending. C. real growth. D. velocity.
B. consumer spending.
If the Fed sells $200 million in government bonds, the total money supply will: A. not change. B. decrease by more than $200 million. C. decrease by less than $200 million but more than $0 million. D. decrease by exactly $200 million.
B. decrease by more than $200 million.
If consumption growth decreases, the government spending "multiplier effect" means that in order to counter the recession: A. the government cannot use fiscal policy. B. fiscal policy needs to raise G by less than the decrease in C. C. the government is forced to use both tax cuts and increases in G. D. fiscal policy needs to raise G by more than the decrease in C.
B. fiscal policy needs to raise g by less than the decrease in C.
In the short run, if the Fed responds to a negative real shock by raising the growth rate of the money supply, inflation will be: A. the same as the rate without responding to the negative shock. B. higher than the rate without responding to the negative shock. C. lower or higher than the rate without responding to the negative shock, depending on the size of money supply growth. D. lower than the rate without responding to the negative shock.
B. higher than the rate without responding to the negative shock.
Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD 1 to AD 4, then the government can avoid a short-run increase in inflation by: A. increasing taxes so that the AD curve shifts further out to AD5. B. increasing taxes so that the AD curve shifts back to AD1. C. increasing government spending so that the AD curve shifts back to AD1. D. increasing government spending so that the AD curve shifts further out to AD5.
B. increasing taxes so that the AD curve shifts back to AD1.
When banks borrow from the Fed: A. they pay an interest rate called the Federal Funds rate. B. it increases the money supply C. it decreases the availability of banks to extend new loans. D. interest rates rise.
B. it increases the money supply
The money multiplier is the amount the: A. deposits expand with each dollar increase in reserves. B. money supply can potentially expand with each dollar increase in reserves. C. money supply can potentially expand with each dollar increase in deposits. D. reserves expand with each dollar increase in deposits.
B. money supply can potentially expand with each dollar increase in reserves.
All else held constant, an increase in U.S. imports will cause the U.S. current account to: A. remain unchanged. B. move in a negative direction. C. move in a positive direction. D. become more volatile.
B. move in a negative direction.
All else held constant, an increase in U.S. exports will cause the U.S. current account to: A. become more volatile. B. move in a positive direction. C. remain unchanged. D. move in a negative direction.
B. move in a positive direction.
In the long run, with a floating exchange rate, changes in _____ will have an impact on the real exchange rate. A. the foreign country's money supply only B. neither the U.S. money supply nor the foreign country's money supply C. both the U.S. money supply and the foreign country's money supply D. the U.S. money supply only
B. neither the U.S. money supply nor the foreign country's money supply
The U.S. income tax system is: A. proportional. B. progressive. C. regressive. D. marginal.
B. progressive.
Which refers to the decrease in private spending when government spending increases? A. the automatic stabilizing effect B. the crowding out effect C. the multiplier effect D. the timing effect
B. the crowding out effect
Social Security and Medicare primarily transfer wealth to: A. children. B. the elderly. C. the poor. D. the unemployed.
B. the elderly.
In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of: A. both the real shock and the increase in money growth. B. the increase in money growth only. C. some reason other than the real shock and the increase in money growth. D. the real shock only.
B. the increase in money growth only.
In the AD-AS model, an increase in money growth will cause the growth rate of real GDP to increase in: A. both the short run and the long run. B. the short run only. C. the long run only. D. neither the short run nor the long run.
B. the short run only.
When consumers cut back on spending _____fall(s). A. interest rates B. the velocity of money C. tax rates D. the money supply
B. the velocity of money
If instead of buying short-term Treasury securities the Fed decides to purchase the country's supply of paper clips, the money supply: A. will not change. B. will expand. C. might expand or contract. D. will contract.
B. will expand.
(Table: Multiple Deposit Expansion) Refer to the table. For the multiple deposit expansion process described in this table, what is the maximum amount of loans that the Third National Bank can make if it decides to hold 1% of deposits as excess reserves? A. $338,560 B. $30,470.40 C. $308,089.60 D. $311,475.20
C. $308,089.60
Which asset is MOST liquid? A. a house B. a money market mutual fund C. cash D. antique furniture
C. cash
As a result of an increase in the growth rate of the money supply: A. real GDP growth increases in both the short run and the long run, and the inflation rate increases only in the short run. B. both the real growth and the inflation rate increase only in the short run. C. real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run. D. real GDP growth increases only in the long run, and the inflation rate increases only in the short run.
C. real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.
An increase in money growth will cause the economy's AD curve to: A. shift inward. B. not shift. C. shift outward. D. shift outward during expansions and inward during contractions.
C. shift outward.
The members of the Board of Governors of the Federal Reserve have 14-year nonrenewable terms. Thus: A. the chairman of the Board of Governors also has a 14-year term. B. every president of a Federal Reserve district bank will serve at least 14 years on the Board of Governors. C. they are somewhat insulated from the political process. D. the New York Federal Reserve District Bank President can only serve 14 years on the Federal Open Market Committee.
C. they are somewhat insulated from the political process.
Refer to the table. According to the data in the table, the total amount of M1 equals: A. $3,268 billion. B. $920 billion. C. $1,450 billion. D. $3,388 billion.
C. $1,450 billion.
(Table: Statistics for a Small Economy) Refer to the table. The table shows some statistics for a small economy. Using only the information provided, the monetary base amounts to: A. $71 million. B. $19 million. C. $12 million. D. $149 million.
C. $12 million.
The United States national debt held by the public was nearly _______ trillion dollars in 2014. A. 0 B. 10 C. 13 D. 5
C. 13
(Table: A Cross-Country Comparison) According to the data in the table, which country has a flat tax rate system? A. A and B only B. A and C only C. C only D. None of the countries has a flat tax rate system.
C. C only
_____ in the U.S. dollar will cause U.S. _____ to _____ in the short run. A. Appreciation; aggregate supply; decrease B. Appreciation; aggregate demand; increase C. Depreciation; aggregate demand; increase D. Depreciation; aggregate supply; decrease
C. Depreciation; aggregate demand; increase
Which is an example of quantitative easing by the Federal Reserve? A. The Fed purchases $100,000 worth of short-term government bonds. B. The Fed lowers interest rates. C. The Fed purchases $50,000 worth of long-term government bonds. D. The Fed raises the money multiplier.
C. The Fed purchases $50,000 worth of long-term government bonds.
In the face of a negative shock to consumer confidence, politicians are on the fence about whether to implement policies based on the advice of economists or to make decisions on the basis of Tarot card readings. What would happen during the period in which they are making up their minds about which strategy to pursue? A. P would rise B. V would rise C. V would fall D. YR would rise
C. V would fall
When the Fed responds to a negative spending shock by increasing the money supply, it is using: A. its political power. B. its credibility. C. a discretionary policy. D. a policy rule.
C. a discretionary policy.
The multiplier effect from an increase in government spending causes additional increases in aggregate demand through: A. a decrease in interest rates. B. even more government spending. C. an increase in consumer spending. D. a decrease in taxes.
C. an increase in consumer spending.
Which of the following results in an appreciation of the U.S. dollar? A. an increase in Americans' demand for foreign currencies B. an increase in U.S. capital outflow C. an increase in foreign investment in the United States D. an increase in U.S. imports
C. an increase in foreign investment in the United States
Fiscal Policy Lags A. are generally the same length as monetary policy lags. B. are generally shorter than monetary policy lags. C. are generally longer than monetary policy lags. D. may be shorter or longer than monetary policy lags.
C. are generally longer than monetary policy lags.
Open market operations occur when the Fed: A. sets up the Term Auction Facility. B. changes the rate of interest paid on reserves. C. buys and sells government bonds. D. changes the discount rate on lending to banks.
C. buys and sells government bonds.
If the Central Bank of China decides to hold more dollars as reserves, the: A. dollar's value will become more unpredictable. B. dollar will depreciate. C. dollar will appreciate. D. dollar's value will remain unchanged.
C. dollar will appreciate.
One of the Federal Reserve's most powerful tools is its influence over _____, not its influence over _____. A. aggregate supply; aggregate demand B. expectations; aggregate supply C. expectations; the money supply D. the money supply; expectations
C. expectations; the money supply
In the short run, an increase in the money supply tends to increase employment because:C. exports only increase. D. both exports and imports increase. A. imports only increase. B. government spending increases. C. exports only increase. D. both exports and imports increase.
C. exports only increase.
If the economy is in a recession, the most appropriate fiscal policy would be to: A. decrease both government spending and taxes. B. increase government spending and increase taxes in order to keep the budget balanced. C. increase government spending and cut taxes, thus running a higher budget deficit. D. decrease government spending in order to balance the budget.
C. increase government spending and cut taxes, thus running a higher budget deficit.
Holding reserves is costly for banks because: A. it leads to the risk of bank robberies. B. it forces banks to pay for ATMs. C. it leads to fewer profits. D. the Fed charges banks interest on required reserves.
C. it leads to fewer profits.
As a result of the multiplier effect, a tax cut causes a: A. larger shift of the aggregate demand curve to the left. B. smaller shift of the aggregate demand curve to the left. C. larger shift of the aggregate demand curve to the right. D. smaller shift of the aggregate demand curve to the right.
C. larger shift of the aggregate demand curve to the right.
Increases in government spending financed through additional borrowing will typically: A. stimulate both consumption and investment. B. provide more stimulus than when government spending is financed through higher taxes. C. lead to higher interest rates. D. lead to higher taxes.
C. lead to higher interest rates.
The implementation lag is likely to be: A. similar in length for both changes in government spending and changes in taxation. B. indefinitely long for both changes in government spending and changes in taxation. C. longer for changes in government spending than for changes in taxation. D. shorter for changes in government spending than for changes in taxation.
C. longer for changes in government spending than for changes in taxation.
If Ricardian equivalence holds, then a $100 million tax cut financed by issuing government bonds means that: A. aggregate demand will increase by $100 million. B. government spending will increase by $100 million. C. private saving will increase by $100 million. D. consumption will increase by $100 million.
C. private saving will increase by $100 million.
In addition to monetary policy, the Fed also has the power to: A. control the mortgage market. B. oversee Treasury transactions. C. regulate banks. D. monitor the housing market.
C. regulate banks.
Which is NOT a means of payment in the United States? A. Federal Reserve notes B. checkable deposits C. stock options D. savings deposits
C. stock options
Other things being equal, a decrease in government spending growth causes: A. the AD curve to shift to the right. B. the LRAS curve to shift to the left. C. the AD curve to shift to the left. D. the LRAS curve to shift to the right.
C. the AD curve to shift to the left.
(Figure: Monetary Policy) Refer to the figure. Assume that the economy is initially at point Y in the graph. If the Fed takes the appropriate action with monetary policy, but overestimates how serious the recession is, then: A. the Fed would take the economy to point X. B. the LRAS curve would shift to the left. C. the Fed would overshoot and the economy would move to point W. D. the Fed would fail to stimulate the economy and it would remain at point Y.
C. the Fed would overshoot and the economy would move to point W.
Which of the following prevents the purchasing power parity theorem from holding perfectly? A. transportation costs B. goods that cannot be shipped C. transportation costs, goods that cannot be shipped, and tariffs and quotas D. tariffs and quotas
C. transportation costs, goods that cannot be shipped, and tariffs and quotas.
(Table: Multiple Deposit Expansion) Refer to the table. For the multiple deposit expansion process described in this table, what is the maximum amount of loans that the Second National Bank can make if it holds only the required reserves? A. $30,470.40 B. $308,089.60 C. $311,475.20 D. $338,560
D. $338,560
U.S. currency is printed by the: A. Comptroller of the Currency. B. President's Council of Economic Advisors. C. Federal Reserve. D. U.S. Department of the Treasury.
D. U.S. Department of the Treasury.
Systemic risk is present when: A. the U.S. government defaults on Treasury securities. B. the Fed increases the money supply when it should decrease it. C. a bank or other financial institution acts recklessly, hoping that the Fed and regulators will later bail them out. D. the failure of one financial institution will bring down other institutions as well.
D. the failure of one financial institution will bring down other institutions as well.
If you purchased 10 shares of Goldman Sachs stock for $1,200 five years ago and continue to hold the stock today but its value has risen to $1,500, how much will you owe in capital gains tax on your 10 shares? Assume the tax rate on capital gains is set at 15%. A. $180 B. $225 C. $45 D. $0
D. $0
(Figure: U.S. Marginal and Average Tax Rates) According to the tax rates shown in the figure, an individual who earns $85,000 a year will pay income tax of: A. $7,202.50. B. $21,250. C. $5,325. D. $14,097.50.
D. $14,097.50.
Which of the following is an example of an "earmark" expenditure? A. $1 million to build a bridge in Ohio B. $2 million in payments to welfare recipients C. $5 million to build more tanks for the military D. $2 million for a tennis program in a national highway appropriations bill
D. $2 million for a tennis program in a national highway appropriations bill
(Figure: U.S. Marginal and Average Tax Rates) According to the tax rates shown in the figure, an individual who earns $63,700 a year, has no deductions, and claims no exemptions will pay income tax of: A. $15,925.00. B. $9,555.00. C. $1,565.00. D. $8,772.50.
D. $8,772.50.
If $1 in cash is held in reserve for every $20 of deposits, the reserve ratio is: A. 20%. B. 10%. C. 1%. D. 5%.
D. 5%.
Which of the following transactions can be classified as foreign direct investment for the United States? A. The purchase of a Maserati GranTurismo from a Maserati dealer in New Jersey. B. A Korean businessman, living in South Korea, purchases stock on the NYSE. C. A Bangladeshi-American purchases a home in Dhaka, Bangladesh. D. A Beijing antique dealer opens a store in downtown New York City.
D. A Beijing antique dealer opens a store in downtown New York City.
Which statement is TRUE of the difference between a tax cut and a tax rebate? A. A tax cut only increases the incentive to spend, but a tax rebate increases the incentive to work and the incentive to spend. B. A tax cut only increases the incentive to spend, while a tax rebate only increases the incentive to work. C. A tax cut only increases the incentive to work, while a tax rebate only increases spending. D. A tax cut increases the incentive to work and the incentive to spend, while a tax rebate only increases the incentive to spend.
D. A tax cut increases the incentive to work and the incentive to spend, while a tax rebate only increases the incentive to spend.
Which BEST describes U.S. economic conditions in the 1980s? A. Deflation occurred because the Fed reacted too much to AD shocks. B. High real growth occurred because of the deliberate actions of the Fed. C. High inflation occurred because the Fed reacted too little to AD shocks. D. Disinflation occurred because of the deliberate actions of the Fed.
D. Disinflation occurred because of the deliberate actions of the Fed.
If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable? A. increase government spending B. cut taxes C. raise taxes D. No government action can achieve those goals.
D. No government action can achieve those goals.
The largest spending program for the U.S. federal government is: A. unemployment insurance. B. Medicare. C. Medicaid. D. Social Security.
D. Social Security.
Which of the following is TRUE when measuring the role of the government in an economy by the amount of its government spending? A. The amount of government spending overstates the role of the government in the economy because it ignores the costs associated with corruption in the government. B. Government spending is not related to the role of government in the economy because most government actions are motivated by politics. C. The amount of government spending overstates the role of the government in the economy because most government actions have negative effects on free markets. D. The amount of government spending understates the role of the government in an economy because of the effects of government policies on economic activity.
D. The amount of government spending understates the role of the government in an economy because of the effects of government policies on economic activity.
In what way are monetary and fiscal policies similar? A. They are both effective when the economy suffers from real shocks. B. Neither involves a lag. C. Both involve a multiplier effect. D. They both target aggregate demand to overcome business fluctuation
D. They both target aggregate demand to overcome business fluctuation
(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. For an economy in a recession at point Z, what will happen in the long run in the absence of any government action to counter the recession? A. The economy will remain in a recession at point Z. B. Wages will remain sticky and aggregate demand will fall farther, moving the economy to point Y. C. Aggregate demand will rise above the LRAS curve, moving the economy to point W. D. Wages will become flexible and spending growth will recover to increase aggregate demand, moving the economy to point X.
D. Wages will become flexible and spending growth will recover to increase aggregate demand, moving the economy to point X.
A country with a negative current account (trade deficit) has: A. a negative capital account. B. large budget deficits. C. no capital account. D. a positive capital account.
D. a positive capital account.
Portfolio investment takes place in the United States when foreigners: A. shift bank deposits into the United States. from other countries. B. construct new business plants in the United States. C. buy U.S. exports. D. buy U.S. stocks and bonds.
D. buy U.S. stocks and bonds.
The _____ measures transactions that may result in future financial flows, whereas the _____ measures current financial flows. A. portfolio investment; foreign direct investment B. current account; capital account C. foreign direct investment; portfolio investment D. capital account; current account
D. capital account; current account
Fiscal policy is a good option to stimulate an economy when: A. LRAS has suddenly shifted to the left. B. there has been a negative technological shock in the economy. C. consumer saving is very low. D. consumer spending is very low.
D. consumer spending is very low.
The _____ is the sum of the balance of trade, net income on capital held abroad, and net transfer payments. A. balance of payment B. capital account C. national account D. current account
D. current account
If a country has a trade surplus of $100 million, then it has a capital _____ so that the balance of payments is _____. A. surplus; -$100 million B. surplus; $100 million C. deficit; -$100 million D. deficit; balanced.
D. deficit; balanced.
Examples of automatic stabilizers include: A. income taxes. B. unemployment benefits. C. food stamps. D. food stamps, unemployment benefits, and income taxes.
D. food stamps, unemployment benefits, and income taxes.
The disinflation of the 1980s led to: A. sticky wages and prices. B. reduced credibility for the Federal Reserve. C. extremely low interest rates. D. high unemployment.
D. high unemployment.
(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. In the best case scenario, effective fiscal policy would take which action to correct an economy in recession at point Z? A. increase the LRAS curve to a level above 3% B. decrease the LRAS curve to a level below 2% C. increase aggregate demand to move the economy to point W D. increase aggregate demand to move the economy to point X
D. increase aggregate demand to move the economy to point X
As the savings rate in the private sector rises: A. the crowding out effect will have more of a negative effect on aggregate demand. B. the government spending multiplier will also rise. C. aggregate demand will be less responsive to changes in fiscal policy. D. increases in government spending become a more effective means of stimulating aggregate demand.
D. increases in government spending become a more effective means of stimulating aggregate demand.
Which is regarded as a policy rule? A. making policy on a case-by-case basis B. discretionary changes to the money supply growth rate C. adjusting policy actions to deal with the nature of the economic shocks D. keeping the money supply growth rate consistent with a given inflation rate
D. keeping the money supply growth rate consistent with a given inflation rate
Crowding out: A. affects contractionary fiscal policy. B. shifts the LRAS curve to the left. C. increases the multiplier effect. D. limits the increase in aggregate demand due to fiscal policy.
D. limits the increase in aggregate demand due to fiscal policy.
A negative shock to AD will cause the growth rate of real GDP to increase in: A. the long run only. B. the short run only. C. both the short run and the long run. D. neither the short run nor the long run.
D. neither the short run nor the long run.
Currency held by governments is part of the: A. Treasury direct account. B. current account. C. capital account. D. official reserves account.
D. official reserves account.
Suppose the federal government gives taxpayers a tax rebate financed by borrowing. If taxpayers use the tax rebate to pay off their debts, total spending will: A. first increase and then decrease. B. increase. C. decrease. D. remain unchanged.
D. remain unchanged.
Who bears the burden of corporate income tax? A. employees B. shareholders C. consumers D. shareholders, consumers, and employees
D. shareholders, consumers, and employees
Ricardian Equivalence A. shock to the LRAS curve. B. change in expected inflation that shifts the SRAS curve. C. real shock. D. shock to aggregate demand.
D. shock to aggregate demand.
Ricardian equivalence refers to the case where lower taxes today lead to higher: A. inflation in the future. B. government spending in the future. C. aggregate demand in the future. D. taxes in the future.
D. taxes in the future.
If Ricardian equivalence holds: A. consumption smoothing is less important than when Ricardian equivalence doesn't hold. B. taxpayers respond to lower tax rates today with increased spending today. C. changes in fiscal policy are more likely to have a larger impact on aggregate demand. D. taxpayers respond to lower tax rates today with increased savings today.
D. taxpayers respond to lower tax rates today with increased savings today.
The financial crisis of 2008 illustrates that: A. the Fed does not concern itself with the actions of investment banks. B. the Fed has the power to control the President's responses to a financial and economic crisis and supervise fiscal policy. C. systemic risk is no longer a serious concern for the U.S. economy. D. the Fed has the power to step outside its normal functions and lend to investment banks when it perceives the risk of financial contagion.
D. the Fed has the power to step outside its normal functions and lend to investment banks when it perceives the risk of financial contagion.
The United States currently has a net _____ with the rest of the world. A. capital deficit B. balance of payments deficit C. exchange rate deficit D. trade deficit
D. trade deficit
Under which scenario would expansionary fiscal policy work BEST? A. when the economy has had a large negative supply shock B. when two real shocks have occurred C. when the economy is at equilibrium in the long run D. when AD is low compared with the long-run equilibrium position of the economy
D. when AD is low compared with the long-run equilibrium position of the economy
(Figure: Oil Market Diagrams) Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts the cause of rises in the price of oil in the early 2000s? A. Panel C B. Panel A C. Panel D D. Panel B
Panel D
If the actual rate of inflation turns out to be higher than the expected rate of inflation, what happens to the growth rate of output before expectations are updated? A. The growth rate is lower than the Solow growth rate. B. The growth rate stays at the Solow growth rate. C. The growth rate is higher than the Solow growth rate. D. The growth rate could go up or down.
The growth rate stays at the Solow growth rate.
Why is the SRAS curve steeper above its intersection with the long-run aggregate supply curve? A. Employees become less motivated to work during times of unexpected inflation. B. Wages are less sticky in the upward direction. C. Wages are stickier in the upward direction. D. Lower inflation will lead to faster growth.
Wages are less sticky in the upward direction.
In the basic model that includes the AD and LRAS curves only, increased spending growth causes: A. a lower inflation rate, but no change in the real growth rate. B. a higher inflation rate, but no change in the real growth rate. C. a higher real growth rate, but no change in the inflation rate. D. a lower real growth rate, but no change in the inflation rate.
a higher inflation rate, but no change in the real growth rate.
Economists use the term ________________ to describe the part of the budget deficit that is a result of a downturn in economic activity. a. cyclical deficit b. natural deficit c. economic deficit d. structural deficit
a. Cyclical deficit
Which of the following causes a shift of the AD curve to the right? A. an increase in income taxes B. an increase in consumer confidence C. an increase in interest rates D. an increase in import growth
an increase in consumer confidence
If wages are not as flexible as prices in the AD -AS model, an increase in money growth will lead to: A. no change in inflation, but a fall in the profits of firms. B. an increase in inflation and in the profits of firms. C. an increase in inflation and a rise in real long-run GDP growth. D. an increase in inflation, but no rise in real short-run GDP growth.
an increase in inflation and in the profits of firms.
From an initial equilibrium in the AD -AS model, an increase in consumption growth will initially cause inflation: A. and real growth to increase. B. to increase and real growth to decrease. C. and real growth to remain unchanged. D. to increase and real growth to remain unchanged.
and real growth to increase.
In the basic model that includes the AD and LRAS curves only, aggregate demand shocks caused by changes in the growth of money supply: A. are neutral in the short run only. B. are neutral in both the short run and long run. C. are neutral in the long run only. D. are neutral in neither the short run nor the long run.
are neutral in both the short run and long run.
The _________________ lag consists of the time it takes the president and Congress to propose some fiscal policy measure, build support for it, and get it passed. a. effectiveness b. legislative c. wait-and-see d. data e. transmission
b. legislative
The main reason(s) for the slope of SRAS is: A. neither sticky prices nor sticky wages. B. both sticky prices and sticky wages. C. sticky wages only. D. sticky prices only.
both sticky prices and sticky wages.
An unexpected increase in money growth leads to increased inflation in: A. both the short run and the long run. B. the short run only. C. the long run only. D. neither the short run nor the long run.
both the short run and the long run.
The real business cycle (RBC) model implies that: A. business cycles are driven by real shocks to the economy. B. the rate of inflation is closely linked to the long-run rate of output growth. C. business cycles are the result of fluctuations in the money supply. D. real output fluctuates as a result of demand shocks only.
business cycles are driven by real shocks to the economy.
If π < π e: A. firms' profits will increase. B. money growth will cause the short-run aggregate supply curve to shift. C. there will be no change in real GDP growth because it is determined by real factors. D. firms will reduce their output.
firms will reduce their output.
The AD-AS model is most useful for explaining what causes: A. inflation. B. stock market fluctuations. C. the economy's long-run growth rate. D. fluctuations in GDP growth around its trend rate.
fluctuations in GDP growth around its trend rate.
In the AD -AS model, an unexpected increase in the growth rate of the money supply: A. increases both the inflation and real growth rates in the long run. B. decreases both the inflation and real growth rates in the short run. C. decreases both the inflation and real growth rates in the long run. D. increases both the inflation and real growth rates in the short run.
increases both the inflation and real growth rates in the short run.
(Figure: Two SRAS Curves) The figure shows the AD -AS model with two SRAS curves. If the economy is initially at Point A and expected inflation rate remains unchanged, the economy can achieve a real GDP growth rate of 9% only by: A. first moving to Point D and then moving along SRAS2 to Point C. B. moving directly to Point C. C. first moving to Point C and then to Point B. D. moving along SRAS1 to Point B.
moving along SRAS 1 to Point B.
A positive real shock causes the aggregate demand curve to: A. shift inward. B. shift outward and become flatter. C. not shift at all. D. shift outward.
not shift at all.
Using a graph of the AD and long-run aggregate supply curves, the Internet revolution of the 1990s caused: A. both real growth and inflation to decrease. B. both real growth and inflation to increase. C. real growth to increase and inflation to decrease. D. real growth to decrease and inflation to increase.
real growth to increase and inflation to decrease.
An increase in expected inflation will cause the economy's aggregate demand curve to: A. shift outward. B. remain unchanged. C. become steeper. D. shift inward.
remain unchanged.
The lowering of the growth rate of the money supply is represented graphically by a: A. shift to the left of the SRAS curve. B. shift to the left of the AD curve. C. shift to the right of the AD curve. D. shift to the right of the SRAS curve.
shift to the left of the AD curve.
A decrease in spending growth will cause the economy's aggregate demand curve to: A. become steeper. B. shift to the right. C. become flatter. D. shift to the left.
shift to the left.
During the Great Depression, the long-run aggregate supply curve: A. became flatter. B. shifted outward. C. did not shift at all. D. shifted inward.
shifted inward.
An unexpected outward shift of the economy's AD curve will cause real GDP growth to increase in: A. neither the short run nor the long run. B. both the short run and the long run. C. the short run only. D. the long run only.
the short run only.
An increase in the rate of expected inflation causes: A. an upward movement along the short-run aggregate supply curve. B. the short-run aggregate supply curve to shift down. C. a downward movement along the short-run aggregate supply curve. D. the short-run aggregate supply curve to shift up.
the short-run aggregate supply curve to shift up.
The long-run aggregate supply curve is represented by a vertical line at the Solow growth rate because: A. growth is affected by changes in the money supply in the long run. B. growth is not affected by the factors of production. C. growth depends on the rate of inflation in the long run. D. there is an underlying assumption of long-run money neutrality.
there is an underlying assumption of long-run money neutrality.
In the AD -AS model, money is not neutral in the short run if: A. unexpected inflation turns into expected inflation. B. the change in the money supply is fully anticipated. C. wages and prices are sticky. D. wages and prices are flexible.
wages and prices are sticky.