Macroeconomics Final Exam
Suppose you deposit $1,100 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.10? The change in the money supply is: $_____ (enter your result rounded to the nearest dollar).
$9,900
Suppose the government increases taxes by $90 billion and the marginal propensity to consume is 0.80. By how will equilibrium GDP change? The change in equilibrium GDP is: $___ billion. (Round your solution to one decimal place and include the minus sign if necessary.)
-360
Suppose the government increases expenditures by $30 billion and the marginal propensity to consume is 0.90. By how will equilibrium GDP change? The change in equilibrium GDP is: $___ billion. (Round your solution to one decimal place.)
300
Which one of the following is not one of the monetary policy goals of the Fed? A. Reduce income inequality. B. Maintain stability of financial markets and institutions. C. Maintain high employment. D. Maintain price stability.
A. Reduce income inequality.
The Federal Reserve sells Treasury securities. This is an example of A. an automatic stabilizer. B. not a fiscal policy. C. a discretionary fiscal policy.
B. not a fiscal policy.
As the interest rate increases, A. consumption, investment, and net exports increase, and aggregate demand increases. B. consumption increases but investment and net exports decrease; aggregate demand remains unchanged. C. consumption, investment, and net exports decrease; aggregate demand decreases. D. consumption, investment, and net exports fall but government spending increases, and aggregate demand increases.
C. consumption, investment, and net exports decrease; aggregate demand decreases.
Each year that the federal government runs a deficit, the federal debt (grows/shrinks). Each year that the federal government runs a surplus, the federal debt (grows/shrinks)
grows, shrinks
1. Using the information below compute the M1 money supply. Currency and coin held by the public = $200 Checking account balances = $900 Traveler's checks = $10 Savings account balances = $3,300 Small denomination time deposits = $5,000 Money market deposit accounts in banks = $1,000 Noninstitutional money market fund shares = $2,000 The M1 money supply is equal to: $_____ 2. Using the information below compute the M2 money supply. Currency and coin held by the public = $1,000 Checking account balances = $900 Traveler's checks = $10 Savings account balances = $2,700 Small denomination time deposits = $5,000 Money market deposit accounts in banks = $1,000 Noninstitutional money market fund shares = $2,000 The M2 money supply is $_____
1. $1,110 2. $12,610
1. If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 3 percent per year, and velocity LOADING... is constant, what will the inflation rate be? __%. (Enter your response as an integer value.) 2. If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 3 percent per year, and velocity is growing at 3 percent per year instead of remaining constant, what will the inflation rate be? __%. (Enter your response as an integer value.)
1. 2% 2. 5%
1. Which of the following is not a correct statement about M2? A. M2 is the best definition of money as a medium of exchange. B. M2 includes savings accounts, small-denomination time deposits, and money market mutual funds. C. M2 is a broader definition of money compared to M1 and currency. D. M2 includes all of the assets in M1. 2. If you move $100 from your savings account to your checking account, then M1 will (increase/decrease) by $100 and M2 will (change/remain the same).
1. A. M2 is the best definition of money as a medium of exchange. 2. increase, remain the same
1. When money is acting as a store of value, it allows an individual to A. transfer dollars, and therefore purchasing power, into the future. B. trade money for goods and services in the economy. C. exchange goods for other goods and services in the economy. D. measure the value of goods and services in the economy. 2. Money is an imperfect standard of deferred payment because _________ causes the value of money to decrease over time.
1. A. transfer dollars, and therefore purchasing power, into the future. 2. inflation
1. The formula for the simple deposit multiplier is A. Simple Deposit Multiplier = (1-RR)/RR B. Simple Deposit Multiplier = 1/RR C. Simple Deposit Multiplier = -RR/1-RR D. Simple Deposit Multiplier = 1/1-RR 2. If the required reserve ratio is 0.15, the maximum increase in checking account deposits that will result from an increase in bank reserves of $5000 is $______ (Enter your response as an integer.)
1. B. Simple Deposit Multiplier = 1/RR 2. $33333.33.
In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times, economist Steven Levitt observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008." 1. What is the relationship between the federal funds rate falling and the money supply increasing? A. Cutting the federal funds rate increases the money supply. B. Cutting the federal funds rate increases saving, which increases the money supply. C. To decrease the federal funds rate, the Fed must increase the money supply. D. Cutting the federal funds rate increases bank reserves, which increases the money supply. 2. How does lowering the target for the federal funds rate "pour money" into the banking system? A. To increase the money supply, the Fed increases government spending, which increases aggregate demand. B. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves. C. To increase the money supply, the Fed sells bonds on the open market, which increases bank reserves. D. To increase the money supply, the Fed decreases taxes, which increases consumer spending.
1. C. To decrease the federal funds rate, the Fed must increase the money supply. 2. B. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
When the Fed conducts an open market purchase, the Fed buys securities from banks and the money supply increases 1. As a result of the open market purchase, the A. money demand curve will shift to the right. B. money supply curve will shift to the left. C. money demand curve will shift to the left. D. money supply curve will shift to the right. 2. The new equilibrium will be where A. the new money supply curve intersects the original money demand curve. B. the new money supply curve intersects a new money demand curve. C. the original money supply curve intersects the original money demand curve. D. anywhere along the new money supply curve. 3. When the Fed conducts an open market purchase, the interest rate should (increase/decrease)
1. D. money supply curve will shift to the right. 2. A. the new money supply curve intersects the original money demand curve. 3. decrease
The hypothetical information in the following table shows what the situation will be in 2021 if the federal government does not use fiscal policy: Year = 2020 Potential GDP = $18 trillion Real GDP = $18 trillion Price Level = 120.3 Year = 2021 Potential GDP = $18.4 trillion Real GDP = $18 trillion Price Level = 122.7 1. If Congress and the president want to keep real GDP at its potential level in 2021, they should use an (contractionary/expansionary) fiscal policy, which would mean (decreasing/increasing) government spending or cutting taxes 2. If Congress and the president are successful in keeping real GDP at its potential level in 2021, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action: a. Real GDP will be (the same/higher/lower) b. Potential real GDP will be (the same/higher/lower) c. The inflation rate will be (the same/higher/lower) d. The unemployment rate will be (the same/higher/lower)
1. expansionary fiscal policy, decreasing 2a. higher 2b. the same 2c. higher 2d. lower
The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of A. an automatic stabilizer. B. a discretionary fiscal policy. C. not a fiscal policy.
A. an automatic stabilizer.
Assuming a fixed amount of taxes and a closed economy and that the marginal propensity to consume equals 0.90, calculate the value of the following multipliers. Be sure to use a negative sign (-) to show if a multiplier has a negative value. A. The government purchases multiplier equals ___ (enter your response rounded to one decimal place). B. The tax multiplier equals ___ (enter your response rounded to one decimal place). C. The balanced budget multiplier equals ___ (enter your response rounded to one decimal place).
A. 10 B. -9 C. 1
What is a banking panic? A. A situation in which many banks experience runs at the same time. B. A situation in which banks wish to recall all of their loans. C. A situation in which there is no demand for loans, so banks cannot make a profit. D. A situation in which bank assets exceed liabilities.
A. A situation in which many banks experience runs at the same time.
What is a contractionary fiscal policy? A. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand. B. Contractionary fiscal policy includes increasing government spending and taxes to decrease aggregate demand. C. Contractionary fiscal policy includes increasing government spending and decreasing taxes to decrease aggregate demand. D. Contractionary fiscal policy includes decreasing government spending and taxes to decrease aggregate demand.
A. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.
What is fiscal policy? A. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives.
A. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
The term "crowding out" refers to a situation where: A. Government spending increases interest rates and decreases private investment. B. Government spending decreases interest rates and increases private investment. C. Fed policy decreases interest rates and increases private investment. D. Fed policy increases interest rates and decreases private investment.
A. Government spending increases interest rates and decreases private investment.
The Federal Reserve cannot affect the unemployment rate directly; therefore, the Fed typically uses the following as its policy target: A. Interest rates. B. Taxes. C. Government expenditures. D. Inflation.
A. Interest rates.
What is the disadvantage of holding money? A. Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest. B. Money is not very "liquid." C. Money cannot be readily used to buy financial assets. D. Money can be easily stolen or lost.
A. Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.
Which of the following best explains how the Federal Reserve acts to help prevent banking panics? A. The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors. B. The Fed insures deposits of banks and thus reduces the chance of a panic. C. The Fed can make it illegal to withdraw deposits from banks, preventing bank panics. D. The Fed regulates asset markets and prevents damaging speculation.
A. The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.
Which tool is the most important? A. The Fed conducts monetary policy principally through open market operations. B. The Fed conducts monetary policy principally by tax cuts and government spending increases. C. The Fed conducts monetary policy principally through discount policy. D. The Fed conducts monetary policy principally by changing the reserve requirement.
A. The Fed conducts monetary policy principally through open market operations.
When the Federal Reserve decreases the discount rate A. The money supply will increase. B. The money supply will decrease. C. There is no effect on the money supply. D. Not enough information is given.
A. The money supply will increase.
As the interest rate increases, A. consumption, investment, and net exports decrease; aggregate demand decreases. B. consumption increases but investment and net exports decrease; aggregate demand remains unchanged. C. consumption, investment, and net exports fall but government spending increases, and aggregate demand increases. D. consumption, investment, and net exports increase, and aggregate demand increases.
A. consumption, investment, and net exports decrease; aggregate demand decreases.
Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 definition of the money supply? A. c & e B. a & b C. d & e D. b & e
A. c & e
Evidence shows that the quantity equation is correct over the long run, which implies that the A. growth rate of the money supply determines the rate of inflation. B. growth rate of GDP causes most of the change in the money supply. C. growth rate of inflation leads to growth in GDP. D. growth rate of the velocity of money causes the level of prices to change.
A. growth rate of the money supply determines the rate of inflation.
The federal government changes the required gasoline mileage for new cars. This is an example of A. not a fiscal policy. B. an automatic stabilizer. C. a discretionary fiscal policy.
A. not a fiscal policy.
When the Federal Reserve sells Treasury securities in the open market, A. the buyers of these securities pay for them with checks and bank reserves fall. B. the public starts selling houses and firms disinvest in anticipation of banks decreasing their reserves. C. the sellers of such securities deposit the funds in their banks and bank reserves decrease. D. the buyers of such securities buy new securities in the open market and there is a decrease in bank reserves.
A. the buyers of these securities pay for them with checks and bank reserves fall.
The national debt is best measured as A. the total value of U.S. Treasury securities outstanding. B. the value of all debts of private citizens and businesses. C. the difference between federal government spending and federal taxes. D. the total value of stocks issued in a country.
A. the total value of U.S. Treasury securities outstanding.
If the Fed believes the inflation rate is about to increase, it should A. use a contractionary monetary policy to increase the interest rate and shift AD to the left. B. use an expansionary monetary policy to lower the interest rate and shift AD to the right. C. use a contractionary fiscal policy to increase the interest rate and shift AD to the left. D. use a combination of tax increases and spending cuts to keep the budget balanced.
A. use a contractionary monetary policy to increase the interest rate and shift AD to the left.
Money serves as a unit of account when A. it can be easily stored and used for transactions in the future. B. prices of goods and services are stated in terms of money. C.sellers are willing to accept it in exchange for goods or services. D.All of the above are examples of money serving as a unit of account.
B. prices of goods and services are stated in terms of money.
Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.) A. Government spending B. Business investment projects C. Consumption of durable goods D. The value of the dollar
B, C, D
Which of the following is not a function of money? A. Unit of account. B. Commodity. C. Standard of deferred payment. D. Store of value. E. Medium of exchange.
B. Commodity.
What is an expansionary fiscal policy? A. Expansionary fiscal policy includes increasing government spending and taxes to increase aggregate demand. B. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. C. Expansionary fiscal policy includes decreasing government spending and increasing taxes to increase aggregate demand. D. Expansionary fiscal policy includes decreasing government spending and taxes to increase aggregate demand.
B. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
Based on the quantity theory of money, if velocity is constant, inflation is likely to occur when: A. The money supply and inflation are unrelated. B. The money supply grows at a faster rate than real GDP. C. The money supply grows at a slower rate than real GDP. D. The money supply grows at the same rate as real GDP.
B. The money supply grows at a faster rate than real GDP.
The revenue the federal government collects from the individual income tax declines during a recession. This is an example of A. a discretionary fiscal policy. B. an automatic stabilizer. C. not a fiscal policy.
B. an automatic stabilizer.
When actual GDP is below potential GDP the budget deficit increases because of: A. a decrease in transfer payments and a decrease in tax revenues. B. an increase in transfer payments and a decrease in tax revenues. C. an increase in transfer payments and an increase in tax revenues. D. an decrease in transfer payments and an increase in tax revenues.
B. an increase in transfer payments and a decrease in tax revenues.
The U.S. dollar can best be described as A. reserve money. B. fiat money. C. commodity money. D. commodity-backed money.
B. fiat money.
Why is the Fed sometimes said to have a "dual mandate"? The Fed is said to have a" dual mandate" because A. the Fed is entrusted by Congress to maintain price stability and low taxes. B. maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946. C. the Employment Act of 1946 empowers the Fed to maintain low taxes and high employment. D. the two most important goals of the Fed are controlling inflation and the budget deficit.
B. maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.
Briefly explain whether each of the following is an example of (1) a discretionary fiscal policy, (2) an automatic stabilizer, or (3) not a fiscal policy. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of A. an automatic stabilizer. B. not a fiscal policy. C. a discretionary fiscal policy.
B. not a fiscal policy.
Money serves as a standard of deferred payment when A. sellers are willing to accept it in exchange for goods or services. B. payments agreed to today but made in the future are in terms of money. C. it can be easily stored today and used for transactions in the future. D. All of the above are examples of money serving as a standard of deferred payment.
B. payments agreed to today but made in the future are in terms of money.
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the A. theory of comparative advantage. B. principle of a double coincidence of wants. C. market clearing mechanism. D. irrational exuberance doctrine.
B. principle of a double coincidence of wants.
When the Federal Reserve purchases Treasury securities in the open market, A. the public starts buying houses and firms invest in anticipation of bank increasing their reserves. B. the sellers of such securities deposit the funds in their banks and bank reserves increase. C. the sellers of such securities buy new securities in the open market and there is an increase in bank reserves. D. the buyers of these securities pay for them with checks drawn on their bank account and bank reserves increase.
B. the sellers of such securities deposit the funds in their banks and bank reserves increase.
The average number of times each dollar in the money supply is used to purchase goods and services is called A. the fractional reserve system. B. the velocity of money. C. the discount rate. D. the quantity theory of money.
B. the velocity of money.
If the Fed believes the inflation rate is about to increase, it should A. use a contractionary fiscal policy to increase the interest rate and shift AD to the left. B. use a contractionary monetary policy to increase the interest rate and shift AD to the left. C. use a combination of tax increases and spending cuts to keep the budget balanced. D. use an expansionary monetary policy to lower the interest rate and shift AD to the right.
B. use a contractionary monetary policy to increase the interest rate and shift AD to the left.
If the Fed believes the economy is about to fall into recession, it should A. use an expansionary fiscal policy to increase the interest rate and shift AD to the right. B. use an expansionary monetary policy to lower the interest rate and shift AD to the right. C. use a contractionary monetary policy to lower the interest rate and shift AD to the left. D. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP.
B. use an expansionary monetary policy to lower the interest rate and shift AD to the right.
When the Federal Reserve sells bonds as a part of a contractionary monetary policy, there is: A. An increase in the money supply and an increase in the interest rate. B. An increase in the money supply and a decrease in the interest rate. C. A decrease in the money supply and an increase in the interest rate. D. A decrease in the money supply and a decrease in the interest rate.
C. A decrease in the money supply and an increase in the interest rate.
Are federal expenditures higher today than they were in 1960? A. As a percentage of GDP, federal expenditures have decreased since 1960. B. As a percentage of GDP, federal expenditures have remained unchanged since 1960. C. As a percentage of GDP, federal expenditures have increased since 1960.
C. As a percentage of GDP, federal expenditures have increased since 1960.
Are federal purchases higher today than they were in 1960? A. As a percentage of GDP, federal purchases have remained unchanged since 1960. B. As a percentage of GDP, federal purchases have increased since 1960. C. As a percentage of GDP, federal purchases have decreased since 1960.
C. As a percentage of GDP, federal purchases have decreased since 1960.
What is inflation targeting? A. A target that links the Fed's target for the federal funds rate to inflation. B. A policy that attempts to reduce inflation to zero. C. Committing the central bank to achieve an announced level of inflation. D. Another name for contractionary monetary policy.
C. Committing the central bank to achieve an announced level of inflation.
What is the advantage of holding money? A. Money held by an individual can be used to measure one's wealth. B. Currency and checking account deposits held by individuals earn substantial interest income. C. Money can be used to buy goods, services, or financial assets. D. An individual pays little or no taxes on the amount of money he holds.
C. Money can be used to buy goods, services, or financial assets.
Which of the following is not a viable monetary policy target for the Fed? A. The interest rate. B. The inflation rate. C. The money demand. D. The money supply.
C. The money demand.
Congress and the president enact a temporary cut in payroll taxes. This is an example of A. not a fiscal policy. B. an automatic stabilizer. C. a discretionary fiscal policy.
C. a discretionary fiscal policy.
Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________. A. expands; expands B. contracts; contracts C. expands; contracts D. contracts; expands
C. expands; contracts
An increase in interest rates affects aggregate demand by A. shifting the aggregate supply curve to the left, decreasing real GDP and increasing the price level. B. shifting the aggregate supply curve to the right, increasing real GDP and lowering the price level. C. shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level. D. shifting the aggregate demand curve to the right, increasing real GDP and lowering the price level.
C. shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.
If the FOMC orders the trading desk to sell Treasury securities, A. the money supply curve will shift to the left, and the equilibrium interest rate will fall. B. the money supply curve will shift to the right, and the equilibrium interest rate will fall. C. the money supply curve will shift to the left, and the equilibrium interest rate will rise. D. the money supply curve will shift to the right, and the equilibrium interest rate will rise.
C. the money supply curve will shift to the left, and the equilibrium interest rate will rise.
What is the difference between federal purchases and federal expenditures? A. The difference between federal purchases and federal expenditures is so small that it is generally ignored. B. Federal purchases require that the government receives a good or service in return, whereas federal expenditures exclude transfer payments. C. Federal purchases and federal expenditures both require that the government receives a good or service in return. D. Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments.
D. Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments.
What do economists mean by the demand for money? A. It is the amount of currency, checking account deposits and stocks and bonds that individuals hold. B. It is the amount of money - currency and checking account deposits - that individuals use to pay for one transaction per day. C. It is the monetary value of total wealth of individuals. D. It is the amount of money - currency and checking account deposits - that individuals hold.
D. It is the amount of money - currency and checking account deposits - that individuals hold.
Which one of the following is not one of the policy tools the Fed uses to control the money supply? A. Discount policy. B. Open market operations. C. Reserve requirements. D. Moral suasion.
D. Moral suasion.
Which one of the following is not one of the policy tools the Fed uses to control the money supply? A. Reserve requirements. B. Discount policy. C. Open market operations. D. Moral suasion.
D. Moral suasion.
Which tool is the most important? A. The Fed conducts monetary policy principally by changing the reserve requirement. B. The Fed conducts monetary policy principally through discount policy. C. The Fed conducts monetary policy principally by tax cuts and government spending increases. D. The Fed conducts monetary policy principally through open market operations.
D. The Fed conducts monetary policy principally through open market operations.
Who is responsible for fiscal policy? A. The Federal Reserve controls fiscal policy. B. The federal government and the Federal Reserve jointly control fiscal policy. C. Fiscal policy is controlled by market forces. D. The federal government controls fiscal policy.
D. The federal government controls fiscal policy.
If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to A. sell stocks. B. buy stocks. C. sell U.S. Treasury securities. D. buy U.S. Treasury securities.
D. buy U.S. Treasury securities.
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier. A. leaves unchanged B. increases C. eliminates D. decreases
D. decreases
An increase in interest rates affects aggregate demand by A. shifting the aggregate supply curve to the right, increasing real GDP and lowering the price level. B. shifting the aggregate supply curve to the left, decreasing real GDP and increasing the price level. C. shifting the aggregate demand curve to the right, increasing real GDP and lowering the price level. D. shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.
D. shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.
If the Fed believes the economy is about to fall into recession, it should A. use an expansionary fiscal policy to increase the interest rate and shift AD to the right. B. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP. C. use a contractionary monetary policy to lower the interest rate and shift AD to the left. D. use an expansionary monetary policy to lower the interest rate and shift AD to the right.
D. use an expansionary monetary policy to lower the interest rate and shift AD to the right.
