Macroeconomics Midterm Exam 3
Refer to Scenario 14-1, below. Assume there are no traveler's checks. M1 in this simple economy equals Currency $1,000 Checking Account Balances $2,000 Savings Account Balances $5,000 Small-Denomination Time Deposits $6,000 Non-institutional Money Market Fund Shares $7,000
3,000
Round Initial Change in Government Spending Change in Consumption 1 $100 2 0 $80.00 2 0 $64.00 3 0 $51.20 4 0 $40.96 5 0 $32.77 6 0 $26.21 7 0 $20.97 8 0 $16.78 9 0 $0 According to the table above, what is the approximate government purchase multiplier?
4
Refer to Figure 16-1, above. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to B
Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential,
All of the above
Which of the following is a function that money serves?
All of the above are correct
Which of the following transactions would be included in Japan's current account?
An American citizen purchases a new Toyota made in Japan.
Suppose the government spending multiplier is 2. The federal government raises spending by $40 billion. What is the change in GDP if the price level is held constant?
An increase equal to $80 billion
Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the SRAS is positive sloped?
An increase of greater than $80 billion
Refer to Figure 15-5, above. Suppose the Fed sells Treasury bills in pursuit of contractionary monetary policy when the economy is at point C. Using the static AD-AS model in the figure above, this situation would be depicted as a movement to
B
Refer to Figure 15-5, above. Suppose the economy is at point A and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement to
B
Refer to Figure 15-5, above. Suppose the economy is in short-run equilibrium above potential GDP, say point C, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the CORRECT Fed policy for this situation would be depicted as a movement to
B
Refer to Figure 15-5, above. Suppose at point B the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement to
C
Refer to Figure 16-1, above. A contractionary fiscal policy would be depicted as a movement from ________, using the static AD-AS model in the figure above.
C to b
Gold is an example of a
Commodity money
An HMO hires radiology services from India to cut costs. If all else remains equal, this will
Decrease net exports
Refer to Figure 15-5, above. Suppose the economy is in a recession, at point A and no policy is pursued. Using the static AD-AS model in the figure above, when the economy adjusts by itself then it would be depicted as a movement to
E
Expansionary monetary policy refers to the ________ to increase real GDP.
Federal Reserve's increasing the money supply and decreasing interest rates
Paper currency is a
Fiat money
Which of the following would be classified as fiscal policy?
George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 into law to stimulate economy.
Refer to Figure 16-2, above. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to
Increase government expenditures
Suppose the majority of the shares of Ford stock were sold to a Japanese firm. Assuming all else remains constant, this will
Increase the balance of the US financial account
Who is the current Chair of the Board of Governors of the Federal Reserve System?
Janet Yellen
Suppose the Fed increases the money supply, then at the original interest rate, the quantity of money demanded is______________ the quantity of money supplied.
Less than
The most liquid measure of money supply is
M1
The M2 measure of the money supply equals
M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.
Which of the following provides health-care coverage to people age 65 and over?
Medicare
Which of the following functions of money would be violated if inflation were high?
Medium of exchange
Which of the following is one of the most important benefits of money in an economy?
Money makes exchange easier, leading to more specialization and higher productivity.
Dollar bills in the modern economy serve as money because
People have confidence that other will accept them as money
Refer to Figure 15-2, above. In the figure above, when the money supply shifts from MS1 to MS2, what does the Fed do to make this change?
Sell treasury bills
Smith buys a $10,000 car by making one immediate payment of $10,000, or one or more deferred payments that total (at least) $10,000. This illustrates which function of money?
Standard of deferred payment
Joe sold his farm-raised chickens and made $200 this morning, but he saved this amount to buy a new cell phone next month. This illustrates which function of money?
Store of value
Rising prices erode the value of money as a_____________.
Store of value
Which of the following best describes supply-side economics?
Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.
Refer to Figure 15-1, above. In the figure, the money demand curve would move from MD1 to MD2 if
The price level increased
The statement " My MacBook is worth $899" illustrates which function of money?
Unit of account
An increase in the interest rate causes
a movement up along the money demand curve
Money is
an asset that people are willing to accept in exchange for goods and services.
A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending.
an induced; an autonomous
The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of
automatic stabilizers
In an economy with ________, there are more prices than in an economy with ________.
barter; money
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?
c&e
The government purchases multiplier is defined as
change in equilibrium real GDP / change in government purchases
In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending.
complete
Which of the following is not counted in M1?
credit card balances
The balance of payments includes which three accounts?
current account, financial account, capital account
Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
decrease
If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account, then M1 will ________ and M2 will ________.
decrease; not change
An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
decrease; rise; falls
An increase in interest rates
decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.
A decrease in real GDP
decreases the buying and selling of goods and decreases the demand for money as a medium of exchange.
The United States has a trade ______ with all its major trading partners and a trade ___________ with every region of the world except for Latin America.
deficit; deficit
By making exchange ________, money allows for ________ and higher ________.
easier; specialization; productivity
A person's wealth
equals the value the person's assets minus his or her liabilities.
The tax multiplier equals the change in ________ divided by the change in ________.
equilibrium real GDP; taxes
A barter economy is an economy where
goods and services are exchanged for other goods and services.
An increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand
If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in ________
government purchases
A change in tax rates
has a larger multiplier effect the smaller the tax rate.
Among potential stores of value, money
has the advantage of being the most liquid asset.
Commodity money
has value independent of its use as money.
Which of the following is an objective of fiscal policy?
high employment
Increases in the price level
increase the quantity of money needed for buying and selling
Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.
increase, increase
If a person withdraws $500 from his/her savings account and holds it as currency, then M1 will ________ and M2 will ________.
increase; not change
If the Fed lowers the interest rate, this will______ inflation and _____real GDP in the short run.
increase; raise
If the Fed wants to increase money supply, this will______ inflation and _____real GDP in the short run.
increase; raise
A decrease in individual income taxes ________ disposable income, which ________ consumption spending.
increases, increases
The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.
induced; consumption; autonomous
Which of the following would not be considered an automatic stabilizer?
legislation increasing funding for job retraining passed during a recession
The money demand curve has a negative slope because
lower interest rates cause households and firms to switch from financial assets to money.
Money's most narrow definition is based on its function as a
medium of exchange
Which of the following assets is most liquid?
money
You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets, and $1,000 of debt. You have
money = $300, annual income = $6,000, and wealth = $4,300.
If the Fed buys Treasury bills, this will shift the
money supply curve to the right
It is ________ difficult to effectively time fiscal policy than monetary policy because ________.
more; fiscal policy takes longer to implement
The money demand curve has a
negative slope because an increase in the interest rate decreases the quantity of money demanded.
If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially
not change M1 and not change M2.
Credit card balances are
not part of the money supply
When the Federal Reserve System was established in 1913, its main policy goal was
preventing bank panics
Federal government expenditures, as a percentage of GDP,
rose from 1950 to 1991, fell from 1992 to 2001, and have risen from 2001 to the present.
When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to
sell treasury bills
Suppose the Fed decreases the money supply. In response households and firms will______ short term assets and this will drive_____ interest rates.
sell; up
The money market model is concerned with ________ and the loanable funds market model is concerned with ________.
short-term nominal interest rates; long-term real interest rates
Before the Great Depression of the 1930s, the majority of government spending took place at the ________ and after the Great Depression the majority of government spending took place at the ________.
state and local levels; federal level
Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, the cyclically adjusted budget
surplus was $10 billion
The federal funds rate is
the interest rate banks charge each other for overnight loans
Monetary policy refers to the actions the Federal Reserve takes to manage
the money supply and interest rates to pursue its economic objectives
In the United States, currency includes
the paper money and coins in circulation
When the Fed uses contractionary policy,
the price level rises less than it would if the Fed did not pursue policy.
Which of the following is an example of discretionary fiscal policy?
the tax cuts passed by Congress in 2001 to combat the recession
Which of the following describes what the Fed would do to pursue an expansionary monetary policy?
use open market operations to buy Treasury bills
The money supply curve, against possible levels of interest rates, has a
vertical slope
An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier.
will decrease
If households and firms decide to hold less of their money in checking account deposits and more in currency, then initially, the money supply
will not change
