Official exam 4

A $100 million increase in government spending increases equilibrium GDP by: -$100 million. -more than $100 million. -less than $100 million. -zero.

more than $100 million.

If it looks as if a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the: -Congress to borrow funds. -open market and borrow money there. -Federal Reserve and borrow money at the discount rate. -other member banks and borrow money at the federal funds rate.

other member banks and borrow money at the federal funds rate.

Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If Sarah deposits $5,000 in cash in her checking account, the money supply can potentially increase by an additional: -$5,000. -$1,000. -$25,000. -$20,000.

$20,000.

Suppose that a bank receives a $5,000 deposit and the reserve ratio is 25%. Based on this deposit alone, the bank can lend out: -$3,500. -$4,000. -$4,500. -$3,750.

$3,750.

If the marginal propensity to save is 0.25, and the government increases its purchases of goods and services by $100 million, then real GDP increases by: -$2,800 million. -$133 million. -$400 million. -$25 million.

$400 million.

Suppose that U.S. debt is $7.5 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $3.5 trillion. At the end of the fiscal year, the debt is: -$10.5 trillion. -$9 trillion. -$7.5 trillion. -$6 trillion.

$6 trillion.

If the marginal propensity to consume is 0.9, then the government spending multiplier is: -9. -1.11. -10. -0.1.

10.

The difference between a budget deficit and government debt is that: -debt is the amount by which government spending exceeds tax revenues, whereas a deficit is the sum of money the government owes. -a deficit is measured as of a particular time, whereas debt is measured over time. -a deficit harms the economy, whereas debt improves the economy. -a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

Which example does NOT illustrate government transfers? -a Social Security disability pension -Medicaid-paid prescription drugs for low-income individuals -unemployment insurance -a reimbursement of personal income tax withheld from wages

a reimbursement of personal income tax withheld from wages

If banks were required to keep 100% of deposits in reserves, they could: -use excess reserves for loans -all the other choices are wrong. -make more loans. -make more deposits.

all the other choices are wrong.

Which factor is an expansionary fiscal policy? -an increase in the money supply that decreases interest rates -an increase in taxes that reduces the budget deficit and decreases consumption -a decrease in government spending -an increase in unemployment benefits

an increase in unemployment benefits

The discount rate is the interest rate the Federal Reserve charges on loans to: -the federal government. -banks. -state governments. -consumers.

banks.

Which asset would NOT fit the economist's definition of money? -bonds -coins -checkable bank deposits -currency

bonds

What can the federal government do to finance a deficit? -increase purchases of goods and services -borrow funds -increase transfer payments -cut taxes

borrow funds

To lower the short-term interest rate, the Federal Reserve can: -sell Treasury bills. -tell the banks to make more loans. -buy Treasury bills. -tell the banks to make fewer loans.

buy Treasury bills.

Monetary policy affects GDP and the price level by: -changing aggregate supply. -changing the aggregate amount of labor supplied. -changing exports. -changing aggregate demand.

changing aggregate demand.

Fiscal policy that decreases aggregate demand is: -expansionary. -supplemental. -contractionary. -balanced.

contractionary.

Among the liabilities of banks are: -reserves. -loans and reserves. -customers' deposits. -loans.

customers' deposits.

If the marginal propensity to consume is 0.8 and government purchases of goods and services decrease by $30 billion, real GDP will: -decrease by $120 billion. -increase by $22.5 billion. -decrease by $150 billion. -decrease by $30 billion.

decrease by $150 billion.

Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. After the withdrawal, reserves _____, and checkable deposits _____. -increase by $8,000; decrease by $8,000 - decrease by $8,000; decrease by $8,000 -increase by $1,600; decrease by $1,600 -decrease by $1,600; decrease by $1,600

decrease by $8,000; decrease by $8,000

If the Fed increases the reserve requirement from 5% to 10%, the money multiplier will _____ and the money supply will most likely _____. -increase; increase -increase; decrease -decrease; increase -decrease; decrease

decrease; decrease

Monetary policy that lowers the interest rate is called _____ because it _____. -contractionary; reduces saving and increases consumption - expansionary; increases aggregate demand -contractionary; aims to head off inflation -expansionary; increases short-run aggregate supply

expansionary; increases aggregate demand

Reducing taxes in response to a recession is an example of _____ policy. -consumption -fiscal -investment -monetary

fiscal

Suppose that the Federal Reserve were to buy $100 million of U.S. Treasury bills. The money supply would: -stay the same. -decrease by $100 million. -increase by $100 million. -increase by more than $100 million.

increase by more than $100 million.

Expansionary monetary policy _____ the money supply, _____ interest rates, and _____ consumption and investment spending. -decreases; decreases; decreases -decreases; increases; decreases -increases; increases; increases -increases; decreases; increases

increases; decreases; increases

If overall spending declines and thus the economy contracts, the government could counter this by: -decreasing government transfers. - increasing government spending. -decreasing government spending. -raising tax rates.

increasing government spending.

Expansionary monetary policy does NOT increase: -aggregate demand. -GDP and the price level. -consumption spending. -interest rates.

interest rates.

Suppose a bank has excess reserves of $50 and the reserve ratio is 20%. If Andy deposits $5,000 of cash in his checking account and the bank lends $2,500 to Molly, the money supply: -is decreased by $5,000. -remains unchanged. - is increased by $2,500. -is increased by $7,500.

is increased by $2,500.

When the Fed increases the reserve requirement, banks lend _____ of their deposits, which leads to a(n) _____ in the money supply. -more; increase -more; decrease -less; increase -less; decrease

less; decrease

A cut in taxes will have the most effect on aggregate demand if it is given to: -people with a low marginal propensity to consume. -those who hold a large amount of wealth. - people with a high marginal propensity to consume. -everyone in the economy.

people with a high marginal propensity to consume.

The federal government's LARGEST source of revenue is: -social insurance taxes. -property taxes. -sales taxes. -personal income taxes.

personal income taxes.

Deposit insurance: -can be used only if depositors lose deposits in excess of $250,000. -encourages banks to carefully consider to whom they lend funds. -provides depositors with assurances that they will receive their deposits up to $250,000, even if there are questions about a bank's soundness. -is essentially the same as a bank's required reserves.

provides depositors with assurances that they will receive their deposits up to $250,000, even if there are questions about a bank's soundness.

Suppose the required reserve ratio increased from 10% to 20%. This would: -increase the money multiplier from 5 to 10. -not change the money multiplier. -reduce the money multiplier from 10 to 5. -increase the amount of excess reserves available.

reduce the money multiplier from 10 to 5.

Suppose that the Federal Reserve sells Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates. -increase; raise; lower -increase; lower; lower -reduce; reduce; raise -reduce; increase; lower

reduce; reduce; raise

The national debt _____ when the federal government incurs a _____. -stays the same; surplus - rises; deficit -falls; deficit -rises; surplus

rises; deficit

The larger the amount of outstanding public debt: -the more spending the government can afford. -the larger the fraction of the federal budget deficit that must be devoted to interest payments. -The other answers are all wrong. -the lower the tax revenue the government must collect.

the larger the fraction of the federal budget deficit that must be devoted to interest payments.

When the Federal Reserve decreases bank's reserves through an open-market operation: -the monetary base decreases, loans decrease, and the money supply decreases. -the monetary base decreases, the money multiplier decreases, and the money supply increases. -loans increase, the federal funds rate rises, and the discount rate rises. -deposits increase, currency in circulation increases, and the monetary base remains the same.

the monetary base decreases, loans decrease, and the money supply decreases.

When a bank lends excess reserves to a customer: -the money supply is increased. -this does not affect the money supply. -it has the same effect as when one customer writes a check to another customer at a different bank. -the money supply is decreased.

the money supply is increased.

Banks can lend money because: - they know not everyone wants their deposits back at the same time. -there is a high demand for commodity money. -they don't know how much cash they have in their vault. -they have so much to lend.

they know not everyone wants their deposits back at the same time.

Government payments to households for which no good or service is provided in return are called: -consumption expenditures. -transfer payments. -government purchases. -investment expenditures.

transfer payments.