Practice Final Topics 10-12
The economic definition of money
any asset that people are generally willing to accept in exchange for goods and services
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future
When the economy is experiencing an expansion automatic stabilizers will cause
transfer payments to decrease and tax revenues to increase
Two examples of automatic stabilizers in the US are
unemployment insurance payments and the progressive income tax system
automatic stabilizers can reduce the severity of a recession because, during a recession
unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment
If the Fed believes the inflation rate is about to increase it should
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
use an expansionary monetary policy to lower the interest rate and shift AD to the right
Additionally, the federal funds rate is
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ____ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ____U.S. Treasury securities
buys Sells
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
changing income tax rates
Which of the following is not a function of money
commodity
Congress passed legislation to create the Federal Reserve System in 1913 in order to
end the instability created by bank panics by acting as a lender of last resort
The U.S. dollar can best be described as
fiat money
Real GDP
increase real GDP by increasing aggregate demand
the price level
increase the price level because more is demanded
Why is the Fed sometimes said to have a "dual mandate". The Fed is said to have a "dual mandate" because
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
Which of the following would be the least desirable candidate to be a good medium of exchange?
milk
Which one of the following is not one of the policy tools the Fed uses to control the money supply?
moral suasion
An increase in interest rates affects aggregate demand by
shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level
How does the quantity theory provide an explanation about the cause of inflation?
the quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation
What is the relationship the federal funds rate falling and the money supply increasing?
to decrease the federal funds rate, the Fed must increase the money supply
how does lowering the target for the federal funds rate "pour money" into the banking system?
to increase the money supply, the Fed buys bonds on the open market, which increases bank reserves
How do the banks "create money"?
when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands
Suppose you deposit $1300 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.10? The change in checking deposits is equal to:
13000
Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account Asset Liabilities Reserves +100000 Deposits 100000 If the required reserve ratio is 0.15, or 15 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as a result of this transaction is
85000
Which one of the following is not the formula for the quantity theory of money?
M*Y=P*V
Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet.
You bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100
Which of the following is NOT a function of money
acceptability
As the interest rate increases
consumption, investment, and net exports decrease; aggregate demand decreases
An attempt to reduce inflation requires _____ fiscal policy, which causes real GDP to ____ and the price level to ___
contractionary fall fall
The most important role of the Federal Reserve in today's U.S. economy is
controlling the money supply to pursue economic objectives
The unemployment rate
decrease the unemployment rate by increasing production
What is fiscal policy?
fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives
Automatic stabilizers are
government spending and taxes that automatically increase or decrease along with the business cycle
Money is an imperfect standard of deferred payment because ____________ causes the value of money to decrease over time.
inflation
Budget deficits
occur when government spending exceeds tax revenue and increase during recessions and wars
Which one of the following is not one of the monetary policy goals of the Fed?
reduce income inequailty
Which tool is the most important?
the Fed conducts monetary policy principally through open market operations
Monetary policy is defined as
the actions the Federal Reserve takes to manage the money supply and interest rates
An asset would be usable as a medium of exchange for all of the following reasons except
the asset should be a commodity that has intrinsic value
who is responsible for fiscal policy?
the federal government controls fiscal policy
The federal funds rate is
the interest that banks charge each other for overnight loans
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?
yes because fiscal policy and monetary policy are separate things