ECON 10A Exam 2

Responsibilities of the Federal Reserve System include all but which of the following? a) Collecting federal taxes b) Supplying the public with currency c) Acting as fiscal agents for the federal government d) Providing facilities for check collection e) Supervising the operation of the member commercial banks

a) Collecting federal taxes

The power to decide on the amount of government securities the Fed should buy or sell at any given time rests with the a) Federal Open Market Committee. b) president of the United States. c) chairperson of the Federal Reserve Board. d) secretary of the Treasury. e) Council of Economic Advisers.

a) Federal Open Market Committee.

If a family's disposable income is $100,000 and the amount it saves is $35,000, its a) average propensity to consume is 0.65. b) marginal propensity to save is 0.53. c) marginal propensity to consume is 0.65. d) marginal plus average propensities to consume equal 1. e) average propensity to consume is 1.53.

a) average propensity to consume is 0.65.

The bank practice of lending money and therefore holding less cash than what is owed its depositors is called a) fractional-reserve banking. b) Federal Reserve banking. c) cash flow banking. d) creative banking. e) deposit ratio banking.

a) fractional-reserve banking.

Inflation a) hurts people living on fixed incomes. b) inevitably tends to die out. c) has been the experience of this country since its founding. d) does not tend to redistribute income. e) inevitably leads to deflation.

a) hurts people living on fixed incomes.

In a simple Keynesian model, an increase in government spending, other things being equal, a) increases the equilibrium GDP by a multiplier effect. b) alters the composition of, but not the total amount of, intended spending. c) shifts the C + I + G line downward. d) pushes the aggregate demand curve to the left, causing price levels to fall. e) changes the angle of the 45-degree line.

a) increases the equilibrium GDP by a multiplier effect.

To say that all U.S. currency is presently fiat money means that a) it is money by government decree. b) its metallic value exceeds its face value. c) the government will redeem that money with gold. d) money serves as a store of value. e) currency is the only asset that can serve as money.

a) it is money by government decree.

A decrease in the value of (exports minus imports) will a) lower equilibrium GDP. b) lead to a decline in net investment. c) lead to a decline in the 45-degree line. d) shift the total intended spending line upward. e) lower the value of the multiplier.

a) lower equilibrium GDP.

The sensitivity of GDP to changes in intended investment increases as the a) marginal propensity to save declines. b) multiplier declines. c) slope of the consumption function declines. d) change in equilibrium declines. e) spending chain declines.

a) marginal propensity to save declines.

The basic principle behind fractional-reserve banking is that a) on a daily basis new deposits tend to equal withdrawals. b) loans and investments are made with funds advanced by bank owners. c) banks hold reserves either in the form of cash or deposits with the Federal Reserve banks. d) a bank's assets are equal to its liabilities plus net worth. e) there is a legal limit on the amount of reserves banks must retain against their loans.

a) on a daily basis new deposits tend to equal withdrawals.

In general, financial institutions a) exclude those businesses that lend to the public. b) act as intermediaries between savers and investors. c) number fewer than a thousand in the United States. d) hold reserves equal to the value of checkable deposits. e) operate as nonprofit institutions for the public good.

b) act as intermediaries between savers and investors.

Tax cuts and tax surcharges are examples of a) public works programs. b) discretionary fiscal policy. c) welfare transfers. d) monetary policy. e) automatic stabilizers.

b) discretionary fiscal policy.

Investment in a project will take place if the a) marginal propensity to save exceeds the marginal propensity to consume. b) expected rate of return exceeds the interest rate. c) interest rate exceeds the marginal propensity to save. d) net investment in the economy exceeds gross investment. e) multiplier exceeds the expected rate of return.

b) expected rate of return exceeds the interest rate.

If intended spending falls short of the total value of final goods and services produced, a) GDP will rise. b) firms will cut back on their production rates. c) inventories will be depleted faster than firms desire. d) the aggregate supply curve must be vertical. e) depreciation exceeds investment.

b) firms will cut back on their production rates.

The 45-degree line represents points of equality between a) saving and investment. b) intended spending and GDP. c) consumption and saving. d) unemployment and inflation. e) price levels and intended spending.

b) intended spending and GDP.

Demand-side inflation is most likely to occur when the economy a) has substantial excess capacity. b) is approaching or operating at full employment. c) has an aggregate demand curve shifting to the left. d) has a horizontal aggregate supply curve. e) has labor productivity rising faster than wages.

b) is approaching or operating at full employment.

Autonomous changes in intended investment a) are due to changes in GDP. b) lead to changes in GDP. c) are inversely related to changes in induced investment. d) are rarely if ever negative. e) offset changes in the propensity to consume.

b) lead to changes in GDP.

The cumulative expansion process in the commercial banking system will come to an end when a bank's a) excess reserves equal required reserves. b) legal reserves equal required reserves. c) total reserves equal demand deposits. d) required reserves plus excess reserves equal legal reserves. e) demand deposits are some fraction of legal reserves.

b) legal reserves equal required reserves.

The major indicators of monetary tightness or ease are the a) discount rate and the prime rate of interest. b) level of interest rates and the rate of growth of the money supply. c) government deficit and the tax rate. d) size and composition of the money supply. e) level of real output and the level of interest.

b) level of interest rates and the rate of growth of the money supply.

If the multiplier is 3, a $1 billion decease in government spending will a) lower equilibrium GDP by 1/3. b) lower equilibrium GDP by 3. c) raise equilibrium GDP by 1/3. d) raise equilibrium GDP by 3. e) leave equilibrium GDP unchanged but change intended spending by 1/3.

b) lower equilibrium GDP by 3.

The slope of the consumption function is equal to the a) average propensity to consume. b) marginal propensity to consume. c) rate of interest. d) saving function. e) multiplier.

b) marginal propensity to consume.

A recessionary gap a) exists when actual spending is greater than its potential. b) means that equilibrium total real output is below potential output. c) measures the decrease in total real output needed to achieve price stability. d) indicates the extent of the recession needed to raise the rate of inflation. e) can be eliminated by fiscal policies designed to shift the C + I + G +(X - MI ) line downward.

b) means that equilibrium total real output is below potential output.

From the standpoint of society, a stable Phillips curve indicates that a) it is possible to have lower rates of inflation and unemployment simultaneously. b) policies to increase employment also increase the price level. c) wage increases that exceed productivity increases result in lower prices. d) government policy makers need make no fundamental choices between price stability and unemployment. e) full employment can be defined as the unemployment rate at which price increases equal productivity increases.

b) policies to increase employment also increase the price level.

When the equilibrium level of output in an economy is above its potential output, a) the government should raise its spending. b) there is an inflationary gap. c) the long-run aggregate supply curve is horizontal. d) unemployment rates are high. e) wages and prices must be rapidly falling.

b) there is an inflationary gap.

If commercial banks have no excess reserves and the Fed sells government securities, a) the money supply will expand and interest rates will fall. b) total demand deposits in the banking system will fall by some multiple of the bond sale. c) the size of the money supply will not change, but its composition will. d) the required reserve ratio will increase. e) banks will gain excess reserves equal to the amount of bonds sold.

b) total demand deposits in the banking system will fall by some multiple of the bond sale.

If Carolyn's consumption rises by $5,000 as her income increases from $26,000 to $32,000 per year, her marginal propensity to consume is a) 0.16. b) 19. c) 0.83. d) 1.20. e) impossible to determine from the data.

c) 0.83.

Excluded from the list of those having primary responsibility for making fiscal policy is the a) president of the United States. b) Council of Economic Advisers. c) Federal Reserve System. d) Congressional Budget Office. e) Joint Economic Committee of Congress.

c) Federal Reserve System.

Historically, the inverse relationship between the level of unemployment and the rate of increase of wages is known as the a) labor demand curve. b) aggregate supply curve. c) Phillips curve. d) Laffer curve. e) production possibilities curve.

c) Phillips curve.

Which of the following conditions imposes the largest disincentive to speculate in precious metals and collectibles? a) Runaway inflation b) Negative real interest rates c) Price stability d) Significant increases in the general price level e) A breakdown in the monetary system

c) Price stability

Which of the following best expresses the relationship between the marginal propensity to consume (MPC) and the average propensity to consume (APC)? a) The APC equals 1 minus the MPC. b) The APC equals the change in personal consumption divided by the change in disposable income; the MPC is the proportion of disposable income consumed. c) The APC is the proportion of total income consumed; the MPC is the proportion of the additional income consumed. d) The APC can never exceed the value 1; the MPC can exceed 1 at low income levels. e) The MPC deals with the consumption behavior of a household; the APC deals with the consumption behavior of society.

c) The APC is the proportion of total income consumed; the MPC is the proportion of the additional income consumed.

Automatic stabilizers make fiscal policy easier to undertake because they a) allow economists to formulate rules so that the economy is perpetually stable. b) enable policy makers to prescribe public works programs during inflationary periods since expenditures for unemployment and welfare have correspondingly decreased. c) act to increase spending when the economy turns down and to decrease spending when the economy overheats. d) eliminate the causes of unemployment and inflation experienced by the economy. e) give the president the complete authority for determining stabilization policy.

c) act to increase spending when the economy turns down and to decrease spending when the economy overheats.

If the morning paper reports that Americans, for the sixth month in a row, tend to spend more money and save less, these events would be depicted in an income expenditures model as a) causing the 45-degree line to slope upward. b) a downward shift in the supply function. c) an upward shift in the consumption function. d) an upward shift in the investment function. e) a right to left movement along the consumption function.

c) an upward shift in the consumption function.

Tax collections alter the equilibrium level of GDP by a) causing a change in government spending. b) changing the relationship between government expenditures and GDP. c) changing the relationship between consumption expenditures and GDP. d) shifting the 45-degree line to the left. e) causing an increase in prices.

c) changing the relationship between consumption expenditures and GDP.

The largest component of the U.S. money supply, narrowly defined, is a) coins. b) currency. c) demand and other checkable deposits. d) savings deposits. e) credit cards.

c) demand and other checkable deposits.

The interest rate charged by the Fed for loans to commercial banks is called the a) prime rate. b) required reserve ratio. c) discount rate. d) Q rate. e) T-bill rate.

c) discount rate.

The consumption function expresses the relationship between consumption spending and a) investment spending. b) aggregate supply. c) disposable income. d) savings. e) the 45-degree line.

c) disposable income.

If intended spending exceeds the total value of final goods and services produced, a) GDP falls. b) firms cut back on their production rates. c) inventories will be depleted faster than firms desire. d) the aggregate supply curve must be vertical. e) depreciation exceeds investment.

c) inventories will be depleted faster than firms desire.

Government anti-inflationary fiscal policy a) is intended to shift the short-run aggregate supply curve to the left. b) typically leads to an increase in total real output and a rise in the price level. c) leads to a reduction in total real output when the short-run aggregate supply curve is positively sloped. d) shifts the aggregate demand curve to the right. e) is undertaken when the economy is in the horizontal range of the short-run aggregate supply curve.

c) leads to a reduction in total real output when the short-run aggregate supply curve is positively sloped.

The Federal Reserve Bank's exercising control over the quantity of money and interest rates is called a) fiscal policy. b) commercial banking. c) monetary policy. d) functional finance. e) incomes policy.

c) monetary policy.

A leftward shift in the aggregate supply curve produces a) demand-side inflation. b) increases in real output. c) supply-side inflation. d) a higher standard of living. e) a horizontal Phillips curve.

c) supply-side inflation.

Inflationary conditions that emerge because of specific resource shortages or scarcities are called a) cost-overrun inflations. b) sedentary-spending inflations. c) supply-side inflations. d) demand-side inflations. e) parity-price inflations.

c) supply-side inflations.

If one pictures the Federal Reserve System as a pyramid, the apex (top peak) of the pyramid represents a) the president. b) Congress. c) the Federal Reserve Board. d) the Federal Open Market Committee. e) the presidents of large commercial banks.

c) the Federal Reserve Board.

Inflation occurs whenever a) aggregate demand rises. b) the price of any given commodity rises. c) the money supply increases more rapidly than output. d) the tax rate is lower than the government spending rate. e) the money supply falls.

c) the money supply increases more rapidly than output.

If one pictures the Federal Reserve System as a pyramid, the bottom of the pyramid represents a) the 12 Regional Reserve Banks. b) the U.S. consumers. c) the Federal Advisory Council and other economic advisers. d) commercial banks. e) Congress.

d) commercial banks.

Wartime inflations are generally a) cost-overrun inflations. b) sedentary-spending inflations. c) supply-side inflations. d) demand-side inflations. e) parity-price inflations.

d) demand-side inflations.

The total increase in the money supply that can be achieved from a given amount of excess reserves can be found by a) adding the excess reserve ratio to the amount of excess reserves. b) multiplying the excess reserve ratio by the amount of excess reserves. c) subtracting the required reserve ratio from the excess reserve ratio. d) dividing the amount of excess reserves by the required reserve ratio. e) adding the required reserve ratio to the excess reserve ratio and multiplying the reciprocal of the result by the amount of required reserves.

d) dividing the amount of excess reserves by the required reserve ratio.

Economic stabilization activity, which is the responsibility of the executive and legislative branches of the U.S. government, is called , while that presided over by the U.S. central bank is called . a) deficit financing, functional finance b) supply-side economics, liquidity preference c) incomes policy, commercial policy d) fiscal policy, monetary policy e) positive economics, normative economics

d) fiscal policy, monetary policy

Unanticipated inflation clearly imposes a cost on a) everyone, because it reduces money incomes. b) employees working under contracts with cost-of-living increase clauses. c) borrowers. d) lenders. e) foreigners, because our exports cost more.

d) lenders

In 1997, weekly payrolls in manufacturing were $553 while the consumer price index was 161 (1982-84 = 100). In terms of base period dollars, real weekly earnings for the quarter were a) identical to real weekly earnings in 1982-84. b) greater than $553. c) equal to $553. d) less than $553. e) impossible to determine from the information given.

d) less than $553.

The additional amount a family spends on consumption from an additional dollar of disposable income is called the a) saving function. b) marginal propensity to save. c) multiplier. d) marginal propensity to consume. e) average propensity to consume.

d) marginal propensity to consume.

The Federal Reserve's most important tool for controlling the amount of reserves in the banking system is a) changing the discount rate. b) moral suasion. c) establishing margin requirements. d) open market operations. e) buying and selling gold certificates.

d) open market operations.

The average propensity to consume is the a) fraction of an extra dollar of GDP that becomes disposable income. b) share of GDP spent by households and businesses. c) proportion of an extra dollar of disposable income that is spent on consumption. d) percentage of disposable income that is consumed. e) reciprocal of the marginal propensity to consume.

d) percentage of disposable income that is consumed.

The extent to which the banking system can expand the money supply is greater, the greater is the a) legal reserve requirements. b) amount of reserves the public removes from the banking system in form of cash. c) willingness of banks to hold excess reserves. d) reciprocal of the required ratio of reserves to deposits. e) number of independent banks in the system.

d) reciprocal of the required ratio of reserves to deposits.

To be considered money, a financial asset must be a) convertible into gold or silver. b) coins, currency, or fractional reserve. c) issued by the Federal Reserve System. d) serving as a medium of exchange, store of value, and standard of value. e) kept in banks.

d) serving as a medium of exchange, store of value, and standard of value.

The consumer price index a) is a 10-year moving average of commodity prices. b) establishes the maximum price sellers may charge consumers. c) lists the annual ratios of consumption to disposable income. d) shows the ratio of cost of a market basket of goods and services in a given year to a base year. e) is another name for aggregate demand.

d) shows the ratio of cost of a market basket of goods and services in a given year to a base year.

The Federal Reserve influences the money supply by managing a) personal and corporate tax rates. b) government spending programs. c) the foreign trade balance. d) the reserves of the banking system. e) the number of financial intermediaries.

d) the reserves of the banking system.

Fiscal policy is the a) policy that corporations follow to maintain their dividends when profit rises. b) name given to Federal Reserve Banks' efforts to control interest rates. c) process by which prices are established in the stock market. d) use of government spending and taxation for stabilization purposes. e) international trade and commerce policy pursued by a nation.

d) use of government spending and taxation for stabilization purposes.

Which of the following policy tools will have the greatest effect on bank reserves? a) Maintaining the existing legal reserve ratio b) Advising Congress on budget policy c) Decreasing the discount rate d) Encouraging banks to be more cautious e) Buying U.S. government securities

e) Buying U.S. government securities

Another name for the income expenditure model is the a) classical model. b) consumption propensities model. c) paradox of thrift. d) production possibilities model. e) Keynesian model.

e) Keynesian model.

The basic distinction between M1 and M2 is that a) M2 excludes all checkable deposits. b) M1 is the money supply broadly defined to include large certificates of deposit. c) M2 is the money supply expressed in current dollars, whereas M1 is expressed in constant dollars. d) M1 includes credit card balances on bank-issued credit cards. e) M2 equals M1 plus savings, small time deposits, money market mutual fund balances, and money market deposit accounts.

e) M2 equals M1 plus savings, small time deposits, money market mutual fund balances, and money market deposit accounts.

Currently, the largest share of the annual federal budget goes for a) interest on the national debt. b) energy programs. c) education and health. d) national defense and other items connected with international relations and national security. e) Social Security programs, welfare and other income security programs, health, and education.

e) Social Security programs, welfare and other income security programs, health, and education.

The paper currency we use in the United States is a) issued and controlled by the Treasury Department. b) backed by gold certificates. c) issued by commercial banks. d) composed almost entirely of silver certificates. e) a debt of the Federal Reserve System.

e) a debt of the Federal Reserve System.

If equilibrium GDP exceeds potential GDP, a) potential output is much greater than actual output. b) the economy is in a recession. c) price levels are falling. d) actual spending is too low. e) an inflationary gap exists.

e) an inflationary gap exists.

Automatic stabilizers a) make sure that the government budget is balanced every year. b) give Congress the complete authority for determining fiscal policy. c) are under the control of the Council of Economic Advisers. d) force Congress to expedite budget hearings during times of economic hardship. e) come into play without the need for new legislation or administrative decisions.

e) come into play without the need for new legislation or administrative decisions.

The government may attempt to reduce unemployment by a) pushing the aggregate demand curve to the left. b) increasing the tax rate on personal income. c) reducing government expenditures. d) decreasing net exports. e) cutting taxes.

e) cutting taxes.

Over the 2001-03 period, the Fed steadily reduced the discount rate to 2 percent. These moves suggest that monetary policy was a) selective. b) redundant. c) tight. d) autonomous. e) easy.

e) easy.

Discretionary fiscal policy is a) the responsibility of the Federal Reserve System. b) designed to increase the size of recessionary and inflationary gaps. c) focused on making the 45-degree line more vertical. d) intended to ensure continuing corporate dividends under changing sales conditions. e) implemented through changes in government expenditures and tax rates.

e) implemented through changes in government expenditures and tax rates.

GDP is at the equilibrium level when a) total intended household spending equals business spending. b) it is a full employment level. c) the rate of inflation equals the rate of unemployment. d) any further increases in intended spending increase the price level. e) it equals the amount of intended spending.

e) it equals the amount of intended spending.

In the long run, increases or decreases in the money supply a) cause real potential output to rise and fall. b) must ultimately be approved by Congress. c) may increase or decrease aggregate supply but not aggregate demand. d) are tied to increases and decreases in the U.S. government holdings of gold. e) raise and lower the price level but have no effect on real GDP.

e) raise and lower the price level but have no effect on real GDP.

Increases in the price level accompanied by reductions in total real output mean that the economy is experiencing a) leftward shifts in the aggregate demand curve. b) full employment. c) technological advances leading to increased productivity. d) leftward shifts in the Phillips curve. e) supply-side inflation.

e) supply-side inflation

Public confidence in the commercial banking system has been strengthened by a) the requirement that commercial banks use their reserves mainly to buy government bonds. b) bank practices that maintain cash reserves equal to 50 percent of demand deposit liabilities. c) the fact that all commercial banks are members of the Federal Reserve System. d) the over 15 percent spread between interest paid to depositors and interest earned on loans. e) the existence of almost universal insurance on deposits up to $100,000.

e) the existence of almost universal insurance on deposits up to $100,000.

The NAIRU is a) a measure of those temporarily unemployed because of a recession. b) calculated by dividing the unemployment rate by the employment rate. c) considered by most economists to be no greater than 1-2 percent of the labor force. d) based on the assumption that many people will not work unless they are forced to. e) the unemployment rate associated with a constant rate of inflation.

e) the unemployment rate associated with a constant rate of inflation.