Econ 110 Exam 3

The Federal Reserve's narrowest definition of the money supply is A. M0 B. M1 C. M2 D. M3

B. M1

If the marginal propensity to save is 0.4, the multiplier is 2.5 True or False

True

Money will fail to serve as a medium exchange if it ceases to be a store of value True or False

True

When Jack's income increases by $1,000, he spends an additional $850. This implies that his marginal propensity to consume is 0.85 True or False

True

Consumption Disposable Income (dollars) (dollars) $1,200 $3,00o $2,100 $4,000 $3,000 $5,000 Given the consumption schedule in the table above, the marginal propensity to save is A. 0.1 B. 0.4 C. 0.7 D. 0.9

A. 0.1

If disposable income increases by $100 million, and consumption increases by $90 million, then marginal propensity to consume is A. 0.9 B. 0.8 C. 0.75 D. 0.6

A. 0.9

____ consumption is consumption that does not depend upon the level of GDP A. autonomous B. induced C. voluntary D. disposable

A. autonomous

The five most important variables that determine the level of consumption are A. disposable income, wealth, expected future income, price level and interest rate B. wealth, savings account balances, checking account balances, stock portfolio balances and bond portfolio balances C. government purchases, interest rates, income, taxes and transfers D. government purchases, saving account balances, wealth, interest rates, portfolio balances

A. disposable income, wealth, expected future income, price level and interest rate

A decrease in the discount rate ___ bank reserves and ____ the money supply is banks respond appropriately to the change in the rate A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

A. increases; decreases

The aggregate expenditure model focuses on the ____ relationship between real spending and ____ A. short-run; real GDP B. short-run; inflation C. long-run; real GDP D. long-run; inflation

A. short-run; real GDP

Actual investment spending does not include A. spending on consumer durable goods B. spending on new capital equipment C. spending on new houses D. changes in inventories

A. spending on consumer durable goods

Examples of assets that are included in household wealth would be A. stocks, bonds and savings accounts B. stocks, loans owed, and savings accounts C. stocks, bonds, and mortgages D. stocks, credit cards, and savings accounts

A. stocks, bonds and savings accounts

The slope of the consumption function is equal to A. the change in consumption divided by the change in disposable income B. the change in consumption divided by the change in personal income C. the change in disposable income divided by the change in consumption D. the change in national income divided by the change in consumption

A. the change in consumption divided by the change in disposable income

Refer to figure 31. If the economy is at a level of aggregate expenditure given by K, A. the economy is at equilibrium B. production is greater than spending C. production is less than spending D. inventories will increase above their desired level

A. the economy is at equilibrium

Which of the following is a true statement about the multiplier? A. the multiplier rises as the MPC rises B. the smaller the MPC, the larger the multiplier C. the multiplier is a value between zero and one D. the multiplier effect does not occur when autonomous expenditure decreases

A. the multiplier rises as the MPC rises

Bank reserves include A. vault cash and deposits with the Federal Reserve B. loans to bank customers and deposits with the Federal Reserve C. vault cash and loans to bank customers D. customer checking accounts and vault cash

A. vault cash and deposits with the Federal Reserve

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred? A.there was an unplanned increase in inventories equal to $2 million B. there was no unplanned change in inventories C. there was an unplanned decrease in inventories equal to $2 million D. there was an unplanned decrease in inventories equal to $19 million

A.there was an unplanned increase in inventories equal to $2 million

Open market operations refer to the purchase or sale of ____ to control the money supply A. corporate bonds and stocks by the Federal Reserve B. U.S. Treasury securities by the Federal Reserve C. corporate bonds and stocks by the U.S. Treasury D. U.S. Treasury securities by the U.S. Treasury

B. U.S. Treasury securities by the Federal Reserve

If inventories decline by more than analysts predict they will decline, this implies that A. actual investment spending was greater than planned investment spending B. actual investment spending was less than planned investment spending C. actual investment spending was equal to than planned investment spending D. there is no relationship between actual investment spending and planned investment spending

B. actual investment spending was less than planned investment spending

Economies where goods and series are traded directly for other goods are called ____ economies A. trade B. barter C. direct D. seigniorage

B. barter

To offset the effect of households and firms deciding to hold less of their money in checking account deposits and more in currency, the Federal Reserve could A. raise the required reserve ratio B. buy Treasury securities C. raise the discount rate D. lower bank taxes

B. buy Treasury securitiesOn

The largest proportion of M1 is made up of A. currency B. checking account deposits C. traveler's checks D. savings account deposits

B. checking account deposits

If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium? A. inventories will decline, and GDP and employment will decline B. inventories will rise, and GDP and employment will decline C. inventories will decline, and GDP and employment will rise D. inventories will rise, and GDP and employment will rise

B. inventories will rise, and GDP and employment will decline

If firms are more optimistic that future profits will rise and remain strong for the next few years, then A. investment spending will fall B. investment spending will rise C. investment spending will remain unaffected D. investment spending will rise then fall

B. investment spending will rise

H0w does a decrease in government spending affect the aggregate expenditure line? A. it shifts the aggregate expenditure line upward B. it shifts the aggregate expenditure line downward C. it increase the slope of the aggregate expenditure line D. it decreases the slope of the aggregate expenditure line

B. it shifts the aggregate expenditure line downward

Fiat money has A. little to no intrinsic value but is backed by the quantity of gold held by the central bank B. little to no intrinsic value is authorized by the central bank or governmental body C. value, because it can be redeemed for gold by the use of the central bank D. a great intrinsic value that is independent of its use as money

B. little to no intrinsic value is authorized by the central bank or governmental body

On the 45-degree line diagram, for points that lie below the 45-degree-line, A. planned aggregate expenditure is greater than GDP B. planned aggregate expenditure is less than GDP C. planned aggregate expenditure is equal to GDP D. planned aggregate expenditure is less than aggregate income

B. planned aggregate expenditure is less than GDP

If the central bank can act as a lender of last resort during a banking panic, banks can A. call in their loans to their customers and eventual restore the public's faith in the banking system B. satisfy customer withdrawal needs and eventually restore the public's faith in the banking system C. borrow more and more money from the central bank, and this will lower its reserves and decrease the public's faith in the banking system D. encourage the public to borrow directly from the central bank and this will worsen the banking panic

B. satisfy customer withdrawal needs and eventually restore the public's faith in the banking system

Which of the following functions of money would be violated if inflation were high? A. unit of account B. store of value C. certificate of gold D. medium of exchange

B. store of value

At macroeconomic equilibrium, A. total investment equals total inventories B. total spending equals total production C. total consumption equals total production D. total taxes equal total transfers

B. total spending equals total production

If the require ratio is 10%, an increase in bank reserves of $1,000 can support an increase in checking account deposits (including the original deposit) in the banking system as a whole of up to A. $100 B. $1,000 C. $10,000 D. $100,000`

C. $10,000

The general formula for the multiplier is A. 1/(1-MPS) B. 1/(MPC) C. 1/(MPS) D. 1/(MPC-1)

C. 1/(MPS)

If the marginal propensity to save is 0.25 then a $10,000 increase in disposable income will A. increase consumption by $7,500 B. increase consumption by $2,500 C. decrease consumption by $7,500 D. decrease consumption by $2,500

C. decrease consumption by $7,500

Which of the following is one of the most important benefits of money in an economy? A. money allows for the exchange of goods and services B. money allows for the accumulation of wealth C. money makes exchange easier, leading to more specialization and higher productivity D. money encourages people to produce all of their own goods (self-sufficient) and therefore increases economic stability

C. money makes exchange easier, leading to more specialization and higher productivity

_____ usually increase(s) when the U.S. economy is in recession and decrease(s) when the U.S. economy is expanding A. consumer spending B. planned investment C. net exports D. unplanned investment

C. net exports

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then A. the MPC is 0.5 B. the MPC is 0.75 C. the MPC is 0.8 D. the MPC is 0.9

C. the MPC is 0.8

If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP then, A. the multiplier is 0.125 B. the multiplier is 3.5 C. the multiplier is 8 D. the multiplier is 50

C. the multiplier is 8

Refer to figure 32. Suppose that investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP 1 to GDP 2. If the MPC is 0.9, then what is the change in GDP? A. $9 million B. $10 million C. $90 million D. $100 million

D. $100 million

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 M2 in this simple economy equals, A. $3,000 B. $8,000 C. $14,000 D. $21,000

D. $21,000

In economics, money is defined as A. the goal value of one's assets in current prices B. the goal value of one's assets minus the total value of one's debts, in current year prices C. the total amount of salary, interest, and rental income earned during a year D. any asset people generally accept in exchange for goods and services

D. any asset people generally accept in exchange for goods and services

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by A. investment spending B. export spending C. government spending D. the level of aggregate expenditure

D. the level of aggregate expenditure

All of the following are true statement about the multiplier except A. the formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate B. the larger the MPC, the larger the multiplier C. the multiplier is the ratio of the change in real GDP to the change in autonomous expenditure D. the multiplier makes the economy less sensitive to changes in autonomous expenditure

D. the multiplier makes the economy less sensitive to changes in autonomous expenditure

John Maynard Keynes argues that if many households decide at the same time to increase saving and reduce saving, A. this may benefit the economy in the short-run, but not in the long-run B. the economy will benefit in the short-run and benefit by an even greater amount in the long-run C. this will have a major negative impact on the economy in both short-run and long-run D. this may benefit the economy in the long-run, but could be counterproductive in the short run

D. this may benefit the economy in the long-run, but could be counterproductive in the short run

Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases and net exports True or False

False

Commodity money can be used only as a medium of exchange True or False

False

Economies cannot function without money True or False

False

If gold is used in an economy, the money supply is east to control True or False

False

Liquidity increases as we move from M1 to the M2 definition of money supply True or False

False

The amount of national income in an economy equals the money supply in the economy True or False

False

When the dollar becomes stronger compared to the Japanese Yen, the Japanese imports from the U.S. will increase True or False

False