Econ Test 4 Practice Exam

M2 is (blank) in dollar value than M1; it also contains (blank) assets

larger; less liquid

If the reserve requirement is 25%, a new deposit of $1000 leads to a potential increase in the money supply of:

$4000

Open market operations involved the purchase and sale of:

government securities

The price of a band is equal to:

interest payment divided by yield

Transfer payments are:

monies paid directly to individuals by the government

Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. If this bank is subject to a reserve requirement of 5%, how much more can it loan out if it wants to be fully loaned up? (Assets: Cash=$2500, Deposits=$7500, Loans=$90000. Liabilities: Deposits $100000)

$5000

Yolanda took $5000 from her checking account and put the money in her savings account at the same bank. Based on that information, which of these is true?

M1 went down by $5000, but M2 was unchanged

When workers lose their job, they file for unemployment benefits; therefore government spending on such programs naturally rises during recessions. As the economy recovers and people go back to work, spending on unemployment programs shrinks. Based on the given information, which of the following is correct?

Unemployment compensation is a form of an automatic stabilizer

Successful barter in a primitive economy necessitates:

a double coincidence of wants

The (blank) rate is the rate at which banks charge each other for overnight loans, while the (blank) rate is the rate at which regional Federal Reserve banks charge depository institutions for short-term loans

federal funds; discount

The (blank) lag can be expected to last 18 to 24 months

implementation

The (blank) lag is the time required to turn fiscal policy into law to have an impact on the economy.

implementation

Suppose the economy is in a recession. To increase demand using discretionary fiscal policy, the government can:

increase government spending or reduce taxes

The demand curve for loanable funds represents (blank) and is (blank)

investors; downward sloping

Money:

is anything that is accepted in exchange for other goods and services or for payment of debt

Crowding out:

leads to higher interest rates

Rising productivity will increase economic growth and raise the average standard of living, shifting the (blank) curve to the (blank)

long-run aggregate supply; right

Automatic stabilizers include all of the following EXCEPT:

national defense spending

The crowding-out effect can drive up interest rates, which (blank) consumer spending on durable goods and (blank) business investment

reduces: reduces

Increased government (blank) leads to a larger increase in GDP when compared to be the same reduction in (blank)

spending; taxes

Mandatory spending comprises nearly (blank) of the federal budget

two-thirds

Serving as a (blank) is a function of money that gives us a yardstick by which we can measure and compare the values of a wide variety of goods and services

unit of account

What are the primary functions of money?

unit of account, medium of exchange, store of value

If the marginal propensity to consume is 0.9, how much will $100 of government spending increase GDP?

$1000

A bank has $50000 in deposits from its checking account customers and loads of $49000. Of the $49000 loaned out, $43000 remains in the checking accounts of the loan recipients. The bank has $50000 cash on hand, and the reserve requirement is 25%. The reserve ratio for this bank is (blank), and (blank) meeting its reserve requirement.

53.76%; it is

The Federal Reserve System includes (blank) regional banks

C

A supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point (blank) in the graph

D (high average tax rate, low tax revenue)

Based on the graph, if business taxes increase, the demand for loanable funds curve will shift from (blank) to (blank) and the new equilibrium will be at point (blank), holding supply constant at S0:

D1;D0;A

Disposable income is equal to:

Y-T

If a government collects $1400 in tax revenue and spends $1600, it has:

a deficit of $200

Legislators debate for six months on which spending programs to utilize to manipulate the business cycle. This is an example of the:

decision lag

Flat money:

does not necessarily have any intrinsic value but has been declared by a government to be money

The (blank) oversee(s) the main tool of monetary policy

federal open market committee

The (blank) is the central bank of the United States

federal reserve system

Which of these is a basic goal of the Federal Reserve System?

full employment

Corporate bonds generally have a (blank) return on investment than do checking deposits because bonds are (blank)

higher; riskier

Liquidity refers to:

how quickly, easily, and reliably an asset can be converted into a medium of exchange

The largest source of federal government revenue is:

individual income taxes

The (blank) lag is the time policymakers must wait for economic data to be collected, processed, and reported

information

The formula for calculating the reserve ratio is:

reserves divided by total deposits

When government spending increases, the aggregate demand curve shifts to the (blank) and the multiplier effects is dampened by a (blank) in the aggregate price level

right; rise

If the Fed increases the supply of money in the market, bond prices will (blank) and interest rates will (blank)

rise; fall

Which of these is likely to lead to a higher interest rates?

the end of a government program that provides taxpayers with additional incentives to invest in their retirement plans

The graph shows a hypothetical Laffer curve. If the tax rate is 80%:

the government should reduce the rate to 50% to maximize tax revenue

If the reserve requirement is 1%, what is the money multiplier?

100

Assume taxes increase by $200 and the marginal propensity to consumer is 0.75. We would expect:

equilibrium income to fall by $600

The Federal Open Market Committee:

is composed of the board of governors and five other regional reserve bank presidents

(Blank) are all examples of discretionary spending:

national defense, income security, and veteran's benefits

The (blank) lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession

recognition

If Jack Sparrow buries a chest of gold on a deserted island and plans to come back for it later, then the gold is functioning as a

store of value

Suppose the government implements a policy reducing the rewards earned by savers. In this case, the (blank) loanable funds shifts (blank)

supply of; left

Consider the T-account in the table. If the reserve requirement is 20%, then: (Assets: $25000 cash, $50000 loans. Liabilities: $50000 (checking account balances) $25000 (loan recipients' checking account balances)

the potential money multiplier is larger than the actual money multiplier

If an expansionary policy pushes output beyond the full employment level of GDP:

the short-run aggregate supply curve will shift to the left

Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. What is the amount of this bank's reserves? (Assets: Vault Cash: $2500, Deposits $7500, Loans $90000. Liabilities: Deposits $100000)

$10000

Based on the table, M1 for June 2010 was: (Currency 883.6, Traveler's checks 467, Savings deposits, 5086.1, Small-denomination time deposits 382, Retail money funds 746.6)

$1737.4 billion

Suppose a bank has $1 million in deposits, a reserve requirement of 10%, and bank reserves of $300000. The bank has excess reserves of:

$200000

If a person borrows $2000 at 5% interest and never makes any payments, how much will the loan balance be after 2 years?

$2205

If the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of:

$5000

Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. This bank's reserve ratio is: (Assets: Cash $2500, Deposits $7500, Loans $90000. Liabilities: Deposits $100000)

0.10

Suppose the ZZZ Corporation sells a one-year coupon bond for $1000 and its coupon payment is $100. In this example, the yield is (blank) If instead the price of the bond is $500, the yield is (blank)

10%; 20%

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1200 is:

5%

Based on the graph, if technological advances increase productivity, the demand for loanable funds curve will shift from (blank) to (blank) and the new equilibrium will be at point (blank), holding supply constant at S0

D0;D1:C

Based on the graph, if households decide to save a larger portion of their income because they fear job loss due to a recession, the loanable funds supply curve will shift from (blank) to (blank), and the new equilibrium will be at point (blank), holding demand constant at D0.

S0;S1:B

(Blank) is the amount by which annual government spending exceeds tax revenues

The budget deficit

Which of the following is the LEAST liquid?

a picasso painting

The Laffer Curve demonstrates that:

above some point on the tax rate scale, lowering tax rates increases tax revenues

The 12 federal reserve banks and their branches do all of the following EXCEPT:

accept deposits from US citizens

M1 includes:

cash, demand deposits, and other checkable deposits

Which action is NOT a tool of monetary policy?

changing government spending and taxes

Contractionary fiscal policy is typically used to:

combat inflation stemming from an overheated economy

The best discretionary fiscal policy option is: (AD and SRAS to the left of LRAS)

expansionary fiscal policy that leads to full employment

The reward for saving is called (blank), and this variable is placed on the (blank) axis of the loanable funds market graph

interest; vertical

If a bank is subject to a reserve requirement of 15%, then it is required to:

place 15% of its deposits in the account with its regional federal reserve bank or the vault

The (blank) is the sum of the past (blank)

public debt; budget deficits

(Blank) government spending, (blank) transfer payments, and (blank) taxes are all examples of concretionary fiscal policy:

reducing; reducing; raising

(Blank) are all examples of mandatory spending

social security, interest on the national debt, and medicare

If there is a general rise in fear of the financial system:

the actual multiplier will fall

The graph shoes the supply and demand for loanable funds. If the market interest rate is 3%: (current equilibrium is $5000 loanable funds at 2%)

there will be an excess supply of funds