Economics test 4

The T-account below represents assets and liabilities for a bank. Use the T-account to calculate the bank's net worth.

$-4 million

Find the maximum possible change in the money supply associated with a reserve requirement of 0.25 and an excess reserve amount of $300 billion. (Note that the answer should be expressed in trillions.)

$1.2 trillion

Using the quantity equation of money MV=PQ, calculate the money supply (M) if velocity (V) equals 2, the price level (P) equals 105, and real GDP (Q) equals 240.

$12600 (M=PQ/V)

Using the quantity equation of money MV=PQ, calculate the money supply (M) if velocity (V) equals 3, the price level (P) equals 94, and real GDP (Q) equals 505. Round to whole number.

$15823

The table below shows the components of M1 and M2 in the U.S. Use the table to calculate Total M2. Calculate in trillions and round to the third decimal point.

$16.124 trillion

The T-account below represents assets and liabilities for a bank. Use the T-account to calculate the bank's net worth. Express your answer in millions.

$2 million (A bank's net worth is calculated by subtracting liabilities from assets: Net Worth=Assets−Liabilities Assets=$8 million+$2 million+$1 million=$11 million Liabilities=$9 million Net Worth=$11 million−$9 million=$2 million)

Find the maximum possible change in the money supply associated with a reserve requirement of 0.15 and an excess reserve amount of $600 billion. (Note that the answer should be expressed in trillions.)

$4 trillion (Applying the money multiplier formula, we see that the total change in the money supply will be: 1reserve requirement×excess reserves = 10.15×$600 billion=6.67×$600 billion=$4 trillion) Content

The table below shows the components of M1 and M2 in the U.S. Use the table to calculate Total M1. Present the result in trillions and round to third decimal point.

$6.104 trillion (M1 money supply is composed of coins and currency in circulation, checkable deposits, and traveler's checks. To calculate M1, add currency, traveler's checks, and demand deposits together, which is equal to $6.104 trillion.)

Which of the following is an example of commodity money?

(a gold bar cigarettes used in POW camps a silver coin) all of the above

The M2 definition of money supply includes:

(currency checking accounts and travelers checks savings deposits, money market funds, and certificates of deposit) all of the above

Which of the following statements is true about a balance sheet?

1 Assets will always equal the liabilities plus the net worth of a company. 2 A balance sheet is an accounting tool that lists assets and liabilities.

Which of the following do not have ownership or members in the regional Federal Reserve Banks in each district?

1 the United States federal government 2 the state governments of each district

Banks reduce transaction costs because _________________________.

1 they save borrowers and lenders (savers) the time and cost to find each other 2 they make transactions safer for both borrowers and savers

Which of the following is true about excess reserves?

1. By choosing to hold more of their deposits as excess reserves instead of lending the money out, banks may reduce the effectiveness of monetary policy. 2. Excess reserves are the reserves that banks choose to hold in addition to the legally required level of reserves.

When it comes to state and local funding, which of the following statements are true?

1. Education accounts for about one-third of total state and local government spending. 2. State and local funding has increased during the last four decades from around 8% to around 14%.

Which of the following is an example of countercyclical monetary policy?

1. The Fed buys bonds to increase employment during a recession 2. The Fed sells bonds to reduce inflation during an economic boom with accelerating inflation.

The Federal Reserve has the power to __________________. Note: Please select two correct answers.

1. carry out monetary policy through open market operations 2. lend money directly to its member commercial banks

The leverage cycle can cause __________.

1. increases and reductions in lending/borrowing to be exaggerated 2. bubbles in asset prices

Deflation means that ______________.

1. the price level has fallen 2. the real value of money has increased

If there is an increase in budget deficits by 1 % of GDP and the initial interest rate is 4%, the long-term interest rate will be between 4.5 % and what?

5%

Of all the sources of state and local revenue, which of the following is most accurate?

A & C (The main revenue sources for state and local governments are sales taxes, property taxes, and revenue passed along from the federal government. State and local governments collect taxes imposed on business firms.)

All of the following are examples of commodity-backed currencies, except

A check backed up by a checkable deposit

Which of the following is not an asset?

A debt or something you owe.

Of the following list of government taxes which can state and local governments expect to receive? A. corporate taxes B. sales taxes C. revenue from federal government D. social security witholdings E. individual income taxes F. property taxes

A, B, C, E, F

The M1 money supply includes which of the following?

All of the above (demand deposits currency in circulation travelers checks)

In addition to be "a unit of account," which of the following is a function of money?

All of the above.

Bonds are considered a liability for a bank because banks will receive a stream of payments on bonds in the future.

False

When you make a purchase with a debit card, it is a considered a short-term loan.

False

When an economy recovers from a recession, how does the economic structure change?

It evolves and changes over a long period of time.

All of the following reasons are why most economists consider a perpetual balanced budget unrealistic, except:

It is impossible to balance the budget as the government would never reduce spending.

What is an effect of a temporary tax cut?

It will be less impactful than a permanent tax cut.

Given that the reserve requirement is 0.25, what is the money multiplier?

MM=4 (The money multiplier (MM) determines the maximum increase in loans that can be made assuming banks hold no excess reserves and there are no cash holdings in the economy. If these assumptions are true, then the money multiplier formula is MM=1RR, where RR is the required reserve ratio. In this case, since RR=0.25, MM=10.25=4.)

Which of the following formulas is the quantity equation of money?

Money Supply×Velocity=Price Level×Real GDP

Calculate the reserve requirement if the money multiplier is equal to 15. Round your answer to the nearest thousandth.

RR= 0.07 (The money multiplier determines how much money a bank or institution can make. The money multiplier formula is MM=1RR, where RR is the required reserve ratio. To find the reserve requirement, manipulate the money multiplier formula to RR=1MM. In this case, the reserve requirement is equal to 115 or 0.067.)

An extremely high level of aggregate demand will generate inflationary increases in the price level. By moving the aggregate demand curve, show how a contractionary fiscal policy can help reduce inflation.

Shift AD to the left

Suppose that the Fed implements monetary policy to raise the interest rates in the economy. Illustrate the effects of this policy in the goods and services market.

Shift AD to the left

Suppose that the government is concerned about high inflation so it carries out fiscal policy to reduce inflation. Move the aggregate demand curve to show the effect of fiscal policy on the economy.

Shift AD to the left

Illustrate what happens to the aggregate demand curve when the government decides to increase its spending on domestic infrastructure such as roads and bridges.

Shift AD to the right

What happens to the aggregate demand curve when the government decides to reduce the corporate tax rate?

Shift AD to the right

A demand deposit is a checkable deposit in a bank that is available by making a cash withdrawal or writing a check.

True

If velocity is constant over time, then a certain percentage rise in the money supply will inevitably lead to the same percentage rise in nominal GDP.

True

The purpose of bank regulation is to prevent bank runs, financial crisis, and the loss of depositors' money, among other goals.

True

When a bank diversifies its loans, those parts of its lending portfolio with a lot of defaults will tend to be balanced out by parts that have low defaults to help a bank keep ________________.

a positive net worth

An account that the depositor has committed to leaving in the bank for a certain period of time in exchange for a higher rate of interest is called _____________.

a time deposit

A cost associated with finding a lender or a borrower for money is called ________________________.

a transaction cost

Which of the following best describes contractionary fiscal policy?

action that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

Which of the following does bank regulation help prevent or resolve?

all of the above (bank runs loss of depositors money risky behavior by banks)

Who among the following participate in the Federal Open Market Committee?

all of the above (the seven members of the Board of Governors the president of the New York Federal Reserve Bank four regional bank presidents who serve on a rotating basis)

A family takes out a 30-year mortgage loan to purchase a house, and will repay the loan over the next 30 years. This loan is ___________________.

an asset for the bank

A payroll tax is a tax ________________________________.

based on the wages earned by an employee

The negative difference between government spending and tax revenues is called a _______________.

budget deficit

To make bond purchases, the Fed gets the money __________.

by creating it

The discount rate is an interest rate __________.

charged by the central bank on the loans that it gives to other commercial banks

Contractionary monetary policy through the selling of government bonds will ____________.

decrease the supply of loanable funds and increase in interest rate

Recognition lag is a term used by economists to identify the time it takes to _______________________________.

determine that a recession has occurred

Buying a good through barter means?

exchanging it for another good or service

Open market operations target which of the following interest rates?

federal funds rate

A regressive tax is a tax that requires people with ____________ incomes to pay a ___________share of their income in tax than people with lower incomes.

higher, smaller

An individual's marginal tax rate is determined by _______________.

his or her income

Once the government passes a bill to respond to a recession, it takes some time to disperse the funds to the appropriate agencies to start the programs. Economists call this time to start the projects the _________________.

implementation lag

The asset-liability time mismatch, which can cause severe problems for a bank, refers to the possibility for customers to withdraw a bank's liabilities _____________________ while customers repay its assets __________________.

in the short term; in the long term

When the Fed buys securities on the open market __________.

it increases the money supply and lowers the federal funds rate

In the neoclassical model, low inflation is good because _________________.

it provides a better climate for a healthy and growing economy.

When the Fed carries out contractionary monetary policy through selling bonds __________.

it reduces the supply of loanable funds which raises the interest rate

During expansionary fiscal policy, what happens to the aggregate demand?

it shifts outward to the right

Currently, the Fed does not have a responsibility of correcting asset bubbles because __________.

its dual mandate only includes achieving low inflation and low unemployment

Until the 1970s, the debt/GDP ratio revealed a fairly clear pattern of federal borrowing. The government ran ______________ and raised the debt/GDP ratio in World War II, but from the 1950s to the 1970s the government ran ________________, and so the debt/GDP ratio drifted down.

large deficits, either surpluses or relatively small deficits

Inflation targeting means that a central bank will focus ________________________.

on keeping inflation low

Discretionary fiscal policy is when the government __________________________________________.

passes a new law that explicitly changes tax or spending levels

Individual income tax and ___________________________ mean the same thing.

personal income tax

A budget surplus is a financial situation in which the government ___________ more money in taxes than it ______________ in a year.

receives, spends

Money functions as a medium of exchange because it

serves as an intermediary between the buyer and the seller

Suppose that the Fed is concerned about unemployment being too high as the economy is producing below potential levels, so the Fed buys bonds. Shift the aggregate demand (AD) curve on the graph below to show the impact of the Fed's actions on the economy.

shift AD to the right

Cards which can store a certain value of money to be used for purchases such as a calling card or a gift card are called:

smart cards

A budget deficit is a financial situation in which the federal government ___________ more money than it ___________ in taxes in a given year.

spends, receives

Automatic stabilizer are programs that automatically____________ aggregate demand in a recession and ___________ aggregate demand in a potentially inflationary boom.

stimulate, hold down

Countercyclical monetary policy means that _________________.

the Fed lowers interest rates during recessions and raises them during economic booms

Determining whether to raise or lower the Federal Funds Rate is a responsibility of __________.

the central bank

The federal debt can fluctuate from year to year based on the annual deficits and surpluses. Assume that a deficit is represented as a negative number whereas a surplus is represented as a positive number. How is the federal debt derived?

the sum of deficits and surpluses

For barter to be possible between two people, it must be the case that________________________.

there is a double coincidence of wants

What effect would a perpetually balanced budget have on automatic stabilizers?

they would not work and economic fluctuations would worsen

Crowding out is a term used to explain which of the following?

when government borrowing and spending results in higher interest rates