Final Practice 2 Ch.12-17, 20,21
Refer to the graph. Assume that the economy initially has a price level of P1 and output level Q1. If the government implements expansionary fiscal policy, and the full multiplier effect is felt, it will bring the economy to
P1 and Q3
Refer to the graph. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?
P2 and Q2
If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government
budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
Which of the following is an example of an economic investment?
building a new bank office
A mutual fund company uses the funds of its investors to
buy stocks and bonds
Refer to the table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 to 5 percent at a time when the investment demand declines from that shown by columns (1) and (2) to that shown by columns (1) and (3). As a result of these two occurrences, investment will
decrease by $10 billion
Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called the
discount rate
A stock investor may expect returns in the form of
dividends and capital gains
A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other.
false
As long as the owner (seller) of an asset is willing to accept any price, the asset will sell quickly, thus making it meet the full definition of liquidity.
false
Economic investment refers to the buying or selling of any asset in expectation of a financial gain.
false
If the Fed does a reverse repo of bonds with banks, then the banks' reserves will increase.
false
The discount rate is the interest rate at which commercial banks lend to their best corporate customers.
false
The general public can open deposit accounts at their district's Federal Reserve Bank.
false
When the Fed pays interest on excess reserves held at Fed banks, the interest rate used is the discount rate.
false
When the Fed raises interest rates on excess reserves, they are attempting to encourage bank lending.
false
The paper money used in the United States is
federal reserve notes
What is the difference between economic and financial investments?
financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods
When the Federal government uses taxation and spending actions to stimulate the economy, it is conducting
fiscal policy
Refer to the given diagram, in which line AB is the U.S. production possibilities curve and AC is its trading possibilities curve. We can conclude that the United States
has chosen to specialize in the production of cheese
Refer to the given diagram, in which line AB is the U.S. production possibilities curve and AC is its trading possibilities curve. We can conclude that the United States
has chosen to specialize in the production of cheese.
Interest paid on excess reserves held at the Fed
incentivizes financial institutions to hold more reserves and reduce risky lending.
Other things equal, an increase in productivity will
increase both aggregate supply and real output
Which combination of fiscal policy actions would most likely offset each other?
increase both taxes and government spending
Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will
increase by $1 billion and the money supply will increase by $10 billion
Other things equal, an improvement in the expected rate of net profit would
increase investment spending, real GDP, and the price level
When the Fed lends money to a commercial bank, the bank
increases its reserves and enhances its ability to extend credit to bank customers
If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by
increasing taxes by $20 billion
Arbitrage occurs when
investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return
Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money
is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8
The rise of mutual funds has radically changed the way corporations are controlled in that
it shifted ownership away from individual investors toward "institutional" investors like mutual funds
Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?
the reserve ratio
Answer the question on the basis of the information in the table. An interest rate of 2 percent is not sustainable because
the supply of bonds in the bond market will rise and the interest rate will rise
Which of the following is not a reason why after the Great Recession, when the recovery turned out to be very weak, economic policy in the U.S. had to turn forcefully toward fiscal policy?
there was a time lag implementing monetary policy
Which of the following is not true about subprime mortgage loans?
they had always been discouraged by the government and even banned in some cases
Arbitrage equalizes rates of return across assets of a given beta.
true
If the MPC in the economy is 0.75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.
true
In 2015, the United States had its first-ever trade surplus with OPEC.
true
One new element of the Fed's open market operations is the use of government securities as collateral for loans to banks and other financial institutions.
true
The production possibilities curves suggest that
west Mudville should specialize in, and export, baseball bats
To say money is socially defined means that
whatever performs the functions of money extremely well is considered to be money
Which of the following is an example of a land-intensive commodity?
wool
Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions. The commercial banking system has excess reserves of
zero
The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?
$10 billion
At the end of 2015, U.S. households and nonprofit organizations held approximately __________ in mutual funds.
$8.1 trillion
If countries A and B produce only either rubber bands or paper clips, their maximum outputs are shown in the accompanying production possibilities schedules. In country A the opportunity cost of 1 paper clip is
1/2 rubber band
In the United States, exports of goods and services accounted for about what percentage of GDP (total output) in 2014?
13 percent
The number of countries belonging to the World Trade Organization (WTO), as of 2015, is about
161
Answer the question on the basis of the accompanying production possibilities tables for two countries, Latalia and Trombonia. Assume that before specialization and trade, Latalia produced combination C and Trombonia produced combination B. If these two nations now specialize completely based on comparative advantage, the total gains from specialization and trade will be
4 tons of beans
The hypothetical nations Wat and Xat have the production possibilities for rice and corn given in the accompanying tables. Assume that Wat originally produced rice and corn at combination C and that Xat originally produced combination B. If the nations now fully specialize based on comparative advantage, the total gains from specialization and trade are
50 units of rice and 50 units of corn
Refer to the diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at
AD3
An appropriate fiscal policy for severe demand-pull inflation is
a tax rate increase
The main function of the Federal Reserve System is to
control the money supply
The United States has had significant trade and current account surpluses in recent years.
False
When commercial banks borrow from the Federal Reserves Banks, they decrease their excess reserves and their money-creating potential.
False
Which of the following financial institutions was acquired by Bank of America as a result of the financial crisis of 2007 and 2008?
Merrill Lynch
In which of the following countries did exports account for the biggest percentage of GDP in 2014?
Netherlands
Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with
a contractionary fiscal policy
At the time when a trade deficit is occurring, U.S. consumers benefit from having more goods and services available.
True
Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.
True
The fundamental objective of monetary policy is to assist the economy in achieving
a full-employment, noninflationary level of total output.
What function is money serving when you use it when you go shopping?
a medium of exchange
Which of the following is not true about the use of a credit card?
credit card balances are part of M2 but not part of M1
A money loan is said to be collateralized when
an asset is pledged by the borrower to the lender in case of default
Which of the following best describes the cause-effect chain of an expansionary monetary policy?
an increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP
Arbitrage is the process by which investors simultaneously sell
assets with lower rates of return and buy otherwise identical assets with higher rates of return
What are "mortgage-backed securities"?
bonds backed by mortgage payments
The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy, then there will be a
budget deficit
Which of the following is not a tool of monetary policy?
changes in banking laws
Which of the following is not part of the M2 money supply?
large-denominated time deposits
Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should try to
make no change in the interest rate
How do actively managed funds differ from passively managed funds?
managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns
Refer to the figure. The economy is at equilibrium at point B. What would expansionary fiscal policy do?
move the economy from point B towards point A
In the real world, specialization is rarely complete because
nations normally experience increasing opportunity costs in producing more of the product in which they are specializing
Suppose stock A sells for $50 per share and pays dividends of $2 per share per year. Stock B sells for $100 per share and pays dividends of $4 per share per year. Through the process of arbitrage, we would expect the price of
neither stock to change
Currency held within banks is part of
neither the M1 nor the M2 definition of the money supply
Which of the following monetary policy tools was introduced in 2008?
paying interest on excess reserves held at the Fed
The purchase of government securities from the public by the Fed will cause
the money supply to increase
The "shadow banking system" refers to
the process by which securities exchanges provide credit for personal and business needs apart from traditional bank lending
Which of the following actions by the Fed would cause the money supply to increase?
purchases of government bonds from banks
In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should
reduce tax rates and/or increase government spending
Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should
reduce taxes by $80 billion
The principle of comparative advantage indicates that mutually beneficial international trade can take place only when
relative costs of production differ between nations
Upon which of the following industries is a restrictive monetary policy likely to be most effective?
residential construction
Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary, full-employment level of real GDP?
sell government securities in the open market
What do stocks represent?
shares of ownership in a corporation and an entitlement to its future profits
The tables give production possibilities data for two countries, Alpha and Beta, which have populations of equal size. Beta
should specialize in catching fish and trade with Alpha for chips
Suppose stock A sells for $30 per share and pays dividends of $1 per share per year. Stock B sells for $40 per share and pays dividends of $2 per share per year. Through the process of arbitrage, we would expect the price of
stock A to fall and/or the price of stock B to rise
The Standard & Poor's 500 Index measures prices of the 500
stocks of the largest companies in the United States
If the Fed sells government securities to the general public in the open market,
the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed
One of the consequences of the U.S. trade deficit is that
the accumulation of American dollars in foreign hands has enabled foreign firms to build factories in America
If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when
the demand for money increases
Which of the following is not common to all investments?
the investment pays a positive rate of interest
Which of the following is not common to all investments?
the investment pays a positive rate of interest.