Macro: Ch #12-19 Quiz Questions
Other things equal, which of the following would increase the federal funds rate?
a decline in excess reserves in the banking system
In the financial industry, "securitization" refers to
bundling groups of loans, bonds, mortgages, and other financial debts into new securities.
Before the financial crisis, if the Fed wanted to lower the federal funds rate, it would
buy government securities in the open market.
The money supply is backed
by the government's ability to control the supply of money and therefore to keep its value relatively stable.
Open-market operations change
commercial bank reserves but not the size of the monetary multiplier.
An expansionary monetary policy may be less effective than a restrictive monetary policy because
commercial banks may not be able to find good loan customers.
New classical economists
hold that, left alone, the economy gravitates to its full-employment level of output.
Recessions have contributed to the public debt by
reducing national income and therefore tax revenues.
Contractionary fiscal policy would tend to make a budget deficit become
smaller
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. The commercial banking system has excess reserves of
$0 billion.
Other things equal, an excessive increase in the money supply will
decrease the purchasing power of each dollar.
The four main tools of monetary policy are
the discount rate, the reserve ratio, interest on excess reserves, and open-market operations.
The traditional Phillips Curve suggests that, if government uses an expansionary fiscal policy to stimulate output and employment,
the inflation rate will increase.
Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?
the reserve ratio
Interest paid on excess reserves held at the Fed
incentivizes financial institutions to hold more reserves and reduce risky lending.
If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are
$1,000.
A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?
$2 million
In the U.S. economy, the money supply is controlled by the
Federal Reserve System.
To the extent that the US steel industry reflects the US macro-economy, which of the following is most correct?
Increased investment has increased AD
Which of the following are weaknesses of expansionary monetary policy?
It can make credit and money available to be borrowed, but cannot ensure that the money will be borrowed
A major problem with a "balanced budget" policy is that:
It is pro-cyclical and makes matters worse instead of better.
The basic equation of monetarism is
MV = PQ.
Refer to the diagram for a specific economy. The curve on this graph is known as a
Phillips Curve.
The public debt is held as
Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
The seven members of the Board of Governors of the Federal Reserve System are
appointed by the president with the confirmation of the Senate.
In terms of aggregate supply, a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the
long run.
Which of the following is correct?
The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.
Since the financial crisis that began in 2007, the Federal Reserve has added a significant amount of which of the following securities?
mortgage-backed securities
When there is inflation in the economy, it implies that the
price index is rising and the purchasing power of money is falling.
Prior to the financial crisis of 2007-2009, the Fed would typically initiate an expansionary monetary policy by
setting a lower target for the federal funds rate.
In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the
short run
The actual reason that banks must hold required reserves is:
to give the Fed control over the lending ability of commercial banks.
A $70 price tag on a sweater in a department store window is an example of money functioning as a
unit of account.
In the extended analysis of aggregate supply, the short-run aggregate supply curve is
upsloping and the long-run aggregate supply curve is vertical.
Most modern banking systems are based on
fractional reserves.
"Subprime mortgage loans" refer to
high-interest-rate loans to home buyers with above-average credit risk.
A rightward shift of the AD curve in the very flat part of the short-run AS curve will
increase real output by more than the price level.
The short-run aggregate supply curve represents circumstances where
input prices are fixed, but output prices are flexible.
Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending
is financed by borrowing.
The economy's long-run aggregate supply curve
is vertical
Graphically, cost-push inflation is shown as a
leftward shift of the AS curve.
The version of aggregate supply that allows for changes in both product prices and resource prices is the
long run
Some economists are concerned that the financial rescue provided by the TARP will encourage financial investors and firms to take on greater risks in the future. This is an example of
moral hazard.
Banks lost money during the mortgage default crisis because
of all of these reasons.
The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits
of commercial banks are unchanged, but their reserves increase.
The short-run version of aggregate supply assumes that
product prices are flexible, while resource prices are fixed.
A rightward shift in the aggregate supply curve is best explained by an increase in
productivity
The primary purpose of the legal reserve requirement is to
provide a means by which the monetary authorities can influence the lending ability of commercial banks.
If the monetary authorities want to reduce the monetary multiplier, they should
raise the required reserve ratio.
Which of the following was the incorrect assumption that contributed most to the onset of the Great Recession?
Housing prices would continue to increase
If the reserve ratio is 100 percent, the value of the monetary multiplier is
1.
What is one significant characteristic of fractional reserve banking?
Banks can create money through lending their reserves.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Growth, full-employment, and price stability are depicted by
C
The Federal Reserve System regulates the money supply primarily by
altering the reserves of commercial banks, largely through sales and purchases of government bonds.
Stagflation refers to
an increase in inflation accompanied by decreases in real output and employment
In the curve, a decline in the tax rate from c to b would
increase tax revenue.
Adherents of the traditional monetary rule say that the supply of money should be
increased at a constant rate each year.
If you place a part of your summer earnings in a savings account, you are using money primarily as a
store of value.
A fall in labor costs will cause aggregate
supply to increase.
In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line
3
Which of the following best describes the idea of a political business cycle?
Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
Which one of the following would not shift the aggregate demand curve?
a change in the price level
Refer to the diagram. The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1. In the long run, demand-pull inflation is best shown as
a shift of aggregate demand from AD1 to AD2, followed by a shift of aggregate supply from AS1 to AS2.
Which of the following fiscal policy actions is most likely to increase aggregate supply?
an increase in government spending on infrastructure that increases private sector productivity
In the accompanying graph, which of the following factors will shift AS1 to AS3?
an increase in input prices
The interest-rate effect suggests that
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits
and reserves of commercial banks both decrease.
The short-run aggregate supply curve
becomes steep at output levels above the full-employment output
A bank temporarily short of required reserves may be able to remedy this situation by
borrowing funds in the federal funds market.
Mainstream economists contend that, as stabilization tools,
both discretionary fiscal policy and discretionary monetary policy can be effective if appropriately used.
Rational expectations theory is based on the assumption that
both product and resource markets are very competitive.
According to the equation of exchange, changes in the money supply can affect
both the price level and real output.
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.
The largest component of the money supply (M1) is
checkable deposits.
If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)
contractionary fiscal policy.
If personal income taxes and business taxes increase, then this will
decrease aggregate demand and aggregate supply.
The crowding-out effect works through interest rates, and it tends to
decrease the effectiveness of an increase in government spending.
An increase in the legal reserve ratio
decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
The crowding-out effect refers to the possibility that
deficit financing will increase the interest rate and reduce investment.
Maximum checkable-deposit expansion in the banking system is equal to
excess reserves times the monetary multiplier.
According to mainstream economists, the Fed's adherence to a traditional monetary rule rather than to discretionary monetary policy is likely to
increase the amount of instability in the economy.
When the required reserve ratio is decreased, the excess reserves of member banks are
increased and the multiple by which the commercial banking system can lend is increased.
The crowding-out effect suggests that
increases in government spending may reduce private investment.
New classical economists say that a fully anticipated increase in aggregate demand
moves the economy up along its vertical long-run aggregate supply curve.
Coins held in commercial bank vaults are
not part of the nation's money supply.
The Laffer Curve is a central concept in
supply-side economics.
What "backs" the money supply of the United States?
the U.S. government's ability to keep the value of money relatively stable
To say that "the U.S. public debt is mostly held internally" is to say that
the bulk of the public debt is owned by U.S. citizens and institutions.
In a full-employment economy, a rise in M will cause inflation unless
the velocity of money diminishes.
The opportunity cost of holding money
varies directly with the interest rate.
Monetarists believe that
velocity is relatively stable.
Since the financial crisis of 2007-2009, borrowing at the federal funds rate
virtually never happens, as most banks have sufficient excess reserves.
Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?
$20 billion
If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be
$200 billion.
Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves?
$24,000
Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank's actual reserves?
$38,000
Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5,000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank now have?
$4,000
Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return. What level of excess reserves does the bank now have?
$5,000
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The commercial banking system has excess reserves of
$9 billion.
Why has the volume of excess reserves at the Fed increased so much since the Great Recession?
The Fed started paying interest on commercial bank reserves
Which of the following statements is true?
The Federal Reserve does not set the federal funds rate, but historically has influenced it through the use of its open-market operations.
According to mainstream macroeconomists, U.S. macro instability has resulted from
investment "booms" and "busts" and, occasionally, adverse aggregate supply shocks.
If the Federal Reserve System buys government securities from commercial banks and the public,
it will be easier to obtain loans at commercial banks.
Refer to the diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the long run, an increase in the price level from P2 to P3 will
move the economy from b to d.
An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?
12 billion
A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?
2/5
The commercial banking system has excess reserves of $200,000. Then new loans of $800,000 are made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be
25 percent.
Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults The M1 definition of money includes item(s)
3 and 6.
In the diagram, the economy's immediate-short-run AS curve is line ______, its short-run AS curve is _____, and its long-run AS curve is line ______
3; 2; 1
Refer to the graph. Private investments are initially at point 5 on curve B. The crowding-out effect would be illustrated by a movement from point 5 to point
4
1. Real-Balances Effect 2. Household Expectations 3. Interest-Rate Effect 4. Personal Income Tax Rates 5. Profit Expectations 6. National Incomes Abroad 7. Government Spending 8. Foreign Purchases Effect 9. Exchange Rates 10. Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. Investment spending would most likely be influenced by changes in
5 and 10
The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. The monetary multiplier is
5.00.
1. Government Spending 2. Consumer Expectations 3. Degree of Excess Capacity 4. Personal Income Tax Rates 5. Productivity 6. National Income Abroad 7. Business Taxes 8. Domestic Resource Availability 9. Prices of Imported Products 10. Profit Expectations on Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. Changes in which combination of factors best explain why the aggregate supply curve would shift?
7 and 8
Which of the following is a true statement?
A decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward.
Which of the following best describes the Fed's balance sheet after thet Grea Recession?
An increase in the volume of bonds held as assets and an increase in the volume of bank reserves held as liabilities
The Federal Reserve System consists of which of the following?
Board of Governors and the 12 Federal Reserve Banks
Which of the following is a true statement?
Bond prices and interest rates are inversely related
What is the "market" in open market operations?
Bonds
What does it mean when economists say that home buyers are "underwater" on their mortgages?
Buyers owe more on their mortgage than the properties are worth.
Which of the diagrams for the U.S. economy best portrays an improvement in expected rates of return on investment?
C
Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?
Canada
Modern Monetary Theory argues that which of the following is NOT a problem caused by expansionary fiscal policy?
Crowding Out
Expansionary fiscal policy is intended to reduce which type of unemploymnet?
Cyclical
Which of the following was the policy response to the Great Recession?
Fiscal and monetary policy
Which of the following is the best description of the current state of the US economy?
GDP growth rose in the last quarter and the unemployment rate fell
Which of the following is the largest part of the US government budget?
Social Security
To the extent that the steel industry reflects the US economy as a whole, which of the following best describes its impact on the macro-economy?
Technological advancements are pushing the AS Curve to the right
Which of the following is correct?
The Fed Board of Governors are appointed to 14 year terms in order to insulate them from political pressure
The effectiveness of a tax cut to "stimulate" the economy and increase GDP depends primarily on which of the following?
The MPC of those getting the tax cut
Who is Herman Cain?
The President's nominee to the Fed Board of Governors
Which of the following as an example of an Automatic Stabilizer?
Unemployment insurance
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as
a medium of exchange.
A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan _________________.
excess reserves
If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)
expansionary fiscal policy.
All else equal, when the Federal Reserve Banks engage in an expansionary monetary policy, the interest rates received on government bonds usually
fall
A major advantage of the built-in or automatic stabilizers is that they
require no legislative action by Congress to be made effective.
