Macro Econ Midterm 2

Assume that the nominal interest rate that a bank charged is 7% and the expected inflation rate was 5%. If the actual inflation rate turned out to be 11%, what is the expected real interest rate and the actual real interest rate? Expected Actual A. 2% -4% B. 2% 6% C. 12% -6% D. -2% -6% E. -2% 4%

A. 2% -4%

A decrease in the supply of money will cause which of the following? A. An increase in nominal interest rates B. An increase in the demand for money C. An increase in investment D. An increase the reserve requirement E. An increase demand deposits

A. An increase in nominal interest rates

To eliminate an inflationary gap, the Federal Reserve might A. Increase personal income taxes B. Increase in the money supply C. Decrease the federal funds rate D. Buy bonds on the open market E. Sell bonds on the open market

A. Increase personal income taxes

When an economy is at full employment, an expansionary monetary policy will lead to A. Lower interest rates and more investment B. Lower interest rates and less investment C. Higher interest rates and lower prices D. Higher interest rates and higher prices E. Higher interest rates and lower price levels

A. Lower interest rates and more investment

Which of the following is NOT part of M1? A. Savings deposits B. Checkable deposits C. Coins D. Travelers checks E. Currency

A. Savings deposits

The Federal Reserve can increase the federal funds rate most effectively by A. Selling government bonds B. Buying government bonds C. Increasing the discount rate D. Decreasing the discount rate D. Decreasing the reserve requirement

A. Selling government bonds

Which of the following combined policies is the most effective in decreasing unemployment? A. Taxes Decrease, Discount Rate Decrease, Reserve Requirement Decrease B. Taxes Decrease, Discount Rate Decrease, Reserve Requirement Increase C. Taxes Decrease, Discount Rate Increase, Reserve Requirement Increase D. Taxes Increase, Discount Rate Increase, Reserve Requirement Decrease E. Taxes Increase, Discount Rate Increase, Reserve Requirement Decrease

A. Taxes Decrease, Discount Rate Decrease, Reserve Requirement Decrease

Which of the following is true regarding budget deficits? A. The national debt is the accumulation of budget deficits and surpluses over time B. Budget deficits occur when tax revenues are greater than government expenditures C. Budget deficits are often greater than the national debt D. Large budget surpluses can cause the crowding-out effect E. Budget deficits occur when imports are more than exports

A. The national debt is the accumulation of budget deficits and surpluses over time

Velocity of money is best described as: A. The number of times the average dollar is spent in a year B. Equivalent to nominal GDP C. Equivalent to Price level D. Equivalent to real GDP E. Another term for the spending multiplier

A. The number of times the average dollar is spent in a year

Which of the following to occur in the long-run if the economy is at full employment and the central bank conducts an open market purchase of bonds? A. The short-run Phillips Curve will shift to the right B. The short-run Phillips Curve will shift to the left C. The long-run Phillips Curve will shift to the right D. There will be a movement to the right along a short-run Phillips Curve E. There will be a movement to the left along a short-run Phillips Curve

A. The short-run Phillips Curve will shift to the right

A decrease in government spending by a given amount accompanied by a decrease in taxes by the same amount will cause which of the following? A. Aggregate demand to increase B. Aggregate demand to decrease C. Aggregate demand to stay the same D. Aggregate supply to increase E. Aggregate supply to decrease

B. Aggregate demand to decrease

The quantity theory of money suggests that A. An increase in spending will always lead to inflation B. An increase in the amount of money will lead to a proportional increase in prices C. Hyperinflation is due to increase in the cost of key resources D. Demand-pull inflation will occur as countries produce more output E. The quantity of money times the velocity of money equals the real GDP

B. An increase in the amount of money will lead to a proportional increase in prices

All of the following are true regarding money except A. Money is used as a medium of exchange B. Commodity money is used more than fiat money today C. Inflation erodes money's ability to serve as a store value D. Money measures relative values when it serves as a unit of account E. The money system is more efficient than the barter system

B. Commodity money is used more than fiat money today

Which of the following will most likely occur in an economy if more money is demanded than is supplied? A. The amount of investment spending will increase. B. Interest rates will increase C. The supply of money will decrease D. Deflation E. The aggregate demand will increase

B. Interest rates will increase

Suppose that all banks hold no excess reserves and the reserve requirement is 20%. If Paula deposits $200 she earned for babysitting in the bank, what is the maximum increase in the total money supply? A. $200 B. $400 C. $800 D. $1,000 E. $1,200

C. $800

Which of the following is true regarding the balance sheet of a commercial bank? A. Banks make a profit when the value of their assets are greater than the value of their liabilities B. Loans given to consumers are considered a liability C. Demand deposits are considered a liability D. Savings accounts are considered an asset E. Loans from the Federal Reserve are considered an asset

C. Demand deposits are considered a liability

Which of the following best explains why the money demand curve is downward sloping? A. High interest rates lead to less investment B. Banks charge higher nominal interest rates on loans when price level increases C. Higher interest rates encourage people to exchange money for other interest-bearing assets D. Households need to hold money for daily transactions E. Households demand less money because of the use of debit cards.

C. Higher interest rates encourage people to exchange money for other interest-bearing assets

Which of the following is true regarding the federal funds rate? A. It is the interest rate that the Federal Reserve charges commercial banks B. It is the highest interest rate banks can charge lenders C. It is the interest rate that banks charge each other D. It is the target rate of inflation set by the Federal Reserve E. It is usually higher than the discount rate

C. It is the interest rate that banks charge each other

The required reserve ratio is 10% and the central bank sells $2 million in bonds to banks. If banks loan out all their excess reserves and there are no leakages, what will happen to the money supply? A. It will decrease by $2 million B. It will decrease by $10 million C. It will decrease by $20 million D. It will increase by $10 million E. It will increase by $20 million

C. It will decrease by $20 million

If you use money as a store of value, you would be A. Buying a new watch B. Searching the Internet for a deal on a new car C. Putting money into a savings account D. Lending money to friend E. Paying for gas on your credit card

C. Putting money into a savings account

"The price for a ticket to the Super Bowl is $500." This statement best illustrates money used as a A. Illiquid asset B. Liquid asset C. Unit of account D. Medium of exchange E. Store of value

C. Unit of account

When government spending cause an increase in real interest rates, gross private domestic investment A. Will increase at the same rate as the increase in government expenditures B. Will increase the amount of capital stock and cause economic growth in the economy C. Will experience crowding-out D. Will not change E. Will decrease at the same rate as the increase in government expenditures

C. Will experience crowding-out

Which of the following is the best example of fractional reserve banking? A. A bank places $300 of deposits in reserve B. A bank borrows $4000 from another commercial bank C. A bank borrows $10,000 from the country's central bank D. A bank lends out $5000 of its excess reserves E. A bank buys $7000 of U.S. Treasuries with excess reserves

D. A bank lends out $5000 of its excess reserves

Which of the following is the best example of the crowding-out effect? A. The government changes laws regulating banks B. The Federal Reserve buys bonds increasing private investment C. Deficit spending leads to a higher national debt D. Deficit spending results in high interest rates that decrease private investment E. Public sector borrowing increases the supply of loanable funds

D. Deficit spending results in high interest rates that decrease private investment

If the Federal Reserve raises the discount rate, how are interest rates and real GDP affected? Interest Rates / Real GDP A. Decrease / Decrease B. Increase / Increase C. Decrease / Increase D. Increase / Decrease E. Decrease / No change

D. Increase / Decrease

Which of the following will most likely result in economic growth? A. Increased wages B. Decreased savings C. Increased business taxes D. Increased labor productivity E. Decreased unemployment

D. Increased labor productivity

Which of the following is true regarding the central bank's use of open market operations? A. Open market operations always result in inflation B. Decreasing the discount rate will increase the money supply C. Investment will increase when the central bank sells bonds D. Interest rates will decrease when the central bank buys bonds E. Aggregate demand will decrease when the central bank buys bonds

D. Interest rates will decrease when the central bank buys bonds

Which if the following is true for the money market graph? A. The demand for money is vertical because of autonomous spending B. The supply of money is downward sloping C. There is no relationship between the nominal interest rate and the quantity of money demanded in the long-run D. There is an inverse relationship between the nominal interest rate and the quantity of money demanded E. An increase in the nominal interest rate will shift the money supply to the right

D. There is an inverse relationship between the nominal interest rate and the quantity of money demanded

A decrease in interest rates resulting in the increase in capital stock will likely cause which of the following in the long-run? A. Decrease in only aggregate demand B. Decrease in only aggregate supply C. Increase in only aggregate demand D. Increase in only aggregate supply E. Increase in aggregate demand, aggregate supply, and long-run aggregate supply

E. Increase in aggregate demand, aggregate supply, and long-run aggregate supply

Which of the following is an appropriate monetary policy used by a central bank to reduce inflation? A. Decreasing government expenditures B. Increasing consumer income taxes C. Decreasing the reserve requirement D. Decreasing the discount rate E. Selling government securities

E. Selling government securities

Which of the following is true regarding the short-run Phillips curve (SRPC)? A. A rightward shift in aggregate demand will cause the SRPC to shift leftward B. The SRPC is upward sloping showing the positive relationship between price and output C. The SRPC shows the inverse relationship between interest rates and unemployment D. The SRPC is vertical when the economy has no cyclical unemployment E. The SRPC shows the inverse relationship between inflation and unemployment

E. The SRPC shows the inverse relationship between inflation and unemployment

According to the long-run Phillips curve, which of the following is true? A. Unemployment increases with an increase in inflation. B. Unemployment decreases with an increase in inflation. C. Increased automation leads to lower levels of frictional unemployment in the long run. D. Changes in the composition of the overall labor force tend to be deflationary in the long run. E. The natural rate of unemployment is independent of inflation

E. The natural rate of unemployment is independent of inflation

Which of the following to occur in the short-run if the economy is at full employment and the central bank conducts an open market purchase of bonds? A. The short-run Phillips Curve will shift to the right B. The short-run Phillips Curve will shift to the left C. The long-run Phillips Curve will shift to the right D. There will be a movement to the right along a short-run Phillips Curve E. There will be a movement to the left along a short-run Phillips Curve

E. There will be a movement to the left along a short-run Phillips Curve