Macro exam 3

Which of the following indicates the primary mechanism by which the money supply expands?

The Fed purchases additional bonds, which increases the reserves available to the banking system.

Which of the following is true about public choice analysis?

It is the study of the decision making of individual actors (such as voters, politicians, and bureaucrats) in the public sector.

When the Federal Reserve System wants to increase the money supply, what does it typically do?

It purchases U.S. government securities.

An increase in the money supply will have which of the following effects?

It will reduce the interest rate, causing an increase in investment and an increase in GDP.

Which of the following assets can a commercial bank count as reserves?

Its vault cash and deposits with the Fed

In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates, which of the following is likely to occur?

There will be a net inflow of capital, which will cause the dollar to appreciate and net exports to decline.

Other things constant, if both the benefits and costs of a public-sector activity are widespread among voters, the political process will generally result in the

acceptance of productive activities and rejection of unproductive activities.

The immediate effect of a member bank's sale of U.S. government securities to the Fed is

an increase in that bank's excess reserves.

The expenditure multiplier indicates that

changes in investment, government, or consumption spending can trigger much larger changes in output.

From the standpoint of society as a whole, rent seeking is

counterproductive because it takes resources away from the creation of wealth in the private sector.

Compared to a permanent reduction in tax rates, a temporary tax cut will generally

exert a smaller impact on output and employment because the temporary cut will not exert much impact on long-term income or the incentive to earn.

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could

increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

Public choice theory indicates that the behavior of people in government

is best understood by applying the same principles we use to predict the behavior of people in the private sector.

Within the Keynesian model, the multiplier effect tends to

magnify small changes in spending into much larger changes in output and employment.

When the Fed buys bonds and injects additional reserves into the banking system, this action will

place downward pressure on short-term interest rates.

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because

real interest rates will fall, stimulating business investment and consumer purchases.

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?

A higher price level.

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?

A planned increase in the budget deficit.

Which of the following is most likely to result in an increase in crony capitalism?

An increase in government spending and growth of government regulation.

Which of the following is the strongest evidence of a shift toward a more expansionary fiscal policy?

An increase in government spending as a share of the economy and an expansion in the size of the budget deficit

Which of the following best expresses the central idea of countercyclical fiscal policy?

Deficits are planned during economic recessions, and surpluses are utilized to restrain expansionary periods.

When the Fed sells Treasury Bonds on the open market, it will tend to

decrease the money supply and raise interest rates.

If a budget surplus leads to a decrease in U.S. real interest rates, the lower rates will tend to cause

dollar to depreciate

The political incentive structure tends to

encourage budget deficits during both recessions and expansions.

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

the higher taxes cause workers to work less.