Macro Practice Exam

In the short run, a decrease in planned investment will _____.

raise the unemployment rate and reduce the rate of inflation

The demand curve for federal funds is _____.

downward-sloping, because higher interest rates discourage commercial banks from borrowing federal funds, but lower rates encourage borrowing

The price of a bond with no expiration date is originally $1,000 and has a fixed annual interest payment of $150. If the price of the bond then falls by $100, what will be the interest rate yield to a new buyer of the bond?

16.7%

A shift from AS1 to AS2 would be consistent with what economic event in U.S. history?

Cost-push inflation in the mid-1970s

If aggregate demand curve shifts from AD2 to AD1, the effect on real GDP will be a decrease from _____.

Q2 to Q1

A move up, along the short-run Phillips curve represents a decrease in the unemployment rate.

True

Crowding out is less of a concern in the United States' economy today because the supply of loanable funds is ________ supply.

a global

A bank is in the position to make loans when required reserves

are less than actual reserves.

An increase in personal income tax rates would tend to reduce

consumption

Contractionary monetary policy should initially change gross investment by _____.

less than necessary to reach full employment

Which of the following will create the largest increase in the money supply?

the Federal Reserve buys bonds and the banks choose to hold less excess reserves

How many members can serve on the Board of Governors of the Federal Reserve System?

7

Answer the next question based on the following list of factors that are related to the aggregate demand curve. 1) Real-Balances Effect 2) Household Expectations 3) Interest-Rate Effect 4) Personal Income Tax Rates 5) Profit Expectations 6) National Income Abroad 7) Government Spending 8) Foreign Purchases Effect 9) Exchange Rates 10) Degree of Excess Capacity Changes in which two of the factors would most likely cause a shift in aggregate demand due to a change in consumer spending?

2 and 4

Use the following table to answer the next question. Interest Rate Demand for Money (billions) 7% - $200 6% - $300 5% - $400 4% - $500 If the current interest rate is 5%, what will be the equilibrium interest rate if the money supply falls by $100 billion dollars?

6%

Which of the following factors does not explain the inverse relationship between the price level and the total demand for output?

A substitution effect

Use the following diagram to answer the next question. Which of the following would have caused a move from point 1 to point 2 in the diagram above?

An increase in taxes

Use the following graph to answer the next question. If the economy is currently in equilibrium at output level Q2, but full-employment output is at level Q1, which of the following fiscal policy actions would be the most effective at bringing the economy back to its full-employment output level?

Increase taxes

The economy experiences an increase in the price level and a decrease in real domestic output. Which of the following is a likely explanation?

Input prices have increased.

Use the following graph to answer the next question. Assume that the economy initially has a price level of P1 and output level Q1. If the government implements expansionary fiscal policy, it would bring the economy to

P2 and Q2

Use the following graph to answer the next question. 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

Money eliminates the need for a coincidence of wants in trading primarily through its role as a

medium of exchange

If the price level decreases, then the aggregate expenditures schedule will shift and this translates into a _____.

movement down along the aggregate demand curve

Because of policy lags in monetary policy, the Fed _____.

must try to anticipate changes in the economy before they happen

One of the potential upsides of contractionary fiscal policy is a reduction in

payments on the national debt

Generally speaking, the government implements fiscal policy in a

slow and inaccurate manner.

Reserves borrowed at the federal funds rate are usually repaid _____.

the next day

One timing problem in using fiscal policy to counter a recession is the "legislative lag" that occurs between the

time the need for the fiscal action is recognized and the time that the action is taken.

The upward slope of the short-run aggregate supply curve is based on the assumption that _____.

wages and other resource prices do not respond to price level changes

Use the following graph to answer the next question. If demand for overnight funds in the graph should increase by $50 billion at each and every point on the demand curve, but the Federal Reserve wants to keep the target rate at 5.0%, what will be the new equilibrium quantity of reserves?

$200 billion

When the interest rate in the economy was 10%, the price of a bond with no expiration date that pays a fixed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6%, the price of this bond will be about

$8,333

Use the following graph to answer the next question. Which line in the graph above would best illustrate the transactions demand for money curve?

Line 2

Use the following graph for the federal funds market to answer the next question. If the Fed wants the federal funds rate to be at if1, what quantity of reserves do they need to make available to banks?

Qf1

Use the following graphs to answer the next question. In the graphs, 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.

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

Selling government securities in the open market and decreasing government spending.

Use the following diagram to answer the next question. Which of the following would cause a move from MS1 to MS3?

The Federal Open Market Committee decides to sell bonds.

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

The interest rate decreases and nominal GDP increases.

The Federal Reserve System regulates the money supply primarily by _____.

altering the reserves of commercial banks, largely through sales and purchases of government bonds

The Federal Reserve System controls the money supply by_____.

changing the amount of reserves the banking system has available

Holding the money deposits of businesses and households and making loans to the public are the basic functions of

commercial banks and thrift institutions.

Cost-push inflation is characterized by a(n) __.

decrease in aggregate supply and no change in aggregate demand

The set of fiscal policies that would be most contractionary would be a(n)

decrease in government purchases and an increase in taxes.

With cost-push inflation in the short run, there will be a(n) _____.

decrease in real GDP

Which of the following would not be considered an automatic stabilizer?

defense spending

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _____.

discount rate

One major advantage of money serving as a medium of exchange is that it allows society to

escape the complications of barter.

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the _____.

federal funds rate

Compared to a country with an MPC of 0.9, a country with an MPC of 0.5 would have to change government expenditures by _________ as much to have the same impact on real GDP.

five times

Which of the following correctly expresses the Fisher equation?

i = r + πe

A decrease in business taxes will tend to _____.

increase aggregate supply

Assume that the required reserve ratio is 20%. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the reserves at Bank A and Bank B?

increase by $50,000 at Bank A and decrease by $50,000 at Bank B

Use the following table to answer the next question. The money supply and investment are in billions. Money Supply (billions of dollars) Interest Rate Investment (billions of dollars) $50 - 7% - $100 $60 - 6% - $110 $70 - 5% - $120 $80 - 4% - $130 $90 - 3% - $140 Assume that the MPC is 0.8 and the reserve requirement is 0.1. If the Federal Reserve needs to increase aggregate demand by $100 billion at each price level to move the economy back to full employment and the current interest rate is 7%, then the Federal Reserve should _________ the money supply by ________.

increase, $20 billion

During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ______ the money supply, which will put ______ pressure on nominal interest rates.

increase; decrease

If the MPC in an economy is 0.9, the government could shift the aggregate demand curve rightward by $40 billion by

increasing government purchases by $4 billion.

The aggregate supply curve (short run) is upward-sloping because ______.

per-unit production costs rise as the economy moves toward and beyond its full-employment real output

Use the graph to answer the following question: Suppose the loanable funds market is initially in equilibrium at point A, but then implementation of fiscal policy causes crowding out to occur. After the implementation occurs, the equilibrium in the market would be best represented by

point D

A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to _____.

reduce inflationary pressures in the economy

Use the following table to answer the next question. Money Supply Interest Rate Money Demand $200 billion - 0.2% - $1 trillion $250 billion - 0.2% - $1 trillion $300 billion - 0.2% - $1 trillion Which limitation for monetary policy is illustrated by the table?

the liquidity trap

Use the following graph to answer the next question. If the economy is in equilibrium at point B and full employment output is at point A, the most appropriate fiscal policy would be

to increase government purchases

Amalgamated Widget Company is currently considering which investment projects it should undertake. The following list of projects along with the estimated rate of return of each project is presented to the executive management team: Project A (9%) Project B (7.5%) Project C (6.5%) Project D (11%) Project E (5.5%) The current interest rate in the loanable funds market is 6%. However, if an increase in government borrowing pushes the interest rate to 8%, we would expect the company to undertake _________ projects.

two

In the Great Recession of 2007-2009, the stock market values shrank, causing a reverse _____.

wealth effect