Macroecon test 1 review - test 2 review - Final Test Study

govt doesnt create wealth

it redistributes it

what does john maynard keynes macroecon formula show? (spending multiplier)

it shows that consumer, investment, and govt spending will equal the national GDP/AD. (he argued that an increase in govt spending was the quickest way to stimulate most nations out of the Great Depression.

Main sources of economic growth come from

land, labor, capital, and the entrepreneurial spirit

what makes (AD- aggregate demand) shift left

less consumption spending, less investment spending, less govt. spending, higher taxes, less imports, less spending multiplier

According to the Gross Output theory, government spending to stimulate the economy will not be very successful. According to this theory, the economy can be more prosperous if the government passed laws to lower taxes, cancel unnecessary regulations, and adopted a more pro-business attitude

true

According to the Keynesian theory, consumer spending represents about two-thirds (66%) of all U.S. economic activity.

true

A budget deficit is when the government is not able to collect enough money to cover their costs.

true

A corporate bond is used when an individual wants to lend money to a firm for a fixed rate of interest income for a fixed period of time (e.g. 1 year).

true

conservative economists like Milton Friedman and Thomas Sowell

have more faith in the private sector

The Keynesian View (1930s-1980s)

+govt spending. Fiscal policy > Monetary policy

The Monetarist View (1960s-present)

+money supply, interest banks and banking are critical to ensure overall success of the economy. Monetary Policy > Fiscal Policy

Austrian School of Economics

- govt. (govt must support private property rights and not interfere with private sector)

Consumer Spending + Business Spending + Government Spending + (Imports - Exports) equals: 1. Aggregate Demand 2. Aggregate Production Possibilities Curve 3. Aggregate Keynesian Full Employment 4. Aggregate Supply.

1. Aggregate Demand

What two factors influence the demand for money? 1. Both the transaction demand and the asset demand for money 2. Only the interest rate and the currency exchange rate 3. The supply of money and Ms=GDP 4. Give me money and I'll be happy. They say money can't buy happiness, but whatever money can't buy I don't need. (Comment: Do you agree with #4?)

1. Both the transaction demand and the asset demand for money

How can the Fed effectively lower inflation without causing turmoil in the marketplace? 1. Make sure Ms growth = GDP growth 2. It could order all banks to lower their interest rates on credit cards 3. It could lower the Reserve Requirement 4. This is easy. Simply convince the Congress to pass new laws that would put price caps on all goods and services.

1. Make sure Ms growth = GDP growth

5 desired goals of any economic system

1. full employment 2. price stability 3. robust economic growth 4. improving the standard of living 5. an equitable income distribution

how is the money multiplier calculated

1/Legal Reserve Requirement

Supply-Side economists believe in what two major ideas: 1. Higher taxes and more government spending 2. Lower taxes and privatizing government services whenever possible 3. Higher taxes and more defense spending 4. Lower taxes and doing more entitlement (welfare) spending

2. Lower taxes and privatizing government services whenever possible

The U.S. government collects most of its tax revenues from what source? 1. Estate tax payments 2. Personal income tax payments 3. Corporate taxes 4. The Capital Gains tax

2. Personal income tax payments

The actions of the Federal Reserve Bank have no impact on financial markets such as stocks, bonds and currency trading. 1. It has been proven that there is no relationship between Fed actions and the financial markets 2. This statement is false 3. This statement is true because the Fed is not responsible to regulate these markets 4. We have no data to show that Fed actions influence the financial markets

2. This statement is false

Social Security payments account for over 30 to 35 percent of all federal spending in the U.S. It is the largest government program. These Social Security payments are also counted as transfer payments. 1. This statement is false 2. This statement is true 3. Social Security is not part of the official U.S. federal budget 4. Aye Caramba! Economics is making my life too difficult.

2. This statement is true

Which of the following will be counted in the Gross Domestic Product for this year? (Assume we are now in the year 2018) 1. A used 2012 car that is sold in 2018 2. A new 2018 Ford Escape that is manufactured in Canada 3. A new 2018 Ford Escape that is manufactured within the borders of the U.S. 4. All of the above count as U.S. GDP

3. A new 2018 Ford Escape that is manufactured within the borders of the U.S.

The President of the United States nominates and appoints all seven members of the Board of Governors who serve at the Federal Reserve Bank 1. This is partially true, but they must be approved by the U.S. Senate 2. The President only nominates them, he can't appoint them 3. Responses 1 and 2 are correct. 4. None of the above

3. Responses 1 and 2 are correct.

Sometimes the free market does fail. When it can't solve a problem like air pollution, then it must usually rely on the government to step in and regulate the problem. This problem is known as an: 1. Transfer Payment 2. Social Tax 3. Negative Externality 4. A Reallocation Problem

3. negative externality

What is a positive externality?: 1. The government offers free flu shots to protect everyone from getting sick 2. When the government offers K-12 education with no direct cost or tuition 3. Offering the new missile defense shield technology for Hawaii to protect them from rogue countries like North Korea who might fire nuclear missiles. 4. All of the above are true.

4. All of the above are true.

What can we say about the underground economy in the U.S.: 1. People who participate in it are trying to avoid the IRS and paying taxes 2. The Hells Angels, the Mafia and MS-13 gangs are active in the underground economy 3. All activity in the underground economy is not reported as part of the U.S.GDP 4. All of the above statements are true

4. All of the above statements are true

Which 'individual' country has the largest Gross Domestic Product (GDP) in the world? 1. Japan 2. Great Britain 3. Germany 4. United States

4. United States

Monetary Policy:

A central banks changing of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth.

The textbook tells us that credit cards are not really money. They are simply a tool to get a short-term loan. However, debit cards are: A) Are part of the money supply since they are directly tied to checking accounts. B) Are not part of the money supply just like credit cards are not. C) Debit cards were part of the old M3 statistic. D) Debit cards are only part of M2 and not M1.

A) Are part of the money supply since they are directly tied to checking accounts.

The Comptroller of the Currency does what? A) It has supervisory authority over banks and thrifts (including credit unions). B) It supervises all banks and does bank audits for the Federal Reserve Bank. C) It acts as the primary watchdog for Congress and it keeps an eye on the Federal Reserve bank, FDIC, Office of Thrift Supervision and the National Credit Union Agency. D) All of the statements above are false.

A) It has supervisory authority over banks and thrifts (including credit unions).

Which entity below is considered to be a quasi-public bank: A) The 12 Federal Reserve Banks. B) Fannie Mae. C) TIAA-CRET D) The National Credit Union Administration (NCUA).

A) The 12 Federal Reserve Banks.

According to our reading, the top five largest private banks in the world are U.S. banks: A) This statement is false. B) This statement is true. C) This statement is false and Switzerland has most of the largest banks in the world. D) This statement is true because Citibank, plus Bank of America and Chase control a large portion of the banking marketplace.

A) This statement is false.

It was the banking crisis of 1907 that helped the U.S. government decide that it was time to create a national bank like the Federal Reserve Bank: A) This statement is true. B) This statement is false. C) This statement is false because it was World War I that helped the U.S. government decide it was time to start a national bank. D) Both B and C are correct.

A) This statement is true.

The Federal Open Market Committee creates the monetary policy of the Federal Reserve Bank: A) This statement is true. B) This statement is false; it is the Chairman of the Federal Reserve - Ben Bernanke - who executes the policy for the Federal Reserve. C) This statement is false; it is the Monetary Fund of the U.S. Treasury that directs the Federal Reserve Bank's actions. D) This statement is false, Congress directs the Federal Reserve Bank.

A) This statement is true.

In the U.S., paper money is a debt of the Federal Reserve Bank. A) Are you crazy? Cash money is not a debt. B) Cash or paper currency is a debt obligation of the Federal Reserve Bank C) Both statements A and D are correct. D) The Federal Reserve Bank has clearly stated that the U.S. currency is neither a debt or asset according to the way they classify money supply.

B) Cash or paper currency is a debt obligation of the Federal Reserve Bank

The Wall Street Reform and Consumer Protection Act of 2010 eliminated a federal agency that watched over the thrift industry and gave more power to two other agencies. Which agency was eliminated and what other agencies gained more power? A) The Senate Banking Committee was eliminated and FDIC and SEC got more power. B) The Office of Thrift Supervision was eliminated and FDIC and the Fed got more power. C) The FDIC was eliminated and the Fed and FOMC got more power. D) All statements above are false

B) The Office of Thrift Supervision was eliminated and FDIC and the Fed got more power.

In emergency situations, the Federal Reserve is also known as: A) The lead bank of both U.S. banks and the International Monetary Fund. B) The lender of last resort. C) The Federal Reserve is also known as the World Bank. D) None of the above statements are true.

B) The lender of last resort.

The term "securitization" means what and which asset listed below would be a good example of a securitized security? A) This term simply means stocks and any stock of a firm would be a good example. B) This means that financial instruments such as bonds are bundles or wrapped together and sold as an investment. An example would be mortgage backed securities. C) Securitization was outlawed after the 2008 financial crisis and those securities are no longer sold. D) All of the above statements are false.

B) This means that financial instruments such as bonds are bundles or wrapped together and sold as an investment. An example would be mortgage backed securities.

MZM is always less than M2: A) This statement is true. B) This statement is false. C) Statement B is correct this is a false statement, but MZM also measures part of the GDP D) MZM is the name of a successful rap group.

B) This statement is false.

M1 consists of roughly 50 percent cash and 50% checking accounts A) This statement is false because you forgot to include savings accounts B) This statement is true. C) This statement is false because any liquid asset is part of M1. D) This statement is false because in the current credit crisis the Federal Reserve is changing the definition of M1.

B) This statement is true.

M1 is one of many measurements of the U.S. money supply. Therefore, which of the statements below is correct? A) M1 is made up of all currency that exists within the U.S. and outside our borders. B) M1 is made up of currency + coins only. C) M1 is made up of currency (coins and paper money) plus all types of checking accounts. D) M1 is made up of checking accounts, savings accounts, Certificates of Deposit plus all currency (coins and paper money).

C) M1 is made up of currency (coins and paper money) plus all types of checking accounts.

Which agency below regulates credit unions? A) The Federal Deposit Insurance Corporation (FDIC) B) The Securities and Exchange Commission (SEC) C) The National Credit Union Agency (NCUA) D) The Credit Union Defense Fund

C) The National Credit Union Agency (NCUA)

In the Federal Reserve's Twelfth District, San Francisco is where the main regional headquarters is located? A) This statement is false. B) This statement is false, there are no regions allocated within the Federal Reserve. C) This statement is true. D) This statement is true and the S.F. headquarters serves as the lead office for all of the mid-Western states and some states in the southern part of the U.S. such as Texas.

C) This statement is true.

The main functions of money are: A) It serves as a medium of exchange. B) It serves as a store of value. C) It serves as a unit of account. D) All of the above.

D) All of the above.

Why do some countries use the U.S. dollar as their primary currency? A) They feel the U.S. dollar provides monetary stability. They also see the U.S. as a "safe haven" country. B) They probably had a history of massive inflation and they want to use a currency that the people can trust. C) They like to use the dollar because when it appreciates in value against other major international currency, then they will benefit. D) All of the statements above are true.

D) All of the statements above are true.

The Federal Reserve Bank does what: A) It controls the U.S. money supply and helps to influence interest rates B) It controls the money supply and regulates the U.S. banking system. C) The U.S. Treasury controls the money supply, but the Federal Reserve does regulate banks and influences the direction of interest rates. D) Both A and B are true.

D) Both A and B are true.

The Board of Governors at the Federal Reserve does what? A) They set the basic policies of the Fed. B) They are responsible for the management policies of all U.S. banks. C) Some of the board members are appointed by the President of the U.S. to serve on the FOMC and are subject to final approval by the U.S. Senate. D) Both A and C are true.

D) Both A and C are true.

Which of the following is a responsibility of the Federal Reserve Bank? A) It sets the Reserve Requirements for all U.S. banks. B) It establishes the monetary policy guidelines for the International bank of the U.S. C) It acts as a fiscal agent (or private banker) for the U.S. government. D) Both A and C are true.

D) Both A and C are true.

T/F? M1 consists of cash and checking accounts. M1 is a basic measurement of U.S. money supply.

True

T/F? The banking crisis of the Great Depression caused the U.S. federal government to set up the Federal Deposit Insurance Corporation (FDIC) in 1933 and they also created the Federal Reserve Bank.

False

T/F? If Americans suddenly started to repay debt and started to payoff their car, home and personal loans, then the money supply in the U.S. would increase.

False

T/F? It is not in the strategic interest of the U.S. to allow the citizens in other countries like Cuba, Argentina, Zimbabwe, Panama, Bolivia, and Vietnam to use U.S. dollars as their 'currency of choice' to conduct trade. Conclusion: The U.S. should take aggressive steps to halt these uses of the U.S. dollar in these foreign countries because this harms the value of the dollar.

False

T/F? Only the Federal Reserve Bank can increase the money supply, independent banks have no way to increase the money supply.

False

T/F? Suppose you bought an item online being sold by a foreign firm based in Italy. You then use your debit card to buy the item. Conclusion: This debit card purchase will not affect the U.S. money supply.

False

T/F? The "liquidity trap" will happen when bankers get very bold and start lending lots of money to business and individual borrowers. During a liquidity trap, borrowers are also very happy to borrow as much money as they can.

False

T/F? The Board of Governors at the Federal Reserve Bank have the power to set the Fed Funds Rate, print money and issue statements about the Fed's monetary policy choices.

False

T/F? The Federal Deposit Insurance Corporation (FDIC) regulates and insures the deposits at all credit unions in America. They are the leading regulatory agency for U.S. credit unions.

False

T/F? The Federal Reserve Bank does not own any gold.

False

T/F? The Federal Reserve Bank doesn't care what goes on in the Fed Funds Rate because that is a private market where banks loan money directly other banks.

False

T/F? When the Fed sells U.S. government bonds in the general marketplace, it is effectively increasing the nation's money supply.

False

T/F? When the money supply is increased, then short-term lending interest rates should go up

False

The Fed Funds Market:

Federal Reserve funds are overnight loans banks use to meet the reserve requirement at the end of each day. The Federal Reserve uses the fed funds to control the nation's interest rates. That is because banks borrow fed funds from each other. ... The fed funds market is the total amount borrowed by all banks.

T/F? MZM is the new replacement for the old M3 money supply measurement.

True

T/F? For years the Federal Reserve Bank has been telling Congress to reduce their reckless spending and to stop creating and expanding social programs (e.g. Medicare and free prescription drugs for elderly retirees) that have no cost restraints. Conclusion: The bottom line is that Congress doesn't have to do what the Federal Reserve says because the Fed has no legal control over fiscal policy.

True

T/F? An International Economic History Story: During 2001, the nation of Argentina went through a major financial crisis and their government ran out of money to pay for government programs. Eventually they seized the retirement accounts of their private citizens and told them it was a national emergency because they needed the money to continue to pay for government social programs like healthcare, free education and generous unemployment benefits. Conclusion: This seizure of their citizens money was a violation of financial privacy laws and this is also a signal that their government's previous fiscal and monetary policies failed.

True

T/F? Congress authorized a $700 billion bailout for U.S. big banks during Q4 2008 and the bulk of that money was provided by the Federal Reserve Bank. During this same time the Federal Reserve Bank also issued an additional $1 trillion in new "electronic money" to U.S. banks to help them get through their sub-prime mortgage loan crisis. Finally, the Federal Reserve Bank also lent $600 billion directly to foreign central banks to help them out. (Everything stated up top this point is true) Conclusion: All of this activity was commonly known as QE1.

True

T/F? During March 2009, the Federal Reserve Bank set up a $1 trillion line of credit known as TALF. The purpose of this program was to buy low-quality mortgages directly from banks in order to stimulate the housing market and to strengthen the asset side of bank balance sheets.

True

T/F? During the 18th and 19th centuries in the U.S., people used gold and silver to conduct trade. They also used the private bank notes printed by the strong regional banks of those days as currency for trading purposes.

True

T/F? During the fourth quarter 2008, the U.S. nearly went into a Great Depression because large banks like Washington Mutual and Citibank failed and needed emergency bailout money. Large Wall Street firms like Merrill Lynch and Lehman Brother also failed, the insurance firm known as AIG who was a major player in the $100 trillion in U.S. based derivatives based on sub-prime mortgage loans failed and other large firms important to the U.S. economy such as General Motors and Chrysler were on the brink of bankruptcy.

True

T/F? If the Federal Reserve severely decreases the money supply, that would be bad news for stocks and good news for holders of bank Certificates of Deposit who always desire higher rates of interest

True

T/F? In 1933, President Franklin Roosevelt declared a "bank holiday." The purpose of this was to give bank inspectors enough time to review bank accounting records and to decide which banks should remain open and which ones should be closed down. The bank holiday lasted for one week

True

T/F? In past recessions (after-1945), the Fed usually increased the money supply. This monetary policy is their standard reaction to stimulate the economy. One of their goals is to grow the U.S. GDP.

True

T/F? Not only did the Troubled Asset Relief Program (TARP) lend out $700 billion to banks during the financial crisis (Q4 2008), but the Federal Reserve Bank also started to purchase commercial paper directly in the marketplace to help support business. Traditionally, the Fed doesn't do this but it had to during this crisis because banks stopped buying commercial paper from business firms. (Hard Question)

True

T/F? One of the changes from the Wall Street Reform and Consumer Protection Act of 2010 is that it gives the Federal Reserve Bank the power to watch over and regulate mortgage backed securities and derivatives. (Hard Question)

True

T/F? Open market operations, the discount window and the reserve requirement are the three main tools that the Fed has to conduct monetary policy. The Open Market Operation tool is by far the most used of the three tools.

True

T/F? Recently, as of September 2017, the Federal Reserve Bank has said that it intends to start raising interest rates and shrinking the excessive money supply that was created during the past several years. They are doing this because they still feel the economy is now much stronger.

True

T/F? Securitization is a concept that describes the process of slicing up and bundling mortgage loans or bonds into distinct new securities that will be re-sold to long-term investors like insurance companies.

True

T/F? The 12 regional Federal Reserve Banks are privately owned by regional U.S. commercial banks, but instead of trying to maximize profits like most private firms, the Fed acts in the public interest.

True

T/F? The Federal Open Market Committee controls Monetary Policy. They meet roughly once every two months to make decisions about the money supply, interest rates, and bank regulations.

True

T/F? The Federal Reserve Bank acts as the fiscal agent (or private banker) for the U.S. federal government. For example, when taxes are paid in April 15th the U.S. government does not deposit the hundreds of billions it collects with big banks like Bank of America, Wells Fargo or Chase Bank. Instead the federal government deposits that money into its account at the Federal Reserve Bank.

True

T/F? The Federal Reserve currently pays banks interest if they deposit their money at the Federal Reserve Bank.

True

T/F? The Money Multiplier is calculated like this: 1 / Required Reserve Ratio = Money Multiplier

True

T/F? The Office of Thrift Supervision was eliminated with the passage of the Wall Street Reform and Consumer Protection Act of 2010.

True

T/F? The Reserve Ratio is set by the Federal Reserve Bank. This tells banks what percentage of new deposit money must be kept in their vaults.

True

T/F? This question is about the concept of 'moral hazard.' This concept says that bankers, investors and/or financial services firms will take more risk if they know that the government will be there to save them in case they make decisions that lead to disaster.

True

cost push inflation is where economy faces ________ to the AD, thus creating

a shock, an inflationary environment

Deflation:

a sustained drop in the price level

free market capitalism turns scarcity into

abundance

The Supply Side View (1980s - present)

all about tax policy and increasing production. was used by both Ronald Reagan and Britain's leader Margaret thatcher. Margaret Thatcher actually privatized whole industries such as oil, utilities, and housing formerly.

Rational Expectations View (1970s)

believe economy could be better managed if the govt followed simple rules.

normative economics

economists who add personal bias to their work.

positive economics

economists who seek truth. no bias

A transfer payment is when a U.S. citizen pays their taxes to the government.

false

According to the Spending Multiplier formula, an increase of marginal tax rates cut will be beneficial for the U.S. economy and will increase the Gross Domestic Product (GDP). ___________1________ X (C + I + G +/- Trade) = AD/GDP 1 - MPC X (1 - tax rate)

false

An earmark is an example of "wise" government spending that John Maynard Keynes would enthusiastically support.

false

If U.S. Consumer Confidence goes way down and if the national mood turns grim, then this will probably mean that Consumer Spending will go down and that the Gross Domestic Product will go up.

false

In 1979, the U.S. Gross Domestic Product (GDP) didn't grow at all (0%) and the general economy was performing miserably. Also, in that year the U.S. economy suffered a severe setback from the Iranian oil embargo, which created high gas prices, high unemployment and a 13 percent inflation rate. Yet, the U.S. money supply grew by 13% during 1979. So far everything said up to this point is true. Conclusion: Therefore, under these conditions, it is O.K. to allow the money supply to grow at triple digit rates even if the Gross Domestic Product (GDP) isn't growing because it really doesn't matter since there is no connection between money supply and the Gross Domestic Product (GDP).

false

The Classical economists (1776 to 1930s - Adam Smith / Alfred Marshal) supported strong government intervention in the economy, high taxation, and heavy regulation of business.

false

The term Creative Destruction means that government macroeconomic policy has failed and the economy is headed for a recession or economic slowdown.

false

liberl economists like paul krugman and joseph stiglitz heavily promote the idea that

govt sector spending is more powerful and beneficial vs. private sector at stimulating the economy

what makes (AD-aggregate demand) shift right

more consumption spending. more investment spending, more govt spending, lower taxes, more exports than imports and more spending multiplier

govt has the power :

of law, power to tax the private sector, and to print the currency

what is the money multiplier?

relationship between an original bank deposit and the potential addition it can make to the total money supplu

demand pull inflation is when the AD curve has shifted to the ____, thus creating an

right, inflationary environment

every economic problem is the result of

scarcity

microeconomics

studies the behavior and reactions of basic economic units such as firms and individuals

Economics

study of how people manage their resources to satisfy their wants

Macroeconomics

study of overall performance of an economic system

what are key elements in the free enterprise system

the "profit motive" and finding ways to "better serve the needs of others"

how is the wealth create

the private sector (C+i=the Trade Sector) "creates wealth." They take ideas, raw materials and through labor's effort plus managerial skill, create wealth.

Open Market Operations:

the purchases and sales of us govt securities that the federal reserve system undertakes in order to influence interest rates and the money supply; one method by which the Federal reserve implements the monetary policy.

The Fed Discount Rate:

the rate of interest the Federal Reserve charges for lending reserves to private banks

aggregate demand

the total demand for goods and services within a particular market

According to the Spending Multiplier formula, an increase in the MPC percentage (from .80 to .90) will be good for the U.S. economy and our Gross Domestic Product. ___________1________ X (C + I + G +/- Trade) = AD/GDP 1 - MPC X (1 - tax rate)

true

Consumers spend on both durable goods and non-durable goods. Durable goods are products that have at least a three-year life (e.g. new car) and a non-durable good is a product that has an estimated life of less than three years (e.g. food).

true

Fiscal policy is controlled by the Congress and influenced a little by the President of the United States. Specially, fiscal policy allows the government to direct four economic policies -they are: government spending, tax policy, federal regulations, and monitor trade policy.

true

From 1900 to 1929, the predominant economic school of thought was "Classical Economics" theory

true

If the economy is in a severe economic slowdown, then cutting taxes and lowering lending interest rates would be the logical things to do to stimulate the economy.

true

If the price level (inflation) goes up by 10 percent, then this automatically means that the nominal GDP has also increased by 10 percent.

true

If the unemployment rate falls at or below 4.00 percent, then we can say that America is at the level of Full-Employment.

true

Limited Liability provides an advantage to a business that organizes itself as a corporation. This means that the executives and even the owners of the business can't be personally sued for their individual assets

true

Over 70 percent of all U.S. firms are sole proprietorships. This group also creates most of the jobs in the U.S.

true

Rent Seeking means that a firm is using politicians to get a sweet deal for itself and basically the U.S. taxpayer is being used in a negative way to pay the costs that the firm faces.

true

The Marginal Propensity to Consume (MPC) simply reflects what percentage of income the typical U.S. household will spend on an annual basis. The U.S. has the highest MPC figure in the world. Note: No other people spend $$$ like Americans do. Go ahead and chant "USA USA USA" (LOL!)

true

The federal government debt is currently at $22 trillion as of February 2019. The U.S. federal government Debt/GDP ratio is now over 100 percent!!! Conclusion: According to our lecture, John Maynard Keynes believed that government debt should be used like medicine. When the economy was sick, then it was O.K. to borrow but when the economy recovered then he favored no more government debt.

true

The term "civil service protection" means that it's very hard to fire a federal government worker.

true

Free Gift -I love economics.

true LOL