Macroeconomics Discussion/ True&False Questions (13,14,15)
13- A large U.S. public debt cannot bankrupt the federal government, leaving it unable to meet its financial obligations, because the government can decrease interest rates which will increase investment spending.
False
13- A significant contributor to, or cause of, the large U.S. public debt is the financing of additional gross private domestic investment by businesses.
False
13- True or False: A budget deficit arises when federal government expenditures are increasing.
False
13- True or False: A contractionary fiscal policy is designed to decrease short-run aggregate supply
False
13- True or False: Fiscal policy refers to changing the level of government spending and taxes to achieve a greater equality in the distribution of income.
False
13- True or False: Non-discretionary fiscal policy refers to Congress changing the tax and transfer payments programs during a recession or inflationary boom to stabilize the size of government.
False
13- True or False: Tax rates are an example of an automatic stabilizer
False
13- True or False: The crowding-out effect suggests that increases in consumption are usually at the expense of saving.
False
13- True or False: The primary objective of fiscal policy is to stabilize the size of the federal debt.
False
14- In a barter economy money functions only as a store of value.
False
14- Money must be created through the banking system.
False
14- One function of money is to serve as an encouragement to work.
False
14- To say money is socially defined means that society, acting through Congress, specifies what shall be money.
False
14- True or False One function of the Federal Reserve is to issue new government securities to finance a federal budget deficit.
False
14- True or False: The backing for the money in the United States comes from the confidence the public has in the ability of the U.S. president.
False
14- True or False: To keep inflation from eroding the value of money, policymakers in the United State make paper money legal tender.
False
14- True or False: To keep inflation from eroding the value of money, policymakers in the United States establish insurance (FDIC) on checkable deposit accounts.
False
15- True or False: Individual commercials banks are limited in their ability to create money because banking is a highly competitive industry.
False
15- True or False: The primary purpose of the legal reserve requirement is to prevent commercial banks from earning excess profits
False
15- True or False: Overnight loans from one commercial bank to another for reserve purposes involve an interest rate called the federal funds rate.
True
14- When money serves as a means for determining the relative value of an item, e.g., its price, money functions as a __________.
Unit of Account
15- The legal reserve requirement is 10%. If a bank initially has no excess reserves and $1,000 cash is deposited into a savings account, the bank can increases its loans by a maximum of $__________.
$1,000
13- The public debt is the accumulation of household, business, and gov't debt over time.
False
14- True or False: Currently, U.S. paper currency is issued by the __________.
12 Federal Reserve Banks
15- In a 10% reserve banking system the money multiplier is ______.
10
15- The legal reserve requirement is 10%. A check for $1,000 drawn on 1st National Bank and deposited in 2nd National Bank will increase the excess reserves of 2nd National Bank by $ __________.
$900
15- In a 100% reserve banking system the money multiplier is ______.
1
14- True or False: The Federal Reserve Bank of _______________ regulates commercial banks conducting business in Florida (part of district 6)
Atlanta
15- A commercial bank temporarily short of required reserves may replenish reserves by: a. shifting some of its vault cash to its reserve account at the district Fed Bank. b. borrowing reserves in the federal funds market. c. charging a higher interest rate on loans and using those funds to replenish reserves. d. All of the above
B.
Discussion Question: A wave of consumer and business optimism stimulates the economy. As a result GDP exceeds the economy's full-employment real GDP and the unemployment rate falls to 3%. The economic boom causes demand-pull inflation. In this situation proper counter-cyclical discretionary fiscal policy would involve: a. running a budget deficit. b. running a budget surplus. c. Congress increasing means-tested public assistance programs. d. Congress increasing tax revenues and government spending by the same amount.
B.
13- Assume the economy is at its full-employment real GDP. Which of the following would most likely result if the federal government increased spending without increasing tax revenues? a. a decrease in potential real GDP b. a decrease in the public debt c. an increase in the price level d. a recession
C
14- The M1 money supply consists primarily of: a. Federal Reserve Notes, checkable deposits, and savings deposits. b. checkable deposits and short-term U.S. Treasury securities. c. currency in circulation and checkable deposits. d. currency in circulation, checkable deposits, and small-denominated time deposits.
C
15- A commercial bank creates money when: a. the banks raises the interest rate on loans to households and businesses. b. the bank cashes a customer's check. c. the bank creates checkable deposits in exchange for IOUs or lends its excess reserves. d. a depositor gets cash from the bank's ATM machine.
C.
Discussion Question: Checkable deposits are: a. included in the M1, but not the M2, definition of money supply. b. assets of commercial banks. c. liabilities of commercial banks. d. legal tender.
C.
Discussion Question: The commercial banking system can lend by a multiple of its excess reserves because: a. the marginal propensity to consume (MPC) of borrowers is greater than 1. b. the required reserve ratio for the largest commercial banks is greater than 1. c. reserves lost by one bank will be gained by some other bank. d. reserves are on deposit with the Federal Reserve Banks.
C.
Discussion Question: The economy is initially operating at its potential real GDP. Because of a deteriorating international political situation the federal government decides to increase military spending by $21 billion. At the same time policymakers decide to change the level of taxes to maintain full-employment, non-inflationary real GDP. Assume the MPC = 0.75 and the full multiplier effect is in effect. The level of taxes should be: a. decreased by $28 billion. b. decreased by $15.75 billion. c. increased by $28 billion. d. increased by $21 billion.
C.
13- During the past twelve months unemployment has been under 5 percent and the GDP price index has increased by 2%. Total production of goods and services is projected to be 5% higher in the next twelve months. Which of the following policies would be most appropriate for short-run stabilization purposes? a. increasing federal government spending b. decreasing federal income taxes c. passing new corporate tax incentives to encourage investment d. relying on the automatic stabilizers
D
15- In a 100% reserve banking system: a. the reserve ratio equals zero. b. banks serve two basic functions, to accept deposits and to make loans. c. people are prohibited from holding money, all money must be deposited into a bank. d. banks serve only as a place for the safe-keeping of money and are prevented from making loans.
D.
Discussion Question: Which of the following, cetreis paribus, would increase the money supply? a. A check clears from Bank X to Bank Y. b. Borrowers repay commercial bank loans. c. Commercial banks sell government bonds to the public. d. Commercial banks buy government bonds from the public.
D.
13- An expansionary fiscal policy is designed to ______________ aggregate ____________.
Increase / demand
14- If you write a check on your commercial bank account to purchase anything, say common stocks, this is an example of money functioning as a __________.
Medium of Exchange
14- When people hold some of their wealth as money because it enables them to transfer purchasing power from the present to the future money functions as a __________.
Store of Value
15- True or False: In a fractional reserve banking commercial banks create money through lending and therefore hold less in reserves than the amounts they owe their depositors.
True
13- Suppose the federal government had a budget deficit of $60 billion in year 1, a budget surplus of $20 billion in year 2, a budget deficit of $90 billion in year 3. At the end of three years the federal government's public debt would have __________ by $ ____ billion.
increase / $130