MACROECONOMICS EXAM 3

Which statement is FALSE? In the long run, monetary policy: affects only the aggregate price level. does not affect aggregate output. is neutral. increases potential output.

increases potential output.

Which is NOT a method of fiscal policy? changing tax rates government transfers government purchases of goods and services changes in the money supply

changes in the money supply

If interest rates rise there will be a(n): decrease in aggregate demand. increase in aggregate demand. increase in aggregate supply. increase in the money supply.

decrease in aggregate demand.

If the Federal Reserve conducts a $10 million open-market sale and the reserve requirement is 20 percent, the maximum change in the money supply is a(n): increase of $10 million. decrease of $10 million. decrease of $8 million. decrease of $50 million.

decrease of $50 million.

Monetary policy that increases the demand for goods and services is known as _____ monetary policy. expansionary contractionary inflationary quantitative

expansionary

Which is NOT an argument against the use of expansionary fiscal policy? Government spending may crowd out private spending. Government borrowing may crowd out private investment spending. Government borrowing may reduce the marginal propensity to consume. Government budget deficits may lead to reduced private spending.

Government borrowing may reduce the marginal propensity to consume.

Which asset is an example of money? $20 bill in your pocket valuable work of art baseball signed by a famous player shares of stock in a profitable company

$20 bill in your pocket

The reserve requirement is 20 percent, and Leroy deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. According to the Scenario: Money Creation, what is the maximum expansion in the money supply possible? $1000 $1800 $4000 $5000

$4000

Which asset is the MOST liquid? $50 bill $50 Amazon.com gift certificate 100 shares of Microsoft stock economics textbook

$50 bill

If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is (assuming the bank is not holding any excess reserves: 5 percent. 10 percent. 12.5 percent. 25 percent.

25 percent

Which statement is FALSE? If the Fed reduces reserve requirements, banks will lend a smaller percentage of their deposits, leading to fewer loans and a decrease in the money supply via the money multiplier. Banks typically borrow in the federal funds market when they have insufficient reserves to meet the reserve requirement of the Federal Reserve. When a bank borrows reserves from the Fed itself, it is said to be borrowing at the discount window. A change in reserve requirements or a change in the discount rate will have an effect on the money supply.

If the Fed reduces reserve requirements, banks will lend a smaller percentage of their deposits, leading to fewer loans and a decrease in the money supply via the money multiplier.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which would most likely result? Equilibrium real GDP will be more than anticipated. The economy could move into a recession. The economy will generate a larger inflationary gap than anticipated. This will not have any adverse effects on the economy, since inflation has been abated.

The economy could move into a recession.

Because money holds its purchasing power over time, we say that it is: a store of value. a unit of account. a medium of exchange. the same thing as wealth.

a store of value.

Capital requirements for banks include all EXCEPT: an attempt to reduce a bank owner's incentive for excessive risk taking. an attempt to offset the change in incentives caused by deposit insurance. the excess of a bank's assets over its deposits and other liabilities. an attempt to reduce deposits.

an attempt to reduce deposits.

Which would NOT fit the economist's definition of money? currency checkable bank deposits coins bonds

bonds

If the economy is in an inflationary gap, the Federal Reserve should conduct ______ monetary policy to ______ aggregate demand. contractionary; decrease contractionary; increase expansionary; decrease expansionary; increase

contractionary; decrease

If the Federal Reserve conducts a $10 million open-market sale and the reserve requirement is 20 percent, the monetary base will: increase by $10 million. increase by $8 million. decrease by $10 million. decrease by $50 million.

decrease by $10 million.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: decrease government purchases. decrease taxes. decrease government transfers. increase real interest rates.

decrease taxes.

To close an inflationary gap using monetary policy, the Federal Reserve should ________ the money supply to ________ investment and consumer spending and shift the aggregate demand curve to the ________. increase; increase; left decrease; decrease; left increase; increase; right decrease; decrease; right

decrease; decrease; left

A decrease in the supply of money will lead to a(n) _______ in equilibrium real GDP and a _______ equilibrium interest rate. increase; higher increase; lower decrease; higher decrease; lower

decrease; higher

The reserve ratio is the: bank's holdings of gold. government's holdings of gold at Fort Knox. fraction of deposits that banks hold in their vaults plus their deposits at the Federal Reserve. ratio of gold to the paper money in the economy.

fraction of deposits that banks hold in their vaults plus their deposits at the Federal Reserve.

If the current level of real GDP lies below potential GDP, then an appropriate fiscal policy would be to increase _____, which will shift the _____ curve to the _____. government purchases; AD; left. transfer payments; AS; right. tax rates; AD; right. government purchases; AD; right.

government purchases; AD; right.

The national debt: is the sum of all past federal surpluses. grows when the government runs a deficit. grows when the government runs a surplus. did not exist until 1998.

grows when a government runs a deficit

If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will: increase by exactly $30 billion. decrease by exactly $30 billion. increase by more than $120 billion. increase by less than $120 billion.

increase by less than $120 billion.

An economy is in the midst of a recession. An example of a government policy aimed at moving the economy back to potential GDP is a(n): increase in taxes. increase in government spending on infrastructure improvements. increase in the property tax. decrease in unemployment benefits.

increase in government spending on infrastructure improvements.

If actual output is equal to potential output and the Fed increases the money supply, in the short run the price level will likely: fluctuate randomly. remain the same. decrease. increase.

increase.

Suppose the Federal Reserve buys $50 million in Treasury bills from commercial banks. If the reserve ratio is 10 percent, the monetary supply might eventually ______ by _______. increase; $500 million increase; $450 million decrease; $450 million decrease; $500 million

increase; $500 million

If the Fed decreases the reserve requirement from 10 percent to 5 percent, the money multiplier will ________ and the money supply will most likely _______. decrease; decrease decrease; increase increase; decrease increase; increase

increase; increase

Contractionary fiscal policy causes the aggregate demand curve to shift to the _______ and is used to close a(n) _______ gap. right; inflationary right; recessionary left; inflationary left; recessionary

left; inflationary

When the Fed increases the reserve requirement, banks lend ______ of their deposits, which leads to a(n) _______ in the money supply. less; decrease less; increase more; decrease more; increase

less; decrease

Banks are illiquid because their: deposits are less liquid than their loans. loans are less liquid than their deposits. assets are greater than their liabilities. liabilities are greater than their assets.

loans are less liquid than their deposits.

Among the assets of a bank are: deposits. loans. borrowings. deposits and loans.

loans.

Which fiscal policy would make a budget surplus larger or a budget deficit smaller? increase in government purchases of goods and services lower government transfers lower taxes higher interest rates

lower government transfers

Expansionary monetary policy leads to: lower interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. lower interest rates, a decrease in planned investment spending, and an increase in equilibrium GDP. higher interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. higher interest rates, a decrease in planned investment spending, and a decrease in equilibrium GDP.

lower interest rates, an increase in planned investment spending, and an increase in equilibrium GDP.

Banks create money when they: make loans. take deposits. hold excess reserves. pay withdrawals to depositors.

make loans.

To close an inflationary gap by employing fiscal policy, the government could: reduce budget allocations to interstate highway maintenance. increase federal subsidies to state universities. lower the corporate income tax rate. raise the average amount awarded for a disability pension.

reduce budget allocations to interstate highway maintenance.

All are examples of fiscal policy EXCEPT: increasing the size of reimbursements under Medicaid. reducing the money supply in order to raise the interest rate. increasing personal income tax deductions for home ownership. reducing federal subsidies to state universities.

reducing the money supply in order to raise the interest rate.

All else equal, when the unemployment rate decreases, the budget: - will always be balanced. - surplus gets smaller or the budget deficit gets larger. - surplus gets larger or the budget deficit gets smaller. - is unaffected.

surplus gets larger or the budget deficit gets smaller.

Bank reserves are: the fraction of deposits kept in gold with the Federal Reserve. the deposits lent to finance illiquid investments. the fraction of deposits kept in the form of very liquid assets. gold kept in the bank's vault.

the fraction of deposits kept in the form of very liquid assets.

Banks don't lend out all of the funds deposited because: it would not be profitable. they have to satisfy any depositor who wants to withdraw funds. they need to reduce their liquidity position. they need to make more money on interest-bearing deposits.

they have to satisfy any depositor who wants to withdraw funds.

"Tuition at State University this year is $8000." Which function of money does this statement best illustrate? store of value medium of exchange unit of account means of deferred payment

unit of account

The cyclically adjusted budget balance is an estimate of: the contractionary fiscal policy needed to close an inflationary gap. the tax increase needed to compensate for larger government transfers so that the budget remains balanced. the expansionary fiscal policy needed to close a recessionary gap. what the budget balance would be if real GDP were exactly equal to potential output.

what the budget balance would be if real GDP were exactly equal to potential output.

Which statement is FALSE? Most economists agree that it would be a good idea to require an annually balanced budget. The role of taxes and transfers as automatic stabilizers would be undermined if the budget is required to balance annually. During recessions, the budget balance is reduced. During periods of prosperity, the budget balance increases.

Most economists agree that it would be a good idea to require an annually balanced budget.

Which are tools of monetary policy used by the Federal Reserve? I. tax rates II. government purchases of goods and services I only II only I and II Neither I nor II

Neither I nor II

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $850 billion, which policy would bring the economy to potential output? Increase taxes by $50 billion. Increase taxes by $10 billion. Increase taxes by $12.5 billion. Increase transfers by $12.5 billion.

Increase taxes by $12.5 billion.

Which explains why the Federal Reserve never buys U.S. Treasury bills directly from the federal government? It could make the budget deficit worse. It could be a route to disastrous inflation. It could lead to a recession. It could reduce the power of the Fed.

It could be a route to disastrous inflation.

The short-run effect of a decrease in the money supply is that the aggregate price level: increases, and real output also increases. increases, and real output decreases. decreases, and real output also decreases. decreases, and real output increases.

decreases, and real output also decreases.

When banks borrow from the Fed in order to satisfy their reserve requirements, the rate of interest charged is known as the: prime rate. discount rate. federal funds rate. reserve rate.

discount rate

An increase in government spending of $300 billion and a tax cut of $300 billion will have _______ effects on the budget balance and _______ effects on real GDP. equal; equal equal; unequal unequal; equal unequal; unequal

equal; unequal

Government borrowing will not crowd out private investment spending if unemployment is: high and the fiscal expansion causes an increase in incomes and saving at each interest rate. high and the fiscal expansion causes an increase in incomes and a decrease in saving at each interest rate. low and the fiscal expansion causes an increase in incomes and a decrease in saving at each interest rate. low and the fiscal expansion causes a decrease in incomes and a decrease in saving at each interest rate.

high and the fiscal expansion causes an increase in incomes and saving at each interest rate.

A cut in taxes ________, therefore shifting the aggregate demand curve to the ________. decreases government transfers and consumption; right increases disposable income and consumption; right decreases the marginal propensity to save, increasing consumption; left increases corporate profits and investment; left

increases disposable income and consumption; right

A bank run occurs when: too many people are trying to borrow more at one time. many bank depositors are trying to withdraw their funds from the bank. interest rates start to increase. interest rates are higher than inflation rates.

many bank depositors are trying to withdraw their funds from the bank.

Buying a ticket to a football game with a $20 bill means money is functioning as a: medium of exchange. store of value. unit of account. standard of deferred payment.

medium of exchange

If the current interest rate is below the target rate, the Federal Reserve should: purchase U.S. Treasury bills. sell U.S. Treasury bills. increase the money supply. change the target to meet the actual rate.

sell U.S. Treasury bills.

Contractionary monetary policy: increases aggregate demand. increases aggregate supply. works by discouraging investment spending. decreases interest rates.

works by discouraging investment spending.