Macroeconomics Module 3

A Fed sale of government bonds will cause a reduction in the interest rate and an increase in the equilibrium quantity of money. True False

False

An excess demand for money drives interest rates down. True False

False

As the economy expands, unemployment rises, and the result is an increase in unemployment benefits. True False

False

If autonomous consumption (Ca) increases, the slope of the consumption function becomes steeper. True False

False

The larger the marginal propensity to consume, the smaller the multiplier. True False

False

The money multiplier is represented by 1/(1-reserve ratio). True False

False

During the U.S. savings and loan crisis in the 1980s, depositors were saved at the expense of: a)investors. b)taxpayers. c)managers of financial institutions. d)insurance companies.

b)taxpayers.

A monetary system in which gold backs up paper money is called: a)the silver standard. b)the gold standard. c)the commodity standard. d)the golden age.

b)the gold standard.

Taxes are reduced by $50 billion and income increases by $1,000 billion. The value of the tax multiplier is: a)-10. b)-5. c)-4. d)-20

d)-20

If the consumption function is C = 80 + 0.6Y, then the marginal propensity to consume equals: a) 0.6. b)0.4. c)0.5. d)-0.4.

a) 0.6.

A decrease in the discount rate will increase the money supply. True False

True

According to the Application, the reason why the problem caused by securitization was exposed was because the housing boom ended. True False

True

When the Fed conducts open market operations, the Fed buys and sells government securities to: a)the private sector. b)foreign countries only. c)state and local government agencies only. d)the U.S. Treasury.

a)the private sector.

The Republic Bank has $2 million in deposits and $250,000 in reserves. If the required reserve ratio is 10%, excess reserves are equal to: a)$200,000. b)$50,000. c)zero. d)$450,000

b)$50,000.

If the marginal propensity to consume is 0.95, the tax multiplier is: a)-20. b)-19 c)-.05. d)20.

b)-19

If the nominal interest rate is 5 percent and the rate of inflation is 1 percent, then the real interest rate is: a)5 percent. b)4 percent. c)6 percent. d)5.5 percent.

b)4 percent.

Saving account balances are included in: a)M1 only. b)M2 only. c)neither M1 nor M2. d)both M1 and M2.

b)M2 only.

Which of the following is an example of a Federal Reserve action that increases the money supply? a)an increase in the required reserve ratio b)a decrease in the discount rate c)an increase in the federal funds rate d)the Fed selling government bonds in the open market

b)a decrease in the discount rate

If the government collects taxes using a constant income tax rate t, then the adjusted marginal propensity to consume (adjusted MPC) is: a) t ( 1 - b). b) bt - t. c) b ( 1 - t ). d) 1 (1-bt).

c) b ( 1 - t )

Assume that the consumption function is C = 200 + 0.8Y. When Y equals $200, then C equals ________. a)$160 b)$200 c)$360 d)$400

c)$360

If the MPC is 0.9, then the tax multiplier is: a)9. b)10. c)-9. d)-10.

c)-9.

If C = 500 + 0.5Y and I = 400, then the equilibrium level of income is: a)2,500 b) 900 c)1,800 d)4,000.

c)1,800

All else equal, when the Fed purchases government bonds, the money supply curve shifts to the ________ and the equilibrium interest rate ________. a)left; rises b)right; rises c)right; falls d)left; falls

c)right; falls

An increase in government spending will: a)shift the aggregate expenditure line upwards and decrease equilibrium output. b)shift the aggregate expenditure line downwards and decrease equilibrium output. c)shift the aggregate expenditure line upwards and increase equilibrium output. d)shift the aggregate expenditure line downwards. and increase equilibrium output.

c)shift the aggregate expenditure line upwards and increase equilibrium output.

If the marginal propensity to save is 0.3, the tax multiplier is: a)-2.5. b)-1.67. c)-1.5. d) -2.33.

d) -2.33.

Assuming no government or foreign sector, if the marginal propensity to consume is 0.8, the multiplier is: a)0.2. b)0.8. c)1.25. d) 5.

d) 5.

Assume that the required reserve ratio is 25%. If the Fed buys $5 million worth of government bonds from the public, the maximum change in the money supply is: a)$125 million. b)1.25 million. c)less than 5 million. d)more than 5 million.

d)more than 5 million.

Which of the following assets is the least liquid? a)currency b)checking accounts c)stocks d)real estate

d)real estate

Nobel laureate Franco Modigliani found that increases in wealth cause: a)increases in autonomous consumption. b)decreases in autonomous consumption. c)increases in the marginal propensity to consume. d)decreases in the marginal propensity to consume.

increases in autonomous consumption.

The interest rate determines the present value of a future payment. True False

True

Bank runs are not common today because of deposit insurance. True False

True

All presidents of the 12 district banks of the Federal Reserve can vote during FOMC meetings. True False

False

An asset that is difficult to convert into money is considered a liquid asset True False

False

An increase in the price level increases the speculative demand for money. True False

False

An unexpected increase in inventories has a positive effect on future production. True False

False

If there is inflation, real interest rates will be greater than nominal interest rates. True False

False

The discount rate is the interest rate on loans that commercial banks make to the Fed. True False

False

The speculative demand for money states that in the long run, people hold on to money because it's quicker to make purchases with money than with bonds or stocks. True False

False

For a given interest rate, a higher level of output means an increase in the number of transactions and an increase in the demand for money. True False

True

If output is less than aggregate planned expenditures, there will be an unplanned decrease in inventories. True False

True

Liabilities plus net worth equal assets. True False

True

Optimistic expectations about the future increase investment spending because they inflate the price of stock shares. True False

True

The government spending multiplier in a closed economy is the same as the government spending multiplier in an open economy, if the marginal propensity to import equals zero. True False

True

According to the multiplier-accelerator model, a downturn in real GDP leads to an even sharper fall in investment. True False

True

A decrease in the price level will: a)increase consumption and increase output demanded. b)decrease consumption and decrease output demanded. c)increase consumption and decrease output demanded. d)decrease consumption and increase output demand.

a) increase consumption and increase output demanded.

Deposit insurance guarantees that the federal government will reimburse depositors up to ________ in each account in each bank should the banks fail. a)$250,000 b)$100,000 c)$25,000 d)$1,000,000

a)$250,000

As of 2012, banks have been required to keep ________ percent of deposits exceeding $71 million as reserves. a)10 b)3 c)7 d)20

a)10

What is the government spending multiplier is if c=2000+0.5(y-7) and T=200, G=400 and I=500 a)2. b)-2. c)0.5. d)1

a)2.

The Federal Open Market Committee consists of the: a)7 members of the Board of Governors and 5 of the 12 regional bank presidents. b)the chairman of the Federal Reserve and members of the Senate Finance Committee. c)7 members of the Board of Governors and the 12 regional bank presidents. d)7 members of the Board of Governors and the presidents of the 12 largest banks in the country.

a)7 members of the Board of Governors and 5 of the 12 regional bank presidents.

________ is a monetary system in which the money has no intrinsic value. In this system, the money is backed by the government. a)Fiat money b)Commodity money c)The gold standard d)The barter system

a)Fiat money

Which of the following is true when the US dollar appreciates against the euro? a)It takes fewer dollars to buy the euro. b)It becomes more expensive for Americans to buy goods from Germany. c)It takes fewer euros to buy the dollar. d)All of these are correct.

a)It takes fewer dollars to buy the euro.

Which of the following statements is correct? a)The Fed can change GDP by changing the money supply. b)The Fed can directly change GDP and investment. c)A high real interest rate stimulates investment. d)The Fed does not have the power to influence the level of spending in the economy.

a)The Fed can change GDP by changing the money supply.

Which of the following represents an action by the Federal Reserve that is designed to increase the money supply? a)a decrease in the required reserve ratio b)an increase in the discount rate c)a decrease in federal tax rates d)selling government bonds in the open market

a)a decrease in the required reserve ratio

Broadly defined, investments are: a)actions that create a cost today but provide benefits in the future. b)actions that create benefits today and provide costs in the future. c)actions that create costs and benefits in the future. d)actions that create costs today, but provide no benefit in the future.

a)actions that create a cost today but provide benefits in the future.

Which of the following would cause an increase in GDP? a)an open market purchase b)an open market sale c)a higher discount rate d)a higher required reserve ratio

a)an open market purchase

The level of consumption in the economy when the level of income is zero is called: a)autonomous consumption. b)the consumption function. c)independent income. d)the marginal propensity to consume.

a)autonomous consumption.

According to the accelerator theory of investment, a decrease in the expected future growth rate of real GDP will cause: a)current investment spending to decrease. b)current investment spending to increase. c)future investment spending to increase. d)future investment spending to decrease.

a)current investment spending to decrease.

Suppose that in the United States people begin to spend a smaller fraction of their income on imports. This would cause the multiplier to: a)decrease. b)increase. c)remain unchanged. d)either increase or decrease depending on the value of the MPC.

a)decrease.

A depreciation of the U.S. dollar will likely cause U.S. exports to ________ and U.S. imports to ________. a)increase; decrease b)increase; increase c)decrease; decrease d)decrease; increase

a)increase; decrease

Which of the following sequence of events would follow a decrease in the reserve requirement? a)interest rate investment aggregate demand real GDP b)interest rate investment aggregate demand real GDP c)interest rate investment aggregate demand real GDP d)interest rate investment aggregate demand real GDP

a)interest rate investment aggregate demand real GDP

Which of the following is not a function of the Federal Reserve? a)issue new Treasury bonds b)conduct monetary policy c)provide a system of check collection and clearing d)regulate banks

a)issue new Treasury bonds

Though a powerful tool, the reserve requirement is seldom used by the Fed to control the money supply because: a)it causes significant disruptions in the banking system. b)using the reserve requirement can be inflationary. c)it takes a long time for the policy to be implemented. d)it is very difficult for the Fed to monitor the reserve requirement.

a)it causes significant disruptions in the banking system.

The required reserve ratio is 10%. If the banks hold excess reserves, then the money multiplier is: a)less than 10. b)greater than 10. c)less than 0.10. d)zero.

a)less than 10.

The theory that considers real interest rates and taxes as the important determinants of investment spending is the: a)neoclassical theory of investment. b)Keynesian theory of investment. c)classical theory of investment. d)Q-theory of investment.

a)neoclassical theory of investment.

In the money market, the demand and supply of money determine the equilibrium: a)nominal interest rate. b)inflation rate. c)real interest rate. d)mortgage interest rate

a)nominal interest rate.

In theory, the price of a stock equals the: a)present value of expected future dividend payments. b)future value of expected future dividend payments. c)future value of expected future profits of the firm. d)present value of expected future sales of the firm

a)present value of expected future dividend payments.

Firms react to unplanned increases in inventories by: a)reducing output. b)increasing output. c)increasing planned investment. d)increasing consumption.

a)reducing output.

If a firm that chooses to use all of its corporate earnings as dividends, then: a)retained earnings equal zero. b)profits equal zero. c)taxes paid to the government equal zero. d)sales equal zero.

a)retained earnings equal zero.

The decisions concerning the money supply are made by: a)the FOMC. b)the Board of Governors. c)the presidents of the district central banks. d)Congress.

a)the FOMC.

The seven members of the board of governors are appointed to 14-year terms by: a)the President of the United States. b)by the Federal Reserve Chairman. c)Congress. d)the 12 district bank presidents.

a)the President of the United States.

The present value of a payment to be received in the future is lower than the nominal value of that payment in the future as long as: : a)the interest rate is positive. b)the real GDP growth rate is positive. c)inflation is negative. d)banks are losing money on investments.

a)the interest rate is positive.

The consumption function describes the relationship between consumption expenditures and: a)the level of income. b)the level of prices. c)the level of the interest rates. d)the rate of growth of GDP.

a)the level of income.

The fraction of additional income that is saved is called: a)the marginal propensity to save. b)the marginal propensity to consume. c)average consumption. d)the marginal propensity of income

a)the marginal propensity to save.

A checking deposit in a bank is considered ________ of that bank. a)an asset b)a liability c)owners' equity d)capital

b)a liability

Which of the following assets is easiest to make transactions with? a)individual retirement accounts b)checking deposits c)money market mutual funds d)time deposits

b)checking deposits

Suppose that the required reserve ratio is 0.4. If a customer withdraws $10 million from a bank, then the money supply could potentially: a)decrease by $40 million. b)decrease by $15 million. c)increase by $40 million. d)increase by $2.5 million.

b)decrease by $15 million.

If the Fed wanted to reduce the market interest rate, it could: a)raise the discount rate. b)decrease the required reserve ratio. c)contract the money supply. d)sell U.S. government securities in the open market.

b)decrease the required reserve ratio.

The interest rate that the banks pay to borrow money from the Fed is the: a)federal funds rate. b)discount rate. c)prime lending rate. d)reserve rate.

b)discount rate.

Traveler's checks are: a)included only in M1. b)included in M2. c)not included in M2. d)not included in M1.

b)included in M2.

Disposable income: a)increases when net taxes increase. b)increases when income increases. c)decreases when saving increases. d)All of these

b)increases when income increases.

If a economy's planned expenditures turn out to be less than production, then inventories will be: a)increasing, prompting firms to increase production in the future. b)increasing, prompting firms to increase production in the future. c)decreasing, prompting firms to decrease production in the future. d)decreasing, prompting firms to increase production in the future.

b)increasing, prompting firms to increase production in the future.

Which of the following is a function of the Federal Reserve? a)collects taxes b)regulates banks c)buys mortgages from banks d)maintains U.S. exchange rate regime.

b)regulates banks

When you keep your savings in a savings account, you are using money as a(n): a)investment good. b)store of value. c)medium of exchange. d)unit of account.

b)store of value.

The boom period of the late 1990s was a good example of: a)the irrationality of long-term investments when share prices are not high enough. b)the Q-theory of investment at work. c)the impact that low interest rates have of investment expenditure. d)the depressing effect on share prices of low expectations about future dividends.

b)the Q-theory of investment at work.

If the money multiplier is 4, the required reserve ratio is: a)2%. b)20%. c)25%. d)50%.

c)25%.

A $100 million increase in government spending causes: a)an equal amount of change in equilibrium output in an open and a closed economy. b)a larger change in equilibrium output in an open economy than in a closed economy. c)a larger change in equilibrium output in a closed economy than in an open economy. d)a larger change in equilibrium output in a closed economy than in an open economy if the marginal propensity to import is zero.

c)a larger change in equilibrium output in a closed economy than in an open economy

Commercial banks: a)conducts monetary policy. b)are nonprofit organizations that lend and borrow funds. c)are financial intermediaries that lend funds and accept deposits. d)print all the money used in the US.

c)are financial intermediaries that lend funds and accept deposits.

Even though banks have been required to keep 10 percent of deposits exceeding $71 million as reserves in 2012, the measured multiplier is only between 2 to 3 because: a)bank hold excess reserves. b)people hold some of their loans in cash. c)bank hold excess reserves and people hold some of their loans in cash are both correct. d)neither bank hold excess reserves nor people hold some of their loans in cash is the reason.

c)bank hold excess reserves and people hold some of their loans in cash are both correct.

An increase in the marginal propensity to save will: Selected Answer: a)shift the consumption function upwards. b)shift the consumption function downwards. c)cause the consumption function to be flatter. d)cause the consumption function to be steeper.

c)cause the consumption function to be flatter.

Financial intermediaries reduce the risk faced by savers through: a)lowering negotiation costs. b)pooling the funds of savers. c)diversification of investment projects. d)reducing the liquidity of savers' funds.

c)diversification of investment projects.

When interest rates are ________, the opportunity cost of holding ________ outside banks is ________. a)low; cash; high b)high; stocks and bonds; low c)high; cash; high d)low; stocks and bonds; high

c)high; cash; high

Money is an imperfect store of value because of: a)currency devaluations. b)tax fraud. c)inflation. d)double coincidence of wants.

c)inflation.

The Fed indirectly controls long-term interest rates by: a)setting the Federal Funds rate in advance. b)determining the interest rate offered by Treasury Bills. c)influencing market expectations about future short-term interest rates. d)reducing outside lags and increasing inside lags.

c)influencing market expectations about future short-term interest rates.

Which of the following would not be counted as part of M1? a)demand deposits b)traveler's check c)money market accounts d)currency

c)money market accounts

If the quantity of money demanded equals the quantity of money supplied, then the interest rate will: a)rise. b)fall. c)remain constant. d)equal zero.

c)remain constant.

he accelerator theory describes the impact of: a)a change in investment on future GDP. b)a change in government spending on future GDP. c)a change in planned aggregate expenditures on future GDP. d) a change in future GDP on investment.

d) a change in future GDP on investment.

How many governors are included in the Board of Governors of the Federal Reserve? : a)12 b)10 c)8 d)7

d)7

Which choice is true? a)A higher interest rate causes lower investment, higher demand, and higher real GDP. b)A lower interest rate causes lower investment, higher demand, and higher real GDP. c)A higher interest rate causes higher investment, lower demand, and lower real GDP. d)A higher interest rate causes lower investment, lower demand, and lower real GDP.

d)A higher interest rate causes lower investment, lower demand, and lower real GDP.

Which of the following is a function of the district Federal Reserve Banks? a)provide advice on monetary policy b)participate in monetary policy decision-making c)act as a liaison between the Fed and the banks in their district d)All of the following are correct.

d)All of the following are correct.

In order to provide liquidity to the economy after the September 11, 2001, terrorist attacks against the United States, the Fed: a)purchased government securities in the marketplace. b)increased the length of the "Federal Reserve float." c)increased direct lending to commercial banks. d)All of these

d)All of these

Which of the following is a determinant of firms' investment and employment decisions? a)cost of capital b)expectations of future economic conditions c)interest rates d)All of these are correct.

d)All of these are correct.

Which of the following is an investment (broadly defined)? a)education b)purchase of capital equipment c)a purchase of ownership of a company d)All of these are investments.

d)All of these are investments.

In the most basic model of the economy, equilibrium output is achieved when: a)the C + I line intersects the 45 degree line. b)C + I equals output. c)there is no change in inventories. d)all of these are correct

d)all of these are correct

When the economy is in a recession and the stock market plunges, the interest rates ________ and the bond prices ________. a)increase; decrease b)decrease; decrease c)increase; increase d)decrease; increase

d)decrease; increase

Because investment is generally procyclical, it usually ________ when the economy ________. : a)decreases; is in an expansion b)increases; in a recession c)reaches its peak; in a recession d)decreases; is in a recession

d)decreases; is in a recession

Which of the following is not a financial intermediary? a)commercial bank b)savings and loan association c)life insurance company d)district bank of the Federal Reserve System

d)district bank of the Federal Reserve System

If the economy finds itself at a point where planned spending is equal to output, then we will expect to see: a)a decrease in inventories. b)an increase in inventories. c)a decrease in planned spending. d)no change in inventories.

d)no change in inventories.