Test 4a Bank

An increase in the interest rate decreases the opportunity cost of holding money.

False

The Fed uses increases in government spending to increase the supply of money in our economy.

False

The Federal Reserve's four goals of monetary policy are price stability, low government debt, low rate of bank failures, and economic growth.

False

The federal budget is a cumulative measure of all past government deficits and surpluses, while the national debt is an annual measure of government tax revenues and expenditures.

False

The money supply curve has a negative slope because an increase in the interest rate decreases the quantity of money demanded, ceteris paribus.

False

When the Fed conducts open market sales to correct an output gap, the unemployment rate falls, ceteris paribus.

False

To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks.

Fannie Mae and Freddie Mac

Which of the following would be classified as fiscal policy?

The federal government cuts taxes to stimulate the economy.

Aggregate demand = consumption + investment + government purchases + net exports.

True

One of the two main monetary policy targets of the Federal Reserve is the money supply

True

The Federal Reserve's policies can simultaneously reduce the inflation rate and increase unemployment rates

True

The U.S. Federal Reserve has been successful in "fine tuning" the economy but has not been able to entirely eliminate business cycles.

True

To correct an inflationary gap, Congress could increase taxes and/or decrease government purchases.

True

In the figure above, the movement from point B to point A in the money market would be caused by

a decrease in the required reserve ratio by the Federal Reserve.

If the Federal Reserve pursues contractionary monetary policy,

aggregate demand will fall, and the price level will fall.

The decrease in government spending on food stamps to low income families during an expansion is an example of

an automatic stabilizer.

Expansionary monetary policy on the part of the Fed results in

an increase in the money supply, a decrease in interest rates, and an increase in real GDP.

Which of the following would cause the money demand curve to shift to the right?

an increase in the price level

When the Federal Reserve conducts open market transactions, it

buys or sells previously issued government bonds.

Automatic stabilizers refer to

government spending and taxes that automatically increase or decrease along with the business cycle.

According to the money demand and supply model, an open market sale of Treasury bonds by the Federal Reserve would cause the equilibrium interest rate to

increase

A decrease in interest rates

increases investment spending and increases consumption spending.

A decrease in individual income taxes ________ disposable income, which ________ consumption spending.

increases; increases

Refer to figure above. At point A, this economy is experiencing a(n)___________________.

inflationary gap

If an economy's actual real GDP is above potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run equilibrium? An increase in

taxes

The total value of U.S. Treasury bonds outstanding equals

the federal government debt.

The federal funds rate is

the interest rate banks charge each other for overnight loans.

In late 2008, the U.S. Congress voted to extend unemployment insurance benefits for seven additional weeks, in recognition of the growing unemployment problem. This extension is an example of

discretionary fiscal policy.

During inflationary periods, government expenditure automatically

falls because of programs such as unemployment insurance and Medicaid.

According to the money market, a decrease in interest rates is likely to cause

firms and households to increase the quantity of money demanded.