Unit 2 macro

The major purpose of the Federal Reserve buying government securities in open market operations is to:

Allow banks to increase their lending

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

Allow the Fed to control the amount of bank lending

Loans of the Federal Reserve Banks to commercial banks are:

An asset of the Federal Reserve Banks and a liability for commercial banks

If the cyclically-adjusted budget shows a deficit zero and the actual budget shows a deficit of about $150 billion, it can be concluded that there is:

An expansionary fiscal policy

Refer to the graph above. Which of the following factors will shift AD1 to AD2?

An increase in national incomes abroad

As disposable income decreases, consumption

And saving both decrease

The Great Recession of 2007-09 and the consequent policy response made the:

Cyclically-adjusted deficit grow during that period

As the consumption and saving schedules relate to real GDP, an increase in taxes will shift:

Downward both the consumption and saving schedules

One major advantage of money serving as a medium of exchange is that it allows society to:

Escape the complications of barter

Maximum checkable-deposit expansion in the banking system is equal to

Excess reserves times the monetary multiplier

Refer to the consumption schedule above. At income level 3, the amount of saving is represented by the line segment:

FG

A change in interest rates would shift the consumption schedule and the saving schedule ______; a change in taxes would shift these two schedules ______.

In opposite directions; in the same direction

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:

Is not subject to the timing problems of discretionary policy

Banks' borrowed funds come mostly from

Issuing bonds and accepting deposits

Which of the following is an important real consequence of the public debt of the United States

Its consequent higher interest rates lead to fewer incentives to bear risk and innovate

The commercial banking system can lend by a multiple of its excess reserves primarily because:

Its required reserves are fractional

In general, the steeper the consumption schedule the:

Larger is the multiplier

During the Great Recession of 2007-2009, the investment demand curve shifted:

Left because of declines in expected returns

The version of aggregate supply that allows for changes in both product prices and resource prices is the:

Long run

The real-balances effect on aggregate demand suggests that a:

Lower price level will increase the real value of many financial assets and therefore cause an increase in spending

In a supply-and-demand graph for the Federal funds market, the demand curve is downward-sloping because:

Lower rates give banks more incentive to borrow reserves

Monetary policy actions by the Fed are:

More effective in a restrictive direction than they are in an expansionary direction

Joe deposits $200 in currency into his checking account at a bank. This deposit is treated as:

No change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits

The reason for the Fed being set up as an independent agency of government is to

Protect it from political pressure

The so-called too-big-to-fail policy has two conflicting sides: on one hand there's the moral hazard problem that it creates, but in the other hand the Fed must:

Protect the stability of the banking system

When bankers hold excess reserves:

The money-creating potential of the banking system decreases

Which of the following varies directly with the interest rate?

The opportunity cost of holding money

In the later part of 2009, something historic happened relative to Social Security, in that for the first time:

Social Security contributions fell short of payouts

A fall in labor costs will cause aggregate:

Supply to increase

If the Fed sells government securities to the general public in the open market:

The Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the Fed

Money in the U.S. is essentially debt of

The Federal Reserve System and the banks

The level of GDP, ceteris paribus, will tend to increase when:

The Federal Reserve buys government securities in the open market

The value of the multiplier is likely to fall if there is a fall in

The marginal propensity to consume

In 2012 and 2013, the U.S. Attorney General's office illustrated, in several major cases, a bias in favor of the goal of maintaining the stability of the financial system over:

The prosecution of financial crimes

The multiple by which the commercial banking system can expand the supply of money is equal to:

The reciprocal of the reserve ratio

A depositor places $10,000 in cash in a commercial bank, where the required reserve ratio is 10 percent. The bank sends the $10,000 to its Federal Reserve Bank. As a result, the actual reserves, required reserves, and excess reserves of the bank have been increased by:

$10,000, $1000, and $9000 respectively

The foreign purchases, interest rate, and real-balances effects explain why the

Aggregate demand curve is downward-sloping

Answer the question based on the information given in the table above that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, the liabilities and net worth would be items 7 and

1, 2, and 3

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by:

10,800

The Federal Reserve System is divided into

12 districts

Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is:

25 percent

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to:

25 percent of nominal GDP

If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetary multiplier for the banking system will be:

4

Answer the question based on the information given in the table above that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, the assets would be items 5 and:

4 and 6

Refer to the graph above. Which of the following factors will shift AD1 to AD3?

A decrease in consumer wealth

The fundamental objective of monetary policy is to assist the economy in achieving

A full-employment, noninflationary level of total output

Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to:

A price level that is inflexible downward

The Glass-Steagall Act of 1933 required:

A separation of commercial banking from the trading of stocks

What is one significant consequence of fractional reserve banking?

Banks are vulnerable to "panics" or "bank runs"

What is one significant characteristic of fractional reserve banking?

Banks can create money through lending their reserves

The investment demand curve will shift to the left as the result of:

Business pessimism about future economic conditions

When a check is cleared against a bank, the bank will lose:

Checkable deposits and reserves

To keep high inflation from eroding the value of money, monetary authorities in the United States:

Control the supply of money in the economy

The Federal Reserve System performs many functions but its most important one is:

Controlling the money supply

In the mid-1970s, changes in oil prices greatly affected U.S. inflation. When oil prices rose, the U.S. would experience:

Cost-push inflation and falling output

The built-in stabilizers in the economy tend to:

Dampen the irregular swings in real GDP

During the Great Recession of 2007-2009, real interest rates:

Declined to about zero, and investments also declined sharply

The interest rate effect on aggregate demand indicates that a(n):

Decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending

Actions by the Federal government that decrease the progressivity of the tax system

Decrease the effect of automatic stabilizers

Money functions as a store of value if it allows you to:

Delay purchases until you want the goods

The American Recovery and Reinvestment Act of 2009 is a clear example of:

Discretionary fiscal policy that made the cyclically-adjusted budget become more negative

A commercial bank's checkable-deposit liabilities can be estimated by

Dividing its required reserves by the reserve ratio

Aggregate demand decreases and real output falls but the price level remains the same. Which of the following factors most likely contributes to downward price inflexibility in the immediate short run?

Fear of price wars

Which group aids the Board of Governors of the Federal Reserve System in conducting monetary policy

Federal Open Market Committee

The cyclically-adjusted surplus as a percentage of GDP is 1 percent in Year 1. This surplus becomes a deficit of 2 percent of GDP in Year 2. It can be concluded from Year 1 to Year 2 that:

Fiscal policy turned more expansionary

The short-run version of aggregate supply assumes that product prices are:

Flexible while resource prices are fixed

Refer to the consumption schedule above. At income level 3, the amount of consumption is represented by the line segment:

GH

During the Financial Crisis of 2007-2008, Goldman Sachs, Morgan Stanley, and other financial firms with heavy exposure to the mortgage-related problems rushed to become bank holding companies in order to:

Get massive loans from the Fed

The crowding-out effect arises when:

Government borrows in the money market, thus causing an increase in interest rates

The government bail-out of large institutions creates the problem of moral hazard, which means that these large firms will:

Have an incentive to make highly risky investments

Refer to the graph. The ratchet effect would suggest that:

If AD1 shifts to AD2, the economy would move to point b

If consumption increases while income remains the same, the average propensity to consume will:

Increase

If the price of crude oil decreases, then this would most likely:

Increase aggregate supply in the U.S.

Assume that the required reserve ratio is 20 percent. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the required reserves at Bank A and Bank B?

Increase by $10,000 at Bank A, and decrease by $10,000 at Bank B

Which combination of fiscal policy actions would most likely offset each other?

Increase taxes and government spending

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

Increased by $5,400

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:

Increased government spending or decreased taxation, or a combination of the two actions

When the Fed buys government securities in the open market, it:

Increases the excess reserves of the banking system, raising excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate

Other things being equal, an expansion of commercial bank lending:

Increases the money supply

Which of the following would shift the investment demand curve from ID2 to ID1?

Increasing operating costs for capital goods

Refer to the graph above. If the price level is initially at P1, then the economy will adjust by:

Increasing output produced

The goal of expansionary fiscal policy is to increase:

Real GDP

The Federal Reserve can increase aggregate demand by

Reducing the discount rate

If the economy is to have significant built-in stability, then when real GDP increases, the tax revenues should:

Rise proportionately more than the change in GDP

The destabilizing effects of defaulting mortgages quickly spread throughout the financial system because those mortgages were involved in widespread:

Securitization

When the Federal Reserve raises the target Federal funds rate, it:

Sells government securities to decrease the excess reserves available for overnight loan

The Great Recession of 2007-2009 altered the prior behavior of consumers in the economy by:

Shifting the consumption schedule down

Refer to the graph above. It depicts an economy in the:

Short run

Refer to the graph above, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6 percent interest rate. If the money supply increases, then Sm2 will shift to:

Sm3 and the interest rate will be 4 percent

Contractionary fiscal policy would tend to make a budget deficit become:

Smaller

Generally speaking, the greater the MPS, the:

Smaller would be the increase in income which results from an increase in consumption spending

When the dollar appreciates relative to foreign currencies, it means that:

The value of foreign currencies decreased relative to our dollar

The currency or money of the United States, like those of other countries, is:

Token money

A firm invests in a new machine that costs $2,000 a year but which is expected to produce an increase in total revenue of $2,200 a year. The current real rate of interest is 8 percent. The firm should:

Undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest

If people expected that a fiscal policy in the form of a tax cut was temporary, then this policy's effect on the economy will tend to be:

Weaker

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

You can lead a horse to water, but you can't make it drink"