ECON201 - Exam 2 - Review

Question 1

If the MPC in an economy is .75, a $1 billion increase in taxes will ultimately reduce consumption by:

Answer 1

$3 billion.

Question 2

When the required reserve ratio is increased, the excess reserves of member banks are:

Answer 2

Reduced and the multiple by which the commercial banking system can lend is reduced.

Question 3

If you are estimating your total expenses for school next semester, you are using money
primarily as:

Answer 3

A unit of account.

Question 4

The total demand for money curve will shift to the right as a result of:

Answer 4

An increase in nominal GDP.

Question 5

If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:

Answer 5

Increase by $10 billion.

Question 6

Money functions as:

Answer 6

ALL OF THE ABOVE: a store of value, a unit of account, and a medium of exchange.

Question 7

In the late 1990s the U. S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:

Answer 7

Wealth effect.

Question 8

The consumption schedule shows:

Answer 8

The amounts households plan or intend to consume at various possible levels of aggregate income.

Question 9

If the MPC in an economy is .8, government could shift the aggregate demand curve
rightward by $100 billion by:

Answer 9

Decreasing taxes by $25 billion.

Question 10

The MPC can be defined as that fraction of a:

Answer 10

Change in income that is spent.

Question 11

The asset demand for money:

Answer 11

Varies inversely with the rate of interest.

Question 12

Refer to the above graph. A shift of the consumption schedule from C2 to C1 might be
caused by a(an):

Answer 12

Reverse wealth effect, caused by a decrease in stock market prices.

Question 13

If the Fed were to increase the legal reserve ratio, we would expect:

Answer 13

Higher interest rates, a contracted GDP, and appreciation of the dollar.

Question 14

Given the expected rate of return on all possible investment opportunities in the economy:

Answer 14

An increase in the real rate of interest will reduce the level of investment.

Question 15

The determinants of aggregate supply:

Answer 15

Include input prices and resource productivity.

Question 16

In the United States, the money supply (M1) is comprised of:

Answer 16

Coins, paper currency, and checkable deposits.

Question 17

Refer to the above data. After a deposit of $10 billion of new currency into a checking account
in the banking system, excess reserves will increase by:

Answer 17

$9 billion.

Question 18

Which of the following represents the most expansionary fiscal policy?

Answer 18

A $10 billion increase in government spending

Question 19

Open-market operations refer to:

Answer 19

The purchase or sale of government securities by the Fed.

Question 20

A commercial bank can add to its actual reserves by:

Answer 20

Borrowing from a Federal Reserve Bank.

Question 21

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank’s required and excess reserves are equal, then its actual reserves:

Answer 21

Are $20,000.

Question 22

Overnight loans from one bank to another for reserve purposes entail an interest rate
called the:

Answer 22

Federal funds rate.

Question 23

The consumption schedule shows:

Answer 23

A direct relationship between aggregate consumption and aggregate income.

Question 24

The purchasing power of the dollar:

Answer 24

Is the reciprocal of the price level.

Question 25

In which of the following sets of circumstances can we confidently expect inflation?

Answer 25

aggregate supply decreases and aggregate demand increases

Question 26

Expansionary fiscal policy is so named because it:

Answer 26

Is designed to expand real GDP.

Question 27

The three main tools of monetary policy are:

Answer 27

The discount rate, the reserve ratio, and open-market operations.

Question 28

A bond having no expiration date: bond price = $1000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent.
Refer to the above information. If the price of this bond falls by $200, the interest rate will:

Answer 28

Rise by 2.5 percentage points.

Question 29

The discount rate is the interest:

Answer 29

Rate at which the Federal Reserve Banks lend to commercial banks.

Question 30

The multiplier effect means that:

Answer 30

A small increase in investment can cause GDP to change by a larger amount.

Question 31

When current government expenditures exceed current tax revenues and the economy is achieving full employment:

Answer 31

The full-employment budget has a deficit.

Question 32

The Fed can change the money supply by:

Answer 32

Doing all of the above.

Question 33

If the dollar appreciates relative to foreign currencies, we would expect:

Answer 33

A country’s net exports to rise.

Question 34

In the United States monetary policy is the responsibility of the:

Answer 34

Board of Governors of the Federal Reserve System.

Question 35

Which of the following will not tend to shift the consumption schedule upward?

Answer 35

The expectation of a future decline in the consumer price index

Question 36

Most modern banking systems are based on:

Answer 36

Fractional reserves.

Question 37

Which of the following is the basic economic policy function of the Federal Reserve Banks?

Answer 37

Controlling the supply of money

Question 38

The purchase of government securities from the public by the Fed will cause:

Answer 38

The money supply to increase.

Question 39

The purchasing power of the dollar:

Answer 39

Is the reciprocal of the price level.

Question 40

Refer to the above data. The maximum amount by which the commercial banking
system can expand the supply of money by lending is:

Answer 40

$30 billion.

Question 41

Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy?

Answer 41

An increase in Federal income tax rates

Question 42

Refer to the above diagram of the money market. Given Dm and Sm, an interest rate of i3 is not sustainable because the:

Answer 42

Demand for bonds in the bond market will rise and the interest rate will fall.

Question 43

The Federal Open Market Committee (FOMC) is made up of:

Answer 43

The seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.

Question 44

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by:

Answer 44

Horizontally adding the transactions and the asset demand for money.

Question 45

A change in the legal reserve ratio affects the:

Answer 45

Amount of excess reserves in the banking system.

Question 46

The transactions demand for money is most closely related to money functioning as a:

Answer 46

Medium of exchange.

Question 47

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a
depositor and the bank finds that it can safely lend out $4,500, the reserve requirement
must be:

Answer 47

10 percent.

Question 48

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for them by drawing checks. As a result, commercial bank reserves will:

Answer 48

Decrease by $2 billion.

Question 49

Other things equal, appreciation of the dollar:

Answer 49

Decreases aggregate demand in the United States and may increase aggregate supply
by reducing the prices of imported resources.

Question 50

The crowding-out effect suggests that:

Answer 50

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

Question 51

The problem of “cyclical asymmetry” refers to the idea that:

Answer 51

A tight money policy can force a contraction of the money supply, but an easy money policy may not achieve an expansion of the money supply.

Question 52

If the real interest rate in the economy is i and the expected rate of return from
additional investment is r, then more investment will be forthcoming when:

Answer 52

r is greater than i.

Question 53

The twelve Federal Reserve Banks:

Answer 53

Hold the reserve deposits of commercial banks.

Question 54

(4) 20(Reserve Requirement Percent) 300,000(Checkable Deposits) 70,000(Actual Reserves) Z(Excess Reserves)
Refer to row 4 in the above table. The number appropriate for space Z is:

Answer 54

$10,000

Question 55

In an effort to avoid recession, the government implements a tax rebate program,
effectively cutting taxes for households. We would expect this to:

Answer 55

Increase aggregate demand.

Question 56

Refer to the above data. If the legal reserve ratio is 14 percent, suppose that customers of this
bank collectively write checks for cash at the bank in the amount of $6 million. As a result, the
bank’s excess reserves diminish to:

Answer 56

$.84 million.

Question 57

In the U.S. economy the money supply is controlled by the:

Answer 57

Federal Reserve System.

Question 58

In the above diagram, a shift from AS1 to AS3might be caused by a(n):

Answer 58

Increase in the prices of oil.

Question 59

Refer to the above data. After the deposit, the maximum amount by which this commercial
banking system can expand the supply of money by lending is:

Answer 59

$90 billion.

Question 60

Fiscal policy refers to the:

Answer 60

Manipulation of government spending and taxes to stabilize domestic output,
employment, and the price level.

Question 61

To say that the Federal Reserve Banks are quasi-public banks means that:

Answer 61

They are privately owned, but managed in the public interest

Question 62

The money supply is backed:

Answer 62

By the government’s ability to control the supply of money and therefore to keep its value relatively stable.

Question 63

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government:

Answer 63

Surplus and the sale of securities in the open market, a higher discount rate, and higher reserve requirements.

Question 64

Other things equal, if there is an increase in nominal GDP:

Answer 64

The interest rate will rise.

Question 65

Most modern banking systems are based on:

Answer 65

Fractional reserves.

Question 66

In comparison with the consumption schedule, the investment schedule is:

Answer 66

Relatively unstable.

Question 67

The political business cycle refers to the possibility that:

Answer 67

Politicians will manipulate the economy to enhance their chances of being reelected.

Question 68

Refer to the above data. The commercial banking system has excess reserves of:

Answer 68

$0 billion.

Question 69

Refer to the above diagram. Suppose that aggregate demand increased from AD1 to
AD2. For the price level to stay constant:

Answer 69

The aggregate supply curve would have to shift rightward.

Question 70

Commercial banks create money when they:

Answer 70

Create checkable deposits in exchange for IOUs.

Question 71

Money is destroyed when:

Answer 71

Loans are repaid.

Question 72

(3) 12(Reserve Requirement Percent) 200,000(Checkable Deposits) Y(Actual Reserves) 8,000(Excess Reserves)
Refer to row 3 in the above table. The number appropriate for space Y is:

Answer 72

$32,000.

Question 73

The equilibrium rate of interest in the money market is determined by the intersection of the:

Answer 73

Supply of money curve and the total demand for money curve.

Question 74

The asset demand for money is most closely related to money functioning as a:

Answer 74

Store of value.

Question 75

Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy?

Answer 75

A reduction in Federal tax rates on personal and corporate income

Question 76

When a bank loan is repaid the supply of money:

Answer 76

Is decreased.

Question 77

Banks create money when they:

Answer 77

Exchange checkable deposits for the IOU’s of businesses and individuals.

Question 78

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:

Answer 78

Buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.

Question 79

When a check is drawn and cleared, the

Answer 79

bank against which the check is cleared loses reserves and deposits equal to the
amount of the check.

Question 80

When economists say that money serves as a medium of exchange, they mean that it is:

Answer 80

A means of payment.

Question 81

In defining money as M1 economists exclude time deposits because:

Answer 81

They are not directly or immediately a medium of exchange.

Question 82

Answer the next question(s) on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks and buys $500
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of securities from individuals, who deposit the cash in checking accounts.

Answer 82

Remain unchanged.

Question 83

The reserves of a commercial bank consist of:

Answer 83

Deposits at the Federal Reserve Bank and vault cash.

Question 84

The above schedule indicates that if the real interest rate is 8 percent, then:

Answer 84

$30 billion of investment will be undertaken.

Question 85

Which of the following fiscal actions would be the most effective in curbing inflation?

Answer 85

Incurring a budget surplus and impounding that surplus