Exam 3

Question 1

According to Keynes the level of economic activity is determined by the level of

Answer 1

Aggregate demand

Question 2

The U.S. government was given the power to tax income in the

Answer 2

Early 1900s.

Question 3

3) Nearly half of the federal government’s tax revenues come from

Answer 3

Individual income taxes.

Question 4

4) Payments to individuals for which no current goods or services are exchanged are known as

Answer 4

Income transfers.

Question 5

5) Fiscal policy works primarily through

Answer 5

Shifts of the AD curve.

Question 6

6) Which of the following will most likely provide fiscal stimulus to the economy

Answer 6

Increasing transfer payments.

Question 7

7) If the government purchases multiplier is 4 and a change in government spending leads to a $500 million decrease in aggregate demand we can conclude that

Answer 7

Government spending decreased by $125 million.

Question 8

9) The balanced budget multiplier is equal to

Answer 8

1

Question 9

10) Refer to Figure 11.1. Assume aggregate demand is represented by AD and full-employment output is $6.0 trillion. The economy confronts a real GDP gap of

Answer 9

2 trillion.

Question 10

Refer to Figure 11.3. Assume aggregate demand is represented by AD and full-employment output is $5.8 trillion. To restore price stability the AD curve must shift

Answer 10

Rightward by $400 billion.

Question 11

13) The use of government taxes and spending to alter economic outcomes is known as

Answer 11

Fiscal policy.

Question 12

14) Deficit spending results whenever the government

Answer 12

Uses borrowed funds to finance expenditures that exceed tax revenue.

Question 13

15) If the economy is in a recession deficit spending

Answer 13

will not increase the size of the debt because interest rates will be falling.

Question 14

16) A budget surplus is

Answer 14

An excess of government spending over government revenues in a given time period.

Question 15

17) Fiscal restraint is

Answer 15

Tax hikes and/or spending cuts intended to reduce aggregate demand.

Question 16

18) Automatic stabilizers tend to stabilize the level of economic activity because they

Answer 16

Increase spending during recessions and reduce spending during inflationary periods.

Question 17

19) Spending for unemployment compensation and welfare benefits increase automaticall

Answer 17

When the economy goes into recession.

Question 18

20) Foreign households and institutions hold approximately ____ percent of national debt

Answer 18

33

Question 19

percent of the U.S.

Question 20

21) When the U.S. Treasury issues new bonds to replace bonds that have matured it is engaging in

Answer 20

Debt refinancing.

Question 21

22) Interest payments on the national debt are a

Answer 21

redistribution of income from taxpayers to bondholders.

Question 22

23) The burden of the debt is passed on to future generations when the debt is held by

Answer 22

Foreign households

Question 23

24) According to Figure 12.1 if the economy moves from point C to point A because of increased government spending the amount of private spending crowded out is equal to the distance

Answer 23

BC.

Question 24

25) Farmer Brown wants some bacon for breakfast. He gets the bacon from Farmer Hernandez by giving her a dozen eggs. This type of transaction is referred to as

Answer 24

Barter.

Question 25

26) When money is used to acquire goods and services it is functioning as a

Answer 25

Medium of exchange.

Question 26

27) Which of the following gave the U.S. federal government permanent authority to issue money?

Answer 26

The National Banking Act of 1863.

Question 27

28) The basic money supply or M1 includes

Answer 27

Currency in circulation-savings accounts-and credit card balances.

Question 28

29) The different components of the money supply reflect

Answer 28

Variations in liquidity and accessibility of assets.

Question 29

30) Transactions account balances are included in

Answer 29

Both M1 and M2.

Question 30

31) Currency in circulation is included in

Answer 30

Both M1 and M2.

Question 31

33) One of the main functions of banks is

Answer 31

Borrowing money and lending to savers.

Question 32

34) Which of the following is not considered to be a private depository institution?

Answer 32

The Federal Reserve.

Question 33

35) The ratio of a bank's total reserves to its total transactions deposits is known as the

Answer 33

Reserve ratio.

Question 34

37) The use of money and credit controls to achieve macroeconomic goals is

Answer 34

Monetary policy.

Question 35

38) The Federal Reserve System was created by

Answer 35

The Federal Reserve Act in 1913.

Question 36

39) Which of the following serves as the central banker for private banks in the United States?

Answer 36

The 12 Federal Reserve banks.

Question 37

40) Which of the following is responsible for the Fed's daily activity in financial markets

Answer 37

The FOMC.

Question 38

41) The money supply (M1) includes currency held by the public plus

Answer 38

Transactions accounts plus traveler funds

Question 39

42) The M2 money supply is defined as

Answer 39

M1 plus balances in most savings accounts and money market mutual funds.

Question 40

43) The money supply (M2) includes M1 plus balances in

Answer 40

Saving accounts and money market mutual funds.

Question 41

44) Discounting refers to the Fed's practice of

Answer 41

Lending reserves directly to private banks.

Question 42

46) By raising and lowering the discount rate the Fed changes the

Answer 42

Incentive for banks to borrow reserves.

Question 43

47) In order to increase the money supply the Fed can

Answer 43

Lower the reserve requirement decrease the discount rate or buy bonds.

Question 44

48) Which of the following is likely in response to the policy initiative described in the In the News article titled "U.S. Federal Reserve Cuts Interest Rates to Historic Low"?

Answer 44

Bank lending will increase.

Question 45

49) The choice to hold money in the form of cash

Answer 45

Results in forgone intrest

Question 46

50) The money supply M2 includes M1

Answer 46

Plus balances in savings accounts and money market mutual funds.

Question 47

51) The speculative transactions and precautionary demands for money added together give the

Answer 47

Market demand curve for money.

Question 48

52) The equilibrium rate of interest is determined by

Answer 48

Money demand and money supply.

Question 49

53) An increase in the money supply will

Answer 49

Reduce interest rates and increase aggregate demand.

Question 50

54) The Fed's diversity reflects

Answer 50

Changes in the targets the Fed sets for adjusting monetary policy.

Question 51

Which diagram in Figure 15.1 best represents the Keynesian view of investment demand when monetary policy is effective?

Answer 51

d.

Question 52

In Figure 15.2 the equilibrium rate of interest

Answer 52

Is 6 percent.

Question 53

57) In Figure 15.2 if the money supply increased from $200 billion to $300 billion all of the following would be likely to occur except

Answer 53

The money demand curve would shift to the right.

Question 54

In Figure 15.4 an increase in the money supply from $65 billion to $100 billion will cause the equilibrium rate of interest to

Answer 54

Decrease from 7 percent to 3 percent.

Question 55

Which of the following Fed actions is most likely to decrease the aggregate demand curve from AD1 to AD2?

Answer 55

Raising the federal funds rate.

Question 56

Refer to Figure 15.7. Suppose the money supply decreases. This will cause interest rates to and cause a shift from point

Answer 56

increase; B to point A

Question 57

A tax cut

Answer 57

Contains less fiscal stimulus than an increase in government spending of the same size