Exam 3

Question 1

The government’s fiscal policy is its plan to regulate aggregate demand by manipulating:

Answer 1

taxation and government spending

Question 2

Budget deficits are created when:

Answer 2

government spending exceeds its tax revenues

Question 3

Budget surpluses exist when:

Answer 3

government tax revenues exceed its spending

Question 4

A decrease in transfer payments or an increase in taxes would____disposable income of households and thus____consumption purchases.

Answer 4

decrease:decrease

Question 5

If government policy makers were worried about the inflationary potential of the economy, what would NOT be a correct fiscal policy change?

Answer 5

increase in government purchases of goods and services

Question 6

If the government sought to end a recession, what would be an appropriate policy?

Answer 6

decrease taxes and increase transfer payments

Question 7

If there is initially a federal budget deficit, and taxes rise, while transfer payments fall:

Answer 7

AD decreases and the budget deficit decreases

Question 8

AD will shift left when:

Answer 8

the government budget surplus increases because taxes rose

Question 9

If unemployment is the most significant problem in the economy, what action would be an appropriate fiscal policy?

Answer 9

decrease taxes and increase government purchases

Question 10

What tax change would a supply-side economist be most likely to favor?

Answer 10

lower marginal income tax rates

Question 11

Supply-side advocates believe that when taxes and regulations are too burdensome, people will:

Answer 11

save less
work less
provide less investment capital

Question 12

After legislation is signed into law, the time it takes before actual fiscal stimulus is noticed is termed as:

Answer 12

impact lag

Question 13

The size of the crowding out effect is uncertain. If the crowding out effect is small,

Answer 13

the impact of an increase in G on the interest rates will be small, thus reducing the decrease in I

Question 14

Due to crowding-out effects:

Answer 14

investment will tend to move in the opposite direction from a change in government purchases

Question 15

Which group or groups buy U.S. public debt?

Answer 15

government agencies
private individuals
private institutions

Question 16

Typically, the budget deficit is financed by:

Answer 16

issuing debt

Question 17

The government does not have to repay the national debt, in the sense that it must reduce the debt to zero, because:

Answer 17

it can constantly refund the debt by issuing new bonds

Question 18

Which of the following is the best definition of money?

Answer 18

anything generally accepted as a payment for goods or repayment of debt

Question 19

The primary benefit of monetary exchange compared to barter exchange is:

Answer 19

increased efficiency in arranging transactions

Question 20

Using money as a store of value rather than wheat is:

Answer 20

both safer and less expensive

Question 21

Money almost always serves as the standard unit for quoting prices. This is another way of saying money serves as a:

Answer 21

Standard of value

Question 22

Which of the following is an example of money serving as a medium of exchange?

Answer 22

buying coffee

Question 23

Which of the following backs our money supply?

Answer 23

the faith in the government’s ability to provide an instrument people will take in exchange for goods and services

Question 24

One reason why gold and silver coins have historically served as money is that:

Answer 24

easily portable
can be made of uniform size and quality
divided if necessary for low prices
do not corrode or rust

Question 25

Fiat money has value because:

Answer 25

it can be used to buy things

Question 26

"Near Monies" are:

Answer 26

highly liquid assets that are close substitutes for money

Question 27

In defining money, it is universally accepted that

Answer 27

must be spendable must be liquid must be accepted as payment must be easily transferable

Question 28

What asset is most liquid:

Answer 28

funds in a savings account

Question 29

Which is NOT a form of money?

Answer 29

credit cards

Question 30

The difference between M1 and M2 is:

Answer 30

M2 is nearly four times as large as M1

Question 31

A decrease in currency in circulation combined with an equal increase in savings account deposits would:

Answer 31

decrease M1 but have no effect on M2

Question 32

M2 equals M1 plus:

Answer 32

near moneys

Question 33

M1 includes:

Answer 33

cash checking account balances travelers' checks

Question 34

If you took money out of your savings deposit account and put it in a demand deposit account:

Answer 34

M1 would increase but M2 would not change

Question 35

A depositor can not directly write checks against:

Answer 35

non-transaction deposits

Question 36

With the invention of banking, one important aspect of money was that:

Answer 36

banks have SOME discretion over the money supply

Question 37

Fractional reserve banking takes its name from the fact that:

Answer 37

banks keep only a fraction of total deposits on reserve

Question 38

Can bankers create money?

Answer 38

Yes, through multiple deposit creation

Question 39

A reserve requirement of 10% means a money multiplier of:

Answer 39

10 | 1/reserve requirement (1/.10=10)

Question 40

The money _____ is 1 divided by the reserve requirement. The larger the reserve requirement, the ___ the money multiplier.

Answer 40

multiplier, smaller

Question 41

If the reserve requirement is 15% and a customer makes a cash deposit of $50,000, how much new excess reserves are created?

Answer 41

$42,500 | 15% of 50,000=7500. 50,000-7500=42500

Question 42

Potential money creation is:

Answer 42

initial deposit times money multiplier

Question 43

A single bank is severely limited in its ability to create money because:

Answer 43

the funds loaned probably will be deposited in another bank

Question 44

The process of money creation can be reversed:

Answer 44

when a person pays a loan back to a bank

Question 45

If a bank had demand deposits of $80 million and is faced a 25% required reserve ratio, it would be required to have how many reserves?

Answer 45

$20 million | $80 million x .25=$20 million

Question 46

A decreae in the excess reserves banks want to hold, together with people taking currency out of their demand deposits account would:

Answer 46

have an indeterminate effect on money supply

Question 47

Demand deposits are:

Answer 47

liabilities of banks, assets of depositors

Question 48

Loans are:

Answer 48

assets to banks, liabilities of borrowers

Question 49

If the required reserve ratio was increased, then:

Answer 49

both the money supply and the outstanding loans of banks would tend to decrease

Question 50

What change would clearly increase the supply of money in the banking system?

Answer 50

a decrease in the percentage of the money people want to hold as currency and a decrease in the fraction of deposits banks want to hold as excess reserves

Question 51

Uncertainty may cause banks to hold larger excess reserves. This will:

Answer 51

tend to reduce the volume of loans and the money supply

Question 52

What guarantees the deposits in almost all banks up to a limit of $100,000 per account?

Answer 52

the FDIC

Question 53

The chairman of the Federal Reserve Board is:

Answer 53

Ben Bernanke

Question 54

All decisions of the Fed are subject to approval by:

Answer 54

No one

Question 55

What is NOT a function of the Federal Reserve System?

Answer 55

making commercial loans to its customers

Question 56

Decisions regarding purchases and sales of securities by the Fed are made by:

Answer 56

Federal Open Market Committee

Question 57

The Fed's purchases and sales of government securities are called:

Answer 57

open market operations

Question 58

When the Fed wants to expand the money supply through open market operations, it:

Answer 58

purchases government securities from member banks

Question 59

The money supply contracts when the Fed:

Answer 59

sells government securities

Question 60

What is most frequently used when the Fed is attempting to adjust the money supply?

Answer 60

open market operations

Question 61

Halving the required reserve ration would:

Answer 61

double the money supply

Question 62

If the Fed raises the discount rate, it:

Answer 62

reduces the supply of money

Question 63

If the Fed wanted to reduce the federal funds interest rate, it might:

Answer 63

decrease the discount rate

Question 64

A combination of a decrease int he discount rate and an increase in the reserve requirements would:

Answer 64

have and indeterminate effect on the money supply

Question 65

If the Fed buys a U.S. government bond from a member of the public,

Answer 65

the banking system has more reserves and the money supply tends to grow

Question 66

What would constitute contractionary monetary policy by the Fed?

Answer 66

open market sales of government securities an increase in the discount rate an increase in reserve requirements

Question 67

The primary reason that money is demanded is for:

Answer 67

transaction purposes

Question 68

When the money supply decreases:

Answer 68

real interest rates rise and investment spending falls

Question 69

If the interest rates rise, what will happen to demand for money?

Answer 69

Nothing

Question 70

Expansionary monetary policy will tend to have what effect?

Answer 70

increase the money supply and lower interest rates

Question 71

If money supply and money demand both increased?

Answer 71

the change in the interest rates and investment would be indeterminate

Question 72

When money demand decreases, interest rates will fall. In this situation the Fed can choose between:

Answer 72

letting interest rates remain lower or decreasing the supply of money

Question 73

What would tend to increase AD?

Answer 73

a commercial bank using excess reserves to extend a loan to a customer

Question 74

When the economy is in a recession:

Answer 74

expansionary monetary policy can potentially result in increase real output in both the short run and the long run

Question 75

When the economy is initially at full employment:

Answer 75

contractionary monetary policy can result in decreased real output in both the short and long run

Question 76

Id unemployment is the major problem in the economy, what would be an appropriate monetary policy response?

Answer 76

decrease the discount rate

Question 77

Is increasing taxes a fiscal policy or monetary policy?

Answer 77

fiscal policy

Question 78

How would you counteract an inflationary gap?

Answer 78

sell government bonds

Question 79

What are some examples of contractionary monetary policy?

Answer 79

increase reserve requirements increase the discount rate sell government bonds

Question 80

If inflation is the major problem in the economy, what would be an appropriate monetary policy response?

Answer 80

increase the discount rate

Question 81

The equation of exchange states that:

Answer 81

the money supply times the velocity = the price level times the quantity of goods and services produced

Question 82

In the equation of exchange, PQ represents:

Answer 82

the dollar value of all final goods and services sold in a county in a given year

Question 83

What id the definition of velocity?

Answer 83

velocity = value of final goods and services produced/money supply

Question 84

If policies of the Fed cause the money supply to increase, and velocity is help constant, the expected outcome would be:

Answer 84

P ' Q would increase, and therefore the general price level and/or Q would increase

Question 85

Compared to fiscal policy, what is an advantage of using monetary policy to attain macroeconomic goals?

Answer 85

the implemention of monetary policy is not slowed down by th same budgetary process as fiscal policy

Question 86

An important limitation of monetary policy is that

Answer 86

it must be conducted through the commercial banking system, and the Fed cannot always make banks do what it wants them to do

Question 87

What is not a major trading partner of the U.S./

Answer 87

Russia

Question 88

The main reason why one nation trades with another is to:

Answer 88

exploit the advantages of specialization

Question 89

If discussing trade, it is ____ which matters, rather than ____.

Answer 89

comparative advantage; absolute advantage

Question 90

If a nation does not have an absolute advantage in producing anything, it:

Answer 90

will hav a comparative advantage in the activity in which its disadvantage is the least

Question 91

If two countries each are currently producing two goods, and each begins to specialize in the good in which it has a comparative advantage, what will happen to total world output?

Answer 91

it will increase

Question 92

Comparative advantage occurs when a person or a country can produce a good or service at a lower ___ than others.

Answer 92

opportunity cost

Question 93

In Samoa the opportunity cost of producing 1 coconut is 4 pineapples, while Guam the opportunity cost of producing 1 coconut is 5 pineapples. In this situation:

Answer 93

if trade occurs, both countries will be able to consume beyond their original production possibilities frontiers

Question 94

The record of all international financial transactions in which a nation has engaged over a year is known as the:

Answer 94

balance of payments

Question 95

The record of all transactions with foreign nations that involve the exchange of merchandise goods and services or unilateral gifts is called the:

Answer 95

current account

Question 96

The difference between the value of a country's merchandise exports and imports is known as the balance of:

Answer 96

trade

Question 97

The U.S. balance of trade:

Answer 97

is the difference between exports and imports

Question 98

The balance on current account records information about:

Answer 98

the levels of imports and exports of goods and services for a country

Question 99

What would be included in the capital account section of the balance of payments?

Answer 99

government bond purchases

Question 100

Whenever there is a deficit in the current account, the capital account:

Answer 100

will be positive

Question 101

If U.S. buys a lot of foreign produced video games it would tend to:

Answer 101

increase the balance of trade deficit of the U.S

Question 102

The exchange rate:

Answer 102

states the price of one currency in terms of another currency

Question 103

If the dollar APPRECIATES it can be said that:

Answer 103

other currencies depreciate

Question 104

Is it possible for a currency to appreciate relative to another currency, and depreciate relative to a third?

Answer 104

Yes, this is possible in a world of floating exchange rates

Question 105

If the U.S. dollar depreciates, what will happen to aggregate demand?

Answer 105

it will increase exports and decrease imports and therefore increase AD

Question 106

What is demand-pull inflation?

Answer 106

a price-level increase due to an increase in aggregate demand

Question 107

What is cost-push inflation?

Answer 107

a price-level increase due to a negative supply shock or increase in input prices

Question 108

What is a supply shock?

Answer 108

An unexpected event that changes the supply of a product or commodity, resulting in a sudden change in its price.