test 2

Question 1

A change in the money income of consumers will:

Answer 1

shift the market demand curve for housing.

Feedback
Correct. When the money income of consumers increases, some consumers are willing and able to buy more of a good at each price. So, the market demand for the good increases, causing the demand curve to shift to the right. See 4-2: What Shifts a Demand Curve

Question 2

A decrease in the demand for a good generally implies that:

Answer 2

the demand curve for the good has shifted to the left.

Feedback
Correct. A change in demand for a good is usually represented by a shift of the demand curve. A decrease in demand will shift the demand curve to the left. See 4-2: What Shifts a Demand Curve

Question 3

A decrease in the price of peanuts will cause a leftward shift of the supply curve of peanut butter.

Answer 3

False

Feedback
The prices of resources employed in the production of a good affect the cost of production and, therefore, the supply of the good. See 4-4: What Shifts a Supply Curve

Question 4

A movement along the demand curve for a good can be attributed to a change in:

Answer 4

The quantity demanded of the good

Feedback
Correct. A point on the demand curve indicates the quantity demanded of a good at a particular price. Any movement along the demand curve reflects a change in quantity demanded, and not a change in demand. See 4-1: Demand

Question 5

According to the law of demand, as the price of a good rises, _____.

Answer 5

buyers purchase less of the good because their real income decreases with an increase in price

Feedback
An increase in the price of a good lowers its quantity demanded as consumers’ real income falls when price increases. See 4-1: Demand

Question 6

If Good A and Good B are complements, then a decrease in the price of Good B:

Answer 6

Increases the demand for good A

Feedback
Correct. Two goods are considered complements if an increase in the price of one good decreases the demand for the other. See 4-2: What Shifts a Demand Curve

Question 7

If butter and margarine are substitute goods, an increase in the price of butter is most likely to:

Answer 7

shift the demand curve for margarine rightward.

Feedback
Correct. An increase in the price of a substitute good shifts the demand curve for the other good rightward. See 4-2: What Shifts a Demand Curve

Question 8

The demand for an inferior good decreases as consumer income increases.

Answer 8

True

Feedback
The demand for an inferior good decreases as money income increases. See 4-2: What Shifts a Demand Curve

Question 9

The explanation for the law of demand begins with:

Answer 9

unlimited wants confronting scarce resources.

Feedback
Correct. Consumers will demand a good only when they have the ability to satisfy their want. See 4-1: Demand

Question 10

A decrease in the price of peanuts will cause a leftward shift of the supply curve of peanut butter.

Answer 10

False

Feedback
The prices of resources employed in the production of a good affect the cost of production and, therefore, the supply of the good. See 4-4: What Shifts a Supply Curve

Question 11

A new cattle feed has been found to increase the amount of milk each cow produces. Which of the following is likely to be the impact on the market for milk if this cattle feed is used by most dairies?

Answer 11

A rightward shift of the supply curve of milk

Feedback
Correct. A technological improvement such as the introduction of a new cattle feed increases the supply of milk and shifts the supply curve to the right. See 4-6: Changes in Equilibrium Price and Quantity

Question 12

A price ceiling set above the equilibrium price of a good will result in a shortage.

Answer 12

False

A price ceiling set below the equilibrium price of a good will result in a shortage. See 4-7: Disequilibrium

Question 13

A price floor set below the equilibrium price will result in a surplus.

​

Answer 13

False

Feedback
To have an impact, a price floor must be set above the equilibrium price. A price floor set at or below the equilibrium price would not matter to the producers or the consumers. See 4-7: Disequilibrium

Question 14

A shortage of textbooks is most likely to cause:

Answer 14

an increase in the price of textbooks.

Feedback
Correct. A shortage creates an upward pressure on the price of a good. See 4-5: Demand and Supply Create a Market

Question 15

A supply curve typically slopes upward because:

Answer 15

opportunity cost of production increases as quantity supplied increases.

(as price increases, the quantity supplied also increases)

Feedback
Correct. Producers have a profit incentive to offer more at a higher price than at a lower price, so the supply curve slopes upward. See 4-3: Supply

Question 16

As the price of milk increases, producers are generally willing to sell a larger quantity of milk in the market, other things constant. This represents the law of:

Answer 16

supply

Feedback
Correct. The law of supply states that the quantity supplied is directly related to its price, other things constant. See 4-3: Supply

Question 17

For a given downward-sloping demand curve, a decrease in supply will cause a(n):

Answer 17

decrease in quantity demanded

Feedback
Correct. Given a downward-sloping demand curve, all other things remaining constant, a leftward shift of the supply curve moves the equilibrium to a point that lies to the left of the initial equilibrium. An increase in price will lead to a decrease in quantity demanded. See 4-6: Changes in Equilibrium Price and Quantity

Question 18

For a given upward-sloping supply curve, an increase in demand for chocolate chips will result in a:

Answer 18

higher equilibrium price and a higher equilibrium quantity.

Feedback
Correct. Given an upward-sloping supply curve, a rightward shift of the demand curve increases both equilibrium price and quantity. See 4-6: Changes in Equilibrium Price and Quantity

Question 19

Given upward-sloping supply curve, all other things remaining constant, a decrease in demand will lead to a(n):

Answer 19

decrease in the equilibrium price.

Feedback
Correct. Given an upward-sloping supply curve, all other things remaining constant, a leftward shift of the demand curve decreases both the equilibrium price and quantity. See 4-6: Changes in Equilibrium Price and Quantity

Question 20

Other things constant, the current supply curve of index cards is likely to shift to the right if:

Answer 20

the expected future price of index cards is lower than the current price.

(If a producer expects the future price of a storable product (like index cards) to be lower than the current price, they will likely increase supply in the current period to sell while prices are still high)

Feedback
Correct. A producer who expects a lower price in the near future for a product that can be easily stored will increase supply in the current period. See 4-4: What Shifts a Supply Curve

Question 21

Recently it has been discovered that lobsters grown on lobster farms can feed on algae, which is a cheaper lobster food. As a result of this discovery, _____.

​

Answer 21

the supply curve for lobster will shift to the right

Feedback
Correct. When the price of a resource falls, the cost of production decreases and producers are more willing and able to supply the good in the market. See 4-4: What Shifts a Supply Curve

Question 22

When the quantity demanded of a good exceeds the quantity supplied of the good at the prevailing market price, _____.

Answer 22

the price of the good will tend to increase

Feedback
Correct. An excess demand for a good in the market creates an upward pressure on the market price. See 4-5: Demand and Supply Create a Market

Question 23

The introduction of a new cost effective production technique is likely to:

Answer 23

shift the supply curve rightward.

Feedback
Correct. When a cost effective production technology is introduced producers will be more willing and able to supply the good at each price. Thus, supply of the good will increase. See 4-4: What Shifts a Supply Curve

Question 24

The Federal Reserve

Answer 24

was created in 1913.

has more than one specific job to perform.

is an example of a central bank.

Correct:All of the above are correct.

Question 25

All Fed purchases and sales of

Answer 25

government bonds are conducted at the New York Fed’s trading desk.

Question 26

The Federal Reserve

Answer 26

is a central bank; it is responsible for conducting the nation’s monetary policy; and it plays a role in regulating banks.

Question 26

Suppose the First National Bank acquires $500,000 in new *deposits* and the required **reserve ratio** is 12 percent. Which of the following is true?​

Answer 26

Required reserves on the new deposits are $60,000. feedback:**Deposits multiplied by the required reserve ratio gives the amount of a bank's required reserves.** See 14-2: How Banks Work

Question 27

Which of the following does the Federal Reserve not do?

Answer 27

convert Federal Reserve Notes into gold

Question 27

The **least liquid** of the *assets* listed below is:​

Answer 27

​*real estate*. feedback: **An asset's liquidity depends on how easily it can be converted into cash without significant loss of value.** See 14-2: How Banks Work

Question 28

When the Fed conducts **open-market sales**

Answer 28

it **sells Treasury securities**, which decreases the money supply.

Question 28

To maximize its profit, a bank will:​

Answer 28

​minimize excess reserves. feedback:Liquid assets yield lower interest rates. Excess reserves are held as cash and earn no interest. See 14-2: How Banks Work

Question 29

When the Fed conducts open-market purchases,

Answer 29

it buys Treasury securities, which increases the money supply.

Question 29

When a customer deposits $1,000 in a bank, the deposit is:

Answer 29

a liability for the bank as the bank owes it to the customer. feedback:While accepting any cash from a depositor, the bank promises to repay the depositor that amount. The deposit therefore is an amount the bank owes-it's a liability of the bank. See 14-2: How Banks Work

Question 30

The Fed’s primary tool to change the money supply is

Answer 30

conducting open market operations.

Question 30

Which of the following is an asset to a bank?​

Answer 30

loans feedback: Checkable deposits, transaction deposits, credit cards, and borrowings from the Fed are not assets owned by a bank. See 14-2: How Banks Work

Question 31

New money is created in the U.S. economy by

Answer 31

banks that create checkable deposits

Question 31

Which of the following is true of banks?​

Answer 31

​Banks reduce the transaction costs of borrowing and lending money.

Question 32

Banks count among their assets

Answer 32

government securities, loans, and office equipment.

Question 32

​An important function of commercial banks is to _____.

Answer 32

make loans feedbacks:Financial intermediaries, such as commercial banks, serve as go-betweens by borrowing from people who save to make loans to others. See 13-2: Money and Banking

Question 33

Which of the following is a liability on a bank's balance sheet?

Answer 33

checkable deposits

Question 33

​Banks want to minimize their holdings of excess reserves because:

Answer 33

​excess reserves earn no interest. feedbacks: Excess reserves are held as cash in the vault and banks earn no interest on cash in the vault. See 14-2: How Banks Work

Question 34

Banks differ from other types of businesses because banks:​

Answer 34

Banks differ from other types of businesses because banks:​ feedback: The banking system as a whole can create fiat money. See 14-3: How Banks Create Money

Question 34

Barter is the direct exchange of goods and services for:

Answer 34

​other goods and services. feedback: In a barter economy, goods and services are exchanged for other goods and services on the basis of a double coincidence of wants. See 13-1: The Birth of Money

Question 35

Banks help to overcome the problem of asymmetric information by:

Answer 35

acquiring expertise in evaluating the credit histories of borrowers. feedback: Owing to their experience and expertise in evaluating loan applicants, banks can better cope with asymmetric information than could an individual saver. See 14-2: How Banks Work

Question 35

​Exchange is necessary in an economy if:

Answer 35

​labor is specialized. feedback:When families were self-sufficient, they produced all they consumed and consumed all they produced, so there was little need for exchange. With the emergence of specialization, exchange, or trade, was necessary. See 13-1: The Birth of Money

Question 36

If an increase of $10 million in excess reserves increases checkable deposits in the banking system by a maximum of $200 million, the required reserve ratio is:

Answer 36

5 percent. feedback: The total change in the money supply due to a fresh injection by the Fed equals the product of the change in fresh reserves and the simple money multiplier. See 14-3: How Banks Create Money

Question 36

​The reserve ratio is the ratio of:

Answer 36

​a bank's reserves to its total deposits. feedback: he reserve ratio measured reserves as a percentage of total claims against the total deposits. See 13-2: Money and Banking

Question 37

If r is the required reserve ratio, which of the following is the simple money multiplier?

Answer 37

1/r feedback: The multiple by which the money supply increases as a result of an increase in the banking system’s reserves is called the money multiplier. See 14-3: How Banks Create Money

Question 38

On a bank's balance sheet, the value of its assets must equal the value of its:

Answer 38

the value of its liabilities plus net worth. feedback:Assets must equal liabilities plus net worth on a bank's balance sheet. See 14-2: How Banks Work

Question 39

Suppose a bank has $8,000 in checkable deposits and the required reserve ratio is 0.2. If actual reserves equal $3,000, then excess reserves equal:​

Answer 39

​$1,400. feedback:Excess reserves are bank reserves exceeding required reserves that are held as cash in bank vaults. See 14-2: How Banks Work