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WorksheetsExam 3- Macro
Total questions: 183
Worksheet time: 46hrs 45mins
In economics, money is defined as
any asset people generally accept in exchange for goods and services.
the total value of one's assets minus the total value of one's debts, in current prices.
the total value of one's assets in current prices.
the total amount of salary, interest, and rental income earned during a year.
Economies where goods and services are traded directly for other goods and services are called ________ economies.
trade
direct
seigniorage
barter
Commodity money
can be used to purchase commodities, but not services.
is backed by a valuable commodity such as gold.
has value independent of its use as money.
has little to no value independent of its use as money.
Silver is an example of a
barter money.
commodity money.
fiat money.
representative money.
The statement, "My iPhone is worth $300" represents money's function as
a unit of account.
a medium of exchange.
a store of value.
a standard of deferred payment.
Which of the following assets is most liquid?
bond
money
savings account
stock
People hold money as opposed to financial assets because money
earns a higher return than other financial assets.
earns interest.
is perfectly liquid.
earns no interest.
Which of the following statements regarding the use of gold as money is false?
It is durable.
It has value other than money
It is acceptable to traders.
It has standardized quality.
According to the U.S. Treasury,
U.S. dollars must be accepted as payment for any good or service sold in the United States.
the government will not accept cash in payment of taxes.
firms do not have to accept cash as payment for goods and services.
creditors do not have to accept cash in payment of debts.
The largest proportion of M1 is made up of
checking account deposits.
traveler's checks.
time deposits.
currency.
savings account deposits.
Which of the following is not counted in M1?
coins in circulation
checking account balances
credit card balances
currency in circulation
traveler's check balances
You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have
money = $2,300, annual income = $6,000, and wealth = $5,000.
money = $300, annual income = $6,000, and wealth = $4,300.
money = $300, annual income = $6,000, and wealth = $5,000.
money = $200, annual income = $500, and wealth = $4,300.
Consider the information above for a simple economy. Assume there are no traveler's checks.
Refer to Scenario 14-1. M1 in this simple economy equals
$1,000.
$2,000.
$3,000
$8,000.
If households and firms decide to hold less of their money in checking account deposits and more in currency, then initially, the money supply
will increase.
may increase or decrease.
will decrease
will not change.
A bank will consider a car loan to a customer ________ and a customer's checking account to be ________.
a liability; a liability
an asset; net worth
an asset; a liability
an asset; an asset
a liability; an asset
Bank reserves include
vault cash and loans to bank customers.
loans to bank customers and deposits with the Federal Reserve.
vault cash and deposits with the Federal Reserve.
deposits with the Federal Reserve and holdings of securities.
customer checking accounts and vault cash.
Banks can make additional loans when required reserves are
less than total loans.
greater than total reserves.
less than total deposits.
less than total reserves.
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%.
Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's reserves immediately increase by
$2,000.
$8,000.
$10,000.
$50,000.
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%.
Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's required reserves increase by
$2,000
$8,000.
$10,000
$50,000
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's excess reserves increase by
$2,000.
$8,000.
$10,000
$50,000.
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%.
Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A can make a maximum loan of
$2,000.
$8,000.
$10,000.
$50,000.
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%.
Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of
$8,000
$10,000.
$50,000
$100,000.
Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of
$0.
$50.
$500.
$5,000.
If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is
2
5
10
20
Table 14-1
Refer to Table 14-1. Suppose a transaction changes a bank's balance sheet as indicated in the T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of
$0
$400.
$3,600
$4,000
Table 14-2
Refer to Table 14-2. Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of
$0.
$800.
$7,200.
$8,000.
Table 14-3
Refer to Table 14-3. Consider the above simplified balance sheet for a bank. If the required reserve ratio is 10 percent, the bank can make a maximum loan of
$2,000
$5,000.
6,300.
$45,000
Banks can continue to make loans until their
actual reserves equal their required reserves.
actual reserves equal their excess reserves.
actual reserves equal their checking account balances.
excess reserves equal their required reserves.
Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan all of their excess reserves, the real-world deposit multiplier is
less than 5.
equal to 5.
greater than 5.
equal to 20.
A bank's liabilities are
a measure of the bank's net losses.
things owned by or owed to the bank.
included as part of the bank's reserves.
things the bank owes to someone else.
The portion of ________ that a bank does not loan out or spend on securities is known as ________.
loans; reserves
loans; securities
deposits; reserves
deposits; securities
Which of the following is a true statement?
excess reserves = loans - required reserves
excess reserves = deposits - loans
excess reserves = deposits - required reserves
excess reserves = actual reserves - required reserves
A cash withdrawal from the banking system
decreases excess reserves.
decreases reserves.
decreases deposits.
All of the above are correct.
A central bank like the Federal Reserve in the United States can help banks survive a bank run by
raising the discount rate.
acting as a lender of last resort.
printing money
increasing the required reserve ratio.
Open market operations refer to the purchase or sale of ________ to control the money supply.
corporate bonds and stocks by the Federal Reserve
corporate bonds and stocks by the U.S. Treasury
U.S. Treasury securities by the Federal Reserve
U.S. Treasury securities by the U.S. Treasury
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
tax rates, government purchases, and government transfer payments.
open market operations, the exchange rate of the dollar against foreign currencies, and government purchases.
interest rates, tax rates, and government spending.
open market operations, discount policy, and reserve requirements.
The sale of Treasury securities by the Federal Reserve will, in general,
increase the quantity of reserves held by banks.
decrease the quantity of reserves held by banks.
not change the quantity of reserves held by banks.
not change the money supply.
If a bank receives a $1 million discount loan from the Federal Reserve, then the bank's reserves will
not change.
increase by less than $1 million.
increase by more than $1 million.
increase by $1 million.
Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve raises the required reserve ratio to 12 percent, then the bank will now have excess reserves of
$12,000.
$0.
-$2,000.
$12,000.
A decrease in the reserve requirement ________ bank reserves and ________ the money supply.
increases; decreases
decreases; decreases
decreases; increases
increases; increases
A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.
increases; increases
decreases; decreases
decreases; increases
increases; decreases
The quantity equation states that the
money supply times the price level equals real output times the velocity of money.
money supply times the velocity of money equals the price level times real output.
money supply times the price level equals real output divided by the velocity of money.
money supply divided by the velocity of money equals the price level divided by real output.
The quantity theory of money predicts that, in the long run, inflation results from the
money supply growing at a faster rate than real GDP.
velocity of money growing at a faster rate than real GDP.
money supply growing at a lower rate than real GDP.
velocity of money growing at a lower rate than real GDP.
According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be
15 percent.
20 percent.
25 percent.
100 percent.
In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience
hyperinflation.
inflation.
deflation.
stagflation.
The quantity theory of money seeks to explain the connection between money and
output.
prices.
interest rates.
unemployment.
The quantity equation states that
M + V = P + Y.
M × V = P × Y.
M - V = P - Y.
the money supply (M) divided by the velocity of money (V) equals the price level (P) divided by real output (Y), i.e., M/V = P/Y.
The velocity of money is defined as
the total number of times each dollar is used to purchase goods and services.
the average number of times each dollar is used to purchase goods and services.
P × Y.
The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals
0.
the growth rate of real GDP.
the growth rate of the velocity of money.
the growth rate of the price level.
The basic aggregate demand and aggregate supply curve model helps explain
output fluctuations in an individual market.
price fluctuations in an individual market.
long-term growth.
short-term fluctuations in real GDP and the price level.
The ________ shows the relationship between the price level and quantity of real GDP demanded.
45-degree line
aggregate demand curve
consumer price index
aggregate expenditure line
Because of the slope of the aggregate demand curve, we can say that
an increase in the price level leads to a higher level of real GDP demanded.
an increase in the price level leads to no change in the level of real GDP demanded.
a decrease in the price level leads to a higher level of real GDP demanded.
a decrease in the price level leads to a lower level of real GDP demanded.
Which of the following best describes the "wealth effect"?
When the price level falls, the nominal value of household wealth rises.
When the price level falls, the nominal value of household wealth falls.
When the price level falls, the real value of household wealth rises.
When the price level falls, the real value of household wealth falls.
The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off
government spending and unplanned investment.
investment and consumption spending.
government spending.
net exports.
The international trade effect states that a(n) ________ in the price level will ________ net exports.
decrease; decrease
decrease; not affect
increase; decrease
increase; increase
An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________.
increase; a higher price level increases consumption, investment, and net exports.
decrease; a higher price level reduces consumption, investment, and net exports.
decrease; a higher price level increases consumption, investment, and net exports.
increase; a higher price level reduces consumption, investment, and net exports.
When the price level in the United States falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise.
exports; imports; net exports
net exports; exports; imports
net exports; imports; exports
imports; exports; net exports
Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?
They will move the economy up along a stationary aggregate demand curve.
They will shift the aggregate demand curve to the left.
They will move the economy down along a stationary aggregate demand curve.
They will shift the aggregate demand curve to the right.
The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?
This will shift the aggregate demand curve to the right.
This will shift the aggregate demand curve to the left.
This will move the economy up along a stationary aggregate demand curve.
This will move the economy down along a stationary aggregate demand curve.
Higher personal income taxes
increase aggregate demand.
increase disposable income.
decrease aggregate demand.
both B and C
Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
an increase in interest rates
a decrease in expected profits for firms
an increase in net exports
a decrease in disposable income
How do lower taxes affect aggregate demand?
They reduce disposable income, consumption, and aggregate demand.
they increase corporate investment and aggregate demand.
They increase disposable income, consumption, and aggregate demand.
They increase aggregate supply and thus increase aggregate demand as well.
Figure 13-1
Refer to Figure 13-1. Ceteris paribus, an increase in the price level would be represented by a movement from
AD1 to AD2.
AD2 to AD1.
point A to point B
point B to point A.
Figure 13-1
Refer to Figure 13-1. Ceteris paribus, an increase in interest rates would be represented by a movement from
AD1 to AD2
AD2 to AD1.
point A to point B.
point B to point A.
Figure 13-1
Ceteris paribus, a decrease in government spending would be represented by a movement from
AD1 to AD2
AD2 to AD1.
point A to point B.
point B to point A.
Figure 13-1
Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from
AD1 to AD2
AD2 to AD1.
point A to point B.
point B to point A.
Figure 13-1
Ceteris paribus, a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from
AD1 to AD2
AD2 to AD1.
point A to point B.
point B to point A.
Figure 13-1
Ceteris paribus, a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from
AD1 to AD2
AD2 to AD1.
point A to point B.
point B to point A.
The level of aggregate supply in the long run is not affected by
Correct!
changes in the price level.
changes in the number of workers.
changes in technology.
changes in the capital stock.
Potential GDP refers to the level of
nominal GDP in the short run.
nominal GDP in the long run.
real GDP in the long run.
real GDP in the short run.
The long-run aggregate supply curve
is vertical.
is horizontal.
has a steep but positive slope.
has a negative slope.
What is potential GDP?
It is the difference between current GDP and maximum GDP.
It is the level of real GDP in the short run.
It is the level of real GDP in the long run.
It is the level of GDP at which inflation is constant.
On the long-run aggregate supply curve,
a decrease in the price level decreases the aggregate quantity of GDP supplied.
a decrease in the price level decreases the level of potential GDP.
a decrease in the price level increases the aggregate quantity of GDP supplied.
a decrease in the price level has no effect on the aggregate quantity of GDP supplied.
The long-run aggregate supply curve will shift to the right if
the economy experiences high levels of inflation.
the economy experiences technological change
there is a decrease in population.
net exports decrease.
Which aggregate supply curve has a positive slope?
both long run and short run
neither long run nor short run
long run only
short run only
The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly.
positive; final goods and services; inputs
infinite; final goods and services; inputs
infinite; inputs; final goods and services
positive; inputs; final goods and services
Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should
shift the short-run aggregate supply curve to the right.
shift the short-run aggregate supply curve to the left.
move the economy up along a stationary short-run aggregate supply curve.
move the economy down along a stationary short-run aggregate supply curve.
If full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?
It is a vertical line at a level of GDP below $4.2 trillion.
It is a vertical line at a level of GDP above $4.2 trillion.
It is a vertical line at $4.2 trillion of GDP.
It is a horizontal line at $4.2 trillion of GDP.
Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result,
the purchasing power of wages will rise if wages increase by 2.5%.
aggregate demand will increase by 2.5%.
workers will be willing to take lower wages next year, but not lower than a 2.5 percent decrease.
the short-run aggregate supply curve will shift to the left as wages increase.
Figure 13-2
Refer to Figure 13-2. Ceteris paribus, an increase in the labor force would be represented by a movement from
SRAS1 to SRAS2.
SRAS2 to SRAS1.
point A to point B.
point B to point A.
Figure 13-2
Refer to Figure 13-2. Ceteris paribus, a decrease in the capital stock would be represented by a movement from
SRAS1 to SRAS2.
SRAS2 to SRAS1
point A to point B.
point B to point A.
Figure 13-2
Refer to Figure 13-2. Ceteris paribus, an increase in productivity would be represented by a movement from
SRAS1 to SRAS2.
SRAS2 to SRAS1.
point A to point B.
point B to point A
Figure 13-2
Refer to Figure 13-2. Ceteris paribus, an increase in the price level would be represented by a movement from
SRAS1 to SRAS2.
SRAS2 to SRAS1.
point A to point B.
point B to point A
Figure 13-2
Refer to Figure 13-2. Ceteris paribus, an increase in the price level would be represented by a movement from
SRAS1 to SRAS2.
SRAS2 to SRAS1.
point A to point B.
point B to point A
Figure 13-2
Refer to Figure 13-2. Ceteris paribus, an increase in the expected future price level would be represented by a movement from
SRAS1 to SRAS2.
SRAS2 to SRAS1.
point A to point B.
point B to point A
Long-run macroeconomic equilibrium occurs when
output is above potential GDP.
aggregate demand equals short-run aggregate supply.
structural and frictional unemployment equals zero.
aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run aggregate supply curve.
Suppose there has been an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.
decrease; decrease further
increase; decrease to its initial value
decrease; increase to its initial level
increase; increase further
An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.
real GDP; the price level
the price level; real GDP
real GDP; real GDP
the price level; the price level
Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?
Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall.
Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise.
If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium,
GDP will be above potential GDP.
aggregate demand will increase.
GDP will be equal to potential GDP.
GDP will be below potential GDP.
Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.
Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.
Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
Figure 13-3
Refer to Figure 13-3. Which of the points in the above graph are possible long-run equilibria?
A and D
B and D
A and B
A and C
Figure 13-3
Refer to Figure 13-3. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP.
C and D
A and C
A and B
B and D
Figure 13-3
Refer to Figure 13-3. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?
A
B
C
D
Figure 13-3
Refer to Figure 13-3. Suppose the economy is at point A. If the economy experiences a supply shock, where will the eventual short-run equilibrium be?
A
B
C
D
Figure 13-3
Refer to Figure 13-3. Which of the points in the above graph are possible short-run equilibria?
A and C
A and D
A and B
A,B,C, and D
A negative supply shock in the short run causes
equilibrium real GDP to rise.
the price level to fall.
the aggregate supply curve to shift to the left.
unemployment to fall.
Which of the following is considered a negative supply shock?
an unexpected decrease in the refining capacity for oil
increasing immigration in the economy causes the labor supply to rise
an improvement in technology
an increase in unemployment
The long-run adjustment to a negative supply shock results in
the price level rising.
unemployment rising.
workers being willing to accept higher wages.
the short-run aggregate supply curve shifting to the right.
After an unexpected ________ in the price of oil, the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.
Correct!
increase; decreases
decrease; decreases
increase; increases
decrease; increases
Stagflation occurs when
inflation rises and GDP falls.
inflation rises and GDP rises.
inflation falls and GDP rises.
inflation falls and GDP falls.
A decrease in aggregate demand results in a(n) ________ in the ________.
expansion; long run
recession; short run
recession; long run
expansion; short run
Short-run macroeconomic equilibrium occurs when
structural and frictional unemployment equal zero
the equilibrium lies on the long-run aggregate supply curve.
aggregate demand and short-run aggregate supply intersect.
A and B
Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand?
Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.
Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.
Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
Ceteris paribus, in the long run, a negative supply shock causes
unemployment to fall below its short-run level.
the long-run aggregate supply curve to shift to the left.
equilibrium real GDP to fall.
the price level to rise initially, and then return to its lower level.
Monetary policy refers to the actions the
President and Congress take to manage the money supply and interest rates to pursue their economic objectives.
President and Congress take to manage government spending and taxes to pursue their economic objectives.
Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.
Federal Reserve takes to manage government spending and taxes to pursue its economic objectives.
The Federal Reserve System's four monetary policy goals are
price stability, high employment, economic growth, and stability of financial markets and institutions.
low government budget deficits, low current account deficits, high employment, and a high foreign exchange value of the dollar.
price stability, low government budget deficits, low current account deficits, and a low rate of bank failures.
a low rate of bank failures, high reserve ratios, price stability, and economic growth.
When the Federal Reserve System was established in 1913, its main policy goal was
preventing bank panics.
promoting price stability.
keeping employment high.
encouraging strong economic growth.
The money demand curve has a
positive slope because an increase in the price level increases the quantity of money demanded.
negative slope because an increase in the price level decreases the quantity of money demanded.
negative slope because an increase in the interest rate decreases the quantity of money demanded.
positive slope because an increase in the interest rate increases the quantity of money demanded.
An increase in the interest rate
decreases the percentage yield of holding money.
decreases the opportunity cost of holding money.
increases the percentage yield of holding money.
increases the opportunity cost of holding money.
An increase in the price level causes
a movement down along the money demand curve.
a movement up along the money demand curve.
the money demand curve to shift to the left.
the money demand curve to shift to the right.
Which of the following would cause the money demand curve to shift to the left?
an increase in the interest rate
a decrease in real GDP
an open market purchase of Treasury securities by the Federal Reserve
an increase in the price level
Figure 15-1
Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if
the price level decreased.
the Federal Reserve sold Treasury securities.
the interest rate increased.
real GDP increased.
Figure 15-1
Refer to Figure 15-1. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if
the interest rate decreased.
the price level increased.
the Federal Reserve sold Treasury securities.
real GDP decreased.
Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
increase if the economy is in a recession.
increase.
decrease.
not change.
Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should
not change.
increase, then decrease.
decrease.
increase.
When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have
the amount of money that they want to hold.
more money than they want to hold.
to sell Treasury bills.
less money than they want to hold.
When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to
hold less money.
buy Treasury bills.
neither buy nor sell Treasury bills.
sell Treasury bills.
An increase in the demand for Treasury bills will
increase the opportunity cost of holding money vs. Treasury bills.
eventually cause households to hold less money.
decrease the price of Treasury bills.
decrease the interest rate on Treasury bills.
Figure 15-2
Refer to Figure 15-2. In the figure above, the movement from point A to point B in the money market would be caused by
an increase in the price level.
a decrease in the required reserve ratio by the Federal Reserve.
a decrease in real GDP
an open market sale of Treasury securities by the Federal Reserve.
Figure 15-3
Refer to Figure 15-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will
neither buy nor sell Treasury bills.
sell Treasury bills.
want to hold more money.
buy Treasury bills.
For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the
Treasury bill rate.
discount rate.
federal funds rate.
prime rate.
The interest rate that banks charge other banks for overnight loans is the
Treasury bill rate.
discount rate.
prime rate
federal funds rate.
The Fed can increase the federal funds rate by
selling Treasury bills, which increases bank reserves.
selling Treasury bills, which decreases bank reserves.
buying Treasury bills, which decreases bank reserves.
buying Treasury bills, which increases bank reserves.
The Fed's two main monetary policy targets are
the money supply and the interest rate.
the interest rate and real GDP.
the inflation rate and real GDP.
the money supply and the inflation rate.
An increase in the money supply will
decrease the equilibrium quantity of money in the economy.
decrease the interest rate.
increase the interest rate.
have no affect on the interest rate.
Figure 15-5
Refer to Figure 15-5. In the figure above, the movement from point A to point B in the money market would be caused by
an open market sale of Treasury securities by the Federal Reserve.
an increase in the price level.
a decrease in real GDP.
an increase in the required reserve ratio by the Federal Reserve.
The money market model is concerned with ________ and the loanable funds market model is concerned with ________.
short-term real interest rates; long-term real interest rates
short-term nominal interest rates; long-term real interest rates
short-term nominal interest rates; long-term nominal interest rates
short-term real interest rates; long-term nominal interest rates
The federal funds rate is
the interest rate the Fed charges commercial banks.
the interest rate a bank charges its best customers.
the interest rate on a Treasury Bill.
the interest rate banks charge each other for overnight loans.
An increase in interest rates
decreases investment spending on machinery, equipment, and factories, and consumption spending on durable goods, but increases net exports.
increases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.
decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.
decreases investment spending on machinery, equipment, and factories, but increases consumption spending on durable goods and net exports.
An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________.
decrease; increase
decrease; decrease
increase; increase
increase; decrease
increase; not change
The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as
a zero-sum game.
a liquidity trap
The Taylor rule.
an interest rate panic.
With the federal funds rate near zero and the economy still struggling, In response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as
securities-bubble deflating.
contractionary monetary policy.
quantitative easing.
inflation targeting.
Expansionary monetary policy refers to the ________ to increase real GDP.
Federal Reserve's increasing the money supply and decreasing interest rates
government's increasing spending and lowering taxes
government's decreasing spending and raising taxes
Federal Reserve's decreasing the money supply and increasing interest rates
Figure 15-6
Refer to Figure 15-6. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to
lower interest rates
raise income taxes.
lower income taxes.
raise interest rates.
Figure 15-7
Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from
B to C.
C to D.
A to B.
A to E.
C to B.
Figure 15-7
Refer to Figure 15-7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from
C to B
A to E.
B to C.
A to B.
C to D.
Figure 15-7
Refer to Figure 15-7. Suppose the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from
A to B.
E to A.
C to B.
B to A.
C to D.
Figure 15-7
Refer to Figure 15-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from
A to B.
B to D.
C to D.
C to B.
B to C.
Figure 15-7
Refer to Figure 15-7. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from
C to D.
A to E.
B to A.
A to B.
C to B.
Which of the following describes what the Fed would do to pursue an expansionary monetary policy?
raise the reserve requirement
use open market operations to buy Treasury bills
use discount policy to raise the discount rate
use open market operations to sell Treasury bills
Contractionary monetary policy on the part of the Fed results in
a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.
an increase in the money supply, a decrease in interest rates, and an increase in GDP.
an increase in the money supply, an increase in interest rates, and an increase in GDP.
a decrease in the money supply, an increase in interest rates, and a decrease in GDP.
When the Fed embarked on a policy known as quantitative easing, they
opened up lending to primary dealers, commercial banks, and investment banks.
bought longer-term securities than are usually bought in open market operations.
slowly lowered the federal funds rate target until it was equal to zero.
reduced the required reserve ratio by one-quarter point per month for 12 months.
Figure 15-8
Refer to Figure 15-8. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to
lower interest rates.
lower income taxes.
raise interest rates.
raise income taxes.
Figure 15-9
Refer to Figure 15-9. In the figure above suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
an open market purchase of Treasury bills
an increase in the required reserve ratio
a decrease in income taxes
an open market sale of Treasury bills
Figure 15-10
Refer to Figure 15-10. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
Correct!
an open market sale of Treasury bills
an open market purchase of Treasury bills
an increase in income taxes
a decrease in the required reserve ratio
If the Fed raises its target for the federal fund rate, this indicates that
the Fed is pursuing an expansionary monetary policy.
the Fed is attempting to combat deflation.
The Fed is concerned that the growth in aggregate demand is too slow to keep up with potential GDP.
the Fed is pursuing a contractionary monetary policy.
Fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
federal taxes and purchases that are intended to fund the war on terrorism.
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle.
the money supply and interest rates that automatically increase or decrease along with the business cycle.
changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
discretionary monetary policy.
discretionary fiscal policy.
automatic stabilizers.
automatic monetary policy.
Which of the following is an example of discretionary fiscal policy?
the tax cuts passed by Congress in 2001 to combat the recession
an increase in unemployment insurance payments during a recession
a decrease in food stamps issued during an expansion or boom
an increase in income tax receipts with rising income during an expansion
Fiscal policy is determined by
the Federal Reserve.
Congress and the president.
Congress and the Federal Reserve.
the president and the Federal Reserve.
An increase in government purchases will increase aggregate demand because
consumption expenditures are a component of aggregate demand.
the decline in the interest rate will increase demand.
government expenditures are a component of aggregate demand.
the decline in the price level will increase demand.
Expansionary fiscal policy involves
increasing the money supply and decreasing interest rates.
decreasing the money supply and increasing interest rates.
increasing government purchases or decreasing taxes.
increasing taxes or decreasing government purchases.
Figure 16-1
Refer to Figure 16-1. An increase in taxes would be depicted as a movement from ________, using the static AD-AS model in the figure above.
Correct!
B to A
E to B
B to C
C to D
A to B
Figure 16-1
Refer to Figure 16-1. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to E.
B to C
B to A
C to B.
A to B.
Figure 16-1
Refer to Figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from
B to A.
B to C.
A to E.
C to B.
A to B.
Figure 16-1
Refer to Figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to B
B to A.
A to E.
C to B.
B to C.
Figure 16-1
Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from
B to A.
A to E.
D to C.
E to A.
C to B.
Figure 16-1
Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from
E to A.
A to E.
D to C.
C to B.
C to D.
An increase in individual income taxes ________ disposable income, which ________ consumption spending.
decreases; increases
increases; increases
decreases; decreases
increases; decreases
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
higher; higher
lower; lower
lower; higher
higher; lower
Figure 16-2
Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to
sell government securities.
increase government expenditures.
decrease transfer payments.
decrease the required reserve ratio.
Figure 16-3
Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?
an increase in the money supply
a decrease in income taxes
a decrease in interest rates
a decrease in government purchases
Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.
aggregate demand
consumption
expenditure
multiplier
The aggregate demand curve will shift to the right ________ the initial increase in government purchases.
by more than
by less than
sometimes by more than and other times by less than
by the same amount as
Figure 16-11
Refer to Figure 16-11. In the graph above, the shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion.
would be greater than
would be equal to
would be less than
may be greater than or less than
The government purchases multiplier equals the change in ________ divided by the change in ________.
government purchases; equilibrium real GDP
government purchases; consumption spending
equilibrium real GDP; government purchases
consumption spending; government purchases
The tax multiplier equals the change in ________ divided by the change in ________.
taxes; equilibrium real GDP
equilibrium real GDP; taxes
taxes; consumption spending
consumption spending; taxes
If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)
a $300 billion increase in GDP
a $300 billion decrease in GDP
a $133.33 billion decrease in GDP
a $30 billion increase in GDP
a $133.33 billion increase in GDP
Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?
a decrease of more than $80 billion
an increase of greater than $80 billion
a decrease of less than $80 billion
an increase of less than $80 billion
an increase equal to $80 billion
The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the
decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods.
increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods.
decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods.
increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods.
Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?
Real equilibrium GDP will rise.
There will be no change in real equilibrium GDP.
Real equilibrium GDP will fall.
Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value.
The tax multiplier
is a measure of how much taxes will fall when income is falling.
is negative.
is larger in absolute value as compared to the government spending multiplier.
is always less than one.
If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP.
$500 billion
$7.25 trillion
$250 billion
$1 trillion
If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP.
None of the above are correct. Taxes should be increased in this case.
$250 billion
$640 billion
$400 billion
The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because
the Federal Reserve can immediately recognize when real GDP is below or above potential GDP.
changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time.
changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes.
the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.
Crowding out refers to a decline in ________ as a result of an increase in ________.
tax revenues; unemployment
private expenditures; government purchases
government purchases; tax rates
government purchases; private expenditures
Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.
partial crowding out; partial crowding out
complete crowding out; complete crowding out
partial crowding out; complete crowding out
complete crowding out; partial crowding out
A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
decrease; fall; rises
decrease; rise; falls
increase; rise; falls
increase; fall; rises
The federal government debt equals
the accumulation of past budget deficits.
the total value of U.S. Treasury bonds outstanding.
tax revenues minus government spending.
government spending minus tax revenues.
The tax wedge is the difference between the
pretax and posttax returns to an economic activity.
nominal and real interest rates.
amount of taxes needed to balance the federal budget and the actual amount of taxes.
amount of taxes needed to pay off the national debt and the actual amount of taxes.
Economists who believe the supply-side effects of tax cuts are small essentially believe that
tax cuts will result in relatively small changes in the price level.
tax cuts mainly affect aggregate demand.
tax cuts will increase the quantity of labor supplied.
tax cuts mainly affect aggregate supply.
