The primary source of earnings of commercial banks is income derived from
the use of deposits to extend loans and undertake investments.
When the actual reserves held by a bank exceed the legal requirement, the bank
has excess reserves, which can be used to extend additional loans
The legal requirement that commercial banks hold reserves equal to some fraction of their deposits
limits the ability of banks to expand the money supply by extending additional loans.
Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?
the reserve requirements mandated by the Fed
If the public decides to hold more currency and fewer deposits in banks, bank reserves
decrease and the money supply eventually decreases.
Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will
increase and the money supply will eventually increase
When the Fed sells Treasury Bonds on the open market, it will tend to
decrease the money supply and raise interest rates
Ordinary commercial banks can expand the supply of money by
using a portion of their deposits to extend additional loans.
If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
continue inflationary pressures.
If the government cuts the tax rate, workers get to keep
more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)
will stimulate aggregate demand and, thereby, promote employment
If the economy is experiencing less than full-employment, the Keynesian model recommends that the government
undertake expansionary fiscal policy to stimulate aggregate demand.
Which of the following best describes the crowding-out effect?
An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.
If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should
decrease government spending and/or raise taxes.
The crowding-out effect suggests that
budget deficits that lead to higher interest rates reduce private investment spending
If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
worsen and prolong the recession.
When the economy is operating at an output beyond its full-employment potential, the
strong demand for resources will place upward pressure on resource prices.
Which of the following will most likely accompany an unanticipated reduction in aggregate demand?
an increase in unemployment
Which of the following would cause prices and real GDP to rise in the short run?
Aggregate demand shifts right
If the U.S. price level increased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?
the aggregate demand curve would shift inward and the aggregate supply curve would remain unchanged
Which of the following will most likely increase long-run aggregate supply?
an increase in the rate of investment
If an unanticipated increase in aggregate demand results in an output beyond the economy's long-run capacity, long-run equilibrium will eventually be restored by
higher resource prices, a decrease in SRAS, and an increase in the general level of prices
Which of the following would cause prices to fall and output to rise in the short run?
Short-run aggregate supply shifts right.
If the U.S. price level decreased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?
the aggregate demand curve would shift outward and the aggregate supply curve would remain unchanged
Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?
Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.