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Which of the following can commercial banks count as legal reserves?

Vault cash and deposits of the bank with the Fed.

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

Buy U.S. securities

The immediate effect of a member bank's sale of U.S. government securities to the Fed is...

an increase in that bank's excess reserves.

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?

sell some of its holdings of government bonds.

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.

Which of the following will cause the U.S. money supply to expand?

A commercial bank uses excess reserves to extend a loan to a customer.

Which of the following is the primary tool the Fed uses to control the supply of money?

Open market operations

If people decide to hold less money as currency and more as checking deposits, this will most likely cause a(n)

increase in the money supply.

Other things constant, a reduction in the real interest rate will

induce businesses to increase their level of investment.

When an economy is in a recession

the unemployment rate will rise above its natural rate.

If an economy was initially in long-run equilibrium, an unanticipated increase in aggregate demand will tend to cause

a temporarily high level of output and employment that cannot be maintained.

When output is greater than the economy's long-run capacity, which of the following is most likely to occur?

increases in real interest rates and real resource prices

If an unanticipated reduction in aggregate demand throws a market economy into a recession,

lower real resource prices and interest rates will act as a stabilizing force and direct the economy back to its full employment potential.

Which of the following will most likely increase long-run aggregate supply?

an increase in the rate of investment.

If an economy operates at a short-run equilibrium output that exceeds its long-run capacity, which of the following will be most likely to direct the economy toward full employment?

Resource prices will increase, causing the SRAS curve to shift to the left.

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 occur as the result of an unanticipated increase in aggregate demand that pushes output beuond long-run capacity?

an increase in the real interest rate.

Which of the following is a major deficiency of fiscal policy as a stabilization tool?

Both political and economic factors make it unlikely that changes in fiscal policy will be timed correctly.

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?

A decrease in tax rates

If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keyneseian model indicates that the likely effect will be to

continue inflationary pressures

Keynesian analysis stresses that a tax cut that increases the governments budget deficit (or reduces its budget surplus)

will stimulate aggregate demand and, therby, promote employment.

Crowding out refers to the situation in which

borrowing by the federal government raises interest rates and causes firms to invest less.

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

the higher taxes cause workers to work less

Which of the following is a correct conclusion regarding the use of coutercyclical fiscal policy?

Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited.

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.

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