Economics

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Macroeconomics

1. Refer to the above diagrams. Other things equal, curve B will shift upward when:
A. the level of GDP increases.
B. the interest rate increases.
C. curve A shifts to the left.
D. curve A shifts to the right.

D. curve A shifts to the right.

2. Refer to the above diagrams. Other things equal, an interest rate decrease will:
A. shift curve A to the right and shift curve B upward.
B. shift curve A to the left and shift curve B downward.
C. leave curve A in place but shift curve B downward.
D. leave curve A in place but shift curve B upward.

D. leave curve A in place but shift curve B upward.

3. In the data above for a private closed economy, if gross investment is $12 billion, equilibrium GDP is:
A. $380.
B. $370.
C. $360.
D. $350.

C. $360.

4. In the above diagram for a private closed economy, at the equilibrium level of GDP, investment and saving are both:
A. $50.
B. $100.
C. $20.
D. $40.

A. $50.

5. For a private closed economy, an unintended decline in inventories suggests that:
A. aggregate expenditures are less than the business sector expected them to be.
B. aggregate expenditures exceed production.
C. actual investment exceeds saving.
D. planned investment is greater than consumption.

B. aggregate expenditures exceed production.

6. In the above diagram for a private closed economy, equilibrium GDP is:
A. $60 billion.
B. $180 billion.
C. between $60 and $180 billion.
D. $60 billion at all levels of GDP.

B. $180 billion.

7. In the above diagram for a private closed economy, investment:
A. decreases as GDP increases.
B. increases as GDP increases.
C. is $40 billion at all levels of GDP.
D. is $60 billion at all levels of GDP.

C. is $40 billion at all levels of GDP.

8. The equilibrium level of income (Y) is:
A. 360.
B. 225.
C. 200.
D. 135.

B. 225.

9. In equilibrium the level of consumption spending will be:
A. 170.
B. 270.
C. 160.
D. 195.

D. 195.

10. In the aggregate expenditures model, technological progress will shift the investment schedule:
A. downward and increase aggregate expenditures.
B. downward and decrease aggregate expenditures.
C. upward and increase aggregate expenditures.
D. upward and decrease aggregate expenditures.

C. upward and increase aggregate expenditures.

11. In the above diagram for a private closed economy, the upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects:
A. an increase in investment expenditures.
B. a decrease in consumption expenditures.
C. an increase in the MPC.
D. an increase in the APS.

A. an increase in investment expenditures.

12. In the above diagram for a private closed economy, the multiplier is:
A. GF/DE.
B. GF/GB.
C. FE/GF.
D. AB/GF.

D. AB/GF.

13. For the open economy shown above the equilibrium GDP and the multiplier are:
A. $300 and 2.5.
B. $450 and 5.
C. $400 and 4.
D. $400 and 5.

D. $400 and 5.

14. An upward shift of the aggregate expenditures schedule might be caused by:
A. a decrease in exports, with no change in imports.
B. a decrease in imports, with no change in exports.
C. an increase in exports, with an equal decrease in investment spending.
D. an increase in imports, with no change in exports.

B. a decrease in imports, with no change in exports.

15. Other things equal, serious recession in the economies of U.S. trading partners will:
A. have no perceptible impact on the U.S. economy.
B. cause inflation in the U.S. economy.
C. depress real output and employment in the U.S. economy.
D. stimulate real output and employment in the U.S. economy.

C. depress real output and employment in the U.S. economy.

16. Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by:
A. $100 billion.
B. $90 billion.
C. $40 billion.
D. $50 billion.

C. $40 billion.

17. If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause:
A. a rightward shift in the investment demand schedule.
B. an $8 billion downshift in the consumption schedule.
C. a $4 billion upshift in the consumption schedule.
D. a $12 billion downshift in the consumption schedule.

B. an $8 billion downshift in the consumption schedule.

18. The equilibrium level of GDP for this economy is:
A. $600.
B. $530.
C. $415.
D. $400.

B. $530.

19. The multiplier for this economy is:
A. 4.
B. 3.
C. 2.
D. 2.33.

A. 4.

20. If government desired to raise the equilibrium GDP to $650, it could:
A. raise G by $45 and reduce T by $10.
B. raise G by $40 and reduce T by $30.
C. raise G by $30 or reduce T by $40.
D. raise both G and T by $40.

C. raise G by $30 or reduce T by $40.

21. A recessionary expenditure gap is:
A. the amount by which the full-employment GDP exceeds the level of aggregate expenditures.
B. the amount by which equilibrium GDP falls short of the full-employment GDP.
C. the amount by which investment exceeds saving at the full-employment GDP.
D. the amount by which aggregate expenditures exceed the full-employment level of GDP.

B. the amount by which equilibrium GDP falls short of the full-employment GDP.

22. In the above table, the after-tax MPC in the economy shown is:
A. .5.
B. .67.
C. .75.
D. .8.

B. .67.

23. In the above table, equilibrium GDP is:
A. $40.
B. $70.
C. $100.
D. $130.

B. $70.

24. In the above table, if the full-employment real GDP is $100 the:
A. inflationary expenditure gap is $30.
B. inflationary expenditure gap is $10.
C. recessionary expenditure gap is $30.
D. recessionary expenditure gap is $10.

D. recessionary expenditure gap is $10.

25. In the above table, an increase in net exports of $10 would:
A. increase real GDP by $10.
B. increase real GDP by $30.
C. decrease real GDP by $10.
D. decrease real GDP by $30.

B. increase real GDP by $30.

26. In the above diagram, if the full-employment level of GDP is B and aggregate expenditures are at AE1, the:
A. inflationary expenditure gap is BC.
B. recessionary expenditure gap is BC.
C. inflationary expenditure gap is zero.
D. inflationary expenditure gap is ei.

D. inflationary expenditure gap is ei.

27. In the above diagram, the value of the multiplier for this economy is:
A. BC/hg.
B. BC/AB.
C. ed/di.
D. df/BC.

A. BC/hg.

28. The recessionary expenditure gap associated with the recession of 2007-2009 resulted from:
A. the government's attempt to control hyperinflation.
B. a major increase in personal and corporate taxes.
C. a rapid decline in investment spending.
D. a rapid increase in imports resulting from large tariff reductions.

C. a rapid decline in investment spending.

29. In The General Theory of Employment, Interest, and Money:
A. Adam Smith stated his idea of the invisible hand.
B. Thorstein Veblen poked fun at the leisure class.
C. John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.
D. J. B. Say developed "Say's law."

C. John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.

1. The aggregate demand curve is:
A. vertical under conditions of full employment.
B. horizontal when there is considerable unemployment in the economy.
C. downsloping because of the interest-rate, real-balances, and foreign purchases effects.
D. downsloping because production costs decrease as real output rises.

C. downsloping because of the interest-rate, real-balances, and foreign purchases effects.

2. Which of the following is incorrect?
A. As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise.
B. As the price level falls, the demand for money declines, the interest rate declines, and interest-rate sensitive spending increases.
C. When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending.
D. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level.

C. When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending.

3. If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:
A. leftward by $50 billion at each price level.
B. rightward by $10 billion at each price level.
C. rightward by $50 billion at each price level.
D. leftward by $40 billion at each price level.

C. rightward by $50 billion at each price level.

4. In the above diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines:
A. 4 and 3.
B. 4 and 1.
C. 2 and 4.
D. 2 and 3.

A. 4 and 3.

5. The aggregate supply curve (short-run) is upsloping because:
A. wages and other resource prices match changes in the price level.
B. the price level is flexible upward but inflexible downward.
C. per-unit production costs rise as the economy moves toward and beyond its full-employment real output.
D. wages and other resource prices are flexible upward but inflexible downward.

C. per-unit production costs rise as the economy moves toward and beyond its full-employment real output.

6. In the above diagram, a shift from AS3 to AS2 might be caused by an increase in:
A. business taxes and government regulation.
B. the prices of imported resources.
C. the prices of domestic resources.
D. productivity.

D. productivity.

7. In the above diagram, a shift from AS2 to AS3 might be caused by a (n):
A. decrease in interest rates.
B. increase in business taxes and costly government regulation.
C. decrease in the prices of domestic resources.
D. decrease in the price level.

B. increase in business taxes and costly government regulation.

8. The determinants of aggregate supply:
A. are consumption, investment, government, and net export spending.
B. explain why real domestic output and the price level are directly related.
C. explain the three distinct ranges of the aggregate supply curve.
D. include resource prices and resource productivity.

D. include resource prices and resource productivity.

9. Other things equal, an improvement in productivity will:
A. increase the equilibrium price level.
B. shift the aggregate supply curve to the left.
C. shift the aggregate supply curve to the right.
D. shift the aggregate demand curve to the left.

C. shift the aggregate supply curve to the right.

10. The short-run aggregate supply curve represents circumstances where:
A. both input and output prices are fixed.
B. both input and output prices are flexible.
C. input prices are fixed, but output prices are flexible.
D. input prices are flexible, but output prices are fixed.

C. input prices are fixed, but output prices are flexible.

11. The equilibrium price level is:
A. 150.
B. 200.
C. 250.
D. 300.

B. 200.

12. If the price level is 250 and producers supply $450 of real output:
A. a shortage of real output of $150 will occur.
B. a shortage of real output of $100 will occur.
C. a surplus of real output of $150 will occur.
D. neither a shortage nor a surplus of real output will occur.

C. a surplus of real output of $150 will occur.

13. If the amount of real output demanded at each price level falls by $200, this might have been caused by:
A. an increase in net exports.
B. a worsening of business expectations.
C. an increase in consumer wealth.
D. a decrease in the personal income tax.

B. a worsening of business expectations.

14. Graphically, demand-pull inflation is shown as a:
A. rightward shift of the AD curve along an upsloping AS curve.
B. leftward shift of the AS curve along a downsloping AD curve.
C. leftward shift of AS curve along an upsloping AD curve.
D. rightward shift of the AD curve along a downsloping AS curve.

A. rightward shift of the AD curve along an upsloping AS curve.

15. If aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, it is most likely that:
A. the money supply has declined.
B. the price level is inflexible downward and a recession has occurred.
C. cost-push inflation has occurred.
D. productivity has declined.

B. the price level is inflexible downward and a recession has occurred.

16. A decrease in aggregate demand will cause a greater decline in real output the:
A. less flexible is the economy's price level.
B. more flexible is the economy's price level.
C. steeper is the economy's AS curve.
D. larger is the economy's marginal propensity to save.

A. less flexible is the economy's price level.

17. In the above diagram, if the aggregate supply curve shifted from AS0 to AS1, and the aggregate demand curve remains at AD0 we could say that:
A. aggregate supply has increased, equilibrium output has decreased, and the price level has increased.
B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.
C. an increase in the amount of output supplied has occurred.
D. aggregate supply has increased and the price level has risen to G.

B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.

18. In the above diagram, if aggregate supply is AS1 and aggregate demand is AD0, then:
A. at any price level above G a shortage of real output would occur.
B. F represents a price level that would result in a surplus of real output of AC.
C. a surplus of real output of GH would occur.
D. F represents a price level that would result in a shortage of real output of AC.

D. F represents a price level that would result in a shortage of real output of AC.

19. In the above diagram, a shift of the aggregate demand curve from AD1 to AD0 might be caused by a(n):
A. decrease in aggregate supply.
B. decrease in the amount of output supplied.
C. increase in investment spending.
D. decrease in net export spending.

C. increase in investment spending.

20. In the above diagram and other things equal, a shift of the aggregate supply curve from AS0 to AS1 might be caused by a(n):
A. increase in government regulation.
B. increase in aggregate demand.
C. increase in productivity.
D. decline in nominal wages.

A. increase in government regulation.

21. If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium:
A. output would necessarily rise.
B. output would necessarily fall.
C. price level would necessarily fall.
D. price level would necessarily rise.

A. output would necessarily rise.

22. In which of the following sets of circumstances can we confidently expect inflation?
A. aggregate supply and aggregate demand both increase
B. aggregate supply and aggregate demand both decrease
C. aggregate supply decreases and aggregate demand increases
D. aggregate supply increases and aggregate demand decreases

C. aggregate supply decreases and aggregate demand increases

23. When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may:
A. reduce per unit production costs.
B. reduce worker morale and work effort, and thus lower productivity.
C. increase the firms' cost of raising financial capital.
D. reduce the demands for their products.

B. reduce worker morale and work effort, and thus lower productivity.

24. When aggregate demand declines, the price level may remain constant, at least for a time, because:
A. firms individually may fear that their price cut may set off a price war.
B. menu costs rise.
C. price cuts tend to increase efficiency wages.
D. product markets are highly competitive.

A. firms individually may fear that their price cut may set off a price war.

25. (Last Word) In recent years:
A. significant changes in the price of oil have had much less effect on the U.S. economy than did similar changes in oil prices in previous decades.
B. large increases in the price of oil have reduced U.S. aggregate supply and caused significant cost-push inflation.
C. large decreases in the price of oil have increased U.S. aggregate supply and caused deflation.
D. the United States has become a net exporter of oil.

A. significant changes in the price of oil have had much less effect on the U.S. economy than did similar changes in oil prices in previous decades.

1. Countercyclical discretionary fiscal policy calls for:
A. surpluses during recessions and deficits during periods of demand-pull inflation.
B. deficits during recessions and surpluses during periods of demand-pull inflation.
C. surpluses during both recessions and periods of demand-pull inflation.
D. deficits during both recessions and periods of demand-pull inflation.

B. deficits during recessions and surpluses during periods of demand-pull inflation.

2. An economist who favors smaller government would recommend:
A. tax cuts during recession and reductions in government spending during inflation.
B. tax increases during recession and tax cuts during inflation.
C. tax cuts during recession and tax increases during inflation.
D. increases in government spending during recession and tax increases during inflation.

A. tax cuts during recession and reductions in government spending during inflation.

3. If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by:
A. reducing government expenditures by $12 billion.
B. reducing government expenditures by $60 billion.
C. increasing taxes by $15 billion.
D. increasing taxes by $20 billion.

D. increasing taxes by $20 billion.

4. Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?
A. A Congressional proposal to incur a Federal surplus to be used for the retirement of public debt.
B. Reductions in agricultural subsidies and veterans' benefits.
C. Postponement of a highway construction program.
D. Reductions in Federal tax rates on personal and corporate income.

D. Reductions in Federal tax rates on personal and corporate income.

5. Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to:
A. increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD2.
B. reduce taxes on businesses to shift the aggregate supply curve leftward.
C. reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.
D. do nothing since the economy appears to be achieving full-employment real GDP.

C. reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

6. Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to:
A. do nothing since the economy appears to be achieving full-employment real output.
B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.
C. increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level.
D. increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1.

B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.

7. Refer to the above diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with:
A. an expansionary fiscal policy.
B. a major recession.
C. a contractionary fiscal policy.
D. severe demand-pull inflation.

A. an expansionary fiscal policy.

8. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should:
A. increase government expenditures by $80 billion.
B. reduce government expenditures by $40 billion.
C. reduce taxes by $40 billion.
D. reduce taxes by $80 billion.

D. reduce taxes by $80 billion.

9. Refer to the above diagram. If the full-employment level of GDP is D, then it would be appropriate fiscal policy for government to:
A. decrease spending and increase taxes.
B. decrease spending and decrease taxes.
C. increase spending and increase taxes.
D. increase spending and decrease taxes.

D. increase spending and decrease taxes.

10. Refer to the above diagram. If the full-employment level of GDP is A, then it would be appropriate fiscal policy for government to:
A. decrease spending and increase taxes.
B. decrease spending and decrease taxes.
C. increase spending and increase taxes.
D. increase spending and decrease taxes.

A. decrease spending and increase taxes.

11. Built-in stability means that:
A. an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy.
B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
C. Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
D. government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.

B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.

12. Which of the following best describes the built-in stabilizers as they function in the United States?
A. The size of the multiplier varies inversely with the level of GDP.
B. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.
D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

13. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit:
A. at all levels of GDP.
B. at any level of GDP above $400.
C. at any level of GDP below $400.
D. only when GDP is stable.

C. at any level of GDP below $400.

14. If the economy has a cyclically-adjusted budget surplus, this means that:
A. the public sector is exerting an expansionary impact on the economy.
B. tax revenues would exceed government expenditures if full employment were achieved.
C. the actual budget is necessarily also in surplus.
D. the economy is actually operating at full employment.

B. tax revenues would exceed government expenditures if full employment were achieved.

15. Suppose the government purposely changes the economy's cyclically-adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n):
A. expansionary fiscal policy.
B. contractionary fiscal policy.
C. neutral fiscal policy.
D. low-interest rate policy.

A. expansionary fiscal policy.

16. The immediate primary cause of the swing from Federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was:
A. the tax cuts of 2001.
B. spending increases relating to the wars in Afghanistan and Iraq.
C. the recession of 2001.
D. the acceleration of inflation in 2001 and 2002.

C. the recession of 2001.

17. The American Recovery and Reinvestment Act of 2009:
A. created a $700 billion rescue package for financial institutions.
B. cut taxes by $152 billion, distributed primarily as rebate checks to taxpayers.
C. implemented a $787 billion package of tax cuts and government expenditure increases.
D. substantially lowered interest rates in an attempt to stimulate investment spending.

C. implemented a $787 billion package of tax cuts and government expenditure increases.

18. Which of the following best describes the idea of a political business cycle?
A. Politicians are more willing to cut taxes and increase government spending than they are to do the reverse.
B. Fiscal policy will result in alternating budget deficits and surpluses.
C. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
D. Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.

C. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

19. The crowding-out effect of expansionary fiscal policy suggests that:
A. tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
C. it is very difficult to have excessive aggregate spending in the U.S. economy.
D. consumer and investment spending always vary inversely.

B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

20. Which of the following fiscal policy actions is most likely to increase aggregate supply?
A. An increase in personal income tax rates.
B. A reduction in interest rates that encourages consumers to purchase more durable goods.
C. An increase in transfer payments to unemployed workers.
D. An increase in government spending on infrastructure that increases private sector productivity.

B. A reduction in interest rates that encourages consumers to purchase more durable goods.

21. Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:
A. increased by $90 billion.
B. increased by $20 billion.
C. decreased by $70 billion.
D. decreased by $20 billion.

B. increased by $20 billion.

22. If year 1 is the first year of this nation's existence and year 4 is the present year, the public debt as a percentage of GDP in year 4 is:
A. 7.5 percent.
B. 1.39 percent.
C. 2.5 percent.
D. 3.9 percent.

D. 3.9 percent.

23. The public debt declined in year:
A. 6.
B. 5.
C. 4.
D. 3.

A. 6.

24. Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions?
A. 56 percent
B. 71 percent
C. 43 percent
D. 29 percent

D. 29 percent

25. To say that "the U.S. public debt is mostly held internally" is to say that:
A. only interest payments on the public debt are an economic burden.
B. official figures understate the size of the public debt.
C. the bulk of the public debt is owned by U.S. citizens and institutions.
D. the public debt is equal to the land and buildings assets owned by the Federal government.

C. the bulk of the public debt is owned by U.S. citizens and institutions.

26. The most likely way the public debt burdens future generations, if at all, is by:
A. reducing the current level of investment.
B. causing future unemployment.
C. causing deflation.
D. reducing real interest rates.

A. reducing the current level of investment.

27. Which of the following is the best example of public investment?
A. salaries of Senators and Representatives
B. government expenditures on food stamps
C. construction of highways
D. funding of regulatory agencies

C. construction of highways

28. Which of the following would not help to relieve the Social Security and Medicare shortfalls?
A. Extending the Social Security tax to a higher level of earnings.
B. Restricting immigration of skilled working-age adults.
C. Increasing the retirement age for collecting Social Security and Medicare benefits.
D. Reducing Social Security and Medicare benefits for wealthier individuals.

**B. Restricting immigration of skilled working-age adults.

1. To say money is socially defined means that:
A. money has been defined in a Constitutional amendment.
B. whatever performs the functions of money extremely well is considered to be money.
C. the money supply includes all public and private securities purchased by society.
D. society, acting through Congress, specifies what shall be included in the money supply.

B. whatever performs the functions of money extremely well is considered to be money.

2. If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as:
A. a medium of exchange.
B. a store of value.
C. a unit of account.
D. an economic investment.

A. a medium of exchange.

3. When economists say that money serves as a unit of account, they mean that it is:
A. a way to keep wealth in a readily spendable form for future use.
B. a means of payment.
C. a monetary unit for measuring and comparing the relative values of goods.
D. declared as legal tender by the government.

C. a monetary unit for measuring and comparing the relative values of goods.

4. In the United States, the money supply (M1) is comprised of:
A. coins, paper currency, and checkable deposits.
B. currency, checkable deposits, and Series E bonds.
C. coins, paper currency, checkable deposits, and credit balances with brokers.
D. paper currency, coins, gold certificates, and time deposits.

A. coins, paper currency, and checkable deposits.

5. Checkable deposits are classified as money because:
A. they can be readily used in purchasing goods and paying debts.
B. banks hold currency equal to the value of their checkable deposits.
C. they are ultimately the obligations of the Treasury.
D. they earn interest income for the depositor.

A. they can be readily used in purchasing goods and paying debts.

6. Paper money (currency) in the United States is issued by the:
A. United States Mint.
B. Federal Reserve Banks.
C. United States Treasury.
D. national banks.

B. Federal Reserve Banks.

7. The difference between M1 and M2 is that:
A. the former includes time deposits.
B. the latter includes small-denominated time deposits, non-checkable savings accounts, money market deposit accounts, and money market mutual fund balances.
C. the latter includes negotiable government bonds.
D. the latter includes cash held by commercial banks and the U.S. Treasury.

B. the latter includes small-denominated time deposits, non-checkable savings accounts, money market deposit accounts, and money market mutual fund balances.

8. Refer to the above information. Money supply M1 for this economy is:
A. $60.
B. $70.
C. $130.
D. $140.

C. $130.

9. Refer to the above information. Money supply M2 for this economy is:
A. $480.
B. $130.
C. $490.
D. $630.

A. $480.

10. The money supply is backed:
A. by the government's ability to control the supply of money and therefore to keep its value relatively stable.
B. by government bonds.
C. dollar-for-dollar by gold and silver.
D. by gold reserves representing a fraction of the total value of dollars in circulation.

A. by the government's ability to control the supply of money and therefore to keep its value relatively stable.

11. Which of the following does not explain what backs the money supply in the United States?
A. It is backed by gold.
B. It is widely accepted in transactions.
C. It is designated "legal tender" by the Federal government.
D. It is relatively scarce.

A. It is backed by gold.

12. Suppose that the Federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?
A. The value of the "wheat dollar" would be unstable depending on crop yields from year to year.
B. Farmers would replace corn and soy crops with wheat.
C. Wheat would function as money so long as people accept it in exchange for goods and services.
D. All of these are possible outcomes.

D. All of these are possible outcomes.

13. If the price index rises from 100 to 120, the purchasing power value of the dollar:
A. may either rise or fall.
B. will rise by one-sixth.
C. will fall by one-sixth.
D. will rise by 20 percent.

C. will fall by one-sixth.

14. During periods of rapid inflation, money may cease to work as a medium of exchange:
A. unless it has been designated legal tender.
B. unless it is backed by gold.
C. because it is too scarce for everyone to have enough for transactions.
D. because people and businesses will not want to accept it in transactions.

D. because people and businesses will not want to accept it in transactions.D. because people and businesses will not want to accept it in transactions.

15. Other things equal, an excessive increase in the money supply will:
A. increase the purchasing power of each dollar.
B. decrease the purchasing power of each dollar.
C. have no impact on the purchasing power of the dollar.
D. reduce the price level.

B. decrease the purchasing power of each dollar.

16. The Federal Open Market Committee (FOMC) is comprised of:
A. the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks.
B. the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank.
C. the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers.
D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.

D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.

17. Which one of the following is true about the U.S. Federal Reserve System?
A. There are 12 regional Federal Reserve Banks.
B. The head of the U.S. Treasury also chairs the Federal Reserve Board.
C. There are 14 members of the Federal Reserve Board.
D. The Open Market Committee is smaller in size than the Federal Reserve Board.

A. There are 12 regional Federal Reserve Banks.

18. Which of the following statements best describes the twelve Federal Reserve Banks?
A. They are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities.
B. They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry.
C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.
D. They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners.

C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.

19. Research for industrially advanced countries indicates that:
A. the more independent the central bank, the lower the average annual rate of inflation.
B. the more independent the central bank, the higher the average annual rate of inflation.
C. there is no relationship between the degree of independence of a country's central bank and its inflation rate.
D. the more independent the central bank, the higher the average annual rate of unemployment.

A. the more independent the central bank, the lower the average annual rate of inflation.

20. "Subprime mortgage loans" refer to:
A. high-interest rate loans to home buyers with above average credit risk.
B. home-buying loans that charge interest rates below the prime interest rate.
C. loans to buyers of homes that are in need of substantial repair.
D. loans from the Federal Reserve to home mortgage lenders to support a greater volume of home-buying loans at affordable interest rates.

A. high-interest rate loans to home buyers with above average credit risk.

21. Banks lost money during the mortgage default crisis because:
A. of defaulted loans to investors in mortgage-backed securities.
B. they held mortgage-backed securities they had purchased from investment firms.
C. homebuyers defaulted on mortgages held by the banks.
D. of all of these reasons.

D. of all of these reasons.

22. Which of the following statements is true as a result of Federal Reserve efforts to rescue the financial industry from the financial crisis of 2007 and 2008?
A. From February 2008, to May 2009, the Fed oversaw the consolidation of 20 major financial institutions into fewer than a dozen.
B. From March 2008, to February 2009, the Fed experienced a 50 percent decline in the value of assets held.
C. From February 2008, to March 2009, Fed assets more than doubled to nearly $2 trillion.
D. From February 2008, to March 2009, Fed lending caused the U.S. public debt to rise by over $1 trillion.

C. From February 2008, to March 2009, Fed assets more than doubled to nearly $2 trillion.

23. The various lender-of-last-resort programs implemented by the Fed in response to the financial crisis of 2007 and 2008:
A. severely depleted the assets of the Federal Reserve.
B. have been little used, and therefore ineffective.
C. increased the moral hazard problem by limiting losses from bad financial decisions.
D. were designed to offset the moral hazard created by the TARP and other bailout programs.

C. increased the moral hazard problem by limiting losses from bad financial decisions.

24. TIAA-CREF, Teamsters' Union, and CalPERS, are all primarily:
A. commercial banks.
B. thrifts.
C. insurance companies.
D. pension funds.

D. pension funds.

25. Firms whose central business is providing individual account shares of collections of stocks, bonds, or both are known as:
A. insurance companies.
B. thrifts.
C. commercial banks.
D. mutual funds companies.

D. mutual funds companies.

26. Credit card balances are:
A. a component of M1.
B. a component of M2 but not of M1.
C. a component of M1 but not of M2.
D. not a component of M1 or M2.

D. not a component of M1 or M2.

1. When the receipts given by goldsmiths to depositors were used to make purchases:
A. the gold standard was created.
B. existing banking laws were violated.
C. the receipts became in effect paper money.
D. a fractional reserve banking system was created.

C. the receipts became in effect paper money.

2. A bank that has assets of $85 billion and a net worth of $10 billion must have:
A. liabilities of $75 billion.
B. excess reserves of $10 billion.
C. liabilities of $10 billion.
D. excess reserves of $75 billion.

A. liabilities of $75 billion.

3. The reserves of a commercial bank consist of:
A. the amount of money market funds it holds.
B. deposits at the Federal Reserve Bank and vault cash.
C. government securities that the bank holds.
D. the bank's net worth.

B. deposits at the Federal Reserve Bank and vault cash.

4. This commercial bank has excess reserves of:
A. $0.
B. $3,000.
C. $12,000.
D. $5,000.

D. $5,000.

5. This bank can safely expand its loans by a maximum of:
A. $7,000.
B. $25,000.
C. $12,000.
D. $5,000.

D. $5,000.

6. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit, and has a check cleared against it for that amount, its reserves and checkable deposits will now be:
A. $25,000 and $122,000 respectively.
B. $22,000 and $110,000 respectively.
C. $32,000 and $115,000 respectively.
D. $22,000 and $105,000 respectively.

B. $22,000 and $110,000 respectively.

7. If the original balance sheet was for the commercial banking system, rather than a single bank, loans and checkable deposits could have been expanded by a maximum of:
A. $8,000.
B. $15,000.
C. $48,000.
D. $25,000.

D. $25,000.

8. Commercial banks create money when they:
A. accept cash deposits from the public.
B. purchase government securities from the central banks.
C. create checkable deposits in exchange for IOUs.
D. raise their interest rates.

C. create checkable deposits in exchange for IOUs.

9. Which of the following is correct?
A. Both the granting and repaying of bank loans expand the aggregate money supply.
B. Granting and repaying bank loans do not affect the money supply.
C. Granting a bank loan destroys money; repaying a bank loan creates money.
D. Granting a bank loan creates money; repaying a bank loan destroys money.

D. Granting a bank loan creates money; repaying a bank loan destroys money.

10. Banks create money when they:
A. allow loans to mature.
B. accept deposits of cash.
C. buy government bonds from households.
D. sell government bonds to households.

C. buy government bonds from households.

11. In prosperous times commercial banks are likely to hold very small amounts of excess reserves because:
A. the Fed wants commercial banks to increase the money supply during economic expansions.
B. it is very costly to transfer funds between commercial banks and the central banks.
C. the Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves.
D. the Federal Reserve Banks want to minimize their interest payments on such deposits.

C. the Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves.

12. Which of the following would reduce the money supply?
A. Commercial banks use excess reserves to buy government bonds from the public.
B. Commercial banks loan out excess reserves.
C. Commercial banks sell government bonds to the public.
D. A check clears from Bank A to Bank B.

C. Commercial banks sell government bonds to the public.

13. The Federal funds market is the market in which:
A. banks borrow from the Federal Reserve Banks.
B. U.S. securities are bought and sold.
C. banks borrow reserves from one another on an overnight basis.
D. Federal Reserve Banks borrow from one another.

C. banks borrow reserves from one another on an overnight basis.

14. The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to:
A. the reciprocal of the required reserve ratio.
B. 1 minus the required reserve ratio.
C. the reciprocal of the income velocity of money.
D. 1/MPS.

A. the reciprocal of the required reserve ratio.

15. The commercial banking system has excess reserves of:
A. $0 billion.
B. $30 billion.
C. $60 billion.
D. $70 billion.

A. $0 billion.

16. After a deposit of $10 billion of new currency into a checking account in the banking system, excess reserves will increase by:
A. $0 billion.
B. $7 billion.
C. $9 billion.
D. $10 billion.

C. $9 billion.

17. After the deposit of $10 billion of new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is:
A. $9 billion.
B. $45 billion.
C. $36 billion.
D. $90 billion.

D. $90 billion.

18. When the legal reserve ratio is 30 percent, the monetary multiplier is:
A. 5.
B. 4.
C. 3.33.
D. 2.5.

C. 3.33.

19. If the legal reserve ratio falls from 25 percent to 10 percent, excess reserves of this single bank will:
A. rise by $6,000 and the monetary multiplier will increase from 4 to 10.
B. rise by $60,000 and the monetary multiplier will increase from 4 to 10.
C. fall by $6,000 and the monetary multiplier will decline from 30 to 10.
D. fall by $2,000 and the monetary multiplier will decline from 10 to 4.

A. rise by $6,000 and the monetary multiplier will increase from 4 to 10.

20. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1,000.
B. liabilities are $1,000.
C. net worth is zero.
D. profit is $1,000.

B. liabilities are $1,000.

21. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1,100.
B. liabilities are $1,100.
C. net worth is $300.
D. profit is $1,000.

A. assets are $1,100.

22. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1000.
B. liabilities are $300.
C. net worth is $100.
D. annual profit is $200.

C. net worth is $100.

23. Refer to the above information. If Moolah Bank is legally "loaned up," the reserve requirement must be:
A. 10 percent.
B. 15 percent.
C. 20 percent.
D. 25 percent.

A. 10 percent.

24. Refer to the above information. If Moolah Bank is legally "loaned up," the banking system's monetary multiplier must be:
A. 5.
B. 8.
C. 10.
D. 20.

C. 10.

25. Refer to the above information and assume that Moolah bank is "loaned up." If it receives a $100 deposit of currency, it could safely expand its loans by:
A. $100.
B. $90.
C. $900.
D. $1,000.

B. $90.

26. Refer to the above information and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by:
A. $100.
B. $90.
C. $900.
D. $1000.

C. $900.

27. Which of the following resulted from the financial crisis of 2007-2008?
A. A national bank holiday was declared that shut down banks for one week.
B. The Fed raised reserve requirements to keep cash from flowing out of banks.
C. The Fed raised interest rates to entice depositors to keep their money in banks.
D. FDIC insurance was increased from $100,000 to $250,000 per account.

D. FDIC insurance was increased from $100,000 to $250,000 per account.

28. Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics of 1930-1933?
A. banks are more cautious lenders
B. banks keep large amounts of excess reserves on hand
C. the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw money when individual banks have financial problems
D. the President now has the authority to close banks whenever panics occur

C. the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw money when individual banks have financial problems

1. The desire to hold money for transactions purposes arises because:
A. receipts of income and expenditures are not perfectly synchronized.
B. people fear that prices will rise.
C. households want money on hand in case a good financial investment opportunity arises.
D. low interest rates reduce the opportunity cost of holding money.

A. receipts of income and expenditures are not perfectly synchronized.

2. The asset demand for money:
A. is unrelated to both the interest rate and the level of GDP.
B. varies inversely with the rate of interest.
C. varies inversely with the level of real GDP.
D. varies directly with the level of nominal GDP.

B. varies inversely with the rate of interest.

3. In which of the following situations is it certain that the quantity of money demanded by the public will decrease?
A. nominal GDP decreases and the interest rate decreases
B. nominal GDP increases and the interest rate decreases
C. nominal GDP decreases and the interest rate increases
D. nominal GDP increases and the interest rate increases

C. nominal GDP decreases and the interest rate increases

4. An increase in nominal GDP increases the demand for money because:
A. interest rates will rise.
B. more money is needed to finance a larger volume of transactions.
C. bond prices will fall.
D. the opportunity cost of holding money will decline.

B. more money is needed to finance a larger volume of transactions.

5. Refer to the above diagram of the market for money. The vertical money supply curve Sm reflects the fact that:
A. bond prices and interest rates are inversely related.
B. the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
C. the rate at which money is spent is zero.
D. lower interest rates result in lower opportunity costs of supplying money.

B. the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.

6. Refer to the above diagram of the market for money. Given Dm and Sm, an interest rate of i3 is not sustainable because the:
A. supply of bonds in the bond market will decline and the interest rate will rise.
B. supply of bonds in the bond market will increase and the interest rate will decline.
C. demand for bonds in the bond market will decline and the interest rate will rise.
D. demand for bonds in the bond market will rise and the interest rate will fall.

D. demand for bonds in the bond market will rise and the interest rate will fall.

7. Refer to the above diagram of the market for money. Other things equal, the money demand curve in the diagram would shift leftward if:
A. the asset demand for money increased.
B. the transactions demand for money increased.
C. nominal GDP decreased.
D. the overall price level rose.

C. nominal GDP decreased.

8. Initially, the bond price = $1000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent. If the price of this bond increases to $1250, the interest rate will:
A. fall to 9 percent.
B. fall to 8 percent.
C. rise to 11 percent.
D. rise to 12 percent.

B. fall to 8 percent.

9. At equilibrium in the above market for money, the total amount of money demanded is:
A. $500.
B. $480.
C. $460.
D. $440.

C. $460.

10. The equilibrium interest rate is:
A. 2 percent.
B. 4 percent.
C. 6 percent.
D. 8 percent.

D. 8 percent.

11. An increase in the money supply of $20 billion will cause the equilibrium interest rate to:
A. fall by 4 percentage points.
B. fall by 2 percentage points.
C. rise by 4 percentage points.
D. rise by 2 percentage points.

B. fall by 2 percentage points.

12. Federal Reserve Notes in circulation are:
A. an asset as viewed by the Federal Reserve Banks.
B. a liability as viewed by the Federal Reserve Banks.
C. neither an asset nor a liability as viewed by the Federal Reserve Banks.
D. part of M1, but not of M2.

B. a liability as viewed by the Federal Reserve Banks.

13. Which of the following will increase commercial bank reserves?
A. the purchase of government bonds in the open market by the Federal Reserve Banks
B. a decrease in the reserve ratio
C. an increase in the discount rate
D. the sale of government bonds in the open market by the Federal Reserve Banks

A. the purchase of government bonds in the open market by the Federal Reserve Banks

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