Econ 102 Final Exam

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The major shortcoming of a barter economy is A) Requirement of double coincidence of wants
B) Requirement of specialization and exchange
C) That goods and services are not traded
D) That money loses value from inflation

A

Consider the following traders who meet: Bob has an apple wants an orange
Ted has an orange wants a peach Mary has a pear wants an apple Alice has a peach wants an orange
Which, if any, pairs of traders has a double coincidence of wants?
A) Bob with Alice
B) Ted with Alice
C) Bob with Mary,Ted with Bob,and Ted with Alice
D) None of the pairs above has a double coincidence of wants.

B

In an economy with barter, there are __________ prices than in an economy with money.
A) More
B)Less
C)Equal
D)Can'tSay

A

Which of the following lists ranks types of assets from most liquid to least liquid?
A) currency, demand deposits, money market mutual funds
B)currency, money market mutual funds, demand deposits
C)money market mutual funds, demand deposits, currency
D) demand deposits, money market mutual funds, currency

A

Which of the following is included in M2 but not in M1?
A) demand deposits
B) corporate bonds
C) large time deposits
D) money market mutual funds

D

Currency $1,000
Checking Account Balances $2,000
Savings Account Balances $5,000
Small Denomination Time Deposits $6,000
Non institutional Money Market Fund Shares $7,000
Q6. M1 = ________
A) 1,000
B)2,000
C)3,000
D)8,000

C

Currency $1,000
Checking Account Balances $2,000
Savings Account Balances $5,000
Small Denomination Time Deposits $6,000
Non institutional Money Market Fund Shares $7,000
M2=__________
A) 3,000
B)8,000
C)14,000
D)21,000

D

You earn $5,000 a month and currently have $200 in currency, $100 in your checking account, $2,000 in your savings account, $3,000 worth of illiquid assets and $1,000 in debt. Then: Money (M1)= _____, Wealth = _____.
A) 2,300; 5,000
B) 300; 4,300
C) 200; 4,300
D) 300; 5,000

B

If I withdraw $500 from my savings account and put it in my checking account, M1 will ______ and M2 will _________.
A) Increase, decrease
B) Increase, not change
C) Not change, increase
D) Not change, not change

B

If a person withdraws $500 from their checking account and holds it in currency, M1 will _______ and M2 will ________
A) Increase,decrease
B) Not change, not change
C) Not change, increase
D) Decrease, increase

B

A bank will consider a car loan to a customer as a(n) ________ and a customer's checking
account as a(n) ________.
A) Liability; Asset
B) Asset; Liability
C) Liability; Liability
D) Asset; Asset
E) Asset; net worth

B

The First Bank of Johnson City
Assets
Reserves $2,000 Loans $8,000
Liabilities
Deposits $10,000

The reserve ratio for this bank is
A) 0 percent
B) 20 percent
C) 80 percent
D) 100 percent

B

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million Tazes of required reserves, 75 million Tazes of excess reserves, have issued 7,500 million Tazes of deposits, and hold 225 million Tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits (checking accounts) and hold no currency in their wallets.

Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What is the reserve ratio for Tazian Banks?
A) 8 percent
B) 4 percent
C) 5 percent
D) None of the above is correct.

C

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million Tazes of required reserves, 75 million Tazes of excess reserves, have issued 7,500 million Tazes of deposits, and hold 225 million Tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits (checking accounts) and hold no currency in their wallets.

Assuming the only other thing Tazian banks have on their balance sheets is loans, what is the value of existing loans made by Tazian banks?
A) 6,900 million Tazes
B) 7,125 million Tazes
C) 7,350 million Tazes
D) None of the above is correct

A

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million Tazes of required reserves, 75 million Tazes of excess reserves, have issued 7,500 million Tazes of deposits, and hold 225 million Tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits (checking accounts) and hold no currency in their wallets.

Suppose the Bank of Tazi loaned the banks of Tazi 10 million Tazes. Suppose a lso that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply change?
A) 250 million Tazes
B) 200 million Tazes
C) 125 million Tazes
D) None of the above is correct

B

Suppose you deposit $2,000 in currency into your checking account. The reserve ratio is 10%. Assuming that banks do not hold any excess reserves, what is the maximum increase in checking account deposits that can result from your $2,000 initial deposit? What is the maximum increase in the money supply?

The maximum increase in checking account deposits is $20,000. The maximum increase in
the money supply is $18,000.

If a checking account pays no interest and a Treasury bill pays 1% interest, then the opportunity cost of holding money in checking is
a) 0%
b) 1%
c) 2%
d) there is never an opportunity cost of holding money in checking

b

An increase in government purchases causes GDP to increase, then the
a) money supply decreases.
b) money supply increases.
c) money demand decreases.
d) money demand increases.

d

If the equilibrium interest rate in the money market is 2%, then at an interest rate of 5%
a) money demanded exceeds the money supplied, and people shift from holding money to interest bearing assets, causing the interest rate to fall.
b) money supplied exceeds the money demanded, and people shift from holding money to interest bearing assets, causing the interest rate to fall.
c) money demanded exceeds the money supplied and people shift from holding interest bearing assets to money, causing the interest rate to rise.
d) money supplied exceeds the money demanded and people shift from holding interest bearing assets to money, causing the interest rate to rise.

b

An increase in the required reserve ratio will __________ the money supply, causing interest rates to __________.
a) decrease; decrease
b) decrease; increase
c) increase; decrease
d) increase; increase

b

Monetary policy affects the price level and GDP by
a) changing imports.
b) changing government purchases.
c) changing aggregate demand.
d) changing the amount of labor supplied.

c

When the Federal Reserve wants to increase the federal funds rate,
a) it buys treasury bills from banks, increasing bank reserves and increasing the money supply.
b) it buys treasury bills from banks, decreasing bank reserves and decreasing the money supply.
c) it sells treasury bills to banks, increasing bank reserves and increasing the money supply.
d) it sells treasury bills to banks, decreasing bank reserves and decreasing the money supply.

d

In the short run, according to the loanable funds model, contractionary monetary policy a) decreases the demand for loanable funds.
b) has no effect on the supply of loanable funds.
c) decreases the supply of loanable funds.
d) has no effect on the quantity of loanable funds demanded.

c

When there is a recessionary gap, the Federal Reserve can __________ interest rates to __________ GDP and __________ the price level.
a) increase; increase; increase
b) increase; decrease; increase
c) decrease; increase; increase
d) decrease; decrease; increase

c

Suppose expansionary fiscal policy causes inflation to rise above the Federal Reserve's inflation target. Then the Federal Reserve will __________ interest rates in order to __________ inflation.
a) decrease; decrease
b) decrease; increase
c) increase; decrease
d) increase; increase

c

Suppose that the Federal Reserve follows a Taylor rule for monetary policy. When inflation increases, the Federal Reserve will want to __________ the interest rate. So it will __________ banks, causing the money supply to __________.
a) decrease; sell Treasury bills to; increase
b) decrease;buy treasury bills from; increase c) increase; sell Treasury bills to; decrease
d) increase;buyTreasurybillsfrom;decrease

c

Consider an economy that is in its long-run equilibrium right now. If the Federal Reserve increases the money supply, then in the long run GDP will be __________ now and the price level will be __________ now.
a) the same as; the same as
b) lower than; higher than
c) higher than; the same as
d) the same as; higher than

d

Suppose the Federal Reserve increases the money supply by buying Treasury bills from banks. Then
a) in the short run interest rates decrease, and in the long run interest rates stay low
b) in the short run interest rates increase, and in the long run interest rates decrease
c) in the short run interest rates decrease, and in the long run interest rates return to where
they started
d) in the short run interest rate stay the same, and in the long run interest rates decrease

c

Which of the following statements are true?
a) Hyperinflation refers to any period of inflation
b) During periods of high inflation, people are eager to hold large sums of money since these sums of money grow in value, the higher the inflation rate
c) In the long run, an increase in the money supply does not change real GDP
d) All of the above
e) a and b
f) a and c

c

The classical model of the price level
a) Reflects the work of John Maynard Keynes
b) Ignores the short-run movements of the economy in response to a change in the money supply
c) Works particularly well for periods in which inflation is low
d) All of the above
e) a and b

b

Seignorage is the term
a) Used to describe open-market operations
b) That dates back to the Middle Ages and refers to the government's right to issue coins and to charge, and therefore, collect a fee for issuing these coins
c) That economists use to refer to the government's right to print money
d) All of the above
e) b and c

e

For a given inflation rate, an increase in the real money supply
a) Does not affect the real inflation tax
b) Increases the real inflation tax
c) Decreases the real inflation tax
d) May increase, decrease, or have no effect on the real inflation tax

b

Which of the following statements are true?
a) The short-run Phillips curve is a vertical line with the horizontal intercept equaling the NAIRU
b) The short-run Phillips curve depicts the negative relationship between the unemployment rate and the inflation rate
c) An economy with a low rate of unemployment is an economy with a shortage of labor and other resources, which leads to falling prices
d) All of the above

b

Expected inflation
a) Shifts the short-run Phillips curve but not the long-run Phillips curve
b) Shifts the long-run Phillips curve but not the short-run Phillips curve
c) Shifts both the short-run and long-run Phillips curve
d) May shift either, both, or neither of the curves

a

The natural rate of unemployment is 4%
If the equation of the current short-run Phillips curve is ∆𝑃 = 6 − 𝑈 where ∆𝑃 is inflation and U is
𝑃𝑃
unemployment, then the expected inflation rate is
a) 0%
b) 2%
c) 4%
d) 6%

b

Suppose the policymakers for the economy decide to pursue an unemployment rate of 2%. This will
a) Cause accelerating inflation in the long run
b) Lead to rightward shifts of the SRPC, with each shift reflecting the expected inflation rate
c) Cause equilibrium wage rates to fall
d) All of the above
e) a and b

e

Which of the following statements are true?
a) In the short run, an increase in the money supply will increase the aggregate price level but will not alter the level of real GDP
b) In the long run, an increase in the money supply will increase the aggregate price level but will have no effect on the level of real GDP
c) In the long run, an increase in the money supply will cause nominal prices and nominal wages to increase by the same percentage as the percentage increase in the money supply
d) a and c
e) b and c

e

Governments that run large deficits can
a) Reduce the size of the deficit by raising taxes
b) Reduce the size of the deficit by reducing spending
c) Finance the deficit by printing money
d) All of the above

d

A positive output gap implies an unemployment rate
a) Above the natural rate of unemployment
b) Below the natural rate of unemployment

b

Disinflation in an economy is
a) Easy to accomplish and relatively painless for people living and working in this economy
b) Difficult to accomplish and typically results in reduced production and real GDP and high rates of unemployment

b

What is the level of reserves at Prime Bank? And how many mortgages Prime Bank will be able to make?
a) 25,000,000; 500
b) 50,000; 1000
c) 5,000,000; 100
d) 500,000; 200

c

What is the market value of the each mortgage after the fall in real estate prices?
a) 210,000
b) 200,000
c) 21,000
d) 189,000

d

After the decrease in home prices, what is value of Prime Bank's total asset? Is the value of total asset smaller or larger than it liabilities?
a) 18,900,000; smaller
b) 25,000,000; larger
c) 23,900,000; smaller
d) 5,000,000; larger

c

A subprime mortgage is
a) a mortgage issued to a homebuyer who does not have sufficient income to qualify for a standard or prime mortgage.
b) a mortgage issued to a homebuyer who does not have sufficient assets to qualify for a standard or prime mortgage.
c) less risky for the lender than a prime mortgage.
d) Answers (a), (b), and (c) are all correct.
e) Answers (a), and (b) are both correct.

e

A global credit crunch occurs when
a) borrowers cannot find credit or they must pay very high interest rates for credit.
b) lenders cannot loan money or they receive very low interest rates for any loans they do make.
c) lenders are willing to loan money to borrowers, but borrowers refuse to take out loans.
d) borrowers are willing to borrow money, but lenders do not have any money they can lend to borrowers.

a

Shadow banking refers to
a) commercial banks that accept deposits and make loans
b) a wide variety of types of financial firms including investment banks, hedge funds, and money market funds.
c) financial firms that, prior to the banking crisis of 2008, were not closely watched or effectively regulated.
d) Answers (a), (b) and (c) are all correct.
e) Answers (b) and (c) are both correct.

e

The repo market prior to the crisis of 2007-2009
a) paid a higher rate of return than traditional depository institutions did on their deposits.
b) was used as a way for shadow banks to finance their speculative investments, since the shadow banks could borrow funds in the repo market, use these funds to purchase mortgage- backed securities, and then use these mortgage-backed securities as collateral for another repo trade.
c) by 2007, the repo and other forms of shadow banking had grown larger than traditional depository banking.
d) Answers (a), (b) and (c) are all correct.
e) Answers (a), and (b) are all correct.

d

Banking crises typically result in prolonged recessions because of
a) the credit crunch that lead to a reduction in available credit due to the disruption of the banking system.
b) the debt overhang that arises as a result of falling asset prices that lead to a vicious circle of deleveraging; as this circle progresses, it leads to even greater decreases in asset prices. As asset prices fall, consumers and businesses cut back on their spending in order to reduce their debt and rebuild their assets.
c) the loss of monetary effectiveness as a means to stimulate aggregate spending in the economy. d) Answers (a), (b) and (c) are all correct.
e) Answers (a) and (c) are both correct.

d

The Great Depression
a) reinforced prevailing economic views of the day that it was only long run economic performance that was important.
b) threatened both economic and political stability.
c) illustrated that market economies produced consistently at the potential output level.
d) answers (a), (b), and (c) are all correct.
e) answers (b) and (c) are both correct.

b

Discretionary fiscal policy
a) due to implementation lags often ends up feeding a boom rather than fighting a recession.
b) refers to the use of government spending and taxing policies used to smooth out the economy's ups and downs.
c) without expansionary monetary policy will result in crowding out that limits the effect of the fiscal expansion, according to Friedman.
d) answers (a), (b) and (c) are all correct.
e) answers (a), and (b) are both correct.
f) answers (b), and (c) are both correct.

d

Monetary policy can
a) change the level of aggregate output in the short run, according to macroeconomists who support the classical model.
b) have no impact on unemployment unless the monetary policy is unexpected according to models that assume rational expectations.
c) lower the nominal interest rate even when there is a liquidity trap.
d) answers (a), (b) and (c) are all correct.
e) answers (a), and (b) are both correct.
f) answers (b), and (c) are both correct.

b

The _____ hypothesis has been almost universally accepted amongst modern economists. This hypothesis is that macroeconomic policy should be to stabilize the economy rather than attempt to permanently decrease the unemployment rate.
A) rational expectations
B) natural rate
C) real business cycle
D) political business cycle

B

According to the loanable funds model, in the short run expansionary monetary policy:
A) increases the demand for loanable funds.
B) has no effect on the supply of loanable funds.
C) increases the supply of loanable funds.
D) increases the quantity of loanable funds supplied.

C

Which of the following factors is causing upward pressure on long term Treasury interest rates?
A) Federal Deficit
B) Euro-Zone Debt Crisis
C) Fed Quantitative Easing
D) Fears of recession

A

The inflation tax is:
A) the reduction in the value of money that is held by the public caused by inflation.
B) the higher tax paid by individuals whose incomes are indexed to inflation.
C) the higher prices consumers pay due to inflation.
D) the taxes paid during periods of inflation.

A

Suppose Ronny decides to withdraw all of the cash out of his checking account and open a single time deposit account at the same bank. As a result of this transaction:
A) M1 falls but M2 remains unchanged.
B) M2 falls but M1 remains unchanged.
C) M1 and M2 both fall.
D) M1 and M2 both remain unchanged.

A

When the Fed uses quantitative easing, it is: A) selling three-month Treasury bills.
B) selling longer-term government debt.
C) buying three-month Treasury bills.
D) buying longer-term government debt.

D

Monetary policy is similar among wealthy countries because the central banks of most countries:
A) try to keep inflation between 5% and 6% per year.
B) try to keep inflation between 0% and 2% per year.
C) are trying to establish a single global currency.
D) try to keep inflation between 2% and 3% per year.

D

Monetary policy affects GDP and the price level by:
A) changing aggregate demand.
B) changing the aggregate amount of labor supplied.
C) changing exports.
D) changing aggregate supply.

A

Because Keynes's theory mostly stressed the short run, it:
A) favored the use of monetary policy over fiscal policy.
B) favored the use of fiscal policy over monetary policy.
C) perceived the economy as being mostly self-adjusting.
D) considered technological progress the answer to any economic slump.

B

The Empire State Manufacturing Survey General Activity Index now stands at a negative 5. This signals that manufacturing activity is:
A) growing at a slower pace.
B) unchanged but expected to decline over the next six months.
C) expanding.
D) contracting.

D

Currency, checkable deposits, and traveler's checks are about _______ of M1.
A) 100%
B) 75%
C) 10%
D) 55%

A

Suppose interest rates rise in the United States. We expect capital _____ to(from) the United States and the U.S. dollar price of foreign currencies to _____, all other things equal.
A) inflows; rise
B) inflows; fall
C) outflows; fall
D) outflows; rise

B

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%:
A) the quantity of nonmonetary interest-bearing financial assets demanded is equal to
the quantity supplied.
B) it is impossible to predict which is greater, the quantity demanded or quantity
supplied of nonmonetary interest-bearing financial assets.
C) the quantity of nonmonetary interest-bearing financial assets demanded is greater
than the quantity supplied.
D) the quantity of nonmonetary interest-bearing financial assets demanded is less than
the quantity supplied.

D

Suppose that in a particular year, the Japanese yen falls from ¥800 to ¥1,200 to the dollar and the price level in Japan increases by 50%, but there is no change in the price level in the United States. Which of the following is true?
A) The real exchange rate has remained unchanged.
B) The nominal exchange rate of the yen has appreciated against the dollar.
C) The nominal exchange rate of the dollar has depreciated against the yen.
D) The real exchange rate of the yen has decreased.

A

Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account at the local bank. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as _____.
A) $90; $900
B) $100; $1,000
C) $100; $900
D) $90; $1,000

A

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is:
A) 0.02%.
B) 1%.
C) 2%.
D) zero.

C

According to supply-side economics, tax cuts:
A) increase output by directly increasing aggregate demand.
B) increase incentives to work and save and cause increases in potential output.
C) cause dangerous budget deficits.
D) unfairly sacrifice equity in favor of efficiency.

B

Most economists now agree that:
A) fiscal policy can change the natural rate of unemployment.
B) fiscal policy should be conducted by the Federal Reserve.
C) fiscal policy can shift aggregate demand.
D) the government should seek to balance its budget.

C

Contractionary fiscal measures, such as less government spending and tax increases designed to reduce budget deficits, are called:
A) maturity transformation.
B) automatic stabilizers.
C) fiscal austerity.
D) fiscal stimulus.

C

Financial regulation was not adequate to deal with the 2008 financial crisis because:
A) up until the 2008 crisis, the market had worked very well in preventing banking
crises, so there was very little need for bank regulation.
B) the Supreme Court had ruled that the regulatory powers of the Federal Reserve
were unconstitutional and prohibited the Fed from using its regulatory powers.
C) before 2008 banks were very small and could be effectively regulated by the states.
D) the role of shadow banks had become very important, but shadow banks were not
subject to banking regulation at the time of the 2008 crisis.

D

Which of the following is true of the Federal Reserve's response to the banking crises of the 1930s and 2008?
A) In both crises, the Fed failed to use its power to act as a lender of last resort or to
guarantee liabilities of troubled banks.
B) In the 1930s the Fed acted aggressively as a lender of last resort and to guarantee
liabilities of troubled banks, but it did not act in 2008.
C) In 2008 the Fed acted aggressively as a lender of last resort and to guarantee
liabilities of troubled banks, but it did not act in the 1930s.
D) In both crises, the Fed acted aggressively as a lender of last resort and to guarantee
liabilities of troubled banks.

C

Banks can lend money because:
A) they know how much cash they have in their vault.
B) there is a high demand for loans.
C) they have so much to lend.
D) they know not everyone wants their deposits back at the same time.

D

Suppose the Federal Reserve has set a target for the federal funds rate. If initially the equilibrium interest rate happens to be higher than the target interest rate, then the Federal Reserve should:
A) sell Treasury bills in the open market, increase money supply, shift the supply of
money curve to the left, and raise the interest rate to the target rate.
B) sell Treasury bills in the open market, decrease money supply, shift the supply of
money curve to the left, and raise the interest rate to the target rate.
C) purchase Treasury bills in the open market, decrease money supply, shift the
supply of money curve to the left, and lower the interest rate to the target rate.
D) purchase Treasury bills in the open market, increase money supply, shift the supply
of money curve to the right, and lower the interest rate to the target rate.

D

Which of the following ranges of Capacity Utilization is considered "full capacity" and corresponds with potential GDP?
A) 86-88%
B) 90-92%
C) 91-93%
D) 82-84%

D

If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is:
A) $60 billion.
B) $5 billion.
C) $1500 billion.
D) $15 billion.

D

The demand curve for money will NOT shift as a result of a change in: A) banking technology.
B) real GDP .
C) the interest rate.
D) the price level.

C

Which of the following Producer Price Indices are a leading indicator of global economic growth?
A) Finished goods prices
B) Core crude good prices
C) Core intermediate goods prices
D) Core finished goods prices

B

Monetary policy is often ineffective in a banking crisis because:
A) businesses and consumers aren't willing to borrow and spend because interest rates
are so high.
B) businesses and consumers aren't willing to borrow and spend even though interest
rates are very low.
C) businesses and consumers borrow too much because interest rates are so low and
increase spending so much that inflation results.
D) businesses and consumers borrow large amounts because interest rates are so low,
but they are unwilling to spend the money that they have borrowed.

B

Suppose the required reserve ratio is 10% and a depositor withdraws $500 from her checkable deposit. The money supply will ______ if the banking system does NOT hold any excess reserves.
A) decrease by $4,500
B) decrease by $5,000
C) decrease by $500
D) be unchanged

A

If the Chinese government wants to keep the real and nominal exchange rates between the yuan and the U.S. dollar fixed at 8 yuan per dollar, the:
A) interest rate in China must be higher than the interest rate in the United States.
B) inflation rate in China must be constantly higher than the inflation rate in the
United States.
C) inflation rate in China must be equal to the inflation rate in the United States.
D) inflation rate in China must be constantly lower than the inflation rate in the United
States.

C

The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to:
A) economists today the adjustment of prices to changes in the money supply is
instantaneous, while classical economists argued that this adjustment process took
some time.
B) classical economists the adjustment of prices to changes in the money supply is
instantaneous, while economists today argue that this adjustment process takes
some time.
C) classical economists money is neutral in the long run, while economists today do
not consider money to be neutral in the long run.
D) economists today money is neutral in the long run, while classical economists did
not consider money to be neutral in the long run.

B

Politicians may accept moderate inflation in an election year, since the:
A) decrease in aggregate supply serves to increase employment.
B) increase in aggregate demand serves to increase employment.
C) increase in aggregate supply serves to decrease employment.
D) decrease in aggregate demand serves to increase output.

B

When shadow banks engage in maturity transformation, they raise funds by ___________ and invest in _________.
A) borrowing in short-term credit markets; longer-term speculative investments
B) issuing stock; stock of other companies
C) borrowing in long-term credit markets; short-term speculative investments
D) selling bonds; Treasury bills

A

Contractionary monetary policy involves:
A) decreasing the money supply, increasing interest rates, and decreasing aggregate
demand.
B) decreasing the money supply, interest rates, and aggregate demand.
C) increasing the money supply, interest rates, and aggregate demand.
D) increasing the money supply and decreasing interest rates and aggregate demand.

A

The index of leading economic indicators rose 2.3% over the last year. Four of the ten
components made a positive contribution to the increase. components was not one of the four?
A) Jobless Claims
B) ISM New Orders
C) Credit Index
D) Yield Curve

B

Expansionary monetary policy will ______ interest rates and _______ savings in the short run.
A) lower; decrease
B) raise; increase
C) raise; decrease
D) lower; increase

D

A sudden and widespread disruption of financial institutions and markets is known as: A) stagflation.
B) a liquidity trap.
C) the fallacy of composition.
D) a financial panic.

D

Given an inflationary gap, the Federal Reserve will use monetary policy to _______ real GDP and _______ the price level.
A) decrease; increase
B) decrease; decrease
C) increase; decrease
D) increase; increase

B

Many economists expect inflation to be lower in 2013. Which of the following is not a factor contribution to this disinflation?
A) Subdued economic recovery
B) Quantitative easing
C) Higher than normal unemployment rate
D) Lack of broad pricing power

B

If wages and prices are perfectly flexible, a decrease in aggregate demand will cause a(n):
A) decrease in the price level and employment.
B) decrease in the price level and no change in employment.
C) increase in the price level and unemployment.
D) increase in the price level and no change in employment.

B

Suppose that the equilibrium interest rate in the U.S. market for loanable funds is 3% prior to any international capital flows in the United States. In Japan, the equilibrium interest rate in the Japanese market for loanable funds is 7%. If lenders in both nations believe that loans to foreigners are just as good as loans to their own citizens, we would expect:
A) capital to flow from Japan to the United States, making interest rates fall in Japan and interest rates rise in the United States.
B) capital to flow from the United States to Japan, making interest rates fall in Japan and interest rates rise in the United States.
C) capital to flow from the United States to Japan, making interest rates rise in Japan and interest rates fall in the United States.
D) capital to flow from Japan to the United States, making interest rates rise in Japan and interest rates fall in the United States.

B

Suppose that the Federal Reserve sells $500 in U.S. Treasury bills, and as a result the money supply falls by $5,000. The reserve ratio can be as low as:
A) 0.5.
B) 100.
C) 10.
D) 0.1.

D

The primary difference between M1 and M2 is that:
A) M2 includes checkable deposits, but M1 does not.
B) M2 includes savings deposits and time deposits, but M1 does not.
C) M1 includes checkable deposits, but M2 does not.
D) the dollar amount of M1 is much larger than the dollar amount of M2.

B

The bill that Congress passed in 2010 to correct many of the problems that led to the 2008 financial crisis was called:
A) the Glass-Steagall Act.
B) the Financial Institutions Modernization Act.
C) the Sherman Anti-Trust Act.
D) the Wall Street Reform and Consumer Protection Act.

D

Consumer confidence has been rising over the last few months. Which of the following factors has not been contributing to this improvement?
A) Improving housing market
B) Falling debt burden
C) Rapid wage growth
D) Improving credit availability

C

If the reserve ratio is 25% and the money supply increases by $100,000, then the initial reserve injection by Federal Reserve was:
A) $25,000.
B) $4,000.
C) $2,500.
D) $10,000.

A

In the long run, changes in the money supply:
A) affect only the price level; they do not change aggregate output.
B) affect aggregate output but not the aggregate price level.
C) have no impact on either the aggregate price level or aggregate output.
D) affect both the aggregate price level and aggregate output.

A

Suppose that the United States and European Union are the only trading partners in the world. If interest rates in the United States are significantly lower than those in the European Union, we would expect:
A) the demand for euros to decrease, depreciating the euro.
B) the supply of the dollar to fall, appreciating the dollar.
C) the demand for the dollar to fall, depreciating the dollar.
D) the supply of euros to increase, depreciating the euro.

C

When actual output is above potential output over time:
A) the short-run aggregate supply curve will shift to the right.
B) nominal wages will increase, and the short-run supply curve will shift to the right.
C) nominal wages will increase, and the short-run supply curve will shift to the left.
D) the aggregate demand curve will shift to the right.

C

When the Treasury Department borrows from the public to finance the government's purchases of goods and services and the Fed buys the debt back from the public in the form of Treasury bills, it is known as:
A) monetizing the debt.
B) structuring the deficit.
C) moral suasion.
D) money illusion.

A

Which of the following statements is FALSE?
A. Banks typically borrow in the federal funds market when they have insufficient reserves to meet the reserve requirement of the Federal Reserve.
B. When a bank borrows reserves from the Fed itself, it is said to be borrowing at the discount window.
C. A change in reserve requirements or a change in the discount rate will have an effect on the money supply.
D. If the Fed reduces reserve requirements, banks will lend a smaller percentage of their deposits, leading to fewer loans and a decrease in the money supply via the money multiplier

D

Which of the following statements is FALSE?
A. Following the collapse of Lehman Brothers, currency in circulation became a larger fraction of the monetary base than it typically is.
B. As people choose to hold more of their money as currency, rather than as checkable deposits, the size of the money multiplier will be reduced.
C. In January 2012, the money multiplier was less than one.
D. In January 2012, the monetary base was actually larger than M1.

A

The excess of a banks assets over its bank deposits and other liabilities is known as
A. The reserve requirement
B. Deposit insurance
C. Capital insurance
D. The bank's capital

D

The fraction of customer deposits that a bank holds as reserves is known as
A. The safety factor
B. The liquidity ratio
C. The deposit back-up
D. The reserve ratio

D

The arrangement in which the Federal Reserve stands ready to lend money to banks in trouble is known as
A. Deposit insurance
B. The discount window
C. The reserve window
D. The reserve requirement

B

Which of the following statements about the relationship between M1 and M2 is TRUE?
A. M1 is larger than M2, because M1 includes near-moneys, and M2 does not.
B. M2 is larger than M1, because M2 includes near-moneys, and M1 does not.
C. M1 is larger than M2, because M2 does not include currency in circulation.
D. Of these two measures of the money supply, M2 is the narrower definition.

B

The seven members of the Federal Reserve Board of Governors
A. are elected by stockholders of banks.
B. are appointed by the U.S. president and must be approved by Congress.
C. are elected by governors of the individual states of the United States
D. are appointed by the U.S. Secretary of the Treasury.

B

In the United States, what is the approximate minimum reserve ratio for checkable bank deposits?
A. 10%
B. 20%
C. 5%
D. 33%

A

Because money is a commonly accepted measure used to set prices and make economic calculations, we say that it is
a. A unit of account
b. A medium of exchange
c. The same thing as wealth
d. A store of value

A

Suppose a bank finds itself with $3,000 in excess reserves. If the banking system faces a 20 percent minimum reserve requirement, what is the maximum amount of the potential increase in the money supply?
A. $3,000
B. $9,000
C. $15,000
D. $6,000

C

The monetary base is the sum of
A. M1 and M2
B. Bank assets and bank liabilities
C. Currency in circulation and reserves held by banks
D. Currency in circulation and checkable bank deposits

C

Because money is an asset that can be traded for goods and services, we say that it is
A. A unit of account
B. A medium of exchange
C. The same thing as wealth
D. A store of value

B

When the Fed Res buys and sells US T-bills, this is known as
A. Multiplier policy
B. Discount policy
C. Open-market operations
D. Commercial policy

C

Money is
A. the measure of the market value of an asset.
B. any asset that can easily be used to purchase goods and services.
C. the sum total of all economic activity.
D. the same thing as wealth.

B

How many fed res banks are there?
A. 12
B. 16
C. 8
D. 25

A

The money multiplier is the ratio of
A. checkable bank deposits to currency in circulation.
B. the money supply to the monetary base.
C. bank assets to bank liabilities.
D. bank reserves to currency in circulation.

B

Which of the following statements about fiat money is FALSE?
A. Fiat money is money whose value derives entirely from its official status as a means of exchange.
B. With fiat money, there is no risk of counterfeiting.
C. With fiat money, the supply of money can be adjusted more easily than with commodity money.
D. With fiat money, there is the risk that governments will increase the money supply at times when it is to their own advantage.

B

A medium of exchange that has intrinsic value in other uses is known as
A. fiat money
B. commodity-backed money
C. paper currency.
D. commodity money

D

When a bank issues a loan to a customer,
A. bank assets rise by the amount of the loan.
B. the composition of bank assets changes so that bank reserves are increased and the value of bank loans is decreased.
C. bank assets fall by the amount of the loan.
D. the composition of bank assets changes so that bank reserves are decreased and the value of bank loans is increased.

D

What name is given to the process of assembling several different loans into a pool and then selling shares in the pool?
A. Securitization
B. Diversification
C. Leverage
D. Centralization

A

An increase in the money supply shifts aggregate demand to the _______, thereby causing a _______ level of real output in the short run.
A. Right; higher
B. Right; lower
C. Left; higher
D. Left; lower

A

Monetary policy that increases the demand for goods and services is known as
A. quantitative monetary policy.
B. contractionary monetary policy.
C. inflationary monetary policy.
D. expansionary monetary policy.

D

The liquidity preference model of the interest rate asserts that
a. the demand for money is vertical.
b. there is no opportunity cost of holding money.
c. the interest rate is established by the interaction of the supply and demand for money.
d. the amount of money people are willing to hold is independent of the interest rate.

C

An increase in the aggregate price level
A. will cause an increase in the demand for money.
B. is shown by moving from one point to another along the same money demand curve.
C. will cause a decrease in the demand for money.
D. will have no effect on the demand for money.

A

When the Federal Reserve undertakes actions to decrease the money supply, the money supply curve shifts to the _______, and the equilibrium interest rate _______.
A. Left; increase
B. Right; decreases
C. Right; increases
D. Left; decrease

A

An increase in the money supply will lead to a short-run _______ in investment spending, due to the resulting _______ interest rate.
A. Increase; higher
B. Increase; lower
C. Decrease; lower
D. Decrease; higher

B

When short-term interest rates fell between 2007 and 2008,
A. the opportunity cost of holding money increased.
B. the opportunity cost of holding money decreased.
C. the interest rate on holding money increased.
D. people were less willing to hold money in place of making deposits in an interest-earning account.

B

What is measured on the horizontal axis when we draw a money demand curve?
A. The aggregate price level
B. The interest rate
C. The inflation rate
D. The quantity of money demanded by the public

D

The advent of ATM machines has
A. not affected the demand for money.
B. shifted the demand for money to the right.
C. caused people to hold higher average money balances.
D. shifted the demand for money to the left.

D

To increase the interest rate, the Federal Reserve will _______ U.S. Treasury bills, and this will have the effect of _______ the money supply.
A. purchase; increasing
B. sell; decreasing
C. purchase; decreasing
D. sell; increasing

B

The short-run effect of an increase in the money supply is that
A. the aggregate price level increases, and real output decreases.
B. the aggregate price level increases, and real output also increases.
C. the aggregate price level decreases, and real output increases.
D. the aggregate price level decreases, and real output also decreases.

B

In the long run, a monetary expansion
A. decreases real GDP but has no effect on the aggregate price level.
B. increases real GDP but has no effect on the aggregate price level.
C. increases real GDP but has no effect on the aggregate price level.
D. raises the aggregate price level but has no effect on real GDP.

D

If the economy starts out in long-run macroeconomic equilibrium, the long-run effect of an increase in the money supply is to
A. increase real GDP.
B. leave the aggregate price level unchanged.
C. decrease real GDP.
D. leave real GDP unchanged.

D

If the current interest rate is below the target rate, the Federal Reserve will
A. purchase U.S. Treasury bills.
B. increase the money supply.
C. change the target to meet the actual rate.
D. sell U.S. Treasury bills.

D

The Federal Open Market Committee meets _______ times per year.
A. 12
B. 54
C. 4
D. 8

D

The actual rate of unemployment will be equal to the natural rate of unemployment when
A. actual aggregate output is equal to potential output.
B. actual aggregate output is above potential output.
C. actual aggregate output is below potential output.
D. the actual inflation rate equals the actual unemployment rate.

A

What is measured on the horizontal axis of a graph depicting the short-run Phillips curve?
A. The unemployment rate
B. Real output
C. The inflation rate
D. The price level

A

In countries with persistently high inflation, increases in the money supply
A. will decrease real GDP.
B. are quickly translated into changes in the inflation rate.
C. do not affect the price level.
D. will increase real GDP.

B

A liquidity trap arises when
A. the expected inflation rate equals the actual inflation rate.
B. debt deflation reduces aggregate demand.
C. conventional monetary policy is ineffective because nominal interest rates are up against the zero lower bound.
D. expansionary monetary policy has been used to keep the actual unemployment rate below its natural rate.

C

Governments are most likely to print money as a way of paying expenses when
A. the central bank is completely independent of political influence.
B. they are concerned about inflation.
C. there have been large discoveries of gold.
D. a large budget debt has been incurred and further borrowing is not a workable option.

D

The short-run Phillips curve represents a trade-off between which two variables?
A. Inflation and unemployment rates
B. Inflation and interest rates
C. Output and interest rates
D. Output and unemployment rates

A

What is the effect of an expansionary monetary policy in the AD-AS model?
A. This will shift aggregate demand to the left, thereby increasing the price level.
B. This will shift aggregate demand to the right, thereby increasing the price level.
C. This will shift aggregate demand to the right, thereby decreasing the price level.
D. This will shift aggregate demand to the left, thereby decreasing the price level.

B

The reduction in the purchasing power of money caused by inflation is known as
A. Deflation
B. Indexing
C. The inflation tax
D. Seignorage

C

In the AD-AS model, the short-run aggregate supply curve
A. Is vertical
B. Will shift to the right when there is an increase in nominal wages.
C. Is horizontal
D. will shift to the left when there is an increase in nominal wages.

D

To pursue a strategy of disinflation, policy makers must
A. shift the long-run Phillips curve to the left.
B. keep the unemployment rate above its natural rate for an extended period.
C. shift the long-run Phillips curve to the right.
D. shift the short-run Phillips curve up and to the right.

B

In the classical model of the price level,
A. the price level is unaffected by changes in the money supply.
B. an increase in the money supply will increase real GDP.
C. the real quantity of money is always at its long-run equilibrium level.
D. an increase in the money supply will decrease real GDP.

C

In the long run, a persistent attempt to reduce unemployment at the expense of higher inflation
A. will cause a downward shift of the short-run Phillips curve.
B. will be effective.
C. will result in a permanently lower inflation rate.
D. will cause accelerating inflation.

D

Disinflation is
A. a persistent attempt to keep unemployment below its natural rate.
B. a decline in the aggregate price level.
C. an overall decline in nominal wages.
D. the process of bringing down inflation that has become embedded in expectations.

D

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