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Other things equal, an increase in defense spending will increase the budget deficit.


The Budget of the United States Government is officially submitted by...

The President to the Congress and contains proposals for government expenditures.

When a budget is not approved in time for continued agency operation..

a continuing resolution is frequently used

Problems with the budget process include the fact that...

1) frequently missed timetables result in continuing resolutions replacing budgets 2) budgets are frequently overly detailed 3) much of federal spending is uncontrollable 4) overlapping budget authorities exist across committees

If aggregate output is falling...

automatic stabilizers will tend to increase the size of the deficit

If US interest rates are higher than world rates, we would expect the US dollar to appreciate.


The national debt is...

a stock variable measuring the net accumulation of past deficits

The federal budget deficit becomes....during recessions because....

larger; transfer payments increase and tax revenues decline

Which component of aggregate expenditure is most subject to crowding out?

investment spending

If a budget is cyclically balanced, the government should run a surplus when the economy experiences a contractionary gap.


The national debt is dramatically larger than the federal government budget deficit.


Exchange is necessary in an economy if...

labor is specialized

Barter works best...

when each trader has what the other wants and wants what the other has

Any bank that uses deposits to make loans...

operates on a fractional reserve system

What would be considered legal tender?

Federal Reserve notes

The main source of profit for financial institutions is..

the difference between interest paid on deposits and interest received on loans

What is not a function of the Federal Reserve System?

making loans to the public

The discount rate is...

the interest rate charged by the Federal Reserve banks on loans to banking institutions

Open-market operations involve...

the Fed's purchase and sale of government securities

A bank holding company is..

a corporation that owns one or more banks

The emergence of mortgage-backed securities provided mortgage brokers with an incentive to seek out only the most credit worthy borrowers.


Currency held by the nonbank public is a medium of exchange.


Narrowly defined, the M1 money supply consists primarily of...

checkable deposits

M2 is defined as...

M1 plus saving accounts, small time deposits, and money market mutual funds

Banks minimize the risk of loss to depositors by...

making many different loans to different borrowers.

On a bank's balance sheet...

assets equal liabilities plus net worth

By holding highly liquid assets to guard against sudden large withdrawals, banks...

sacrifice profitability

Suppose you bank at Bank A and you write a check to your friend, who banks at Bank B. What happens after the check clears?

Bank A's assets decrease and Bank B's assets increase

In the money and credit expansion process, when r=the required reserve ratio, the total change in checkable deposits is equal to the initial change in excess reserves...

multiplied by 1/r

The simple money multiplier equals...

the reciprocal of the required reserve ratio

The money multiplier will be...

smaller if either banks hold on to excess reserves or private citizens hold on to cash

The Fed can reduce the money supply by..

selling securities

What is not one of the procedures the Fed uses to change the money supply?

extending loans to the public

The Federal Reserve may increase the money supply by...

lending reserves to banks

The demand for money..

increases as GDP increases

The demand for money varies...

directly with both the price level and the level of GDP

If the price level rises, then the...

demand for money will increase

If the quantity of money supplied exceeds the quantity of money demanded...

the interest rate will fall

If the Fed wanted to stimulate the economy, it might...

lower the discount rate to increase the money supply

As a result of expansionary monetary policy,

both aggregate expenditure and aggregate demand increase

An increase in the money supply leads to...

a decline in interest rates, an increase in investment, and an increase in aggregate demand

What is an example of a contractionary monetary policy?

The discount rate is raised.

The equation of exchange states that..

nominal GDP=money in circulation x velocity

If interest rates are to remain constant, the money supply should change..

in the same direction as a change in money demand

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