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126 terms

Econ 104 Final Review

STUDY
PLAY
In a market system, the most dangerous types of bankruptcies involve
financial institutions.
Which of the following are reasons that banks are so heavily regulated?
Governments are concerned about the safety of deposits, The industry is a principal determinant of aggregate demand, Bank failures are contagious
Bankers' business decisions effect the money supply because bankers
have the ability to create money.
A bank run involves a large flow of money
out of depositors' accounts.
In order for barter trades to occur, there must be a
double coincidence of wants
The "efficiency of the payments mechanism" refers to
the ease and speed of exchanging money for goods and services.
7. Money is an imperfect store of value when
the rate of inflation is high.
8. Liquidity refers to the
ease with which an asset can be converted into cash.
9. Fiat money is
only backed by government decree.
10. The primary feature of money is that it serves as
a medium of exchange.
11. Currently in the United States, money is backed by
everyone's willingness to accept it.
12. The new $20 bills are being introduced by the U.S. Treasury primarily to diminish
counterfeiting.
13. The official definition of the money supply that includes coins, paper money, travelers' checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called ____.
M1
14. Electronic cash or E-cards are
not included in the definition of the money supply.
15."Near monies" are
liquid assets that are close substitutes for money.
16.One difference between the assets included in M1 and those added to calculate M2 is that items in M1 are
more liquid than those added to compute M2.
17. Which of the following is included in M1?
travelers' checks
18. The M2 definition of the money supply is based on the concept that
many types of deposits can be used as both payments and stores of value.
19. Are "smart cards" or E-cash cards part of the money supply?
No, because they are merely means to transfer checking deposits.
20. Due to new methods of electronically transferring assets from savings accounts to checking accounts, many economists favor moving savings accounts from
M2 into M1.
21. Under fractional banking, when a bank lends to a customer
the money supply increases.
22. Bank regulators are concerned about the safety of depositors because
bank failures were common throughout most of U.S. history and have even occurred in recent decades,in the absence of federal insurance, depositors would lose their money if a bank failed, in the absence of federal insurance, depositors would lose their money if a bank failed, nervous depositors may rush to withdraw their accounts and produce a "run" that could threaten even a sound bank.
23. The objective of bank management is to
strike the appropriate balance between the attraction of bank profits and the need for bank safety.
24. Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves
means lower profits for banks.
25. If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank's reserve position if the required reserve ratio is 20 percent?
The bank has $600,000 of required reserves and $400,000 of excess reserves.
26. The balance sheet of a solvent bank will show
assets = liabilities + net worth.
27. The government banking regulation that places an upper limit on the money supply is
reserve requirements on bank deposits.
28. The required reserve ratio is 10 percent, but banks actually keep 20 percent on reserve. The actual money multiplier will be
5.
29. If people begin to hold more cash, the money multiplier process will
decrease in actual size.
30. The Fed's principal objective is to
manage the money supply and interest rates.
31. The Fed is unlike other central banks in that it
has 12 branches.
32. The actual control of the Federal Reserve System resides in the
Board of Governors.
33. Members of the Board of Governors of the Fed are
appointed by the president for 14-year terms and confirmed by the Senate.
34. When the Federal Reserve System was first established, its founders intended the Fed to
provide protection against financial panics by acting as the lender of last resort.
35. The European Central Bank, established in 1999, was patterned after the
Federal Reserve, founded in 1914.
36. In practice, money supply and short-term interest rates are determined by the
Federal Open Market Committee.
37. The Fed is institutionally independent. A major advantage of this is that monetary policy
is not controlled by politicians.
38. If the Fed buys a T-bill from an individual rather than from a bank, the effect on the money supply is
the same.
39. If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
It will give the bank new reserves.
The tool most frequently relied on by the Fed is
open market operations.
41. Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks. If the oversimplified money multiplier is assumed, then the money supply will
increase by $500 million.
42. When the Fed sells a government security to the public, how does it usually receive payment for the security?
by accepting checks on bank accounts
43. Which of the following will lower interest rates in the short run?
a decrease in real GDP
44. Interest rates rose in the second quarter of 1999. What happened to bond prices during this time?
They decreased.
45. The concept of "lender of last resort" is that when
commercial banks are hesitant to lend, the Fed will step in and increase reserves.
46. The reason that the Fed does not actively use discount rate policy to control the money supply is because the Fed
does not know how banks will respond to discount rate changes.
47. Which of the following will increase interest rates in the short run?
open market sales by the Fed
48. If the Fed were to increase the money supply at the same time the government was increasing taxes, we could expect
a decrease in interest rates but the effect on real GDP is indeterminant.
49. Under what conditions will the inflationary impact of an expansionary monetary policy be the largest?
When equilibrium real GDP is at potential real GDP.
50. After the attacks of September 11, 2001, the proper policy response was
expansionary monetary and fiscal policy.
51. Which of the following is the formula for velocity?
Velocity = nominal GDP/M
52. Which is likely to be larger, the velocity of M1 or M2?
M1, because M2 is a larger number.
53. A look at the historical data indicates that velocity for M1
has been more variable than the velocity for M2, but both have been fairly constant for the past 65 years.
54. The quantity theory of money assumes that
changes in velocity are so small that velocity can be considered constant.
55. If credit cards were suddenly ruled illegal and were no longer used, the most likely effect would be a decrease in the
velocity of circulation.
56. As the price level rises, the demand for money
increases because more money is needed for each transaction.
57. The principal factor determining velocity is the
frequency with which paychecks are distributed.
58. If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?
It will increase.
59. When comparing the Keynesian and monetarist approaches, the only substantive difference is that
the Keynesian equation leads to a prediction of real GDP; the monetarist equation leads to a prediction of nominal GDP.
60. The major limitation of both the Keynesian approach and the monetarist approach is that both
are ways of studying the aggregate demand curve, but to learn anything about the price level and output, the aggregate supply curve must be i
61. According to the simple quantity theory of money, a change in the money supply of 9.6 percent would lead to a
9.6 percent change in nominal GDP.
62. Contractionary fiscal policy
reduces the quantity of money demanded, reduces interest rates, and increases investment spending.
63. For Keynesian economists to incorporate monetary policy into their models, they must know
how the money supply affects interest rates.
64. Which of the following is the Keynesian view of the sequence of cause and effect of monetary policy?
M, r, I, Y
65. It is often reported by financial news reports that higher interest rates reduce automobile sales. If this is true, we can expect
monetary policy to be more effective.
66. A major advantage of monetary policy over fiscal policy is that monetary
policy can be put into effect more quickly.
67. The optimal time for the implementation of contractionary fiscal policy would be
before inflation accelerated.
68. One of the problems with fixed targets for the money supply is that
demand for money does not grow smoothly and predictably.
69. If the Fed decides to target money supply growth, it must be prepared to accept
interest rate volatility.
70. Figure 1 shows the equilibrium interest rate and the money stock (M) before the demand for money shifted to M1D1. If the Fed wants to return to the original equilibrium position (E), it should
It is impossible for the Fed to restore the original equilibrium condition.
71. In Figure 1, if the Fed wants to target the money supply at $830 billion, and the money demand curve shifts to M1D1, the interest rate will have to
rise above 11 percent.
72. In Figure 1 if the Fed wants to stabilize interest rates at 9 percent, and the money demand curve shifts to M1D1, the money supply will have to rise
above $840 billion.
73. If the aggregate supply curve is flat,
expansionary fiscal or monetary policy will buy large gains in real output at low cost in terms of inflation.
74. Many economists maintain that
the aggregate supply curve is nearly horizontal at low levels of real GDP,the aggregate supply curve is nearly vertical at very high levels of real GDP, any change in aggregate demand will have most of its effect on output when economic activity is low but on prices when
75. An expansionary monetary policy is most likely to produce an inflationary effect with little impact on output when the economy
is near full employment and the aggregate supply curve is vertical.
76. When will stabilization policy be most effective in combating recessions?
when AS is flat
77. What role does ideology play in the debate on stabilization?
A large role, because there are conservative and liberal economists.
78. The Fed's quick response to the threat to the economy after September 11, 2001, makes a strong case for
a discretionary-based monetary policy regime.
79. After September 11, 2001, both Republicans and Democrats agreed on the need for some type of
stimulus package to counteract recession.
80. To maintain a balanced budget during the sag in personal spending in 2000-2001 could cause a(n)
decrease in aggregate demand and a recession.
81. If the U.S. government decided to pay off the national debt by creating money in a few years, what would be the most likely effect?
rapid inflation
82. The government should not attempt to balance the budget if
the economy is in a recessionary gap.actual GDP is below full-employment GDP.unemployment is rising.
83. If the economy is in an inflationary gap, and the government attempts to balance the budget, the effect will be to
continue inflationary pressures.
84. If the president and Congress agree to balance the budget during a recession, then the appropriate monetary policy is
increase the growth of the money supply.
85. If in fiscal year 2001, the federal government receives $1,990 billion in revenues and spends $1,875 billion for goods and services, the national debt will
decrease by $115 billion.
86. Compared to the size of GDP in 2004, the national debt was approximately
one-third as large.
87. A chart of the ratio of national debt to GDP from 1915 to 2001 would show
significant increases from 1980 to 1995.
88. The net national debt is smaller than the gross national debt because
some debt is held by government agencies.
89. With no change in fiscal policy, the budget
deficit will rise during a recession and fall during a boom.
90. A recessionary gap causes national debt to increase because
income tax receipts drop off markedly.
91. If the inflation rate falls, what will happen to the budget deficit?
It will fall, because interest payments will fall.
92. The U.S. government need never default on its debt because
it can raise the funds it needs to repay by taxation, and it can print money to repay.
93. The policy mix that the Clinton administration sought in early 1993 was a
smaller budget deficit and looser monetary policy.
94. Budget deficits are inflationary when
the economy is at full employment and the aggregate supply curve is vertical.
95. The central bank is said to monetize the deficit when it
purchases the bonds that the government issues.
96. If the Fed is increasing its holdings of government bonds at the same time the federal deficit is increasing,
the debt is being monetized.
97. The decisions on the part of the government to increase spending by $5 billion will have the largest impact on aggregate demand when the spending is financed by the sale of bonds to
the Fed.
98. Why might the Fed decide to monetize the deficit?
to keep interest rates low
99. Crowding out can best be defined as:
government deficits increase interest rates and decrease investment.
100. Economists who argue in favor of rapid deficit reduction claim that deficit reduction will
reduce crowding out, increase investment, and increase AS.
101. In the late 1990s, the more than expected increases in tax revenues were the result of
rapid economic growth.
102. The economy's self-correcting mechanism to eliminate a recessionary gap relies on
falling wage rates that shift the aggregate supply curve outward.
103. Demand-side inflation differs from supply-side inflation in the following way:
demand-side inflation has higher output; supply-side inflation has lower output.
104. Aggregate supply tends to grow because
there are more workers in the economy every year.there is more capital in the economy every year.technology tends to improve every year.
105. If the aggregate supply curve is vertical, then the short-run Phillips curve will
also be vertical.
106. The Phillips curve is built on the assumption that business fluctuations are
from the demand side.
107. One reason why the Phillips curve "broke down" is
most of the inflation of the 1970s was from the supply side.
108. The recent rapid advance in computer technology is one of the reasons given for the shift of the
aggregate supply curve outward.
109. After September 11, 2001, President George W. Bush believed in the need for a fiscal stimulus. The proper fiscal policy to reflect this could include a(n)
increase in government purchases.
110. Assume that the government is considering different policies to increase total expenditures in order to reduce unemployment. Which of the following would achieve this objective?
decreasing taxes,increasing government spending,increasing transfer payments
111, The central idea of supply-side tax cuts is that certain types of tax cuts will increase
aggregate supply.
112. A proponent of supply-side economics would advocate
reducing income taxes on saving.
113. The primary goal of supply-side economics is to
reduce inflation and increase growth at the same time.
114. A reduction in the capital gains tax, often advocated by proponents of supply-side economics, is supposed to stimulate
investment spending.
115. Critics of supply-side economics argue that a major flaw is
the small magnitude of supply-side effects.the large size of demand-side effects.increased income inequality.
116. One objection to supply-side tax cuts is that demand-side changes
are larger than supply-side changes.
117. If the demand-side effects of supply-side tax cuts are greater than the supply-side effects, then we can expect the result to be a(n)
increase in output and prices.
118. Capital gains tax cuts inevitably benefit
high-income stock owners.
119. Tax cuts associated with supply-side economics often lead to increased
federal budget deficits.
120. Since the supply-side tax cuts of the 1980s,
there has been no evidence that supply-side incentives increase saving or the labor supply.
121. A Keynesian economist would expect a supply-side tax cut to shift
only the aggregate demand curve outward.
122. When did we begin experiencing a negative growth rate during current recession?
First quarter of 2008
123. Which of the following is said to cause current Great Recession?
Excessive lending by banks which violated lending rules. Subprime mortgage defaults, High leverage,
124. If I use $10,000.00 of my own saving and borrow $60,000.00 from a local bank and invest the total Amount, my leverage is:
7 to 1
125. One of the following is the main reason as to why the current recession has lasted for so long. Which one is it?
Depressed housing market
126. Obama administration and the Fed have been consistent in fighting current recession in that
Fed has engaged in excessive lending and administration has increased government spending