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Economics > ECON201 - Exam 2 - Review > Flashcards

ECON201 - Exam 2 - Review Flashcards

1
Q

If the MPC in an economy is .75, a $1 billion increase in taxes will ultimately reduce consumption by:

A

$3 billion.

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2
Q

When the required reserve ratio is increased, the excess reserves of member banks are:

A

Reduced and the multiple by which the commercial banking system can lend is reduced.

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3
Q

If you are estimating your total expenses for school next semester, you are using money
primarily as:

A

A unit of account.

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4
Q

The total demand for money curve will shift to the right as a result of:

A

An increase in nominal GDP.

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5
Q

If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:

A

Increase by $10 billion.

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6
Q

Money functions as:

A

ALL OF THE ABOVE: a store of value, a unit of account, and a medium of exchange.

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7
Q

In the late 1990s the U. S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:

A

Wealth effect.

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8
Q

The consumption schedule shows:

A

The amounts households plan or intend to consume at various possible levels of aggregate income.

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9
Q

If the MPC in an economy is .8, government could shift the aggregate demand curve
rightward by $100 billion by:

A

Decreasing taxes by $25 billion.

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10
Q

The MPC can be defined as that fraction of a:

A

Change in income that is spent.

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11
Q

The asset demand for money:

A

Varies inversely with the rate of interest.

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12
Q

Refer to the above graph. A shift of the consumption schedule from C2 to C1 might be
caused by a(an):

A

Reverse wealth effect, caused by a decrease in stock market prices.

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13
Q

If the Fed were to increase the legal reserve ratio, we would expect:

A

Higher interest rates, a contracted GDP, and appreciation of the dollar.

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14
Q

Given the expected rate of return on all possible investment opportunities in the economy:

A

An increase in the real rate of interest will reduce the level of investment.

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15
Q

The determinants of aggregate supply:

A

Include input prices and resource productivity.

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16
Q

In the United States, the money supply (M1) is comprised of:

A

Coins, paper currency, and checkable deposits.

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17
Q

Refer to the above data. After a deposit of $10 billion of new currency into a checking account
in the banking system, excess reserves will increase by:

A

$9 billion.

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18
Q

Which of the following represents the most expansionary fiscal policy?

A

A $10 billion increase in government spending

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19
Q

Open-market operations refer to:

A

The purchase or sale of government securities by the Fed.

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20
Q

A commercial bank can add to its actual reserves by:

A

Borrowing from a Federal Reserve Bank.

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21
Q

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank’s required and excess reserves are equal, then its actual reserves:

A

Are $20,000.

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22
Q

Overnight loans from one bank to another for reserve purposes entail an interest rate
called the:

A

Federal funds rate.

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23
Q

The consumption schedule shows:

A

A direct relationship between aggregate consumption and aggregate income.

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24
Q

The purchasing power of the dollar:

A

Is the reciprocal of the price level.

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25
Q

In which of the following sets of circumstances can we confidently expect inflation?

A

aggregate supply decreases and aggregate demand increases

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26
Q

Expansionary fiscal policy is so named because it:

A

Is designed to expand real GDP.

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27
Q

The three main tools of monetary policy are:

A

The discount rate, the reserve ratio, and open-market operations.

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28
Q

A bond having no expiration date: bond price = $1000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent.
Refer to the above information. If the price of this bond falls by $200, the interest rate will:

A

Rise by 2.5 percentage points.

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29
Q

The discount rate is the interest:

A

Rate at which the Federal Reserve Banks lend to commercial banks.

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30
Q

The multiplier effect means that:

A

A small increase in investment can cause GDP to change by a larger amount.

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31
Q

When current government expenditures exceed current tax revenues and the economy is achieving full employment:

A

The full-employment budget has a deficit.

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32
Q

The Fed can change the money supply by:

A

Doing all of the above.

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33
Q

If the dollar appreciates relative to foreign currencies, we would expect:

A

A country’s net exports to rise.

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34
Q

In the United States monetary policy is the responsibility of the:

A

Board of Governors of the Federal Reserve System.

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35
Q

Which of the following will not tend to shift the consumption schedule upward?

A

The expectation of a future decline in the consumer price index

36
Q

Most modern banking systems are based on:

A

Fractional reserves.

37
Q

Which of the following is the basic economic policy function of the Federal Reserve Banks?

A

Controlling the supply of money

38
Q

The purchase of government securities from the public by the Fed will cause:

A

The money supply to increase.

39
Q

The purchasing power of the dollar:

A

Is the reciprocal of the price level.

40
Q

Refer to the above data. The maximum amount by which the commercial banking
system can expand the supply of money by lending is:

A

$30 billion.

41
Q

Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy?

A

An increase in Federal income tax rates

42
Q

Refer to the above diagram of the money market. Given Dm and Sm, an interest rate of i3 is not sustainable because the:

A

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

43
Q

The Federal Open Market Committee (FOMC) is made up of:

A

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.

44
Q

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by:

A

Horizontally adding the transactions and the asset demand for money.

45
Q

A change in the legal reserve ratio affects the:

A

Amount of excess reserves in the banking system.

46
Q

The transactions demand for money is most closely related to money functioning as a:

A

Medium of exchange.

47
Q

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a
depositor and the bank finds that it can safely lend out $4,500, the reserve requirement
must be:

A

10 percent.

48
Q

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for them by drawing checks. As a result, commercial bank reserves will:

A

Decrease by $2 billion.

49
Q

Other things equal, appreciation of the dollar:

A

Decreases aggregate demand in the United States and may increase aggregate supply
by reducing the prices of imported resources.

50
Q

The crowding-out effect suggests that:

A

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

51
Q

The problem of “cyclical asymmetry” refers to the idea that:

A

A tight money policy can force a contraction of the money supply, but an easy money policy may not achieve an expansion of the money supply.

52
Q

If the real interest rate in the economy is i and the expected rate of return from
additional investment is r, then more investment will be forthcoming when:

A

r is greater than i.

53
Q

The twelve Federal Reserve Banks:

A

Hold the reserve deposits of commercial banks.

54
Q

(4) 20(Reserve Requirement Percent) 300,000(Checkable Deposits) 70,000(Actual Reserves) Z(Excess Reserves)
Refer to row 4 in the above table. The number appropriate for space Z is:

A

$10,000

55
Q

In an effort to avoid recession, the government implements a tax rebate program,
effectively cutting taxes for households. We would expect this to:

A

Increase aggregate demand.

56
Q

Refer to the above data. If the legal reserve ratio is 14 percent, suppose that customers of this
bank collectively write checks for cash at the bank in the amount of $6 million. As a result, the
bank’s excess reserves diminish to:

A

$.84 million.

57
Q

In the U.S. economy the money supply is controlled by the:

A

Federal Reserve System.

58
Q

In the above diagram, a shift from AS1 to AS3might be caused by a(n):

A

Increase in the prices of oil.

59
Q

Refer to the above data. After the deposit, the maximum amount by which this commercial
banking system can expand the supply of money by lending is:

A

$90 billion.

60
Q

Fiscal policy refers to the:

A

Manipulation of government spending and taxes to stabilize domestic output,
employment, and the price level.

61
Q

To say that the Federal Reserve Banks are quasi-public banks means that:

A

They are privately owned, but managed in the public interest

62
Q

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.

63
Q

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government:

A

Surplus and the sale of securities in the open market, a higher discount rate, and higher reserve requirements.

64
Q

Other things equal, if there is an increase in nominal GDP:

A

The interest rate will rise.

65
Q

Most modern banking systems are based on:

A

Fractional reserves.

66
Q

In comparison with the consumption schedule, the investment schedule is:

A

Relatively unstable.

67
Q

The political business cycle refers to the possibility that:

A

Politicians will manipulate the economy to enhance their chances of being reelected.

68
Q

Refer to the above data. The commercial banking system has excess reserves of:

A

$0 billion.

69
Q

Refer to the above diagram. Suppose that aggregate demand increased from AD1 to
AD2. For the price level to stay constant:

A

The aggregate supply curve would have to shift rightward.

70
Q

Commercial banks create money when they:

A

Create checkable deposits in exchange for IOUs.

71
Q

Money is destroyed when:

A

Loans are repaid.

72
Q

(3) 12(Reserve Requirement Percent) 200,000(Checkable Deposits) Y(Actual Reserves) 8,000(Excess Reserves)
Refer to row 3 in the above table. The number appropriate for space Y is:

A

$32,000.

73
Q

The equilibrium rate of interest in the money market is determined by the intersection of the:

A

Supply of money curve and the total demand for money curve.

74
Q

The asset demand for money is most closely related to money functioning as a:

A

Store of value.

75
Q

Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy?

A

A reduction in Federal tax rates on personal and corporate income

76
Q

When a bank loan is repaid the supply of money:

A

Is decreased.

77
Q

Banks create money when they:

A

Exchange checkable deposits for the IOU’s of businesses and individuals.

78
Q

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:

A

Buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.

79
Q

When a check is drawn and cleared, the

A

bank against which the check is cleared loses reserves and deposits equal to the
amount of the check.

80
Q

When economists say that money serves as a medium of exchange, they mean that it is:

A

A means of payment.

81
Q

In defining money as M1 economists exclude time deposits because:

A

They are not directly or immediately a medium of exchange.

82
Q

Answer the next question(s) on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks and buys $500
Page 10
of securities from individuals, who deposit the cash in checking accounts.

A

Remain unchanged.

83
Q

The reserves of a commercial bank consist of:

A

Deposits at the Federal Reserve Bank and vault cash.

84
Q

The above schedule indicates that if the real interest rate is 8 percent, then:

A

$30 billion of investment will be undertaken.

85
Q

Which of the following fiscal actions would be the most effective in curbing inflation?

A

Incurring a budget surplus and impounding that surplus

Economics (5 decks)

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