Exam 3 Flashcards
The government’s fiscal policy is its plan to regulate aggregate demand by manipulating:
taxation and government spending
Budget deficits are created when:
government spending exceeds its tax revenues
Budget surpluses exist when:
government tax revenues exceed its spending
A decrease in transfer payments or an increase in taxes would____disposable income of households and thus____consumption purchases.
decrease:decrease
If government policy makers were worried about the inflationary potential of the economy, what would NOT be a correct fiscal policy change?
increase in government purchases of goods and services
If the government sought to end a recession, what would be an appropriate policy?
decrease taxes and increase transfer payments
If there is initially a federal budget deficit, and taxes rise, while transfer payments fall:
AD decreases and the budget deficit decreases
AD will shift left when:
the government budget surplus increases because taxes rose
If unemployment is the most significant problem in the economy, what action would be an appropriate fiscal policy?
decrease taxes and increase government purchases
What tax change would a supply-side economist be most likely to favor?
lower marginal income tax rates
Supply-side advocates believe that when taxes and regulations are too burdensome, people will:
save less
work less
provide less investment capital
After legislation is signed into law, the time it takes before actual fiscal stimulus is noticed is termed as:
impact lag
The size of the crowding out effect is uncertain. If the crowding out effect is small,
the impact of an increase in G on the interest rates will be small, thus reducing the decrease in I
Due to crowding-out effects:
investment will tend to move in the opposite direction from a change in government purchases
Which group or groups buy U.S. public debt?
government agencies
private individuals
private institutions
Typically, the budget deficit is financed by:
issuing debt
The government does not have to repay the national debt, in the sense that it must reduce the debt to zero, because:
it can constantly refund the debt by issuing new bonds
Which of the following is the best definition of money?
anything generally accepted as a payment for goods or repayment of debt
The primary benefit of monetary exchange compared to barter exchange is:
increased efficiency in arranging transactions
Using money as a store of value rather than wheat is:
both safer and less expensive
Money almost always serves as the standard unit for quoting prices. This is another way of saying money serves as a:
Standard of value
Which of the following is an example of money serving as a medium of exchange?
buying coffee
Which of the following backs our money supply?
the faith in the government’s ability to provide an instrument people will take in exchange for goods and services
One reason why gold and silver coins have historically served as money is that:
easily portable
can be made of uniform size and quality
divided if necessary for low prices
do not corrode or rust
Fiat money has value because:
it can be used to buy things
“Near Monies” are:
highly liquid assets that are close substitutes for money
In defining money, it is universally accepted that
must be spendable
must be liquid
must be accepted as payment
must be easily transferable
What asset is most liquid:
funds in a savings account
Which is NOT a form of money?
credit cards
The difference between M1 and M2 is:
M2 is nearly four times as large as M1
A decrease in currency in circulation combined with an equal increase in savings account deposits would:
decrease M1 but have no effect on M2
M2 equals M1 plus:
near moneys
M1 includes:
cash
checking account balances
travelers’ checks
If you took money out of your savings deposit account and put it in a demand deposit account:
M1 would increase but M2 would not change
A depositor can not directly write checks against:
non-transaction deposits
With the invention of banking, one important aspect of money was that:
banks have SOME discretion over the money supply
Fractional reserve banking takes its name from the fact that:
banks keep only a fraction of total deposits on reserve
Can bankers create money?
Yes, through multiple deposit creation
A reserve requirement of 10% means a money multiplier of:
10
1/reserve requirement (1/.10=10)
The money _____ is 1 divided by the reserve requirement. The larger the reserve requirement, the ___ the money multiplier.
multiplier, smaller
If the reserve requirement is 15% and a customer makes a cash deposit of $50,000, how much new excess reserves are created?
$42,500
15% of 50,000=7500. 50,000-7500=42500
Potential money creation is:
initial deposit times money multiplier
A single bank is severely limited in its ability to create money because:
the funds loaned probably will be deposited in another bank
The process of money creation can be reversed:
when a person pays a loan back to a bank
If a bank had demand deposits of $80 million and is faced a 25% required reserve ratio, it would be required to have how many reserves?
$20 million
$80 million x .25=$20 million
A decreae in the excess reserves banks want to hold, together with people taking currency out of their demand deposits account would:
have an indeterminate effect on money supply
Demand deposits are:
liabilities of banks, assets of depositors
Loans are:
assets to banks, liabilities of borrowers
If the required reserve ratio was increased, then:
both the money supply and the outstanding loans of banks would tend to decrease
What change would clearly increase the supply of money in the banking system?
a decrease in the percentage of the money people want to hold as currency and a decrease in the fraction of deposits banks want to hold as excess reserves
Uncertainty may cause banks to hold larger excess reserves. This will:
tend to reduce the volume of loans and the money supply
What guarantees the deposits in almost all banks up to a limit of $100,000 per account?
the FDIC
The chairman of the Federal Reserve Board is:
Ben Bernanke
All decisions of the Fed are subject to approval by:
No one
What is NOT a function of the Federal Reserve System?
making commercial loans to its customers
Decisions regarding purchases and sales of securities by the Fed are made by:
Federal Open Market Committee
The Fed’s purchases and sales of government securities are called:
open market operations
When the Fed wants to expand the money supply through open market operations, it:
purchases government securities from member banks
The money supply contracts when the Fed:
sells government securities
What is most frequently used when the Fed is attempting to adjust the money supply?
open market operations
Halving the required reserve ration would:
double the money supply
If the Fed raises the discount rate, it:
reduces the supply of money
If the Fed wanted to reduce the federal funds interest rate, it might:
decrease the discount rate
A combination of a decrease int he discount rate and an increase in the reserve requirements would:
have and indeterminate effect on the money supply
If the Fed buys a U.S. government bond from a member of the public,
the banking system has more reserves and the money supply tends to grow
What would constitute contractionary monetary policy by the Fed?
open market sales of government securities
an increase in the discount rate
an increase in reserve requirements
The primary reason that money is demanded is for:
transaction purposes
When the money supply decreases:
real interest rates rise and investment spending falls
If the interest rates rise, what will happen to demand for money?
Nothing
Expansionary monetary policy will tend to have what effect?
increase the money supply and lower interest rates
If money supply and money demand both increased?
the change in the interest rates and investment would be indeterminate
When money demand decreases, interest rates will fall. In this situation the Fed can choose between:
letting interest rates remain lower or decreasing the supply of money
What would tend to increase AD?
a commercial bank using excess reserves to extend a loan to a customer
When the economy is in a recession:
expansionary monetary policy can potentially result in increase real output in both the short run and the long run
When the economy is initially at full employment:
contractionary monetary policy can result in decreased real output in both the short and long run
Id unemployment is the major problem in the economy, what would be an appropriate monetary policy response?
decrease the discount rate
Is increasing taxes a fiscal policy or monetary policy?
fiscal policy
How would you counteract an inflationary gap?
sell government bonds
What are some examples of contractionary monetary policy?
increase reserve requirements
increase the discount rate
sell government bonds
If inflation is the major problem in the economy, what would be an appropriate monetary policy response?
increase the discount rate
The equation of exchange states that:
the money supply times the velocity = the price level times the quantity of goods and services produced
In the equation of exchange, PQ represents:
the dollar value of all final goods and services sold in a county in a given year
What id the definition of velocity?
velocity = value of final goods and services produced/money supply
If policies of the Fed cause the money supply to increase, and velocity is help constant, the expected outcome would be:
P ‘ Q would increase, and therefore the general price level and/or Q would increase
Compared to fiscal policy, what is an advantage of using monetary policy to attain macroeconomic goals?
the implemention of monetary policy is not slowed down by th same budgetary process as fiscal policy
An important limitation of monetary policy is that
it must be conducted through the commercial banking system, and the Fed cannot always make banks do what it wants them to do
What is not a major trading partner of the U.S./
Russia
The main reason why one nation trades with another is to:
exploit the advantages of specialization
If discussing trade, it is ____ which matters, rather than ____.
comparative advantage; absolute advantage
If a nation does not have an absolute advantage in producing anything, it:
will hav a comparative advantage in the activity in which its disadvantage is the least
If two countries each are currently producing two goods, and each begins to specialize in the good in which it has a comparative advantage, what will happen to total world output?
it will increase
Comparative advantage occurs when a person or a country can produce a good or service at a lower ___ than others.
opportunity cost
In Samoa the opportunity cost of producing 1 coconut is 4 pineapples, while Guam the opportunity cost of producing 1 coconut is 5 pineapples. In this situation:
if trade occurs, both countries will be able to consume beyond their original production possibilities frontiers
The record of all international financial transactions in which a nation has engaged over a year is known as the:
balance of payments
The record of all transactions with foreign nations that involve the exchange of merchandise goods and services or unilateral gifts is called the:
current account
The difference between the value of a country’s merchandise exports and imports is known as the balance of:
trade
The U.S. balance of trade:
is the difference between exports and imports
The balance on current account records information about:
the levels of imports and exports of goods and services for a country
What would be included in the capital account section of the balance of payments?
government bond purchases
Whenever there is a deficit in the current account, the capital account:
will be positive
If U.S. buys a lot of foreign produced video games it would tend to:
increase the balance of trade deficit of the U.S
The exchange rate:
states the price of one currency in terms of another currency
If the dollar APPRECIATES it can be said that:
other currencies depreciate
Is it possible for a currency to appreciate relative to another currency, and depreciate relative to a third?
Yes, this is possible in a world of floating exchange rates
If the U.S. dollar depreciates, what will happen to aggregate demand?
it will increase exports and decrease imports and therefore increase AD
What is demand-pull inflation?
a price-level increase due to an increase in aggregate demand
What is cost-push inflation?
a price-level increase due to a negative supply shock or increase in input prices
What is a supply shock?
An unexpected event that changes the supply of a product or commodity, resulting in a sudden change in its price.
