2 Multiple Choice Ii

Front 1

121. Which of the following is NOT an example of government transfers?
A) Medicaid-paid prescription drugs for low-income individuals
B) unemployment insurance
C) a Social Security disability pension
D) a reimbursement of personal income tax withheld from wages

Back 1

D) a reimbursement of personal income tax withheld from wages

Front 2

122. Which of the following is not an example of a government transfer payment?
A) environmental protection programs
B) Social Security
C) Medicare
D) Medicaid

Back 2

A) environmental protection programs

Front 3

123. A change in taxes or a change in government transfers affects consumption through a change in:
A) autonomous consumption.
B) the marginal propensity to save.
C) disposable income.
D) government spending.

Back 3

C) disposable income.

Front 4

124. Consumer spending will rise if:
A) government transfers rise.
B) the government raises tax rates.
C) government transfers fall.
D) the government raises tax rates or government transfers fall.

Back 4

A) government transfers rise.

Front 5

125. Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:
A) decrease government purchases.
B) decrease taxes.
C) decrease government transfers.
D) increase real interest rates.

Back 5

B) decrease taxes.

Front 6

126. If the current level of real GDP lies below potential GDP, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.
A) increase government purchases; AD; left.
B) increase transfer payments; AS; right.
C) increase tax rates; AD; right.
D) increase government purchases; AD; right.

Back 6

D) increase government purchases; AD; right.

Front 7

135. If the economy is at equilibrium below potential output:
A) there is a recessionary gap, and expansionary fiscal policy is appropriate.
B) there is an inflationary gap, and expansionary fiscal policy is appropriate.
C) there is a recessionary gap, and contractionary fiscal policy is appropriate.
D) there is an inflationary gap, and contractionary fiscal policy is appropriate.

Back 7

A) there is a recessionary gap, and expansionary fiscal policy is appropriate.

Front 8

136. If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:
A) a decrease in government transfers.
B) an increase in government spending.
C) a decrease in government spending.
D) an increase in the money supply to decrease interest rates.

Back 8

B) an increase in government spending.

Front 9

137. Which of the following is an expansionary fiscal policy?
A) an increase in the money supply that decreases interest rates
B) an increase in taxes that reduces the budget deficit and decreases consumption
C) a decrease in government spending on the space program
D) an increase in unemployment benefits

Back 9

D) an increase in unemployment benefits

Front 10

138. A reduction in government transfers ________, therefore shifting the aggregate demand curve to the ________.
A) increases labor costs to companies, increasing investment; left
B) decreases government purchases of goods and services, decreasing consumption; right
C) increases the marginal propensity to save, decreasing consumption; right
D) decreases disposable income and consumption; left

Back 10

D) decreases disposable income and consumption; left

Front 11

139. To close a recessionary gap by employing fiscal policy, the government could:
A) increase national savings so that the interest rate falls.
B) lower the annual income exempt from paying the personal income tax.
C) lower the corporate income tax rate.
D) lower the amount of unemployment insurance benefits.

Back 11

C) lower the corporate income tax rate.

Front 12

149. An expansionary fiscal policy:
A) usually decreases a government budget deficit or increases a government budget surplus.
B) may include decreases in government spending.
C) may include increases in taxes.
D) may include decreases in taxes.

Back 12

D) may include decreases in taxes.

Front 13

150. An inflationary gap can be closed with:
A) expansionary monetary policy.
B) a decrease in taxes.
C) a decrease in government purchases.
D) expansionary fiscal policy.
D) expansionary fiscal policy.

Back 13

C) a decrease in government purchases.

Front 14

151. Contractionary fiscal policy causes the aggregate demand curve to shift to the _______ and is used to close a(n) _______ gap.
A) right; inflationary
B) right; recessionary
C) left; inflationary
D) left; recessionary

Back 14

C) left; inflationary

Front 15

153. Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following would most likely result?
A) Equilibrium real GDP will be more than anticipated.
B) The economy could move into a recession.
C) The economy will generate a larger inflationary gap than anticipated.
D) This will not have any adverse effects on the economy, since inflation has been abated.

Back 15

B) The economy could move into a recession.

Front 16

154. Decreasing funding to explore space:
A) will shift the aggregate supply curve to the left.
B) will shift the aggregate supply curve to the right.
C) will shift the aggregate demand curve to the left.
D) will shift the aggregate demand curve to the right.

Back 16

C) will shift the aggregate demand curve to the left.

Front 17

155. If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by:
A) $40 million.
B) $50 million.
C) $200 million.
D) $250 million.

Back 17

D) $250 million.

Front 18

156. If the government spends an extra $5 billion on goods and services:
A) GDP will go up by $5 billion.
B) GDP will remain unchanged.
C) GDP will increase by less than $5 billion.
D) GDP will increase by more than $5 billion.

Back 18

D) GDP will increase by more than $5 billion.

Front 19

157. If the marginal propensity to save is 0.1, then the government spending multiplier has a value of
A) one-tenth
B) 9
C) 10
D) one-ninth

Back 19

C) 10

Front 20

159. If the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, the income expenditure model would predict that real GDP will increase by:
A) $100 billion.
B) $750 billion.
C) $400 billion.
D) $300 billion.

Back 20

C) $400 billion.

Front 21

160. Congress increases personal income tax rates in order to balance the budget. Which of the following is likely to result?
A) Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand.
B) Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand.
C) Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand.
D) Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.

Back 21

B) Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand.

Front 22

161. Government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as:
A) automatic stabilizers.
B) discretionary fiscal policy.
C) balanced budget policy.
D) deficit reduction policy.

Back 22

A) automatic stabilizers.

Front 23

164. Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If current real GDP is $850, which of the following policies would bring the economy to potential output?
A) Decrease government spending by $50 billion.
B) Increase government spending by $50 billion.
C) Decrease government transfers by $50 billion.
D) Decrease government spending by $10 billion.

Back 23

D) Decrease government spending by $10 billion.

Front 24

165. Economists believe that the budget should be balanced each fiscal year. Is this correct?
A) Yes, a budget should be balanced annually, otherwise persistent budget deficits can cause havoc in the economy.
B) Yes, as the law states that both the federal and state government budgets should always be balanced.
C) Yes, since the balanced budget multiplier is larger, hence it makes the economy grow faster.
D) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

Back 24

D) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

Front 25

166. The stability pact, signed by many of the European countries that adopted the euro, limited each member nation's deficit to 3% of GDP. This:
A) enhanced the ability of each of the member countries to conduct fiscal policy.
B) enhanced the ability of each of the member countries to conduct monetary policy.
C) limited each member country's ability to use fiscal policy.
D) did away with budget deficits all together.

Back 25

C) limited each member country's ability to use fiscal policy.

Front 26

167. What can the federal government do to finance a deficit?
A) cut taxes
B) increase spending
C) reduce interest rates
D) borrow funds

Back 26

D) borrow funds

Front 27

168. Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is:
A) $10.5 trillion.
B) $6.5 trillion.
C) $9 trillion.
D) $7.5 trillion.

Back 27

D) $7.5 trillion.

Front 28

169. When the budget is in deficit, the government generally:
A) raises taxes.
B) increases the public debt.
C) sells public assets like national parks.
D) decreases military spending.

Back 28

B) increases the public debt.

Front 29

170. If the economy exhibited an inflationary gap, the government should follow:
A) an expansionary policy, which would shift the AD curve to the right.
B) a contractionary policy, which would shift the AD curve to the right.
C) an expansionary policy, which would shift the AD curve to the left.
D) a contractionary policy, which would shift the AD curve to the left.

Back 29

D) a contractionary policy, which would shift the AD curve to the left.

Front 30

171. When the government decreases government spending, the:
A) AD curve will shift to the left.
B) SRAS curve will shift to the left.
C) government's budget balance will move toward a deficit.
D) government debt will increase.

Back 30

A) AD curve will shift to the left.

Front 31

172. Holding everything else constant, the government's budget balance during an expansion will
A) increase.
B) remain the same.
C) decrease.
D) be equal to 100.

Back 31

A) increase.

Front 32

173. The government deficit:
A) is the essentially the same as the government debt.
B) is much higher than the government debt.
C) measures the difference between the amount government spends and the amount it
collects in tax revenues in a given period.
D) is the total amount of money a government owes at a particular point in time.

Back 32

C) measures the difference between the amount government spends and the amount it
collects in tax revenues in a given period.

Front 33

174. Funding for Social Security and Medicare:
A) must come from government borrowing.
B) comes from dedicated taxes.
C) is likely to increase with the retirement of baby boomers.
D) can be accomplished with lower taxes in the future.

Back 33

B) comes from dedicated taxes.

Front 34

175. The 2009 American Recovery and Reinvestment Act was an example of:
A) an automatic stabilizer.
B) a contractionary government policy.
C) a contractionary monetary policy.
D) an expansionary fiscal policy.

Back 34

D) an expansionary fiscal policy.

Front 35

176. If the tax rate is 0.1 and the MPC is 0.5:
A) the multiplier is equal to 2.
B) the multiplier is equal to 1.8.
C) the multiplier is equal to 2.1.
D) the multiplier is equal to 1.

Back 35

B) the multiplier is equal to 1.8.

Front 36

177. Which of the following combination of assets is considered to be money?
A) currency in circulation, checkable bank deposits, and credit cards
B) currency in circulation, checkable bank deposits, and travelers' checks
C) currency in circulation and in bank vaults, checkable bank deposits, and travelers' checks
D) currency in circulation and in bank vaults, checkable bank deposits, and credit cards

Back 36

B) currency in circulation, checkable bank deposits, and travelers' checks

Front 37

178. Which of the following is considered to be money?
A) Google stock
B) bonds
C) credit cards
D) checking account deposits

Back 37

D) checking account deposits

Front 38

179. “Tuition at State University this year is $8,000.” Which function of money does this statement best illustrate?
A) as a store of value
B) as a medium of exchange
C) as a unit of account
D) as a means of deferred payment

Back 38

C) as a unit of account

Front 39

180. When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n):
A) medium of exchange.
B) expander of economic activity.
C) factor of production.
D) store of value.

Back 39

D) store of value.

Front 40

181. When people use money to purchase downloaded music, they are using money as:
A) a medium of exchange.
B) a store of value.
C) a unit of account.
D) a store of account.

Back 40

A) a medium of exchange.

Front 41

182. Commoditymoneyis:
A) whatever the government has decreed is money.
B) a good used as a medium of exchange that has other uses.
C) money used for commodity futures trading.
D) whatever people accept as money.

Back 41

B) a good used as a medium of exchange that has other uses.

Front 42

185. Which of the following is true concerning the monetary aggregates?
A) M2 includes the gold stock but not M1.
B) M2 includes M1.
C) The gold stock backs M2 but not M1.
D) M1 includes M2 but not the gold stock.

Back 42

B) M2 includes M1

Front 43

186. Which of the following is near-money?
A) a traveler's check
B) a credit card
C) a debit card
D) a savings account

Back 43

D) a savings account

Front 44

187. Which of the following financial assets belongs to M2 but not to M1?
A) a savings account
B) a checkable deposit
C) currency
D) travelers' checks

Back 44

A) a savings account

Front 45

188. Included in the M1 definition of money are:
A) checkable bank deposits.
B) savings deposits.
C) U.S. Treasury bills.
D) demand deposits, savings deposits, and U.S. Treasury bills.

Back 45

A) checkable bank deposits.

Front 46

189. Bank reserves are:
A) the fraction of deposits kept in gold with the Federal Reserve.
B) the deposits lent to finance illiquid investments.
C) the fraction of deposits kept in the form of very liquid assets.
D) gold kept in the bank's vault.

Back 46

C) the fraction of deposits kept in the form of very liquid assets.

Front 47

191. Among the assets of a bank are:
A) deposits.
B) loans.
C) borrowings.
D) deposits and loans.

Back 47

B) loans.

Front 48

192. If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is:
A) 5%.
B) 10%.
C) 12.5%.
D) 25%.

Back 48

D) 25%.

Front 49

193. The reserve ratio is defined as the ratio of:
A) bank assets to bank liabilities.
B) bank assets to bank reserves.
C) customers' bank deposits to bank assets.
D) bank reserves to customers' bank deposits.

Back 49

D) bank reserves to customers' bank deposits.

Front 50

194. Which of the following is NOT true about bank runs?
A) They may start as a result of a rumor that a bank is in financial trouble.
B) Many banks' depositors try to withdraw their funds due to fears of a bank failure.
C) Bank runs typically only happen to small banks with few financial assets.
D) Bank runs often lead to a loss of faith in other banks, causing additional bank runs.

Back 50

C) Bank runs typically only happen to small banks with few financial assets.

Front 51

195. A bank run can break a bank because:
A) borrowers default on their loans, and the bank's assets become worthless.
B) banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.
C) depositors' panic spreads to borrowers, who want to take additional loans from the bank.
D) the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury bonds.

Back 51

B) banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.

Front 52

196. Bank runs in the United States during the 1930s had a large negative impact on the economy because:
A) capital requirements prevented bank managers from taking additional lending risks.
B) the reserve ratio was set too high.
C) the Federal Reserve system did not exist at the time.
D) the loss of confidence at one bank quickly extended to other banks.

Back 52

D) the loss of confidence at one bank quickly extended to other banks.

Front 53

197. A major problem with bank runs is that they:
A) spread to other banks.
B) cause inflation, because the money moves so fast in the economy.
C) cause interest rates to fall.
D) cause both inflation and interest rates to fall.

Back 53

A) spread to other banks.

Front 54

198. If a bank has assets equal to $100 million dollars, according to practice, its liabilities should NOT exceed:
A) $7 million.
B) $70million.
C) $93 million.
D) $107 million.

Back 54

C) $93 million.

Front 55

199. The existence of banks:
A) results in the money supply being larger than the amount of currency in circulation.
B) inhibits the creation of money.
C) makes the money supply equal to the amount of currency in circulation.
D) results in the money supply being less than the amount of currency in circulation.

Back 55

A) results in the money supply being larger than the amount of currency in circulation.

Front 56

200. Banks create money when they:
A) make loans.
B) take deposits.
C) hold excess reserves.
D) pay withdrawals to depositors.

Back 56

A) make loans.

Front 57

201. Which of the following would be the initial effect if an individual made a $10,000 cash deposit in a bank?
A) The money supply would rise by $10,000.
B) The money supply would fall by $10,000.
C) The money supply would not be affected by the deposit.
D) The money supply would fall but by less than the $10,000 deposit.

Back 57

C) The money supply would not be affected by the deposit.

Front 58

202. Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by:
A) $500.
B) $2,500.
C) $100.
D) $400.

Back 58

D) $400.

Front 59

203. Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%. Then Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly. That bank can lend an additional:
A) $100
B) $800
C) $900
D) $300

Back 59

C) $900

Front 60

204. 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; $1,000
B) $100; $900
C) $90; $900
D) $100; $1,000

Back 60

C) $90; $900

Front 61

205. The money multiplier is equal to:
A) 1 divided by the reserve ratio.
B) 1 divided by excess reserves.
C) 1 minus the reserve ratio.
D) the reserve ratio plus excess reserves divided by the reserve ratio.

Back 61

A) 1 divided by the reserve ratio.

Front 62

213. Decisions about monetary policy are made by:
A) the president and Congress.
B) the President's Council of Economic Advisors.
C) the Federal Open Market Committee.
D) representatives of banks that are members of the Federal Reserve System.

Back 62

C) the Federal Open Market Committee.

Front 63

214. To change the money supply, the Federal Reserve most frequently uses:
A) changes in the required reserve ratios.
B) changes in the discount rate.
C) open-market operations.
D) changes in the inflation rate.

Back 63

C) open-market operations.

Front 64

215. All of the following are responsibilities of the Federal Reserve EXCEPT to:
A) control the monetary base.
B) mint bills and coins.
C) oversee and regulate the banking system.
D) set the discount rate.

Back 64

B) mint bills and coins.

Front 65

216. To_________ the money supply, the Federal Reserve could ________.
A) increase; lower the reserve requirements
B) decrease; lower the discount rate
C) increase; raise the federal funds rate
D) decrease; conduct open-market purchases

Back 65

A) increase; lower the reserve requirements

Front 66

217. If the Federal Reserve wants to increase the money supply, it will:
A) sell U.S. Treasury bills.
B) cut taxes across the board.
C) lower the reserve requirement.
D) increase the discount rate.

Back 66

C) lower the reserve requirement.

Front 67

218. A firm uses financial leverage when it:
A) replaces labor with capital.
B) borrows money from a bank to enlarge a factory.
C) raises the price of a product when demand is inelastic.
D) gets a volume discount from a supplier.

Back 67

B) borrows money from a bank to enlarge a factory.

Front 68

221. Money is:
A) any form of wealth.
B) an asset that can be easily used to purchase goods and services.
C) only currency which is designated by law.
D) only currency in circulation.

Back 68

B) an asset that can be easily used to purchase goods and services.

Front 69

222. Suppose a bank faces a 10% required reserve ratio and it has $100 in required reserves. If it is fully loaned out, what is the amount of deposits into this bank?
A) $900
B) $10
C) $1,000
D) $10,000

Back 69

C) $1,000

Front 70

223. The existence of deposit insurance:
A) can increase the possibility of bank runs.
B) often makes banks more accountable for their actions and less likely to engage in risky behavior.
C) essentially serves the same function as a fractional reserve system.
D) leads depositors to be less inclined to monitor bank operations.

Back 70

D) leads depositors to be less inclined to monitor bank operations.

Front 71

224. When a bank lends excess reserves to a customer:
A) this does not affect the money supply.
B) the money supply is increased.
C) the money supply is decreased.
D) it has the same effect as when one customer writes a check to another customer at a different bank.

Back 71

B) the money supply is increased.

Front 72

225. When a bank borrows from the Federal Reserve, it pays the:
A) required reserve ratio.
B) discount rate.
C) federal funds rate.
D) prime rate.

Back 72

B) discount rate.

Front 73

226. If the Federal Reserve wanted to increase the money supply, it could:
A) decrease the required reserve ratio, increase the federal funds rate, and sell bonds on the open market.
B) decrease the required reserve ratio, decrease the discount rate, and buy bonds on the open market.
C) increase the required reserve ratio, increase the personal tax rate, and sell bonds on the open market.
D) increase the personal tax rate, decrease the required reserve ratio, and buy bonds on the open market.

Back 73

B) decrease the required reserve ratio, decrease the discount rate, and buy bonds on the open market.

Front 74

227. Suppose an economy uses a checkable deposits only monetary system and it has a required reserve ratio of 20%. If the central bank in this economy conducts an open market purchase of $5 million Treasury bills, this will potentially:
A) increase the money supply by $25 million.
B) decrease the money supply by $25 million.
C) increase the money supply by $10 million.
D) decrease the money supply by $10 million.

Back 74

A) increase the money supply by $25 million.

Front 75

228. Generally, the more liquid an asset is:
A) the lower its purchasing power.
B) the lower its rate of return.
C) the higher its capacity to store value over time.
D) the higher its rate of return.

Back 75

B) the lower its rate of return.