Econ 1500 - Chapters 9-12

Front 1

Most economists agree that fiscal policy:
A. can be used to eliminate most fluctuations in any economy.
B. can be used to fine tune the economy.
C. cannot be used to fine tune the economy.
D. should not be used to attempt to eliminate economic fluctuations, no matter how large.

Back 1

C. cannot be used to fine tune the economy.

Front 2

An increase in aggregate demand:
A. raises potential output.
B. reduces potential output.
C. does not change potential output.
D. has an unpredictable effect on potential output.

Back 2

C. does not change potential output.

Front 3

During the Reagan Administration (1981-1989), tax rates were reduced significantly, while federal defense spending rose by 80 percent. The effect of these policies on the AD curve is:
A. Shifted left
B. Stayed the same.
C. Went flat
D. Shifted right

Back 3

D. Shifted right

Front 4

A recessionary gap exists if the price level is:
A. A gap to the left of LAS
B. A gap to the right of LAS

Back 4

A. A gap to the left of LAS

Front 5

An economy's resources:
1. can never be over-utilized.
2. can be over-utilized indefinitely.
3. are always fully employed.
4. can be over-utilized, but only temporarily.

Back 5

4. can be over-utilized, but only temporarily.

Front 6

Contractionary fiscal policies are most appropriate when the economy is in:
1. a recessionary gap.
2. an inflationary gap.
3. a short-run equilibrium.
4. a long-run equilibrium.

Back 6

2. an inflationary gap.

Front 7

If actual output exceeds potential output, the economy:
1. is experiencing an inflationary gap.
2. is experiencing a recessionary gap.
3. may be in a long-run equilibrium but is not in a short-run equilibrium.
4. is in neither a short-run nor long-run equilibrium.

Back 7

1. is experiencing an inflationary gap.

Front 8

The rapid development of internet technologies during the 1990s allowed businesses to produce goods and services cheaper than. We would show this change in the aggregate-demand/aggregate-supply model by moving the aggregate:
1. demand curve right.
2. demand curve left.
3. supply curve down (to the right).
4. supply curve up (to the left).

Back 8

3. supply curve down (to the right).

Front 9

During 2005-2007, oil prices rose rapidly and reached historic highs. How would most economists predict these high prices should affect the U.S. economy in terms of the AD/AS model?
1. They would have no effect because oil prices are a microeconomic phenomenon.
2. They do not change anything, but are evidence of a shift in the aggregated demand curve to the right.
3. Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).
4. Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve down (to the right).

Back 9

3. Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).

Front 10

Keynes believed equilibrium output (income) was:
1. not fixed at the economy's potential income.
2. fixed at the economy's potential income
3. always below the economy's potential income.
4. always above the economy's potential income.

Back 10

1. not fixed at the economy's potential income.

Front 11

A fiscal policy that increases government spending or cuts taxes is most appropriate when the economy is in:
1. a recessionary gap.
2. an inflationary gap.
3. a short-run equilibrium.
4. a long-run equilibrium

Back 11

1. a recessionary gap.

Front 12

According to the short-run aggregate supply curve, the response to an increase in aggregate demand is an increase in:
1. prices.
2. production.
3. both production and prices.
4. neither production nor prices.

Back 12

3. both production and prices.

Front 13

The Classical economists argued that:
1. a market economy will never experience unemployment.
2. if unemployment occurs it will not persist because wages and prices will fall.
3. aggregate expenditures may be too low.
4. if inflation occurs it will cure itself because prices, wages, and interest rates will rise.

Back 13

2. if unemployment occurs it will not persist because wages and prices will fall.

Front 14

Expansionary monetary policy will likely:
1. shift the AD curve in to the left.
2. shift the AD curve out to the right.
3. make the AD curve steeper.
4. make the AD curve flatter.

Back 14

2. shift the AD curve out to the right.

Front 15

An increase in the aggregate demand curve will, in the long run, change:
1. output but not price level.
2. the price level but not output.
3. both output and the price level.
4. neither output nor the price level.

Back 15

2. the price level but not output.

Front 16

In 2009 the dollar depreciated sharply against foreign currencies. The dollar's depreciation should result in:
1. an increase in U.S. exports and an outward shift of the U.S. aggregate demand curve.
2. an increase in U.S. exports and an inward shift of the U.S. aggregate demand curve.
3. a decrease in U.S. exports and an outward shift of the U.S. aggregate demand curve.
4. a decrease in U.S. exports and an inward shift of the U.S. aggregate demand curve.

Back 16

1. an increase in U.S. exports and an outward shift of the U.S. aggregate demand curve.

Front 17

The short-run aggregate supply curve is most likely to shift down (to the right) if:
1. productivity falls.
2. wages rise.
3. sales taxes increase.
4. input prices fall.

Back 17

4. input prices fall.

Front 18

Fiscal policy is:
1. easy to enact and quick to affect the economy.
2. easy to enact but slow to affect the economy .
3. difficult to enact but quick to affect the economy.
4. difficult to enact and slow to affect the economy.

Back 18

4. difficult to enact and slow to affect the economy.

Front 19

Under what circumstances is it most clear the government should pursue neither fiscal nor monetary policy?
1. There is no inflation and the unemployment rate equals the target rate of unemployment.
2. Unemployment rate exceeds the target rate of unemployment.
3. The economy is experiencing deflation
4. The economy is below potential output.

Back 19

1. There is no inflation and the unemployment rate equals the target rate of unemployment.

Front 20

What effect occurs because as prices fall, people become richer, so they buy more?
1. international effect
2. multiplier effect
3. interest rate effect
4. wealth effect

Back 20

4. wealth effect

Front 21

The financial sector of an economy:
A. is not an important sector of the U.S. economy as it does not produce real goods.
B. transfers spending back into savings.
C. transfers savings back into spending.
D. is comprized of only one financial asset, money.

Back 21

C. transfers savings back into spending.

Front 22

If the reserve ratio is 0.08, the simple money multiplier is:
A. 1.
B. 8.
C. 10.5.
D. 12.5.

Back 22

D. 12.5.

Front 23

Short-term interest rates and long-term interest rates are determined in the ____________ and ____________, respectively.

Back 23

money market, loanable funds market

Front 24

If the required reserve ratio is 0.10 and individuals hold no cash, a new cash deposit of $2 million will increase the money supply by:
A. $ 2 million.
B. $ 4 million.
C. $ 20 million.
D. $200 million.

Back 24

C. $ 20 million.

Front 25

Total Reserves= $100,000 Demand Deposits= $100,000

The data above represents a bank's balance sheet. Suppose it is the only bank in town and individuals hold no cash. Assuming the reserve ratio is 10 percent and that the bank does not want to hold excess reserves. What will be the bank's loans at the end of the money creation process?
A. $90,000
B. $100,000.
C. $900,000.
D. $1,000,000.

Back 25

C. $900,000.

Front 26

What are the 3 functions of money?

Back 26

A. medium of exchange.
B. unit of account.
C. store of wealth.

Front 27

When a cashier gives you a pair of jeans for your $20 bill, money is serving which function?

Back 27

Medium of exchange.

Front 28

As the reserve ratio goes up, the simple money multiplier goes_____ and _____ money is created.

Back 28

down, less

Front 29

If the required reserve ratio is 0.20 and individuals hold no cash, a $5 million cash deposit in the banking system will increase the money supply by:

Back 29

$25 million.

Front 30

Suppose the required reserve ratio is 0.15 and individuals hold no cash. Total bank deposits are $100 million and the bank holds $20 million in reserves. How much additional money can the bank create if it does not hold excess reserves?

Back 30

$33 million.

Front 31

The measure of money most closely correlated with the price level and economic activity is:

Back 31

M2

Front 32

Total Reserves= $800,000 Demand Deposits= $800,000

The data above represents a bank's balance sheet. If the reserve ratio is 5 percent, this bank is in a position to make a maximum new loan of:

Back 32

$760,000.

Front 33

Non-liquid assets are able to perform which of the following functions?
A. Medium of exchange.
B. Cash for transactions.
C. Store of value.
D. Trade without bartering.

Back 33

C. Store of value.

Front 34

The required reserve ratio refers to the ratio of a bank's:
A. liabilities to its net worth.
B. required reserves to its deposits.
C. total reserves to its deposits.
D. deposits to its actual reserves.

Back 34

B. required reserves to its deposits.

Front 35

When banks offer checking accounts, they are issuing a(n):
A. financial asset that functions as money.
B. financial liability.
C. financial asset that cannot function as money.
D. IOU.

Back 35

A. financial asset that functions as money.

Front 36

A single bank has a reserve requirement of 10 percent. This means that if a customer deposits $100 million, the bank may lend out:

Back 36

$90 million.

Front 37

Small-denomination time deposits are included in:

Back 37

M2

Front 38

Total Reserves= $800,000 Demand Deposits= $800,000

The data above represents a bank's balance sheet. Suppose it is the only bank in town and individuals in town hold no cash. If the reserve ratio is 5 percent, what will the bank's reserves be at the end of the first round of the money creation process?

Back 38

$800,000

Front 39

Total Reserves= $100,000 Demand Deposits= $100,000

The data above represents a bank's balance sheet. Suppose it is the only bank in town and individuals in town hold no cash. Assuming the reserve ratio is 10 percent, what will be the bank's loans at the end of the money creation process?

Back 39

$900,000

Front 40

Total Reserves= $100,000 Demand Deposits= $100,000

The data above represents a bank's balance sheet. Suppose it is the only bank in town and individuals in town hold no cash. Assuming the reserve ratio is 10 percent, what will be the bank's deposits and reserves at the end of the money creation process?

Back 40

Deposits will equal $1,000,000 and reserves will equal $100,000.

Front 41

In 2008, the Fed followed an extraordinarily expansionary monetary policy, which was evident by the:
A. decrease in the Fed funds rate from 5 percent in 2007 to 0 percent by late 2008.
B. increase in the Fed funds rate from 1.25 percent in 2007 to 6 percent in 2008.
C. increase in the discount rate from 6 percent in 2008 to 12 percent in 2008.
D. increase in the discount rate and decrease in the Fed fund rate by the same percentage points.

Back 41

A. decrease in the Fed funds rate from 5 percent in 2007 to 0 percent by late 2008.

Front 42

One June 30, 2004 the Federal Reserve boosted its target for the Federal funds rate for the first time in four years, increasing it from a 46-year low of 1% to 1.25%. By June 2007 the Federal funds rate increased to 5%. During the period 2004-2007, the Federal Reserve:
A. bought U.S. government securities, thereby creating and supplying additional Federal funds.
B. sold U.S. government securities, thereby contracting funds to the Federal funds market.
C. speeded up the clearing of checks to make more funds available to banks.
D. encouraged banks to loan out funds to ease their reserve requirements and thus lower the demand for Federal funds.

Back 42

B. sold U.S. government securities, thereby contracting funds to the Federal funds market.

Front 43

On June 30, 2004 the Federal Reserve boosted its target for the Federal funds rate for the first time in four years, increasing it from a 46-year low of 1% to 1.25%. The Fed likely made this decision because it believed:
Student Response Value Correct Answer Feedback
A. savers are not being given enough encouragement to save.
B. unemployment was too high and needed to be reduced.
C. inflation might become a problem in 2005 and was moving to head off the problem.
D. there was threat of a recession and was trying to stimulate the economy.

Back 43

C. inflation might become a problem in 2005 and was moving to head off the problem.

Front 44

The body that oversees the 12 regional Federal Banks is the:

Back 44

Board of Governors.

Front 45

Open market operations are related to:

Back 45

The Fed's buying and selling of government securities.

Front 46

The discount rate refers to the:

Back 46

rate of interest the Fed charges for loans to banks.

Front 47

In general, the yield curve is ________ sloping

Back 47

upward

Front 48

Banks can borrow reserves from each other through:

Back 48

the Federal funds market.

Front 49

The reserve requirement is the:

Back 49

minimum ratio of reserves to deposits that a bank can have.

Front 50

If the Fed increases the required reserve ratio, financial institutions will likely lend out _____ than before, _______ the money supply

Back 50

less, decreasing

Front 51

One year the lead sentence in a Wall Street Journal article read, "Tight job markets, rising wages, and the economy's continued strength put more pressure on the Federal Reserve to raise short-tem interest rates." If the Fed responded to this pressure, it would adopt:
A. a contractionary monetary policy that reduces output.
B. a contractionary monetary policy that raises output.
C. an expansionary monetary policy that reduces output.
D. an expansionary monetary policy that raises output.

Back 51

A. a contractionary monetary policy that reduces output.

Front 52

Which of the following Fed policies would help the economy out of a recession?
A. Open market purchases of government securities.
B. Open market sales of government securities.
C. An increase in the discount rate.
D. An increase in reserve requirements.

Back 52

A. Open market purchases of government securities.

Front 53

The Fed announces what it is doing with monetary policy in terms of a target for:

Back 53

Federal funds rate.

Front 54

According to the AS/AD model, contractionary monetary policy:
A. increases interest rates, raises investment, and increases income.
B. decreases interest rates, raises investment, and increases income.
C. increases interest rates, reduces investment, and decreases income.
D. decreases interest rates, reduces investment, and decreases income.

Back 54

C. increases interest rates, reduces investment, and decreases income.

Front 55

Suppose the Federal funds rate is 5 percent. If the Fed decides to decrease the target for the Federal funds rate from 5 percent to 4 percent, it should take:
A. a defensive action and raise reserve requirements.
B. a defensive action and reduce reserve requirements.
C. an offensive action and raise reserve requirements.
D. an offensive action and reduce reserve requirements.

Back 55

D. an offensive action and reduce reserve requirements.

Front 56

Expansionary monetary policy is designed to:
A. reduce investment spending.
B. shift the aggregate demand curve to the left.
C. raise interest rates.
D. lower interest rates.

Back 56

D. lower interest rates.

Front 57

Suppose the money multiplier in the U.S. is 4. If the Fed buys $10 million dollars of government securities, the money supply will:
A. decrease by $2.5 million.
B. increase by $2.5 million.
C. decrease by $40 million.
D. increase by $40 million.

Back 57

D. increase by $40 million.

Front 58

To decrease the nation's money supply, the Fed can:
A. increase reserve requirements.
B. decrease reserve requirements.
C. decrease the discount rate.
D. buy government securities in the open market.

Back 58

A. increase reserve requirements.