practice exam

What pair of terms is used interchangeably in national income accounting?

Public saving and government tax revenue minus government spending.

Who meets to discuss changes in the economy and determine monetary policy?

The Federal Open Market Committee.

As the maturity of a bond becomes longer, what does the bond pay?

A higher interest rate because it has more risk.

In a closed economy with GDP $31 trillion, consumption $7 trillion, taxes $3 trillion, and a government surplus of $4 trillion, what are private and national saving?

Private saving is $21.0 trillion and national saving is $25.0 trillion.

What is the future value of $125 in a bank account at 4.75% annual interest for 19 years?

$301.88.

What happens when the Fed makes open-market sales?

Neither currency nor reserves increase.

Which is not an example of monetary policy?

The Federal Reserve facilitates bank transactions by clearing checks.

Who knows proprietary technology?

Only the company that discovered it.

If interest rates rise, what can we infer about a business expansion?

It illustrates that the demand for loanable funds slopes downward.

What does a budget deficit do?

Changes the supply of loanable funds.

If the nominal interest rate is 8% and inflation is 3%, what is the real interest rate?

5%.

What are printers, computers, and furniture needed to open a print shop called?

Capital investment.

What is an example of physical capital?

The tables and chairs in the restaurant.

What is the reserve ratio if Bank of Cheerton has reserves of $4,200 and deposits of $60,000?

7.0%.

How does a high credit rating affect bond interest rates?

It contributes to a lower interest rate.

What does an increase in the government’s budget surplus mean for public saving?

Public saving is positive and increasing.

In a closed economy, what does T - G represent?

Public saving.

What happens if there is a shortage of loanable funds?

Quantity supplied rises and quantity demanded falls as interest rate rises to equilibrium.

What is true in a 100-percent-reserve banking system?

Banks do not influence the supply of money.

What is private saving if GDP is $7.3 trillion, consumer spending $5.2 trillion, taxes minus transfers $1.1 trillion, and government purchases $0.7 trillion?

$1 trillion.

What does the Fed do when conducting an open-market sale?

Sells government bonds and decreases the money supply.

What explains the fall in mortgage rates and increase in mortgage lending in 2002?

The supply of loanable funds shifted rightward.

What explains a decrease in interest rates and increase in quantity of loanable funds?

The supply of loanable funds shifted to the right.

How much excess reserves does the Bank of Cheerton hold if the reserve requirement is 5%?

$1,200.

What happens when the government removes a product with a serious defect from the market?

Demand for existing shares of the stock and the price will both fall.

What is not included in M1?

Savings deposits.

Which is not a function of money?

Protection against inflation.

What is the money multiplier if Bank of Cheerton is exactly meeting the reserve requirement?

14.3.

What happens if the government decreases the tax rate on interest income?

There would be an increase in the equilibrium quantity of loanable funds.

What is a correct statement about stock market irrationality?

Speculative bubbles could arise because stock prices depend partly on what people think others will pay in the future.

What does a policy that increases saving do?

Improves economic growth and health outcomes.

What best represents fiat money?

The euro.

If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, what could it do?

Buy $300,000 worth of bonds.

What is included in Keira’s human capital?

What she’s learned from experience but not her seed drill.

What tends to make the stock price rise?

The announcement but not the rise in interest rates.