Econ Quiz Questions - Exam 3

For economists, money is?

• a medium of exchange.

• a store of value.

• a unit of account

• Options a, b, and c

• None of the above

Options a, b, c

Fiat money…

• Is the basis for barter

• has intrinsic value.

• is not vulnerable to hyperinflation.

• is a type of commodity money.

• is accepted because a government says it has value.

Is accepted because a government says it has value.

Money that has intrinsic value is known as…

• Fiat money

• Commodity money

• currency

• liquid assets

Commodity money

A retail bank that is owned by its customers is…

• Commercial bank

• Private bank

• Credit union

• Central bank

• savings and loan

Credit Union

The glass-steagall act of 1933…

• separated the activities of commercial and investment banks.

• stated that all bank deposits must be insured by the federal government.

• created the Federal Reserve.

• instituted the fractional reserve system.

Separated the activities of commercial and investment banks

In a fractional reserve system…

• Banks must keep the total value of their deposits on reserve.

• banks may not lend funds to speculators.

• banks can loan excess reserves to borrowers.

• commercial banking is kept separate from investment banking.

Banks can loan excess reserves to borrowers

When a bank lends excess reserves…

• inflation is decreased.

• the money supply is increased.

• The money supply remains constant.

• The money supply is decreased.

The money supply is increased

According to Minsky's Financial Instability Hypothesis

• a) markets are always perfectly competitive

• b) stability itself is destabilizing because economic actors move toward higher risk-taking activities during periods of economic growth

• c) the occurrence of financial crises cannot be predicted as they are caused by factors outside the economic system

• d) markets are always self-correcting

• e) all the above

Stability itself is destabilizing because economic actors move toward higher risk-taking during periods of growth.

According to the Efficient Market Hypothesis

• a)The price of a financial asset at any moment reflects its true value

• b) the price of a financial asset is dependent on expectations of the market participants

• c) market participants have perfect information about the value of an assess

• d) only a and c

• e) a, b, and c

b) the price of a financial asset is dependent on expectations of the market participants

Speculative bubbles can result from investors…

• Following herd behavior.

• being blindly optimistic.

• extrapolating values over time.

• having access to low interest rates.

• All the above

(All of the above)

According to Keynes,

• Actions of market participants are guided by their expectations.

• risk-taking behavior of financial firms are affected by their confidence levels.

• market participants are always able to value assets accurately.

• Both a and b.

• Both b and c.

(Both a and b)

Inflation refers to a situation in which…

• The general level of prices is rising over time

• The general level of prices is falling over time

• The general level of prices stays constant

• The rate of change of prices is negative

There general level of prices is rising over time

What is the main reason that currency in the United States has value?

• Because all currency is backed up with an equivalent value in gold

• Because all currency is backed up with an equivalent value in silver

• Because all currency is backed up with an equivalent value in government bonds

• Because all currency is backed up with an equivalent value in governmental assets

• Because the federal government declares currency to have value

Because the federal government declares currency to have value

The term leverage refers to…

• Political influence wall street exercises in congress

• The use of stockholder equity

• The use of borrowed money to increase ones rate or return

• The power that bondholders have in bankruptcy proceedings

• None of these statements

The use of borrowed money to increase ones rate or return

Which one of the following is the best example of fiat money

• Gold coins

• Business stock

• a painting

• Dollar Bills

• Bitcoin

Dollar Bills

When bank lends excess reserves

• inflation is decreased.

• the money supply is increased.

• the money supply remains constant.

The money supply is increased

Bank reserves are …

• funds not lent out or invested by a private bank.

• funds kept as vault cash or on deposit at the Federal Reserve.

• funds lent out to the government.

• Funds lent out to the governemnt

• both A and B

Both A and B

A collective investment vehicle is …

• a fund that pools investments from many different sources.

• a type of pooled fund that is sometimes known as a "hedge fund.”

• a fund that pools resources to create a political action committee.

• A type of pooled fund that is no longer legal in the United States.

• None of these accurately describes a collective investment vehicle.

a fund that pools investments from many different sources

What is the problem posed by too-big-to-fail banks?

• A bankruptcy of a very large bank could cause a domino effect.

• A failure of very large bank may require a government bailout.

• A very large bank has an incentive to take on greater risks.

• None of the above

• All of the above

All of the above

Speculators pose the greatest risk for an economy when?

• They are highly leveraged.

• They buy securities for long-term gain.

• They engage in portfolio investment.

• They purchase commodity futures.

• They use their own funds to purchase assets.

They are highly leveraged

A subprime mortgage is…

• Offered to someone with poor credit

• A package of assets including mortgages

• A package of government bonds

• A government guarantee

Offered to someone with poor credit

Which one of the following is a disruptive effect of high inflation on the economy?

• It can wipe out the value of peoples savings

• It hurts people who are living on fixed incomes

• It redistributes wealth from creditors to debtors

• It creates a great deal of uncertainty

• All of the above

All of the above

Which one of the following is the most liquid type of asset?

• Gold

• jewelry

• Cash

• Bonds

• Cars

Cash

The liquidity continuum …

• Refers to how easy it is to use an asset as a store of value

• Suggests a share of stock is more liquid than precious metal

• Is used to argue that checking accounts are not liquid enough to belong in M1

• Non of these statements

Suggests a share of stock is more liquid than precious metal

What is the main difference between M1 and M2 as measures of money?

• M2 includes the value of checking accounts while M1 does not

• M2 includes the value of certificates of deposit while M1 does not

• M2 includes the value of travelers checks while M1 does not 

M2 Includes the value of certificates of deposits while M1 does not

The Fed can decrease the money supply by …

• Making an open market sale of bonds

• Raising the required reserve ratio

• Raising the discount ratio

• Making an open market purchase of bonds

• A, B, C

A, B, C

A liquidity trap refers to when …

• A central bank cannot raise interest rates enough to prevent inflation

• A central bank runs out of fund to lend to private banks

• A central bank cannot decrease the money supply enough to prevent inflation

• A central bank cannot lower reserve lower reserve requirements any further

A central bank cannot lower interest rates any further

The most important policy tool for the Federal Reserve is…

• Changing the discount rate

• Increasing deficit spending

• Setting the required reserve ratio

• Changing the money multiplier

Changing the money multiplier

The Fed can increase the money supply by…

• Making an open market purchase of bonds

• Lowering the required reserve ratio

• Lowering the discount rate 

• Using quantitative easing

• All of the above

All of the above

Milton Friedman argued in favor of monetarism, in which the federal reserve would…

• Pursue an expansionary monetary policy to stimulate the economy

• Engage in quantitative easing to escape a liquidity trap

• Maintain a fixed supply of money

• Increase the money supply at a steady rate 

• Be abolished

Increase the money supply at a steady rate

What is main policy recommendations of monetarists?

• The fed should keep inflation constant

• The fed should keep the growth rate of the money supply constant

• The fed should keep the federal funds rate constant

• The fed should keep the growth of GDP constant

The fed should keep the growth rate of the money supply constant

Money neutrality implies that…

• Increasing the money supply will not affect the velocity of money

• Increasing the money supply will not affect the federal funds rate

• Increasing the money supply will not affect the interest rate

• Increasing the money supply will not affect the level of output

Increasing the money supply will not affect the level of output

Quantitative easing refers to …

• decreasing the reserve ratio

• fiscal policy undertaken by the Fed

• decreasing the federal funds rate.

• the purchase of finacial assets including long-term bonds by the Fed.

• maintaining the prime rate to a low level.

the purchase of financial assets including long-term bonds by the Fed.

An increase in the transaction demand for money in the economy would ….

• Shift the money supply curve to the left and raise interest rates.

• Shift both the money supply and money demand curves to the right and the impact on equilibrium interest rates is ambiguous.

• Shift the money demand curve to the right and raise the equilibrium interest rate.

• Shift the money supply curve to the right and lower interest rate.

• shift the money demand curve to the left and lower the equilibrium interest rate.

• Shift the money demand curve to the right and raise the equilibrium interest rate.

The phrase "push on a string" refers to…

• the Fed imposing strict bank regulations to minimize risky activities

• interest rates rising too quickly due to Fed's contractionary policies

• investors being unwilling to spend more despite the Fed's efforts to encourage investment by lowering interest rates

• Low interest rates resulting in high demand in the housing market

• investors being unwilling to spend more despite the Fed's efforts to encourage investment by lowering interest rates

Which of the following characterizes the Federal Reserve?

• It is technically private as it has commercial banks and private shareholders that earn dividends on their Fed shares.

• it is involved in regulating banks.

• it is independent of other branches of government.

• is focused on maintaining stable prices and adequate national employment

• All the above

All the above

The Federal Reserve's sale or purchase of government bonds is referred to as…

quantitative easing

Monetarism

Leverage

Credit rationing

Open market operations

Open market operations

What tends to be the relationship between the prime rate and the federal funds rate in the United States?

• There is no clear relationship between the prime rate and the federal funds rate.

• The prime rate tends to be three percentage points higher than the federal funds rate.

• The prime rate tends to be one percentage point higher than the federal funds rate.

• The prime rate tends to be one percentage point lower than the federal funds rate.

The prime rate tends to be three percentage points higher than the federal funds rate

Monetary policy impacts GDP mainly through its effect on…

• Investment

• Govt. Spending

• Net Exports

• Consumption

• Taxes

Investment

Recall the quantity equation: M x V = P x Y, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output. Assuming that V is constant, classical monetary theory claims that changes in the money supply impact ____ but not ____.

• P;Y

• P;M

• Y;P

• M;P

P - price ;Y - output

What does classical monetary theory state will hapen with an increase in the money supply

• Prices will fall and GDP will rise

• Prices and GDP will both rise

• Prices will rise and GDP will fall

• Prices will rise and GDP will remain the same

Prices will rice and GDP will remain the same

Suppose that in an economy real GDP is $100, the price level index is 4, and the money supply is $50. What would the velocity of money be in this economy?

• 1

• 2

• 4

• 8

• 16

8

The federal funds rate is…

• the interest rate for overnight interbank loans.

• equal to the prime rate minus inflation.

• the interest rate that the Fed charges to private banks.

• determined in the private market for overnight loans of reserves among banks.

• Both a., and d.

Both a and d

An increase in the transaction demand for money in the economy would ….

• shift both the money supply and money demand curves to the right and the impact on equilibrium interest rates is ambiguous

• shift the money demand curve to the left and lower the equilibrium interest rate.

• shift the money supply curve to the right and lower interest rate.

• shift the money demand curve to the right and raise the equilibrium interest rate.

shift the money demand curve to the right and raise the equilibrium interest rate.

Which of the following school of economists believe government intervention is needed to counter the inherent instability of markets?

• Monetarists

• Classical Economists

• Keynesian Economists

• Real Business cycle theorists

Keynesian Economists

According to the classical view of the AS/AD model, the effect of increasing aggregate demand…

• Decreases output and lowers inflation

• Has no impact on output and raises inflation

• Increases output and raises inflation

• Decreases unemployment and lowers inflation

Decreases output and lowers inflation

Which one of the following statements describes why the aggregate demand curve slopes downward

• As inflation rises, real wealth declines, people tend to demand less

• As inflation rises, real money supply declines, raising interest rates discouraging investment

• As inflation rises the Fed will tend to raise interest rates which reduces investment

• All of the above

All of the above

Suppose the Fed decides to institute an expansionary monetary policy. What change would we expect to occur in the AD/AS model as a result?

• The AS curve would shift to the right

• The AS curve would shift to the left

• The AD curve would shift to the right

• The AD curve would shift down

The AD curve would shift to the right

Which of the following statements best describes why the aggregate supply (AS) curve slopes upward?

• As inflation rises, firms will be less likely to undertake new investments

• As inflation rises, the government responds to tax cuts

• As output rises, the fed will allow inflation to rise

• As firms run into bottlenecks, in the the supply of resources, they will bid prices up more quickly

As firms run into bottlenecks, in the the supply of resources, they will bid prices up more quickly

Maximum capacity output refers to the level of output the economy would produce if…

• The govt. sets limits on wages and prices

• The economy were at full employment

• Every resource in the economy were fully utilized

• Inflation were zero

Every resource in the economy were fully utilized

Under what conditions is a wage price spiral most likely to occur?

• When the economy is at full employment

• When the economy is in a recession

• When the economy is near maximum capacity output

• When the AD curve shifts downwards

When the economy is near the maximum capacity output

In the classical view, the aggregate supply curve is a vertical line because….

• Prices are sticky

• The economy is always at full employment

• Only shifts in aggregate demand can affect output

• All of the above

The economy is always at full employment

Based on the AD/AS model, in which of the following situations is stagflation most likely to occur?

• The government is undertaking expansionary fiscal policy and people have come to expect lower levels of inflation

• The economy is in a wage price spiral

• The government is undertaking contractional fiscal policy and people have come to expect higher levels of inflation

• The government is undertaking contractional fiscal policy and people have come to expect lower levels of inflation

• The government is undertaking contractional fiscal policy and people have come to expect higher levels of inflation

According to the Keynesian view of macroeconomics, what should be the role of the government as far as economy policy?

• The govt. should try to stabilize the AD curve

• The govt. should keep the growth rate of the money supply steady

• The govt. should maintain a fixed interest rate

• The govt. should try to raise the AS curve

The government should try to stabilize the AD curve