Econ Macro Final (6-8)

Money that has no significant non-monetary value is called

fiat money.

The most liquid source of money is ________.

M1

Which of the following does NOT qualify as "money"?

barter

Credit is

a tool for buying things you cannot afford to pay for all at once.

Which of the following is considered a security?

savings bond

Correct. Financial assets are called securities and include foreign and domestic stocks and foreign and domestic bonds. These can be easily converted to cash.

Equilibrium in financial markets occurs at an interest rate where the quantity of loanable funds demanded is

equal to the quantity of loanable funds supplied.

If interest rates on credit cards are high, then

credit card companies will want to enter the market.

Demand deposits are considered a(n) ________ to a bank.

liability

Banks that go bankrupt have a ________ net worth.

negative

An example of a bank asset is ________.

a loan made out to a customer

Which type of depository institution is considered safest?

credit unions

How much of a new deposit can a bank loan out to earn income?

The bank can loan out only up to the amount of its excess reserves.

If Pablo deposits $5000 cash into his checking account and his bank operates with a required reserve ratio of 20 percent, how much will the money supply (M1) expand?

$20,000

Correct. The calculation to solve this is the change in M1 money supply = money multiplier times the change in reserves in the banking system, or 1/(required reserve ratio) x $5,000, then minus the initial deposit (since the cash was already counted in M1) . This simplifies to 5 x $5,000 = $25,000 - 5,000.

The M2 measure of money include(s)

money market funds.

Cigarettes can be used as a form of ________.

commodity money

Credit is

a tool for buying things you cannot afford to pay for all at once.

Around the world, oil is consistently priced in United States dollars. In economic terms, this is an example of the dollar serving as:

a unit of account.

Cigarettes can be used as a form of ________.

commodity money

Correct. Cigarettes have been used in prisons as money, but they can also be smoked. A commodity money has value from use as something other than money.

The M2 money supply consists of everything in the M1 money supply, money market funds and which of the following?

• certificates of deposit

Correct. Certificates of deposit are bank accounts where depositors promise not to touch them for a specific length of time.

If a debit card is used for a purchase it is like using

cash

Correct. A debit card draws on a bank account, so it is a form of money, or more precisely, the funds in the bank account are money which the debit card allows one to access.

Around the world, oil is consistently priced in United States dollars. In economic terms, this is an example of the dollar serving as:

a unit of account.

Correct. Using the U.S. dollar as a unit of account means that the dollar can serve a common denominator and as a ruler by which other economic values are measured.

________ is what brings lenders and borrowers together to make investments or obtain loans.

The financial market

Equilibrium in financial markets occurs at an interest rate where the quantity of loanable funds demanded is

equal to the quantity of loanable funds supplied.

Correct. Equilibrium in any market occurs at the price where the quantity supplied equals the quantity demanded. In financial markets, the interest rate represents the “price” of borrowed funds and the return for lending.

What makes all financial markets linked directly or indirectly?

Since financial markets are both sources of funding and destinations for savings, all financial markets are substitutes for each other.

Correct. If one financial market is paying higher returns than another, savers will put their funds there, and borrowers will borrow elsewhere. The result is that returns will tend to equalize, when corrected for the different risk of different financial assets.

Which of the following is NOT an example of a financial market?

The real estate market.

Which economics principle is essential to understanding in financial markets?

supply and demand

Correct. Financial markets are where savers (supply) put their savings to work and borrowers (demand) find funding to borrow.

The law of demand in the loanable funds market predicts that

fall in consumer credit card usage will occur if the interest rate rises.

Correct. According to the law of demand, a higher interest rate (that is, a higher price) will decrease the quantity demanded. As the interest rate rises, consumers will reduce the quantity that they borrow.

What is true about savings banks and credit unions?

they are depository institutions

Correct. These are institutions that accepts money deposits and then uses these to make loans.

A key function of a bank is

to be an intermediary between savers and borrowers.

Correct. Banks play two key roles in the functioning of the economy, first by facilitating the payments system and second by serving as financial intermediaries.

A liability in a bank’s T-account is ________.

something the bank owes someone else

Correct. These are funds from a customer held in an account at a bank from which deposited funds can be withdrawn at any time.

Banks that go bankrupt have a ________ net worth.

negative

Correct. This means its assets are worth less than its liabilities.

Which type of depository institution is considered safest?

credit unions

Correct. They are nonprofit financial institutions that its members own and run.

An asset in a bank’s T-account is

Correct. These are typically loans made by banks to consumers.

Which is true about a certificate of deposit (CD)?

There is a penalty for early withdrawal.

Correct. A CD is a type of savings account that has a fixed interest rate and fixed date of withdrawal, known as the maturity date. It is possible to withdraw the funds early, but only by paying a penalty.

If money supply expansion falls below expected amounts predicted by the money multiplier, what has most likely occurred?

Banks have failed to loan out all of their excess reserves.

Correct. If banks choose to hold excess reserves, they will loan out less, and the money supply will not grow by the full amount predicted by the money multiplier.

Which statement is true regarding banks' deposits?

Banks lend out most of the deposits to earn income.

Correct. Banks do lend out money that is deposited while a percentage of total deposits a bank must hold as reserves.

Suppose McDonalds Corporation deposits $5 million cash in its bank account. If the reserve requirement is 15 percent, the total change in the money supply, after all rounds of lending in the banking system are completed, will be ________.

28.3 million

Correct. The calculation to solve for the change in M1 money supply = money multiplier x the change in bank reserves minus the amount of the initial deposit = 1/(required reserve ratio) x $5 million minus $5 million. That means 1/.15 x $5 million - $5 million= $28.3 million.

Money creation in the United States results from which of the following?

The process of multiple banks’ lending out deposits.

Correct. Banks and money are intertwined. It is not just that most money is in the form of bank accounts. The banking system can literally create money through the process of making loans.

Assume the government has a balanced budget and that the economy is experiencing a period of growth higher than predicted. The tax revenue collected by the government is likely to ________, which would lead to a ________.

increase; budget surplus

When does a budget surplus occur?

When government tax revenues exceed government spending.

If a state with a balanced budget law runs a budget surplus, its options include

a spending increase.

Which of the following does NOT affect aggregate demand?

Crop failures due to weather events.

A ________ means that government spending and tax revenues are equal.

balanced budget

In 2010, Microsoft will pay corporate income tax to the federal government based on the company's ________.

profits

How would a balanced budget amendment change the effect of automatic stabilizer programs?

They would lose flexibility because spending could not increase unless funds were there.

Sales taxes are

imposed as a percentage of the value of the purchase.

When inflation begins to climb to unacceptable levels in the economy, the government should

use contractionary fiscal policy to reduce aggregate demand.

Which of the following is an example of an automatic fiscal policy stabilizer?

Tax revenues fall as real GDP decreases.

The country of Latinivia has a goal to increase and foster economic activity and therefore increase Aggregate Demand. What actions would it take to achieve this goal?

Fund new infrastructure projects by passing a new spending bill.

In the midst of a recession, the country of Bagernat’s analyzes its economic data and discovers a substantial decrease in the financial capital accessible to private sector companies. What is the most likely cause of this circumstance?

The government’s continued extensive borrowing.

According to the crowding out effect, the government’s continued extensive borrowing could be the cause of the substantial decrease in the financial capital accessible to private sector companies.

A supply side economist would advocate reducing income tax rates to encourage

people to work more.

Correct. As workers after tax pay increases, they have a greater incentive to work.

An argument to promote capital deepening is that it will

increase productivity and economic growth in the long run.

Which of the following can the government use as a tool of fiscal policy if it wants to increase the level of real GDP in the economy?

a cut in taxes.

A tax that is a flat percentage of all wages earned is a

proportional tax.

Assuming that the income tax is the only source of revenue for the government, if tax revenues are $50 billion and government spending totals $70 billion, which of the following is true of the government’s budget?

The government has a budget deficit of $20 billion.

In 2010, Microsoft will pay corporate income tax to the federal government based on the company's ________.

profits

If a state with a balanced budget law runs a budget surplus, its options include

a spending increase.

In 2016, the federal government spent $200 billion but collected $180 billion in taxes, therefore in 2016, the government accumulated

a budget deficit of $20 billion.

What are some of the unexpected events in an economy that can lead to a national surplus rather than a deficit?

An economy has unexpected growth that increases national payroll tax revenues.

Correct. Growth usually increases tax revenue and can lead to a budget surplus.

When the government increases its spending, it is conducting

fiscal policy.

Assuming the government of country Balistan has a balanced budget requirement and collects $100 million more in taxes than expected in 2016. As a result, the government would have to

Increase spending by $100 million.

If a government reduces tax rates in order to increase the level of aggregate demand, what type of fiscal policy is being used?

discretionary and expansionary

Correct. Reducing taxes is expansionary and will increase aggregate demand and is also discretionary because it requires new laws or budget passed by congress.

Which of the following is an example of an automatic fiscal policy stabilizer?

Tax revenues fall as real GDP decreases.

Correct. In the case of a recession, as households’ income fall, tax revenue for the government also falls.

An increase in taxes through a new budget would

decrease aggregate demand and reduce the Gross Domestic Product at the new equilibrium.

Correct. An increase in taxes would reduce aggregate demand and GDP.

In order to increase the level of aggregate demand in the economy, the government can use ________ in the form of ________.

an expansionary fiscal policy; an increase in government spending.

If the economy is producing more than its potential GDP, ________ will be larger than the actual budget deficit.

the standardized (or full) employment deficit

Correct. If the economy is producing more than its potential GDP, automatic stabilizers will push the budget towards a surplus and therefore the standardized employment deficit (if the economy were are potential GDP) would be larger than actual deficit (or surplus) is.

When inflation begins to climb to unacceptable levels in the economy, the government should

use contractionary fiscal policy to reduce aggregate demand.

If an economy was in a recession and the government decided to use a supply side policy to address it, the government would most likely

institute cutting taxes rather than increasing spending by the government.

Correct. Supply side policy favors tax decreases to deal with recessions, because they believe tax cuts will stimulate aggregate supply.

The Joint Economic Committee of the U.S. Congress recommends avoiding budget deficits to avoid crowding out private investment. The council appears to follow

the neoclassical approach to fiscal policy.

An argument to promote capital deepening is that it will

increase productivity and economic growth in the long run.

An increase in government spending may result in which of the following?

crowding out of private investment.

If an economy was in a recession and the government decided to use a supply side policy to address it, the government would most likely

institute cutting taxes rather than increasing spending by the government.

An increase in government spending may result in which of the following?

crowding out of private investment.

Of the following examples, which is associated with government spending for investment?

The federal government spends $400 million on fixing airports and upgrading control tower software and technology.

According to the Keynesian approach to fiscal policy

The crowding out effect is quite limited as the demand for private loans is low in times of recessions.

Correct. In time of recession, the demand for loans from private businesses is rather limited and therefore the crowding out effect minimal. Thus, government borrowing and spending causes little crowding out.

Assume that the government of Ostentia for its current budget plans to collect taxes in the amount of $10 billion and to spend $9 billion. A civil war breaks out and the government spends an additional $1 billion and tax collection is down by $1 billion. What is the result?

The expected budget surplus turns in to a $1 billion deficit.

How would a balanced budget amendment change the effect of automatic stabilizer programs?

They would lose flexibility because spending could not increase unless funds were there.

Which of the following example(s) describe a regressive tax?

Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above $117,000.

Correct. A lower percentage of income is paid by those with higher income, making this is a regressive tax.

If a state with a balanced budget law runs a budget surplus, its options include

a spending increase.

Which of the following are NOT major components of US federal government spending?

Community and regional development

Correct. Community and regional development is not a significant component of the federal budget.

Which of the following is true in the income-expenditure model about export and import expenditures as a function of national income?

Exports are shown in the model as a horizontal line, while imports are shown with a upward-sloping line

This year the economy is strong and there is every expectation that it will continue to be strong over the next few years. With this confidence in the economy, what would most likely happen to the consumption function?

• It will shift the consumption function upward.

• With optimism consumers are likely to increase consumption for any given income and the entire consumption function will shift upward.

A key part of the Income-Expenditure model is understanding that as GDP (or national income) rises, so does ________.

• aggregate expenditure

• GDP is composed of the aggregate expenditures.

Which of the following aggregate expenditure components is not impacted by real income?

Autonomous expenditures

Consumption still exists even if income is zero because ________.

people still have basics needs they must meet

Suppose an economy is defined by the following: C = 136 + 0.9 (Yd). The (Yd) in this algebraic equation represents the ________.

disposable income

National disposable income is the Yd in the equation.

In a Keynesian cross diagram, what name is given to the distance between an equilibrium level of output that is below potential GDP and potential GDP?

recessionary gap

Imagine the economy is at macro equilibrium. Suppose businesses become pessimistic about the future, and as a result, reduce investment expenditure. The result will be

A decrease in total expenditure and a decrease in GDP.

Since investment is a component of investment expenditure, a decrease in investment spending will reduce total expenditure, shifting the total expenditure curve down, leading to a new macro equilibrium at a lower level of GDP.

When the real aggregate supply curve is vertical, increased expenditures cause higher prices, but no additional output. This is because

resources, like labor and physical capital, are fully employed so there are none available to produce more output.

The real aggregate supply curve becomes vertical at potential GDP. This corresponds to full employment of resources. Thus, any additional spending causes higher prices, but no additional output.

In the figure, which line is the potential GDP Line?

line 1

What is the income=expenditure line called in the Keynesian Cross Diagram?

45-degree line

Suppose the level of potential GDP is $6,000 billion, but the equilibrium level of GDP is $7,500 billion. If the marginal propensity to consume is 0.67, how much should government spending be decreased to eliminate the inflationary gap?

$ 500 billion

In the figure, the spending multiplier is represented by ΔY/ΔAE and ________.

ΔY/ΔAE.

This year the economy is strong and there is every expectation that it will continue to be strong over the next few years. With this confidence in the economy, what would most likely happen to the consumption function?

It will shift the consumption function upward.

With optimism consumers are likely to increase consumption for any given income and the entire consumption function will shift upward.

The aggregate expenditure determines the total amount that firms and households plan to spend on goods and services at each level of income. Therefore this model focuses on the short run relationship between ________ and national income or GDP.

real spending

The model focuses on the relationship between real spending and GDP

Which of the following is true in the income-expenditure model about export and import expenditures as a function of national income?

Exports are shown in the model as a horizontal line, while imports are shown with a upward-sloping line.

Exports (purchases by foreigners) are independent of national income (income of US citizens) so they are shown as a horizontal line. Imports (purchases by US citizens) are positively related to national income, so when national income rises, people buy more imports. In other words, imports are an upward-sloping line with respect to income.

Autonomous expenditures are NOT affected by what factor?

National income

Autonomous expenditure is not affected by national income.

Algebraically, the consumption function is represented as ________.

C = a + MPC*Y, where a is autonomous consumption (the amount of consumption expenditure when Y = 0), MPC is the marginal propensity to consume, and Y is national income

The consumption function is dependent on income, the marginal propensity to consume and autonomous consumption.

Imagine the economy is at macro equilibrium. Suppose businesses become pessimistic about the future, and as a result, reduce investment expenditure. The result will be

A decrease in total expenditure and a decrease in GDP.

Since investment is a component of investment expenditure, a decrease in investment spending will reduce total expenditure, shifting the total expenditure curve down, leading to a new macro equilibrium at a lower level of GDP.

An increase in labor and physical capital

would shift the real aggregate supply curve to the right.

Increased labor and capital resources would increase potential GDP.