Practice Questions for Final for new material

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___________are funds that the bank keeps on hand that are not loaned out or invested in bonds.

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___________are funds that the bank keeps on hand that are not loaned out or invested in bonds.

Reserves

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__________________ pool the deposits of many investors together and invest them in a safe way like short-term government bonds.


Money market funds

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All the inhabitants in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 5% of the deposits as reserves. What is the money multiplier in this economy?

20

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4
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What do stock markets do (PlayPosit video)?

spread risk, channel savings from savers to investors

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5
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Which of the following assets is MOST liquid?

funds in your checking account

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If the central bank decreases the amount of reserves banks are required to hold to 5%, then:

both the money multiplier and the supply of money in the economy will increase.

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What term is used to describe the interest rate charged by the central bank when it makes loans to commercial banks?

discount rate

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Which of the following terms is used to describe the proportion of deposits that banks are legally required to deposit with the central bank?

reserve requirements

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Which of the following is a traditional tool used by the Fed during recessions?

open market operations

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The ___________________ is the institution designed to control the quantity of money in the economy and also to oversee the: 


Central Bank; safety and stability of the banking system.

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The economy is in a recession and the government wants to increase output. If the multiplier equals 3 and the government increases spending by 250, how much will output increase by?

750

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12
<p><span>(Figure: Predicting Aggregate Demand Shifts) Which of these would shift the aggregate demand curve from </span><em>AD</em><sub>1</sub><span> to </span><em>AD</em><sub>2</sub><span>?</span></p>
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<p><span>(Figure: Predicting Aggregate Demand Shifts) Which of these would shift the aggregate demand curve from </span><em>AD</em><sub>1</sub><span> to </span><em>AD</em><sub>2</sub><span>?</span></p>

(Figure: Predicting Aggregate Demand Shifts) Which of these would shift the aggregate demand curve from AD1 to AD2?

a decrease in interest rates

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A shift of the aggregate _____ curve to the _____ would cause inflation to rise and employment to increase.

demand; right

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  (Inside Job) What is a credit default swap?

an insurance contract in which the buyer pays the seller to protect her against losses

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  (Inside Job) What is a credit ratings agency?

a company which assigns credit ratings (risk assessment) for firms, and were often paid by those firms

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What is a subprime loan?


a high-risk and high-interest rate loan

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If people stopped using banks and instead used saddlebags to hold all of their money, what would happen to the (actual, not potential) money multiplier?

it would shrink

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An expansionary fiscal policy either _____ government spending or _____ taxes.

increases; decreases

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A law requiring the federal budget to be balanced each year would likely:

make business cycles more severe.

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If the U.S. passed a law that require the federal government to run a balanced budget. If there were a recession, the government would want to implement _____________________, but may be unable to do so because such a policy would ____________________________.

expansionary fiscal policy; lead to a budget deficit

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When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting:

discretionary fiscal policy.

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

use contractionary fiscal policy to shift aggregate demand to the left.

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If a country’s GDP increases, but its debt also increases during that year, then the country’s debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes.

increase or decrease

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A ______________________ is created each time the federal government spends more than it collects in taxes in a given year.

budget deficit

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Javonte paid $475,000 for his house in 2013 and sold it for $625,000 in 2019. What function did the house serve during the time he owned it?

store of value

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True or false The "Zero Lower Bound" problem exists for Fiscal (but not Monetary) policy.

False

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When did the U.S. Financial Crisis happen that was the subject of The Inside Job?

2008

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True or false: Monetary and Fiscal policy primarily work by affecting the AD and AE curves (not the SRAS or LRAS) curves.

true

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In class we viewed historical data about deficits.  We found that, starting in the 1980's deficits really started to rise, even in non-recession years.

true

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When did Keynes think governments should run deficits to stimulate the economy?

Only during recession

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