Untitled Flashcards Set

1.     Other things equal, a decrease in the real interest rate will

a.      expand investment and shift the AD curve to the left.

b.     expand investment and shift the AD curve to the right.

c.      reduce investment and shift the AD curve to the left.

d.     reduce investment and shift the AD curve to the right.        

2.       If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate   demand curve will shift

a.      leftward by $50 billion at each price level.

b.     rightward by $10 billion at each price level.

c.      rightward by $50 billion at each price level.

d.     leftward by $40 billion at each price level.

3.      The aggregate supply curve

a.      is explained by the interest rate, real-balances, and foreign purchases effects.

b.     gets steeper as the economy moves from the top of the curve to the bottom of the curve.

c.     shows the various amounts of real output that businesses will produce at each price level.

d.     is downsloping because real purchasing power increases as the price level falls.

4.     Other things equal, an improvement in productivity will

a.     shift the aggregate demand curve to the left.

b.     shift the aggregate supply curve to the left.

c.     shift the aggregate supply curve to the right.

d.     increase the price level.

5.     Graphically, demand-pull inflation is shown as a

a.      rightward shift of the AD curve along an upsloping AS curve.

b.     leftward shift of the AS curve along a downsloping AD curve.

c.      leftward shift of the AS curve along an upsloping AD curve.

d.     rightward shift of the AD curve along a downsloping AS curve.

6.     Graphically, cost-push inflation is shown as a

a.      leftward shift of the AD curve.

b.     rightward shift of the AS curve.

c.      leftward shift of the AS curve.

d.     rightward shift of the AD curve.

7.     The table gives aggregate demand and supply schedules for a hypothetical economy. The equilibrium price level will be

a.      150.

b.     200.

c.      250.

d.     300.

8.     Refer to the diagram. If the initial aggregate demand and supply curves are AD0 and AS0, the equilibrium price level and level of real domestic output will be

a.      F and C, respectively.

b.     G and B, respectively.

c.      F and A, respectively.

d.     E and B, respectively.

9.     Expansionary fiscal policy is so named because it

a.      involves an expansion of the nation's money supply.

b.     necessarily expands the size of government.

c.      is aimed at achieving greater price stability.

d.     is designed to expand real GDP.

10.    Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

a.         A congressional proposal to incur a federal surplus to be used for the retirement of public debt.

b.        Reductions in agricultural subsidies and veterans' benefits.

c.         Postponement of a highway construction program.

d.        Reductions in federal tax rates on personal and corporate income.

11.  In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should

a.      encourage personal saving by increasing the interest rate on government bonds.

b.     decrease government expenditures.

c.      reduce tax rates and/or increase government spending.

d.     discourage private investment by increasing corporate income taxes.

12.  An appropriate fiscal policy for a severe recession is

a.      a decrease in government spending.

b.     a decrease in tax rates.

c.      appreciation of the dollar.

d.     an increase in interest rates.

13.  An appropriate fiscal policy for severe demand-pull inflation is

a.      an increase in government spending.

b.     depreciation of the dollar.

c.      a reduction in interest rates.

d.     a tax rate increase.

14.  The federal budget deficit is found by

a.      subtracting government tax revenues plus government borrowing from government spending in a particular year.

b.     subtracting government tax revenues from government spending in a particular year.

c.      cumulating the differences between government spending and tax revenues over all years since the nation's founding.

d.     subtracting government revenues from the noninvestment-type government spending in a particular year.

15.  The amount by which government expenditures exceed revenues during a particular year is

a.      the public debt.

b.     the budget deficit.

c.      full employment.

d.     the GDP gap.

16.  The amount by which federal tax revenues exceed federal government expenditures during a particular year is the

a.      Federal Reserve.

b.     budget deficit.

c.      budget surplus.

d.     public debt.

17.  The public debt is held as

a.      U.S. securities, corporate bonds, and common stock.

b.     Federal Reserve Notes.

c.      U.S. gold certificates.

d.     Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

18.  Refer to the diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

a.      AD0.

b.     AD1.

c.      AD2.

d.     AD3.

19.  Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,

a.      the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes.

b.     the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes.

c.      government should undertake neither an expansionary nor a contractionary fiscal policy.

d.     the economy is achieving its maximum possible output.

20.  Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to

a.      reduce government expenditures and taxes by equal-size amounts.

b.     reduce government expenditures or increase taxes.

c.      increase government expenditures or reduce taxes.

d.     reduce unemployment compensation benefits.

21.  Refer to the above  diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to

a.      reduce government expenditures and taxes by equal-size amounts.

b.     reduce government expenditures or increase taxes.

c.      increase government expenditures or reduce taxes.

d.     reduce unemployment compensation benefits.

22.  Money functions as

a.      a store of value.

b.     a unit of account.

c.      a medium of exchange.

d.     a store of value, a unit of account, and a medium of exchange.

23.  When economists say that money serves as a medium of exchange, they mean that it is

a.      a way to keep wealth in a readily spendable form for future use.

b.     a means of payment.

c.      a monetary unit for measuring and comparing the relative values of goods.

d.     declared as legal tender by the government.

24.   In the United States, the money supply (M1) includes

a.      coins, paper currency, and checkable deposits.

b.     currency, checkable deposits, and Series E bonds.

c.      coins, paper currency, checkable deposits, and credit balances with brokers.

d.     paper currency, coins, gold certificates, and time deposits.

25.   Checkable deposits are classified as money because

a.      they can be readily used in purchasing goods and paying debts.

b.     banks hold currency equal to the value of their checkable deposits.

c.      they are ultimately the obligations of the Treasury.

d.     they earn interest income for the depositor.

26.  Currency in circulation is part of

a.      M1 only.

b.     M2 only.

c.      neither M1 nor M2.

d.     both M1 and M2.

27.  Which of the following does not explain what backs the money supply in the United States?

a.      It is backed by gold.

b.     It is widely accepted in transactions.

c.      It is designated "legal tender" by the federal government.

d.     None of the Above

28.  A $20 bill is a

a.      gold certificate.

b.     Treasury note.

c.      Treasury bill.

d.     Federal Reserve Note.

29.  In the U.S. economy, the money supply is controlled by the

a.      U.S. Treasury.

b.     Federal Reserve System.

c.      Senate Committee on Banking and Finance.

d.     Congress.

30.  Which of the following is the basic economic policy function of the Federal Reserve Banks?

a.      holding the deposits or reserves of commercial banks

b.     acting as fiscal agents for the federal government

c.      controlling the supply of money

d.     collecting or clearing checks among commercial banks

31.  The basic requirement for an item to function as money is that it be

a.      backed by precious metals—gold or silver.

b.     authorized as legal tender by the central government.

c.      generally accepted as a medium of exchange.

d.     some form of debt or credit.

32.  When there is inflation in the economy, it implies that the

a.      price index is rising and the purchasing power of money is also rising.

b.     price index is falling and the purchasing power of money is also falling.

c.      price index is falling and the purchasing power of money is rising.

d.     price index is rising and the purchasing power of money is falling.

33.  On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

a.      horizontally adding the transactions and the asset demand for money.

b.     vertically subtracting the transactions demand from the asset demand for money.

c.      horizontally subtracting the asset demand from the transactions demand for money.

d.     vertically adding the transactions and the asset demand for money.

34.  The main function of the federal reserve is to

a.      Control the money supply.

b.     Forecast GDP growth.

c.      Determine optimal investment levels.

d.     Fund Government purchases.

35.  If the quantity of money demanded exceeds the quantity supplied,

a.      the supply-of-money curve will shift to the left.

b.     the demand-for-money curve will shift to the right.

c.      the interest rate will rise.

d.     the interest rate will fall.

36.  The equilibrium rate of interest in the market for money is determined by the intersection of the

a.      supply-of-money curve and the asset-demand-for-money curve.

b.     supply-of-money curve and the transactions-demand-for-money curve.

c.      supply-of-money curve and the total-demand-for-money curve.

d.     Investment-demand curve and the total-demand-for-money curve.

37.  Refer to the diagram of the market for money. The vertical money supply curve Sm reflects the fact that

a.      bond prices and interest rates are inversely related.

b.     the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.

c.      the rate at which money is spent is zero.

d.     lower interest rates result in lower opportunity costs of supplying money.

38.  Refer to the diagram of the market for money. The equilibrium interest rate is

a.      I1.

b.     I2.

c.      I3.

d.     not determinable without additional information.

39.  The securities held as assets by the Federal Reserve Banks consist mainly of

a.     corporate bonds.

b.     Treasury bills, Treasury notes, and Treasury bonds.

c.     common stock.

d.     certificates of deposit.

40.  Which of the following will increase commercial bank reserves?

a.     the purchase of government bonds in the open market by the Federal Reserve Banks

b.     a decrease in the reserve ratio

c.     an increase in the discount rate

d.     the sale of government bonds in the open market by the Federal Reserve Banks

41.  Which of the following is a tool of monetary policy?

a.      open-market operations

b.     changes in banking laws

c.      changes in tax rates

d.     changes in government spending

42.  The four main tools of monetary policy are

a.      tax-rate changes, the discount rate, open-market operations, and the federal funds rate.

b.     tax-rate changes, changes in government expenditures, open-market operations, and interest on excess reserves.

c.      the discount rate, the reserve ratio, interest on excess reserves, and open-market operations.

d.     changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate.

43.  Open-market operations refer to

a.      purchases of stocks in the New York Stock Exchange.

b.     the purchase or sale of government securities, as well as collateralized money loans, by the Fed.

c.      central bank lending to commercial banks.

d.     the specifying of loan maximums on stock purchases.

44.  The purchase of government securities from the public by the Fed will cause

a.      commercial bank reserves to decrease.

b.     the money supply to increase.

c.      demand deposits to decrease.

d.     the interest rate to increase.

45.  Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply

a.      contracts and commercial bank reserves increase.

b.     expands and commercial bank reserves decrease.

c.      contracts and commercial bank reserves decrease.

d.     expands and commercial bank reserves increase.

46.  When the reserve requirement is increased,

a.      required reserves are changed into excess reserves.

b.     the excess reserves of member banks are increased.

c.      a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.

d.     the excess reserves of member banks are reduced.

47.  Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called the

a.      prime rate.

b.     federal funds rate.

c.      Treasury bill rate.

d.     discount rate.

48.  If the Fed wants to discourage commercial bank lending, it will

a.      increase the interest paid on excess reserves held at the Fed.

b.     decrease the interest paid on excess reserves held at the Fed.

c.      buy government securities from commercial banks.

d.     lower the federal funds rate target.

49.  Interest paid on excess reserves held at the Fed

a.      is available to the general public, but not to commercial banks.

b.     incentivizes financial institutions to hold more reserves and reduce risky lending.

c.      is determined by the federal funds rate.

d.     totaled over $1 trillion in 2012.

50.  The interest rate that banks charge one another on overnight loans is called the

a.      discount rate.

b.     prime lending rate.

c.      overnight lending rate.

d.     federal funds rate.

51.  A contraction of the money supply

a.      increases the interest rate and decreases aggregate demand.

b.     increases both the interest rate and aggregate demand.

c.      lowers the interest rate and increases aggregate demand.

d.     lowers both the interest rate and aggregate demand.

52.  Which of the following best describes the cause-effect chain of a restrictive monetary policy?

a.      A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

b.     A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

c.      An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

d.     An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.

53.  Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions.  If the money supply is MS1 and the goal of the monetary authorities is full-employment output Qf, they should

a.      increase the money supply from $80 to $100.

b.     increase the money supply from $80 to $120.

c.      maintain the money supply at $80.

d.     decrease the money supply from $80 to $60.

54.  Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If aggregate demand is AD3 and the monetary authorities desire to reduce it to AD2, they should

a.      increase the interest rate from 3 percent to 9 percent.

b.     increase the money supply from $100 to $120.

c.      decrease the money supply from $120 to $100.

d.     decrease the interest rate from 3 percent to 9 percent.

55.  Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. Which of the following would shift the money supply curve from MS1 to MS3?

a.      an increase in the discount rate

b.     purchases of U.S. securities by the Fed in the open market

c.      sales of U.S. securities by the Fed in the open market

d.     an increase in the reserve ratio

56.  An increase in the money supply will

a.      lower interest rates and lower the equilibrium GDP.

b.     lower interest rates and increase the equilibrium GDP.

c.      increase interest rates and increase the equilibrium GDP.

d.     increase interest rates and lower the equilibrium GDP.

57.  In the extended analysis of aggregate supply, the short-run aggregate supply curve is

a.      vertical and the long-run aggregate supply curve is horizontal.

b.     horizontal and the long-run aggregate supply curve is vertical.

c.      upsloping and the long-run aggregate supply curve is vertical.

d.     horizontal and the long-run aggregate supply curve is upsloping.

58.  Refer to the diagram and assume the economy is operating at equilibrium point w. In the short run, an increase in the price level from P2 to P3 would move the economy from point w to point

a.      v.

b.     x.

c.      u.

d.     z.

59.  Refer to the diagram and assume the economy is operating at equilibrium point w. In the long run, an increase in the price level from P2 to P3 would move the economy from point w to point

a.      v.

b.     x.

c.      u.

d.     y.

60.  Refer to the diagram and assume the economy is operating at equilibrium point w. In the short run, a decrease in the price level from P2 to P1 would move the economy from point w to point

a.      v.

b.     x.

c.      t.

d.     y.

61.  Refer to the diagram and assume the economy is operating at equilibrium point w. If wages and other resource prices are flexible downward, in the long run a decrease in the price level from P2 to P1 would move the economy from point w to point

a.      v.

b.     x.

c.      t.

d.     y.

62.  Refer to the diagram. The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1.  Demand-pull inflation in the short run is best shown as

a.      a shift of the aggregate demand curve from AD1 to AD2.

b.     a move from d to b to a.

c.      a move directly from d to a.

d.     a shift of the aggregate supply curve from AS1 to AS2.

63.  Refer to the diagram. The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1. In the long run, the aggregate supply curve is vertical in the diagram because

a.      nominal wages and other input prices are assumed to be fixed.

b.     real output level Qf is the potential level of output.

c.      price level increases produce perfectly offsetting changes in nominal wages and other input prices.

d.     higher-than-expected rates of actual inflation reduce real output only temporarily.

64.  Refer to the diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Cost-push inflation in the short run is best represented as a

a.      leftward shift of the aggregate supply curve from AS1 to AS2.

b.     rightward shift of the aggregate demand curve from AD1 to AD2.

c.      move from d to b to a.

d.     move from d directly to a.

65.  Refer to the diagram. The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1.  Assuming no change in aggregate demand, the long-run response to a recession caused by cost-push inflation is best depicted as a

a.      move from a to d along the long-run aggregate supply curve.

b.     rightward shift of the aggregate supply curve from AS2 to AS1.

c.      move from a to c to d.

d.     leftward shift of the aggregate supply curve from AS1 to AS2.

66.  Refer to the diagram. The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD1 to AD2,

a.      real output will rise above Qf.

b.     the price level will rise from P1 to P2.

c.      it is possible that aggregate supply will shift rightward from AS2 because nominal wage demands will rise.

d.     the price level will rise from P2 to P3.

67.  The traditional Phillips Curve suggests a trade-off between

a.      price stability and income equality.

b.     the level of unemployment and inflation.

c.      unemployment and income equality.

d.     economic growth and full employment.

68.  In the long run,

a.      attempts to "fine-tune" the economy cause the rate of unemployment to accelerate.

b.     there is no inflation-unemployment trade-off.

c.      there is an inflation-unemployment trade-off, and the terms of that trade-off have worsened in recent years.

d.     there is an inflation-unemployment trade-off, but the terms of that trade-off have improved in recent years.