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ECON 131 Final

A barter economy is an economy where
goods and services are exchanged for other goods and services
Commodity money is a good
used as money that also has value independent of its use of money
Which of the following is a function that money serves?
(store of value, unit of account, medium of exchange, or all of the above)
All of the above
A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?
Store of value
The narrowest official definition of the money supply is
M1
* M2 includes M1 plus
savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non-institutional money market fund shares
If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially
decrease M1 and not change M2
If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially
not change M1 and not change M2
The portion of ___ that a bank does not loan out or spend on securities is known as ____
deposits; reserves
A bank holds its reserves as ___ and ___
vault cash; deposits at the Federal Reserve
* Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account
______________________
Assets | Liabilities |
Reserves +1000 | Deposits +1000
————————————–
At this point, what percentage of the new deposits does Well Fargo hold in reserves?
100 percent
Suppose a transaction changes a bank’s balance sheet as indicated in the following T – account, and the required reserve ratio is 10 percent

________________________
Assets | Liabilities |
Reserves +2000 | Deposits +2000
——————————————
As a result of the transaction, the bank can make a maximum loan of

1,800
In 1913, Congress established the Federal Reserve system with the intention of putting an end to
bank panics
Which of the following is not a major function of the Federal Reserve System?
(lender of last resort, clearing checks between banks, controlling the money supply, or setting interests rates)
setting income tax rates
* If the Federal Open Market Committee wants to decrease the money supply through open market operations it will
sell U.S. Treasury securities
* The primary tool the Federal Reserve uses to increase the money supply is
buying U.S. Treasury securities
The quantity equation states that
M(money supply) x V(velocity of money) = P(price level) x Y(real output)
* The quantity theory of money assumes that
the velocity of money is constant
According to the quantity theory of money, inflation is caused by
the money supply is growing faster than real GDP
The quantity theory of money implies that the price level will be stable (no definition or deflation) when the growth rate of the money supply equals
the growth rate of real GDP
* Monetary policy refers to the actions the Federal Reserve takes to manage
the money supply and interest rates to purpose its economic purposes
Which of the following are goals to monetary policy?
([A]price stability, economic growth, and maximizing the value of the dollar relative to other currencies; [B]price stability, maximizing the value of the dollar relative to other currencies, and high employment; [C] price stability, money growth, and high employment; [D] maximizing the value of the dollar relative to other currencies, economic growth, and high employment)
[C] price stability, money growth, and high employment
Rising prices erode the value of money as ____ and as a ____
medium of exchange; store of value
The Fed seeks to promote stability of financial markets because
resources are lost when there is not an efficient matching of savers and borrowers
The Fed’s two main monetary policy targets are
the money supply and interest rate
If the Fed raises the interest rate, this will ____ inflation and ___ real GDP in the short run.
reduce; lower
Increases in the price level
increase the quantity of money needed for buying and selling
In the figure (15.2), a movement from point A to point B would be caused by
an increase in the interest rate
In the figure (15.3), the movement from point A to point B in the money market would be caused by
an open market sale of Treasury securities by the Federal Reserve
In the figure (15.4), the movement from point A to point B in the money market would be caused by
an increase in the price level
* Lowering the interest rate
increase investment projects by firms
If money demanded is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will
change very little and investment and consumer spending will change very little
Falling interest rates can
increase a firm’s stock price, which causes firms to issue more stock shares, and thus increase funds for investments
When the Fed embarked on a policy known as quantitive easing, they
bought longer-term securities than are usually bought in open market operations
* In the figure (15.6), suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
an open market purchase of Treasury bills
In the figure (15.7), suppose the economy is initially at point A. The movement of the economy to point as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
an open market sale of Treasury bills
If the Fed pursues expansionary monetary policy then
the money supply will increase, interest rates will fall, and the real GDP will rise
If the Fed pursues expansionary monetary policy,
aggregate demand will rise(shift to the right), and the price level will rise
Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?
Potential GDP is forecasted to be higher than equilibrium GDP
Which of the following characterizes the Fed’s ability to prevent recessions?
The Fed is able to keep recessions shorter and milder than it would be otherwise be
In figure (15.8), if the economy in Year 1 is at point A and expected to Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to
lower interest rates
* In figure (15.10), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?
Buy treasury bills
*In figure (15.11), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?
Sell treasury bills
* From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely
Decrease interest rate
*Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ___ and real GDP to be ____
higher; higher
Refer to Table 15-2. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2014 and 2015 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2015, it should
sell Treasury securities
Refer to Table 15-3. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2015 and in 2015 if the Federal Reserve does not sue monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, which of the following will be higher than if the Fed had taken no action?
real GDP and the inflation rate
* The Taylor rule helps explain the relationship between the Fed’s _____ and ____.
federal funds target; economic conditions
The Taylor rule predicted a federal funds rate which was ___ that set when Paul Volcker was chairman of the Fed, and a rate which was ___ that set when Arthur Burns chaired the Fed.
less than; greater than
* By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ____ and “Alt-A” borrowers _____.
with flawed credit histories; who did not document their incomes
The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?
The Fed lent investment banks Treasury securities in exchange for mortgage – backed securities
Although the Federal Reserve had traditionally made discount loans only to _____, in response to the financial crisis in 2008 the Fed made primary dealers eligible for discount loans as well.
commercial banks
Which of the following would be considered an active fiscal policy?
A tax cut is designed to stimulate spending passed during a recession.
* Active changes in tax and spending by government intended to smooth out the business cycle are called ____, and changes in taxes and spending that occur passively over the business cycle are called _____.
discretionary fiscal policy; automatic stabilizers
Which of the following is an example of discretionary fiscal policy?
the tax cuts passed by Congress in 2001 to combat the recession
The majority of dollars spent by government prior to the Great Depression was spending at the ____ level. In the post World War II period, two – thirds to three quarters of all dollars spent by government in the United States are spend at the ____ level.
state and local; federal
* Expansionary fiscal policy will
shift the aggregate demand curve to the right
Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?
an increase in government purchases
A decrease in individual income taxes ________ disposable income, which ________ consumption spending.
increases; increases
Tax increases on business income decrease aggregate demand by decreasing
business investment spending
Refer to Figure 16-2. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?
a decrease in income taxes
Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?
an increase in the marginal income tax rate
Refer to Figure 16-4. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?
increase government spending
Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.
increase; increase
Refer to Figure 16-5. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use
to move the economy to point C?
increase government spending
Refer to Figure 16-6. Given that the economy has moved from A to B in the graph above, which of the following would the appropriate fiscal policy to achieve potential GDP?
increase taxes
Refer to Figure 16-7. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use
increase income taxes
Refer to Table 16-4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use
fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be lower than if the Congress and the president had taken no action?
real GDP and the inflation rate
Cutting taxes
will raise disposable income and raise spending
A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.
increasing; increasing
Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by
less than $500 billion
Suppose real GDP is $14 trillion and potential real GDP is $14 trillion. An increase in government purchases of $400 billion would cause real GDP to ____ potential real GDP (assuming a constant price level).
be more than
* If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would be to increase by _____ to restore the economy to potential real GDP
$250 billion
If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by _____ to restore the economy to potential real GDP
$250 billion
It is ____ difficult to effectively time fiscal policy than monetary because ____.
more; fiscal policy takes longer to implement
A(n) ____ in private expenditures as a result of a(n) _____ in government purchases is called crowding out
decrease; increase
If government spending and the price level increase, then
the interest rate increases, consumption declines, and investment spending declines
Crowding out, following an increase in government spending, results form (the exchange rate is the foreign exchange price of the domestic currency)
higher interest rates and a lower exchange rate
Crowding out will be greater
the more sensitive investment spending is to changes in the interest rate
If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to
be below potential GDP
Following a decrease in government spending, as the price level falls we would expect the level of interest rates to _____ and investment to _____.
decrease; increase
An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may
All are correct. Raise interest rates and reduce consumer expenditures on automobiles and new houses, make domestic business less competitive in international markets as the dollar appreciates in value, and reduce investment in new capital.
If the federal government’s expenditures are less than its tax revenues, then
a budget surplus results
During the twentieth century, the largest budge deficits as a percentage of GDP occured
during World Wars I and II
If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 million, then the economy
must be blow potential real GDP
Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential,
All are correct. Government transfer payments will be rising and tax receipts will be falling, this will result in a current budget deficit, and the cyclically adjusted budget will be balanced.
If tax reduction and simplification are effective, then
saving and investment in new capital will increase
Tax reduction and simplification should ____ long – run aggregate supply and ____ aggregate demand
increase; increase
If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply, we would expect crowding out of investment and net exports brought about by the tax cut to be
less than it would be without the supply – side effects
Which of the following transactions would be included in Germany’s current account?
An American citizen purchases a new Volkswagen made in Germany
Which of the following would decrease net exports in the United States?
An American party planner purchases 350 piñatas from Mexico
When the United States sends money to the Philippines to help typhoon survivors, the transaction is recorded in
the current account
* A Canadian oil company hires geological survey services form the United State. If all else remains equal, this will
increase net exports
* If New Yorkers decrease their purchases of French champagne, assuming all else remains constant, this will _____ of the United States
increase the balance of trade
In international exchange markets, a rise in interest rates in the United States will cause the demand for dollars to ____ and the supply of dollars to _____
increase; decrease
Ceteris paribus, a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to _____. I.e., the dollar ____ in value against the yen.
increase; appreciates
Refer to Figure 18-1. Which of the following events below cause the shifts in the supply and demand curves in the market for dollars against the British pound shown in the graph above?
interest rates rise in England
How does an increase in the relative price of a country’s goods in terms of foreign goods, or real exchange rate, affect its balance of trade?
An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade
National saving equals
income – consumption – government spending
If net exports are negative,
net foreign investments are also negative
If net exports are equal to net foreign investment,
All are true. The current account balance is equal to the negative of the financial account balance, the balance of payment is zero, and net capital inflows are equal to imports minus exports.
* A federal budget deficit _____ interest rates, which ____ exchange rates (foreign currency per domestic currency), and _____ the balance of trade
raises; raises; reduces
What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar?
Interest rates and exchange rates decrease
Suppose the Fed purchases Treasury Securities. Interest rates in the United States will ____ and the U.S. dollar will ____ against foreign currencies?
decrease; depreciate
If the Fed pursues an expansionary monetary policy, investment in the United States will ________ and net exports will ________.
increase; increase
Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets.
rise; appreciate
In an open economy, expansionary monetary policy will cause
consumption, investment, and net exports to rise
Which of the following is “crowded out” by higher interest rates that can be the result of expansionary fiscal policy?
All. Private investment, consumption, and net exports
If the government finances an increase in government purchases with an increase in taxes, which of the following would you expect to see?
an increase in the exchange rate
* If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?
If the required reserve ratio is 10 percent, then a bank must hold 10 percent of its deposits as reserves. Therefore required reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 – $10,000 or $4,000). This is the maximum that the bank can loan out.

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