Econ Chapters 14-16 - Assignment Essays

Q: A government budget deficit occurs during a budget year when

tax revenues < government spending.

Q: Suppose the economy is initially operating at full employment. A fiscal policy action that results in an increase in the size of the budget deficit will cause which of the following in the long run?

change the composition of real GDP.

Q: As a possible approach to eliminating the government budget deficit, increasing taxes on the rich only would

not lead to a significant increase in tax revenues.

Q: An increase in the public debt would most likely indicate that

the budget deficit has increased.

Q: Which of the following is NOT one of the functions of money?

protection from increases in prices of goods and services

Q: Without an accepted medium of exchange

goods and services would be exchanged by barter.

Q: Open market operations are

the Federal Reserve's purchase and sale of existing U.S. government securities.

question

Are federal budget deficits related to trade deficits?

answer

Yes. As deficit spending goes up, it is likely government borrowing will, too. Then foreign residents who lend funds to the U.S. government have less to spend on our goods, so U.S. exports will fall.

question

Which of the following is NOT an entitlement?

answer

federal government salaries

question

Which of the following is TRUE about how trade deficits and government budget deficits are related?

answer

The government budget deficit leads to higher interest rates that will lead to a trade deficit.

question

The gross public debt is the

answer

total of all accumulated deficits and surpluses.

question

A government budget deficit occurs during a budget year when

answer

tax revenues < government spending.

question

Suppose the economy is initially operating at full employment. A fiscal policy action that results in an increase in the size of the budget deficit will cause which of the following in the long run?

answer

change the composition of real GDP.

question

As a possible approach to eliminating the government budget deficit, increasing taxes on the rich only would

answer

not lead to a significant increase in tax revenues.

question

To compare the net public debt of various countries, the debt has to be compared to

answer

the country's real GDP.

question

An increase in the public debt would most likely indicate that

answer

the budget deficit has increased.

question

Suppose the economy is initially operating at full employment. A reduction in the size of the budget deficit will cause which of the following in the short run?

answer

a recessionary gap.

question

If the actual money multiplier equals the potential money multiplier and if the Federal Reserve wishes to increase the money supply by $500 when the reserve ratio is 10 percent, it should

answer

buy $50 of government bonds

question

Which of the following is NOT one of the functions of money?

answer

protection from increases in prices of goods and services

question

Without an accepted medium of exchange

answer

goods and services would be exchanged by barter.

question

Open market operations are

answer

the Federal Reserve's purchase and sale of existing U.S. government securities.

question

Open market operations are

answer

the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply.

question

Which of the following is TRUE of M2?

answer

It is larger than M1.

question

Federal Reserve notes are

answer

a liability of the Federal Reserve System.

question

Which function of money allows for comparison shopping?

answer

unit of accounting

question

When money serves as a store of value, it allows you to

answer

transfer wealth into the future.

question

Which of the following is NOT included in M1?

answer

saving deposits

question

The direct exchange of goods and services for other goods and services is known as

answer

barter.

question

Transaction deposits

answer

are deposits in a thrift institution or a commercial bank on which a check may be written.

question

The Fed sells a U.S. government security and a bank dealer writes a check for the amount. When the check clears

answer

reserves have fallen by the amount of the check because the Fed clears the check by reducing the bank's deposits at the Fed.

question

Financial institutions participate in which of the following activities?

answer

financial intermediation indirect finance the issuance of loans All of these

question

Open market operations involve

answer

the buying and selling of existing federal government bonds.

question

Which of the following will limit the expansion of the money supply following a new deposit?

answer

a strong demand for holding currency outside of commercial banks

question

Federal Reserve notes are

answer

a liability of the Federal Reserve System.

question

Which of the following is NOT a function of the Fed?

answer

offering checking accounts to the U.S. public

question

In an economy that is at full employment, an increase in money supply will result in inflation, unless

answer

velocity decreases.

question

Suppose the Fed conducts an open market purchase of bonds. This monetary policy action will tend to cause

answer

the price of bonds to increase, and the interest rate to decrease.

question

The transactions demand for money will increase when

answer

Correct nominal Gross Domestic Product (GDP) increases.

question

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply will

answer

lead to an increase in investment spending and an increase in real GDP which is greater than the increase in investment spending.

question

A contractionary monetary policy causes

answer

higher interest rates, which increases the international price of the dollar and decreases net exports.

question

During a period of expansionary monetary policy

answer

the rate of growth of the money supply is increased, leading to an increase in the price level.

question

Suppose the Fed conducts an open market sale of bonds. This monetary policy action will tend to cause

answer

the price of bonds to decrease and the interest rate to increase.

question

One result of a contractionary monetary policy would be

answer

a decline in the price level.

question

An increase in the money supply will affect aggregate demand

answer

if the increase in the money supply causes interest rates to fall and/or causes people to buy more goods and services.

question

Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate?

answer

The prices of bonds are inversely related to the interest rate.

question

In the interest-rate-based transmission mechanism, a decrease in the money supply will

answer

reduce investment, shift the aggregate demand function inward, and lower real Gross Domestic Product (GDP).

question

The appropriate monetary policy in the event of a recessionary gap would be to

answer

engage in an open market purchase of U.S. government securities.

question

When the Fed purchases federal government bonds in the open market

answer

the money supply expands.

question

The interest-rate-based monetary policy transmission mechanism emphasizes the

answer

indirect effect of a change in the money supply that operates via a change in total planned expenditures generated by a change in the interest rate.

question

The asset demand for money is

answer

Correct greater at low interest rates, because the opportunity cost of holding money is low.

question

An increase in bond prices will most likely result in

answer

Correct an increase in the quantity demanded of money.

question

The "direct effect" of an increase in the money supply is to

answer

increase aggregate demand as people spend their excess money balances.

question

What are the two features of money that distinguish it from all other goods in the economy?

answer

Correct Money is accepted as a medium of exchange and it is the common unit of account used to express prices.

question

The equation of exchange specifies that

answer

MsV = PY.

question

According to the equation of exchange, if real Gross Domestic Product (GDP) is $25 billion, the money supply is $10 billion, and the price index equals 2, then the income velocity of money is

answer

question

An appreciation of the U.S. dollar occurs when

answer

the international price of the dollar rises.

question

Holding money as a medium of exchange to make payments is

answer

the transactions demand for money.

question

The price of bonds and the interest rate are

answer

inversely related.

question

According to the quantity theory of money

answer

a given proportionate increase in the money supply leads to an equal proportionate increase in the price level.

question

An open market purchase of government securities by the Fed will cause which of the following?

answer

an excess quantity of reserves supplied and a reduction in the federal funds rate

question

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply will

answer

lead to an increase in investment spending and an increase in real GDP which is greater than the increase in investment spending.

question

The interest-rate-based approach to the monetary policy transmission mechanism says that a change in the money supply influences aggregate demand by

answer

a change in interest rates, which changes investment.

question

Money is a ________ and a transaction is a ________.

answer

stock; flow

question

The Fed engages in open market operations and sells government securities. The result is

answer

higher interest rates.

question

An assumption used in the quantity theory of money is that

answer

velocity is constant.

question

The indirect effect of an increase in the money supply is to

answer

lower interest rates, which stimulates both investment and consumption spending.

question

The asset demand for money is related to which function of money?

answer

store of value

question

The equation of exchange is a formula indicating that the number of monetary units times

answer

the number of times each monetary unit is spent on final goods and services is identical to the price level times real GDP.

question

Expansionary monetary policy during periods of underutilized resources can cause

answer

real Gross Domestic Product (GDP) to increase with an increase in the price level.

question

Which of the following actions by the Fed would lead to an increase in the money supply?

answer

the purchase of government securities

question

How is the effect of expansionary monetary policy depicted in an aggregate supply-aggregate demand graph?

answer

The aggregate demand curve shifts rightward.

question

If the economy is underutilizing its economic resources, the Fed should

answer

expand the money supply to increase aggregate demand.

question

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

answer

increases, and the money demand curve shifts to the right.

question

An open market sale of government securities by the Fed will cause which of the following?

answer

an excess quantity of reserves demanded and an increase in the federal funds rate

question

Which of the following best represents the equation of exchange?

answer

M V = P Y

question

According to the quantity theory of money, the price level decreases in equal proportion to

answer

a decrease in the money supply.

question

The equation of exchange is

answer

an accounting identity and therefore is always true.

question

An excess quantity of money demanded will lead to a rise in

answer

the interest rate.

question

The transactions demand for money

answer

varies directly with nominal Gross Domestic Product (GDP).

question

According to the interest-rate-based perspective on the monetary policy transmission mechanism

answer

key channels of monetary policy indirectly ultimately relate money supply changes to total planned spending through indirect effects on planned investment.

question

Which of the following statements is FALSE?

answer

An open market purchase reduces the money supply and pushes down the equilibrium interest rate.

question

An increase in the money supply, other things being constant

answer

causes the price level to increase.

question

As real Gross Domestic Product (GDP) decreases, people hold

answer

less money since they will make fewer purchases.

question

How would expansionary monetary policy affect the AD curve?

answer

It would shift to the right.

question

An indirect effect of monetary policy is that as the money supply

answer

increases, interest rates fall, and borrowing and spending increase.

question

If the Fed sells U.S. government securities, the

answer

money supply decreases, and the money supply curve shifts to the left.

question

When interest rates in the bond market go up

answer

the price of existing bonds goes down.

question

The transactions demand for money exists because households

answer

do not receive their incomes at the same time they wish to make purchases.

question

The monetary transmission mechanism that assumes that money supply growth stimulates the economy primarily by encouraging investment is

answer

the interest-rate-based transmission mechanism.

question

As nominal Gross Domestic Product (GDP) rises, people will wish to

answer

hold more money for transactions.

question

The transactions demand for money is the demand to hold money to

answer

make regular, expected purchases.

question

What is the most common reason people demand money?

answer

People desire to use money as a medium of exchange when they buy goods and services.

question

The hypothesis that changes in the money supply lead to an equiproportional change in the price level is called

answer

the quantity theory of money.

question

An open market sale of government securities by the Fed will cause which of the following?

answer

an increase in the federal funds rate

question

The income velocity of money is the absolute number of times, on average, that

answer

each monetary unit is spent on final goods and services.

1 of 88

question

Are federal budget deficits related to trade deficits?

answer

Yes. As deficit spending goes up, it is likely government borrowing will, too. Then foreign residents who lend funds to the U.S. government have less to spend on our goods, so U.S. exports will fall.

question

Which of the following is NOT an entitlement?

answer

federal government salaries

question

Which of the following is TRUE about how trade deficits and government budget deficits are related?

answer

The government budget deficit leads to higher interest rates that will lead to a trade deficit.

question

The gross public debt is the

answer

total of all accumulated deficits and surpluses.

question

A government budget deficit occurs during a budget year when

answer

tax revenues < government spending.

question

Suppose the economy is initially operating at full employment. A fiscal policy action that results in an increase in the size of the budget deficit will cause which of the following in the long run?

answer

change the composition of real GDP.

question

As a possible approach to eliminating the government budget deficit, increasing taxes on the rich only would

answer

not lead to a significant increase in tax revenues.

question

To compare the net public debt of various countries, the debt has to be compared to

answer

the country's real GDP.

question

An increase in the public debt would most likely indicate that

answer

the budget deficit has increased.

question

Suppose the economy is initially operating at full employment. A reduction in the size of the budget deficit will cause which of the following in the short run?

answer

a recessionary gap.

question

If the actual money multiplier equals the potential money multiplier and if the Federal Reserve wishes to increase the money supply by $500 when the reserve ratio is 10 percent, it should

answer

buy $50 of government bonds

question

Which of the following is NOT one of the functions of money?

answer

protection from increases in prices of goods and services

question

Without an accepted medium of exchange

answer

goods and services would be exchanged by barter.

question

Open market operations are

answer

the Federal Reserve's purchase and sale of existing U.S. government securities.

question

Open market operations are

answer

the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply.

question

Which of the following is TRUE of M2?

answer

It is larger than M1.

question

Federal Reserve notes are

answer

a liability of the Federal Reserve System.

question

Which function of money allows for comparison shopping?

answer

unit of accounting

question

When money serves as a store of value, it allows you to

answer

transfer wealth into the future.

question

Which of the following is NOT included in M1?

answer

saving deposits

question

The direct exchange of goods and services for other goods and services is known as

answer

barter.

question

Transaction deposits

answer

are deposits in a thrift institution or a commercial bank on which a check may be written.

question

The Fed sells a U.S. government security and a bank dealer writes a check for the amount. When the check clears

answer

reserves have fallen by the amount of the check because the Fed clears the check by reducing the bank's deposits at the Fed.

question

Financial institutions participate in which of the following activities?

answer

financial intermediation indirect finance the issuance of loans All of these

question

Open market operations involve

answer

the buying and selling of existing federal government bonds.

question

Which of the following will limit the expansion of the money supply following a new deposit?

answer

a strong demand for holding currency outside of commercial banks

question

Federal Reserve notes are

answer

a liability of the Federal Reserve System.

question

Which of the following is NOT a function of the Fed?

answer

offering checking accounts to the U.S. public

question

In an economy that is at full employment, an increase in money supply will result in inflation, unless

answer

velocity decreases.

question

Suppose the Fed conducts an open market purchase of bonds. This monetary policy action will tend to cause

answer

the price of bonds to increase, and the interest rate to decrease.

question

The transactions demand for money will increase when

answer

Correct nominal Gross Domestic Product (GDP) increases.

question

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply will

answer

lead to an increase in investment spending and an increase in real GDP which is greater than the increase in investment spending.

question

A contractionary monetary policy causes

answer

higher interest rates, which increases the international price of the dollar and decreases net exports.

question

During a period of expansionary monetary policy

answer

the rate of growth of the money supply is increased, leading to an increase in the price level.

question

Suppose the Fed conducts an open market sale of bonds. This monetary policy action will tend to cause

answer

the price of bonds to decrease and the interest rate to increase.

question

One result of a contractionary monetary policy would be

answer

a decline in the price level.

question

An increase in the money supply will affect aggregate demand

answer

if the increase in the money supply causes interest rates to fall and/or causes people to buy more goods and services.

question

Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate?

answer

The prices of bonds are inversely related to the interest rate.

question

In the interest-rate-based transmission mechanism, a decrease in the money supply will

answer

reduce investment, shift the aggregate demand function inward, and lower real Gross Domestic Product (GDP).

question

The appropriate monetary policy in the event of a recessionary gap would be to

answer

engage in an open market purchase of U.S. government securities.

question

When the Fed purchases federal government bonds in the open market

answer

the money supply expands.

question

The interest-rate-based monetary policy transmission mechanism emphasizes the

answer

indirect effect of a change in the money supply that operates via a change in total planned expenditures generated by a change in the interest rate.

question

The asset demand for money is

answer

Correct greater at low interest rates, because the opportunity cost of holding money is low.

question

An increase in bond prices will most likely result in

answer

Correct an increase in the quantity demanded of money.

question

The "direct effect" of an increase in the money supply is to

answer

increase aggregate demand as people spend their excess money balances.

question

What are the two features of money that distinguish it from all other goods in the economy?

answer

Correct Money is accepted as a medium of exchange and it is the common unit of account used to express prices.

question

The equation of exchange specifies that

answer

MsV = PY.

question

According to the equation of exchange, if real Gross Domestic Product (GDP) is $25 billion, the money supply is $10 billion, and the price index equals 2, then the income velocity of money is

answer

question

An appreciation of the U.S. dollar occurs when

answer

the international price of the dollar rises.

question

Holding money as a medium of exchange to make payments is

answer

the transactions demand for money.

question

The price of bonds and the interest rate are

answer

inversely related.

question

According to the quantity theory of money

answer

a given proportionate increase in the money supply leads to an equal proportionate increase in the price level.

question

An open market purchase of government securities by the Fed will cause which of the following?

answer

an excess quantity of reserves supplied and a reduction in the federal funds rate

question

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply will

answer

lead to an increase in investment spending and an increase in real GDP which is greater than the increase in investment spending.

question

The interest-rate-based approach to the monetary policy transmission mechanism says that a change in the money supply influences aggregate demand by

answer

a change in interest rates, which changes investment.

question

Money is a ________ and a transaction is a ________.

answer

stock; flow

question

The Fed engages in open market operations and sells government securities. The result is

answer

higher interest rates.

question

An assumption used in the quantity theory of money is that

answer

velocity is constant.

question

The indirect effect of an increase in the money supply is to

answer

lower interest rates, which stimulates both investment and consumption spending.

question

The asset demand for money is related to which function of money?

answer

store of value

question

The equation of exchange is a formula indicating that the number of monetary units times

answer

the number of times each monetary unit is spent on final goods and services is identical to the price level times real GDP.

question

Expansionary monetary policy during periods of underutilized resources can cause

answer

real Gross Domestic Product (GDP) to increase with an increase in the price level.

question

Which of the following actions by the Fed would lead to an increase in the money supply?

answer

the purchase of government securities

question

How is the effect of expansionary monetary policy depicted in an aggregate supply-aggregate demand graph?

answer

The aggregate demand curve shifts rightward.

question

If the economy is underutilizing its economic resources, the Fed should

answer

expand the money supply to increase aggregate demand.

question

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

answer

increases, and the money demand curve shifts to the right.

question

An open market sale of government securities by the Fed will cause which of the following?

answer

an excess quantity of reserves demanded and an increase in the federal funds rate

question

Which of the following best represents the equation of exchange?

answer

M V = P Y

question

According to the quantity theory of money, the price level decreases in equal proportion to

answer

a decrease in the money supply.

question

The equation of exchange is

answer

an accounting identity and therefore is always true.

question

An excess quantity of money demanded will lead to a rise in

answer

the interest rate.

question

The transactions demand for money

answer

varies directly with nominal Gross Domestic Product (GDP).

question

According to the interest-rate-based perspective on the monetary policy transmission mechanism

answer

key channels of monetary policy indirectly ultimately relate money supply changes to total planned spending through indirect effects on planned investment.

question

Which of the following statements is FALSE?

answer

An open market purchase reduces the money supply and pushes down the equilibrium interest rate.

question

An increase in the money supply, other things being constant

answer

causes the price level to increase.

question

As real Gross Domestic Product (GDP) decreases, people hold

answer

less money since they will make fewer purchases.

question

How would expansionary monetary policy affect the AD curve?

answer

It would shift to the right.

question

An indirect effect of monetary policy is that as the money supply

answer

increases, interest rates fall, and borrowing and spending increase.

question

If the Fed sells U.S. government securities, the

answer

money supply decreases, and the money supply curve shifts to the left.

question

When interest rates in the bond market go up

answer

the price of existing bonds goes down.

question

The transactions demand for money exists because households

answer

do not receive their incomes at the same time they wish to make purchases.

question

The monetary transmission mechanism that assumes that money supply growth stimulates the economy primarily by encouraging investment is

answer

the interest-rate-based transmission mechanism.

question

As nominal Gross Domestic Product (GDP) rises, people will wish to

answer

hold more money for transactions.

question

The transactions demand for money is the demand to hold money to

answer

make regular, expected purchases.

question

What is the most common reason people demand money?

answer

People desire to use money as a medium of exchange when they buy goods and services.

question

The hypothesis that changes in the money supply lead to an equiproportional change in the price level is called

answer

the quantity theory of money.

question

An open market sale of government securities by the Fed will cause which of the following?

answer

an increase in the federal funds rate

question

The income velocity of money is the absolute number of times, on average, that

answer

each monetary unit is spent on final goods and services.

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