question
When the Fed decreases the money supply, interest rates
a.
rise.
b.
fall.
c.
are unaffected.
d.
rise and then fall.
e.
fall and then rise.
a.
rise.
b.
fall.
c.
are unaffected.
d.
rise and then fall.
e.
fall and then rise.
answer
a.
rise.
rise.
question
The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $82 billion, real GDP
a.
will increase by less than $82 billion if the economy was initially operating well below capacity.
b.
will increase by more than $82 billion if the economy was initially operating well below capacity.
c.
will increase by more than $82 billion if the economy was initially operating at full-employment capacity.
d.
will decline if the marginal propensity to consume is less than 1.
a.
will increase by less than $82 billion if the economy was initially operating well below capacity.
b.
will increase by more than $82 billion if the economy was initially operating well below capacity.
c.
will increase by more than $82 billion if the economy was initially operating at full-employment capacity.
d.
will decline if the marginal propensity to consume is less than 1.
answer
b.
will increase by more than $82 billion if the economy was initially operating well below capacity.
will increase by more than $82 billion if the economy was initially operating well below capacity.
question
Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the
a.
demand for government-provided public goods.
b.
level of aggregate demand required to achieve full employment of resources.
c.
size and quality of the labor force.
d.
need to expand or contract the supply of money.
a.
demand for government-provided public goods.
b.
level of aggregate demand required to achieve full employment of resources.
c.
size and quality of the labor force.
d.
need to expand or contract the supply of money.
answer
b.
level of aggregate demand required to achieve full employment of resources.
level of aggregate demand required to achieve full employment of resources.
question
If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend
a.
a reduction in taxes coupled with a reduction in government expenditures of equal size.
b.
an increase in government expenditures coupled with an increase in taxes of equal size.
c.
a reduction in taxes, without any offsetting reduction in government expenditures.
d.
maintenance of a balanced budget.
a.
a reduction in taxes coupled with a reduction in government expenditures of equal size.
b.
an increase in government expenditures coupled with an increase in taxes of equal size.
c.
a reduction in taxes, without any offsetting reduction in government expenditures.
d.
maintenance of a balanced budget.
answer
c.
a reduction in taxes, without any offsetting reduction in government expenditures.
a reduction in taxes, without any offsetting reduction in government expenditures.
question
Which of the following is a problem with discretionary fiscal policy as an economic stabilization tool?
a.
Discretionary changes in fiscal policy can be easily anticipated by private decision makers.
b.
It is difficult to properly time discretionary changes in fiscal policy.
c.
Discretionary fiscal policy is only effective during a recession.
d.
Discretionary fiscal policy is only effective during an economic boom.
a.
Discretionary changes in fiscal policy can be easily anticipated by private decision makers.
b.
It is difficult to properly time discretionary changes in fiscal policy.
c.
Discretionary fiscal policy is only effective during a recession.
d.
Discretionary fiscal policy is only effective during an economic boom.
answer
b.
It is difficult to properly time discretionary changes in fiscal policy.
It is difficult to properly time discretionary changes in fiscal policy.
question
Within the Keynesian model, if the output of an economy is less than the full-employment level, then
a.
a reduction in government expenditures will direct the economy back to full-employment equilibrium.
b.
a reduction in wage rates and resource prices will quickly restore full-employment equilibrium.
c.
a reduction in the real interest rate will soon restore full-employment equilibrium.
d.
output will tend to remain below full-employment capacity unless aggregate expenditures increase.
a.
a reduction in government expenditures will direct the economy back to full-employment equilibrium.
b.
a reduction in wage rates and resource prices will quickly restore full-employment equilibrium.
c.
a reduction in the real interest rate will soon restore full-employment equilibrium.
d.
output will tend to remain below full-employment capacity unless aggregate expenditures increase.
answer
d.
output will tend to remain below full-employment capacity unless aggregate expenditures increase.
output will tend to remain below full-employment capacity unless aggregate expenditures increase.
question
A major advantage of built-in or automatic stabilizers is that they
a.
guarantee the federal budget will be balanced over the course of the business cycle.
b.
require no Congressional action to be effective.
c.
automatically produce surpluses during recessions and deficits during inflation.
d.
require discretionary actions on the part of Congress before they exert an impact on output and employment.
a.
guarantee the federal budget will be balanced over the course of the business cycle.
b.
require no Congressional action to be effective.
c.
automatically produce surpluses during recessions and deficits during inflation.
d.
require discretionary actions on the part of Congress before they exert an impact on output and employment.
answer
b.
require no Congressional action to be effective.
require no Congressional action to be effective.
question
As the marginal propensity to consume (MPC) decreases, the spending multiplier
a.
increases.
b.
decreases.
c.
remains constant.
d.
becomes indefinable.
a.
increases.
b.
decreases.
c.
remains constant.
d.
becomes indefinable.
answer
b.
decreases.
decreases.
question
The marginal propensity to consume is defined as the
a.
fraction of total income not spent on consumption.
b.
proportion of any change in income that is spent on consumption.
c.
fraction of total income spent on consumption.
d.
fraction of a change in income that is saved.
a.
fraction of total income not spent on consumption.
b.
proportion of any change in income that is spent on consumption.
c.
fraction of total income spent on consumption.
d.
fraction of a change in income that is saved.
answer
b.
proportion of any change in income that is spent on consumption.
proportion of any change in income that is spent on consumption.
question
Within the Keynesian model, if the marginal propensity to consume is 0.8, which of the following is true?
a.
When consumption increases by $5, income increases by $1.
b.
When consumption increases by $1, saving increases by $5.
c.
When investment increases by $1, income increases by $5.
d.
When investment increases by $1, saving increases by $5.
a.
When consumption increases by $5, income increases by $1.
b.
When consumption increases by $1, saving increases by $5.
c.
When investment increases by $1, income increases by $5.
d.
When investment increases by $1, saving increases by $5.
answer
c.
When investment increases by $1, income increases by $5.
When investment increases by $1, income increases by $5.
question
The primary tool of fiscal policy is
a.
the money supply.
b.
the stock market.
c.
the federal budget.
d.
regulation of the bond market.
a.
the money supply.
b.
the stock market.
c.
the federal budget.
d.
regulation of the bond market.
answer
c.
the federal budget.
the federal budget.
question
When the federal government is running a budget deficit,
a.
government revenues exceed government expenditures.
b.
government expenditures exceed government revenues.
c.
the economy must be in an economic recession.
d.
the size of the national debt will decline.
a.
government revenues exceed government expenditures.
b.
government expenditures exceed government revenues.
c.
the economy must be in an economic recession.
d.
the size of the national debt will decline.
answer
b.
government expenditures exceed government revenues.
government expenditures exceed government revenues.
question
Which of the following best expresses the central idea of countercyclical fiscal policy?
a.
Planned deficits are experienced during economic booms and planned surpluses during economic recessions.
b.
The balanced-budget approach is the proper criterion for determining annual budget policy.
c.
Actual deficits should equal actual surpluses during a period of deflation.
d.
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
a.
Planned deficits are experienced during economic booms and planned surpluses during economic recessions.
b.
The balanced-budget approach is the proper criterion for determining annual budget policy.
c.
Actual deficits should equal actual surpluses during a period of deflation.
d.
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
answer
d.
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
question
According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?
a.
increase both taxes and government transfer payments
b.
reduction in government purchases and increase in taxes
c.
increase in government purchases and reduction in taxes
d.
increase in taxes to reduce the government deficit
a.
increase both taxes and government transfer payments
b.
reduction in government purchases and increase in taxes
c.
increase in government purchases and reduction in taxes
d.
increase in taxes to reduce the government deficit
answer
c.
increase in government purchases and reduction in taxes
increase in government purchases and reduction in taxes
question
The crowding-out effect suggests that
a.
expansionary fiscal policy causes inflation.
b.
restrictive fiscal policy is an effective weapon against inflation.
c.
a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.
d.
a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment.
a.
expansionary fiscal policy causes inflation.
b.
restrictive fiscal policy is an effective weapon against inflation.
c.
a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.
d.
a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment.
answer
c.
a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.
a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.
question
If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
a.
add demand stimulus during a slowdown but restraint during an economic boom.
b.
exert an expansionary impact during all phases of the business cycle.
c.
restrain aggregate demand during all phases of the business cycle.
d.
keep the government's budget in balance.
a.
add demand stimulus during a slowdown but restraint during an economic boom.
b.
exert an expansionary impact during all phases of the business cycle.
c.
restrain aggregate demand during all phases of the business cycle.
d.
keep the government's budget in balance.
answer
a.
add demand stimulus during a slowdown but restraint during an economic boom.
add demand stimulus during a slowdown but restraint during an economic boom.
question
Keynesians and non-Keynesians would largely agree on which one of the following statements?
a.
Expansionary fiscal policy will tend to substantially increase current real output.
b.
Proper timing of discretionary fiscal policy is difficult to achieve.
c.
The use of discretionary fiscal policy is an important stabilization tool.
d.
Market forces will automatically direct the economy toward full employment.
a.
Expansionary fiscal policy will tend to substantially increase current real output.
b.
Proper timing of discretionary fiscal policy is difficult to achieve.
c.
The use of discretionary fiscal policy is an important stabilization tool.
d.
Market forces will automatically direct the economy toward full employment.
answer
b.
Proper timing of discretionary fiscal policy is difficult to achieve.
Proper timing of discretionary fiscal policy is difficult to achieve.
question
The persistence of budget deficits during the last several decades is not surprising because politicians will find
a.
budget surpluses more attractive than budget deficits.
b.
tax increases more attractive than increases in government expenditures.
c.
budget deficits more attractive than budget surpluses.
d.
reductions in government expenditures more attractive than tax reductions.
a.
budget surpluses more attractive than budget deficits.
b.
tax increases more attractive than increases in government expenditures.
c.
budget deficits more attractive than budget surpluses.
d.
reductions in government expenditures more attractive than tax reductions.
answer
c.
budget deficits more attractive than budget surpluses.
budget deficits more attractive than budget surpluses.
question
Other things being constant, countries with higher rates of saving
a.
will have smaller GDPs than countries with lower rates of saving.
b.
will have higher rates of investment, but slower growth.
c.
will have higher rates of investment and growth.
d.
will be operating at less than full employment and potential output.
a.
will have smaller GDPs than countries with lower rates of saving.
b.
will have higher rates of investment, but slower growth.
c.
will have higher rates of investment and growth.
d.
will be operating at less than full employment and potential output.
answer
c.
will have higher rates of investment and growth.
will have higher rates of investment and growth.
question
If the government ran a major budget deficit, and there was no noticeable effect on the level of GDP, this could be taken as evidence of
a.
Laffer curve effect.
b.
structural deficit.
c.
crowding-out.
d.
monetary policy ineffectiveness.
a.
Laffer curve effect.
b.
structural deficit.
c.
crowding-out.
d.
monetary policy ineffectiveness.
answer
c.
crowding-out.
crowding-out.
question
Money is
a.
valuable because it is backed by gold.
b.
whatever is generally accepted in exchange for goods and services.
c.
anything that is a liability of a commercial bank
d.
an object to be consumed.
a.
valuable because it is backed by gold.
b.
whatever is generally accepted in exchange for goods and services.
c.
anything that is a liability of a commercial bank
d.
an object to be consumed.
answer
b.
whatever is generally accepted in exchange for goods and services.
whatever is generally accepted in exchange for goods and services.
question
In the United States, the purchasing power of money is determined by
a.
the underlying precious metals that back each unit of currency.
b.
the value of U.S. treasury bonds that back each unit of currency.
c.
Federal Reserve policy, which controls the money supply.
d.
Congress, which controls the money supply.
a.
the underlying precious metals that back each unit of currency.
b.
the value of U.S. treasury bonds that back each unit of currency.
c.
Federal Reserve policy, which controls the money supply.
d.
Congress, which controls the money supply.
answer
c.
Federal Reserve policy, which controls the money supply.
Federal Reserve policy, which controls the money supply.
question
Ordinary commercial banks can expand the supply of money by
a.
printing up currency when they need it.
b.
buying and selling government bonds to the general public.
c.
using a portion of their deposits to extend additional loans.
d.
reducing their vault cash and increasing their deposits with the Fed.
a.
printing up currency when they need it.
b.
buying and selling government bonds to the general public.
c.
using a portion of their deposits to extend additional loans.
d.
reducing their vault cash and increasing their deposits with the Fed.
answer
c.
using a portion of their deposits to extend additional loans.
using a portion of their deposits to extend additional loans.
question
Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a
a.
$100 million decrease in the money supply.
b.
$100 million increase in the money supply.
c.
$200 million increase in the money supply.
d.
$500 million increase in the money supply.
a.
$100 million decrease in the money supply.
b.
$100 million increase in the money supply.
c.
$200 million increase in the money supply.
d.
$500 million increase in the money supply.
answer
d.
$500 million increase in the money supply.
$500 million increase in the money supply.
question
The primary benefit of a monetary system of exchange compared to a barter system is the increased
a.
ability to record transactions.
b.
time necessary to find trading partners.
c.
time devoted to shopping.
d.
efficiency in arranging transactions.
a.
ability to record transactions.
b.
time necessary to find trading partners.
c.
time devoted to shopping.
d.
efficiency in arranging transactions.
answer
d.
efficiency in arranging transactions
efficiency in arranging transactions
question
If money were not used as a medium of exchange,
a.
the gains from trade would be severely limited.
b.
our standard of living would probably improve.
c.
the transaction costs of exchange would be lower.
d.
economic efficiency would increase.
a.
the gains from trade would be severely limited.
b.
our standard of living would probably improve.
c.
the transaction costs of exchange would be lower.
d.
economic efficiency would increase.
answer
a.
the gains from trade would be severely limited.
the gains from trade would be severely limited.
question
Fiat money is money
a.
that has little intrinsic value and is not backed by a commodity.
b.
that is not included as part of the M1 money supply.
c.
that is backed by gold or silver held on reserve by the government.
d.
such as coins that are made from metal.
a.
that has little intrinsic value and is not backed by a commodity.
b.
that is not included as part of the M1 money supply.
c.
that is backed by gold or silver held on reserve by the government.
d.
such as coins that are made from metal.
answer
a.
that has little intrinsic value and is not backed by a commodity.
b.
that has little intrinsic value and is not backed by a commodity.
b.
question
Money is used as a unit of account. This means
a.
money cannot store value for use in the future.
b.
money is used to measure the exchange value and costs of goods, services, assets and resources.
c.
money has little or no intrinsic value.
d.
money is dependent on the quantity of gold held by the Federal Reserve.
a.
money cannot store value for use in the future.
b.
money is used to measure the exchange value and costs of goods, services, assets and resources.
c.
money has little or no intrinsic value.
d.
money is dependent on the quantity of gold held by the Federal Reserve.
answer
b.
money is used to measure the exchange value and costs of goods, services, assets and resources.
money is used to measure the exchange value and costs of goods, services, assets and resources.
question
A system that permits banks to hold less than 100 percent of their deposits as reserves is called a
a.
federal reserve system.
b.
fractional reserve banking system.
c.
partially funded deposit insurance system.
d.
gold standard banking system.
a.
federal reserve system.
b.
fractional reserve banking system.
c.
partially funded deposit insurance system.
d.
gold standard banking system.
answer
b.
fractional reserve banking system.
fractional reserve banking system.
question
The legal requirement that commercial banks hold reserves equal to some fraction of their deposits
a.
limits the ability of banks to expand the money supply by extending additional loans.
b.
prevents the Fed from controlling the money supply since commercial banks can always offset the actions of the Fed.
c.
prevents runs on banks by depositors who fear that banks have insufficient assets to meet the claims of their depositors.
d.
limits the ability of the Treasury to expand the national debt.
a.
limits the ability of banks to expand the money supply by extending additional loans.
b.
prevents the Fed from controlling the money supply since commercial banks can always offset the actions of the Fed.
c.
prevents runs on banks by depositors who fear that banks have insufficient assets to meet the claims of their depositors.
d.
limits the ability of the Treasury to expand the national debt.
answer
a.
limits the ability of banks to expand the money supply by extending additional loans.
limits the ability of banks to expand the money supply by extending additional loans.
question
The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the
a.
federal deposit insurance premium.
b.
vault cash quota.
c.
excess reserve requirement.
d.
required reserve ratio.
a.
federal deposit insurance premium.
b.
vault cash quota.
c.
excess reserve requirement.
d.
required reserve ratio.
answer
d.
required reserve ratio.
required reserve ratio.
question
Excess reserves of banks equal
a.
actual reserves minus required reserves.
b.
actual reserves minus demand deposits.
c.
assets minus the liabilities of the banks.
d.
required reserves minus actual reserves.
a.
actual reserves minus required reserves.
b.
actual reserves minus demand deposits.
c.
assets minus the liabilities of the banks.
d.
required reserves minus actual reserves.
answer
a.
actual reserves minus required reserves.
actual reserves minus required reserves.
question
The federal funds rate is the interest rate paid when
a.
the Federal Reserve makes loans to member banks.
b.
taxpayers pay overdue taxes.
c.
one bank borrows reserves from another bank.
d.
banks make loans to the federal government.
e.
the federal debt is refinanced.
a.
the Federal Reserve makes loans to member banks.
b.
taxpayers pay overdue taxes.
c.
one bank borrows reserves from another bank.
d.
banks make loans to the federal government.
e.
the federal debt is refinanced.
answer
c.
one bank borrows reserves from another bank.
d.
one bank borrows reserves from another bank.
d.
question
The major overall purpose of the Federal Reserve System is to
a.
keep the discount rate flexible.
b.
insure the deposits of persons holding funds with banking institutions.
c.
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
d.
regulate the levels of excess reserves held by member banking institutions.
a.
keep the discount rate flexible.
b.
insure the deposits of persons holding funds with banking institutions.
c.
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
d.
regulate the levels of excess reserves held by member banking institutions.
answer
c.
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
question
During 2008-2013, the Fed initiated several rounds of "quantitative easing." Under this policy, the Fed
a.
increased its purchases of financial assets and thereby injected additional reserves into the banking system.
b.
increased its purchases of financial assets, which reduced the reserves available to the banking system.
c.
reduced its purchases of financial assets and thereby injected additional reserves into the banking system.
d.
reduced its purchases of financial assets and thereby reduced the quantity of reserves available to the banking system.
a.
increased its purchases of financial assets and thereby injected additional reserves into the banking system.
b.
increased its purchases of financial assets, which reduced the reserves available to the banking system.
c.
reduced its purchases of financial assets and thereby injected additional reserves into the banking system.
d.
reduced its purchases of financial assets and thereby reduced the quantity of reserves available to the banking system.
answer
a.
increased its purchases of financial assets and thereby injected additional reserves into the banking system
increased its purchases of financial assets and thereby injected additional reserves into the banking system
question
During 2001-2004, the Fed injected additional reserves into the banking system, which reduced the federal funds rate and other short-term interest rates. Other things constant, what is the most likely short-run impact of this policy?
a.
an increase in the rate of unemployment
b.
a reduction in the growth of employment
c.
an increase in aggregate demand and real GDP
d.
a reduction in the long-run rate of inflation
a.
an increase in the rate of unemployment
b.
a reduction in the growth of employment
c.
an increase in aggregate demand and real GDP
d.
a reduction in the long-run rate of inflation
answer
c.
an increase in aggregate demand and real GDP
an increase in aggregate demand and real GDP
question
Cross country data illustrates that rapid expansion in the supply of money over a lengthy period of time (for example, a decade) leads to
a.
rapid growth of real output.
b.
a low real rate of interest.
c.
high rates of inflation.
d.
an inflow of capital and a high rate of investment.
a.
rapid growth of real output.
b.
a low real rate of interest.
c.
high rates of inflation.
d.
an inflow of capital and a high rate of investment.
answer
c.
high rates of inflation.
high rates of inflation.
question
If the Federal Reserve increases its bond purchases, the short-run effects will be
a.
an increase in the money supply and lower real interest rates.
b.
a decrease in the money supply and lower real interest rates.
c.
an increase in the money supply and higher real interest rates.
d.
a decrease in the money supply and higher real interest rates.
a.
an increase in the money supply and lower real interest rates.
b.
a decrease in the money supply and lower real interest rates.
c.
an increase in the money supply and higher real interest rates.
d.
a decrease in the money supply and higher real interest rates.
answer
a.
an increase in the money supply and lower real interest rates.
an increase in the money supply and lower real interest rates.
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