1. Which of the following is the most accurate definition of the velocity of money? The velocity of money is the:
A.GDP of a country divided by its price level.
B.money supply of a country divided by its price level.
C.GDP of a country divided by its money supply.
A B C
C
Velocity is the average number of times per year each dollar is used to buy goods and services (velocity = GDP/money). Therefore, the money supply multiplied by velocity must equal nominal GDP. The equation of exchange must hold with velocity defined in this way. Letting money supply = M, velocity = V, price = P, and real output = Y, the equation of exchange may be symbolically expressed as : MV = PY.
2. If the money interest rate is measured on the y-axis and the quantity of money is measured on the x-axis, the money supply curve is:
A.horizontal.
B.upward sloping to the upper right.
C.vertical.
A B C
C
The money supply schedule is vertical because it is not affected by changes in the interest rate but is determined by the monetary authorities such as the Federal Reserve System (Fed) in the United States.
3. The demand for money curve represents the relationship between the quantity of money demanded and:
A.the quantity of money supplied.
B.short-term interest rates.
C.the price level.
A B C
B
The demand for money curve represents the relationship between short-term interest rates and the quantity of real money that households and firms demand to hold.
4. When an economy dips into a recession, automatic stabilizers will tend to alter government spending and taxation so as to:
A.reduce the budget deficit (or increase the surplus).
B.enlarge the budget deficit (or reduce the surplus).
C.ensure that the budget will remain in balance.
A B C
B
During a recession unemployment is high, so the government will pay out more in unemployment compensation at the exact time that tax receipts from corporations and individuals are low. This will increase the size of the deficit and also maintain aggregate demand during recessionary periods.
5. Which one of the following is NOT a major prediction of the effects of monetary policy?
A.The inflation rate and money interest rates are directly related.
B.Inflation will remit from the rapid and persistent growth of the money supper.
C.There is a strict relationship between shifts in monetary policy and changes in output and prices.
A B C
C
The relationship between shifts in monetary policy and changes in output and prices is not precisely specified. Markets do not adjust immediately to changes in demand. For example, when long-term contracts are in place, adjustments may not be effected for many months or even years.
6. If a central bank wants to implement expansionary monetary policy, how would the central bank use the following monetary tools? Reserve Requirements Open Market Operations Discount Rate ①A. Lower Buy additional government securities Lower ②B. Lower Sell previous purchased government securities Raise ③C. Raise Sell previous purchased government securities Raise A. ①B. ②C. ③
A B C
A
Expansionary monetary policy involves reducing reserve requirements, purchasing addition government securities, and lowering the discount rate.
7. A recession is defined as a period during which real gross domestic product (GDP) declines for:
A.one or more successive quarters.
B.two or more successive quarters.
C.three or more successive quarters.
A B C
B
A recession is defined as a period during which real GDP declines for two or more successive quarters. A depression is defined as a prolonged and very serious recession.
8. ff the economy is just beginning to come out of a recession, which of the following would represent a typical sequence of phases in the business cycle?
A.Expansion, business peak, contraction, recessionary trough.
B.Expansion, business peak, recessionary trough, contraction.
C.Depression, expansion, business peak, contraction.
A B C
A
If the economy is just beginning to come out of a recession, a period of expansion is beginning. In a typical business cycle, this will be followed by a business peak, and a period of contraction, leading to the next recessionary trough. This would complete one cycle from the time of the last recession. C is not appropriate since the question says that the economy is coming out of a recession. This suggests that the economy is getting better, not worse.
9. Analysis using the AS-AD model suggests that if expected inflation equals actual inflation:
A.unemployment will rise.
B.unemployment will fall.
C.the economy will remain at full-employment GDP.
A B C
C
AS-AD model analysis indicates that if expected and actual inflation are equal, the economy will remain at full-employment GDP.
10. Which of the following is not an effect of restrictive monetary policy?
A.higher real interest rates.
B.lower real output.
C.higher employment.
A B C
C
Restrictive monetary policy leads to higher real interest rates, lower aggregate demand, lower output, lower employment, and lower prices.
11. An analyst gathers the following information about Monument State Bank: Demand deposits $ 400 million. Loans and securities $ 260 million. Reserve requirement 10%. The bank has a total of $ 50 million in cash and deposits with the Federal Reserve. Monument Stare Bank is in a position to make additional loans of:
A.$ 5 million.
B.$10 million.
C.$ 26 million.
A B C
B
( Demand deposits) ( reserve requirement) = required reserves (400)×(0.1) = 40 Actual reserves (50) -required reserves (40) =excess (10) The bank can lend $10 million.
12. Which of the following statements is most accurate with respect to the measures of the money supply?
A.When a firm writes a check to an individual, the M1 measure is increased.
B.When an individual pays for a transaction at a business with a credit card, the M2 measure is increased.
C.M2 includes M1 plus time deposits, savings deposits, and money market mutual fund balances.
A B C
C
The statement that M2 includes M1 plus time deposits, savings deposits, and money market mutual fund balances is correct. Writing a check does not increase the money supply, it merely transfers funds from one party to another. Likewise, using a credit card does not increase the money supply. Checking balances owned by individuals and firms are included in M1, but those of government are not.
13. Based on research that has been done regarding the relationship between deficits and interest rates it can be concluded that:
A.year-to-year data indicate a strong relationship between budget deficits and interest rates but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model.
B.year-to-year data indicate a loose relationship between budget surpluses and interest rates but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model.
C.year-to-year data indicate a loose relationship between budget deficits and interest rates but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model.
A B C
C
Based on research that has been done regarding the relationship between deficits and interest rates, it can be concluded that year-to-year data indicate a loose relationship between budget deficits and interest rates, but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model.
14. Which of the following items is least likely to be included in the monetary base?
A.Commercial checking deposits.
B.Federal Reserve notes.
C.Coins issued by the Treasury.
A B C
A
Commercial checking deposits are not included in the monetary base.
15. Which of the following statements about phases of the business cycle is most accurate?
A.During an expansion, real output grows and unemployment increases.
B.During contraction, real output declines and unemployment decreases.
C.The business peak is the highest output (measured in GDP) of an expansion.
A B C
C
Only the business peak is accurately described.
16. Assume that nominal gross domestic product (GDP) is $10 trillion and the money supply is $ 5 trillion. What is the velocity of money?
A.5x.
B.50x.
C.2x.
A B C
C
According to the quantity theory of money, velocity = GDP/money supply. Hence, V = 10/5=2x.
17. U.S. banks will generally opt to hold excess reserves if they believe general business conditions in the U.S. economy are subject to greater uncertainty. If all else is held constant, what is the most likely impact of this action?
A.The money supply will decrease.
B.The money supply will increase during a period of inflation, but will decrease if the economy goes into a recession.
C.There will be no effect on the money supply.
A B C
A
If banks choose to hold excess reserves, they will decrease their lending. Less bank lending will cause the money supply to decrease.
18. Geno Potosi is delivering a lecture on the Phillips curve model, during which he makes the following two statements: Statement 1: If expected inflation is less than actual inflation, the short-run Phillips curve shows that the unemployment rate will increase. Statement 2: The negative relationship between the inflation rate and unemployment rate does not hold in the long run because the expected inflation rate adjusts to the actual performance of inflation. Are Potosi's two statements correct? Statement 1 Statement 2 ①A. Correct Correct ②B. Incorrect Correct ③C. Correct Incorrect A. ①B. ②C. ③
A B C
B
Statement 1 is incorrect. If actual inflation is greater than expected inflation, such as would occur in the case of a greater-than-expected increase in aggregate demand, the unemployment rate decreases in the short run. Statement 2 is correct. The short-run difference between expected and actual inflation is the source of the short-run negative relationship between inflation and unemployment.
19. Automatic stabilizers are government programs that tend to:
A.automatically increase tax collections during a recession.
C.change government deficits in a manner counter-cyclical to economic growth without legislative action.
A B C
C
Automatic stabilizer are built-in features that tend to automatically promote a budget deficit during a recession and a budget surplus during an inflationary boom, without a change in policy.
20. Which of the following statements best explains the importance of the timing of changes in discretionary fiscal policy? Changes in discretionary fiscal policy must be timed properly if they are going to:
A.help the government achieve a balanced budget.
B.exert a stabilizing influence on an economy.
C.enable the government to control the money supply.
A B C
B
Proper timing of discretional policy is needed to reduce economic instability. If timed incorrectly, the fiscal policy change could increase rather than reduce economic instability.
21. According to the quantity theory of money, if the gross domestic product is $6 trillion and M1 money supply is $ 800 billion, the velocity of the M1 money supply is:
A.0.133.
B.1.153.
C.7.500.
A B C
C
MV = PY. PY given as $ 6000 billion and M is given at $ 800 billion. So, V = PY/M = 6000/800 = 7.5.
22. What would be the impact of an unanticipated increase in aggregate demand on an economy's rate of unemployment, rate of inflation, and the short-run Phillips curve (SRPC)? Unemployment Inflation SRPC ①A. Decrease Increase Upward movement along curve ②B. Increase Increase Downward movement along curve ③C. No effect Decrease Upward shift of curve A. ①B. ②C. ③
A B C
A
Assume that the expected inflation rate is 8 percent a year and that the natural rate of unemployment is 5 percent for an economy. An unanticipated increase in aggregate demand will cause firms to hire more workers in the short-run. That action should reduce the economy's unemployment rate below its natural rate. However, as aggregate demand increases the inflation rate will increase. This joint action would result in an upward movement along the short-run Phillips curve.
23. The crowding-out effect suggests that:
A.expansionary fiscal policy causes inflation.
B.restrictive fiscal policy is an effective weapon against inflation.
C.the sale of government bonds to the public will drive up interest rates, thereby retarding private investment and aggregate demand.
A B C
C
The crowding-out effect refers to a reduction in private borrowing and spending as a result of higher interest rates generated by budget deficits that are financed by borrowing in the private loanable funds marker.
24. Which of the following is least likely to be cited as a limitation of discretionary fiscal policy stabilizers?
A.Changes in the business cycle are difficult to predict.
B.Taxes paid by households increase as incomes rise.
C.Legal changes are delayed while legislators debate fiscal policy issues.
A B C
B
Discretionary fiscal policy stabilizers face several limitations. First, economic forecasts might be wrong, which will likely lead to wrong fiscal policy decisions. Second, complications arise in practice that delay the effects of the discretionary stabilizers. Legal changes take time to implement and to have an effect on the economy. All these choices are examples of limitations of discretionary fiscal policy. On the other hand, "induced taxes", in which taxes paid by households increase as incomes rise, are an example of an automatic fiscal policy stabilizer, not a discretionary fiscal policy stabilizer.
25. If the economy is just coming out of a recession, which one of the following would represent a typical sequence of phases in the business cycle?
A.Expansion, business peak, contraction, recession.
B.Expansion, business peak, recession, contraction.
C.Depression, expansion, business peak, contraction.
A B C
A
If the economy is coming out of a recession, a period of expansion will begin. In a typical business cycle, this will be followed by a business peak, a period of contraction, and then a period of recession. This would complete one cycle from the time of the last recession. C and D are not appropriate since the question says that the economy is coming out of a recession. This suggests that the economy is getting better, not worse.
26. The term "automatic stabilizers" refers to the fact that:
A.legislators automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
B.with given tax rates and expenditure policies, a rise in national income tends to produce a surplus, while a decline tends to result in a deficit.
C.government expenditures and tax receipts automatically balance over the course of the business cycle, although they may be out of balance in any single year.
A B C
B
Automatic stabilizers are built-in fiscal devices that ensure deficits in a recession and surpluses during booms. Automatic stabilizers minimize the problem of proper timing.
27. Proper timing of fiscal policy is important if the government is to:
A.generating revenues from taxes and sales equal to its expenditures.
B.stimulate economic activity during a recession and restrain the economy during an inflationary boom.
C.increasing the supply of loanable funds needed to place downward pressure on the real rate of interest.
A B C
B
If fiscal policy is going to reduce economic instability, changes in policy must stimulate the economy during a recession and restrain it during an inflationary boom.
28. Which school of thought holds that fiscal policy is most effective?
A.the basic Keynesian model.
B.the Crowding-Out model.
C.New Classical economics.
A B C
A
The basic Keynesian model has the most optimistic view regarding the effectiveness of fiscal policy.
29. The Laffer curve indicates that:
A.an increase in income tax rates will increase tax revenue.
B.a decrease in sales tax rates could increase tax revenue.
C.an increase in income tax rates may not increase tax revenue.
A B C
C
The Laffer curve suggests that an increase in income tax rates will increase tax revenues up to a point, and thereafter increases in income tax rates will actually decrease tax revenues. Conversely, a decrease in income tax rates may decrease or increase overall tax revenues, depending upon the initial level of income tax rates.
30. Which of the following is determined by the equilibrium between the demand for money and the supply of money?
A.Inflation rate.
B.Interest rate.
C.Money supply.
A B C
B
Interest rates are determined by the equilibrium between money supply and money demand.
31. If the U.S. Federal Reserve (the Fed) sells government securities, what will most likely be the impact on the real interest rate, inflation rate, employment rate, and real GDP in the short run? Inflation Rate Real Interest Rate Real GDP Employment Rate ①A. Decrease Increase Decrease Decrease ②B. Decrease Decrease Decrease Increase ③C. Increase Decrease Increase Increase A. ①B. ②C. ③
A B C
A
If the U.S. Federal Reserve sells government securities for cash, cash is being withdrawn from circulation in the economy. This action will decrease the money supply. A decrease in the money supply will reduce the supply of funds that the banks can loan, which will cause real and nominal interest rates to increase. The increase in real and nominal interest rates will make it more expensive for businesses to finance their capital investments. Therefore, the economy will experience a contraction in business investment, which will also cause aggregate demand to decrease. The decline in aggregate demand will lead to a decline in real GDP, a decrease in the inflation rate, and a decrease in the employment rate.
32. The major advantage of automatic stabilizers is that:
A.they institute crowding out policy without the delays associated with policy changes that require legislative action.
B.they institute countercyclical fiscal policy without the delays associated with policy changes that require legislative action.
C.they institute cyclical fiscal policy without the delays associated with policy changes that require legislative action.
A B C
B
The major advantage of automatic stabilizers is that: they institute countercyclical fiscal policy without the delays associated with policy changes that require legislative action.
33. Which of the following statements regarding inflation is most accurate?
A.The purchasing power of money increases as a result of inflation.
B.Inflation has no effect on the real economic output.
C.Inflation is a persistent increase in the general price level of goods and services.
A B C
C
Inflation is defined as a persistent increase in the price level over time. Inflation indicates that there has been a general decline in the purchasing power of a currency. Inflation reduces economic output by increasing transactions costs and reducing investment rates. Fixed-rate borrowers gain at the expense of lenders when inflation is greater than expected.
34. In a recent economic forum meeting, Jason Federmeyer of the Bank of Detroit, and Lawrence Lobovsky of the Bank of Tulsa, were discussing the demand for money and how it has changed over the years. Federmeyer made the following two statements to Lobovsky: Statement 1: Financial innovation has significantly affected the demand for money. The increased use of credit cards and debit cards, interest-bearing checking accounts, internet banking and even the large number of ATMs around the world have all helped to increase the demand for money above what it would have been if only the increase in real GDP were at work. Statement 2: Although the quantity of money demanded is largely determined by interest rates, the supply of money is determined by the central bank and is independent of interest rates. Are Statement 1 and Statement 2 as made by Federmeyer correct? Statement 1 Statement 2 ①A. Incorrect Incorrect ②B. Correct Incorrect ③C. Incorrect Correct A. ①B. ②C. ③
A B C
C
Overall, financial innovation has reduced the demand for money below what it would have been if only the increase in real GDP was at work. The demand for money is determined, for the most part, by interest rates. However, the quantity of money supplied is determined by the central bank and is independent of the interest rate.
35. The supply of money is primarily determined by:
A.inflation.
B.the monetary authorities.
C.interest rates.
A B C
B
The monetary authorities determine the quantity of money available to the economy. Inflation, interest rates, and the level of GDP affect the demand for money balances.
36. Under the classification system used by the U.S. Bureau of Labor Statistics, which of the following people would least likely be considered unemployed? Someone who:
A.was terminated from his last job.
B.quit his previous job and is looking for new work.
C.is disabled and unable to return to work.
A B C
C
People who are unable to work due to disability are not included as part of the labor force and, therefore, are not considered unemployed. Others who are not included in the labor force are household workers, students, discouraged workers, and retirees.
37. Which of the following most accurately describes the generational effects of fiscal policy?
A.Fiscal stimulus generates economic activity greater than the amount of the stimulus due to the multiplier effect on future generations.
B.Each generation of fiscal policy decisions has unintended effects that require another generation of fiscal policy actions to correct them.
C.Fiscal imbalances must be corrected in the future by increasing taxes or decreasing government spending, and much of the burden will fall on future generations.
A B C
C
Generational effects of fiscal policy refer to the burden of government deficits, which must be corrected by future increases in taxes or decreases in government spending. Studies show that in the U. S. , more than half of the burden of the fiscal imbalance will fall on future generations.
38. According to the supply-side view of fiscal policy, if the impact of tax revenues is the same, does it make any difference whether the government cuts taxes by either reducing marginal tax rates or increasing the personal exemption allowance?
A.No, both of the methods of cutting taxes will exert the same impact on aggregate supply.
B.No, people in both cases will increase their savings expecting higher future taxes and thereby offset the stimulus effect of lower current taxes.
C.Yes, the lower tax rates alone will increase the incentive to earn marginal income and thereby stimulate aggregate supply.
A B C
C
Supply-side economies contends that a reduction in marginal tax rates will give individuals and businesses the incentive to: (1) invest and save, (2) work at and increase their productivity in projects that provide taxable income, and (3) cut back on leisure time activities in order to participate in tax-shelter programs
39. A central bank can control the money of stock by: Ⅰ. establishing reserve requirements for depository institutions Ⅱ. buying and selling government securities in the open market Ⅲ. setting the interest rate at which it will loan funds to commercial banks and other depository institutions Which of the following is FALSE?
A.Ⅰ only.
B.Ⅱ only.
C.none.
A B C
C
A central bank can control the money of stock by : (1) establishing reserve requirements for depository institutions; (2) buying and selling government securities in the open market; (3) setting the interest rate at which it will loan funds to commercial banks and other depository institutions.
40. During the seminar, "Inflation - Friend or Foe?" Joe Lebow, an analyst with Greenwald & Associates, was discussing the difference between inflation and price level. He made the following two statements: Statement 1: To measure the inflation rate of a currency, one should calculate the annual percentage change in the price level. The calculation of this change shows the connection between the inflation rate and the price level. Statement 2: The higher the price level in the current year compared to the price level in the previous year, the higher is the inflation rate of a country. Any increase in the price level is evidence of (positive) inflation. Are the statements as made by Lebow regarding inflation and price levels correct? Statement 1 Statement 2 ①A. Incorrect Incorrect ②B. Correct Correct ③C. Correct Incorrect A. ①B. ②C. ③
A B C
C
Statement 1 is correct. However, Statement 2 is incorrect because a one-time increase in the price level is not necessarily inflation. Inflation is an on-going process; not a one-time increase in the price level.
41. The corporate income tax is an automatic stabilizer because:
A.corporate profits are strongly counter-cyclical.
B.corporate profits are strongly pro-cyclical.
C.the corporate profits tax increases tax collections during recessions.
A B C
B
Since corporate profits are strongly pro-cyclical, rising profits during expansionary periods automatically increase tax collections and work to cool off any inflationary pressures.
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