1. Supply-side economics focuses on the impact of:
A.government borrowing on interest rates and private consumption and investment.
B.higher government spending and lower taxes on aggregate demand.
C.axes on the incentive to engage in productive activities.
A B C
C
The effect of taxes on the incentive to engage in productive activities and thus on aggregate supply is the focus of supply-side economics.
2. Which one of the following is least accurate with regard to money serving as a medium of exchange? Without money to serve as a medium of exchange:
A.people's standard of living would probably decline.
B.people would continue to enjoy their current standard of living and countries would become more self-sufficient in production of goods and services.
C.the transaction cost of exchange would increase.
A B C
B
Without money to serve as a medium of exchange people around the world would see their current standard of living decline, countries would be less self-sufficient in the production of goods and services, transaction costs of exchange would increase, and the gains from international trade would be limited.
3. The Laffer curve begins at:
A.zero tax revenues and ends at zero tax revenues.
B.zero tax revenues and ends at maximum theoretical tax revenues.
C.minimum tax revenues and ends at maximum theoretical tax revenues.
A B C
A
The Laffer curve begins at zero tax revenues (the tax rate is 0%, so no matter how much labor is supplied, the tax revenue is zero) and ends at zero tax revenues (the tax rate is 100%, so no labor will be supplied, and no tax revenue collected).
4. When the economy is operating at potential GDP, an unannounced decrease in the rate of growth of the money supply intended to reduce inflation will most likely lead to. lower inflation and:
A.a decrease in output in both the short run and the long run.
B.no change in output in both the short run and the long run.
C.a decrease in output in the short run, and lower inflation but no change in output in the long run.
A B C
C
In the aggregate supply-aggregate demand model, an unannounced decrease in the growth rate of the money supply will decrease output and prices in the short run, but in the long run inflation will decrease more and output will return to the full-employment level as short-run aggregate supply increases in response to the decrease in inflation.
5. At a recent staff meeting of Economic Advisers Inc. , a think-tank located in Washington, DC, Mitchell Jung made the following statements regarding the main economic functions of depository institutions. Statement 1: One of the main economic functions of depository institutions is to act as financial intermediaries. By doing so, they lower the borrowers' cost of funds from what it would otherwise be if borrowers had to seek out individuals willing to lend. Statement 2: Depository institutions create liquidity by using loans they take in to have funds available to pay interest on short-term deposits. Are Statement 1 and Statement 2 as made by Jung correct? Statement 1 Statement 2 ①A. Incorrect Incorrect ②B. Correct Incorrect ③C. Incorrect Correct A. ① B. ②C. ③
A B C
B
Depository institutions have four main economic functions: 1) they create liquidity by using the short-term deposits they take in to make longer-term loans; 2) by acting as financial intermediaries, depository institutions lower the cost of funds for borrowers from what they would be if they had to seek out individuals willing to lend; 3 ) depository institutions are in a better position than individuals would be to monitor the risk of the projects for which borrowers are using the loaned funds; and 4 ) because they each make many loans, depository institutions can reduce risk through diversification of individual loan risks.
6. The crowding-out model suggests that the stimulus effect of increased government expenditures will be modified by changes in real interest rates and the flow of foreign financial capital, be cause real interest rates will:
A.rise and inflows of financial capital from outside the country will increase.
B.rise and inflows of financial capital from outside the country will decrease.
C.fall and inflows of financial capital from outside the country will increase.
A B C
A
The increase in government borrowing to finance the higher expenditures will put upward pressure on real interest rates. This in turn will slow private investment and attract an inflow of capital from abroad.
7. An increase in which one of the following monetary measures would best complement fiscal measures that are designed to stimulate aggregate demand during a period of high unemployment?
A.Reserve requirements.
B.Treasury securities held by the Federal Reserve.
C.The Federal Reserve's discount rate.
A B C
B
The Fed increases its holdings of Treasury securities through open market purchases, which puts money into the system, which will increase aggregate demand. While the other tools are used to implement monetary policy, they will decrease demand as described.
8. At a recent conference, Joe DiSanto and Michael Depasquale were discussing a recent Federal Reserve policy shift that led to an increase in banks' excess reserves. They each offered an explanation as to why this would cause an increase in bank loans and investments: DiSanto: "Banks are required by law to expand the number of loans they originate when the Fed creates excess reserves. " Depasquale: "It is risky to hold excess reserves, whereas loans and investments are less risky. " Are DiSanto and Depasquale's statements correct? DiSanto Depasquale ①A. Incorrect Incorrect ②B. Correct Incorrect ③C. Incorrect Correct A. ①B. ②C. ③
A B C
A
Both statements are incorrect. Banks are not required to expand their loans. If Fed policy increases banks' excess reserves, the banks will want to expand their loans and investments because they generate more interest income than excess reserves deposited with the Fed. Loans and investments carry higher risk than assets held as reserves, but earn a greater return.
9. Which of the following statements concerning inflation is least accurate?
A.Inflation tends to erode the purchasing power of a currency.
B.There are two fundamental types of inflation, demand-pull and cost-push.
C.Anticipated changes in inflation have greater impacts on real economic outcomes than unanticipated changes.
A B C
C
Unanticipated changes in inflation have greater impacts on real economic outcomes than anticipated changes. The other statements are correct.
10. If the velocity of money is increasing at a rate of 1 percent per year and real GDP is increasing at 2%, a 4% increase in the money supply will lead to:
A.6% inflation.
B.5% inflation.
C.3% inflation.
A B C
C
The inflation rate is calculated as the rate of change in the money supply plus the change in the velocity of money less the change in real GDP. Inflation equals to 3% ( = 1%+4%-2% ).
11. Which of the following statements best describes automatic stabilizers? Although no legislative action has been taken, automatic stabilizers are programs that apply:
A.restraint during a recession and stimulus during an economic boom.
B.restraint during a recession but do not apply stimulus during an economic boom.
C.stimulus during a recession and restraint during an economic boom.
A B C
C
Automatic stabilizers tend to increase deficits during recessions, which stimulates demand during the contraction phase of the business cycle, and increase surpluses or reduce deficits during economic expansions, to reduce aggregate demand during expansions.
12. Which of the following is least likely an automatic stabilizer?
A.Property taxes.
B.Corporate profit taxes.
C.Unemployment compensation.
A B C
A
The only item listed that is not an automatic stabilizer is property taxes. When the economy enters a recession, unemployment compensation increases, which tends to increase (reduce the decrease in) consumption and aggregate demand. Induced taxes, personal income taxes and corporate taxes decrease during a recession, which tends to increase (reduce-the-decreases in) aggregate demand by allowing more for both consumption by individuals and investment by corporations.
13. Which of the following is an effect of expansionary monetary policy?
A.lower prices.
B.lower real output.
C.higher employment.
A B C
C
Expansionary monetary policy leads to lower real interest rates, higher aggregate demand, higher output, higher employment, and higher prices.
14. Joe DeRita is giving an economic briefing before the Senate Banking Committee. During his testimony, Senator Morris Howard states, "Based on the Phillips curve relationship, if we increase the inflation rate from 3% to 5% , we can achieve a reduction in the rate of unemployment in both the short run and the long run. " Senator Lawrence Fine adds, "Furthermore, if the central bank is able to credibly announce that they will maintain the money supply growth rate, so that the increased inflation rate is well anticipated, borrowers, lenders, workers, and employers will incorporate the new higher rate of inflation into long-term contracts, so there will be no adverse impact on the economy. " Should DeRita agree or disagree with the two Senators? M. Howard L. Fine ①A. Agree Agree ②B. Agree Disagree ③C. Disagree Disagree A. ①B. ②C. ③
A B C
C
Senator Howard is incorrect. The Phillips curve suggests that in the short run a decline in unemployment would accompany an unanticipated increase in inflation, but in the long run unemployment would return to its natural rate. Senator Fine is also incorrect. Even if decision makers anticipate it, higher inflation still reduces economic growth by diverting productive activity into activities to deal with inflation and its effects, causing tax distortions (after-tax real rates fall, discouraging investment) , and increasing transactions costs because currency becomes a poorer store of value.
15. Assume the economy is undergoing a recession. In its efforts to stimulate the economy by trying to influence short-term interest rates the Fed is most likely to take which two actions?
A.Sell Treasury securities and increase bank reserve requirements.
B.Buy Treasury securities and decrease bank reserve requirements.
C.Buy Treasury securities and increase bank reserve requirements.
A B C
B
If the economy is in a recession, the Fed is likely to attempt to decrease short-term interest rates. If the Fed buys Treasury securities it will inject funds into the economy, which increases the supply of money, in turn decreasing interest rates. Similarly, if the Fed eases bank reserve requirements, more funds will be available for lending, which again will likely decrease interest rates.
16. Which of the following would be counted as frictional unemployment?
A.Due to the negative growth of GDP, Smith was laid off.
B.Johnson was fired from his job after he got into an argument with his foreman.
C.Although there were jobs available, Jones was unable to find an employer with an opening.
A B C
C
One of the causes of frictional unemployment is that information regarding prospective employees and employers is costly and sometimes hard to find. The other cause of frictional unemployment is that both employees and employers may spend some time looking for information that will match them up.
17. An asset that will allow people to transfer purchasing power from one period to the next is known as a:
A.liquid asset.
B.unit of account.
C.store of value.
A B C
C
An asset that will allow people to transfer purchasing power from one period to the next is known as a store of value.
18. Excess reserves of banks are equal to:
A.required reserves plus demand deposits.
B.required reserves minus actual reserves.
C.actual reserves minus required reserves.
A B C
C
When you subtract the reserves a bank is required to maintain from the bank's actual reserves, the result is excess reserves. If this number is negative, the hank has no excess reserves.
19. Anticipating the effects of monetary policy:
A.makes monetary policy more effective as an instrument of stabilization policy.
B.increases the resulting change in real output and employment.
C.can result in real and nominal interest rates moving in opposite directions.
A B C
C
Nominal and real interest rates move in opposite directions when the effects of monetary policy are anticipated. Expansionary monetary policy drives down real interest rates. The anticipated of the inflation that develops will cause lenders to raise nominal interest rates.
20. Which of the following will not cause a change in the demand for money?
A.an increase in the nominal value of transactions.
B.inflation.
C.a change in the real interest rate.
A B C
C
A change in the real interest rate causes a movement along the money demand curve as the quantity of money that individuals and businesses want to hold changes.
21. Initially, the nominal interest rate is 8 percent and the expected rate of inflation is 6 percent. One year later, the nominal interest rate rises to 12 percent and inflation rate to 10 percent. Based on this information the interest rate:
A.has risen.
B.has fallen.
C.has remained the same.
A B C
C
Nominal rate = Real rate + Inflation premium + Risk premium Risk premium not given ; assume it is zero: a) NR=RR+IP ,so 8=RR+6 ,Thus RR=2; b) NR= RR+ IP, so 12=RR+10, Thus RR =2.
22. The federal government seeks ways to increase the total investment component of GDP. In response to the government's objective, economist Scan Zadora recommends that the federal government lower taxes on interest earned on savings accounts. Zadora's colleague, Timothy Smythe, recommends that the federal government reduce its budget deficit. Regarding the statements made by Zadora and Smythe: Zadora Smythe ①A. Correct Incorrect ②B. Correct Correct ③C. Incorrect Ineorrect A. ①B. ②C. ③
A B C
B
Income tax reductions on interest income cause savings and investments to increase. Lower taxes on savings make saving more attractive. Therefore, Zadora is correct. Smythe is also correct. Budget deficits (expenditures exceed tax revenues) equate to negative savings by the government, detracting from total investment. A reduction in the government deficit, as recommended by Smythe, indicates that the government's negative savings is lessening, thereby contributing positively to total investment. Also, as the government reduces its deficit, it will likely lead to lower interest rates and to a smaller "crowding out effect" of private investment.
23. The crowding-out model suggests that persistent, large government budget deficits are most likely to be associated with a(n):
A.increase in net exports.
B.decrease in private spending.
C.decrease in the real rate of interest.
A B C
B
Crowding-out theory contends that when governments borrow to finance a deficit, they will create an increase in the demand for loanable funds. This will lead to higher real interest rates, which will reduce the profitability of certain investment projects and reduce demand for investment-based plant and equipment expenditures. Thus, the impact of the fiscal policy spending "crowds out" the demand for funds by private business.
24. The quantity theory of money states that:
A.a decrease in the money supply will cause a proportional increase in prices.
B.monetary and fiscal policy must be used in tandem.
C.an increase in the money supply will cause a proportional increase in prices.
A B C
C
The quantity theory is in no way related to fiscal policy. Money supply multiplied by velocity must equal nominal gross domestic product (GDP).
25. Edmund Jones, an economist, recommends that the federal government consider reducing its budget deficit during a recession by raising income taxes with no other fiscal policy changes. Jones' income tax increase recommendation will most likely have the following effects on the supply of labor and on potential GDP? Supply of labor Potential GDP ①A. Decrease Decrease ②B. Decrease Increase ③C. Increase Decrease A. ①B. ②C. ③
A B C
A
Taxes dampen the incentive to work. An increase in income taxes causes after-tax wages per hour to fall. Consequently, workers will he less likely to work the same number of hours as they did when their after-tax wages per hour were higher. As income taxes rise, the full-employment supply of labor (a key factor of production) falls, which then causes the potential GDP (intersection of the supply and demand for labor curves) to fall.
26. In a full employment economy, the quantity theory of money states that any increase in the sup ply of money will lead to:
A.increased prices.
B.increased velocity.
C.increased production.
A B C
A
The quantity theory of money hypothesizes that a change in the money supply, at full employment, will cause a proportional change in the price level because velocity and real output will be unaffected. According to the equation of exchange, MV = PY, output of goods and services produced, Y, at full employment cannot change, so the price level, P, must increase.
27. Michael Vincent and Elizabeth Matthews, economists at Macro Associates, conduct research into the effects of fiscal policy on the economy. Vincent states that government taxing decisions affect the supply of labor. Matthews contends that government taxing decisions affect potential GDP. Regarding the statements made by Vincent and Matthews: Vincent Matthews ①A. Correct Incorrect ②B. Incorrect Correct ③C. Correct Correct A. ①B. ②C. ③
A B C
C
Fiscal policy refers to the federal government's decisions regarding government spending and taxing. Income tax increases cause after-tax wages to fall, dampening the incentive to work. Consequently, workers will be less likely to work the same number of hours as they did when their after-tax wages per hour were higher. As income taxes increase, the full-employment supply of labor (a key factor of production) decreases, which causes potential GDP to decrease. Therefore, government taxing decisions affect both the supply of labor and potential GDP.
28. An expansionary fiscal policy is most likely to include a(n):
A.Increase in government expenditures and a decrease n tax rates.
B.decrease in both government expenditures and tax rates.
C.increase in both government expenditures and tax rates.
A B C
A
An expansionary fiscal policy means that government increases its purchases of goods and services and/or cuts tax rates to expand or create a budget deficit.
29. The public decides to decrease its holdings of currency and to increase its holdings of checking account funds by an equal amount. If the Federal Reserve does not take any offsetting actions, how will the money supply be affected?
A.The money supply will decrease.
B.Although the action does not directly affect the money supply, it will reduce the excess reserves of banks and tend to indirectly reduce the money supply.
C.The action does not directly affect the money supply; it will increase the excess reserves of banks and tend to increase the money supply because banks may expand their loans.
A B C
C
M1 is currency in circulation (coins and paper) , checkable deposits maintained in depository institutions, and travelers' checks. An increase in excess reserves will increase the amount of loanable funds, therefore, increasing the money supply.
30. If households are holding larger real money balances than they desire, which of the following is least likely?
A.The opportunity cost of holding money balances will decrease.
B.Households will bid up securities prices.
C.The central bank must sell securities to absorb the excess money supply and establish equilibrium.
A B C
C
If households' real money balances are larger than they desire, the interest rate ( opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank.
31. To be useful, a measure of inflation for an economy would most likely reflect information about the change in prices of:
A.goods only.
B.goods and services only.
C.goods, services, and financial assets only.
A B C
B
Inflation refers to the movement in the general level of prices of goods and services in an economy.
32. With respect to discretionary changes in both monetary and fiscal policy, the time period necessary to gather and tabulate reliable information about an economy's performance is best described as the:
A.impact lag.
B.recognition lag.
C.administrative lag.
A B C
B
If interest rate parity does not hold, an arbitrage condition will exist; however, absolute purchasing power parity is a theoretical relation requiring determination of an average national price level.
33. Which of the following is least likely to result from an increase in the rate of growth in the money supply?
A.A higher nominal risk-flee rate.
B.A higher real risk-free rate.
C.Higher expected inflation.
A B C
B
The real risk-free rate is independent of changes in the growth of the money supply. All of the other items are consistent with an increase in the growth rate of the money supply.
34. When real interest rates fall as a result of an unexpected expansionary monetary policy of government:
A.aggregate demand decreases leading to both an increase in current output and higher prices in the short run.
B.aggregate demand increases leading to both an increase in current output and higher prices in the short run.
C.aggregate demand increases leading to both a decrease in current output and higher prices in the short run.
A B C
B
When real interest rates fall as a result of an unexpected expansionary monetary policy of government, aggregate demand increases leading to both an increase in current output and higher prices in the short run.
35. You are expecting an additional payment of 52000 of income this year. You intend to save 5 500 of the 5 2000. According to the multiplier effect, total spending will increase by a total amount of:
A.51500.
B.54000.
C.56000.
A B C
C
The marginal propensity to consume (MPC) = added consumption/additional ineome. The multiplier (M) = 1/(1 - MPC). In this case MPC = $1500/2000 = 0.75. M = 1/(1 - 0.75) = 4. Therefore spending will increase by $ 6000 = 4 × $1500.
36. In the long run, when the economy is at full employment, will a decrease in the quantity of money due to restrictive monetary policy that brings a decrease in aggregate demand likely result in: the price level? real GDP? ①A. No No ②B. No Yes ③C. Yes No A. ①B. ②C. ③
A B C
C
From an initial long-run equilibrium, an increase (decrease) in aggregate demand will increase (decrease) prices and output in the short ran, and the resulting increase(decrease) in money wages will decrease (increase) short-run aggregate supply; resulting in further price increases (decreases) and a return to full-employment long-run equilibrium.
37. The short-run relationship between unexpected inflation and:
A.unemployment is positive.
B.unemployment is negative.
C.actual inflation is positive.
A B C
B
The relationship between unexpected inflation and unemployment is a negative one in the short run. There should be no trend in the relationship between unexpected and actual inflation--that is the difference should be zero in the long run and uncorrelated in the short run.
38. Assume the reserve requirement is 10 percent. First National Bank has cash (and deposits with the Federal Reserve) of $25 million, loans and securities of $175 million, and demand deposits of $ 200 million. First National is in a position to make additional loans of:
A.$ 5.0 million.
B.$17.5 million.
C.$ 20.0 million.
A B C
A
(1) [Deposits ($ 200) times Reserve Requirement (0.10)] = Required Reserves ($ 20). (2) [Actual Reserves ($ 25) less Required Reserves ($ 20)] = Excess Reserves $ 5). (3) The bank can lend out its excess reserves of $ 5.
39. Which of the following are problems in measuring unemployment? Ⅰ. In order to be classified as unemployed, one must be looking for a job Ⅱ. People may be busy but their activities are outside the market labor force Ⅲ. Unemployed workers who are seeking work are included in the labor force along with employed workers
A.Ⅰ only.
B.Ⅱ only.
C.all of the above.
A B C
C
Problems in measuring unemployment include: (1) in order to be classified as unemployed, one must be looking for a job. (2) people may be busy but their activities are outside the market labor force. (3) unemployed workers who are seeking work are included in the labor force along with employed workers.
40. Which of the following statements about the basic functions of money is TRUE?
A.When money is defined as a medium of exchange, it means that money enables value to be stored and transported.
B.Money's value is directly related to the level of prices.
C.Money's function as a unit of account allows individuals to account for debts.
A B C
C
As a unit of account, money acts as a common basis for financial transactions and accounting. Imagine the difficulty in trying to use oats to pay back a loan you received in bananas. Money's function as a store of value means that money enables value to be stored and transported. When money is defined as a medium of exchange, it means that money simplifies transaction costs. Money must be commonly recognized and universally accepted for it to serve as a good medium of exchange. Another basic function of money, which of unit of account, means that money allows consumers to compare the value of goods. The liquid asset function of money means that money converts easily into other goods. The statement that begins, "Money's value is. " should continue, ".. inversely related to the level of prices. " The value of a unit of money is measured in terms of what can be purchased with the unit. An increase in the level of prices and a decline in the purchasing power of a unit of money are the same thing. The statement about paper money is partially true, it allows consumers to defer consumption and encourages division of labor. It is not necessarily the best store of value. Other assets may provide a better hedge against inflation or greater price appreciation (real estate, for example).
41. Assume that the reserve requirement is 20 percent and banks currently have no excess reserves. If excess reserves stay at zero and the Federal Reserve buys $100 million of Treasury bills from the public, the money supply would increase by:
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