Exam II Review questions (Chapters 8-11) 1. Which of the following should reduce consumer spending?

Exam II Review questions (Chapters 8-11)

1. Which of the following should reduce consumer spending?

(a) A decrease in personal income tax rates

(b) A decrease in disposable personal income

(c) An expectation that the aggregate price level will increase soon

(d) An increase in government transfers to individuals

2. An expansionary fiscal policy is intended to expand

(a) the government deficit

(b) government spending

(c) output

(d) net taxes

3. Which of the following pairs of actions is the most certain to be a tight monetary policy? A(n) (             )  in the required reserve ratio and an open market (              ) of securities.

(a) increase; purchase

(b) increase; sale

(c) decrease; purchase

(d) decrease; sale

4. If the supply of money decreases as a result of a(n) (              )  in the required reserve ratio, the size of money balances will (             ).

(a) increase; increase

(b) increase; decrease

(c) decrease; increase

(d) decrease; decrease

5. The Fed wishes to increase the money supply. The most likely monetary policy might include the (            ) of bonds by the Fed and the (           )  of the discount rate.

(a) purchase; lowering

(b) purchase; raising

(c) sale; lowering

(d) sale; raising

6. Each of the following will cause the demand for money to increase EXCEPT

(a) an increase in aggregate output

(b) an increase in the average dollar amount of each transaction

(c) an increase in the transaction cost of switching between money and bonds

(d) an increase in the money supply

7. Human capital is

(a) the machines people own

(b) the money people have

(c) the mental or physical skills people have

(d) the property people own

8. Which of the following is considered a liability to a bank?

(a) reserves

(b) time deposits

(c) the bank’s buildings and equipment

(d) the bank’s loans

9. Firms react to unplanned increases in inventories by

(a) increasing output

(b) reducing output

(c) increasing consumption

(d) increasing planned investment

10. Government spending increases by $40 billion and the equilibrium level of output increases by $200 billion. The government spending multiplier

(a) is 6

(b) is 4

(c) is 5

(d) cannot be determined from the information, because the MPC is not given

11. The aggregate consumption function is C = 800 + 0.8 Ýd. If income is $2,000 and net taxes are $500, consumption equals

(a) 2,150

(b) 1,500

(c) 2,000

(d) 2,050

12. The Intrastate Bank has $5 million in deposits and $500,000 in reserves. If the required reserve ratio is 5%, excess reserves are equal to

(a) $125,000

(b) $250,000

(c) $500,000

(d) zero

13. If Megan received a $2,500 bonus and her MPS is 0.20, her consumption rises by

$ (        )  and her saving rises by $ (          ).

(a) 2,000; 500

(b) 2,500; 200

(c) 2,500; 20

(d) 500; 100

14. If consumption is $10,000 when income is $10,000, and consumption increases to $11,000 when income increases to $12,000, the MPS is

(a) 0.50

(b) 0.90

(c) 0.10

(d) 0.25

15. If aggregate output is greater than planned spending, then

(a) unplanned inventory investment is zero

(b) actual investment equals planned investment

(c) unplanned inventory investment is negative

(d) unplanned inventory investment is positive

16. M1 includes

(a) currency

(b) demand deposits

(c) traveler’s checks

(d) all of the above

17. If the reserve ratio for all banks is 10%, $1,000 of additional deposits can create up to

(a) $100 of new money

(b) $1,000 of new money

(c) $10,000 of new money

(d) None of the above is correct

18. Money demand refers to

(a) the total quantity of financial assets that people want to hold

(b) how much income people want to earn per year

(c) how much wealth people want to hold in liquid form

(d) how much currency the Federal Reserve decides to print

19. Open-market purchases by the Fed make the money supply

(a) increase, which makes the value of money increase

(b) increase, which makes the value of money decrease

(c) decrease, which makes the value of money decrease

(d) decrease, which makes the value of money increase

20. When you keep your savings in a saving account, you are using money as a(n)

(a) unit of account

(b) store of value

(c) investment good

(d) medium of exchange

21. Maureen’s optimal money balance will certainly increase if the costs of switching between bonds and money

(a) increases and the interest earned on bonds increases

(b) decreases and the interest earned on bonds decreases

(c) increases and the interest earned on bonds decreases

(d) decreases and there is a decrease in the inflation rate

22. In a barter economy,

(a) money functions only as a medium of exchange

(b) multiple “exchanges” are likely

(c) money functions as a medium of exchange and as a store of value

(d) saving cannot occur

23. Peter earns $3,000 a month. He deposits $300 in an interest-bearing savings account, and buys $200 worth of government securities. The rest he holds in his checking account. What is Peter’s money demand?

(a) $3,000

(b) $2,800

(c) $2,700

(d) $2,500

24. When market interest rates are lower than normal,

(a) bond prices are expected to increase

(b) bond prices are expected to decrease

(c) the demand for bonds is higher than normal

(d) the yield on bonds is higher than normal

25. If the supply of money increases as a result of an open market (          ) by the Fed, the interest rate will (           ).

(a) purchase; increase

(b) purchase; decrease

(c) sale; increase

(d) sale; decrease

26. The Fed reduces the interest rate on Treasury bills by 1%. According to the expectations theory of the term structure of interest rates, the interest rate on 30-year government bonds will

(a) increase by more than 1%

(b) increase by less than 1%

(c) decrease by more than 1%

(d) decrease by less than 1%

27. If Mr. Green is paid an interest rate of 4% on his savings, but the inflation rate is 7%, the real interest rate Mr. Garrison earns is

(a) -7%

(b) 4%

(c) 28%

(d) -3%

28. If you save $80 when you experience a $400 rise in your income,

(a) your MPC is 085

(b) your MPS is 0.25

(c) your MPC is 0.80

(d) your MPS is 0.40

29. If the Fed sells government securities, then there is

(a) an increase in the required reserve ratio

(b) a decrease in the discount rate

(c) a decrease in the supply of money

(d) an increase in the supply of money

30. If government spending is increased by $550 and taxes are increased by $550, the equilibrium level of income will

(a) increase by $1,100

(b) decrease by $550

(c) not change

(d) increase by $550

31. Assume there is no government or foreign sector. If the multiplier is 10, a $10 billion increase in planned investment will cause aggregate output to increase by

(a) $100 billion

(b) 1 billion

(c) $10 billion

(d) $5 billion

32. Money is

(a) the value of all coins and currency in circulation at any time

(b) anything that is generally accepted as a medium of exchange

(c) the same as income

(d) backed by gold in Fort Knox

33. Jacob makes excellent tamales and Amanda is very good at mowing lawns. Amanda agrees to mow Jacob’s lawn, if he makes her a dozen tamales. This is an example of

(a) fiat money

(b) legal tender

(c) barter

(d) commodity money

34. Assume there is no leakage from the banking system and that all commercial banks are loaned up. The required reserve ratio is 10%. If the Fed buys $10 million worth of government securities from the public, the change in money supply will be

(a) $10 million

(b) $1 million

(c) $110 million

(d) 100 million

35. Currency held outside banks + demand deposits + travelers checks + other checkable deposits =

(a) M1

(b) M3

(c) M2 – M1

(d) M3 – M1

36. If the price index in period 2 is 109 and the price index in period 3 is 125, the rate of inflation between period 2 and period 3 is

(a) 14.7%

(b) 9%

(c) 16%

(d) 8.7%

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