1 GCC, ECN 211, Sample Final Exam Questions (Questions from the final lecture are not included here, look for them soon.) Money Supply, Banking, and the Fed: 70. The elimination of the double coincidence of wants that arises in barter exchange is accomplished by which of the following functions of money? A. B. C. D. E. 71. Which of the following assets is most liquid? A. C. E. 72. a U.S. savings bond a savings account is backed by gold or some other precious commodity has value in uses other than money is designated as money by the government is money only because people are willing to accept and use it as a medium of exchange both C. and D. is on deposit in a demand deposit or other checkable type bank account. has value in uses other than as money. has no value in uses other than as money. is owned by the bank. is in the vault at the bank In general, a nation's money supply typically includes A. B. C. D. E. 81. B. D. As a component of the money supply, bank money is money that: A. B. C. D. E. 74. a house a checking account a share of corporate stock Fiat money A. B. C. D. E. 73. standard of deferred payment unit of account medium of exchange store of value any of the above can be used to eliminate a double coincidence of wants. time deposits and currency coin, currency, demand deposits, and other checkable deposits coin, currency, and other non liquid assets coin and currency only stocks, bonds, and certificates of deposit The interest-rate spread in commercial banking is the difference between A. B. C. D. E. the discount rate and the federal funds rate. the interest rate at which banks lend and the interest rate at which banks borrow. interest rates paid by commercial bands and those paid by savings and loans. the prime interest rate paid by credit worthy business borrowers and the interest rate charged on consumer loans. rates earned on NOW accounts and regular checking accounts. 2 82. Which of the following would constitute a liability of a commercial bank? A. C. E. a demand deposit an outstanding loan all of the above are assets D. B. vault cash a deposit at the Fed Use the following table to answer the next 2 questions: Assets Liabilities Vault Cash ................................ $25,000 Demand Deposits .................... $400,000 Deposits at Fed ........................... 45,000 Government Securities................. 50,000 Loans ....................................... 280,000 83. If the reserve requirement on all deposits is .15, this bank has ______ in excess reserves. A. D. 84. B. C. D. E. C. $10,000 the money supply will the money supply will the money supply will the money supply will none of the above. increase by $10,000. increase by $66,666.67. decrease by $10,000. decrease by $66,666.67. an increase in the money supply will lower interest rates and make banks in the system more willing to loan out funds previously used as excess reserves increases in investment spending have the indirect effect of increasing consumption spending as national income increases faced with an increase in the money supply, the Fed will generally increase bank reserves each dollar of excess bank reserves can support several dollars of new demand deposits for the banking system as a whole none of the above The money multiplier is smaller than the deposit multiplier because the money multiplier takes account of A. B. C. D. E. 87. $45,000 none of the above The deposit expansion multiplier for the commercial banking system is greater than one because A. 86. B. E. Assuming no cash leakages and that no banks hold excess reserves, as a $10,000 loan moves through the banking system (new demand deposits, new excess reserves, and new loans) the total impact on the money supply will be: A. B. C. D. E. 85. $25,000 $70,000 cash leakages and tax leakages. banks holding excess reserves and the fact that assets and liabilities may not always be equal. cash leakages and banks holdings of excess reserves. banks holding their excess reserves in the form of vault cash instead of at the Fed. the fact that banks have less money than they have deposits. Which of the following is not correct? The Federal Reserve System A. B. C. D. E. functions as America's "central bank" can take actions independent of presidential or congressional approval. appoints its own board of governors and chairman of the board of governors. imposes reserve requirements on all depository institutions. is run by a board of Governors who are appointed by the President. 3 88. All of the following functions are performed by the Fed except A. B. C. D. E. 89. Which of the following statements is NOT correct? A. B. C. D. E. 90. open-market purchases and sales reserve-requirement changes changes in the discount rate changes in the amount of spending undertaken by the Fed all of the above are tools of the Fed When the Fed buys $1 million of government bonds, the money supply ______ by ______ than $1 million because of the ______. A. B. C. D. E. 92. commercial bank reserves are a liability of Federal Reserve banks Federal Reserve banks increase the monetary base when they purchase government bonds from the public (households, businesses, or private banks) discount loans are one of the assets of Federal Reserve banks the FedвЂ™s assets and liabilities are equal and make up the monetary base of the US money supply all of the above statements are correct Which of the following is not one of the Fed's tools for controlling the US money supply? A. B. C. D. E. 91. lending money to private banks setting reserve requirements for private banks conducting fiscal policy supervising private banks conducting monetary policy increases; more; spending multiplier. decreases; less; money multiplier. decreases; more; money multiplier. increases; more; money multiplier. increases; less; money multiplier. The discount rate is A. B. C. D. E. one of the tools of the Fed the rate at which the Fed lends reserves to private banks can be lowered in order to generate an increase in the money supply all of the above B. and C. are true but A. is false Money Demand, the Money Market, and Monetary Policy 75. Expect a question about wealth, assets and liabilities. 76. The analysis of the demand for money suggests that, other things equal, you will want to hold more money for transactions(spending) purposes if your income ______ and you will be willing to hold more money if the interest rate ______. A. C. E. increases; decrease B. decreases; decreases decreases; increases D. increases; increases like the supply of money, the demand for money is independent of the level of income and the interest rate. 4 77. If a bond that sells for $7000 dollars carries a fixed annual coupon payment of $700, then the current interest rate earned by that bond is: A. D. 78. B. C. D. E. 10% drive drive drive drive drive the the the the the price price price price price of of of of of bonds bonds bonds bonds bonds down and the interest rate up. up and the interest rate up. up and the interest rate down. down and the interest rate down. up but have no effect on the interest rate. an increase in the equilibrium interest rate and a decrease in the equilibrium stock of money a decrease in the equilibrium stock of money and no change in the equilibrium interest rate an decrease in the equilibrium interest rate and a decrease in the equilibrium stock of money an increase in the equilibrium interest rate and no change in the equilibrium stock of money none of the above money demand (MD) will increase and the equilibrium interest rate will rise MD will increase and the equilibrium interest rate will fall MD will decrease and the equilibrium interest rate will fall MD will decrease and the equilibrium interest rate will rise there will be no change in either MD or the equilibrium interest rate Monetary policy is: A. B. C. D. E. 94. C. For a given money supply, if income increases, then A. B. C. D. E. 93. 6.67% none of the above For a given money demand curve, a decrease in the supply of money would result in A. 80. B. E. An increased demand for bonds will: A. B. C. D. E. 79. 7% 12.5% The deliberate control of the money supply for the purpose of achieving macroeconomic goals. The use of the government's regulatory powers for the purpose of improving economic efficiency. The provision of public goods for the purpose of improving economic efficiency. The use of government taxation and expenditures policies for the purpose of achieving macroeconomic goals. The determination of how much new currency the Fed should print. According to Keynesian monetary policy, a decrease in the money supply should lower GDP by A. B. C. D. E. raising the price level and causing consumers to spend less directly decreasing consumer spending because consumers have less money increasing the government deficit which causes spending to fall raising interest rates which should lead to decreased private sector spending raising taxes which causes consumer spending to fall 5 X. 81. In the Keynesian system, an increase in the money supply is expected to increase GDP and reduce unemployment by A. B. C. D. E. lowering the price level and causing consumers spend more. directly increasing consumer spending because consumers have more money. increasing the government deficit which causes spending to rise. lowering interest rates which should lead to increased private sector spending. lowering taxes which causes consumer spending to rise. X. A relatively flat investment demand curve implies that A. B. C. investment is not responsive to the interest rate the interest rate plays a small part in the investment decision economic policy should focus on shifting the investment demand curve (such as through investment tax credits) instead of lowering the interest rate changes in the money supply and the interest rate should have a strong impact on the economy all of the above D. E. X. In the figure, there are two interest rate-sensitive spending curves: пЂЁaпЂ«IP пЂ©DA & пЂЁaпЂ« IP пЂ©DB . According to the r figure, monetary policy will be: A. B. C. D. E. X. more effective if investment spending is highly responsive to interest rates as indicated by curve A more effective if investment spending is unresponsive to interest rates as indicated by curve A more effective if investment spending is highly responsive to interest rates as indicated by curve B more effective if investment spending is unresponsive to interest rates as indicated by curve B none of the above r1 (a+IP)BD (a+IP)AD (a+IP)1 Interest-rate sensitive spending Expect a question about lags in monetary policy. The Aggregate Expenditure (Keynesian) Model 37. John Maynard Keynes rejected the classical notion that wages and prices A. B. C. D. E. 38. were constant would adjust until full employment is reached. were fair. would equate saving and investment. all of the above. In contrast to the classical economists, Keynes argued that: A. B. C. D. E. the economy can become "stuck" at an equilibrium level of real GDP at which there was excessive unemployment. wages and prices would not fall so the economy would not be able to "fix itself." the government could end the Great Depression by increasing government spending. A., B., and C. are true of the classical economists, not Keynes. A., B., and C. are true of Keynes. 6 39. The original Keynesian model is particularly applicable to situations in which the economy A. B. C. D. E. 40. The consumption function shows that as disposable income increases, A. B. C. D. E. 41. consumption consumption consumption consumption consumption increases by an even greater amount increases by the same amount increases by a smaller amount remains constant and disposable income are unrelated When the consumption function is presented graphically, the marginal propensity to consume is: A. B. C. D. E. 42. is at full employment. has low unemployment and high inflation. has massive unemployment. is operating on its production possibilities frontier. all of the above. the the the the the point at which the consumption function line crosses the 45-degree line slope of the consumption function line vertical intercept of the consumption function line variable measured on the vertical axis variable measured on the horizontal axis Using the consumption line and the 45 degree line in the figure: Consumption o 45 A. B. C. D. E. 43. Which of the following changes would tend to make the consumption line steeper? A. B. C. D. E. 44. The area between the 2 lines represented by a indicates saving. The area between the 2 lines represented by a indicates dissaving. the area between the 2 lines represented by a indicates that consumption is less than income cannot occur since consumption cannot be greater than income none of the above an increase in the interest rate an increase in consumption at each level of income a decrease in saving at each level of income an increase in the marginal propensity to consume an increase in the marginal propensity to save The consumption line will shift in response to all of the following except A. B. C. D. E. a a a a a change change change change change in in in in in the interest rate the level of government spending the level of prices the level of autonomous taxes confidence about future employment conditions e b C a Disposable income 7 45. In the Keynesian model, to assume that private investment is autonomous is to assume that: A. B. C. D. E. 46. Adding autonomous investment to the consumption line in the income/expenditure model causes the total planned spending line to: A. D. 47. B. C. D. E. C. shift up the interest rate expectations about future business conditions business taxes the current level of consumer spending all of the above except D. cause both the consumption (C) line and the planned aggregate expenditure (AEP) line to shift up by the full amount of the tax decrease cause both the C line and the AEP line to shift down by the full amount of the tax decrease cause both the C line and the AEP line to shift down by an amount equal to the marginal propensity to consume times the tax decrease cause both the C line and the AEP line to shift up by an amount equal to the marginal propensity to consume times the tax decrease cause the C line and the AEP line to become flatter shift down become steeper both A. and D. are true B. D. shift up become flatter Which of the following is an injection into the income/spending stream? A. C. E. 51. B. shift down none of the above Increased export spending causes the planned aggregate expenditure (AEp) line to A. C. E. 50. E. A decrease in autonomous taxes paid by the household sector will A. 49. become steeper become flatter Which of the following factors are the primary determinants of planned investment spending in the Keynesian model? A. B. C. D. E. 48. it does not depend on interest rates it does not depend on the level of output & income in the economy it is determined by the "animal spirits" of business decision-makers it depends on saving none of the above savings government spending All of the above are leakages, not injections. D. B. taxes imports If businesses and consumers reduce their planned spending because of increased pessimism, this will: A. B. C. D. E. cause the aggregate expenditure (AEP) line to shift up and increase the equilibrium level of income. cause the AEP line to shift down and reduce the equilibrium level of income. have no effect on either the AEP line or the equilibrium level of income. cause the AEP line to become steeper and reduce the equilibrium level of income. cause the AEP line to shift down and reduce the level of prices in the economy. 8 52. In an economy consisting of household, business, government, and foreign sectors, real GDP will be at its equilibrium level when A. B. C. D. E. 53. Which of the following must be true of an economy that is out of equilibrium A. B. C. D. E. 54. 1/(1-MPC) 1/(RR) E. B. 1/(MPS) either A. or B. C. -MPC/(1-MPC) In the Keynesian model, an increase in autonomous spending has a multiplier effect on real GDP because more spending causes A. B. C. D. E. 57. business will accumulate inventories and output will fall business inventories will be depleted and output will increase the president will automatically raise taxes to reduce spending. the Federal Reserve will automatically raise interest rates to reduce spending. all of the above The Keynesian autonomous spending multiplier can be represented by the formula A. D. 56. planned investment (IP) = unplanned investment (IU) IU = 0 IU < 0 IU > 0 both A. and B. In the Keynesian income/expenditure model, if planned aggregate expenditures are greater than the current level of output, then: A. B. C. D. E. 55. total planned spending C + IP + G + (Ex - Im) equals output (Y) planned leakages (S + T + Im) equal planned injections (IP + G + Ex) unplanned inventory investment (IU) equals zero all of the above are true only A. and B. are true less income which causes less spending which causes less income, etc. prices to rise. more income which causes more spending which causes more income, etc. the money supply falls. more saving which causes more investment. The tax multiplier is, in absolute value, A. B. C. D. E. smaller than the spending multiplier because some people don't pay taxes smaller than the spending multiplier because part of the change in taxes causes a change in consumption and part of the change in taxes causes a change in saving larger than the spending multiplier because some people don't pay taxes larger than the spending multiplier because part of the change in taxes causes a change in consumption and part of the change in taxes causes a change in saving equal to the spending multiplier 9 Use the following information from a hypothetical economy to answer the next 6 questions. Nationa Disposabl Planned Planne Planned Governme Export Import l e Consumptio d Investme nt s s Income Income n Saving nt Spending 700 660 635 25 65 60 55 65 800 760 710 50 65 60 55 65 900 860 785 75 65 60 55 65 1000 960 860 100 65 60 55 65 1100 1060 935 125 65 60 55 65 1200 1160 1010 150 65 60 55 65 58. What is the level of taxes for this economy? A. E. 59. 900 C. .85 0 700 1100 B. E. 800 none of the above .75 .95 B. .80 D. .90 905 920 B. E. 1005 none of the above C. 820 Suppose the government were to lower taxes by 5 while holding government spending constant, what would be the new equilibrium level of income? A. D. 63. C. D. Suppose the government were to increase government spending by 5 while holding taxes constant, what would be the new equilibrium level of income? A. D. 62. 100 What is the value of the mpc for this economy? A. E. 61. C. What is the equilibrium level of income/output? A. D. 60. 60 B. 40 Depends on the level of income 915 905 B. E. 895 none of the above C. 1015 Suppose imports were to increase by 28, holding all other variables constant, what would be the new equilibrium level of income? A. D. 872 972 B. E. 907 none of the above C. 788 Fiscal Policy 65. Fiscal policy refers to: A. the deliberate control of the money supply for the purpose of achieving macroeconomic goals B. the use of the government's regulatory powers for the purpose of improving economic efficiency the provision of public goods for the purpose of improving economic efficiency the use of federal government taxation and spending policies for the purpose of achieving macroeconomic goals the deliberate control of interest rates for the purpose of achieving macroeconomic goals C. D. E. 10 64. A contractionary (recessionary) gap occurs when A. B. C. D. E. 66. a low level of planned spending leads to an equilibrium level of output that has high unemployment a high level of planned spending leads to an equilibrium level of output that has low unemployment a high level of planned spending leads to an equilibrium level of output that has high inflation a low level of planned spending leads to an equilibrium level of output that has high inflation low prices cause the economy to contract If the economy is experiencing a recession brought on by a contractionary gap, the federal government can try to increase planned spending in the economy by A. B. C. D. E. increasing government spending lowering taxes decreasing government spending increasing taxes either A. or B. Use the following figure to answer the next 2 questions. 1000 450 Aggregate Expenditures AEP 900 800 700 600 500 400 300 200 100 0 0 67. 200 300 400 YF 500 Y1 600 700 800 900 1000 Y =Real GDP If current GDP is Y1 = 500 and the full employment level of GDP is YF = 400, this economy is experiencing A. B. C. D. E. 68. 100 a contractionary (recessionary)gap. an expansionary (inflationary) gap. full employment equilibrium. a normal gap. all of the above. An appropriate fiscal policy would be A. C. E. a decrease in government spending. an increase in government spending either B. or C. B. D. an increase in taxes. either A. or B. 11 69. Some of the problems of using fiscal policy to stimulate the economy during a recession are: A. B. C. D. E. following an increase in government spending, higher interest rates may crowd out private spending a long lag between the time Congress begins discussing a bill to increase government spending and the time when spending actually begins to take effect may mean that the recession is already over before the increased government spending stimulates the economy the possibility that consumers will save their tax cut instead of spending it. all of the above are potential fiscal policy problems none of the above Aggregate Demand and Aggregate Supply 24. The aggregate demand curve A. B. C. D. E. 25. Using the final version of the circular flow model, aggregate quantity demanded (AD) at a given price level is equal to A. C. E. 26. B. D. C + I + G + X - Im C + S + T + X - Im a reduction in taxes a decrease in the real interest rate an increase in government expenditures growing optimism concerning the expected strength of future business conditions. reduced wages A vertical long-run aggregate supply curve (LRAS) indicates that A. B. C. D. E. 28. C+S C + S + T + Im C+I+G Which of the following factors would not be likely to cause the aggregate demand curve (AD) to shift to the right? A. B. C. D. E. 27. shows the total quantity of domestically produced goods and services that the economy is willing to buy at each price level. is downward sloping because of the real balance effect. is downward sloping because of the interest rate effect. is downward sloping because of the international trade effect. all of the above. the full employment level of output is determined by the price level and the tastes of the population producers are not motivated by profit in deciding how much to produce real and nominal GDP are the same thing the price level has no effect on the full-employment level of output which is determined by real variables such as technology and the endowment of resources none of the above The short-run aggregate supply curve (SRAS) is upward sloping because when the price level rises firms are willing to expand production because: A. B. C. D. E. potential revenue per unit increases because products can be sold for a higher prices. fixed nominal wages lead to lower real wages and lower production costs. potential profits rise as higher potential revenue and lower costs. all of the above none of the above 12 29. Which of the following are factors that will cause the short-run aggregate supply curve to shift? A. D. 30. B. C. D. E. C. wages short-run equilibrium occurs where the aggregate demand (AD) and short-run aggregate supply (SRAS) curves intersect long-run equilibrium occurs when the AD and SRAS curves intersect at the long-run aggregate supply (LRAS) curve long-run equilibrium occurs wherever the AD and SRAS curves intersect short-run equilibrium occurs only when the AD and SRAS curves intersect at the LRAS both A. and B. a higher price level and a lower level of output a lower price level and a higher level of output a higher price level and a higher level of output a lower price level with no change in output none of the above According to the AD/SRAS/LRAS model, the long run effect of an increase in aggregate demand that causes actual real GDP to rise above the full-employment level of real GDP will be that: A. B. C. D. E. 33. government spending all of the above According to the AD/SRAS/LRAS model, if the economy is at or near the full employment level of output, the short-run response to an increase in aggregate demand will be: A. B. C. D. E. 32. B. E. According to the AD/SRAS/LRAS model: A. 31. interest rates the money supply both the price level and real GDP will rise permanently because of a lower price level, workers will eventually begin to accept lower wages allowing the SRAS curve to shift down until the economy returns to the full-employment level of real GDP the price level will rise permanently but real GDP will eventually return to the fullemployment level of real GDP the higher price level will cause the aggregate demand curve to return to its original level none of the above According to the AD/SRAS/LRAS model, the long run effect of a decrease in aggregate demand that causes actual real GDP to fall below the full-employment level of real GDP will be that: A. B. C. D. E. the price level will rise permanently but real GDP will return to its full-employment level because of a lower price level, workers will eventually begin to accept lower wages allowing the SRAS curve to shift down until the economy returns to the full-employment level of real GDP when the SRAS curve shifts down, the price level will fall to an even lower level a lower price level will allow the aggregate demand curve to return to its original level both B. and C.