Chapter 12 Aggregate Expenditure and Output in the Short Run
1) The aggregate expenditure model focuses on the relationship between ________ and
________ in the short run, assuming ________ is constant.
A) total production; total income; real GDP
B) total spending; real GDP; total income
C) total spending; real GDP; the price level
D) total income; real GDP; the price level
Answer: C
2) The key idea of the aggregate expenditure model is that in any particular year, the level of
GDP is determined mainly by
A) investment spending.
B) export spending.
C) government spending.
D) the level of aggregate expenditure.
Answer: D
3) Economists first began studying the relationship between changes in aggregate expenditures
and changes in GDP
A) in the 1950s.
B) during the Great Depression.
C) at the end of the Civil War.
D) during the Industrial Revolution.
Answer: B
4) The aggregate expenditure model focuses on the ________ relationship between real spending
and ________.
A) short-run; real GDP
B) short-run; inflation
C) long-run; real GDP
D) long-run; inflation
Answer: A
5) The formula for aggregate expenditure is
A) AE = C + I + G.
B) AE = C + I + G - NX.
C) AE = C + I + G + NX.
D) AE = C + I + depreciation - NX.
Answer: C
6) Inventories refer to
A) goods which have been presold before they are produced.
B) goods that have been produced but not yet sold.
C) goods that have been planned but not yet produced.
D) goods that have been produced and sold in the same year.
Answer: B
7) An unplanned increase in inventories results from
A) an increase in planned investment.
B) a decrease in planned investment.
C) actual investment that is greater than planned investment.
D) actual investment that is less than planned investment.
Answer: C
8) When aggregate expenditure = GDP,
A) macroeconomic equilibrium occurs.
B) the federal budget is balanced.
C) net exports equal zero.
D) saving equals zero.
Answer: A
9) Consumption spending is $16 million, planned investment spending is $4 million, unplanned
investment spending is $2 million, government purchases are $6 million, and net export spending
is $1 million. What is aggregate expenditure?
A) $22 million
B) $26 million
C) $27 million
D) $29 million
Answer: C
10) When aggregate expenditure is more than GDP, which of the following is true?
A) There was an unplanned decrease in inventories.
B) Firms spent less on capital goods than they planned.
C) Households bought fewer new homes than they planned.
D) All of the above must be true when aggregate expenditure is more than GDP.
Answer: A
11) If aggregate expenditure is less than GDP, how will the economy reach macroeconomic
equilibrium?
A) Inventories will decline, and GDP and employment will decline.
B) Inventories will rise, and GDP and employment will decline.
C) Inventories will decline, and GDP and employment will rise.
D) Inventories will rise, and GDP and employment will rise.
Answer: B
12) Which of the following will cause a direct increase in consumption spending?
A) an increase in planned investment
B) an increase in government spending
C) an increase in disposable income
D) a decrease in net export spending
Answer: C
13) ________ in taxes will decrease consumption spending, and ________ in transfer payments
will increase consumption spending.
A) An increase; an increase
B) A decrease; an increase
C) An increase; a decrease
D) A decrease; a decrease
Answer: B
14) A stock market boom which causes stock prices to rise should cause
A) a decrease in consumption spending.
B) an increase in consumption spending.
C) a decrease in wealth.
D) a decrease in net export spending.
Answer: B
15) An increase in the real interest rate will
A) cause consumers to spend more and save less.
B) most likely lower consumers' purchases of durable goods.
C) most likely lower the reward to savings.
D) most likely lower the cost of borrowing.
Answer: B
16) Decreases in the price level will
A) lower consumption because goods and services are less affordable.
B) raise consumption because goods and services are more affordable.
C) raise consumption because real wealth increases.
D) lower consumption because real wealth decreases.
Answer: C
17) The marginal propensity to save is defined as
A) saving divided by disposable income.
B) disposable income divided by saving.
C) the change in saving divided by the change in disposable income.
D) the change in disposable income divided by the change in saving.
Answer: C
18) If disposable income increases by $100 million, and consumption increases by $90 million,
then the marginal propensity to consume is
A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
Answer: A
19) Disposable income is defined as
A) national income - transfers + taxes.
B) national income + transfers + taxes.
C) national income - transfers - taxes.
D) national income + transfers - taxes.
Answer: D
20) MPC + MPS =
A) 0.
Answer: C
B) 0.5.
C) 1.
D) 100.
21) Investment spending ________ during a recession, and ________ during an expansion.
A) declines; increases
B) increases; declines
C) increases; increases
D) declines; declines
Answer: A
22) If inflation in the United States is higher than inflation in other countries, what will be the
effect on net exports for the United States?
A) Net exports will rise as U.S. exports increase.
B) Net exports will rise as U.S. imports decrease.
C) Net exports will decrease as U.S. exports decrease.
D) Net exports will decrease as U.S. imports decrease.
Answer: C
23) Which of the following will decrease aggregate expenditure in the United States?
A) a decrease in the value of the dollar
B) a decrease in the price level
C) a decrease in interest rates
D) a decrease in government purchases
Answer: D
24) On the 45-degree line diagram, the 45-degree line shows points where
A) real income equals real GDP.
B) real aggregate expenditure equals C + I.
C) real aggregate expenditure equals real GDP.
D) real aggregate output equals the quantity produced.
Answer: C
25) If planned aggregate expenditure is less than total production,
A) actual inventories will equal planned inventories.
B) firms will experience an unplanned increase in inventories.
C) GDP will increase.
D) the economy is in equilibrium.
Answer: B
26) Which of the following leads to an increase real GDP?
A) a decrease in government spending
B) a decrease in the inflation rate in other countries, relative to the inflation in the United States
C) a decrease in interest rates
D) households have increasingly pessimistic expectations about future income
Answer: C
27) If an increase in investment spending of $50 million results in a $400 million increase in
equilibrium real GDP, then
A) the multiplier is 0.125.
B) the multiplier is 3.5.
C) the multiplier is 8.
D) the multiplier is 50.
Answer: C
28) A general formula for the multiplier is
1
A)
.
(1  MPS)
1
C)
.
( MPS)
Answer: C
1
.
(MPC)
1
D)
.
(MPC - 1)
B)
29) Which of the following is a reason why decreases in the price level result in a rise in
aggregate expenditure?
A) Price level decreases cause firms and consumers to hold less money, which lowers the interest
rate. Lower interest rates raise consumption and planned investment expenditures, which raises
aggregate expenditure.
B) Price level decreases reduce real wealth, which causes consumption spending and aggregate
expenditure to rise.
C) As the price level falls, government spending rises, which raises aggregate expenditure.
D) Price level decreases in the United States relative to other countries lower net exports, which
raises aggregate expenditure.
Answer: A
30) What impact does a decrease in the price level in the United States have on net exports and
why?
A) A decrease in the price level increases net exports because lower prices increase the value of
the dollar.
B) A decrease in the price level increases net exports by reducing the relative cost of American
goods.
C) A decrease in the price level reduces net exports because lower prices raise the value of the
dollar.
D) A decrease in the price level reduces net exports because lower prices increase American
spending on imports.
Answer: B
Chapter 13 Aggregate Demand and Aggregate Supply Analysis
1) The ________ shows the relationship between the price level and quantity of real GDP
demanded.
A) consumer price index
B) aggregate expenditure line
C) 45-degree line
D) aggregate demand curve
Answer: D
2) Because of the slope of the aggregate demand curve, we can say that
A) a decrease in the price level leads to a lower level of real GDP demanded.
B) an increase in the price level leads to no change in the level of real GDP demanded.
C) a decrease in the price level leads to a higher level of real GDP demanded.
D) an increase in the price level leads to a higher level of real GDP demanded.
Answer: C
3) Which of the following best describes the "wealth effect"?
A) When the price level falls, the real value of household wealth falls.
B) When the price level falls, the nominal value of household wealth falls.
C) When the price level falls, the nominal value of household wealth rises.
D) When the price level falls, the real value of household wealth rises.
Answer: D
4) The "interest rate effect" can be described as an increase in the price level that raises the
interest rate and chokes off
A) government spending.
B) government spending and unplanned investment.
C) investment and consumption spending.
D) net exports.
Answer: C
5) When the price level in the United States falls relative to the price level of other countries,
________ will fall, ________ will rise, and ________ will rise.
A) imports; exports; net exports
B) exports; imports; net exports
C) net exports; exports; imports
D) net exports; imports; exports
Answer: A
6) Which of the following is one explanation as to why the aggregate demand curve slopes
downward?
A) Decreases in the price level raise the interest rate and increase consumption spending.
B) Decreases in the price level raise the interest rate and increase investment spending.
C) Decreases in the U.S. price level relative to the price level in other countries lower net
exports.
D) Decreases in the price level raise real wealth and increase consumption spending.
Answer: D
7) Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
A) an increase in interest rates
B) a decrease in disposable income
C) a decrease in expected profits for firms
D) an increase in net exports
Answer: D
8) If the U.S. dollar decreases in value relative to other currencies, how does this affect the
aggregate demand curve?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
Answer: D
9) If aggregate demand just increased, which of the following may have caused the increase?
A) an increase in government purchases
B) an increase in the interest rate
C) an increase in the price level
D) an increase in imports
Answer: A
10) The level of aggregate supply in the long-run is not affected by
A) changes in technology.
B) changes in the capital stock.
C) changes in the price level.
D) changes in the number of
workers.
Answer: C
11) If stricter immigration laws are imposed and many foreign workers in the United States are
forced to go back to their home countries,
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) we will move up along the long-run aggregate supply curve.
D) we will move down along the long-run aggregate supply curve.
Answer: B
12) Full-employment GDP is also known as
A) realized GDP.
C) politico-economic GDP.
Answer: B
B) potential GDP.
D) balanced-budget GDP.
13) On the long-run aggregate supply curve,
A) a decrease in the price level decreases the level of potential GDP.
B) a decrease in the price level increases the aggregate quantity of GDP supplied.
C) a decrease in the price level decreases the aggregate quantity of GDP supplied.
D) a decrease in the price level has no effect on the aggregate quantity of GDP supplied.
Answer: D
14) The long-run aggregate supply curve will shift to the right if the economy
A) experiences technological change.
B) has a decrease in population.
C) experiences high levels of inflation.
D) net exports decrease.
Answer: A
15 Which aggregate supply curve has a positive slope?
A) long run only
B) short run only
C) both long run and short run
D) neither long run nor short run
Answer: B
16) The invention of the cotton gin ushered in the Industrial Revolution and began a long period
of technological innovation. What did this technological change do the short-run supply curve?
A) It shifted the short-run aggregate supply curve to the left.
B) It shifted the short-run aggregate supply curve to the right.
C) It moved the economy up along a stationary short-run aggregate supply curve.
D) It moved the economy down along a stationary short-run aggregate supply curve.
Answer: B
17) Long-run macroeconomic equilibrium occurs when
A) aggregate demand equals short-run aggregate supply.
B) aggregate demand equals short-run aggregate supply and they intersect at a point on the longrun supply curve.
C) structural and frictional unemployment equals zero.
D) output is above potential GDP.
Answer: B
18) When the aggregate demand curve and the short-run aggregate supply curve intersect,
A) the long-run aggregate supply curve must also intersect at the same point.
B) inflation must be increasing.
C) structural and frictional unemployment equal zero.
D) the economy is in short-run macroeconomic equilibrium.
Answer: D
19) A decrease in aggregate demand in the economy will have what effect on macroeconomic
equilibrium in the long run?
A) The price level will fall, and the level of GDP will be unaffected.
B) The price level will fall, and the level of GDP will fall.
C) The price level will rise, and the level of GDP will fall.
D) The price level will rise, and the level of GDP will be unaffected.
Answer: A
20) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP.
Which of the following will occur because of the automatic mechanism adjusting the economy
back to potential GDP?
A) Output will decrease.
B) Prices will increase.
C) Unemployment will rise.
D) Short-run aggregate supply will shift to the right.
Answer: D
21) Why does the short-run aggregate supply curve shift to the right in the long run, following a
decrease in aggregate demand?
A) Workers and firms adjust their expectations of wages and prices downward and they accept
lower wages and prices.
B) Workers and firms adjust their expectations of wages and prices downward and they push for
higher wages and prices.
C) Workers and firms adjust their expectations of wages and prices upward and they push for
higher wages and prices.
D) Workers and firms adjust their expectations of wages and prices upward and they accept
lower wages and prices.
Answer: A
22) A negative supply shock in the short run causes
A) the aggregate supply curve to shift to the left.
C) unemployment to fall.
Answer: A
B) the price level to fall.
D) equilibrium real GDP to rise.
23) Which of the following is considered a negative supply shock?
A) increasing immigration in the economy causes the labor supply to rise
B) an improvement in technology
C) an increase in unemployment
D) an unexpected decrease in the refining capacity for oil
Answer: D
24) Which of the following is one reason for the decline in aggregate demand that led to the
recession of 2007-2009?
A) falling oil prices
B) increases in housing prices
C) the financial crisis
D) a decline in government spending
Answer: C
Chapter 14 Money, Banks, and the Federal Reserve System
1) In economics, money is defined as
A) the total value of one's assets in current prices.
B) the total value of one's assets minus the total value of one's debts, in current prices.
C) the total amount of salary, interest, and rental income earned during a year.
D) any asset people generally accept in exchange for goods and services.
Answer: D
2) Commodity money
A) has value independent of its use as money.
B) has little to no value independent of its use as money.
C) is backed by a valuable commodity such as gold.
D) can be used to purchase commodities, but not services.
Answer: A
3) Which of the following is one of the most important benefits of money in an economy?
A) Money allows for the exchange of goods and services.
B) Money allows for the accumulation of wealth.
C) Money makes exchange easier, leading to more specialization and higher productivity.
D) Money encourages people to produce all of their own goods (self-sufficiency) and therefore
increases economic stability.
Answer: C
4) The statement, "My iPhone is worth $300" represents money's function as
A) a medium of exchange.
B) a unit of account.
C) a store of value.
D) a standard of deferred payment.
Answer: B
5) Which of the following assets is most liquid?
A) money
B) bond
C) savings account
Answer: A
D) stock
6) People hold money as opposed to financial assets because money
A) earns interest.
B) is perfectly liquid.
C) earns no interest.
D) earns a higher return than other financial assets.
Answer: B
7) Fiat money has
A) little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B) little to no intrinsic value and is authorized by the central bank or governmental body.
C) value, because it can be redeemed for gold by the central bank.
D) a great intrinsic value that is independent of its use as money.
Answer: B
8) Dollar bills in the modern economy serve as money because
A) they are backed by the gold stored in Fort Knox.
B) they can be redeemed for gold by the central bank.
C) they have value as a commodity independent of their use as money.
D) people have confidence that others will accept them as money.
Answer: D
9) The most liquid measure of money supply is
A) M0.
B) M1.
Answer: B
C) M2.
D) M3.
10) The M1 measure of the money supply equals
A) paper money plus coins in circulation.
B) currency plus checking account balances.
C) currency plus checking account balances plus traveler's checks.
D) currency plus checking account balances plus traveler's checks plus savings account balances.
Answer: C
11) The largest proportion of M1 is made up of
A) currency.
B) checking account deposits.
C) traveler's checks.
D) savings account deposits.
Answer: A
12) The M2 measure of the money supply equals
A) savings account balances plus small-denomination time deposits plus traveler's checks.
B) savings account balances plus small-denomination time deposits plus non-institutional money
market fund shares.
C) M1 plus savings account balances plus small-denomination time deposits.
D) M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.
Answer: D
13) The major assets on a bank's balance sheet are its
A) checking and savings account deposits.
B) loans, and checking and savings account deposits.
C) reserves, loans, and holdings of securities.
D) reserves, checking and savings account deposits.
Answer: C
14) Bank reserves include
A) vault cash and deposits with the Federal Reserve.
B) loans to bank customers and deposits with the Federal Reserve.
C) vault cash and loans to bank customers.
D) customer checking accounts and vault cash.
E) deposits with the Federal Reserve and holdings of securities.
Answer: A
15) The required reserves of a bank equal its ________ the required reserve ratio.
A) deposits divided by
B) deposits multiplied by
C) loans divided by
D) loans multiplied by
Answer: B
16) Banks can make additional loans when required reserves are
A) greater than total reserves.
B) less than total reserves.
C) less than total deposits.
D) less than total loans.
Answer: B
17) If the required reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support
an increase in checking account deposits (including the original deposit) in the banking system as
a whole of up to
A) $100.
B) $1,000.
C) $10,000.
D) $100,000.
Answer: C
18) If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is
A) 2.
B) 5.
C) 10.
D) 20.
Answer: B
19) Banks can continue to make loans until their
A) actual reserves equal their required reserves.
B) excess reserves equal their required reserves.
C) actual reserves equal their excess reserves.
D) actual reserves equal their checking account balances.
Answer: A
20) The more excess reserves banks choose to keep,
A) the larger the deposit multiplier.
B) the smaller the deposit multiplier.
C) the higher the required reserve ratio.
D) the lower the required reserve ratio.
Answer: B
21) The seven members of the Board of Governors of the Federal Reserve are appointed by
A) Congress.
B) the President.
C) the Governors of the States.
D) leaders in the banking industry.
Answer: B
22) Open market operations refer to the purchase or sale of ________ to control the money
supply.
A) corporate bonds and stocks by the Federal Reserve
B) U.S. Treasury securities by the Federal Reserve
C) corporate bonds and stocks by the U.S. Treasury
D) U.S. Treasury securities by the U.S. Treasury
Answer: B
23) The three main monetary policy tools used by the Federal Reserve to manage the money
supply are
A) interest rates, tax rates, and government spending.
B) tax rates, government purchases, and government transfer payments.
C) open market operations, discount policy, and reserve requirements.
D) open market operations, the exchange rate of the dollar against foreign currencies, and
government purchases.
Answer: C
24) The main tool that the Federal Reserve uses to conduct monetary policy is
A) open market operations.
B) discount policy.
C) setting reserve requirements.
D) acting as the lender of last resort.
Answer: A
25) The purchase of Treasury securities by the Federal Reserve will, in general,
A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) increase the quantity of reserves held by banks.
D) decrease the quantity of reserves held by banks.
Answer: C
26) The sale of Treasury securities by the Federal Reserve will, in general,
A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) increase the quantity of reserves held by banks.
D) decrease the quantity of reserves held by banks.
Answer: D
27) To increase the money supply, the Federal Reserve could
A) raise the discount rate.
B) decrease income taxes.
C) raise the required reserve ratio.
D) conduct an open market purchase of Treasury securities.
Answer: D
28) To decrease the money supply, the Federal Reserve could
A) lower the discount rate.
B) raise income taxes.
C) lower the required reserve ratio.
D) conduct an open market sale of Treasury securities.
Answer: D
29) Suppose a bank has $100 million in checking account deposits with no excess reserves and
the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio
to 15 percent, then the bank will now have excess reserves of
A) $0.
B) $5 million.
C) $15 million.
D) $20 million.
Answer: B
30) A decrease in the reserve requirement ________ bank reserves and ________ the money
supply.
A) increases; increases`
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
31) The process of bundling loans together and buying and selling these bundles in a secondary
financial market is called
A) open market operations.
B) securitization.
C) fractional reserve lending.
D) seigniorage.
Answer: B
32) One way investment banks differ from commercial banks is that investment banks
A) lend exclusively to households.
B) do not take in deposits.
C) only buy and sell mortgages.
D) trade only in foreign exchange markets.
Answer: B
33) In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking
system through the Troubled Asset Relief Program (TARP) by
A) allowing domestic banks to be taken over by foreign banks.
B) permitting banks to sell commercial bonds to the Federal Reserve Bank.
C) allowing banks to double any outstanding claims for federal deposit insurance
reimbursements.
D) providing funds to banks in exchange for stock.
Answer: D
34) The quantity equation states that the
A) money supply divided by the velocity of money equals the price level divided by real output.
B) money supply times the velocity of money equals the price level times real output.
C) money supply times the price level equals real output divided by the velocity of money.
D) money supply times the price level equals real output times the velocity of money.
Answer: B
35) The quantity theory of money predicts that, in the long run, inflation results from the
A) velocity of money growing at a faster rate than real GDP.
B) velocity of money growing at a lower rate than real GDP.
C) money supply growing at a lower rate than real GDP.
D) money supply growing at a faster rate than real GDP.
Answer: D
36) Which of the following is not a consequence of hyperinflation?
A) Money's function as a medium of exchange is enhanced.
B) Money loses value so rapidly that firms and individuals stop holding it.
C) It causes an economy to suffer slow growth.
D) The price level grows in excess of hundreds of percentage points per year.
Answer: A
37) In an attempt to bring lenders and borrowers together following the financial crisis of 2008,
the Federal Reserve made a large amount of new funds available to financial markets. Any of
these new funds that are loaned out by banks would be classified as ________ of the banks.
A) required reserves
B) excess reserves
C) deposits
D) liabilities
Answer: B
Chapter 15 Monetary Policy
1) Monetary policy refers to the actions the
A) President and Congress take to manage the money supply and interest rates to pursue their
economic objectives.
B) Federal Reserve takes to manage the money supply and interest rates to pursue its
macroeconomic policy objectives.
C) President and Congress take to manage government spending and taxes to pursue their
economic objectives.
D) Federal Reserve takes to manage government spending and taxes to pursue its economic
objectives.
Answer: B
2) The Federal Reserve System's four monetary policy goals are
A) low government budget deficits, low current account deficits, high employment, and a high
foreign exchange value of the dollar.
B) low rate of bank failures, high reserve ratios, price stability, and economic growth.
C) price stability, high employment, economic growth, and stability of financial markets and
institutions.
D) price stability, low government budget deficits, low current account deficits, and low rate of
bank failures.
Answer: C
3) The money demand curve has a
A) negative slope because an increase in the interest rate decreases the quantity of money
demanded.
B) positive slope because an increase in the interest rate increases the quantity of money
demanded.
C) negative slope because an increase in the price level decreases the quantity of money
demanded.
D) positive slope because an increase in the price level increases the quantity of money
demanded.
Answer: A
4) An increase in the interest rate
A) decreases the opportunity cost of holding money.
B) increases the opportunity cost of holding money.
C) decreases the percentage yield of holding money.
D) increases the percentage yield of holding money.
Answer: B
5) Using the money demand and money supply model, an open market sale of Treasury
securities by the Federal Reserve would cause the equilibrium interest rate to
A) increase.
B) decrease.
C) not change.
D) increase, then decrease.
Answer: A
6) When the Federal Reserve increases the money supply, at the previous equilibrium interest
rate households and firms will now have
A) more money than they want to hold.
B) less money than they want to hold.
C) the amount of money that they want to hold.
D) to sell Treasury bills.
Answer: A
7) When the Federal Reserve decreases the money supply, at the previous equilibrium interest
rate households and firms will now want to
A) buy Treasury bills.
B) sell Treasury bills.
C) neither buy nor sell Treasury bills.
D) hold less money.
Answer: B
8) The interest rate that banks charge other banks for overnight loans is the
A) prime rate.
B) discount rate.
C) federal funds rate.
D) Treasury bill rate.
Answer: C
9) The Fed can increase the federal funds rate by
A) selling Treasury bills, which increases bank reserves.
B) buying Treasury bills, which increases bank reserves.
C) selling Treasury bills, which decreases bank reserves.
D) buying Treasury bills, which decreases bank reserves.
Answer: C
10) The ability of the Federal Reserve to use monetary policy to affect economic variables such
as real GDP ultimately depends upon its ability to affect
A) tax rates.
B) real interest rates.
C) nominal interest rates.
D) foreign exchange rates.
Answer: B
11) An increase in interest rates
A) decreases investment spending on machinery, equipment and factories, but increases
consumption spending on durable goods and net exports.
B) decreases investment spending on machinery, equipment and factories, and consumption
spending on durable goods, but increases net exports.
C) decreases investment spending on machinery, equipment and factories, consumption spending
on durable goods, and net exports.
D) increases investment spending on machinery, equipment and factories, consumption spending
on durable goods, and net exports.
Answer: C
12) In response to already low interest rates doing little to stimulate the economy, the Fed began
buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low.
This policy is known as
A) inflation targeting.
B) contractionary monetary policy.
C) securities-bubble deflating.
D) quantitative easing.
Answer: D
13) Which of the following describes what the Fed would do to pursue an expansionary
monetary policy?
A) use open market operations to buy Treasury bills
B) use open market operations to sell Treasury bills
C) use discount policy to raise the discount rate
D) raise the reserve requirement
Answer: A
14) Contractionary monetary policy on the part of the Fed results in
A) an increase in the money supply, an increase in interest rates, and an increase in GDP.
B) a decrease in the money supply, an increase in interest rates, and a decrease in GDP.
C) an increase in the money supply, a decrease in interest rates, and an increase in GDP.
D) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.
Answer: B
15) Which of the following would most likely induce the Federal Reserve to conduct
expansionary monetary policy? A significant decrease in
A) oil prices.
B) business taxes.
C) income tax rates.
D) investment spending.
Answer: D
16) From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that
next year aggregate demand would grow significantly faster than long-run aggregate supply, then
the Federal Reserve would most likely
A) increase income tax rates.
B) decrease income tax rates.
C) increase interest rates.
D) decrease interest rates.
Answer: C
17) Under the monetary growth rule proposed by the monetarists, the money supply would grow
each year at a constant rate equal to the long-run rate of growth of
A) inflation.
B) real GDP.
C) interest rates.
D) employment.
Answer: B
18) Most economists believe that the best monetary policy target is
A) an interest rate.
B) the money supply.
C) total bank reserves.
D) the discount rate.
Answer: A
19) The Taylor rule links the Federal Reserve's target for the
A) money supply to shifts in money demand.
B) money supply to changes in interest rates.
C) federal funds rate to economic variables.
D) federal funds rate to the money supply.
Answer: C
20) A financial asset is considered a security if
A) the owner of the security receives dividends and realizes a capital gain when the asset is sold.
B) it can be sold in a secondary market.
C) its value increases after it is sold in a primary market.
D) its value is secure; that is, the owner will not suffer a financial loss when the asset is sold.
Answer: B
21) To reassure investors who were unwilling to buy mortgages in the secondary market, the
U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to
stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac
A) sell mortgages to investors and use the funds to purchase bonds from banks.
B) sell bonds to investors and use the funds to purchase mortgages from banks.
C) sell bonds to banks and use the funds to purchase mortgages from investors.
D) sell mortgages to banks and use the funds to purchase bonds from investors.
Answer: B
22) In October 2008, Congress passed the ________, under which the Treasury provided funds
to banks in exchange for stock.
A) Bank Rescue Alliance Treaty (BRAT)
B) Mortgage Transfer Agency (MTA)
C) Troubled Asset Relief Program (TARP)
D) Financial Assurance Association (FAA)
Answer: C
23) In 2008, the Treasury and Federal Reserve took action to save large financial firms such as
Bear Stearns and AIG from failing. Which of the following is one reason why these measures
were taken?
A) The Emergency Economic Stabilization Act required the Fed and the Treasury to provide
financial assistance to firms that participated in regular open market actions with the Fed.
B) The bankruptcy of a large financial firm would force the firm to sell its holdings of securities,
which could cause other firms that hold these securities to also fail.
C) The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the
firms before they went bankrupt.
D) The failure of these firms would have forced the Fed to increase interest rates, which could
have led to a severe recession.
Answer: B
24) The larger the fraction of an investment financed by borrowing,
A) the greater the potential return and potential loss on that investment.
B) the smaller the potential return and potential loss on that investment.
C) the greater the potential return and the smaller the potential loss on that investment.
D) the smaller the potential return and the greater the potential loss on that investment.
Answer: A