Chapter 5: Policy Makers and the Money Supply
Multiple Choice
1. Our country’s economic policy actions are directed toward all of these general goals except
a. economic growth
b. high employment
c. price stability
d. balance in international trade and other transactions
Answer: d
Level: easy
Section: National Economic Policy Objectives
2. The standard of living of U.S. citizens has improved dramatically during the history of the
United States as a result of what factors?
a. the growth of the economy and its productivity
b. international trade
c. foreign exchange markets
d. industrial downsizing and restructuring
Answer: a
Level: medium
Section: National Economic Policy Objectives
3. The Great Recession of 2008-09 was the steepest U.S. recession since the Great Depression of
the 1930’s. Which of these factors did not play a role in causing the Great Recession?
a. The housing price “bubble” burst in 2006.
b. Individuals began defaulting in record numbers on their home mortgages.
c. The U.S. Treasury purchased billions of dollars of toxic assets held by financial institutions.
d. Stock prices fell between 2007 and 2009.
Answer: c
Level: difficult
Section: Government Reaction to the Perfect Financial Storm
4. The government raises funds to pay for its activities in all of the following ways except
a. levies taxes
b. borrows
c. prints money for its own use
d. prints money as a gift to citizens.
Answer: d
Level: easy
Section: Government Influence on the Economy
5. Congress delegated the power to create money to ___________.
a. the Fed
b. the IRS
c. the economic advisor
d. the U.S. Treasury
Answer: a
Level: medium
Section: Government Influence on the Economy
6. The Fed increasing the money supply to help offset the demand for increased funds to finance
the deficit is called ____________.
a. disbursing funds
b. monetizing the debt
c. influencing the money market
d. stimulating the economy
Answer: b
Level: difficult
Section: Government Influence on the Economy
7. How would a massive withdrawal of taxes from the banking system without offsetting actions
impact monetary affairs?
a. the increase in revenue would result in a lower overall tax rate
b. it would aid in the balance between full employment and price stability
c. the decrease in bank deposits would result in a temporary breakdown of the system’s ability
to serve the credit needs of the public
d. it would cause an imbalance in international transactions.
Answer: c
Level: difficult
Section: Policy Instruments of the U.S. Treasury
8. Treasury operations involve spending over _____________ a year.
a. $30 billion
b. $300 billion
c. $1 trillion
d. $3 trillion
Answer: c
Level: difficult
Section: Policy Instruments of the U.S. Treasury
9. Which of the following government policy actions would not serve as automatic stabilizers
during periods of economic downturn?
a. requirement that state budgets must be balanced each year
b. unemployment insurance programs
c. welfare payments
d. progressive income taxes
Answer: a
Level: medium
Section: Policy Instruments of U.S. Treasury
10. Crowding out refers to
a. having to reduce the government budget when tax revenue falters during a recession.
b. lack of funds for private borrowing caused by the sale of government debt used to cover
budget deficits.
c. cuts in government spending that results when imports drive out domestic production.
d. the credit crunch that occurs when investors do not take on risks and let their funds lie
idle.
Answer: b
Level: medium
Section: Debt Management
11. A lesser Treasury objective is to maintain satisfactory conditions in the government securities
market by maintaining ______________.
a. wide price swings
b. investor confidence
c. an increase in buying and selling
d. evenly spaced scheduling of debt maturities
Answer: b
Level: easy
Section: Debt Management
12. The banking system of the United States can change the volume of deposits as the need for
funds by individuals, businesses, and governments change. This ability to alter the size of the
money supply is based on the use of what system or principle?
a. Primary Deposit System
b. Federal Reserve System
c. Fractional Reserve System
d. Marginal Reserve System
Answer: c
Level: difficult
Section: Changing the Money Supply
13. The maximum increase in deposits (and money supply) that can result from a specific
increase in excess reserves can be referred to as ______________.
a. a cumulative contraction
b. excess reserves
c. required reserves ratio
d. a money multiplier
Answer: d
Level: medium
Section: Changing the Money Supply
14. Reserve balances held at Federal Reserve Banks and vault cash held in the banking system
are known as _________________.
a. bank reserves
b. capital investments
c. required reserves
d. deficit reserves
Answer: a
Level: easy
Section: Factors Affecting Bank Reserves
15. The rate of circulation of the money supply is referred to as ________________.
a. economic resurgence
b. M1 growth rates
c. velocity of money
d. nominal GDP
Answer: c
Level: medium
Section: The Monetary Base and the Money Multiplier