Chapter 30
1. Countercyclical discretionary fiscal policy calls for:
A. surpluses during recessions and deficits during periods of demand-pull inflation.
B. deficits during recessions and surpluses during periods of demand-pull inflation.
C. surpluses during both recessions and periods of demand-pull inflation.
D. deficits during both recessions and periods of demand-pull inflation.
2. Fiscal policy refers to the:
A. manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
B. manipulation of government spending and taxes to achieve greater equality in the distribution of income.
C. altering of the interest rate to change aggregate demand.
D. fact that equal increases in government spending and taxation will be contractionary.
3. If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:
A. increasing government spending by $25 billion.
B. increasing government spending by $80 billion.
C. decreasing taxes by $25 billion.
D. decreasing taxes by $100 billion.
4. Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the
recession and stimulate output growth?
A. a Congressional proposal to incur a Federal surplus to be used for the retirement of public debt
B. a reduction in agricultural subsidies and veterans' benefits
C. a postponement of a highway construction program
D. a reduction in Federal tax rates on personal and corporate income
5. An appropriate fiscal policy for a severe recession is:
A. a decrease in government spending.
B. a decrease in tax rates.
C. appreciation of the dollar.
D. an increase in interest rates.
6. An expansionary fiscal policy is shown as a:
A. rightward shift in the economy's aggregate demand curve.
B. movement along an existing aggregate demand curve.
C. leftward shift in the economy's aggregate supply curve.
D. leftward shift in the economy's aggregate demand curve.
7. Refer to the above diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most
appropriate if the economy's present aggregate demand curve were at:
A. AD0.
B. AD1.
C. AD2.
D. AD3.
8. Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most
appropriate if the economy's present aggregate demand curve were at:
A. AD0.
B. AD2.
C. AD3.
D. None of the above.
9. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve fullemployment output (exactly), government should:
A. increase government expenditures by $100 billion. B. increase government expenditures by $50 billion.
C. reduce taxes by $50 billion.
D. reduce taxes by $200 billion.
10. Built-in stability means that:
A. an annually balanced budget will offset the procyclical tendencies created by state and local finance and
thereby stabilize the economy.
B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or
produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
C. Congress will automatically change the tax structure and expenditure programs to correct upswings and
downswings in business activity.
D. government expenditures and tax receipts automatically balance over the business cycle, though they may be
out of balance in any single year.
11. Refer to the above diagram. Assume that G and T1 are the relevant curves and that the economy is currently at B,
which is its full-employment GDP. This economy has a:
A. standardized budget surplus only.
B. standardized budget deficit only.
C. standardized budget surplus and an actual budget surplus.
D. standardized deficit and an actual budget deficit.
12. Refer to the above diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the fullemployment GDP is B. This economy has a(n):
A. standardized budget surplus.
B. standardized budget deficit.
C. actual budget deficit.
D. actual budget surplus.
13. Refer to the above diagram. Discretionary fiscal policy designed to expand GDP is illustrated by:
A. the shift of curve T1 to T2.
B. the shift of curve T2 to T1.
C. a movement from a to c along curve T2.
D. a movement from d to b along curve T1.
14. The amount by which Federal tax revenues exceed Federal government expenditures during a particular year is the:
A. Federal reserve.
B. budget deficit.
C. budget surplus.
D. public debt.
(1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of
a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in
Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise,
aggregate demand increases, and the economy begins to recover.
15. Refer to the above information. The operational lag of fiscal policy is reflected in event(s):
A. 1 and 2.
B. 2 and 3.
C. 3 and 4.
D. 5.
16. The crowding-out effect of expansionary fiscal policy suggests that:
A. government spending is increasing at the expense of private investment.
B. imports are replacing domestic production.
C. private investment is increasing at the expense of government spending.
D. saving is increasing at the expense of investment.
17. The U.S. public debt:
A. refers to the debts of all units of government—Federal, state, and local.
B. consists of the total debt of U.S. households, businesses, and government.
C. refers to the collective amount that U.S. citizens and businesses owe to foreigners.
D. consists of the historical accumulation of all Federal government deficits less surpluses.
18. Suppose real GDP is X, as shown in graph A. Appropriate government fiscal policy would be to:
A. increase taxes.
B. reduce government spending.
C. reduce government spending and taxes by equal-sized amounts.
D. reduce taxes or increase government spending.
19. Suppose real GDP is X, as shown in graph A. If the economy's MPC is .75, X is $100 billion and full-employment real
GDP Y is $140 billion, an appropriate fiscal policy would be to:
A. reduce taxes by $100 billion.
B. increase government expenditures by $100 billion.
C. reduce taxes by $10 billion.
D. increase government expenditures by $10 billion.
20. Suppose real GDP is X, as shown in graph A. If the economy's MPC is .8, X is $200 billion and full-employment real
GDP Y is $300 billion, an appropriate fiscal policy would be to reduce taxes by:
A. $100 billion.
B. $20 billion.
C. $25 billion.
D. $164 billion.
21. Suppose the Federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had
budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down
the public debt. At the end of these four years, the Federal government's public debt would have:
A. increased by $50 billion.
B. increased by $150 billion.
C. decreased by $200 billion.
D. decreased by $150 billion.
22. Other things equal, the stock of capital inherited by future generations will be smaller when government spending:
A. increases during a period of recession, rather than prosperity.
B. is primarily for capital-type goods.
C. is financed by borrowing.
D. is financed by taxation.
23. Which of the following is considered a legitimate concern of a large public debt?
A. Bankruptcy of the Federal government
B. Crowding-out of private investment
C. Burdening future generations
D. Collapse of the financial system
24. Stock market price quotations best exemplify money serving as a:
A. store of value.
B. unit of account.
C. medium of exchange.
D. index of satisfaction.
25. When economists say that money serves as a store of value, they mean that it is:
A. a way to keep wealth in a readily spendable form for future use.
B. a means of payment.
C. a monetary unit for measuring and comparing the relative values of goods.
D. declared as legal tender by the government.
26. The paper money used in the United States is:
A. National Bank Notes.
B. Treasury Notes.
C. United States Notes.
D. Federal Reserve Notes.
27. The largest component of the money supply (M1) is:
A. gold certificates.
B. checkable deposits.
C. currency in circulation.
D. travelers' checks.
28. The M2 money supply includes:
A. stock certificates.
B. currency in bank vaults.
C. the cash value of life insurance policies.
D. individual shares in money market mutual funds.
29. The amount of money reported as M2:
A. is smaller than the amount reported as M1.
B. is larger than the amount reported as M1.
C. excludes coins and currency.
D. includes large (>$100,000) certificates of deposit.
30. Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40
billion, the:
A. M1 money supply will decline.
B. M1 money supply will not change.
C. M2 money supply will decline.
D. M2 money supply will increase.
31. Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds
increase by $40 billion, the:
A. M1 money supply will decline and M2 money supply will remain unchanged.
B. M1 and M2 money supplies will not change.
C. M1 money supply will increase and M2 money supply will remain unchanged.
D. M1 and M2 money supplies will both decline.
32. "Near-monies" are included in:
A. both M1 and M2.
B. M2 only.
C. M1 only.
D. neither M1 nor M2.
33. The purchasing power of money and the price level vary:
A. inversely.
B. directly during recessions, but inversely during inflations.
C. directly, but not proportionately.
D. directly and proportionately.
34. Refer to the above table. The value of the dollar in year 2 is:
A. $1.25.
B. $1.33.
C. $.80.
D. $1.00.
35. Refer to the above table. The value of the dollar in year 3 is:
A. $1.00.
B. $1.25.
C. $.80.
D. $1.10.
36. Refer to the above table. The value of the dollar in year 4 is:
A. $1.25.
B. $.33.
C. $.50.
D. $2.00.
37. The basic policy-making body in the U.S. banking system is the:
A. Federal Open Market Committee (FOMC).
B. Board of Governors of the Federal Reserve.
C. Federal Monetary Authority.
D. Council of Economic Advisers.
38. Which one of the following is true about the U.S. Federal Reserve System?
A. There are 12 regional Federal Reserve Banks.
B. The head of the U.S. Treasury also chairs the Federal Reserve Board.
C. There are 14 members of the Federal Reserve Board.
D. The Open Market Committee is smaller in size than the Federal Reserve Board.
39. An important routine function of the Federal Reserve Bank is to:
A. supervise the liquidation of the assets of bankrupt state banks.
B. help large commercial banks develop correspondent relationships with smaller commercial banks.
C. advise commercial banks as to the most profitable ways of reinvesting profits.
D. provide facilities by which commercial banks and thrift institutions may collect checks.
40. Commercial banks and thrift institutions:
A. differ because thrifts cannot make loans.
B. differ because thrifts cannot offer checkable deposits.
C. have become less similar in recent years.
D. have become increasingly similar in recent years.
41. A fractional reserve banking system:
A. is susceptible to bank panics.
B. prevents money creation through the lending process.
C. only tends to exist in developing economies.
D. prevents the Federal Reserve from influencing the money supply.
42. Which of the following statements is correct?
A. The actual reserves of a commercial bank equal its excess reserves minus its required reserves.
B. A bank's liabilities plus its net worth equal its assets.
C. When borrowers repay bank loans, the supply of money increases.
D. A single commercial bank can safely lend a multiple amount of its excess reserves.
43. A bank that has assets of $85 billion and a net worth of $10 billion must have:
A. liabilities of $75 billion.
B. excess reserves of $10 billion.
C. liabilities of $10 billion.
D. excess reserves of $75 billion.
44. Which of the following are all assets to a commercial bank?
A. demand deposits, stock shares, and reserves
B. vault cash, property, and reserves
C. vault cash, property, and stock shares
D. vault cash, stock shares, and demand deposits
45. Checkable deposits are also called:
A. checking accounts.
B. high-powered money.
C. savings balances.
D. Federal Reserve Notes.
46. Banks create money when they:
A. add to their reserves in the Federal Reserve Bank.
B. accept deposits of cash.
C. sell government bonds.
D. exchange checkable deposits for the IOU's of businesses and individuals.
47. When a check is drawn and cleared, the
A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are
unchanged by this transaction.
B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
C. bank receiving the check loses reserves and deposits equal to the amount of the check.
D. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.
48. Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve
requirement is 25 percent, what is the size of the bank's actual reserves?
A. $16,000
B. $84,000
C. $24,000
D. $20,000
49. Suppose that a bank's actual reserves are $5 million, its checkable deposits are $5 million, and its excess reserves are
$3 million. The reserve requirement must be:
A. 40 percent.
B. 20 percent.
C. 10 percent.
D. 5 percent.
50. Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day Jones
negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed?
A. decreased by $600
B. increased by $1,800
C. increased by $600 D. increased by $1,200
51. A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and
$5,000 of cash is deposited in the bank, it can increase its loans by a maximum of:
A. $1,250.
B. $120,000.
C. $5,000.
D. $3,750.
52. In prosperous times banks are likely to hold very small amounts of excess reserves because:
A. the Fed wants commercial banks to increase the money supply during economic expansions.
B. it is very costly to transfer funds between commercial banks and the central banks.
C. the Federal Reserve Banks do not pay interest on bank reserves.
D. the Federal Reserve Banks want to minimize their interest payments on such deposits.
53. A bank temporarily short of required reserves may be able to remedy this situation by:
A. borrowing funds in the Federal funds market.
B. granting new loans.
C. shifting some of its vault cash to its reserve account at the Federal Reserve.
D. buying bonds from the public.
54. If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent
of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be:
A. 31/2.
B. 4.
C. 5.
D. 10.
55. If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000,
then the monetary multiplier is:
A. 10.
B. 4.
C. 5.
D. 2.
Answer the next question(s) on the basis of the following information for the Moolah Bank.
56. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1000.
B. liabilities are $1000.
C. net worth is zero.
D. profit is $1000.
57. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1100.
B. liabilities are $1100.
C. net worth is $300. D. profit is $1000.
58. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1000.
B. liabilities are $300.
C. net worth is $100. D. annual profit is $200.
59. If Moolah Bank is legally "loaned up," the reserve requirement must be:
A. 10 percent.
B. 15 percent.
C. 20 percent.
D. 25 percent.
60. If Moolah Bank is legally "loaned up," the banking system's monetary multiplier must be:
A. 5.
B. 8.
C. 10.
D. 20.
61. Assume that Moolah bank is "loaned up." If it receives a $100 deposit of currency, it could safely expand its loans by:
A. $100.
B. $90.
C. $900.
D. $1000.
62. Assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which
Moolah is a part could expand loans by:
A. $100.
B. $90.
C. $900.
D. $1000.
63. The transactions demand for money is most closely related to money functioning as a:
A. unit of account.
B. medium of exchange.
C. store of value.
D. measure of value.
64. The asset demand for money is most closely related to money functioning as a:
A. unit of account.
B. medium of exchange.
C. store of value.
D. measure of value.
65. The desire to hold money for transactions purposes arises because:
A. receipts of income and expenditures are not perfectly synchronized.
B. people fear that prices will rise.
C. households want money on hand in case a good financial investment opportunity arises.
D. low interest rates reduce the opportunity cost of holding money.
66. It is costly to hold money because:
A. deflation may reduce its purchasing power.
B. in doing so one sacrifices interest income.
C. bond prices are highly variable.
D. the rate at which money is spent may decline.
67. The asset demand for money is downsloping because:
A. the opportunity cost of holding money increases as the interest rate rises.
B. it is more attractive to hold money at high interest rates than at low interest rates.
C. bond prices rise as interest rates rise.
D. the opportunity cost of holding money declines as the interest rate rises.
68. Refer to the diagram of the market for money. The downward slope of the
money demand curve Dm is best explained in terms of the:
A. transactions demand for money.
B. direct or positive relationship between bond prices and interest rates.
C. asset demand for money.
D. wealth or real-balances effect.
69. Refer to the above diagram of the market for money. The vertical money supply
curve Sm reflects the fact that:
A. bond prices and interest rates are inversely related.
B. the stock of money is determined by the Federal Reserve System and
does not change when the interest rate Changes.
C. the rate at which money is spent is zero.
D. lower interest rates result in lower opportunity costs of supplying money.
68. Refer to the above market for money diagrams. The asset demand for money is shown by:
A. D1.
B. D2.
C. D3.
D. S.
69. Refer to the above market for money diagrams. Curve D1 represents the:
A. total demand for money.
B. transactions demand for money.
C. asset demand for money.
D. stock of money.
70. Refer to the above market for money diagrams. The total demand for money is shown by:
A. D1.
B. D2.
C. D3.
D. S.
71. Refer to the above market for money diagrams. If each dollar held for transactions is spent four times per year on the
average, we can infer that the:
A. real GDP is $800.
B. nominal GDP is $800.
C. money supply must be $800.
D. nominal GDP is $1200.
72. The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800. A
fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:
A. 10 percent.
B. 12 percent.
C. 14 percent.
D. 16 percent.
73. Federal Reserve Notes in circulation are:
A. an asset as viewed by the Federal Reserve Banks.
B. a liability as viewed by the Federal Reserve Banks.
C. neither an asset nor a liability as viewed by the Federal Reserve Banks.
D. part of M1, but not of M2.
74. In the United States monetary policy is the responsibility of the:
A. U.S. Treasury.
B. Department of Commerce.
C. Board of Governors of the Federal Reserve System.
D. U.S. Congress.
75. The four main tools of monetary policy are:
A. tax rate changes, the discount rate, open-market operations, and the Federal funds rate.
B. tax rate changes, changes in government expenditures, open-market operations, and the term auction facility.
C. the discount rate, the reserve ratio, the term auction facility, and open-market operations.
D. changes in government expenditures, the reserve ratio, the Federal funds rate, and the discount rate.
76. The Fed can change the money supply by:
A. changing bank reserves through the sale or purchase of government securities.
B. changing the quantities of required and excess reserves by altering the legal reserve ratio.
C. changing the discount rate so as to encourage or discourage commercial banks in borrowing from the central
Banks.
D. doing all of these.
77. Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the
amount of cash held by the public does not change?
A. the required reserve ratio will increase
B. the money supply will decrease
C. the deposits of commercial banks will decline
D. commercial bank reserves will increase
78. If the Fed were to reduce the legal reserve ratio, we would expect:
A. lower interest rates, an expanded GDP, and a higher rate of inflation.
B. lower interest rates, an expanded GDP, and a lower rate of inflation.
C. higher interest rates, a contracted GDP, and a higher rate of inflation.
D. higher interest rates, a contracted GDP, and a lower rate of inflation.
79. The discount rate is the interest:
A. rate at which the central banks lend to the U.S. Treasury.
B. rate at which the Federal Reserve Banks lend to commercial banks.
C. yield on long-term government bonds.
D. rate at which commercial banks lend to the public.
80. A commercial bank can add to its actual reserves by:
A. lending money to bank customers.
B. buying government securities from the public.
C. buying government securities from a Federal Reserve Bank.
D. borrowing from a Federal Reserve Bank.
81. If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:
A. sell government securities, raise reserve requirements, raise the discount rate, and reduce the amount of
reserves available through the term auction facility.
B. buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of
reserves available through the term auction facility.
C. sell government securities, lower reserve requirements, lower the discount rate, and increase the amount of
reserves available through the term auction facility.
D. sell government securities, raise reserve requirements, lower the discount rate, and increase the amount of
reserves available through the term auction facility.
82. If the amount of money demanded exceeds the amount supplied, the:
A. demand-for-money curve will shift to the left.
B. money supply curve will shift to the right.
C. interest rate will rise.
D. interest rate will fall.
83. The numbers in parentheses after the AD1, AD2, and AD3,
labels indicate the levels of investment spending associated
with each curve, respectively. All numbers are in billions of
dollars. If the interest rate is 8 percent and the goal of the Fed is
full-employment output of Qf, it should:
A. increase the interest rate from 8 % to 10%.
B. decrease the interest rate from 8 to 4%.
C. decrease the interest rate from 8 to 6%.
D. maintain the interest rate at 8%.
84. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated
with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to
reduce or eliminate demand-pull inflation, it should:
A. increase the interest rate from 4 percent to 6 percent.
B. decrease the interest rate from 4 to 2 percent.
C. increase investment spending by $20 billion.
D. maintain the interest rate at 4 percent.
85. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated
with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 6 percent and the goal of the Fed
is full-employment output of Qf, it should:
A. increase the interest rate from 6 percent to 8 percent.
B. decrease the interest rate from 6 to 4 percent.
C. decrease the interest rate from 6 to 2 percent.
D. maintain the interest rate at 6 percent.
86. The purpose of an expansionary monetary policy is to shift the:
A. aggregate demand curve leftward.
B. aggregate demand curve rightward.
C. aggregate supply curve leftward.
D. investment demand curve leftward.
87. Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level
from either rising or falling. If aggregate supply increases in the economy, the Fed:
A. will have to increase interest rates to keep the price level from falling.
B. will have to reduce the money supply to keep the price level from rising.
C. will have to increase the money supply to keep the price level from falling.
D. can keep the price level stable without altering the money supply or interest rate.
88. The problem of cyclical asymmetry refers to the idea that:
A. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary
policy may not achieve an increase in the money supply.
B. the monetary authorities have been less willing to use an expansionary monetary policy than they have a
restrictive monetary policy.
C. cyclical downswings are typically of longer duration than cyclical upswings.
D. an expansionary monetary policy can force an expansion of the money supply, but a restrictive monetary
policy may not achieve a contraction of the money supply.
89. Compared with fiscal policy, monetary policy is:
A. quicker and easier to implement.
B. slower and more cumbersome to implement.
C. more dependent on Congressional action.
D. more likely to produce an offsetting net export effect.
90. Refer to the above table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 percent to
5 percent. Given columns (1) and (2), investment will:
A. decline by $20 billion.
B. increase by $20 billion.
C. decline by $10 billion.
D. increase by $10 billion.
91. Refer to the above table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 to 5
percent at a time when the investment demand declines from that shown by columns (1) and (2) to that shown by columns
(1) and (3). As a result of these two occurrences, investment will:
A. increase by $10 billion.
B. decrease by $10 billion.
C. increase by $20 billion.
D. decrease by $20 billion.