Kentucky Community and Technical College System

ECO 201

MACROECONOMICS-TEST THREE (FINAL EXAM) SUMMER B 2006

1)Fiscal policy refers to the:

1. 1. manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
   2. manipulation of government spending and taxes to achieve greater equality in the distribution of income.
   3. altering of the interest rate to change aggregate demand.
   4. fact that equal increases in government spending and taxation will be contractionary.

 

2. Discretionary fiscal policy is so named because it:
   1. is undertaken at the option of the nation's central bank.
   2. occurs automatically as the nation's level of GDP changes.
   3. involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.
   4. is invoked secretly by the Council of Economic Advisers.

 

3. A politically liberal economist who favored expanded government would recommend:
   1. tax cuts during recession and reductions in government spending during inflation.
   2. tax increases during recession and tax cuts during inflation.
   3. tax cuts during recession and tax increases during inflation.
   4. increases in government spending during recession and tax increases during inflation.

 

4. If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by:
   1. reducing government expenditures by $125 billion. B)            reducing government expenditures by $20 billion.

C) increasing taxes by $50 billion.                                            D)           increasing taxes by $250 billion.

 

5. Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy?
   1. a Congressional proposal to incur a Federal surplus to be used for the retirement of public debt
   2. a reduction in agricultural subsidies and veterans' benefits
   3. a postponement of a highway construction program
   4. a reduction in Federal tax rates on personal and corporate income

 

6. Which of the following best describes the built-in stabilizers as they function in the United States?
   1. The size of the balanced-budget multiplier varies inversely with the level of GDP.
   2. Tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
   3. Tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.
   4. Tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

 

Use the following to answer questions 7-8:

 

 

 

7. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the idea of:
   1. proportional taxation.                                                            B)            built-in stability.

C) a balance budget at all levels of spending.     D)           discretionary fiscal policy.

 

8. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is

$400:

1. 1. there will be a budget deficit.                             B)            there will be a budget surplus.

C) the budget will be balanced.                               D)           the macroeconomy will be in equilibrium.

 

Answer question 9 on the basis of the following sequence of events involving fiscal policy:

 

1) The composite index of leading indicators turns downward for three consecutive months; (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.

 

9. Refer to the above information. The administrative lag of fiscal policy is reflected in events:
   1. 1 and 2.                         B)            2 and 3.

C) 3 and 4.                         D)           4 and 5.

 

10. If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as:
    1. a medium of exchange          B)            a store of value.

C) a unit of account.                      D)           an economic investment.

 

11. In the United States, the money supply (M1) is comprised of:
    1. coins, paper currency, and checkable deposits.
    2. currency, checkable deposits, and Series E bonds.
    3. coins, paper currency, checkable deposits, and credit balances with brokers.
    4. paper currency, coins, gold certificates, and time deposits.

 

12. The money supply is backed:
    1. by the government's ability to control the supply of money and therefore to keep its value relatively stable.
    2. by government bonds.
    3. dollar-for-dollar with gold and silver.
    4. dollar-for-dollar with gold only.

 

13. If the price index rises from 100 to 120, the value of the dollar:
    1. may either rise or fall.            B)            will rise by one-sixth.

C) will fall by one-sixth.                D)           will rise by 20 percent.

 

14. Coins in people's pockets and purses are:
    1. included in M1, but not in M2.                           B)            included in both M1 and in M2.

C) included in M2, but not in M1.                           D)           not part of the nation’s money supply.

 

15. Coins held in commercial banks are:
    1. included in M1, but not in M2.                           B)            included both in M1 and in M2.

C) included in M2, but not in M1.                           D)           not part of the nation's money supply.

 

 

 

 

Use the following to answer question 16:

 

 

 

 

16. Refer to the above diagram of the money market. The vertical money supply curve Sm reflects the fact that:
    1. bond prices and interest rates are inversely related.
    2. the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
    3. the velocity of money is zero.
    4. lower interest rates result in lower opportunity costs of supplying money.

 

Use the following to answer question 17:

 

 

 

D1

S

Rate of interest (percent)

10

 

8

6

4

2

 

100 200 300 400

Amount of money demanded (billions of dollars)

 

17. Refer to the above money market diagrams. The asset demand for money is shown by: A)   D₁.                          B)            D₂.                          C)            D₃.                          D) S.

 

18. An important routine function of the Federal Reserve Bank is to:
    1. supervise the liquidation of the assets of bankrupt state banks.
    2. help large commercial banks develop correspondent relationships with smaller commercial banks.
    3. advise commercial banks as to the most profitable ways of reinvesting profits.
    4. provide facilities by which commercial banks and thrift institutions may collect checks.

 

19. To say that the Federal Reserve Banks are quasi-public banks means that:
    1. they are privately owned, but managed in the public interest.
    2. they deal only with banks of foreign nations and do not have direct business contact with U.S. banks.
    3. they deal only with commercial banks, and not the public.
    4. they are publicly owned, but privately managed.

 

20. Money is destroyed when:
    1. loans are made.        B)            checks written on one bank are deposited in another bank.

C)   loans are repaid.       D)           the net worth of the banking system declines.

 

21. Banks create money when they:
    1. add to their reserves in the Federal Reserve Bank.
    2. accept deposits of cash.
    3. sell government bonds.
    4. exchange checkable deposits for the IOU's of businesses and individuals.

 

Answer question 22 on the basis of the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions.

 

Assets		Liabilities and net worth
Reserves	$ 51	Checkable Deposits             $140
Securities	100	Capital Stock                             130
Loans	109
Property	10

22. Refer to the above data. The commercial banking system has excess reserves of:
    1. $9 billion.                     B)            $7 billion.

C) $6.1 billion.                  D)           $5 billion.

 

23. The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of:
    1. the MPS.                                      B)            its actual reserves.

C) its excess reserves.                 D)           the reserve ratio.

 

24. Which of the following statements is correct?
    1. The supply of money decreases when the Federal Reserve Banks buy government securities from households or businesses.
    2. Excess reserves are the amount by which actual reserves exceed required reserves.
    3. Commercial banks decrease the supply of money when they purchase government bonds from households or businesses.
    4. Commercial bank reserves are a liability to commercial banks but an asset to the Federal Reserve Banks.

 

25. An increase in the legal reserve ratio:
    1. increases the money supply by increasing excess reserves and increasing the monetary multiplier.
    2. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
    3. increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
    4. decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

 

26. A commercial bank can add to its actual reserves by:
    1. lending money to bank customers.
    2. buying government securities from the public.
    3. buying government securities from a Federal Reserve Bank.
    4. borrowing from a Federal Reserve Bank.

 

27. The interest rate at which the Federal Reserve Banks lend to commercial banks is called the:
    1. prime rate.                                 B)            short-term rate.

C) discount rate.                             D)           Federal funds rate.

 

28. Which of the following actions by the Fed would cause the money supply to increase?
    1. purchases of government bonds from banks.             B)        an increase in the reserve requirement.

C)   an increase in the discount rate.                                       D)           sales of government bonds to the public.

 

29. Which of the following best describes the cause-effect chain of a tight money policy?
    1. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
    2. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand

and GDP.

1. 3. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
   4. An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.

 

 

 

30. One of the strengths of monetary policy relative to fiscal policy is that monetary policy:
    1. can be implemented more quickly.
    2. is subject to closer political scrutiny.
    3. does not produce a net export effect.
    4. entails a larger spending income multiplier effect on real GDP.

 

31. The U.S. public debt:
    1. refers to the debts of all units of government--Federal, state, and local.
    2. consists of the total debt of U.S. households, businesses, and government.
    3. refers to the collective amount that U.S. citizens and businesses owe to foreigners.
    4. consists of the historical accumulation of all Federal government deficits and surpluses.

 

32. An annually balanced budget intensifies the business cycle because tax revenue declines associated with:
    1. prosperity will require cuts in government spending.
    2. recession will require increases in government spending.
    3. prosperity will require cuts in government spending.
    4. recession will require cuts in government spending.

 

33. The idea of a cyclically balanced budget is for government to:
    1. balance the economy, not worrying about expansion of the public debt.
    2. balance the budget over ten-year periods.
    3. exactly match budget deficits accruing in the recession phase of the business cycle with surpluses occurring in the late recovery phase.
    4. make sure the full-employment deficit is always zero.

 

34. The idea that the basic purpose of the Federal budget is to stabilize the economy regardless of any resulting changes in the size of the public debt best describes:
    1. a socially optimal budget.                      B)            functional finance.

C) a cyclically balanced budget.                D)           an annually balanced budget.

 

35. If a customer makes a $ 100 deposit to his checking account in bank A, the total amount of additional money created in the banking system, after the monetary multiplier has taken its full effect, is:

 

1. 1. $400, if the reserve requirement is 20%                       B)              $400, if the reserve requirement is 25%

C)      $800, if the reserve requirement is 10%      D)              $800, if the reserve requirement is 12.5%

 

36. (Based on the tape shown in class). The fundamental equation of monetarism is the equation of exchange, which is (where M

= money supply; V = velocity of money; P = the price level; Y = real output or GDP):

1. 1. MP = VY                                       B)            MV = PY

C) MY = VP                                        D)           None of the above

 

37. (Based on the tape shown in class). The equation of exchange is used to argue that changes in the quantity of the money supply (M):
    1. have no impact on real GDP in the short run
    2. have no impact on real GDP in the long run

1. 3. have no impact on real GDP in either the short run or the long run
   4. Monetary policy is really useless.