Ohio Northern University

IBEC 430

BASIC ECON REVIEW QUESTIONS

Chapter 4

1)A decline in the quantity of real output demanded along the aggregate demand curve is a result of a(n):

1. 1. decrease in the level of income.
   2. increase in the price level.
   3. increase in the level of income.
   4. decrease in the price level.

2. An increase in expected future income will:
   1. increase aggregate demand and aggregate supply.
   2. decrease aggregate demand and aggregate supply.
   3. increase aggregate supply.
   4. increase aggregate demand.

3. Which set of events would most likely decrease aggregate demand?
   1. A reduction in the excess capital of the existing capital stock.
   2. A reduction in business and personal tax rates.
   3. An increase in investment spending.
   4. An increase in personal income tax rates.

4. If the dollar appreciates in value relative to foreign currencies:
   1. aggregate demand decreases.
   2. aggregate demand increases.
   3. the quantity of real domestic output demanded increases.
   4. the quantity of real domestic output demanded decreases.

5. If the U.S. dollar depreciates in value relative to foreign currencies, then this will:
   1. increase aggregate demand.
   2. decrease aggregate demand.
   3. cause a movement along the aggregate demand curve.
   4. cause a movement along the aggregate supply curve.

6. Which set of events would most likely increase aggregate demand?
   1. An increase in incomes in foreign nations and a depreciation of the dollar.
   2. An increase in incomes in foreign nations and an appreciation of the dollar.
   3. A decrease in incomes in foreign nations and an appreciation of the dollar.
   4. A decrease in incomes in foreign nations and a depreciation of the dollar.

7. 

   307.

Refer to the above graph. Which factor will shift AD₁ to AD₂?

1. 1. The real-balances effect.
   2. An increase in productivity.
   3. The foreign purchase effect.
   4. An increase in investment spending.

8. Which event would most likely increase aggregate demand?
   1. A depreciation of the dollar.
   2. An appreciation of the dollar.
   3. A decrease in the national incomes in foreign nations.
   4. A decrease in the price level that results in a foreign purchases effect.

9. An aggregate supply curve represents the relationship between the:
   1. price level and the buying of real domestic output.
   2. price level and the production of real domestic output.
   3. real domestic output bought and the real domestic output sold.
   4. price level that producers are willing to accept and the price level buyers are willing to pay.

10. The short-run aggregate supply curve shows the:
    1. inverse relationship between the price level and real GDP purchased.
    2. inverse relationship between the price level and real GDP produced.
    3. direct relationship between the price level and real GDP produced.
    4. direct relationship between the price level and real GDP purchased.

11. An increase in productivity will:
    1. increase aggregate demand.
    2. increase aggregate supply.
    3. increase aggregate supply and aggregate demand.
    4. decrease aggregate supply and aggregate demand.

12. 

    312.

Refer to the above graph. Which factor will shift AS₁ to AS₂?

1. 1. A rise in national income abroad.
   2. An increase in government spending.
   3. A reduction in business taxes.
   4. A decline in consumer confidence.

13. Suppose that real domestic output in an economy is 300 units, the quantity of inputs is 50, and the price of each input is $9. If productivity increased such that 400 units are now produced with the quantity of inputs still equal to 50, then per-unit production costs would:
    1. increase and aggregate demand would decrease.
    2. decrease and aggregate demand would increase.
    3. decrease and aggregate supply would decrease.
    4. decrease and aggregate supply would increase.

14. An increase in business taxes would tend to:
    1. increase aggregate demand and decrease aggregate supply.
    2. increase aggregate demand and increase aggregate supply.
    3. decrease aggregate demand and increase aggregate supply.
    4. decrease aggregate demand and decrease aggregate supply.

15. Which would increase aggregate supply?
    1. An increase in business regulation.
    2. A decline in productivity.
    3. An increase in business subsidies.
    4. A decrease in the capital stock.

16. If personal income taxes and business taxes increase, then this will:
    1. increase aggregate demand and aggregate supply.
    2. decrease aggregate demand and aggregate supply.
    3. decrease aggregate demand and increase aggregate supply.
    4. increase aggregate demand and decrease aggregate supply.

17. The following list contains items that are related to aggregate demand and/or aggregate supply.

Refer to the above list. A change in which factor is most likely to change both aggregate demand and aggregate supply?

1. 1. 3
   2. 5
   3. 7
   4. 9

18. 

    318.

Refer to the above graph. Which line shows the full-employment output for the economy?

1. 1. 1
   2. 2
   3. 3
   4. 4

19. 

    319.

Refer to the above graph. This economy is at equilibrium:

1. 1. at point a.
   2. at point b.
   3. at price level P2 and output Q2.
   4. at price level P1 and output Q1.

20. The table shows the aggregate demand and aggregate supply schedule for a hypothetical economy.

Refer to the above table. If the quantity of real domestic output demanded increased by $2000 at each price level, the new equilibrium price level and quantity of real domestic output would be:

A. 350 and $8000.

B. 300 and $8000.

C. 250 and $7000.

D. 200 and $6000.

21. 

    321.

Refer to the above diagram. When AD1 shifts to AD2, then at P1Q3 output demanded will:

1. 1. equal output supplied.
   2. exceed output supplied.
   3. be less than output supplied.
   4. be at stable full-employment GDP.

22. A decrease in aggregate supply means:
    1. both the real domestic output and the price level would decrease.
    2. the real domestic output would increase and rises in the price level would become smaller.
    3. the real domestic output would decrease and the price level would rise.
    4. both the real domestic output and rises in the price level would become greater.

23. The economy experiences an increase in the price level and a decrease in real domestic output. Which is a likely explanation?

1. 1. Productivity has increased.
   2. Input prices have increased.
   3. Excess capacity has decreased.
   4. Government regulations have been reduced.

24. 

    324.

Refer to the above diagram. If aggregate supply shifts from AS₁ to AS₂, then the price level will:

1. 1. increase and real domestic output will increase.
   2. decrease and real domestic output will increase.
   3. increase and real domestic output will decrease.
   4. decrease and real domestic output will decrease.

25. Aggregate demand decreases and real output falls, but the price level remains the same. Which factor most likely contributes to downward price inflexibility?
    1. The multiplier effect.
    2. The wealth effect.
    3. Fear of price wars.
    4. Business taxes.

26. When aggregate demand decreases, product prices, wage rates, and per-unit production costs are inflexible downward because of a:
    1. ratchet effect.
    2. interest-rate effect.
    3. real-balances effect.
    4. foreign-purchases effect.

27. The multiplier can be calculated by dividing:
    1. the initial change in spending by the change in real GDP.
    2. the change in real GDP by the initial change in spending.
    3. one by one minus the marginal propensity to save.
    4. one by one minus the marginal propensity to invest.

28. When the federal government uses taxation and spending actions to stimulate the economy, it is conducting:
    1. fiscal policy.
    2. incomes policy.
    3. monetary policy.
    4. employment policy.

29. Fiscal policy is enacted through changes in:
    1. interest rates.
    2. the supply of money.
    3. unemployment and inflation.
    4. taxation and government spending.

30. If the Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n):
    1. supply-side fiscal policy.
    2. expansionary fiscal policy.
    3. contractionary fiscal policy.
    4. nondiscretionary fiscal policy.

31. The combination of fiscal policies that would reinforce each other and be most expansionary would be a(n):
    1. increase in government spending and taxes.
    2. decrease in government spending and taxes.
    3. decrease in government spending and an increase in taxes.
    4. increase in government spending and a decrease in taxes.

32. 

    332.

Refer to the above graph. What combination would most likely cause a shift from AD₁ to AD₃?

1. 1. An increase in taxes and an increase in government spending
   2. A decrease in taxes and an increase in government spending
   3. An increase in taxes and a decrease in government spending
   4. A decrease in taxes and a decrease in government spending

33. 

    333.

Refer to the above diagram. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?

1. 1. Decrease aggregate demand by increasing taxes.
   2. Increase aggregate demand by decreasing taxes.
   3. Decrease aggregate supply by increasing taxes.
   4. Increase aggregate demand by increasing government spending.

34. If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:
    1. increased government spending or increased taxation, or a combination of the two actions.
    2. increased government spending or decreased taxation, or a combination of the two actions.
    3. increased government spending or increased taxation, but not a combination of the two actions.
    4. decreased government spending or decreased taxation, or a combination of the two actions.

35. 

    335.

Refer to the above graph. Assume that the economy initially has a price level of P₂ and output level Q₂. The price level is flexible and the government decides to adopt a contractionary fiscal policy. What would most likely be the new equilibrium price level and output?

35. 1. P2 and Q4
    2. P1 and Q1
    3. P2 and Q2
    4. P1 and Q3
36. 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.

37. 

    337.

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:

1. 1. AD0.
   2. AD2.
   3. AD3.
   4. None of these.

38. 

    338.

Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD₃, it would be appropriate for the government to:

1. 1. reduce government expenditures and taxes by equal-size amounts.
   2. reduce government expenditures or increase taxes.
   3. increase government expenditures or reduce taxes.
   4. reduce unemployment compensation benefits.

39. If government tax revenues change automatically and in a countercylical direction over the course of the business cycle, this would be called a(n):
    1. discretionary fiscal policy.
    2. expansionary fiscal policy.
    3. political business cycle.
    4. nondiscretionary fiscal policy.

40. A new member of Congress notes that "[p]ersonal income tax collections automatically fall and transfers and subsidies automatically rise as national income declines." This observation best describes how the personal income tax, transfers, and subsidies:
    1. serve as built-in stabilizers.
    2. produce the standardized budget.
    3. cause crowding out and reduce equilibrium GDP.
    4. contribute to the recognition lag with fiscal policy.

41. 

    341.

In the above graph, tax revenues vary:

1. 1. directly with the level of GDP.
   2. inversely with the level of GDP.
   3. directly with the level of government spending.
   4. inversely with the level of government spending.

42. With a regressive tax system, as the level of income increases in an economy, the average tax rate will:
    1. increase.
    2. decrease.
    3. remain constant.
    4. either increase or decrease.

43. Another term for the full-employment budget is the:
    1. actual budget.
    2. cyclical budget.
    3. cyclically adjusted budget.
    4. administrative budget.

44. The cyclically adjusted deficit as a percentage of GDP is 2 percent in year 1. This deficit becomes 3 percent of GDP in year 2. It can be concluded from year 1 to year 2 that:
    1. fiscal policy was expansionary.
    2. fiscal policy was contractionary.
    3. the federal government is increasing taxes.
    4. the federal government is decreasing spending.

45. If the cyclically adjusted budget deficit increases from $200 billion to $250 billion and GDP remains constant over the two years:
    1. fiscal policy is expansionary.
    2. fiscal policy is contractionary.
    3. fiscal policy is neutral.
    4. the tax system is progressive.

46. If the cyclically adjusted deficit as a percentage of GDP is zero in one year and 1 percent of GDP the next year, it can be concluded that:
    1. fiscal policy is expansionary.
    2. fiscal policy is contractionary.
    3. the federal government is borrowing money.
    4. the federal government is lending money.

47. 

    347.

Refer to the above diagram. Assume that G and T₁ are the relevant curves, the economy is currently at A, and the full- employment GDP is B. This economy has a(n):

1. 1. cyclically adjusted budget surplus.
   2. cyclically adjusted budget deficit.
   3. actual budget deficit.
   4. actual budget surplus.

48. 

    348.

Refer to the above diagram. Discretionary fiscal policy designed to expand GDP is illustrated by:

48. 1. the shift of curve T1 to T2.
    2. the shift of curve T2 to T1.
    3. a movement from a to c along curve T₂.
    4. a movement from d to b along curve T₁.
49. If monies added to, or subtracted from, the Social Security trust fund were excluded from federal budget calculations, the current federal budget:
    1. deficit would nearly disappear.
    2. deficit would be substantially larger.
    3. surplus would nearly disappear.
    4. surplus would be substantially smaller.

50. One timing problem with fiscal policy to counter a recession is an "operational lag" that occurs between the:
    1. start of the recession and the time it takes to recognize that the recession has started.
    2. end of the recession and the time it takes to recognize that the recession has ended.
    3. time fiscal action is taken and the time that the action has its effect on the economy.
    4. time the need for the fiscal action is recognized and the time that the action is taken.

51. Proponents of the notion of a "political business cycle" suggest that:
    1. the cyclically adjusted budget is a better indicator of the state of the economy than the actual budget.
    2. cyclical swings in the economy are produced by the inherent instability found in capitalist economies.
    3. a possible cause of economic fluctuations is due to the use of fiscal policy for political purposes.
    4. there is a trade-off among goals that tends to make the economic policies of state and local governments procyclical.

52. The crowding-out effect works through interest rates to:
    1. increase the effectiveness of expansionary fiscal policy.
    2. decrease the effectiveness of expansionary fiscal policy.
    3. decrease the effectiveness of contractionary fiscal policy.
    4. increase the effectiveness of contractionary fiscal policy.

53. Assume that when there is no crowding out, an increase in government spending increases GDP by $100 billion. If there had been partial crowding out, then GDP would have:
    1. increased by more than $100 billion.
    2. increased by less than $100 billion.
    3. increased by $100 billion.
    4. not increased.

54. There is general agreement among economists that a proposed fiscal policy should be evaluated for its:
    1. contribution to the purpose of "fine-tuning" the economy.
    2. contribution to the growth of exports and imports in the economy.
    3. potential positive and negative effects on long-run productivity growth.
    4. potential positive and negative effects on short-run business indebtedness.

55. The crowding-out effect of expansionary fiscal policy suggests that:
    1. government spending is increasing at the expense of private investment.
    2. imports are replacing domestic production.
    3. private investment is increasing at the expense of government spending.
    4. saving is increasing at the expense of investment.

56. The public debt is the:
    1. amount of U.S. paper currency in circulation.
    2. ratio of all past deficits to all past surpluses.
    3. total of all past deficits minus all past surpluses.
    4. difference between current government expenditures and revenues.

57. 
    The following is budget information for a hypothetical economy. All data are in billions of dollars.

Refer to the above data. In which year is there a budget surplus?

1. 1. Year 1
   2. Year 2
   3. Year 4
   4. Year 5

58. The following is budget information for a hypothetical economy. All data are in billions of dollars.

Refer to the above data. Assume that year 1 is the first year for this economy and year 5 is the current year. What is the public debt in this economy?

1. 1. $100 billion
   2. $150 billion
   3. $250 billion
   4. $300 billion

59. In 2010, approximately what percentage of the public debt was held by foreign individuals and institutions?
    1. 7 percent
    2. 25 percent
    3. 17 percent
    4. 32 percent

60. Most of the public debt is owed to citizens and domestic institutions. This is one reason that the public debt:
    1. crowds out private investment.
    2. does not impose a burden on future generations.
    3. has a procyclical economic effect on the economy.
    4. can result in the bankruptcy of the federal government.

61. One important consequence of the public debt in the United States is that:
    1. income inequality is reduced.
    2. incentives to work are increased.
    3. it transfers a portion of real output to foreign nations.
    4. there is greater saving at every level of disposable income.

62. Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:
    1. increases during a period of recession, rather than prosperity.
    2. is primarily for capital-type goods.
    3. is financed by borrowing.
    4. is financed by taxation.

63. An increase in the public debt will:
    1. increase incentives to work and bear risk.
    2. increase the inequality in the distribution of income.
    3. decrease the U.S. debt held by citizens and institutions in foreign nations.
    4. decrease the potential for higher taxation in the United States.

64. Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely:
    1. crowd out future public investment.
    2. reduce the economy's future productive capacity.
    3. increase the amount of public capital stock in the future.
    4. increase the amount of private capital stock in the future.

65. The functions of money are to serve as a:
    1. resource allocator, method for accounting, and means of income distribution.
    2. unit of account, store of value, and medium of exchange.
    3. determinant of consumption, investment, and government spending.
    4. factor of production, exchange, and aggregate supply.

66. What function is money serving when you deposit money in a savings account?
    1. A store of value.
    2. A unit of account.
    3. A checkable deposit.
    4. A medium of exchange.

67. One major advantage of the medium of exchange function of money is that it allows society to:
    1. transfer purchasing power from the present to the future.
    2. measure the relative worth of products.
    3. escape the complications of barter.
    4. use credit cards instead of currency.

68. All coins in circulation within the United States are:
    1. near monies.
    2. checkable deposits.
    3. token money.
    4. time deposits.

69. The largest component of the money supply (M1) is:
    1. currency.
    2. checkable deposits.
    3. small time deposits.
    4. savings deposits.

70. Paper money in the United States comes in the form of:
    1. U.S. Treasury bills.
    2. U.S. Treasury bonds.
    3. federal legal tender.
    4. Federal Reserve Notes.

71. 

    371.

Refer to the above table. The size of the M2 money supply is:

1. 1. $2054 billion.
   2. $2696 billion.
   3. $5899 billion.
   4. $6792 billion.

72. 

    372.

Refer to the above table. The size of the M2 money supply is: A. $3730.

B. $3980.

C. $4330.

D. $4470.

73. Michelle transfers $4000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?
    1. M1 decreases and M2 increases.
    2. M1 increases and M2 decreases.
    3. M1 increases and M2 stays the same.
    4. M2 increases and M1 stays the same.

74. The federal backing for the money in the United States comes from:
    1. providing sufficient quantities of precious metals such as gold and silver to cover the amount of paper money in circulation.
    2. pledging physical assets, such as land, natural resources, and public buildings as collateral for outstanding currency.
    3. control over the money supply designed to keep the value of money relatively stable over time.
    4. protecting checkable deposits at financial institutions with deposit guarantees.

75. If the value of the dollar is falling, then it follows that:
    1. the price index is falling.
    2. the price index is rising.
    3. real incomes are falling.
    4. interest rates are rising.

76. How long is the term of office for members appointed to serve on the Board of Governors of the Federal Reserve System?
    1. 2 years
    2. 4 years
    3. 7 years
    4. 14 years

77. In which of the following U.S. cities is one of the 12 Federal Reserve Banks located?
    1. New York City
    2. Seattle
    3. Miami
    4. Denver

78. The seven members of the Board of Governors of the Federal Reserve System are:
    1. appointed by the president with the confirmation of the Senate.
    2. elected by Congress from a slate of nominees provided by the president.
    3. appointed by the Senate Finance Committee.
    4. appointed by the presidents of the 12 Federal Reserve Banks.

79. The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily for:
    1. maintaining cash reserves that can be used to settle international transactions.
    2. supervising banks to make sure markets are open to all and remain competitive.
    3. issuing currency and acting as the fiscal agent for the federal government.
    4. setting the Fed's monetary policy and directing the purchase and sale of government securities.

80. Which group is responsible for the policy of the Federal Reserve on purchasing and selling government securities?
    1. Federal Open Market Committee.
    2. Office of Management and Budget.
    3. Thrift Advisory Council.
    4. Federal Advisory Council.

81. Holding the money deposits of businesses and households and making loans to the public are the basic functions of:
    1. district banks of the Federal Reserve System.
    2. commercial banks and thrift institutions.
    3. the Open Market Committee and the Board of Governors.
    4. the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation.

82. In the United States, credit cards account for about what percentage of the dollar volume of transactions for goods and services?
    1. 10 percent
    2. 25 percent
    3. 40 percent
    4. 65 percent

83. Within the financial services industry, which of the following is an example of a financial institution?
    1. Thrifts
    2. Insurance companies
    3. Pension funds
    4. All of these

84. A fractional reserve banking system:
    1. is susceptible to bank panics.
    2. prevents money creation through the lending process.
    3. only tends to exist in developing economies.
    4. prevents the Federal Reserve from influencing the money supply.

85. A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be an example of:
    1. an asset.
    2. a liability.
    3. net worth.
    4. capital stock.

86. Cash held by a bank is sometimes called:
    1. token money.
    2. legal tender.
    3. vault cash.
    4. fractional reserves.

87. An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by:

A. $11,000.

B. $10,800.

C. $9600.

D. $6000.

88. Assume that Johnson deposits $350 of currency in his account in the XYZ Bank. Later the same day Swanson negotiates a loan for $2000 at the same bank. In what direction and by what amounts has the supply of money changed?
    1. Increased by $2350.
    2. Increased by $2000.
    3. Decreased by $350.
    4. Decreased by $1650.

89. 
    Use the following balance sheet for the ABC National Bank in answering the next question. Assume the required reserve ratio is 20 percent.

Refer to the above data. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit, and has a check cleared against it for that amount, its reserves and checkable deposits will now be:

1. 1. $25,000 and $122,000 respectively.
   2. $22,000 and $110,000 respectively.
   3. $32,000 and $115,000 respectively.
   4. $22,000 and $105,000 respectively.

90. If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system:
    1. m = R - 1.
    2. R = m/1.
    3. R = m - 1.
    4. m = 1/R.

91. 
    Answer the next question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent.

Refer to the above data. This commercial bank has excess reserves of:

A. $15,000.

B. $18,000.

C. $27,000.

D. $32,000.

92. 
    Answer the next question based on the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars.

Refer to the above data. The maximum amount by which the commercial banking system can expand the supply of money by lending is:

1. 1. $250 billion.
   2. $350 billion.
   3. $450 billion.
   4. $600 billion.

93. Suppose a commercial banking system has $240,000 of outstanding checkable deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of:

A. $75,000.

B. $25,000.

C. $5000.

D. $100,000.

94. Answer the next question on the basis of the following table for a commercial bank or thrift:

Refer to the above table. When the legal reserve ratio is 25 percent, the excess reserves of this single bank are:

A. $0.

B. $1000.

C. $5000.

D. $30,000.

95. If actual reserves in the banking system are $8000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are:
    1. zero.

B. $1000.

C. $2000.

D. $500.

96. The value of the monetary multiplier is:
    1. 1/MPS.
    2. 1/Excess reserves.
    3. 1/MPC.
    4. 1/Required reserve ratio.