1 6 Chapters

MACROECONOMICS - TEST ONE (Chapters 1-6), Fall 2006

NAME __________________________________

Forty-one multiple-choice questions, each worth 2.439 points. For each question, circle the best answer.

1. The study of economics is primarily concerned with: A) keeping private businesses from losing money. B) keeping economics professors from starving to death. C) choices that are made in seeking to use scarce resources efficiently. D) determining the most equitable (fair) distribution of the government's money.

2. Even though the Orlando Sentinel is inexpensive, people rarely buy more than one of them each day. This fact:A) is an example of irrational behavior.B) implies that reading should be taught through phonics rather than the whole language method.C) contradicts the economic perspective.D) implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost.

3. The basic purpose of the "other things equal" (ceteris paribus) assumption is to: A) allow one to reason about the relationship between price and quantity of X without the intrusion of a change in the price of

Z. B) allow one to focus upon micro variables by ignoring macro variables. C) allow one to focus upon macro variables by ignoring micro variables. D) allow one to reason about the relationship between revenues and expenses of a business.

4. Which of the following is a microeconomic statement? A) The real U.S. output increased by 2.5 percent last year. B) Unemployment was 6.8 percent of the U.S. labor force last year. C) The price of personal computers declined last year. D) The general price level (inflation) increased by 4 percent last year.

5. The problems of aggregate (at the national level) inflation and unemployment are: A) major topics of macroeconomics. B) not relevant to the U.S. economy. C) major topics of microeconomics. D) peculiar to socialistic economies.

6. "If you leave a football game at the end of the third quarter, you will avoid traffic and get home more quickly. Therefore, everyone should leave the game early." This illustrates the: A) "sore loser syndrome" B) adverse selection problem. C) fallacy of division. D) fallacy of

composition.

7. If we say that two variables are inversely related, this means that: A) the two graph as an upsloping line. B) an increase in one variable is associated with a decrease in the other. C) an increase in one variable is associated with an increase in the other. D) the resulting relationship can be portrayed by a straight line parallel to the horizontal axis.

Use the following to answer question 8:

8. Answer on the basis of the relationships shown in the above four figures. The amount of Y is inversely related to the amount of X in: A) 2 only. B) both 1 and 3. C) 3 only. D) 1 only.

9. The fundamental problem of economics is: A) to establish a democratic political framework for the smooth operation of the government. B) the establishment of prices that reflect the relative scarcities of products and resources. C) dealing with the scarcity of productive resources relative to an unlimited number of economic wants. D) What do I do to get out of poverty?

10. Which of the following is real capital (as we define it in economics)? A) a pair of stockings B) a construction crane C) a savings account D) a share of IBM stock

11. Economics can best be defined as the study of: A) how to profitably invest one's income in stocks and bonds. B) how to use scarce productive resources efficiently. C) how government policies affect businesses and labor. D) managing business enterprises for profit.

12. A production possibilities curve shows:A) that resources are unlimited.B) that people prefer one of the goods more than the other.C) the maximum amounts of two goods that can be produced assuming the full and efficient use of available resources.D) combinations of labor only necessary to produce specific levels of output.

13. Opportunity cost is best defined as: A) the monetary price of any productive resource. B) the amount of labor that must be used to produce one unit of any product. C) the ratio of the prices of imported goods to the prices of exported goods. D) the amount of one product that must be given up to produce one more unit of another product.

14. "Allocative efficiency" refers to: A) the use of the least-cost method of production. B) the production of the product-mix most wanted by society. C) the full employment of all available resources. D) production at some point inside of the production possibilities curve.

15. A demand curve: A) shows the relationship between price and quantity supplied. B) indicates the quantity demanded at each price in a series of prices. C) graphs as an upsloping line. D) shows the relationship between income and spending.

16. If two goods are complements (like pepperoni pizza and beer): A) they are consumed independently. B) an increase in the price of one will increase the demand for the other. C) a decrease in the price of one will increase the demand for the other. D) they are necessarily inferior goods.

17. If the demand curve for product B shifts to the right as the price of product A declines, then:A) A and B are substitute goods. B) A is a normal good and B is an inferior good. C) A is an inferior good and B is a normal good. D) A and B are complementary goods.

18. An increase in consumer incomes (like when one wins the big Fantasy Five prize) will: A) increase the demand for an inferior good. B) increase the supply of an inferior good. C) increase the demand for a normal good. D) decrease the supply of a normal good.


Q ua ntity0

x

y

D 1D 2

Price

19. A decrease in quantity demanded (as distinct from a decrease in demand) is depicted by a:A) move from point x to point y. B) a shift from D1 to D2. C) shift from D2 to D1. D) move from point y to

point x.

20. The law of supply: A) reflects the amounts that producers will want to offer at each price in a series of prices. B) is reflected in a downsloping supply curve. C) was enacted by Congress to force businesses to produce goods that society wants. D) reflects the income and substitution effects of a price change.


21. Refer to the above diagram. A shortage of 160 units would be encountered if price was: A) $1.10, that is, $1.60 minus $.50. B) $1.60. C) $1.00. D) $.50.

22.At the equilibrium price: A) quantity supplied may exceed quantity demanded or vice versa. B) there are no pressures on price to either rise or fall. C) there are forces that cause price to rise. D) there are forces that cause price to fall.

23. One can say with certainty that equilibrium quantity of enchiladas bought and sold will increase when: A) supply and demand both decrease. B) supply increases and demand decreases. C) the price of the salsa to go with them will go up. D) supply and demand both increase.

24. Competition means that: A) sellers can manipulate market price by causing product scarcities. B) there are many independently-acting buyers and sellers in each market. C) a product can be purchased at a number of different prices.

D) there is only one seller in a market. 25. A firm's economic profit is:

A) usually lower than its normal profit. B) profit over and above normal profitC) a cost of production. D) a signal to the firm that it is producing too much output.

26. "The 'dollar votes' of consumers ultimately determine the composition of output and the allocation of resources in a market economy." This statement best describes the concept of: A) political demand. B) consumer sovereignty. C) "supply creates its own demand." D) market failure.

27. The "invisible hand" refers to the: A) fact that the U.S. tax system redistributes income from rich to poor. B) notion that, under competition, buying and selling decisions motivated by self-interest promote the social interest. C) tendency of monopolistic sellers to raise prices above competitive levels. D) hands of shoplifters caught "red-handed" by video cameras at stores such as Wal-Mart.

28. The personal distribution of income in the United States is such that the richest fifth receives about _____ percent of total personal income. A) 5 B) 30 C) 50 D) 95

29. The three basic legal forms of business enterprise are: A) monopolists, price fixers, and rip-off artists. B) proprietorships, partnerships, and corporations. C) vertical, horizontal, and conglomerate corporations. D) conglomerates, multinationals, and partnerships.

30. The advantages of the corporate form of business (corporations) include: A) the ability to raise financial capital by selling stocks and bonds. B) managers' ability to pay themselves any salary they want. C) the elimination of the principal-agent problem. D) single taxation of corporate earnings.

31. If a corporation goes bankrupt, its stockholders will lose: A) only the value of their stock. B) the value of their stock plus any other business assets they may own. C) the value of their stock plus any other personal assets they may own. D) the value of their stock plus any other business and personal assets they may own.

32. The owners of a business face unlimited liability for the business’ debts in: A) a corporation. B) a partnership, but not in a proprietorship. C) a proprietorship, but not in a partnership. D) both a proprietorship and a partnership.

33. Stocks are:

A) promises to repay a loan. B) also known as bonds.C) issued by sole proprietorships. D) shares of ownership of a corporation.

34. The U.S. Food Stamp program, which provides coupons that allow low-income individuals to buy food, is an illustration of: A) public provision of a suitable legal framework for the market system. B) the re-distributional function of government. C) a government action designed to enhance competition.D) the stabilization function of government.

35. Spillovers or externalities: A) relate to costs only. B) relate to benefits only. C) relate to both costs and benefits. D) have been legislated out of existence.

36. Which of the following is a type of public good? A) tires B) cars C) highways D) gasoline

37. The "free-rider problem" refers to the fact that:

A) government subsidizes the fares of many municipal mass-transit systems. B) government arbitrarily attaches excise taxes to a select list of goods and services. C) the benefits associated with public goods cannot be denied to those who are unwilling to pay for them. D) homeless people expect free rides on lynx buses.

38. The major source of tax revenue for the Federal government is: A) personal income taxes (i.e., your wallet and mine). B) property taxes. C) corporate income taxes. D) sales and excise taxes.

39. According to the concept of comparative advantage, a good should be produced in that nation where: A) its domestic opportunity cost is greatest. B) money is used as a medium of exchange. C) its domestic opportunity cost is least. D) the terms of trade are maximized.

Use the following production possibilities table for countries Alpha and Beta to answer question 40:

A lp h a B eta P rod u ctio n P oss ib ilities P rod u ctio n P oss ib ilit ies

P rod u ct A B C D P rod u ct A B C D X 3 2 1 0 X 6 4 2 0 Y 0 4 8 12 Y 0 4 8 12

40. Refer to the above tables. The domestic opportunity cost of one unit of X in Alpha is:

A) 2 units of Y. B) 4 units of Y. C) 1 unit of Y. D) 3 units of Y.

41. Appreciation of the Mexican peso will: A) make Mexico's exports and imports both more expensive. B) make Mexican tortillas coming into the U.S. more expensive to U.S. consumers. C) make Mexican jalapeno peppers less expensive in the U.S. D) increase Mexican exports.

Answer Key – MacroTestOneCh1-6Fall2006

1. C2. D3. A4. C5. A6. D7. B8. C9. C

10. B

11. B12. C13. D14. B15. B16. C17. D18. C19. D20. A21. D22. B23. D24. B25. B26. B27. B28. C29. B30. A31. A32. D33. D34. B35. C36. C37. C38. A39. C40. B41. B

MACROECONOMICS – TEST TWO (Chapters 7-11, 20,21)

Name ____________________________________________

Forty-two multiple-choice questions (each worth 2.38 points). Please circle/provide the BEST answer.

1. A nation's gross domestic product (GDP): A) is the dollar value of the total output produced within the borders of the nation. B) is the dollar value of the total output produced by its citizens, regardless of where they are living. C) can be found by summing C + In + S + Xn. D) is always some amount less than its C + Ig + G + Xn.

2. Net exports are negative when: A) a nation's imports exceed its exports. B) the economy's stock of capital goods is declining.

C) depreciation exceeds domestic investment. D) a nation's exports exceed its imports.

3. Suppose that inventories were $80 billion at the end of 2000 and $70 billion at the end of 2001. For 2001, accountants would:A) add $10 billion to other elements of investment in calculating total investment.B) subtract $10 billion from other elements of investments in calculating total investment.C) add $40 billion (= $80/2) to other elements of investment in calculating total investment.D) add $35 billion (= $70/2) from other elements of investment in calculating total investment.

4. GDP excludes:A) the market value of unpaid work in the home. B) the production of services. C) the production of nondurable goods. D) negative changes in inventories.

5. Real GDP measures: A) current output at current prices. B) current output at base year prices. C) base year output at current prices. D) base year output at current exchange rates.

6. If real GDP falls from one period to another, we can conclude that: A) deflation definitely occurred. B) inflation definitely occurred. C) nominal GDP definitely fell. D) production of goods and services definitely fell.

Use the following table to answer questions 7-8 (Note that year 1 is the base year):

P rice P r iceU n its o f o f b ag e l in d ex

Year O u tp u t p er u n it (yea r 1 = 1 00 )1 1 0 $1 0 1 0 02 1 2 2 0 2 0 03 1 5 3 0 3 0 04 2 0 4 0 4 0 0

7. Refer to the above data. Nominal GDP in year 4 is:A) $320. B) $450.C) $225. D) $800.

8. Refer to the above data. Real GDP in year 4 is:A) $320. B) $450.C) $200. D) $800.

9. The consumer price index (CPI): A) is an average of the prices of all consumer goods purchased each year. B) measures changes in the prices of a market basket of some 300 goods and services purchased by urban consumers. C) measures prices of goods, but not services. D) is also known as the GDP price index.

10. Real GDP per capita is found by:A) adding real GDP and population. B) subtracting population from real GDP.C) dividing real GDP by population. D) dividing population by real GDP.

11. Recurring upswings and downswings in an economy's real GDP over time are called:A) recessions. B) business cycles.C) output yo-yos. D) total product oscillations.

12. The phase of the business cycle in which real GDP is at a minimum is called: A) the peak. B) a recession.

C) the trough. D) the pits.

13. If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the: A) frictional unemployment rate is 5 percent. B) cyclical unemployment rate and the frictional unemployment rate together are 5 percent. C) cyclical unemployment rate is 4 percent. D) natural rate of unemployment will eventually increase.

14. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is: A) 3 percent. B) 6 percent. C) 53 percent. D) Not enough information given.

15. Dr. Pinch A Penny, an economics professor, decided to take all of year 2007 off from teaching to work running a commercial fishing boat in Alaska, a for-profit endeavor. Professor Penny did so poorly that all he caught was some blow fish and, therefore, had no income from his fishing endeavor. In 2007, Professor Penny would be officially counted as:A) structurally unemployed. B) frictionally unemployed.C) not in the labor force. D) employed.

16. "For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point GDP gap occurs." This is a statement of: A) Taylor's rule. B) Okun's law. C) Say's law. D) Marx's communist theorem.

17. Inflation means that: A) all prices are rising, but at different rates. B) all prices are rising and at the same rate. C) prices in the aggregate are rising, although some particular prices may be falling. D) real incomes are rising.

18. If the Consumer Price index rises from 300 to 330 in a particular year, the rate of inflation in that year is: A) 10 percent. B) 33 percent. C) 30 percent. D) 9.1 percent; that is, 30 divided by 330.

19. "Too much money chasing too few goods" best describes: A) the GDP gap. B) demand-pull inflation. C) the inflation premium. D) cost-push inflation.

20. In 2007 Frank N. Stine was rewarded for his late night work and got a 6.5% pay increase, but at the same time the price level (inflation) rose by 3.5 percent. We can conclude that Mr. Stine's nominal income in 2007: A) rose by 3 percent. B) rose by 10 percent. C) rose by 6.5 percent. D) fell by 3.5 percent.

21. If Casimiro Aguacate’s disposable income increases from $1,200 to $1,700 and his level of saving increases from minus $100 to a plus $100, his marginal propensity to: A) save is three-fifths. B) consume is one-fifth. C) consume is three-fifths. D) save is one-fifth.

22. With an MPS of .4, the MPC will be: A) 1.0 minus .4. B) .4 minus 1.0. C) the reciprocal of the MPS. D) .4.

23. The average propensity to consume indicates the: A) amount by which income exceeds consumption.

B) relationship between a change in saving and the consequent change in consumption. C) percentage of total income that will be consumed. D) percentage of a change in income that will be consumed.

24. Dissaving occurs where: A) income exceeds consumption. B) saving exceeds consumption. C) consumption exceeds income. D) saving exceeds income.

Use the following to answer question 25. Example of what the table shows: from row one to row two total disposable income goes from 200 to 225, and total consumption goes from 205 to 225.

D isp osa b lein co m e C o n su m p tio n$ 2 0 0 $ 2 0 5 2 25 2 2 5 2 50 2 4 5 2 75 2 6 5 3 00 2 8 5

25. Refer to the above data. The marginal propensity to consume is:A) Not enough information. B) .75.C) .20. D) .80.

26. Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is: A) 5 percent. B) 10 percent. C) 15 percent. D) 20 percent.

27. Assume a machine, which has a useful life of only one year, costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is: A) 7.5 percent. B) 10 percent. C) 15 percent. D) 20 percent.

28. The immediate determinants of investment spending are the: A) expected rate of return on capital goods and the real interest rate. B) level of saving and the real interest rate. C) marginal propensity to consume and the real interest rate. D) interest rate and the expected price level.

29. The equilibrium level of GDP in a private (no government) closed (no net exports) economy is where: A) MPC = APC. B) unemployment is about 3 percent of the labor force. C) consumption equals saving. D) aggregate expenditures equal GDP.

30. The practical significance of the multiplier is that it: A) brings about an equality of planned investment and saving. B) magnifies relatively small initial changes in spending into larger changes in GDP. C) keeps inflation within tolerable limits. D) helps to stabilize the economy.

31. The multiplier is: A) 1/APS. B) 1/APC. C) 1/MPC. D) 1/MPS.

32. The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A) real-balances, interest-rate, and foreign purchases effects. B) determinants of aggregate supply.

C) determinants of aggregate demand. D) sole determinants of the equilibrium price level and the equilibrium real output.

Use the following to answer question 33 (and pay attention to the direction of the arrows):

Pric

e le

vel

R ea l d o m estic o u tp ut G D P

A SA D 2 A D 1

P 1

0 Q 2 Q 1

(A )

Pric

e le

vel

R ea l d o m estic o u tp u t G D P

P 2

P 1

A S 2 A S 1

b

a

A D

Q 2 Q 10

(B )

Pric

e le

vel

R ea l d o m estic o u tp u t G D P

P 2

P 1

A S 2 A S 1

b

a

Q 2Q 10

(C )

P 3

Q 3

A D 1 A D 2

c

33. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. A recession is depicted by:A) panel (A) only. B) panel (B) only.C) panel (C) only. D) panels (A) and (B).

34. Countries engaged in international trade specialize in production based on:A) relative levels of GDP. B) comparative advantage.C) relative exchange rates. D) relative inflation rates.

35. Suppose the domestic price (no-international-trade price) of copper is $1.20 a pound in the United States while the world price is $1.00 a pound. Assuming no transportation costs, the United States will: A) have a domestic surplus of copper. B) export copper. C) import copper. D) neither export nor import copper.

36. A nation will neither export nor import a specific product when its: A) domestic price (no-international-trade price) equals the world price. B) export supply curve lies above its import demand curve. C) export supply curve is upsloping. D) import demand curve is downsloping.

37. Tariffs: A) may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition

(protective tariffs). B) are also called import quotas. C) are excise taxes on goods exported abroad. D) are per unit subsidies designed to promote exports.

38. Evidence of a chronic balance of payments deficit (not trade deficit) is: A) a decline in amount of the nation's currency held by other nations. B) an excess of exports over imports. C) diminishing reserves of foreign currencies. D) an increase in the international value of the nation's currency.

Answer questions 39 and 40 on the basis of the following 2003 balance of payments data (+ and -) for the hypothetical nation of Zabella. All figures are in billions of dollars.

C u rren t A cc ou n t 1 ) G o od s exp o rts + $ 80 2 ) G o od s im p o rts -7 0 3 ) E x po rts o f se rv ice s + 2 0 4 ) Im po rts o f se rv ice s -2 5 5 ) N e t in v estm en t in co m e + 5 6 ) N e t tran s fe rs -5 C ap ita l A ccou n t 7 ) F o re ig n p u rcha ses o f a sse ts in th e U n ited S ta te s + 1 3 8 ) U .S . pu rch ases o f a sse ts ab road -2 3 O ffic ia l R eserves A ccou n t 9 ) O ffic ia l rese rv es + 5

39. Refer to the above data. Zabella's balance on goods and services shows a: A) $5 billion deficit. B) $5 billion surplus. C) $10 billion surplus. D) $15 billion deficit.

40. Refer to the above data. Zabella has a balance of payments: A) deficit of $5 billion. B) surplus of $10 billion. C) deficit of $10 billion. D) surplus of $5 billion.

Use the following table to answer questions 41-42 (Note that year 1 is the base year):

41. Refer to the above data, and using year 1 as the base year. From year 3 to year 4, real GDP:A) went up by $50. B) went up by $100.C) went up by $200. D) went up by $300.

42. Refer to the above data, and using year 1 as the base year. From year 3 to year 4, nominal GDP:A) went up by $50. B) went up by $100.C) went up by $200. D) went up by $300.

Answer Key -- macrotest2of3fall06

1. A2. A3. B4. A5. B6. D7. D8. C9. B

10. C11. B12. C13. C14. B

15. D16. B17. C18. A19. B20. C21. C22. A23. C24. C25. D26. D27. C28. A29. D30. B31. D32. C33. D34. B35. C36. A37. A38. C39. B40. A41. A42. C

MACROECONOMICS – TEST THREE (FINAL EXAM) SUMMER B 2006 (Chapters 12-15, 18)

One short-essay, and thirty-seven multiple-choice questions, each worth 2.63 points. For each question, provide the best answer.

NAME ___________________________________________

1. 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.

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

3. A politically liberal economist who favored expanded government would recommend: A) tax cuts during recession and reductions in government spending during inflation. B) tax increases during recession and tax cuts during inflation. C) tax cuts during recession and tax increases during inflation.

D) 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: A) 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? 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

6. Which of the following best describes the built-in stabilizers as they function in the United States? A) The size of the balanced-budget multiplier varies inversely with the level of GDP. B) Tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C) Tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D) 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: A) 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: A) 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: A) 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:A) 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: A) coins, paper currency, and checkable deposits. B) currency, checkable deposits, and Series E bonds. C) coins, paper currency, checkable deposits, and credit balances with brokers. D) paper currency, coins, gold certificates, and time deposits.

12. The money supply is backed: A) by the government's ability to control the supply of money and therefore to keep its value relatively stable. B) by government bonds. C) dollar-for-dollar with gold and silver. D) dollar-for-dollar with gold only.

13. If the price index rises from 100 to 120, the value of the dollar: A) 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: A) 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: A) 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.


16. Refer to the above diagram of the money market. 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 velocity of money is zero.D) lower interest rates result in lower opportunity costs of supplying money.


Rat

e of

inte

rest

(per

cent

)

1 08642

A m o u n t o f m on ey d em an ded (b illio ns o f do lla rs )

10 0 20 0 30 0 40 0

D 1

S

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: 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.

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

20. Money is destroyed when: A) 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: 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.

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.

A ssets L iab ilitie s an d n et w or th R ese rv es $ 51 C h eck ab le D ep o sits $1 4 0 S ecu ritie s 10 0 C ap ita l S to ck 13 0 L oan s 10 9 P ro p e rty 10

22. Refer to the above data. The commercial banking system has excess reserves of: A) $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: A) the MPS. B) its actual reserves. C) its excess reserves. D) the reserve ratio.

24. Which of the following statements is correct?

A) The supply of money decreases when the Federal Reserve Banks buy government securities from households or businesses. B) Excess reserves are the amount by which actual reserves exceed required reserves. C) Commercial banks decrease the supply of money when they purchase government bonds from households or businesses. D) 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: A) increases the money supply by increasing excess reserves and increasing the monetary multiplier. B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. C) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. D) decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

26. 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.

27. The interest rate at which the Federal Reserve Banks lend to commercial banks is called the: A) 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?A) 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? A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand

and GDP. B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand

and GDP. C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand

and GDP. D) 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: A) can be implemented more quickly. B) is subject to closer political scrutiny. C) does not produce a net export effect. D) entails a larger spending income multiplier effect on real GDP.

31. 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 and surpluses.

32. An annually balanced budget intensifies the business cycle because tax revenue declines associated with: A) prosperity will require cuts in government spending. B) recession will require increases in government spending. C) prosperity will require cuts in government spending. D) recession will require cuts in government spending.

33. The idea of a cyclically balanced budget is for government to: A) balance the economy, not worrying about expansion of the public debt. B) balance the budget over ten-year periods. C) exactly match budget deficits accruing in the recession phase of the business cycle with surpluses occurring in the late

recovery phase. D) 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: A) 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:

A) $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): A) MP = VY B) MV = PYC) 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):A) have no impact on real GDP in the short runB) have no impact on real GDP in the long runC) have no impact on real GDP in either the short run or the long runD) Monetary policy is really useless.

38. In a sentence or two, describe the ancient practice of the Goldsmiths (embryonic bankers) and its relation to the current fractional reserve banking system.

Answer Key -- MaTest3of3SummerB2006

1. A2. C3. D4. B5. D6. D7. B8. C9. C

10. A11. A12. A13. C14. B15. D16. B17. B18. D19. A20. C21. D22. A23. D24. B25. B26. D27. C28. A29. B30. A31. D32. D33. C34. B35. A36. B37. B38. (No answer.)

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