Deck 12: Short-Term Economics Fluctuations: An Introduction

Question 1

A banking panic is an episode in which:

A) depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system.
B) commercial banks, fearing Federal Reserve sanctions, unwillingly participate in open-market operations.
C) commercial banks, concerned about high interest rates, rush to borrow at the Federal Reserve discount rate.
D) depositors, afraid of increasing interest rates, attempt to engage in discount-window borrowing at the Federal Reserve.

Answer 1

A

Question 2

The central bank of the United States is:

A) Bank of America.
B) Bank of the United States.
C) Bank One.
D) the Federal Reserve System.

Answer 2

D

Question 3

The Federal Reserve System is:

A) a group of twelve commercial banks.
B) the central bank of the United States.
C) the agency of the U.S. government that insures commercial bank deposits.
D) the branch of the U.S. Treasury that keeps the U.S. gold reserves.

Answer 3

B

Question 4

The Federal Reserve System first began operations in:

A) 1789.
B) 1865.
C) 1914.
D) 1934.

Question 5

The Federal Reserve consists of ______ regional Banks, ______ governors on the Board of Governors, and ______ voting members of the Federal Open Market Committee.

A) 7; 12; 12
B) 12; 7; 12
C) 12; 7; 19
D) 14; 7; 21

Question 6

During the Great Depression in the United States between 1929 and 1933, banks' reserve/deposit ratio ______ and the amount of currency held by the public ____, while the money supply ______.

A) increased; increased; increased
B) decreased; decreased; decreased
C) increased; increased; decreased
D) decreased; decreased; increased

Question 7

The federal funds rate is the interest rate on short-term loans made by:

A) the Federal Reserve to commercial banks.
B) the federal government to the Federal Reserve.
C) the Federal Reserve to the federal government.
D) commercial banks to other commercial banks.

Question 8

The U.S. Congress instituted a system of deposit insurance for banks in:

A) 1934.
B) 1789.
C) 1865.
D) 1913.

Question 9

Financial markets pay close attention to changes in the federal funds rate because these changes:

A) directly affect a large volume of loans.
B) indicate the Fed's plans for monetary policy.
C) indicate commercial bank lending policies.
D) directly affect the interest payments on the national debt.

Question 10

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

A) conducting open-market operations.
B) changing the Federal Reserve discount rate.
C) changing bank reserve requirement ratios.
D) changing interest rates.

Question 11

The Federal Open Market Committee makes decisions about ______ policy.

A) monetary
B) fiscal
C) banking
D) deposit insurance

Question 12

Deposit insurance is a system in which the government guarantees that:

A) depositors will not lose any money even if their bank goes bankrupt.
B) people can have deposits at commercial banks.
C) commercial banks will not go bankrupt.
D) commercial banks will not lose any deposits.

Question 13

For the past 40 years, the Federal Reserve has expressed policy in terms of a target value for:

A) bank reserves.
B) the Federal Reserve discount rate.
C) the federal funds rate.
D) open market operations.

Question 14

The Board of Governors consists of ______ governors appointed for staggered ___-year terms.

A) 5; 12
B) 5; 14
C) 7; 12
D) 7; 14

Question 15

The two main responsibilities of the Federal Reserve System are to ______ and to ______.

A) apprehend counterfeiters; regulate the stock market
B) enable banks to make affordable mortgages; control the exchange rate of the U.S. dollar
C) insure bank deposits; print currency
D) conduct monetary policy; oversee financial markets

Question 16

Bank depositors will not lose their deposits in a banking panic if:

A) there is fractional reserve banking.
B) there is 100% reserve banking.
C) there is a central bank.
D) the actual reserve/deposit ratio equal to the desired reserve/deposit ratio.

Question 17

One of the serious drawbacks of the deposit insurance system instituted in the United States is that:

A) bank failures continue to occur regularly.
B) the system took away the Federal Reserve's ability to conduct open-market operations.
C) the system took away the Federal Reserve's ability to change reserve requirements.
D) if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses.

Question 18

A higher real interest rate ______ saving and ______ consumption spending.

A) increases; increases
B) increases; decreases
C) does not change; does not change
D) decreases; increases

Question 19

The interest rate that commercial banks charge each other for very short-term loans is called the:

A) prime rate.
B) federal funds rate.
C) Federal Reserve discount rate.
D) commercial paper rate.

Question 20

The seven Fed governors, the president of the Federal Reserve Bank of New York, and four of the presidents of the other regional Federal Reserve Banks constitute the:

A) National Monetary Commission.
B) Board of Governors.
C) Federal Open Market Committee.
D) Federal Reserve System.

Question 21

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150
Given the information about the economy above, which expression below gives autonomous expenditures?

A) 0.8Y
B) [790 - 700r]
C) [910 - 700r]
D) [760 - 700r]

Question 22

If the income-expenditure multiplier equals 4 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by ______ the real interest rate by ______ percentage points.

A) increasing; 10.0
B) increasing; 4.0
C) increasing; 2.5
D) decreasing; 2.5

Question 23

In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ______, planned aggregate expenditure ______, and short-run equilibrium output _______.

A) increase; increases; increases
B) increase; increases decreases
C) increase; decreases; decreases
D) decrease; decreases; decreases

Question 24

To close a recessionary gap, the Federal Reserve must ______ real interest rates by ______ the money supply.

A) increase; increasing
B) increase; decreasing
C) decrease; decreasing
D) decrease; increasing

Question 25

If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

A) recessionary; raise
B) recessionary; reduce
C) recessionary; not change
D) expansionary; raise

Question 26

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150
Given the information about the economy above, what would be the impact on short-run equilibrium output of a one-percentage-point increase in the real interest rate, assuming that the multiplier is equal to 5?

A) Short-run equilibrium output would increase by 35 units.
B) Short-run equilibrium output would decrease by 700 units.
C) Short-run equilibrium output would decrease by 35 units.
D) Short-run equilibrium output would decrease by 7 units.

Question 27

A lower real interest rate ______ saving and ______ consumption spending.

A) increases; increases
B) increases; decreases
C) does not change; does not change
D) decreases; increases

Question 28

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r, the interest rate is currently 2 percent (0.02). If potential output equals 8,000, the central bank must ______ the interest rate to close the ______ gap.

A) lower; expansionary
B) lower; recessionary
C) raise; recessionary
D) raise; expansionary

Question 29

If potential output equals 8,000 and short-run equilibrium output equals 8,500, there is a(n) ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

A) recessionary; raise
B) recessionary reduce
C) recessionary; not change
D) expansionary; raise

Question 30

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

A) 0.02
B) 0.03
C) 0.04
D) 0.05

Question 31

A higher real interest rate ______ investment spending and ______ consumption spending.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Question 32

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150
Given the information about the economy above, what would be the impact on autonomous expenditures of a one-percentage-point increase in the real interest rate?

A) Autonomous expenditures would increase by 35 units.
B) Autonomous expenditures would decrease by 700 units.
C) Autonomous expenditures would decrease by 35 units.
D) Autonomous expenditures would decrease by 7 units.

Question 33

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150
Given the information about the economy above, which expression below gives induced expenditures?

A) [910 - 700r]
B) [790 - 700r]
C) 0.8Y
D) 0.2Y

Question 34

Changes in consumption and planned investment spending resulting from changes in the real interest rate alter:

A) the money supply.
B) money demand.
C) autonomous expenditures.
D) induced expenditures.

Question 35

If potential output equals 3,000 and short-run equilibrium output equals 3,500, there is a(n) ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

A) recessionary; raise
B) recessionary reduce
C) recessionary; not change
D) expansionary; raise

Question 36

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150
Given the information about the economy above, which expression below gives planned aggregate expenditure (PAE)?

A) [790 - 700r] + 0.8Y
B) [790 - 700r]
C) [910 - 700r]
D) [910 - 700r] + 0.8Y

Question 37

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r, the interest rate is currently 5 percent (0.05). If potential output equals 11,750, the central bank must ______ the interest rate to close the ____________ gap.

A) reduce; expansionary
B) reduce; recessionary
C) raise; recessionary
D) raise; expansionary

Question 38

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150
Given the information about the economy above, what would be the impact on induced expenditures of a one-percentage-point increase in the real interest rate?

A) Induced expenditures would increase by 35 units.
B) Induced expenditures would not change.
C) Induced expenditures would decrease by 35 units.
D) Induced expenditures would decrease by 7 units.

Question 39

To close a recessionary gap, the Fed ______ interest rates which ______ planned aggregate spending and ______ short-run equilibrium output.

A) reduces; increases; increases
B) raises; decreases; increases
C) raises; decreases; decreases
D) reduces; increases; decreases

Question 40

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 35,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

A) 0.02
B) 0.03
C) 0.04
D) 0.05

Question 41

Three macroeconomic factors that affect the demand for money are:

A) the nominal interest rate; real income, and the price level.
B) the nominal interest rate; capital, and labor.
C) globalization, skill-biased technological change, and labor mobility.
D) capital, labor, and technology.

Question 42

Higher real income ______ the demand for money and a higher price level ______ the demand for money.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 43

Which of the following would be expected to increase the demand for money in the U.S.?

A) Financial investors become concerned about increasing riskiness of stocks.
B) The economy enters a recession.
C) Political instability decreases dramatically in developing nations.
D) On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

Question 44

One problem with using monetary policy to address "bubbles" in asset markets is that:

A) the Federal Reserve is better than financial-market professionals at identifying bubbles.
B) monetary policy is not a very good tool for addressing the problem of inappropriately high asset prices.
C) reducing the real interest rate to deal with the bubble could lead to inflation.
D) the Federal Reserve is not interested in stabilizing output.

Question 45

The decision about the forms in which to hold one's wealth is called the ______ decision.

A) Taylor
B) portfolio allocation
C) Fisher effect
D) life-cycle

Question 46

Innovations in the United States, such as credit cards, debit cards, and ATMs have:

A) increased the demand for money.
B) decreased the demand for money.
C) had no impact on the supply or demand for money.
D) increased the supply of money.

Question 47

Federal Reserve actions that increase nominal interest rates and decrease the money supply:

A) close a recessionary gap.
B) close an expansionary gap.
C) raise the rate of inflation.
D) raise bond prices.

Question 48

The opportunity cost of money is:

A) the time spent going to the bank to withdraw funds.
B) the fees charged by banks to provide checking services.
C) the nominal interest rate.
D) the price level.

Question 49

The decision about how much money to hold is an application of the:

A) scarcity principle.
B) principle of comparative advantage.
C) equilibrium principle.
D) cost-benefit principle.

Question 50

One problem with using monetary policy to address "bubbles" in asset markets is that:

A) doing so presupposes that the Federal Reserve is better than financial-market professionals at identifying bubbles.
B) monetary policy is well-suited for addressing the problem of inappropriately high asset prices.
C) reducing the real interest rate to deal with the bubble could lead to inflation.
D) the Federal Reserve is not interested in stabilizing output.

Question 51

Higher nominal interest rates ______ the amount of money demanded and a higher price level ______ the amount of money demanded.

A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases

Question 52

The demand for money is:

A) unlimited, since people want to hold as much money as possible.
B) limited by the amount of currency printed by the government.
C) the amount of wealth an individual chooses to hold in the form of money.
D) the amount of income an individual chooses to hold in the form of money.

Question 53

Lower nominal interest rates ______ the amount of money demanded and a lower price level ______ the amount of money demanded.

A) increase; increases
B) increase; decreases
C) increase; does not change
D) decrease; decreases

Question 54

Which of the following would be expected to increase the demand for U.S. currency?

A) Competition among brokers forces down the commission charge for selling bonds or stocks.
B) The economy enters a recession.
C) Political instability increases dramatically in developing nations.
D) On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

Question 55

If the income-expenditure multiplier equals 2.5 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ______ the real interest rate by ______ percentage points.

A) increasing; 2.5
B) increasing; 4.0
C) increasing; 2.0
D) decreasing; 2.0

Question 56

Higher nominal interest rates ______ the amount of money demanded and higher real income ______ the amount of money demanded.

A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases

Question 57

To close an expansionary gap, the Fed ______ interest rates which ______ planned aggregate spending and ______ short-run equilibrium output.

A) raises; increases; increases
B) raises; decreases; increases
C) raises; decreases; decreases
D) reduces; increases; decreases

Question 58

The benefit of holding money is _______, while the opportunity cost of holding money is _______.

A) the nominal interest rate; the fees charged by banks
B) the nominal interest rate; its usefulness in carrying out transactions
C) increased income; lost purchasing power
D) its usefulness in carrying out transactions; the nominal interest rate

Question 59

Lower nominal interest rates ______ the amount of money demanded and lower real income ______ the amount of money demanded.

A) increase; increases
B) increase; decreases
C) increase; does not change
D) decrease; decreases

Question 60

Lower real income ______ the demand for money and a lower price level ______ the demand for money.

A) increases; increases
B) increases; decreases
C) increases; does not change
D) decreases; decreases

Question 61

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.

A) greater; fall; increase
B) less; rise; decrease
C) greater; rise; increase
D) less; fall; increase

Question 62

Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve:

A) shifts to the right.
B) shifts to the left.
C) slopes upward.
D) slopes downward.

Question 63

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.

A) greater; fall; increase
B) greater; fall; decrease
C) greater; rise; increase
D) less; fall; increase

Question 64

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ______ of bonds that ______ the money supply.

A) sale; increases
B) sale; decreases
C) purchase; decreases
D) purchase; increases

Question 65

The money demand curve will shift to the left if:

A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) ATM machines are introduced.
D) the price level increases.

Question 66

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.

A) potential output
B) the nominal interest rate
C) government purchases
D) the budget deficit

Question 67

Any value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.

A) potential output
B) the money supply
C) government purchases
D) the budget deficit

Question 68

During the Christmas shopping season, the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will ____.

A) increase
B) decrease
C) remain constant
D) equal the real interest rates

Question 69

When Argentines increase their savings in U.S. dollars, the U.S. money:

A) supply curve shifts left.
B) supply curve shifts right.
C) demand curve shifts right.
D) demand curve shifts left.

Question 70

The money demand curve will shift to the left if:

A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) price level increases.
D) the price level decreases.

Question 71

Because the Fed determines the money supply, the:

A) money supply curve is downward sloping.
B) money supply curve is upward sloping.
C) money supply curve is vertical.
D) money supply curve is horizontal.

Question 72

The money demand curve relates ______ to the ________.

A) the aggregate quantity of money demanded; aggregate demand
B) aggregate demand; nominal interest rate
C) the aggregate quantity of money demanded; price level
D) the aggregate quantity of money demanded; nominal interest rate

Question 73

If the quantity supplied of money exceeds the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.

A) buy; rise; fall
B) sell; fall; fall
C) sell; rise; fall
D) buy; fall; rise

Question 74

The money demand curve will shift to the left if:

A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) price level increases.
D) real income decreases.

Question 75

If the quantity supplied of money is less than the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.

A) sell; fall; rise
B) sell; fall; fall
C) sell; rise; fall
D) buy; fall; rise

Question 76

The equilibrium quantity of money in circulation is determined by:

A) the interaction of money supply and money demand.
B) the nominal interest rate, real income, and the price level.
C) the Federal Reserve.
D) individuals, households, and businesses.

Question 77

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. If the Fed took no actions to offset this increase in money demand, then nominal interest rates would _____.

A) increase
B) decrease
C) remain constant
D) equal the real interest rates

Question 78

The money demand curve will shift to the right if:

A) the nominal interest rate increases.
B) real income increases.
C) ATM machines are introduced.
D) the price level decreases.

Question 79

The money demand curve will shift to the right if:

A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) the price level increases.
D) the price level decreases.

Question 80

Which of the following would be expected to decrease the demand for money in the U.S.?

A) Grocery stores begin to accept credit cards in payment.
B) The economy enters a boom period.
C) Political instability increases dramatically in developing nations.
D) Households fear increasing computer glitches will severely limit their ability to use ATMs.