Practice Exam III



1.
How many regional banks are part of the Federal Reserve System?
A.
5.
B.
7.
C.
9.
D.
12.


2.
Contractionary monetary policy is always expected to reduce:
A.
nominal income but never real income.
B.
real income but never nominal income.
C.
nominal income.
D.
real income.


3.
Which of the following monetary policies reduces aggregate demand and output?
A.
A cut in the discount rate.
B.
An open market purchase of government securities.
C.
Any Fed policy that injects reserves into the banking system.
D.
An increase in the reserve requirement.


4.
If the Fed wants a tighter monetary policy, it might __________ government securities in an attempt to __________ the Federal funds rate.
A.
sell; increase
B.
sell; reduce
C.
buy; increase
D.
buy; reduce


5.
An open market purchase by the Fed has a tendency to:
A.
increase the demand for bonds, drive up bond prices, and raise interest rates.
B.
increase the demand for bonds, drive up bond prices, and lower interest rates.
C.
increase the supply of bonds, drive down bond prices, and raise interest rates.
D.
increase the supply of bonds, drive down bond prices, and lower interest rates.


6.
If real income increases by 6 percent and the price level increases by 2 percent, nominal income must:
A.
increase by 8 percent.
B.
increase by 4 percent.
C.
decrease by 4 percent.
D.
decrease by 8 percent.


7.
If an expansionary monetary policy raises nominal income by more than it raises real income, it must be true that the price level:
A.
increased.
B.
decreased.
C.
did not change.
D.
increased at the same rate as nominal income.


8.
If the interest rate is 7 percent and the Fed's target is 5 percent, the Fed is most likely to adopt which of the following policies?
A.
A purchase of government bonds.
B.
An increase in the discount rate.
C.
An increase in the reserve requirement.
D.
A more contractionary monetary policy.


9.
The reserve requirement is the __________ ratio of reserves to __________ that a bank can have.
A.
maximum; deposits
B.
minimum; deposits
C.
maximum; loans
D.
minimum; loans


10.
Suppose an expansionary monetary policy raises nominal interest rates. If this is the case, it follows that the expansionary monetary policy must have:
A.
reduced real interest rates.
B.
decreased expected inflation.
C.
increased expected inflation more than it reduced real interest rates.
D.
increased real interest rates more than it reduced expected inflation.


11.
If a expansionary monetary policy raises nominal income by the same amount as real income, it must be true that the price level:
A.
increased.
B.
decreased.
C.
did not change.
D.
increased at the same rate as nominal income.


12.
If the banking system holds no excess reserves, the public holds no cash, and the reserve requirement is 0.05, then a $2 billion purchase of government securities by the Fed ultimately:
A.
has no effect on bank deposits.
B.
increases deposits by $0.1 billion.
C.
increases deposits by $2 billion.
D.
increases deposits by $40 billion.


13.
If a bond's price is $8000 and its annual payment is $600, the interest rate is:
A.
6 percent.
B.
7.5 percent.
C.
8 percent.
D.
13.3 percent.


14.
Open market operations are determined by:
A.
the Chairman of the Fed only.
B.
the Board of Governors.
C.
the president and Congress.
D.
the Federal Open Market Committee.


15.
The monetary policy of the Fed currently focuses on:
A.
monetary aggregates.
B.
interest rates.
C.
the budget deficit.
D.
M2.


16.
An increase in the Federal funds rate is an indication that monetary policy is contractionary.
A. True
B. False


17.
What will happen to the demand for Federal funds and the Federal funds rate if the demand for bank loans suddenly declines?
A.
The Federal funds rate should decrease as the demand for Federal funds increases.
B.
The Federal funds rate should decrease as the demand for Federal funds decreases.
C.
The Federal funds rate should increase as the demand for Federal funds increases.
D.
The Federal funds rate should increase as the demand for Federal funds decreases.


18.
Monetary regimes:
A.
set policy on the basis of a predetermined framework.
B.
rely on the discretion of monetary policy officials.
C.
do not use predetermined rules to set monetary policy.
D.
make it more difficult to correctly anticipate monetary policy.


19.
If the Fed funds rate rises above the Fed's target range, the Fed should take:
A.
a defensive action and raise the discount rate.
B.
a defensive action and reduce the discount rate.
C.
an offensive action and raise the discount rate.
D.
an offensive action and reduce the discount rate.


20.
Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent. If the actual unemployment rate is 11 percent, then:
A.
both expansionary and contractionary policies are appropriate.
B.
expansionary monetary and fiscal policies are appropriate.
C.
contractionary monetary and fiscal policies are appropriate.
D.
neither expansionary nor contractionary policies are appropriate.


21.
Using fiscal policy to stabilize the economy is difficult for which of the following reasons?
A.
Potential income is known but actual output is unknown.
B.
Political and institutional factors make it difficult to implement the appropriate fiscal policy.
C.
Fiscal policy can be implemented too quickly.
D.
The size of the government debt doesn't matter.


22.
What do economists call a government policy that makes overly optimistic predictions about the economy?
A.
a Feel Good policy.
B.
an Optimistic Scenario policy.
C.
a Positive Expectations policy.
D.
a Rosy Scenario policy.


23.
Financing expansionary fiscal policy by increasing the deficit may have offsetting effects on the economy.
A. True
B. False


24.
A disadvantage of expansionary fiscal policy discussed in the text is:
A.
higher economic growth.
B.
more political problems.
C.
larger budget deficits.
D.
greater unemployment.


25.
Monetary policy works because it affects:
A.
interest-sensitive spending.
B.
consumption and/or government spending.
C.
investment and government spending.
D.
all spending.


26.
Automatic stabilizers:
A.
do not affect equilibrium income.
B.
increase equilibrium income when it is above potential income.
C.
decrease equilibrium income when it is above potential income.
D.
do not affect equilibrium income unless it is beneath potential income.


27.
According to most economists, fiscal policy:
A.
is not an effective tool for fine tuning the economy.
B.
is least useful in a serious economic crisis.
C.
is always ineffective because of crowding out.
D.
is effective only when potential output is known.


28.
An advantage of contractionary fiscal policy discussed in the text is it may:
A.
solve short-run political problems.
B.
decrease unemployment.
C.
decrease inflation.
D.
help avoid recessions.


29.
A disadvantage of contractionary monetary policy discussed in the text is:
A.
exchange rates may rise.
B.
inflation may fall.
C.
unemployment may rise.
D.
the trade deficit may decrease.


30.
You've been appointed adviser to the President. She wants interest rates and inflation to fall. You would suggest:
A.
expansionary monetary policy.
B.
contractionary monetary policy.
C.
expansionary fiscal policy.
D.
contractionary fiscal policy.


31.
Modern macroeconomic theory assumes that expectations are:
A.
adaptive.
B.
extrapolative.
C.
rational.
D.
perfect.


32.
Contractionary fiscal policy:
A.
has no effect on the trade deficit.
B.
tends to worsen the trade deficit.
C.
tends to improve the trade deficit.
D.
can improve or worsen the trade deficit depending on the nature of the particular policy.


33.
Policy regimes are preferred to discretionary policy because:
A.
discretionary policies are more likely to affect people's expectations.
B.
regimes are more likely to be adopted by Congress.
C.
regimes provide government with more flexibility.
D.
the impact of policies are significantly affected by expectations.


34.
Government spending on infrastructure such as new roads and highways:
A.
is an automatic stabilizer because it rises as income increases, slowing an economic expansion.
B.
is an automatic stabilizer because it falls as income increases, slowing an economic expansion.
C.
is an automatic stabilizer because it falls as income decreases, slowing an economic contraction.
D.
is not an automatic stabilizer.


35.
Rational expectations are based on:
A.
past economic behavior.
B.
the best available information.
C.
past government policies.
D.
projections of economic trends.


36.
Crowding out occurs when:
A.
the government runs a deficit and sells bonds to finance that deficit.
B.
the government prints money.
C.
the government runs a surplus and sells bonds and the people who buy those bonds sell their older bonds to the government.
D.
the tendency for new workers to replace more expensive older workers is a factor.


37.
Crowding out occurs when:
A.
financing a budget deficit is no longer possible.
B.
financing a budget deficit causes interest rates to rise.
C.
financing a budget deficit causes interest rates to fall.
D.
tax receipts rise more slowly than anticipated, resulting in the need to cut government spending.


38.
Expansionary fiscal policy that is financed by selling government bonds is most likely to:
A.
reduce business investment by increasing interest rates.
B.
reduce business investment by reducing interest rates.
C.
increase business investment by increasing interest rates.
D.
increase business investment by reducing interest rates.


39.
The existence of the Social Security Trust Fund has:
A.
increased the size of the current U.S. budget deficit.
B.
decreased the size of the current U.S. budget deficit.
C.
increased the size of the current U.S. budget surplus.
D.
decreased the size of the current U.S. budget surplus.


40.
A country that runs a budget surplus may still have a national debt.
A. True
B. False


41.
Bond holders:
A.
lose when actual inflation is less than was expected.
B.
lose when actual inflation is more than was expected.
C.
lose when the expected inflation built into the nominal interest rate is correct.
D.
do not lose when the expected inflation built into the nominal interest rate is lower than actual inflation.


42.
A budget deficit that would not exist if the economy were at potential income is called:
A.
a passive deficit.
B.
a real deficit.
C.
a structural deficit.
D.
a nominal deficit.


43.
Government debt is different from individual debt because:
A.
government does not pay interest on its debt.
B.
government never really needs to pay back its debt.
C.
all government debt is owed to other government agencies or to its own citizens.
D.
the ability of a government to pay off is debt is unrelated to income.


44.
Deficits and surpluses are best viewed as:
A.
a measure of social welfare.
B.
a measure of government involvement in the economy.
C.
a summary measure of a nation's fiscal policy.
D.
a summary measure of a nation's monetary policy.


45.
The smaller the debt and the inflation rate, the less debt will be eliminated by inflation.
A. True
B. False


46.
According to Keynesian economics, governments should:
A.
run budget deficits under certain circumstances.
B.
always run budget surpluses.
C.
always balance the budget.
D.
completely ignore the budget deficit.


47.
Government debt differs from individual debt in all the following ways except:
A.
financing national debt need not reduce net national income while financing individual debt must reduce an individual's net income.
B.
government can create money to finance its debt while individuals cannot.
C.
government can finance its debt externally while individuals cannot.
D.
government is ongoing while individuals are not.


48.
The real deficit is not adjusted for inflation's effect on the debt.
A. True
B. False


49.
If the U.S. social security system were fully funded:
A.
it would inevitably fail.
B.
it would have a greater chance of failure than the current unfunded system.
C.
it would have the same chance of failure as the current unfunded system.
D.
it would have a smaller chance of failure than the current unfunded system.


50.
The debt is a __________ and the deficit or surplus is a __________.
A.
flow; stock
B.
flow; flow
C.
stock; stock
D.
stock; flow


51.
Which of the following statements is true?
A.
The budget deficit or surplus is well-defined and easy to measure.
B.
The budget deficit or surplus is well-defined but frequently distorted by improper accounting practices.
C.
The budget deficit or surplus is hard to measure and can be defined legitimately in several ways.
D.
The budget deficit or surplus is so arbitrarily defined that it is meaningless.


52.
Suppose that the economy has a structural deficit of $150 billion and a budget deficit of $130 billion. It follows that:
A.
output must equal potential output.
B.
output must be above potential output.
C.
output must be below potential output.
D.
output could be at, above, or below potential output.


53.
The recession experienced in 2001-2002, when combined with the expansionary fiscal policy of the Bush administration at the time:
A.
increased the existing budget surplus.
B.
reduced but did not eliminate the existing budget surplus.
C.
caused the budget to move from surplus to deficit.
D.
increased the existing budget deficit.


54.
Which of the following would help alleviate the impending Social Security problem?
A.
Reducing income taxes when the baby boomers begin to retire.
B.
Reducing the age at which one is eligible to receive payments.
C.
Raising Social Security retirement benefits.
D.
Introducing means testing.


55.
Use the following table to determine which statement is true.

A.
In 1946 and 1947, the budget was in deficit while in 1949 and 1950, the budget was in surplus.
B.
In 1946 and 1947, the budget was in surplus while in 1949 and 1950, the budget was in deficit.
C.
The debt rose from 1946 to 1950.
D.
The debt fell from 1946 to 1950.


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