4.07 Module Four Exam

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In the diagram above, what will happen if the government sets the price for Internet access at Point B?

There will be a shortage of Internet access.

How does the U.S. government slow economic growth?

By increasing taxes and decreasing spending

Use this image to answer the following question. When the economy is operating at point B, the U.S. Congress is most likely to follow

contractionary monetary policy

Why do governments regulate natural monopolies?

To prevent prices from rising too high and to increase efficiency

Banks that are members of the Federal Reserve have the benefit of

earning dividends from stock in the Federal Reserve

Some products are produced most efficiently when there is a single supplier. What is this called?

Natural monopoly

The country of Lilliput has low unemployment and high consumer spending, and small businesses are thriving. However, prices are starting to rise throughout the economy. What should Lilliput’s government do to prevent inflation from happening?

Raise the income tax, which gives citizens less money to spend, and buy more services from civilian – owned businesses, which creates more jobs.

In the 2000s, Venezuelan President Hugo Chàvez instituted economic policies that caused smuggling and hoarding of food. What did Chàvez do to create this behavior, and which zone (represented by a letter) on the graph represents the result?

Chàvez set a price ceiling (letter C), which resulted in quantity demanded exceeding quantity supplied for food.

The government increases taxes. What might be a reason for this change in fiscal policy?

A deficit due to improving nationwide public transportation

Which of these is the result of a government-regulated natural monopoly?

Fewer pricing plans and options for the consumer

Use this image to answer the following question. When government sets a price for a good below equilibrium, there will be

a shortage

Which of the following circumstances usually comes before a period of economic contraction?

Peak production

Lowering the discount rate can promote full employment because

companies are more likely to expand and hire more workers

How do member banks of the Federal Reserve differ from other depository institutions?

They are stockholders in their regional Federal Reserve Bank.

When a government spends more money in one year than it collects in taxes, there is a budget


Which of these could result from decreased federal spending?

Fewer social programs

The government sets the price of wheat for the coming year above the equilibrium price. What effect would this have on supply and demand?

There will be more wheat produced than demand requires.

The inflation rate is increasing and unemployment is decreasing. The economy is likely in


The Federal Open Market Committee promotes price stability and economic growth through

management of the money supply

Explain how the Federal Reserve may use the discount rate and the reserve requirement to increase the money supply. What impact should these actions have on employment and why?

The tools of the monetary policy promote full employment, price stability, and economic growth. The more money banks have to lend, the more businesses can expand. People will make frequent large purchases, like homes and cars. Business growth leads to jobs and people with jobs can make more purchases. An indicator of a growing economy is moderate inflation, which is good. However, the tools of the monetary policy, like discount rate and the reserve requirement, can promote price stability and prevent inflation from going out of control. Note: Discount rate is the minimum rate of interest. The Federal Reserve also requires the given percentage of total deposits.

From an Associated Press article on Venezuela dated January 22, 2008:
"… troops are cracking down on the smuggling of food … the National Guard has seized about 750 tons of food … [President] Hugo Chàvez ordered the military to keep people from smuggling scarce items like milk … He’s also threatened to seize farms and milk plants …"

These actions were the result of a price ceiling on food. Which zone (represented by a letter) on the graph reflects this policy, and what does it create?

Letter C; demand exceeds supply, resulting in a shortage

How does the president most directly influence the Federal Reserve System?

Through appointments to the Board of Governors

Inflation is skyrocketing, and prices are out of control. What are banks most likely to ask the Federal Reserve to do with regards to government bonds and reserve requirements? Be sure to explain why.

The banks are most likely to ask the Fed’s to raise interest rates, sell bonds on the open market, and raise the reserve ratio in order to decrease inflation. So, there will be less money in the hands of the people and less spending, over all.

The inflation rate is decreasing and unemployment is rising. The economy is likely in


In the diagram above, what will happen if the government sets the minimum wage at Point A?

There will be a surplus of workers.

Use this image to answer the following question. When government sets a price for a good above equilibrium, there will be


What is the difference between a deficit and a surplus?

A deficit results when more money is spent than is taken in; a surplus results when more money is taken in than is spent.

Which is an example of a natural monopoly?

A single source for electricity in your community

Which of these is required to balance the budget for the year?

Revenue equal to spending

The government sets the price of subsidized corn too low. Which of the following statements describes the result?

At that price, quantity demanded exceeds quantity supplied.

How are national debt and deficit related?

the national debt is an accumulation of deficits.

How does the government help ensure fair prices for all citizens of a particular area served by one utility company?

By negotiating affordable rates with the supplier

How does the U.S. government promote economic growth?

By decreasing taxes and increasing spending

inflation is low but the unemployment rate is the highest seen in several years. Economists report signs that show in six months the economy is likely to improve. The economy is likely in


in the diagram above, what will happen if the government sets the price for potatoes at point A?

There will be a surplus of potato

Look at the graph. Does zone A represent the result of a price ceiling or price floor, and which scenario is an example of these conditions?

A price floor and the large amount of corn stored in silos in the U.S. Midwest due to overproduction by farmers

Unemployment is low and inflation is rising, but slowly. Gross Domestic Product is also rising. The Federal Reserve may increase the reserve requirement at this point in order to

protect the public from the potential of inflation rising out of control

When the economy is operating at point C, the Federal Reserve may decrease the discount rate to

increase growth

Which of the following circumstances usually accompanies a period of economic expansion?

high inflation

Which of these is not a result of the federal government spending more than it earns

Increased taxes INCORRECT

When a government collects more revenue in one year than it spends, there is a budge


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