ECON 2301 Test 3

GDP is:
A.
the total value of all consumer expenditures within a given period.

B.
national income after taxes.

C.
the total value of all final goods and services plus intermediate goods and services produced domestically within a given period.

D.
the value of all final goods and services produced domestically within a given period.

E.
the total value of all final goods and services minus the value of intermediate goods and services produced domestically within a given period.

D GDP is the current dollar value of all final goods and services produced within a country (domestically) during a given period of time.

Final goods or services used to compute GDP refer to:
A.
the sum of all wages paid to laborers.

B.
the factors of production used to produce output.

C.
goods and services purchased by the ultimate users.

D.
the value of outstanding shares of stock of manufacturing firms.

E.
the sum of all exports plus imports.

C Final goods or services used to compute GDP refer to goods and services purchased by the ultimate users. The key point is that final goods and services purchased by the ultimate users are the ones taken into account to measure GDP. So, the sugar that goes into a gallon of ice cream is not counted, since it is an intermediate good, however the sugar bought by a typical family is counted since is a final good bought by the ultimate user.

Intermediate products:
A.
produced domestically are not directly reflected in a nation’s GDP.

B.
produced domestically are reflected directly in a nation’s GDP.

C.
are imported retail products.

D.
are goods that are purchased by the ultimate user.

A Intermediate products produced domestically are not directly reflected in a nation’s GDP. The reason for that is that the value of intermediate goods is already part of the value of a final good. Adding the value of the intermediate good would be double counting.

Consumption is the purchase of goods and services by:
A.
households.

B.
government.

C.
business firms.

D.
foreign buyers.

E.
all of the above.

A Consumption (C) is the one GDP component referring to expenditures on goods and services by households. It comprises spending in durable goods (i.e. automobiles, appliances, furniture), nondurable goods (i.e. food, clothing) and services (i.e. recreation, medical services, education).

Consumption is the largest single component of GDP. In recent years it represents approximately ____ percent of GDP.
A.
54

B.
60

C.
70

D.
80

C Consumption is the largest single component of GDP. In recent years it represents approximately 70 percent of GDP, as per 2010 data.

The expenditure method of measuring GDP is calculated by adding up:
A.
the final goods and services produced domestically during a given period.

B.
Consumption + Investment + Government Spending + (Exports-Imports).

C.
domestic production of final goods and services for consumers, firms, government, and the international sector (through net exports).

D.
all of the above.

D Gross Domestic Product is the total market value of all final goods and services produced within an economy in a given year. GDP is divided into four broad types, depending on the purchase: Consumption: expenditures by households Investment: expenditures in capital goods by business firms Government purchases: expenditures by federal, state and local governments Net Exports: Net purchases by the international sector.

Net exports are defined as:
A.
exports plus imports.

B.
exports minus imports.

C.
imports minus exports.

D.
exports plus imports minus tariffs.

E.
exports minus tariffs.

B Net exports is defined as Exports minus Imports. Net exports is a component of GDP, under the expenditure approach. Exports are the goods and services produced domestically and purchased by foreigners, while imports are goods and services bought from other countries. Imports are subtracted since consumption, investment and government purchases include all purchases by households, business firms and the government of goods and services, whether or not produced domestically.

Transfer payments are included in which category under the expenditure approach to GDP accounting?
A.
consumption

B.
government purchases

C.
investment

D.
net exports

E.
Transfer payments are not directly included in GDP calculations.

E Transfer payments are not part of the GDP since they are payments to individuals that are not associated with the purchase of goods and services. GDP is the total market value of final goods and services produced within an economy in a given year. When parts of transfer payments are used to buy final goods and services (for example, if grandma uses part of her social security payment to by aspirin) then they affect the GDP.

What is the measure of the income received by owners of resources used in making final goods and services?
A.
factor payments

B.
product payments

C.
indirect earnings

D.
direct earnings

A Factor payments are the measure of the income received by owners of resources used in making final goods and services. The factor payment entries in the National Income and Product Accounts, maintained by the Bureau of Economic Analysis, are compensation of employees, proprietors’ income, rental income, corporate profits and net interest.

Which of the following is NOT part of U.S. GDP?

A.
the value of a Toyota manufactured in Japan and sold in the United States

B.
the value of a Ford Mustang produced in the United States and sold in Canada

C.
the salary of the governor of Minnesota

D.
the value of a Rhode Island attorney’s services

E.
the value of a Chevrolet produced in the United States last year but not sold until this year

A

Given a constant rate of growth of real GDP, what would cause a fall in real GDP per capita?

A. a rate of population growth that is less than the rate of growth of real GDP

B. a rate of population growth that is greater than the rate of growth of real GDP

C. an increase in the size of the labor force

D. a decrease in the capital stock

E. none of the above

B

The prosperity of a nation today is typically measured by its:

A.
total output or gross national product

B.
output per capita

C.
gold reserves.

D.
proportionate share of international trade.

B The prosperity of a nation today is typically measured by its output per capita. The output of a country or the gross national product is a close measure of total income. Output per capita, then, is a measure of income per person, and isolating the population effect, it becomes an indication of the prosperity of a nation.

A country will roughly double its GDP in twenty years if its annual growth rate is:

A. 2.5 percent.

B. 3.5 percent

C. 7.5 percent.

D. 12 percent.

E. 20 percent.

B A country will roughly double its GDP in twenty years if its annual growth rate is 3.5%. By the rule of 70, the variable GDP, or for that matter any variable (a stock’s price, a manager’s salary, or a country’s population, for example), would nearly double in 70 / x% years, where x is the growth rate in percentage terms. This is just an algebraic result that provides a rule of thumb. In this case, 70/3.5 = 20 years.

As more capital per worker is added, a per worker production function generally becomes:

A. flatter because capital is subject to diminishing marginal returns.

B. flatter because labor is subject to diminishing marginal returns.

C. flatter because capital is subject to increasing marginal returns.

D. steeper because capital is subject to diminishing marginal returns.

E. steeper because labor is subject to increasing marginal returns.

A

The faster the rate of technological progress:

A. the greater the rate of economic growth.

B. the slower the rate of economic growth.

C. the greater the rate of population growth.

D. the slower the rate of growth of the money supply

A

In a fully employed economy, invention and discovery:

A. are automatic.

B. are achieved through sacrifices in
current consumption.

C. have negative opportunity costs.

D. All of the above are correct.

B

Which of the following best describes the relationship between economic growth and literacy?

A. As the economy grows, literacy declines because it becomes less and less useful in a developed economy.

B. Increased literacy initially stimulates economic growth by raising labor
productivity, but as the economy grows and the opportunity cost of education rises, literacy declines.

C. Increased literacy stimulates economic growth by raising labor productivity, and as the economy grows, people consume more education.

D. There is no correlation between economic growth and literacy.

C

Sergei has developed a new fat substitute that has no calories and produces no side effects. In order for him to be encouraged to bring this innovation to the marketplace he is likely to want which of the following the most?

A. time to be able to thoroughly test the fat substitute

B. an ample supply of capital to start the manufacturing process

C. a trademark

D. a patent

D Sergei has developed a new fat substitute that has no calories and produces no side effects. In order for him to be encouraged to bring this innovation to the marketplace he is likely to want to have a patent for his invention, as a way to have the sole right to make, use and sell the invention. A patent is a set of exclusive rights granted by a public entity to an inventor for a set period of time.

GDP is:

A. the value of all final goods and services produced domestically within a given period of time.

B. the value of all final good and services produced anywhere in the world by a nation’s firms within a given period of time.

C. the value of all final goods and services produced by a government within a given period of time.

D. the sum of all currency and coins in circulation.

A GDP is the value of all final goods and services produced domestically within a given period of time.

The goods and services that are used in the production of other goods and services are called:
A. gross domestic goods.

B. intermediate goods.

C. final goods.

D. ultimate goods.

E. preliminary goods.

B

The goods and services that are used in the production of other goods and services are called:

A. gross domestic goods.

B. intermediate goods.

C. a sheet of glass produced this year and ending up in the inventory of a retail hardware store

D. All of the above are counted.

E. Neither b. nor c. are counted.

B A sheet of glass purchased by General Motors for the side window of a new car would not be counted as a final good for inclusion in GDP. It is an intermediate good. Intermediate products produced domestically are not directly reflected in a nation’s GDP. The reason for that is that the value of intermediate goods is already part of the value of the final good. Adding the value of the intermediate good would be double counting. GDP is the current dollar value of all final goods and services produced within a country (domestically) during a given period of time.

Which of the following products are not included in current U.S. GDP?

A. a Washington apple

B. a Ford Mustang produced last year and sold this year

C. a physical examination at a California health clinic

D. All of the above are included in current U.S. GDP.

B A Ford Mustang produced last year and sold this year is not included in current U.S. GDP, since it was already included in last year’s GDP. The key point is when it was produced, not when it was sold. GDP is the current dollar value of all final goods and services produced within a country (domestically) during a given period of time.

GDP does not directly include:

A. the value of final goods and services produced, but not sold, during a period.

B. the value of services rendered during a period.

C. the value of intermediate goods sold during a period.

D. any of the above.

E. either a. or c.

C

The total dollar value of purchases in the economy is far larger than GDP primarily because:
A. GDP ignores taxes.

B. GDP excludes the value of intermediate goods exchanged.

C. GDP excludes the output from foreigners working in America.

D. GDP ignores production in the home

B

The largest single expenditure component of GDP is:

A. consumption.

B. investment.

C. government purchases.

D. net exports.

A Consumption is the largest single component of GDP. In recent years it represents approximately 70 percent of GDP, as per 2010 data.

The most volatile GDP category under the expenditure approach is:

A. wages and salaries.

B. investment.

C. consumption.

D. government purchases.

E. net exports.

B Investment is the most volatile GDP category under the expenditure approach. The determinants of investments are interest rates, business confidence, economic conditions, taxes and capacity utilization. Since some of those factors are based on perceptions, which at times differ widely, investment also fluctuates widely. When the economy is booming, investment tends to increase sharply, when falling, the reverse occurs. Investment refers to the purchases by firms of capital goods – machinery, buildings, housing construction-, which are used to produce goods and services. Notice that buying stocks is NOT investment, as understood here. GDP is divided into four broad types, depending on the purchase: Consumption: expenditures by households Investment: expenditures in capital goods by business firms Government purchases: expenditures by federal, state and local governments Net Exports: Net purchases (exports – Imports) by the international sector.

The investment component of GDP includes:

A. funds in individual retirement accounts.

B. construction of a new steel mill.

C. the sale of shares of Coca-Cola stock.

D. the purchase of a refrigerator by a household.

B

If a nation’s imports exceed its exports:

A. net exports will be positive.

B. GDP will be less than the sum of consumption, investment, and government purchases.

C. GDP will be greater than the sum of consumption, investment, and government purchases.

D. none of the above apply.

B Taking the expenditure approach, GDP = Consumption + Investment + Government Purchases + Net Exports If a nation’s imports exceed its exports, then net exports would be negative (they are subtracted from C+I+G in the GDP equation), and thus, GDP will be less than the sum of consumption, investment, and government purchases.

The services rendered by a special agent with the Federal Bureau of Investigation is included in which expenditure category of GDP?

A. consumption

B. investment

C. government purchases

D. net exports

E. none of the above

C

In 2008, U.S. Nominal GDP totaled approximately:

A. $2.1 trillion

B. $2.8 trillion

C. $10.1 trillion

D. $14.3 trillion

E. none of the above

D

If the price index is now 120, it means:

A. prices are 120 percent higher than in the base year.

B. prices are 20 percent higher than in the base year.

C. prices are 1.2 percent higher than in the base year

D. nominal GDP will be less than real GDP.

E. that both b. and d. are true.

B

Which of the following is a problem with using real GDP as a measure of economic well-being?

A. does not account for inflation

B. does not account for production within the household

C. does not account for production by foreign firms producing inside the U.S.

D. all of the above

EITHER B OR C

Estimates of the size of the underground economy range from:

A. 4 to 20 percent.

B. 2 to 5 percent.

C. 7 to 10 percent.

D. 45 to 60 percent.

A

Which of the following factors that affect our well-being does GDP fail to adequately account for?

A. changes in the quality of goods

B. externalities

C. leisure

D. nonmarket transactions

E. all of the above

E

Measures of well-being include:

A. life expectancy.

B. infant mortality rates.

C. literacy rates.

D. pollution levels.

E. all of the above.

E

The largest single source of revenue for the federal government is the:
A. federal excise tax.
B. personal income tax.
C. corporate income tax.
D. Social Security tax.

B The U.S. government gets most of its revenues from Income taxes (See pie chart below). The percentage has hovered between 44% and almost 50% in the last 20 years, without ever being more than 50%. Many individuals with low incomes may pay a higher amount for Social Security and Medicare tax. The highest taxes paid by unemployed people (and many college students) may be sales taxes.

The main components of spending, which can cause changes in aggregate demand, are:
A. consumption, savings, government purchases, and exports.
B. investment, savings, replacement of depreciated equipment, and spending.
C. consumption, investment, government purchases, and imports.
D. consumption, investment, government purchases, and net exports.

D These are typically written as C + I + G + NX

Expansionary fiscal policy, other things being equal, will tend to:
A. decrease unemployment rates.
B. decrease investment.
C. increase net exports.
D. decrease government deficits
E. do both a. and c.

A Expansionary fiscal policy will tend to speed up the economy, and businesses will generally want to hire more workers.

How does a change in income taxes primarily affect aggregate demand?
A. An income tax change alters government purchases by an equal amount.
B. An income tax change alters disposable income and consumption spending.
C. An income tax change alters investment by an equal and opposite amount.
D. A tax change alters exports and net exports.
E. An income tax change alters saving by an equal amount.

B Changes in income taxes directly impact disposable income and, therefore, consumption spending. Consumption is directly affected by disposable income: the higher (lower) the disposable income, the higher (lower) the consumption level. A tax decrease (increase) implies an increase (decrease) in disposable income.

Which of the following combinations of changes would have a contractionary effect on aggregate demand?
A. An increase in taxes and a decrease in government purchases.
B. A decrease in taxes and an increase in transfer payments.
C. An increase in taxes and an increase in transfer payments.
D. An increase in government purchases and an increase in transfer payments.

A Both an increase in taxes and the decrease in government purchases would have a contractionary impact.

To offset the effect of a steep fall in net exports on the economy, the government might:
A. increase government purchases.
B. decrease government purchases
C. increase taxes
D. decrease transfer payments

A Increasing government purchases would help offset the decrease in net exports. It would help stimulate the economy.

The government’s fiscal policy is its plan to regulate aggregate demand by manipulating:
A.
the money supply.
B.
the treasury.
C.
taxation and spending.
D.
the energy department.

C The classic instruments of fiscal policy are taxes and government expenses. By altering taxes, take-home income is changed, which impacts consumption, which in turns impacts aggregate demand. By altering government purchases, fiscal policy directly affects aggregate demand, since G is one of its components.

Assume that the government is considering plans to increase aggregate demand in order to reduce unemployment. Which of the following would be effective?
A. Increase government purchases of goods and services.
B. Decrease taxes.
C. Increase transfer payments.
D. Any of the above.

D Any of the above would tend to lower the unemployment rate

If the government sought to end a recession, which of the following would be an appropriate policy?
A. Decrease government purchases.
B. Increase taxes and decrease transfer payments.
C. Decrease transfer payments.
D. Decrease taxes and increase transfer payments.

D Decreasing taxes and increasing transfer payments would probably both help to end, or at least shorten the recession

If unemployment is the most significant problem in the economy, which of the following actions would be an appropriate fiscal policy response?
A. decrease taxes
B. decrease transfer payments
C. increase government purchases
D. all of the above
E. both A and C above

E Decreasing taxes and increasing government purchases would both help lower unemployment, but decreasing transfer payments would tend to increase unemployment.

The Magic Number for this quiz is:
A. 7
B. 17
C. 77
D. 777
E. 7777

C

The most important automatic stabilizer (The one with the biggest impact on the economy) is:
A. open market operations.
B. the unemployment compensation system.
C. the tax system.
D. the welfare system.

C The automatic stabilizers are changes in tax collections (income and corporate taxes, for example), or in government transfers payments (unemployment insurance benefits, for example), that automatically help counter business cycle fluctuations The tax system is indeed the most important automatic stabilizer. During expansions, tax revenues automatically increase (incomes, earnings and profits all rise, so government proceeds). Such increases in tax revenues help weaken economic activity during economic upturns. Conversely, during contractions, tax revenues automatically fall (incomes, earnings and profits all drop, so government proceeds). Such decreases in tax revenues help bolster economic activity during economic downturns.

When the economy goes into a ____, the amount of unemployment compensation and welfare payments ____ automatically.
A. recession; decrease
B. recession; increase
C. boom; increase
D. All of the above.

B Let’s recall the phases of a business cycle. A business cycle has four phases: expansion, peak, contraction and through. A contraction or recession is a period between a peak and a trough, During a recession, a significant decline in output and employment spreads across the economy and can last from a few months to more than a year. If output, income and employment declines, necessarily unemployment compensation and welfare payments increase automatically.

Automatic stabilizers in the United States are:
A. changes in government transfer payments and tax revenues that vary automatically and inversely to business cycle changes.
B. controlled by the Federal Reserve System to help control the business cycle.
C. able to completely eliminate all the lag problems associated with fiscal policy.
D. none of the above.

A The automatic stabilizers are changes in tax collections (income and corporate taxes, for example), or in government transfers payments (unemployment insurance benefits, for example), that automatically help counter business cycle fluctuations. During expansions, tax revenues automatically increase (incomes, earnings and profits all rise, so government proceeds) and government outlays automatically decrease. Such increases in revenues and decreases in outlays help weaken economic activity during economic upturns. Notice that greater tax revenues or lower government outlays translate into less disposable income in the hands of the families, which impacts negatively aggregate demand. Conversely, during contractions, tax revenues automatically fall (incomes, earnings and profits all drop, so government proceeds) and government outlays automatically increase. Such decreases in tax revenues and increases in outlays help bolster economic activity during economic downturns. Notice that lower tax revenues or greater government outlays translate into more disposable income in the hands of the families, which impacts positively aggregate demand.

Which of the following statements is not true with regard to automatic stabilizers?
A. The most important automatic stabilizer is the tax system.
B. They act as shock absorbers to the economy.
C. They require legislative action.
D. Automatic stabilizers like government transfer payments change as business cycles conditions change.

C The automatic stabilizers do not require legislative action. They are built-in into the system, they are automatic, no deliberate decisions are required, they do not need deliberations in Congress or the executive branch.

During a recession, total public assistance payments and unemployment compensation payments automatically increase while income taxes automatically decrease. Which of the following best describes the effect of these changes on aggregate demand?
A. Aggregate demand will be less than it would be without these automatic stabilizers.
B. Aggregate demand will be the same as it was before the recession.
C. Aggregate demand will be more than it would be without these automatic stabilizers.
D. Aggregate demand will be greater than it was before the recession.

C The automatic stabilizers are changes in tax collections (income and corporate taxes, for example), or in government transfers payments (unemployment insurance benefits, for example), that automatically help counter business cycle fluctuations. The stabilizers function without direct intervention by policy makers. During recessions, tax revenues automatically fall (incomes, earnings and profits all drop, so government tax revenues) and government outlays automatically increase (transfers payments to the unemployed and those on welfare rise). Lower tax revenues and greater government outlays translate into more disposable income in the hands of the families, which consume more, thus impacting positively aggregate demand. Decreases in tax revenues and increases in outlays help bolster economic activity during economic downturns. However. automatic stabilizers are not sufficiently strong to offset a mild to severe recession. Without the the stabilizers, aggregate demand would certainly be lower.

The primary benefit of the automatic stabilizers is:
A. they provide public assistance through legislative decision making.
B. they require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle.
C. they require legislative action, so there is a lag in response to these tools to fluctuations in the business cycle, and there is time to identify the spillover effects.
D. none of the above.

B They require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle. The automatic stabilizers are changes in tax collections (income and corporate taxes, for example), or in government transfers payments (unemployment insurance benefits, for example), that automatically help counter business cycle fluctuations. The stabilizers function without direct intervention by policy makers.

During an expansionary economy, public assistance payments and unemployment compensation payments automatically decrease while income taxes automatically increase. Which of the following best describes the effect of these changes on aggregate demand?
A. Aggregate demand will be less than it would be without these automatic stabilizers.
B. Aggregate demand will be the same as it was before the expansion.
C. Aggregate demand will be less than it was before the expansion.
D. Aggregate demand will be greater than it was before the expansion.
E. Both a. and d. accurately describe their effect.

E Both a. and d. accurately describe their effect. Answer a. is correct: The automatic stabilizers are changes in tax collections (income and corporate taxes, for example), or in government transfers payments (unemployment insurance benefits, for example), that automatically help counter business cycle fluctuations. The stabilizers function without direct intervention by policy makers. During expansions, tax revenues automatically increase (income and corporate taxes rise) and government outlays automatically decrease (transfer payments to the unemployed and those on welfare drop). Such increases in revenues and decreases in outlays help weaken economic activity during economic upturns. Greater tax revenues or lower government outlays translate into less disposable income in the hands of the families, which consume less that it would be without these automatic stabilizers. Answer d. is correct: During an expansion, with or without automatic stabilizers, aggregate demand would not be less than it was before the expansion. The expansion by itself implies a significant rise in output, income and employment.

The federal government funds deficit spending by:
A. issuing bonds.
B. redeeming bonds.
C. increasing taxes.
D. providing and selling government services.

A The federal government funds deficit spending by borrowing from the public: issuing bonds. It could also print money, but this is inflationary and thus seldom used.

If there is initially a federal budget deficit, and taxes rise, while transfer payments fall:
A. Aggregate Demand increases and the budget deficit increases.
B. Aggregate Demand increases and the budget deficit decreases.
C. Aggregate Demand decreases and the budget deficit increases.
D. Aggregate Demand decreases and the budget deficit decreases.
E. there is an indeterminate effect on both Aggregate Demand and the budget deficit.

D However, although raising taxes and decreasing transfer payments would decrease the deficit, at least in the short run, these actions are not always good for the economy.

Which of the following would be an example or result of expansionary fiscal policy in action?
A. an increase in taxation
B. a decrease in government purchases
C. a budget deficit
D. a decrease in transfer payments
E. a budget surplus

C

Contractionary fiscal policy consists of:
A. increased government purchases, increased taxes, increased transfer payments.
B. decreased government purchases, decreased taxes, decreased transfer payments.
C. decreased government purchases, increased taxes, decreased transfer payments.
D. increased government purchases, decreased taxes, increased transfer payments.

C

Budget surpluses exist when:
A. government spending exceeds its tax revenues.
B. government tax revenues exceed its spending.
C. government spending equals its tax revenues.
D. expansionary fiscal policies increase real GDP and the price level.

B

A contractionary fiscal policy may be implemented in order to:
A. increase a budget deficit.
B. reduce a budget surplus.
C. create or expand a budget surplus.
D. increase government purchases.

C

Which of the following measures is associated with an expansionary fiscal policy?
A. lowering transfer payments
B. lowering taxes
C. lowering government purchases
D. decreasing investments

B

If government policy makers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change?
A. Decrease consumption taxes.
B. Decrease government purchases of goods and services.
C. Increase transfer payments.
D. Increase the budget deficit.
E. None of the above.

B

If government policy makers were worried about the inflationary potential of the economy, which of the following would not be a correct fiscal policy change?
A. Increase consumption taxes.
B. Increase government purchases of goods and services.
C. Reduce transfer payments.
D. Increase the budget deficit.

B

Contractionary fiscal policy, other things being equal, will tend to:
A. increase interest rates.
B. increase investment.
C. increase net exports.
D. do both a. and c.
E. do both b. and c.

E

You are a member of Congress when the economy is in a recession. If your goal is to achieve a fully employed labor force, which of the following fiscal policy scenarios should you follow?
A. Eliminate a federal budget deficit or add to a federal budget surplus.
B. Raise government purchases, reduce taxes, and/or increase transfer payments.
C. Decrease government purchases, increase taxes, and/or cut transfer payments.
D. Raise government purchases, raise taxes by more than the increase in government purchases, and decrease transfer payments.

B

Someone earning $150,000 per year will pay the same amount of ____________ as someone earning $150,000,000 per year:
A. personal income tax.
B. federal excise tax.
C. Social Security tax.
D. Sales tax.

C

A decrease in net taxes (taxes minus transfer payments) would do which of the following in the short run?
A. decrease any budget deficit or increase any budget surplus
B. reduce the price level
C. reduce unemployment
D. reduce consumption purchases
E. All of the above.

C

If MPC = 0.8, a $200 billion increase in government purchases would have what size effect on the "first round" of induced added consumption?
A. $80 billion
B. $160 billion
C. $200 billion
D. $800 billion

B

The Magic Number for the Module 12 Complete Quiz (from the Chapter 14 Sections 6 & 7 Section Quiz was
A. 25 billion
B. 500
C. 23
D. 99
E. 3

C

Economists agree that the multiplier is close to zero when:
A. inflation is very low.
B. the economy is at or near full employment.
C. the national debt is relatively small.
D. "shovel-ready" projects exist.

B

The extent of the multiplier effect visible within a short time will be ____ the total effect indicated by the multiplier formula.
A. significantly higher than
B. equal to
C. less than
D. slightly higher than

C

When the economy goes into a ____, the amount of taxes collected by the government ____ automatically.
A. recession; falls
B. recession; rises
C. boom; falls
D. None of the above.

A

A major advantage of automatic stabilizers is that they:
A. guarantee that the federal budget will be balanced over the course of the business cycle.
B. require no legislative action by Congress to take effect.
C. simultaneously stabilize the economy and reduce the size of the public debt.
D. automatically produce surpluses during recessions and deficits during economic booms.

B

Typically, the budget deficit is financed by:
A. printing money.
B. issuing debt.
C. raising taxes.
D. both a. and c.

B

If there is initially a federal budget deficit, and taxes fall while transfer payments rise:
A. there is an indeterminate effect on both AD and the budget deficit.
B. AD increases and the budget deficit increases.
C. AD increases and the budget deficit decreases.
D. AD decreases and the budget deficit increases.
E. AD decreases and the budget deficit decreases.

B

AD will shift to the right, other things being equal, when:
A. the government budget deficit increases because government purchases rose.
B. under any of the above circumstances.
C. the government budget deficit increases because taxes rose.
D. the government budget deficit increases because transfer payments fell.

A

An expansionary monetary policy is likely to increase real output more than just temporarily:
A. when actual output is beyond the economy’s long-run capacity.
B. when the economy is at full employment.
C. when the economy is operating at less than full capacity.
D. at virtually any output level.

C An expansionary monetary policy is likely to increase real output more than just temporarily when the economy operates at less than full capacity. An expansionary policy entails an increase in money supply to lower interest rates and to induce firms to undertake new projects investing in new plants and equipment, thus, increasing aggregate demand. This would be more effective if the economy is operating below full capacity, since there would not be undue pressure on input costs and wages as firms produce more to meet the expanding aggregate demand.

If the Fed buys a U.S. government bond from a member of the public,
A. the banking system has less reserves and the money supply tends to fall.
B. the banking system has more reserves and the money supply tends to grow.
C. the banking system has more reserves and the money supply tends to fall.
D. the banking system has less reserves and the money supply tends to grow.

B If the Fed buys a U.S. government bond from a member of the public, the banking system has more reserves and the money supply tends to grow. When the Fed conducts an open market purchase, in effect is buying an X amount worth of government bonds, and it pays to the private counter party a check for the same amount. The check is deposited in the banking system, thus, the reserves increase and the money supply increases as well. The Reserves is the portions of the bank deposits set aside and maintained as cash or a as deposit at the Federal Reserve., which acts as a bank of banks. The Money Supply (M1) is the sum of currency in the hands of the pubic, and demand deposits.

When the money supply decreases, other things being equal,
A. real interest rates fall and investment spending rises.
B. real interest rates fall and investment spending falls.
C. real interest rates rise and investment spending rises.
D. real interest rates rise and investment spending falls.

D When the money supply decreases, other things being equal, real interest rates rise and investment spending falls. If the money supply decreases, through the Fed’s open market operation (sale of bonds) for instance, the money supply curve shifts to the left and interest rates increase (there is less liquidity in the market). When interest rate increase, firms would be less prone to undertake their investment projects,and investment spending decreases. This in fact postulates that there is an inverse relationship between investment spending and real interest rates.

Which of the following is not a function of the Federal Reserve System?
A. setting the required reserve ratio for the deposit holdings of depository institutions
B. controlling inflation
C. limiting the national debt
D. buying and selling government bonds to control the size and growth rate of the money supply

C The functions of the Federal Reserve System are outlined in its web page: "The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. Today, the Federal Reserve’s duties fall into four general areas: conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers maintaining the stability of the financial system and containing systemic risk that may arise in financial markets providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system"

If the Fed sells bonds, the short-run impact of this policy will tend to include:
A. a reduction in unemployment.
B. an increase in the inflation rate.
C. an increase in real interest rates.
D. an increase in real output.

C If the Fed sells bonds, the short-run impact of this policy will tend to include an increase in real interest rates. A Fed’s sale of bonds would reduce the money supply, there would be less liquidity and the supply curve (usually represented as a vertical line to indicate that is fixed by the Fed) shifts to the left and interest rates increase. When the Fed conducts an open market sale, in effect is selling an X amount worth of government bonds, and it receives from the private counter party a check for the same amount. The check is drawn on the banking system in favor of the Fed, thus, the banking reserves decrease and the money supply decreases as well.

Which of the following is most frequently used when the Fed is attempting to adjust the money supply?
A. Moral suasion
B. Open market operations
C. Changing reserve requirements
D. all of the other answers are correct.
E. Changing the discount rate

B The Federal Reserve System (or the Fed) is the economic authority responsible for monetary policy. It adjusts the the money supply through open market operations, the discount rate, and reserve requirements. Changing the discount rate is not the most frequently used mechanism to alter the money supply.

All decisions of the Federal Reserve are subject to approval by:
A. the FDIC
B. the U.S. Congress.
C. only the Board of Governors of the Federal Reserve.
D. the President of the United States.

C All decisions of the Federal Reserve are subject to approval by only the Board of Governors of the Federal Reserve, the seven-person governing body of the Federal Reserve System. The Board members are appointed to 14-year terms by the President and Senate’s approval is required. All of the decision power resides on the Board, with no interference from the executive or the legislative branches.

Ceteris paribus, when nominal GDP falls:
A. interest rates will tend to fall.
B. interest rates will tend to rise.
C. the Fed must increase the money supply to keep interest rates from rising.
D. the Fed must increase the money supply to keep interest rates from falling.
E. both a. and d. are true.

A Ceteris paribus, when nominal GDP falls, interest rates will tend to fall. The same effect that occurs at the micro level, is also observed at the macro or aggregate level. When income increases (nominal GDP) the demand for money also increases (the money demand curve shifts to the right); and vice versa. So, when nominal GDP falls, the demand for money decreases, and the money demand curve shifts to the left. Given that the supply does not change (the ceteris paribus condition), interest rates (the price of money) would tend to fall.

The primary reason that money is demanded is for:
A. investment purposes.
B. asset purposes.
C. precautionary reasons.
D. transaction purposes.

D The reasons why individuals hold money are: a) For transaction purposes, to facilitate the exchange of goods and services b) For precautionary purposes, to be able to meet unexpected expenses, c) For asset purposes, to balance the portfolio of liquid assets and illiquid assets. Transaction purposes is the primary reason why money is demanded.

Federal funds market rate is:
A. lower than the discount rate.
B. the rate charged on loans provided to meet reserve requirement.
C. the rate charged by banks on loans to the public.
D. the rate at which central bank provides funds to commercial banks.

A OR B The Fed Funds rate is not the rate charged by banks on loans to the public. There is not a single rate charged by banks on loans to the public, in fact, there are several rates depending on the type of loan and the borrower’s financial condition.