ECOMONICS

MACROECONOMIC MODELS AND FISCAL POLICY

1. Which one of the following statements best describes the idea of a political business cycle? A. Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.
 B. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections. C. Politicians are more willing to cut taxes and increase government spending than they are to do the reverse. D. Fiscal policy will result in alternating budget deficits and surpluses.

2. In building the aggregate expenditures model, Keynes believed that
 A. government intervention into the economy is the primary cause of business cycle fluctuations.
 B. massive unemployment of labor and capital created conditions where sudden demand changes are unlikely to change prices. C. changes in aggregate expenditures are unable to affect the level of real output in the economy.
 D. economies are normally at full employment and thus frequently susceptible to bouts of inflation.

5. Which one of the following statements correctly describes the multiplier effect?
 A. The multiplier effect means that a change in consumption can cause a larger increase in investment.
 B. The multiplier effect means that a decline in the MPC can cause GDP to rise by several times that amount. C. The multiplier effect means that consumption is typically several times as large as saving.
 D. The multiplier effect means that an increase in investment can cause GDP to change by a larger amount.

7. The amount by which federal tax revenues exceed federal government expenditures during a particular year is the
 A. public debt.
 B. budget surplus. C. Federal Reserve. D. budget deficit.

9. Which one of the following statements about dissaving is correct? A. Dissaving occurs where saving exceeds consumption.
 B. Dissaving occurs where consumption exceeds income.
 C. Dissaving occurs where income exceeds consumption. D. Dissaving occurs where saving exceeds income.

11. Which one of the following statements about the interest-rate effect is correct? 
 A. The interest-rate effect suggests that an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending. B. The interest-rate effect suggests that an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending C. The interest-rate effect suggests that a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. D. The interest-rate effect suggests that an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.

MONEY, BANKING AND MONETARY POLICY

1. Commercial banks and thrifts usually hold only small amounts of excess reserves because A. the Fed constantly uses open market operations to eliminate excess reserves.
 B. the Fed doesn't pay interest on reserves.
 C. the presence of such reserves tends to boost interest rates and reduce investment.

D. the Fed doesn't want commercial banks and thrifts to be too liquid.

2. Which one of the following statements about risky investments is correct?
 A. Riskier investments tend to sell for higher prices so they provide a higher expected rate of return to compensate for risk. B. Riskier investments tend to sell for prices directly correlated with expected rates of return.
 C. Riskier investments tend to sell for higher prices; that is why they are considered to be riskier.
 D. Riskier investments tend to sell for lower prices so they provide a higher expected rate of return to compensate for risk.

3. When economists say that money serves as a medium of exchange, they mean that it's A. a way to keep wealth in a readily spendable form for future use.
 B. a monetary unit for measuring and comparing the relative values of goods.
 C. declared as legal tender by the government. D. a means of payment.

4. The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _______ rate. A. prime
 B. discount
 C. short-term D. federal funds

5. Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank A. can't safely lend out more money. B. can safely lend out $50,000.
 C. can safely lend out $5 million.
 D. can safely lend out $500,000.

6. The Security Market Line depicts the relationship between the 
 A. average expected rate of return on stocks and the average expected rate of return on bonds. B. average expected rate of return and risk level of a financial asset.
 C. average expected rate of return of a financial asset and the discount rate.
 D. risk level of a financial asset and the prime interest rate.

7. If the Federal Reserve System buys government securities from commercial banks and the public A. commercial bank reserves will decline.
 B. it will be easier to obtain loans at commercial banks.
 C. commercial bank reserves will be unaffected. D. the money supply will contract.

8. If a corporation goes bankrupt,
 A. bondholders get paid from the sale of company assets before stockholders do.
 B. stockholders get paid from the sale of company assets before bondholders do.
 C. stockholders must honor the debts to bondholders out of personal assets if necessary. D. neither stockholders nor bondholders receive any money.

9. Between March 2001 and November 2002, the Fed reduced the federal funds rate from 5 percent to just above 1 percent. The Fed's purpose was to A. reduce the public debt.
 B. prevent rising inflation. 
C. promote recovery from recession. D. strengthen the international value of the dollar.

10. The basic policy-making body in the U.S. banking system is the A. Board of Governors of the Federal Reserve. 
B. Council of Economic Advisers.
 C. Federal Open Market Committee (FOMC). D. Federal Monetary Authority.

11. What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments? A. Future value
 B. Real rate of interest C. Present value 
D. Compound interest

12. Payments to shareholders from corporate profits are known as A. capital gains.
 B. interest. 
C. appreciation. D. dividends.

13. An important routine function of the Federal Reserve Bank is to A. help large commercial banks develop correspondent relationships with smaller commercial banks. B. advise commercial banks as to the most profitable ways of reinvesting profits. C. supervise the liquidation of the assets of bankrupt state banks. D. provide facilities by which commercial banks and thrift institutions may collect checks. 14. In 1999 and 2000 the Fed increased the federal funds rate several times. The Fed's purpose was to A. strengthen the international value of the dollar. B. prevent rising inflation. C. stimulate economic growth. D. reduce the unemployment rate. 15. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for A. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the term auction facility, and a budgetary deficit. B. selling government securities, raising the reserve ratio, lowering the discount rate, increasing reserves available through the term auction facility, and a budgetary surplus. C. buying government securities, reducing the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary deficit. D. buying government securities, raising the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary surplus. 16. Which one of the following statements about open-market operations is correct? A. Open-market operations refer to purchases of stocks in the New York Stock Exchange. B. Open-market operations refer to the purchase or sale of government securities by the Fed. C. Open-market operations refer to central bank lending to commercial banks. D. Open-market operations refer to the specifying of loan maximums on stock purchases. 17. When commercial banks use excess reserves to buy government securities from the public, A. the money supply falls. B. new money is created. C. commercial bank reserves increase. D. checkable deposits decline. 18. Checkable deposits are classified as money because A. they can be readily used in purchasing goods and paying debts. B. banks hold currency equal to the value of their checkable deposits. C. they earn interest income for the depositor. D. they're ultimately the obligations of the Treasury. 19. When economists say that money serves as a unit of account, they mean that mean that it's

A. a monetary unit for measuring and comparing the relative values of goods. B. a way to keep wealth in a readily spendable form for future use.
 C. declared as legal tender by the government.
 D. a means of payment.

20. If the Fed were to increase the legal reserve ratio, we would expect A. higher interest rates, a contracted GDP, and appreciation of the dollar.
 B. higher interest rates, a contracted GDP, and depreciation of the dollar.
 C. lower interest rates, an expanded GDP, and depreciation of the dollar. D. lower interest rates, an expanded GDP, and appreciation of the dollar.

End of exam