Macroeconomics Exam! MCQ Trivia
(180).jpg "Macroeconomics Exam! MCQ Trivia - Quiz")
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- 1.
Discretionary fiscal policy is
- A.
The use of interest rate changes to affect aggregate demand.
- B.
The use of interest rate changes to affect aggregate supply.
- C.
The use of government spending or tax policy to manage aggregate demand.
- D.
The use of government spending or tax policy to manage aggregate supply.
Correct Answer
C. The use of government spending or tax policy to manage aggregate demand.Explanation
Discretionary fiscal policy refers to the deliberate use of government spending or tax policy to manage aggregate demand. This means that the government can adjust its spending levels or tax rates in order to stimulate or restrain economic activity. By increasing government spending or reducing taxes, aggregate demand can be stimulated, leading to increased economic activity. Conversely, by decreasing government spending or increasing taxes, aggregate demand can be restrained, which can help control inflation or reduce excessive economic growth. Therefore, the correct answer is the use of government spending or tax policy to manage aggregate demand.Rate this question:
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- 2.
The largest categories of government purchases of goods and services are
- A.
National defense and education
- B.
Scientific research and foreign aid.
- C.
Border patrol and interstate highway maintenance.
- D.
Law enforcement and environmental protection.
Correct Answer
A. National defense and educationExplanation
The correct answer is national defense and education. This is because these two categories typically account for the largest portion of government spending on goods and services. National defense refers to the military and defense-related expenditures, which are crucial for maintaining a country's security and defense capabilities. Education spending includes investments in schools, teachers, and educational resources, which are essential for the development and improvement of a nation's human capital and future workforce.Rate this question:
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- 3.
When the government makes a payment to an individual for which no good or service is provided in return, this is referred to as a
- A.
Public exchange.
- B.
Private exchange.
- C.
Reverse tax.
- D.
Transfer payment.
Correct Answer
D. Transfer payment.Explanation
When the government makes a payment to an individual without receiving any goods or services in return, it is known as a transfer payment. This means that the government is transferring funds to the individual for various reasons such as social welfare programs, pensions, or unemployment benefits. It is not considered a public or private exchange as there is no direct exchange of goods or services involved. Reverse tax is not a relevant term in this context.Rate this question:
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- 4.
Social Security, Medicare, and Medicaid are the three main
- A.
Tools of discretionary fiscal policy.
- B.
Social insurance programs.
- C.
Sources of aggregate demand.
- D.
Sources of disposable income.
Correct Answer
B. Social insurance programs.Explanation
Social Security, Medicare, and Medicaid are social insurance programs because they provide financial assistance and support to individuals in need. These programs are designed to provide social protection and ensure that individuals have access to healthcare, income support, and retirement benefits. They are funded through taxes and contributions from individuals and employers, and they play a crucial role in promoting social welfare and reducing poverty. These programs are not tools of discretionary fiscal policy, sources of aggregate demand, or sources of disposable income.Rate this question:
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- 5.
Disposable income
- A.
Is the amount of household income collected as tax revenue.
- B.
Is the total income households have available to spend.
- C.
Is the portion of household income saved.
- D.
Is the portion of household income invested.
Correct Answer
B. Is the total income households have available to spend.Explanation
Disposable income refers to the total income that households have available to spend after deducting taxes and other compulsory payments. It represents the amount of money that individuals can use for consumption or saving purposes. This measure is important in assessing the purchasing power and economic well-being of households. It does not include taxes or the portion of income saved or invested, as these are separate components that are deducted from the total income to arrive at disposable income.Rate this question:
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- 6.
A recessionary gap occurs when
- A.
Aggregate output falls below potential output.
- B.
Potential output falls below aggregate output.
- C.
Transfer payments undermine incentives to work.
- D.
Taxes on corporate profits undermine incentives to invest.
Correct Answer
A. Aggregate output falls below potential output.Explanation
A recessionary gap occurs when aggregate output falls below potential output. This means that the economy is producing less than its full capacity, leading to a decrease in overall economic activity. This can happen due to various factors such as a decline in consumer spending, decrease in investment, or decrease in government spending. When aggregate output falls below potential output, it indicates that there is a gap between the economy's actual performance and its potential performance.Rate this question:
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- 7.
To address a recessionary gap, the appropriate fiscal policy would be
- A.
An increase in personal taxes.
- B.
An increase in corporate taxes.
- C.
An increase in government spending.
- D.
An increase in interest rates.
Correct Answer
C. An increase in government spending.Explanation
During a recessionary gap, there is a decrease in aggregate demand, leading to a decline in economic output and employment. To address this, the appropriate fiscal policy would be to increase government spending. By increasing government spending, there is an injection of funds into the economy, which stimulates aggregate demand and helps to fill the gap. This can lead to increased economic activity, job creation, and a reduction in the recessionary gap. Increasing personal or corporate taxes or interest rates would have the opposite effect, reducing consumer and business spending and potentially worsening the recessionary gap.Rate this question:
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- 8.
The effect of expansionary fiscal policy is to
- A.
Shift aggregate supply to the left.
- B.
Shift aggregate supply to the right.
- C.
Shift aggregate demand to the left.
- D.
Shift aggregate demand to the right.
Correct Answer
D. Shift aggregate demand to the right.Explanation
Expansionary fiscal policy refers to the government's efforts to increase spending or decrease taxes in order to stimulate economic growth. By doing so, it increases the aggregate demand in the economy, as consumers and businesses have more money to spend. This leads to an increase in overall spending, which in turn stimulates production and economic activity. Therefore, the correct answer is that expansionary fiscal policy shifts aggregate demand to the right.Rate this question:
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- 9.
Which of the following is NOT an example of a contractionary fiscal policy?
- A.
Decreasing the money supply
- B.
Decreasing government spending
- C.
Decreasing transfer payments
- D.
Increasing taxes
Correct Answer
C. Decreasing transfer paymentsExplanation
A contractionary fiscal policy aims to decrease aggregate demand and reduce inflationary pressures in the economy. It typically involves reducing government spending, increasing taxes, and decreasing the money supply. Decreasing transfer payments, on the other hand, would not directly impact aggregate demand or inflation. Transfer payments refer to government payments to individuals or households, such as welfare benefits or social security. By decreasing transfer payments, the government would not be directly reducing spending or increasing taxes, which are the main components of contractionary fiscal policy. Therefore, decreasing transfer payments is not an example of a contractionary fiscal policy.Rate this question:
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- 10.
Which of the following would shift aggregate demand to the left?
- A.
An increase in government transfer payments that affects disposable income
- B.
A decrease in taxes that affects disposable income
- C.
An increase in taxes that affects disposable income
- D.
An increase in private investment spending, funded by tax cuts
Correct Answer
C. An increase in taxes that affects disposable incomeExplanation
An increase in taxes that affects disposable income would shift aggregate demand to the left because higher taxes would reduce the amount of income available for consumption and investment. This would lead to a decrease in consumer spending and business investment, causing a decrease in aggregate demand.Rate this question:
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- 11.
Lags that arise in the implementation of fiscal policy mean that
- A.
Expansionary fiscal policy will actually shift aggregate demand to the left, rather than to the right.
- B.
Expansionary fiscal policy will actually shift aggregate supply, rather than aggregate demand.
- C.
Increases in government spending will actually have a contractionary effect.
- D.
It can actually be destabilizing.
Correct Answer
D. It can actually be destabilizing.Explanation
The correct answer is that lags that arise in the implementation of fiscal policy can actually be destabilizing. This means that the delays or time lags in implementing fiscal policy measures, such as changes in government spending or taxation, can have unintended consequences and potentially disrupt the economy. These lags can lead to a misalignment between the timing of the policy action and the actual economic conditions, which can result in economic instability rather than the intended stabilization.Rate this question:
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- 12.
The expansionary fiscal policy in Japan in the 1990s has
- A.
Increased the government debt.
- B.
Caused interest rates to fall to 0%.
- C.
Shifted aggregate demand to the left.
- D.
Produced a full economic recovery.
Correct Answer
A. Increased the government debt.Explanation
The expansionary fiscal policy in Japan in the 1990s refers to the government's increased spending and reduced taxes to stimulate economic growth. This policy led to an increase in the government debt as the government had to borrow more money to finance its spending. The increased debt was a result of the government's efforts to boost the economy, but it did not necessarily lead to a full economic recovery.Rate this question:
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- 13.
The 2008 stimulus package was an example of
- A.
Shifting aggregate demand to the left.
- B.
Shifting short-run aggregate supply to the right.
- C.
Contractionary fiscal policy.
- D.
Expansionary fiscal policy.
Correct Answer
D. Expansionary fiscal policy.Explanation
The 2008 stimulus package refers to the government's response during the financial crisis to boost economic growth and stabilize the economy. By providing tax cuts and increasing government spending, the stimulus package aimed to stimulate consumer spending, business investment, and overall economic activity. This expansionary fiscal policy was implemented to increase aggregate demand and counteract the negative effects of the recession.Rate this question:
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- 14.
The amount of the aggregate demand shift in response to an increase in government spending depends on
- A.
The slope of the short-run aggregate supply curve.
- B.
The slope of the long-run aggregate supply curve.
- C.
The size of the multiplier.
- D.
Whether the increase in government spending is supported by both political parties.
Correct Answer
C. The size of the multiplier.Explanation
The correct answer is the size of the multiplier. The size of the multiplier refers to how much the increase in government spending will multiply and impact the overall aggregate demand in the economy. A larger multiplier means that the increase in government spending will have a greater effect on aggregate demand, leading to a larger shift in demand. Conversely, a smaller multiplier indicates a smaller impact on aggregate demand. Therefore, the size of the multiplier is a crucial factor in determining the extent to which government spending can influence aggregate demand.Rate this question:
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- 15.
A $75 billion tax cut will
- A.
Increase GDP by the same amount as a $75 billion increase in government purchases of goods and services.
- B.
Increase GDP by a smaller amount than would a $75 billion increase in government purchases of goods and services.
- C.
Not affect aggregate demand, as it will only shift aggregate supply.
- D.
Increase the marginal propensity to consume, thereby decreasing the value of the multiplier.
Correct Answer
B. Increase GDP by a smaller amount than would a $75 billion increase in government purchases of goods and services.Explanation
A $75 billion tax cut will increase GDP by a smaller amount than would a $75 billion increase in government purchases of goods and services. This is because a tax cut affects individuals' disposable income, which may not necessarily be spent on goods and services. On the other hand, an increase in government purchases directly increases aggregate demand and stimulates economic activity, leading to a larger impact on GDP. Therefore, the increase in government purchases would have a greater effect on GDP compared to a tax cut of the same amount.Rate this question:
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- 16.
Because transfer payments rise when the economy is contracting and fall when it is expanding, they are referred to as
- A.
Automatic stabilizers.
- B.
Discretionary policy measures.
- C.
Fiscal lags.
- D.
Zero-balance accounts.
Correct Answer
A. Automatic stabilizers.Explanation
Transfer payments refer to government payments to individuals or households for various reasons, such as unemployment benefits or welfare programs. These payments tend to increase during economic contractions when more people are in need of assistance, and decrease during expansions when fewer people require support. This automatic adjustment of transfer payments based on the state of the economy helps stabilize it, hence they are referred to as automatic stabilizers. Discretionary policy measures, on the other hand, are deliberate actions taken by the government to influence the economy, while fiscal lags and zero-balance accounts are unrelated to the concept described in the question.Rate this question:
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- 17.
Which of the following statements is true?
- A.
The presence of a budget deficit is proof that government is trying to expand aggregate demand.
- B.
Tax cuts will not boost aggregate demand unless the money is saved by consumers and then invested by businesses.
- C.
Because transfer payments typically rise during an economic recovery, they destabilize the economy.
- D.
An increase in government spending will have a greater effect on aggregate demand when the marginal propensity to consume is greater.
Correct Answer
D. An increase in government spending will have a greater effect on aggregate demand when the marginal propensity to consume is greater.Explanation
An increase in government spending will have a greater effect on aggregate demand when the marginal propensity to consume is greater. This statement suggests that the impact of government spending on aggregate demand depends on the willingness of consumers to spend. When consumers have a higher marginal propensity to consume, they are more likely to spend the additional income received from government spending, leading to a greater increase in aggregate demand. This implies that government spending can be an effective tool for stimulating the economy, particularly when consumers are willing to spend a larger portion of their income.Rate this question:
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- 18.
The government budget deficit is most likely to rise when
- A.
The interest rate falls.
- B.
The interest rate rises.
- C.
The unemployment rate rises.
- D.
The economy recovers from a recession.
Correct Answer
C. The unemployment rate rises.Explanation
When the unemployment rate rises, it indicates that more people are out of work and therefore not contributing to the economy through taxes. This leads to a decrease in government revenue. In addition, the government may need to increase spending on unemployment benefits and other social welfare programs to support those who are unemployed. As a result, the government budget deficit is likely to rise.Rate this question:
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- 19.
A requirement to have an annually balanced federal budget would mean
- A.
That there would be no more recessionary gaps or inflationary gaps.
- B.
That the role of taxes and transfers as automatic stabilizers would be undermined.
- C.
That total household disposable income would be the same every year.
- D.
That actual GDP would equal potential GDP every year.
Correct Answer
B. That the role of taxes and transfers as automatic stabilizers would be undermined.Explanation
Having an annually balanced federal budget would mean that the government's spending and revenue would be equal every year. This would undermine the role of taxes and transfers as automatic stabilizers. Automatic stabilizers are policies that help stabilize the economy during periods of recession or inflation by automatically adjusting taxes and transfers. If the budget is always balanced, there would be no room for these automatic adjustments, which could lead to a lack of flexibility in responding to economic fluctuations.Rate this question:
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- 20.
The implicit liabilities of the U.S. government
- A.
Cannot continually be honored as they are designed, given demographic trends.
- B.
Are a problem in the short run, but not in the long run.
- C.
Are not a cause for worry unless they lead to crowding out.
- D.
Are designed to offset an inflationary gap when it arises.
Correct Answer
A. Cannot continually be honored as they are designed, given demographic trends.Explanation
The correct answer suggests that the implicit liabilities of the U.S. government cannot be continually honored as they are designed, given demographic trends. This means that the government may not be able to fulfill its obligations in the long run due to changing demographics, such as an aging population or declining workforce. This implies that there may be challenges in meeting these liabilities and it is not sustainable to continue honoring them as they are currently designed.Rate this question:
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- 21.
The money supply is
- A.
The total value of financial assets that can be used to purchase goods and services.
- B.
The total value of the nation's store of gold.
- C.
The total value of stock market holdings.
- D.
The annual sum of gains from trade.
Correct Answer
A. The total value of financial assets that can be used to purchase goods and services.Explanation
The correct answer is "the total value of financial assets that can be used to purchase goods and services." This explanation is based on the definition of money supply, which refers to the total amount of money in circulation in an economy. It includes both physical currency (such as banknotes and coins) and various types of deposits and financial assets that can be readily used for transactions. This definition aligns with the explanation provided in the correct answer option.Rate this question:
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- 22.
Which of the following statements is FALSE?
- A.
Money plays a crucial role in generating gains from trade, because it makes indirect exchange possible.
- B.
In a barter economy, trade can only take place when there is a double coincidence of wants.
- C.
U.S. dollars are used as money only within U.S. borders.
- D.
An asset is liquid if it can easily be converted into cash.
Correct Answer
C. U.S. dollars are used as money only within U.S. borders.Explanation
The statement "U.S. dollars are used as money only within U.S. borders" is false because U.S. dollars are widely accepted and used as a medium of exchange in many countries around the world, not just within the borders of the United States. The U.S. dollar is one of the most commonly used currencies for international trade and is held as a reserve currency by many central banks. Therefore, it is incorrect to say that U.S. dollars are only used within U.S. borders.Rate this question:
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- 23.
Which of the following is NOT a role played by money?
- A.
A medium of exchange
- B.
A store of value
- C.
A unit of account
- D.
A means to increase purchasing power
Correct Answer
D. A means to increase purchasing powerExplanation
Money serves as a medium of exchange, allowing individuals to trade goods and services. It also acts as a store of value, enabling individuals to save and accumulate wealth over time. Additionally, money functions as a unit of account, providing a common measure of value for goods and services. However, money itself does not directly increase purchasing power. While having money may provide individuals with the ability to purchase goods and services, the act of increasing purchasing power requires factors such as earning more income or finding lower prices.Rate this question:
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- 24.
Which of the following is NOT commodity money?
- A.
Cigarettes
- B.
A gold coin
- C.
A silver coin
- D.
A $5 bill in U.S. currency
Correct Answer
D. A $5 bill in U.S. currencyExplanation
A $5 bill in U.S. currency is not considered commodity money because it does not have intrinsic value. Commodity money is a type of currency that has value based on the material it is made of, such as gold or silver. In contrast, a $5 bill is a fiat currency, which means its value is determined by the government that issues it, rather than the material it is made of.Rate this question:
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- 25.
The value of fiat money arises from
- A.
Its usefulness as a commodity.
- B.
Its ability to be redeemed in precious metals.
- C.
Its historical reputation as a currency that maintains its value in international markets.
- D.
Its official status as a means of exchange.
Correct Answer
D. Its official status as a means of exchange.Explanation
The value of fiat money arises from its official status as a means of exchange. Fiat money is not backed by a physical commodity like gold or silver, but it is given value by the government decree that it can be used as legal tender for goods and services. This official recognition and acceptance by the government and society give fiat money its value and make it a widely accepted medium of exchange in an economy.Rate this question:
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- 26.
Which of the following transactions would leave M2 unchanged but increase M1?
- A.
Transferring funds from your checking account to your savings account
- B.
Transferring funds from your savings account to your checking account
- C.
Writing a check to a locksmith, who then deposits it in her checking account
- D.
Writing a check to a locksmith, who then deposits it in her savings account
Correct Answer
B. Transferring funds from your savings account to your checking accountExplanation
Transferring funds from your savings account to your checking account would leave M2 unchanged but increase M1 because M2 includes both M1 (currency in circulation and demand deposits) and savings deposits. Therefore, transferring funds from savings to checking would not affect the broader measure of money supply (M2) but would increase the narrower measure (M1) as the funds move from a savings deposit to a demand deposit.Rate this question:
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- 27.
M1 includes those assets that are
- A.
Directly usable as a medium of exchange.
- B.
Good as a store of value, but not useful as a medium of exchange.
- C.
Not liquid enough to be included in M2.
- D.
Near-monies.
Correct Answer
A. Directly usable as a medium of exchange.Explanation
M1 includes assets that are directly usable as a medium of exchange. This means that the assets included in M1 can be easily used to make purchases and transactions. The other options mentioned in the question, such as being a store of value or not liquid enough for M2, do not accurately describe the assets included in M1. Therefore, the correct answer is directly usable as a medium of exchange.Rate this question:
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- 28.
Federal deposit insurance serves to
- A.
Protect the dollar from inflation.
- B.
Prevent bank runs.
- C.
Preserve the value of the dollar in terms of gold.
- D.
Eliminate the need for banks to satisfy capital requirements.
Correct Answer
B. Prevent bank runs.Explanation
Federal deposit insurance serves to prevent bank runs. Bank runs occur when depositors rush to withdraw their money from a bank due to concerns about its stability. This can lead to a collapse of the banking system and widespread financial panic. Federal deposit insurance, provided by institutions like the FDIC in the United States, guarantees that depositors' funds will be protected up to a certain amount. This assurance helps to instill confidence in the banking system and prevent mass withdrawals, thereby preventing bank runs and maintaining stability in the financial system.Rate this question:
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- 29.
The size of the U.S. money supply
- A.
Is determined by the Internal Revenue Service.
- B.
Is determined by the amount of gold held within U.S. borders
- C.
Is determined by the willingness of other countries to supply the United States with gold.
- D.
Is determined jointly by the federal government and the banking system.
Correct Answer
D. Is determined jointly by the federal government and the banking system.Explanation
The correct answer is that the size of the U.S. money supply is determined jointly by the federal government and the banking system. This is because the federal government, through its monetary policy, influences the money supply by adjusting interest rates, reserve requirements, and conducting open market operations. The banking system also plays a role by creating money through the process of fractional reserve banking, where banks can lend out more money than they actually have in reserves. Therefore, the size of the U.S. money supply is a result of the interaction between the federal government and the banking system.Rate this question:
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- 30.
When you deposit $100 cash in your checking account,
- A.
M1 increases and M2 decreases.
- B.
M1 increases and M2 remains unchanged.
- C.
Both M1 and M2 remain unchanged.
- D.
M2 increases and M1 remains unchanged.
Correct Answer
C. Both M1 and M2 remain unchanged.Explanation
When you deposit $100 cash in your checking account, both M1 and M2 remain unchanged. M1 refers to the narrowest definition of money supply, which includes physical currency (cash) held by the public, traveler's checks, and demand deposits (checking accounts). M2, on the other hand, is a broader definition of money supply that includes M1 plus savings deposits, money market mutual funds, and other time deposits. Since the cash deposit is simply transferred from your possession to the bank, there is no change in the total amount of money in circulation, and therefore both M1 and M2 remain unchanged.Rate this question:
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- 31.
Which of the following transactions would decrease M1 and leave M2 unchanged?
- A.
Depositing $100 cash in your checking account
- B.
Depositing $100 cash in your savings account
- C.
Writing a $75 check to a plumber who deposits it in his checking account.
- D.
Withdrawing $500 in cash from your savings account
Correct Answer
B. Depositing $100 cash in your savings accountExplanation
Depositing $100 cash in your savings account would decrease M1 (the money supply) because cash is being removed from circulation and placed into a savings account, which is not included in M1. However, it would leave M2 (a broader measure of the money supply) unchanged because the funds are still within the banking system and can be accessed through the savings account.Rate this question:
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- 32.
The money supply expands when
- A.
You cash a paycheck.
- B.
You deposit your paycheck into your checking account.
- C.
You deposit your paycheck into your savings account.
- D.
Banks make loans against the excess reserves they hold.
Correct Answer
D. Banks make loans against the excess reserves they hold.Explanation
When banks make loans against the excess reserves they hold, it leads to an expansion in the money supply. This is because when a bank makes a loan, it creates new money by crediting the borrower's account with the loan amount. This new money increases the overall money supply in the economy. Therefore, this option correctly explains how the money supply expands.Rate this question:
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- 33.
The monetary base is
- A.
The sum of currency in circulation and bank reserves.
- B.
Equal to M1.
- C.
Equal to M2.
- D.
The amount of currency held in bank vaults.
Correct Answer
A. The sum of currency in circulation and bank reserves.Explanation
The monetary base refers to the total amount of currency in circulation and the reserves held by banks. It does not include other forms of money such as deposits or savings. Therefore, the correct answer is that the monetary base is the sum of currency in circulation and bank reserves.Rate this question:
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- 34.
Which of the following items is a component of the monetary base but is not part of the money supply?
- A.
Deposits held in checking accounts
- B.
Currency in circulation
- C.
Bank reserves
- D.
Near-monies
Correct Answer
C. Bank reservesExplanation
Bank reserves are a component of the monetary base but are not part of the money supply because they are not directly accessible to the public for transactions. Bank reserves refer to the funds that banks are required to hold in their accounts with the central bank. These reserves are used to ensure the stability and liquidity of the banking system. While they play a crucial role in the functioning of the monetary system, they are not considered part of the money supply as they are not readily available for spending or lending by the public.Rate this question:
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- 35.
Which of the following is part of both the monetary base and the money supply?
- A.
Near-monies
- B.
Currency in circulation
- C.
Savings deposits
- D.
Checkable bank deposits
Correct Answer
B. Currency in circulationExplanation
Currency in circulation is part of both the monetary base and the money supply. The monetary base includes the total amount of currency in circulation plus the reserves held by banks. On the other hand, the money supply refers to the total amount of money in an economy, which includes currency in circulation along with other forms of money such as checkable bank deposits, savings deposits, and near-monies. Therefore, currency in circulation is a common component of both the monetary base and the money supply.Rate this question:
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- 36.
The money multiplier is the ratio of
- A.
The money supply to the monetary base.
- B.
Bank deposits to currency in circulation.
- C.
Bank reserves to bank deposits.
- D.
M2 to M1.
Correct Answer
A. The money supply to the monetary base.Explanation
The correct answer is the money supply to the monetary base. The money multiplier is a measure of how much the money supply can increase based on changes in the monetary base. The monetary base consists of currency in circulation and bank reserves, while the money supply includes currency in circulation, demand deposits, and other forms of money. By dividing the money supply by the monetary base, we can determine how much the money supply can expand based on changes in the monetary base.Rate this question:
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- 37.
How many regional Federal Reserve Banks are there?
- A.
5
- B.
6
- C.
10
- D.
12
Correct Answer
D. 12Explanation
There are 12 regional Federal Reserve Banks in the United States. These banks are located in different regions across the country and are responsible for implementing monetary policy, providing financial services to banks, and supervising and regulating financial institutions within their respective regions. Each regional bank is overseen by a board of directors, with representation from the banking industry, the business community, and the public. The Federal Reserve Banks play a crucial role in maintaining the stability and integrity of the U.S. banking system.Rate this question:
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- 38.
Open market operations are carried out by the Federal Reserve Bank of New York as a means of
- A.
Conducting monetary policy.
- B.
Helping banks become profitable.
- C.
Helping consumers acquire loans more easily.
- D.
Reducing the amount of U.S. currency held overseas.
Correct Answer
A. Conducting monetary policy.Explanation
Open market operations refer to the buying and selling of government securities by the Federal Reserve Bank of New York. These operations are a key tool used by the central bank to implement monetary policy. By buying or selling government securities, the Federal Reserve can influence the money supply in the economy, which in turn affects interest rates and overall economic activity. Therefore, conducting open market operations allows the Federal Reserve to control and manage monetary policy effectively.Rate this question:
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- 39.
When the Federal Reserve purchases Treasury bills on the open market,
- A.
The monetary base decreases, forcing the money supply to contract.
- B.
The monetary base decreases, allowing the money supply to expand.
- C.
The monetary base increases, forcing the money supply to contract.
- D.
The monetary base increases, allowing the money supply to expand.
Correct Answer
D. The monetary base increases, allowing the money supply to expand.Explanation
When the Federal Reserve purchases Treasury bills on the open market, it increases the monetary base. The monetary base refers to the total amount of currency in circulation plus the reserves held by banks. By increasing the monetary base, the Federal Reserve injects more money into the economy, which in turn allows banks to lend more and stimulate economic activity. This expansion of the monetary base leads to an expansion of the money supply, as more money is available for lending and spending. Therefore, the correct answer is that the monetary base increases, allowing the money supply to expand.Rate this question:
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- 40.
What type of action might the Federal Open Market Committee take in order to meet the goal of contracting the money supply?
- A.
Lowering the reserve requirement for banks
- B.
Lowering the discount rate
- C.
Selling Treasury bills on the open market
- D.
Making it easier for banks to acquire deposit insurance
Correct Answer
C. Selling Treasury bills on the open marketExplanation
In order to contract the money supply, the Federal Open Market Committee might take the action of selling Treasury bills on the open market. By selling Treasury bills, the government is essentially removing money from circulation, reducing the amount of money available in the economy. This reduction in the money supply can help to control inflation and tighten monetary policy.Rate this question:
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