Test 3 Econ

145 Questions  I  By Uisnech
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 Test 3 Econ

  
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  • 1. 
       94.   Both Jones and Smith agree that the economy is in a recessionary gap. Jones proposes a tax cut. Smith couldn't agree more. Jones says that lower taxes will result in higher Real GDP. Again, Smith couldn't agree more. It follows that
    • A. 

      Both Jones and Smith believe that lower taxes will raise aggregate demand, but not aggregate supply.

    • B. 

      Both Jones and Smith believe that lower taxes will raise aggregate supply, but not aggregate demand.

    • C. 

      One person believes lower taxes will raise Real GDP by increasing aggregate demand and the other person believes lower taxes will raise Real GDP by increasing aggregate supply.

    • D. 

      Both Jones and Smith believe that lower taxes will raise Real GDP by increasing both aggregate demand and aggregate supply.

    • E. 

      C or d


  • 2. 
       97.   Which piece of evidence is consistent with zero crowding out?
    • A. 

      Government purchases rise and Real GDP does not change.

    • B. 

      Government purchases rise and investment spending declines.

    • C. 

      Government purchases rise and net exports decline.

    • D. 

      Government purchases rise and consumption declines.

    • E. 

      None of the above


  • 3. 
    The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.
    • A. 

      Rise; rise

    • B. 

      Rise; fall

    • C. 

      Fall; rise

    • D. 

      Fall; fall


  • 4. 
    Suppose aggregate demand is too high to bring about the Natural Real GDP level. A Keynesian policy prescription would call for a(n) _____________________ to close this inflationary gap.
    • A. 

      Increase in government spending

    • B. 

      Decrease in government spending

    • C. 

      Increase in taxes

    • D. 

      Decrease in taxes

    • E. 

      B or c


  • 5. 
       96.   Which of the following is not an example of crowding out?
    • A. 

      Government purchases rise, the budget deficit rises, the federal government's demand for loanable funds rises, the interest rate rises, and investment falls.

    • B. 

      Government spends more on X, prompting individuals to spend less on X.

    • C. 

      Taxes decline, the budget deficit rises, the federal government's demand for loanable funds rises, the interest rate rises, the demand rises for U.S. dollars, the dollar appreciates, and net exports decline.

    • D. 

      Business firms spend more on X, prompting households to spend less on Y.

    • E. 

      None of the above


  • 6. 
    The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.
    • A. 

      Rise; rise

    • B. 

      Rise; fall

    • C. 

      Fall; rise

    • D. 

      Fall; fall


  • 7. 
    Which of the following illustrates the data lag?
    • A. 

      The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006.

    • B. 

      Policymakers wait and see what is really going on with the economy.

    • C. 

      Policymakers implement policy X on September 12, 2006, but the effects are not felt until six months later.

    • D. 

      The data lag is illustrated equally well by a, b, and c.


  • 8. 
    Suppose that government expenditures are currently $700 billion and tax revenues are currently $550 billion.  Assume further that the government estimates that if the economy were operating at full employment government expenditures would only be $685 billion and tax revenues would be $600 billion.  In this case, the total budget deficit is _____________ billion.
    • A. 

      $85

    • B. 

      $65

    • C. 

      $150

    • D. 

      $215


  • 9. 
    Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the budget deficit?
    • A. 

      $116

    • B. 

      $284

    • C. 

      $140

    • D. 

      $144


  • 10. 
    Suppose that government expenditures are currently $700 billion and tax revenues are currently $550 billion.  Assume further that the government estimates that if the economy were operating at full employment government expenditures would only be $685 billion and tax revenues would be $600 billion.  In this case, the structural deficit is _____________ billion.
    • A. 

      $85

    • B. 

      $65

    • C. 

      $150

    • D. 

      $215


  • 11. 
    Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the structural deficit?
    • A. 

      $116

    • B. 

      $284

    • C. 

      $140

    • D. 

      $144


  • 12. 
    Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the cyclical deficit?
    • A. 

      $1,260

    • B. 

      $284

    • C. 

      $144

    • D. 

      $1,008


  • 13. 
    That part of the deficit due to output being below Natural Real GDP is called the __________ deficit.
    • A. 

      Net

    • B. 

      Gross

    • C. 

      Cyclical

    • D. 

      Structural


  • 14. 
    The deficit that exists when the economy operates at full employment is called the __________ deficit.
    • A. 

      Net

    • B. 

      Gross

    • C. 

      Cyclical

    • D. 

      Structural


  • 15. 
    Which of the following statements is true?
    • A. 

      A budget deficit occurs when government expenditures exceed tax receipts during any single year.

    • B. 

      The public debt is the total amount the federal government owes its creditors.

    • C. 

      The gross public debt is greater than the net public debt.

    • D. 

      B and c

    • E. 

      A, b, and c


  • 16. 
    Senator Smith proposes that the income tax structure be revised to have two tax rates. The first, 16 percent, applies to persons whose income is between $0 and $40,000 a year. The second, 23 percent, applies to persons whose income is more than $40,000 a year. This is a
    • A. 

      Regressive income tax structure.

    • B. 

      Proportional income tax structure.

    • C. 

      Progressive income tax structure.

    • D. 

      Cyclical income tax structure.


  • 17. 
    Jim and Janet each buy a computer and each pays $200 in sales taxes. Jim's annual income is $40,000 and Janet's annual income is $60,000. The sales tax is
    • A. 

      Progressive

    • B. 

      Cyclical

    • C. 

      Proportional.

    • D. 

      Regressive


  • 18. 
    A "flat tax" is another term for __________ tax.
    • A. 

      A progressive

    • B. 

      A proportional

    • C. 

      A regressive

    • D. 

      The inflation


  • 19. 
    The U.S. income tax is currently a __________ tax.
    • A. 

      Progressive

    • B. 

      Proportional

    • C. 

      Regressive

    • D. 

      Proactive


  • 20. 
    The top 1% of income earners in the U.S. (those with the highest taxable incomes) pay
    • A. 

      About the same percentage of their incomes in tax as the average U.S. taxpayer.

    • B. 

      A much lower percentage of their incomes in tax than the average U.S. taxpayer.

    • C. 

      A much higher percentage of their incomes in tax than the average U.S. taxpayer.

    • D. 

      About 15 percent of their incomes in income taxes

    • E. 

      A and d


  • 21. 
    What are the two types of discretionary fiscal policy?
    • A. 

      Automatic and expansionary

    • B. 

      Expansionary and contractionary

    • C. 

      Expansionary and recessionary

    • D. 

      Automatic and contractionary


  • 22. 
    If the economy is on the downward-sloping portion of the Laffer curve, a(an) __________ in tax rates will __________ tax revenues.
    • A. 

      Decrease; lower

    • B. 

      Increase; raise

    • C. 

      Decrease; raise

    • D. 

      Decrease; not change

    • E. 

      Increase; not change


  • 23. 
    If there is complete crowding out, the effective value of the multiplier is
    • A. 

      Zero

    • B. 

      One

    • C. 

      Infinite

    • D. 

      There is not enough information to answer the question.


  • 24. 
    A curve showing the relationship between tax rates and tax revenues is called a __________ curve.
    • A. 

      Phillips

    • B. 

      Keynesian

    • C. 

      Gaussian

    • D. 

      Laffer


  • 25. 
    If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.
    • A. 

      Average

    • B. 

      Fixed

    • C. 

      Total

    • D. 

      Marginal


  • 26. 
    The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.
    • A. 

      Data

    • B. 

      Wait-and-see

    • C. 

      Legislative

    • D. 

      Transmission


  • 27. 
    Elaine's taxable income increases by $1 and her tax payment increases by $0.28. Her marginal tax rate is
    • A. 

      72 percent.

    • B. 

      28 percent.

    • C. 

      56 percent.

    • D. 

      There is not enough information to answer the question.


  • 28. 

    Refer to Exhibit 11-2. Compare points A and B. Which of the following is true?
    • A. 

      At A and B, the tax rates are the same, but tax revenues are different.

    • B. 

      At A tax rates are higher than at B, but tax revenues are the same.

    • C. 

      At B tax rates are higher than at A, but tax revenues are the same.

    • D. 

      None of the above


  • 29. 

    Refer to Exhibit 11-2. At point A, if we cut tax rates slightly, tax revenues
    • A. 

      Increase.

    • B. 

      Decrease

    • C. 

      Will not change.

    • D. 

      Drop to zero.


  • 30. 

    Refer to Exhibit 11-2. At point B, if we cut tax rates slightly, tax revenues
    • A. 

      Increase

    • B. 

      Decrease

    • C. 

      Will not change.

    • D. 

      Drop to zero.


  • 31. 

    Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and there is complete crowding out. As a result, the aggregate demand (AD) curve in the exhibit
    • A. 

      Maintains its present position at AD1.

    • B. 

      Shifts rightward, but does not shift rightward by enough to go through point 2.

    • C. 

      Shifts rightward by enough to go through point 2.

    • D. 

      Shifts leftward.


  • 32. 

    Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose
    • A. 

      An increase in government purchases.

    • B. 

      A decrease in government purchases.

    • C. 

      An increase in taxes.

    • D. 

      A and c


  • 33. 
         9.   An expansionary fiscal policy will
    • A. 

      Always result in a budget deficit.

    • B. 

      Always result in a budget surplus.

    • C. 

      Sometimes result in a budget deficit.

    • D. 

      Never result in a budget surplus.

    • E. 

      More information is necessary to answer this question.


  • 34. 
    110.   A taxpayer pays __________ tax rate on additional income if the income tax structure is progressive, __________ tax rate on additional income if the income tax structure is proportional, and __________ tax rate on additional income if the income tax structure is regressive.
    • A. 

      A higher; a lower; the same

    • B. 

      A higher; the same; a lower

    • C. 

      A lower; a higher; the same

    • D. 

      The same; a lower; a higher

    • E. 

      The same; a higher; a lower


  • 35. 
       92.   The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates are cut and government purchases are increased. Is a budget deficit inevitable?
    • A. 

      No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) increases tax revenues, and if the increase in tax revenues equals the increase in government purchases there is no deficit.

    • B. 

      Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues.

    • C. 

      No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) decreases tax revenues, and if the decrease in tax revenues is less than the increase in government purchases there is no deficit.

    • D. 

      Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) raises interest rates, and higher interest rates discourage investment spending.


  • 36. 
    Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4.  If a person’s taxable income is $20,000, how much does he pay in taxes?
    • A. 

      $180 $18,000 $180

    • B. 

      $2,000

    • C. 

      $18,000

    • D. 

      $1,800


  • 37. 
         8.   __________ flows from government to households.
    • A. 

      A transfer payment

    • B. 

      A tax payment

    • C. 

      The Laffer Curve

    • D. 

      Crowding out


  • 38. 
    Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4.  If a person’s taxable income is $30,000, how much does he pay in taxes?
    • A. 

      $1,345

    • B. 

      $1,950

    • C. 

      $3,900

    • D. 

      $2,980


  • 39. 
    Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4.  If a person’s taxable income is $50,000, how much does he pay in taxes?
    • A. 

      $3,760

    • B. 

      $8,500

    • C. 

      $5,900

    • D. 

      $6,840


  • 40. 
    Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4.  If a person’s taxable income is $60,000, how much does he pay in taxes?
    • A. 

      $7,600.

    • B. 

      $10,200.

    • C. 

      $8,780.

    • D. 

      $15,300.


  • 41. 
    If the structural deficit is $330 billion and the cyclical deficit is $80 billion, it follows that the __________ is __________ billion.
    • A. 

      Public debt; $410

    • B. 

      Total budget deficit; $250

    • C. 

      Total budget deficit; $410

    • D. 

      Net public debt; $250

    • E. 

      None of the above


  • 42. 
    If an economy has a structural surplus and a cyclical deficit, it may be concluded that
    • A. 

      Fiscal policy is expansionary.

    • B. 

      Fiscal policy is contractionary.

    • C. 

      The economy is in a boom.

    • D. 

      The economy is in a recession.


  • 43. 
    Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Use the information provided in Exhibit 11-4.  What is the marginal tax rate on the 23,000th dollar earned?
    • A. 

      9%

    • B. 

      13%

    • C. 

      17%

    • D. 

      It is impossible to determine the answer to this question.


  • 44. 
    The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.
    • A. 

      Effectiveness

    • B. 

      Transmission

    • C. 

      Legislative

    • D. 

      Data


  • 45. 
    The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.
    • A. 

      Data

    • B. 

      Wait-and-see

    • C. 

      Legislative

    • D. 

      Transmission


  • 46. 
    If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.
    • A. 

      Average

    • B. 

      Fixed

    • C. 

      Total

    • D. 

      Marginal


  • 47. 
    Which of the following illustrates the wait-and-see lag?
    • A. 

      Policymakers believe an economic downturn has occurred, but they decide not to take action until they are sure.

    • B. 

      Policymakers are in the process of proposing policy measures to deal with the current economic slowdown.

    • C. 

      Policymakers first learn of the recession when it is five months old.

    • D. 

      Policymakers implement policy X, but it will be a few months before it starts working.

    • E. 

      Policymakers agree to policy X, but it will be at least two months before the policy is implemented.


  • 48. 
    Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $700 million. This is an example of
    • A. 

      Incomplete crowding out.

    • B. 

      Complete crowding out.

    • C. 

      Zero crowding out.

    • D. 

      A and c

    • E. 

      None of the above


  • 49. 
    Fiscal policy may not work as policymakers intend it to work because of
    • A. 

      Crowding out.

    • B. 

      Lags

    • C. 

      The position of the physical production possibilities frontier.

    • D. 

      A and b

    • E. 

      A, b, and c


  • 50. 
    Suppose the government attempts to stimulate the economy by increasing purchases without increasing taxes. Which of the following statements is most likely to be accepted by someone who believes in crowding out?
    • A. 

      The government's actions will have their intended effect.

    • B. 

      The government's actions will cause businesses to become more optimistic about the economy, and they will increase their output even more than the government had intended.

    • C. 

      The government's actions will raise interest rates, causing decreased investment and consumption, and the economy will not expand as much as the government had intended.

    • D. 

      This is a trick question, because the federal government is required by law to increase taxes by the same amount as it increases expenditures.


  • 51. 
    The AD curve shifts to the right with a __________ in government purchases (G) or a __________ in taxes.
    • A. 

      Rise; rise

    • B. 

      Rise; fall

    • C. 

      Fall; rise

    • D. 

      Fall; fall


  • 52. 
    Which of the following is an example of crowding out?
    • A. 

      A decrease in the rate of growth of the stock of money decreases GDP.

    • B. 

      A deficit causes an increase in interest rates, which causes a decrease in investment spending.

    • C. 

      An increase in tariffs causes a decrease in imports.

    • D. 

      A decrease in government housing subsidies causes an increase in private spending on housing.


  • 53. 
    If there is complete crowding out as a result of an increase in government purchases, there will be
    • A. 

      A decrease in aggregate demand.

    • B. 

      No change in aggregate demand.

    • C. 

      An increase in aggregate demand.

    • D. 

      A downward movement along the aggregate demand curve.


  • 54. 
    Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $700 million. This is an example of
    • A. 

      Incomplete crowding out.

    • B. 

      Complete crowding out.

    • C. 

      Zero crowding out.

    • D. 

      A and c

    • E. 

      None of the above


  • 55. 
    Suppose Congress decreases income taxes. This is an example of
    • A. 

      Expansionary fiscal policy.

    • B. 

      Expansionary monetary policy.

    • C. 

      Contractionary fiscal policy.

    • D. 

      Contractionary monetary policy.


  • 56. 
       51.   Some of the crowding out of private expenditures may come in the form of
    • A. 

      An increase in consumption.

    • B. 

      An increase in net exports.

    • C. 

      A decrease in taxes.

    • D. 

      A decrease in net exports.


  • 57. 
    Expansionary fiscal policy actions include __________ government spending and/or __________ taxes, while contractionary fiscal policy actions include __________ government spending and/or __________ taxes.
    • A. 

      Increasing; increasing; decreasing; decreasing

    • B. 

      Decreasing; decreasing; increasing; increasing

    • C. 

      Increasing; decreasing; increasing; decreasing

    • D. 

      Decreasing; increasing; increasing; decreasing

    • E. 

      Increasing; decreasing; decreasing; increasing


  • 58. 
    A balanced budget occurs when
    • A. 

      The national debt is reduced to zero dollars.

    • B. 

      A budget deficit during one year is matched by a budget surplus in the next year.

    • C. 

      Transfer payments equal tax revenues.

    • D. 

      Government expenditures equal tax revenues.


  • 59. 
    A federal budget surplus
    • A. 

      Occurs when government expenditures exceed tax revenues.

    • B. 

      Occurs when tax revenues exceed government expenditures.

    • C. 

      Occurs when tax revenues exceed transfer payments.

    • D. 

      Occurs when monetary policy works in the opposite direction of fiscal policy.

    • E. 

      Is an impossibility.


  • 60. 
    A federal budget deficit
    • A. 

      Occurs when government expenditures exceed tax revenues.

    • B. 

      Occurs when tax revenues exceed government expenditures.

    • C. 

      Occurs when transfer payments exceed tax revenues.

    • D. 

      Will always result when Congress and the president cannot agree on expenditures.

    • E. 

      Occurs when monetary policy works in the opposite direction of fiscal policy.


  • 61. 
    Fiscal policy refers to
    • A. 

      Efforts to balance a government's budget.

    • B. 

      Changes in the money supply to achieve particular economic goals.

    • C. 

      Changes in government expenditures and taxation to achieve particular economic goals.

    • D. 

      The change in private expenditures that occurs as a consequence of changes in government spending.


  • 62. 
    Suppose Congress increases income taxes. This is an example of
    • A. 

      Expansionary fiscal policy.

    • B. 

      Expansionary monetary policy.

    • C. 

      Contractionary fiscal policy.

    • D. 

      Contractionary monetary policy.


  • 63. 
       50.   The crowding-out effect suggests that
    • A. 

      High taxes reduce both consumption and saving.

    • B. 

      Increases in consumption are always at the expense of saving.

    • C. 

      Increases in government spending may raise the interest rate, thereby reducing investment.

    • D. 

      Increases in government spending will close a recessionary gap.


  • 64. 
       15.   Compared to barter, money __________ transaction costs, making transactions __________ time-consuming.
    • A. 

      Increases; more

    • B. 

      Increases; less

    • C. 

      Reduces; more

    • D. 

      Reduces; less


  • 65. 
       16.   The requirement of a "double coincidence of wants" is the chief __________ of the __________ exchange system.
    • A. 

      Advantage; barter

    • B. 

      Advantage; monetary

    • C. 

      Disadvantage; barter

    • D. 

      Disadvantage; monetary


  • 66. 
       79.   Banks in the United States operate under a fractional reserve system, which means they must maintain only a fraction of their deposits in the form of
    • A. 

      Debt.

    • B. 

      Loans.

    • C. 

      An insurance policy.

    • D. 

      Reserves


  • 67. 
       93.   A bank has $50,000 in excess reserves and the required reserve ratio is 10 percent. This means the bank could have __________ in checkable deposit liabilities and __________ in (total) reserves.
    • A. 

      $500,000; $90,000

    • B. 

      $100,000; $20,000

    • C. 

      $50,000; $25,000

    • D. 

      $250,000; $75,000


  • 68. 
       39.   The amount of required reserves a bank holds depends on the
    • A. 

      Required reserve ratio.

    • B. 

      Demand-deposit ratio.

    • C. 

      Excess-reserve ratio.

    • D. 

      Currency ratio.


  • 69. 
       40.   Reserves held beyond the required amount are called __________ reserves.
    • A. 

      Redundant

    • B. 

      Precautionary

    • C. 

      Excess

    • D. 

      Surplus


  • 70. 
       96.   If excess reserves are $10 million, (total) reserves are $14 million, and the required reserve ratio is 10%, then required reserves equal ________________ and checkable deposits equal ____________________.
    • A. 

      $4 million; $40 million

    • B. 

      $40 million; $4 million

    • C. 

      $24 million; $240 million

    • D. 

      $7 million; $70 million


  • 71. 
       41.   Bank A has deposits of $8,000 and total reserves of $2,000. If the required reserve ratio is 0.15, the bank has required reserves of
    • A. 

      $4,000.

    • B. 

      $1,200.

    • C. 

      $900

    • D. 

      $300.


  • 72. 
       42.   Bank A has deposits of $200,000 and reserves of $24,000. If the required reserve ratio is 11 percent, the bank has excess reserves of
    • A. 

      $2,000.

    • B. 

      $22,000.

    • C. 

      $220,000.

    • D. 

      $20,000.


  • 73. 
       59.   The M2 money supply
    • A. 

      Includes M1.

    • B. 

      Is the most common broad definition of the money supply.

    • C. 

      Includes savings deposits.

    • D. 

      Is larger than M1.

    • E. 

      All of the above


  • 74. 
       95.   If reserves equal $59 million and vault cash equals $29 million, it follows that
    • A. 

      Bank deposits at the Federal Reserve equal $29 million.

    • B. 

      Currency in the hands of the public equals $29 million.

    • C. 

      Excess reserves equal $30 million.

    • D. 

      Bank deposits at the Federal Reserve equal $30 million.

    • E. 

      There is not enough information to answer the question.


  • 75. 
       45.   When a bank makes a loan to one of its customers, to the bank the loan is classified as
    • A. 

      An asset.

    • B. 

      A liability.

    • C. 

      Neither an asset nor a liability.

    • D. 

      An asset in some cases and a liability in other cases, depending on the type of loan.


  • 76. 
       26.   A savings account functions as
    • A. 

      A unit of account.

    • B. 

      A store of value.

    • C. 

      A medium of exchange.

    • D. 

      None of the above


  • 77. 
       27.   The first bankers were
    • A. 

      Sheriffs.

    • B. 

      Goldsmiths.

    • C. 

      Clergy

    • D. 

      Innkeepers.

    • E. 

      Economists.


  • 78. 
       28.   Because money __________________, people are _________________ likely to specialize their work in a money economy.
    • A. 

      Is a store of value; less

    • B. 

      Eliminates the double coincidence of wants; more

    • C. 

      Is a unit of account; more

    • D. 

      Eliminates the need for holdings of precious metals; more


  • 79. 
       30.   According to the text, in the book version of The Wonderful Wizard of Oz, Dorothy's slippers are
    • A. 

      Gold

    • B. 

      Silver.

    • C. 

      Ruby.

    • D. 

      Paper.


  • 80. 
       31.   In the history of banking, warehouse receipts refer to receipts
    • A. 

      That goldsmiths once issued acknowledging that they held a customer's gold.

    • B. 

      For storing furniture in a warehouse.

    • C. 

      Goldsmiths issued to each other when they borrowed gold.

    • D. 

      For storing food and other perishables in a warehouse.


  • 81. 
       32.   Fractional reserve banking is a term used to describe a banking system whereby
    • A. 

      Individual banks share a fraction of the total funds deposited in the whole banking system.

    • B. 

      Banks are required to quote interest rates in fractions.

    • C. 

      Banks hold reserves equal to only a fraction of their deposit liabilities.

    • D. 

      Banks hold reserves equal to a multiple of their deposit liabilities; that is, fractional in this case really means multiple.

    • E. 

      Banks are required to maintain a certain fraction of their deposits in the form of checkable deposits, a certain fraction of their deposits in the form of savings deposits, etc.


  • 82. 
       33.   Total bank reserves equal
    • A. 

      Checkable deposits + vault cash + traveler's checks.

    • B. 

      Vault cash + currency in the hands of the nonbanking public.

    • C. 

      Bank deposits at the Federal Reserve.

    • D. 

      Bank deposits at the Federal Reserve + vault cash.


  • 83. 
       34.   Required reserves are the amount of
    • A. 

      Reserves a bank must hold against its deposits as mandated by the Federal Reserve.

    • B. 

      Cash a bank must hold against its deposits as mandated by the Federal Reserve.

    • C. 

      Checkable deposits a bank must hold against all other deposits as mandated by the U.S. Treasury.

    • D. 

      Reserves a bank must hold against all its assets as mandated by the Federal Reserve.


  • 84. 
       35.   If checkable deposits in Bank A total $100 million and the required reserve ratio is 9 percent, then required reserves at Bank A equal
    • A. 

      $81.0 million.

    • B. 

      $9.0 million.

    • C. 

      $9.9 million.

    • D. 

      $900,000


  • 85. 
       47.   Which of the following is true?
    • A. 

      Reserves = required reserves - excess reserves.

    • B. 

      Reserves - required reserves = excess reserves.

    • C. 

      Reserves = required reserves + excess reserves.

    • D. 

      B and c

    • E. 

      A and b


  • 86. 
       51.   The store of value function of money refers to the ability of money to
    • A. 

      Facilitate the exchange of goods and services.

    • B. 

      Maintain its value over time.

    • C. 

      Express relative scarcity.

    • D. 

      Earn interest over time.


  • 87. 
       50.   The unit of account function of money refers to the
    • A. 

      Fact that money and income are the same thing.

    • B. 

      Common denominator of measurement provided by money.

    • C. 

      Characteristic that all money is intrinsically valuable.

    • D. 

      All of the above


  • 88. 
       52.   M2 includes M1 plus all of the following except
    • A. 

      Savings deposits.

    • B. 

      Retail money market mutual fund balances.

    • C. 

      Short-term U.S. government securities.

    • D. 

      Time deposits.


  • 89. 
       56.   Money is defined by economists as
    • A. 

      The market value of an asset.

    • B. 

      The funds one receives during a specified period of time.

    • C. 

      Any good that is widely accepted in exchange and for the repayment of debts.

    • D. 

      Both b and c

    • E. 

      All of the above


  • 90. 
       46.   A bank has $10,000 in excess reserves and the required reserve ratio is 20 percent. This means the bank could have __________ in checkable deposit liabilities and __________ in reserves.
    • A. 

      $80,000, $10,000

    • B. 

      $100,000, $20,000

    • C. 

      $50,000, $25,000

    • D. 

      $100,000, $30,000


  • 91. 
       44.   Bank A holds $1 million in required reserves and the required reserve ratio is 9 percent. It follows that Bank A holds checkable deposit liabilities that total approximately
    • A. 

      $111 million.

    • B. 

      $11,111,111.

    • C. 

      $90 million.

    • D. 

      $900 million.


  • 92. 
       99.   The potential buyer of a house has less information about the house than the seller of the house. This is a case of
    • A. 

      Externality information.

    • B. 

      Free ridership.

    • C. 

      Asymmetric information.

    • D. 

      Biased information.

    • E. 

      A public good not being a private good.


  • 93. 
       43.   A bank has $10 million in checkable deposits and $2.5 million in reserves. If the required reserve ratio is 10 percent, then the bank has
    • A. 

      Required reserves of $1.0 million.

    • B. 

      Excess reserves of $1.5 million.

    • C. 

      Excess reserves of $7.5 million.

    • D. 

      Required reserves of $7.5 million.

    • E. 

      A and b


  • 94. 
       37.   Ninth National Bank holds $150,000,000 in checkable deposits and $12,000,000 in total reserves. With a required reserve ratio of 8 percent, how much in excess reserves is Ninth National holding?
    • A. 

      $8,500,000

    • B. 

      $132,000,000

    • C. 

      $14,630,000

    • D. 

      $16,720,000

    • E. 

      $0


  • 95. 
       29.   Accordidng to the text, The Wonderful Wizard of Oz is alleged to be a story about
    • A. 

      The California gold strikes of 1849.

    • B. 

      The end of the gold standard in 1934.

    • C. 

      The presidential election of 1896.

    • D. 

      The financial panic of 1907.


  • 96. 
       38.   Tenth National Bank holds $235,000,000 in checkable deposits and $25,500,000 in reserves. With a required reserve ratio of 10 percent, how much in excess reserves is Tenth National holding?
    • A. 

      $20,000,000

    • B. 

      $2,000,000

    • C. 

      $220,500,000

    • D. 

      $18,900,000


  • 97. 
       25.   According to the text, L. Frank Baum, the author of The Wonderful Wizard of Oz, blamed ____________________ for the economic depression of 1893 and the related hardships faced by farmers and workers.
    • A. 

      The gold standard

    • B. 

      The silver standard

    • C. 

      A massive tornado

    • D. 

      High taxes


  • 98. 
       22.   A savings deposit is a type of
    • A. 

      Time deposit that is payable on demand.

    • B. 

      Time deposit that earns interest and allows the depositor to write checks payable to other persons.

    • C. 

      Time deposit that does not earn interest but does offer limited check-writing services.

    • D. 

      Interest-earning account at a bank or thrift institution in which funds can be withdrawn at any time without a penalty payment.

    • E. 

      Checkable deposit that also pays interest.


  • 99. 
       23.   In a barter economy, people are _________ to specialize in the production of one good or service, compared to in a money economy.
    • A. 

      More likely

    • B. 

      Less likely

    • C. 

      Equally likely

    • D. 

      Almost always going


  • 100. 
       21.   A "money market deposit account" is a(n)
    • A. 

      Checking account that pays no interest.

    • B. 

      Bank account with a specified maturity date.

    • C. 

      Store of Federal Reserve Notes held in bank vaults to cash checkable deposits on demand.

    • D. 

      Checking account created from an automatic transfer from a savings account.

    • E. 

      Interest-earning account at a bank or thrift institution that usually has a minimum balance requirement.


  • 101. 
       12.   According to the text, the good that emerged as money in World War II POW camps was
    • A. 

      Tinned beef

    • B. 

      Toilet paper

    • C. 

      Cigarettes

    • D. 

      Cheese


  • 102. 
       13.   In the Yap civilization of the South Pacific prior to 1920, large, heavy stones in the shape of a wheel were used as money. Which function of money was probably least served by this form of money?
    • A. 

      Medium of exchange

    • B. 

      Store of value

    • C. 

      Unit of account

    • D. 

      Store of wealth


  • 103. 
       24.   M2 is comprised of
    • A. 

      Small-denomination time deposits + savings deposits + money market accounts.

    • B. 

      Small-denomination time deposits + credit cards + money market accounts + gold deposits.

    • C. 

      M1 + small-denomination time deposits + savings deposits + retail money market mutual funds.

    • D. 

      M1 + small denomination time deposits + credit cards + money market accounts.


  • 104. 
       14.   Money evolved out of the self-interested actions of
    • A. 

      Economists.

    • B. 

      Governments

    • C. 

      A few kings and queens.

    • D. 

      Individuals.


  • 105. 
       20.   Which of the following statements is true?
    • A. 

      In March 2010, of the three components of M1, the currency held outside banks component was the largest.

    • B. 

      M1 is sometimes referred to as the “broad definition of the money supply”.

    • C. 

      Time deposits are a part of M1, but not M2.

    • D. 

      M1 is a larger dollar figure than M2.

    • E. 

      All of the above statements are false.


  • 106. 
       19.   Historically, which of the following goods have evolved into money?
    • A. 

      Gold

    • B. 

      Salt

    • C. 

      Cattle

    • D. 

      Cocoa beans

    • E. 

      All of the above


  • 107. 
       18.   M1 is comprised of currency held outside banks + traveler’s checks + __________.
    • A. 

      Credit cards

    • B. 

      Savings deposits

    • C. 

      Gold

    • D. 

      Checkable deposits

    • E. 

      Money market mutual funds


  • 108. 
       17.   Your neighbor has knowledge of economics and you would like her to share it with you. You own a car, a CD player and a new pair of running shoes. You wish to make a trade, but the neighbor does not want what you have. The problem can be stated as follows: You are not satisfying the
    • A. 

      Rule of transaction costs.

    • B. 

      Double coincidence of wants.

    • C. 

      Law of marketability.

    • D. 

      Terms of a common denominator.


  • 109. 
    A unit of account is
    • A. 

      A bank account.

    • B. 

      A savings account.

    • C. 

      A common measurement in which values are expressed.

    • D. 

      The same as a medium of exchange.

    • E. 

      None of the above


  • 110. 
       10.   If a person uses money to buy a pair of shoes, money is functioning as
    • A. 

      A unit of account.

    • B. 

      A store of value.

    • C. 

      A medium of exchange.

    • D. 

      None of the above


  • 111. 
    Money's basic advantage as compared to barter is that
    • A. 

      Everybody has money but not everyone has the opportunity to barter.

    • B. 

      A money system relies on a double coincidence of wants.

    • C. 

      Money reduces transaction costs.

    • D. 

      Money is the only medium you can use to store your wealth.


  • 112. 
    If peanuts were widely accepted for purposes of exchange, then
    • A. 

      Peanuts would be money.

    • B. 

      Peanuts would be less valuable than they are currently.

    • C. 

      We would observe people using peanuts to purchase cars.

    • D. 

      A and c

    • E. 

      A and b


  • 113. 
    Transaction costs are best defined as the
    • A. 

      Various costs of different goods and services.

    • B. 

      Cost of one good in terms of another; that is, the price of apples in terms of oranges.

    • C. 

      Costs involved in borrowing money from someone, that is, the interest that must be paid for the use of someone else's money.

    • D. 

      Costs associated with the time and effort necessary to make an exchange.


  • 114. 
    Which of the following is a correct listing of money's functions?
    • A. 

      Source of credit, value of transaction costs, unit of barter

    • B. 

      Medium of barter, medium of exchange, medium of transactions

    • C. 

      Unit of barter, unit of account, a unit of income

    • D. 

      Store of value, store of exchange, measure of account

    • E. 

      Store of value, medium of exchange, unit of account


  • 115. 
    In which situation are transaction costs most likely to be the lowest?
    • A. 

      Rodney buys antiques; he is currently looking for an eighteenth-century table.

    • B. 

      Cathy is looking for someone who is willing to trade accounting services (in return) for law services.

    • C. 

      Rodriguez wants to buy a house with two master bedrooms.

    • D. 

      Melinda wants to buy a McDonald's Big Mac (she will not be asking for a special order).


  • 116. 
    To an economist, money is a synonym for which of the following?
    • A. 

      Income

    • B. 

      Credit

    • C. 

      Wealth

    • D. 

      Salary

    • E. 

      None of the above


  • 117. 
    Barter is
    • A. 

      The exchange of money for goods and then the exchange of those goods for money.

    • B. 

      The exchange of money for money, or the exchange of money for stocks and bonds.

    • C. 

      The exchange of goods and services for goods and services without the use of money.

    • D. 

      Any exchange, with or without the use of money, in which the participants negotiate (or barter) the price of the goods to be exchanged.


  • 118. 
     Which of the following illustrates a barter transaction?
    • A. 

      A bushel of oranges is traded for a bushel of apples.

    • B. 

      Someone buys a pizza for the special price of $4.

    • C. 

      Someone buys a house for $100,000.

    • D. 

      B and c

    • E. 

      A, b, and c


  • 119. 
       76.   Consider the following data: currency (held outside banks) = $354 billion, checkable deposits = $250 billion, traveler's checks = $4 billion, small-denomination time deposits = $200 billion, savings deposits = $100 billion, retail money market mutual funds = $160 billion. M1 equals __________ billion and M2 equals __________ billion.
    • A. 

      $608; $1,068

    • B. 

      $708; $1,038

    • C. 

      $708; $948

    • D. 

      $694; $1,038

    • E. 

      None of the above


  • 120. 
       78.   Bank deposits at the Federal Reserve = $40 billion, vault cash = $2 billion, required reserve ratio = 0.10, and total checkable deposits = $400 billion. It follows that required reserves equal __________ billion, (total) reserves equal __________ billion and excess reserves equal __________ billion.
    • A. 

      $42; $42; $2

    • B. 

      $42; $40; $2

    • C. 

      $2; $40; $38

    • D. 

      $38; $40; $2

    • E. 

      $40; $42; $2


  • 121. 
       88.   The __________ rate is the interest rate one bank pays another bank for a loan.
    • A. 

      Discount

    • B. 

      Mortgage

    • C. 

      Reserve requirement

    • D. 

      Federal funds

    • E. 

      Bank-borrowing


  • 122. 
    121.   In the United States, paper currency is printed at the
    • A. 

      Bureau of Engraving and Printing.

    • B. 

      Federal Reserve District banks.

    • C. 

      U.S. Mint.

    • D. 

      U.S. Treasury


  • 123. 
    122.   Which of the following is not a monetary policy tool of the Fed?
    • A. 

      Open market operations

    • B. 

      The required reserve ratio

    • C. 

      The discount rate

    • D. 

      The term auction facility (TAF) program

    • E. 

      Income tax rates


  • 124. 
       89.   An open market __________ by the Fed increases the money supply; a(n) __________ in the required reserve ratio increases the money supply.
    • A. 

      Sale; decrease

    • B. 

      Purchase; increase

    • C. 

      Sale; increase

    • D. 

      Purchase; decrease


  • 125. 
       86.   If reserves rise by $1 million, what is the dollar difference between the maximum change in checkable deposits when the required reserve ratio is 10 percent and when it is 15 percent?
    • A. 

      $10 million

    • B. 

      $3.33 million

    • C. 

      $2 million

    • D. 

      $5 million


  • 126. 
       87.   Which of the following will lower the money supply?
    • A. 

      Lowering the discount rate

    • B. 

      Raising the required reserve ratio

    • C. 

      An open market purchase

    • D. 

      An open market sale

    • E. 

      A and d


  • 127. 
    110.   The Fed is intended to be controlled by
    • A. 

      The President of the United States.

    • B. 

      Congress.

    • C. 

      The President of the United States and Congress, jointly.

    • D. 

      None of the above


  • 128. 
    109.   If the Fed purchases government securities from Bank A, __________ in the banking system __________ and the money supply __________.
    • A. 

      Reserves; fall; falls

    • B. 

      Reserves; rise; falls

    • C. 

      Reserves; rise; rises

    • D. 

      Excess reserves; fall; rises

    • E. 

      Excess reserves; rise; falls


  • 129. 
    112.   The president of the Federal Reserve Bank of ________________ holds a permanent seat on the _________________________.
    • A. 

      New York; Board of Governors of the Federal Reserve System

    • B. 

      Washington D.C.; FOMC

    • C. 

      San Francisco; FOMC

    • D. 

      New York; FOMC

    • E. 

      Washington D.C.; Board of Governors of the Federal Reserve System


  • 130. 
    Federal Reserve Action Effect on the Money Supply Raise the required reserve ratio (1) Raise the discount rate (2) Lower the required reserve ratio (3) Conduct open market sale (4) Lower the discount rate (5) Conduct open market purchase (6) Refer to Exhibit 13-2.  What word (up or down) should go in the place of blank (3) and blank (4), respectively?
    • A. 

      Up; up

    • B. 

      Up; down

    • C. 

      Down; up

    • D. 

      Down; down


  • 131. 
    Federal Reserve Action Effect on the Money Supply Raise the required reserve ratio (1) Raise the discount rate (2) Lower the required reserve ratio (3) Conduct open market sale (4) Lower the discount rate (5) Conduct open market purchase (6) 120.   Refer to Exhibit 13-2.  What word (up or down) should go in the place of blank (5) and blank (6), respectively?
    • A. 

      Up; up

    • B. 

      Up; down

    • C. 

      Down; up

    • D. 

      Down; down


  • 132. 
       95.   The most important responsibility of the Fed is to
    • A. 

      Clear checks.

    • B. 

      Supervise member banks.

    • C. 

      Serve as fiscal agent for the U.S. Treasury.

    • D. 

      Control the money supply.


  • 133. 
       94.   The president of the ________________________ holds a permanent seat on the FOMC.
    • A. 

      United States

    • B. 

      Federal Reserve District Bank of New York

    • C. 

      Federal Reserve District Bank of San Francisco

    • D. 

      U.S. Senate banking committee

    • E. 

      None of the above


  • 134. 
       72.   Which of the following Fed actions will decrease the money supply?
    • A. 

      An open market purchase of Treasury bills

    • B. 

      An increase in the required reserve ratio

    • C. 

      A decrease in the discount rate

    • D. 

      All of the above

    • E. 

      None of the above


  • 135. 
       71.   Which of the following Fed actions will increase the money supply?
    • A. 

      Open market purchases of Treasury notes

    • B. 

      An increase in the required reserve ratio

    • C. 

      An increase in the discount rate

    • D. 

      All of the above

    • E. 

      None of the above


  • 136. 
       72.   Which of the following Fed actions will decrease the money supply?
    • A. 

      An open market purchase of Treasury bills

    • B. 

      An increase in the required reserve ratio

    • C. 

      A decrease in the discount rate

    • D. 

      All of the above

    • E. 

      None of the above


  • 137. 
    Federal Reserve Action Effect on the Money Supply Raise the required reserve ratio (1) Raise the discount rate (2) Lower the required reserve ratio (3) Conduct open market sale (4) Lower the discount rate (5) Conduct open market purchase (6) 118.   Refer to Exhibit 13-2.  What word (up or down) should go in the place of blank (1) and blank (2), respectively?
    • A. 

      Up; up

    • B. 

      Up; down

    • C. 

      Down; up

    • D. 

      Down; down


  • 138. 
       97.   Here is how an open market sale works: A commercial bank __________ government securities to (from) the Fed, which lowers the bank's deposits at the __________ and __________ the bank's __________.
    • A. 

      Buys; Fed; lowers; reserves

    • B. 

      Sells; Treasury; raises; reserves

    • C. 

      Sells; Fed; raises; reserves

    • D. 

      Buys; Treasury; lowers; liabilities

    • E. 

      None of the above


  • 139. 
       96.   Here is how an open market purchase works: The Fed __________ government securities to (from) a commercial bank, which raises the bank's deposits at the __________ and increases the bank's __________.
    • A. 

      Sells; Fed; reserves

    • B. 

      Buys; Fed; reserves

    • C. 

      Buys; Treasury; discount loans

    • D. 

      Sells; Treasury; required reserve ratio

    • E. 

      Buys; Fed; liabilities


  • 140. 
         7.   Which of the following is not a major responsibility of the Fed?
    • A. 

      Controlling the money supply

    • B. 

      Serving as the federal government's banker

    • C. 

      Determining tax rates

    • D. 

      Acting as a lender of last resort


  • 141. 
       10.   When a check is written on an account at Bank A and deposited in Bank B, the reserve account of __________ will rise and reserves of the entire banking system will __________.
    • A. 

      Bank A; rise

    • B. 

      Bank A; remain constant

    • C. 

      Bank B; rise

    • D. 

      Bank B; remain constant


  • 142. 
         6.   Which of the following is not a major responsibility of the Fed?
    • A. 

      Supplying the economy with paper money

    • B. 

      Providing check-clearing services

    • C. 

      Supervising member banks

    • D. 

      Serving as fiscal agent for the Treasury

    • E. 

      All of the above are major responsibilities of the Fed.


  • 143. 
         3.   The Board of Governors of the Federal Reserve is comprised of
    • A. 

      Seven persons, each appointed to a seven-year term.

    • B. 

      Seven persons, each appointed to a fourteen-year term.

    • C. 

      Fourteen persons, each appointed to a seven-year term.

    • D. 

      Twelve persons, each appointed to a seven-year term.

    • E. 

      Twelve persons, each appointed to a fourteen-year term.


  • 144. 
         1.   The Federal Reserve System is the
    • A. 

      Federal government agency that collects taxes and spends these receipts on tanks, bridges, government employees' salaries, etc.

    • B. 

      Company that delivers packages to your front door.

    • C. 

      Central bank of the United States.

    • D. 

      Federal government agency that collects and disseminates all the economic data that economists are interested in.


  • 145. 
         2.   The Federal Reserve System began operations in
    • A. 

      1834.

    • B. 

      1896

    • C. 

      1914

    • D. 

      1935.


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