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Economics Quizzes & Trivia

Problem Set 6


Questions and Answers
  • 1. 
    What is the reserve multiplier if the required reserve ratio is 25%?
    • A. 

      1

    • B. 

      25

    • C. 

      5

    • D. 

      4

  • 2. 
    The federal funds rate is
    • A. 

      The interest rate on federal government bonds.

    • B. 

      The interest rate on short-term loans of reserves from one bank to another.

    • C. 

      The interest rate banks charge the federal government.

    • D. 

      The interest rate banks charge their most creditworthy customers.

  • 3. 
    In a fractional reserve banking system, banks create money when they
    • A. 

      Accept deposits

    • B. 

      Issue note-certificates.

    • C. 

      Hold their deposits as reserves.

    • D. 

      Make loans

  • 4. 
    An increase in the required reserve ratio decreases excess reserves and tends to
    • A. 

      Decrease the money supply.

    • B. 

      Increase or decrease the money supply.

    • C. 

      Cause no change in the money supply.

    • D. 

      Increase the money supply.

  • 5. 
    Suppose the Federal Reserve wants to prevent aggregate demand from increasing. Which of the following policies will help the Fed achieve its objective?
    • A. 

      Open market purchases of government securities.

    • B. 

      Open market sales of government securities.

    • C. 

      A decrease in the discount rate.

    • D. 

      A decrease in the reserve requirements.

  • 6. 
    Suppose the economy is currently in equilibrium at potential real GDP. During the year, the Fed expects aggregate demand to increase substantially and aggregate supply to increase only slightly. To prevent the economy from overheating, the Fed should
    • A. 

      Lower the discount rate.

    • B. 

      Lower reserve requirements

    • C. 

      Engage in open market sales of government securities.

    • D. 

      Engage in open market purchases of government securities.

  • 7. 
    A reduction in the required reserve ratio would cause the equilibrium interest rate to
    • A. 

      Increase

    • B. 

      Increase, only if the level of investment is low relative to historic levels.

    • C. 

      Decrease

    • D. 

      remain the same.

    • E. 

      Increase, only if the level of unemployment is high.

  • 8. 
    An expansionary monetary policy __________ the money supply, causing the real interest rate to __________ and planned investment to ___________.
    • A. 

      Increases, decrease, increase

    • B. 

      Decreases, increase, decrease

    • C. 

      Increases, increase, increase

    • D. 

      Decreases, decrease, decrease

    • E. 

      Ncreases, increase, decrease

  • 9. 
    If investment spending is unaffected by the level of real interest rates,
    • A. 

      The aggregate purchases line will shift upward by a larger amount than occurs when the investment demand curve is downward-sloping.

    • B. 

      Monetary policy will be particularly effective in reducing the equilibrium level of real GDP.

    • C. 

      The aggregate demand curve will shift to the left, if the money supply is increased.

    • D. 

      Monetary policy will have no effect on the equilibrium level of real GDP in the short run.

    • E. 

      Monetary policy will be particularly effective in increasing the equilibrium level of real GDP.

  • 10. 
    If the economy is experiencing an inflationary GDP gap, __________ monetary policy might be used to __________ aggregate demand and __________ the overall price level.
    • A. 

      Contractionary, increase, increase

    • B. 

      Contractionary, decrease, decrease

    • C. 

      Contractionary, decrease, increase

    • D. 

      Expansionary, decrease, decrease

    • E. 

      Expansionary, increase, decrease

  • 11. 
    Assume that money in circulation in the U.S. economy is $90 billion and nominal GDP is $270 billion. What is the income velocity of circulation of money?
    • A. 

      6

    • B. 

      3

    • C. 

      12

    • D. 

      9

  • 12. 
    In the classical model, assuming constant money velocity, the rate of inflation equals the difference between
    • A. 

      The rate of population growth and the rate of growth in nominal GDP.

    • B. 

      The rate of growth in real wages and the rate of growth in real GDP.

    • C. 

      The rate of growth in the money supply and the rate of growth in nominal GDP.

    • D. 

      The rate of unemployment and the rate of economic growth.

    • E. 

      The rate of growth in the money supply and the rate of growth in real GDP.

  • 13. 
    The money stock measured as M1 is growing at the rate of 5% per year. If real GDP is growing at 2% per year, and the income velocity of circulation of money is constant,
    • A. 

      The inflation rate will be 3%.

    • B. 

      The inflation rate will be 1%.

    • C. 

      The economy will achieve noninflationary growth.

    • D. 

      The inflation rate will be 5%.

  • 14. 
    Monetarists would argue that the Federal Reserve should set the growth rate of the money supply at the level at which
    • A. 

      It equals the rate of growth in nominal wages.

    • B. 

      It equals the growth rate of nominal GDP.

    • C. 

      It equals the rate of population growth.

    • D. 

      It equals the growth rate of real GDP.

  • 15. 
    As real GDP increases during an expansionary phase of the economy, the money stock is held fixed by monetary authorities. As a result,
    • A. 

      Interest rates will fall.

    • B. 

      It's impossible to predict whether interest rates will rise or fall.

    • C. 

      There will be no effect on interest rates.

    • D. 

      Interest rates will rise.

  • 16. 
    Which fiscal policy can be used to stimulate aggregate demand?
    • A. 

      Decrease taxes, and increase expenditures.

    • B. 

      Decrease the money supply.

    • C. 

      Decrease expenditures, and increase taxes

    • D. 

      All of the above.

  • 17. 
    Suppose the economy is experiencing a recessionary GDP gap of $800 billion and the marginal respending rate (MRR) is 0.5. Government fiscal policy could eliminate the recessionary gap by
    • A. 

      Increasing purchases by $1,600 billion.

    • B. 

      Increasing purchases by $400 billion.

    • C. 

      Reducing purchases by $1,600 billion

    • D. 

      Reducing purchases by $400 billion.

    • E. 

      Reducing purchases by $800 billion.

  • 18. 
    Suppose the economy depicted above is initially at a full-employment output level of $900 billion. If a shift of the aggregate demand curve to AD2 occurs,
    • A. 

      An inflationary GDP gap of $75 billion exists.

    • B. 

      A recessionary GDP gap of $75 billion exists.

    • C. 

      A recessionary GDP gap of less than $75 billion exists, due to the existence of the multiplier effect.

    • D. 

      An inflationary GDP gap of less than $75 billion exists, due to the existence of the multiplier effect.

    • E. 

      A recessionary GDP gap of more than $75 billion exists

  • 19. 
    Which of the following is an example of an automatic stabilizer?
    • A. 

      The rise in tax revenue that occurs as a result of growth in real GDP.

    • B. 

      The increase in government spending that occurs as the result of new spending bills passed by Congress.

    • C. 

      The reduction in the money supply that occurs as banks become less willing to make loans during a recession.

    • D. 

      The reduction in real wages that occurs as the economy goes into a recession.

    • E. 

      All of the above.

  • 20. 
    Supply-side fiscal policies
    • A. 

      Primarily involve attempts to shift the aggregate demand curve to the right.

    • B. 

      Are not concerned with the long run

    • C. 

      Are primarily concerned with affecting the short-run aggregate supply curve, rather than the aggregate demand curve.

    • D. 

      Involve the use of tax-code changes to increase the incentives to supply economic resources to the market.

    • E. 

      Are designed to improve overall equality in the nation's distribution of income, so that employee morale and productivity will increase.

  • 21. 
    The federal government usually chooses to finance the deficit by borrowing from the public, rather than by creating money, because
    • A. 

      Money creation is purely expansionary, whereas borrowing from the public enables fiscal policy to be either expansionary or contractionary.

    • B. 

      Money creation would probably be highly inflationary.

    • C. 

      Borrowing from the public negates the inflationary effect of a deficit.

    • D. 

      The printing of new currency raises a second problem--that of getting the currency into public circulation.

    • E. 

      The Federal Reserve System is often unable to accommodate the Treasury and adhere to its money supply targets.

  • 22. 
    The crowding-out effect suggests that government borrowing to finance a deficit will cause
    • A. 

      An increase in consumer spending.

    • B. 

      An increase in corporate and personal income tax rates.

    • C. 

      An increase in interest rates and a reduction in investment.

    • D. 

      A decrease in government spending on Social Security.

  • 23. 
    If the federal government has a budget surplus and uses it to reduce the size of the national debt, interest rates would be expected to
    • A. 

      Increase.

    • B. 

      Change in a manner that can't be predicted without more information.

    • C. 

      Increase only if the shift in the demand curve is larger than the shift in the supply curve.

    • D. 

      Decrease.

    • E. 

      Remain the same.

  • 24. 
    If Germany can produce electric shavers at a lower opportunity cost per unit than Saudi Arabia, Germany has
    • A. 

      A comparative advantage.

    • B. 

      A specialization advantage.

    • C. 

      A production advantage.

    • D. 

      An absolute advantage.

  • 25. 
    For a nation to engage in international trade on the basis of comparative advantage, it should
    • A. 

      Purchase resources from other nations until it acquires a comparative advantage in at least one product.

    • B. 

      Specialize in producing those products that have the lowest opportunity cost per unit compared to other nations, then trade some of its output.

    • C. 

      Specialize in the production of those goods that have the highest opportunity cost, then trade the excess output.

    • D. 

      Produce only those goods in which it has an absolute advantage over other nations.