Chapter 13: money and banks + chapter 14: the federal reserve system

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1. If full-employment income and equilibrium income are equal for a country, then a tax cut will result in:
A) Excess AD. C) Leakages exceeding injections.
B) Output exceeding desired expenditure. D) Undesired inventory accumulation.

2. Which of the following is an appropriate fiscal policy prescription for the government to follow?
A) Deficit reduction during recession. C) Deficit expansion in an inflationary gap.
B) Deficit reduction when there is excess AD. D) All of the above.

3. Which of the following describes a budget deficit?
A) Tax revenues fall short of expenditures over the fiscal year.
B) Discretionary fiscal spending is used to achieve macro equilibrium.
C) The U.S. Treasury engages in refinancing activities.
D) The government uses fiscal policy.

4. Deficit spending results whenever the government:
A) Issues bonds to finance the debt. C) Refinances the debt.
B) Finances expenditures that exceed tax revenues. D) Uses fiscal policy.

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5 Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?
A) More government expenditure and higher taxes.
B) More government expenditure and lower taxes.
C) Less government expenditure and higher taxes.
D) Less government expenditure and lower taxes.

6. With greater deficit spending, ceteris paribus,
A) Aggregate spending should fall.
B) Any inflationary gap would become larger.
C) There are greater leakages.
D) There is inadequate information to tell what happens to aggregate spending.

7. If full-employment output exceeds desired spending, greater deficit spending will result in a:
A) Smaller recessionary gap. C) Larger recessionary gap.
B) Smaller inflationary gap. D) Larger inflationary gap.

8. With an increase in deficit spending, the:
A) U.S. Treasury buys more bonds. C) Aggregate supply curve shifts to the right.
B) Consumption function shifts downward. D) Aggregate demand curve shifts to the right.

9. According to Keynes, an unbalanced budget is appropriate if:
A) The economy is below full employment. C) Macro equilibrium is above full employment.
B) Leakages and injections are out of balance. D) All of the above.

10. Which of the following is an argument against balancing the federal budget?
A) The federal government spends and interferes with the economy too much.
B) The government may not be able to pay off its debts.
C) The government may be unable to pull the economy out of recession if it does so.
D) An equivalent increase in government spending and taxes has no effect on income.

11. Which of the following is not an automatic stabilizer?
A) Unemployment compensation. C) Social security benefits.
B) Income taxes. D) Welfare payments.

12. Automatic stabilizers tend to stabilize the level of economic activity because they:
A) Are changed quickly by Congress.
B) Increase the size of the multiplier.
C) Increase spending during recessions and reduce spending during inflationary periods.
D) Control the rate of change in prices.

13. Which of the following is an automatic stabilizer that reduces tax receipts during a recession?
A) Welfare benefits. C) Corporate income taxes.
B) Medicaid. D) Indexed retirement and social security benefits.

14. Which of the following contributes to greater deficits when unemployment rises, but reduces the deficit during an inflationary gap?
A) Unemployment insurance benefits. C) Progressive personal income taxes.
B) Welfare benefits. D) All of the above.

15. A progressive income tax system is particularly effective as an automatic stabilizer because:
A) It reduces demand when income falls.
B) In a booming economy taxpayers move into higher tax brackets, which restrains their spending.
C) During a recession it causes the budget deficit to fall.
D) It falls more heavily on taxpayers with high MPCs, which stimulates aggregate demand.

16. Which of the following is a possible effect of automatic stabilizers on the federal budget?
A) A decrease in the deficit during recessions.
B) An increase in the deficit when there is AD excess.
C) An increase in the structural deficit during recessions.
D) A decrease in the deficit during an expansion.

17. An increase in unemployment, ceteris paribus:
A) Leads to increased government expenditures.
B) Leads to reduced government revenues.
C) Functions to increase a budget deficit and/or reduce a budget surplus.
D) All of the above.

18. The two components responsible for the total budget balance reflect:
A) Cyclical changes and changes in uncontrollables.
B) Cyclical changes and changes in discretionary fiscal policy.
C) Structural changes and changes in discretionary fiscal policy.
D) Structural changes and changes in uncontrollables.

19. For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy, the actual deficit is divided into which of the following components?
A) Automatic stabilizers and autonomous consumption.
B) C, I, G, X, and M.
C) Structural and cyclical deficits.
D) Frictional and seasonal deficits.

20. The actual deficit equals the sum of:
A) The structural and cyclical deficits. C) The structural and fiscal deficits.
B) The structural, cyclical, and frictional deficits. D) The cyclical and fiscal deficits.

21. Which of the following results from a change in the business cycle, ceteris paribus?
A) Frictional unemployment. C) Structural unemployment.
B) Cyclical unemployment. D) All of the above.

Chapter 13: Money and Banks

Multiple Choice Questions

23. Money:
A) Facilitates the continuous series of exchanges that characterize a market economy.
B) Is a mechanism for transforming current income into future purchases.
C) Promotes efficient division of labor.
D) All of the above.

24. Which of the following gave the federal government permanent authority to issue money?
A) The Constitution of the United States in 1779. C) The creation of the FDIC and FSLIC in 1933.
B) The National Banking Act of 1863. D) The Monetary Control Act of 1980.

25. M1:
A) Includes the most liquid forms of money.
B) Is the narrowest definition of the money supply.
C) Largely consists of transactions-account balances.
D) All of the above.

26. Which of the following is not included in any of the measures of the money supply?
A) Credit-union share drafts.
B) Cash in the vault of a commercial bank.
C) Currency in circulation outside of commercial banks.
D) Transactions-account balances at mutual savings banks.


27. One of the main functions of banks is:
A) Borrowing money and lending to savers. C) Ownership of projects in which they invest.
B) Creating money. D) All of the above.

28. Banks make loans to:
A) Businesses for new plant and equipment. C) The government for its projects.
B) Consumers for new homes and cars. D) All of the above.

29. Which of the following functions do banks perform?
A) Transferring money from savers to spenders C) Creating money.
B) Lending funds held on deposit. D) All of the above.

30. The banking system can lend more than the sum of its excess reserves because:
A) Banks are required to keep only a fraction of deposits on reserve.
B) Bank assets are greater than bank liabilities.
C) Required reserves are a leakage from the banking system.
D) All of the above are true.

31. When the reserve requirement changes, which of the following will change for an individual bank?
A) Transactions-account balances, lending capacity.
B) Transactions-account balances, total reserves, excess reserves.
C) Total reserves, required reserves, excess reserves.
D) Required reserves, excess reserves, lending capacity.

32. Banks are required to keep a minimum amount of funds in reserve:
A) Because depositors may decide to withdrawal funds at any time.
B) Which provides a constraint on the bank’s ability to create money.
C) Which provides a constraint on the bank’s ability to affect aggregate demand.
D) All of the above.

33. For a small bank in a large banking system, excess reserves are equal to the:
A) Amount of money that the Federal Reserve System makes available for loans.
B) The amount of reserves that a bank must hold above the loans that it makes.
C) The amount of loans a bank can make after meeting the reserve requirement.
D) The difference between transactions-account balances and loans.

34. Which of the following is a bank liability?
A) Reserve deposits at the Fed. C) Transactions-account balances.
B) Securities the bank has purchased. D) Loans made to customers.


36. Constraints on deposit creation include:
A) The reserve requirement.
B) The willingness of businesses and consumers to accept checks.
C) The willingness of businesses and consumers to borrow from banks.
D) All of the above.

37. Which of the following could cause the money supply to decrease?
A) People and institutions borrow more.
B) The economy emerges from a recession into rapid growth.
C) The society moves to a cashless society.
D) Banks become conservative in making loans.

38. A higher reserve requirement:
A) Further limits deposit creation.
B) Increases the ability of banks to make loans.
C) Lowers the interest rate.
D) Increases the borrowing capability of borrowers.

Chapter 14: The Federal Reserve System

Multiple Choice Questions


39. Monetary authorities can change the money supply by:
A) Making discount loans more or less attractive.
B) Changing the level of required reserves.
C) Changing the level of reserves in the banking system.
D) All of the above.

40. If banks do not have enough reserves to satisfy the reserve requirement they can:
A) Borrow additional reserves in the federal funds market.
B) Sell securities.
C) Borrow from the discount window at the Federal Reserve bank.
D) All of the above.

41. Discounting refers to the Fed’s practice of:
A) Selling securities at the federal funds rate.
B) Purchasing securities at the lowest available federal funds rate.
C) Lending reserves to private banks.
D) Lending at the prime rate.

42. Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?:
A) Changes in the discount rate. C) Changes in the required reserve ratio.
B) Open-market operations. D) Foreign-exchange operations.

43. When the Fed buys bonds from the public, it:
A) Decreases the flow of reserves to the banking system.
B) Increases the flow of reserves to the banking system.
C) Decreases the money supply.
D) Decreases the discount rate.

44. A bond is a:
A) Share in a private company.
B) Promise to repay borrowed funds.
C) Certification that a bank has met the Fed’s reserve requirement.
D) License to use the Fed’s discount window.

45. Which of the following equals the current yield on a bond?
A) Required reserve ratio  total deposits.
B) Total reserves – required reserves.
C) (Total reserves – required reserves)  the money multiplier.
D) Annual interest payment  price paid for bond.

46. If the annual interest rate printed on the face of a bond is 12 percent, the face value of the bond is $1,000, and you purchase the bond for $500, what is the current yield on the bond?
A) 60 percent. B) 10 percent. C) 24 percent. D) 6 percent.

47. If the Fed wants to sell more bonds than people are willing to buy, then the Fed should:
A) Decrease the price it asks for the bonds.
B) Switch to another type of monetary policy lever.
C) Switch to fiscal policy.
D) Encourage a government agency to buy the bonds.

48. The Fed can decrease the federal funds rate by:
A) Selling bonds.
B) Buying bonds which causes market interest rates to fall.
C) Simply announcing a lower rate since the Fed has direct control of this interest rate.
D) Changing the money multiplier.


49. In order to increase the money supply the Fed can:
A) Raise the reserve requirement, increase the discount rate, or sell bonds.
B) Raise the reserve requirement, increase the discount rate, or buy bonds.
C) Lower the reserve requirement, increase the discount rate, or buy bonds.
D) Lower the reserve requirement, decrease the discount rate, or buy bonds.


50. In order to decrease the money supply the Fed can:
A) Raise the reserve requirement, increase the discount rate, or sell bonds.
B) Raise the reserve requirement, increase the discount rate, or buy bonds.
C) Lower the reserve requirement, increase the discount rate, or buy bonds.
D) Lower the reserve requirement, decrease the discount rate, or sell bonds.

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