ECO 40 Multiple Choice Questions

An improvement in consumer confidence will cause: The aggregate supply curve to shift to the right. A movement down the aggregate demand curve. The aggregate demand curve to shift to the right. The aggregate demand curve to shift to the left.If consumers spend 80 cents out of every extra dollar received, the: MPC is 0.20. Multiplier is 5. Multiplier is 20. MPS is 0.80.Saving: Is equal to income plus consumption. Is the part of disposable income that is not yet spent. Only includes dollars deposited in a financial institution. Is a part of aggregate demand.Which of the following could cause a recession? An increase in aggregate supply A decline in aggregate demand A decline in unemployment An increase in government spendingFigure 12.1 Assuming aggregate demand is represented by AD1, the equilibrium level of income in Figure 12.1 is: $6.0 trillion. $5.6 trillion. $5.2 trillion. $800 billion.Which of the following is the largest component of aggregate demand for the U.S. economy? Government expenditures Consumption Net exports Business investmentAccording to Keynes, which of the following is possible at the intersection of aggregate supply and aggregate demand? Inflation and high levels of unemployment, but not full employment Full employment or high levels of unemployment, but not inflation Inflation, full employment, or high levels of unemployment Full employment, but not high levels of unemployment or inflationFigure 12.1 Assuming aggregate demand is represented by AD1, the economy depicted in Figure 12.1 confronts a real GDP gap of: $400 billion $560 billion. $800 billion. Zero.To an economist, investment refers to the purchase of new plant and equipment by businesses. TRUE FALSEWhich of the following helps explain the multiplier effect? Incomes tend to increase with inflation. People buy a lot of luxury items. Income is spent and re-spent in the circular flow model. Banks only hold a fraction of their deposits on reserve.Figure 12.2 Using Figure 12.2, if Q2 represents full employment, then a shift from AD1 to: AD3 results in a full-employment equilibrium at point W. AD3 takes the economy past full employment to equilibrium at point Z. AD2 closes the GDP gap. AD2 takes the economy past full employment to equilibrium at point Y.The multiplier is equal to: 1 – MPC. 1 ÷ MPS. 1 ÷ MPC. MPS ÷ MPC.If consumers save 15 cents out of every dollar received, the: MPS is 0.15. Multiplier is 15. Multiplier is 0.15. MPS is 0.85.Fiscal restraint: Causes a rightward shift of aggregate demand. Causes a rightward shift of aggregate supply. Includes tax hikes and spending cuts. Is used to reduce a recession.Which of the following will occur if aggregate demand is below full-employment GDP? Recession A stable economy Excessive aggregate demand InflationThe amount of money in circulation can affect spending behavior, but it will not change aggregate demand. FALSE TRUEPotential deposit creation for the entire banking system is without limit because when lending takes place, the excess reserves of one bank become deposits for another bank. FALSE TRUEThe smallest component of the basic money supply is in the form of: Currency in circulation. Savings accounts. Traveler’s checks. Transactions accounts.Suppose Students Bank and Trust has zero excess reserves. If the required reserve ratio decreases: Bank assets will increase. The bank will be able to make more loans. Required reserves will increase. The money multiplier will decrease.Without money, the process of acquiring goods and services would be much more efficient. TRUE FALSEThe distinguishing feature of transactions accounts is that they allow for direct payment to a third party. FALSE TRUEUse the following balance sheet for XYZ Bank, which is one of many banks in a banking system.Table 13.1—XYZ Bank balance sheet Refer to Table 13.1. With total reserves of $50,000 and a required reserve ratio of 25 percent, potential deposit creation for the banking system is equal to: Zero. $50,000. $200,000. $250,000.Suppose the entire banking system has $10,000 in excess reserves and a required reserve ratio of 20 percent. The deposit-creation potential of the banking system is: $50,000 $200,000 $20,000 $500Which of the following is not true about money? It must be minted by the government in order to have value. It is a mechanism for transforming current income into future purchases. It facilitates the continuous series of exchanges that characterize a market economy. It promotes the specialization of labor.Suppose a bank has $1,000,000 in deposits and a minimum reserve requirement of 20 percent. Then required reserves are: $1,000,000 $1,200,000 $200,000 $880,000When the market value of goods and services is expressed in prices, money is functioning as a: Type of barter. Standard of value. Store of value. Medium of exchange.LaTressa takes $230 from under her mattress and deposits it in her checking account. The immediate result of this transaction is that M1: Does not change in value. Increases by more than $230. Decreases by $230. Increases by $230.Professor Williams tutors her next-door neighbor’s son in economics. Instead of paying her for this service, the neighbor washes the professor’s car. This is an example of: Barter. A store of value. A market transaction. A monetary transaction.When you purchase jeans at the mall, money is serving as a medium of exchange. FALSE TRUEWhen a bank makes a loan, dollars leave the banking system so the money supply decreases. TRUE FALSEIf you deposit $1,000 in your checking account, your bank is only required to hold a portion of the deposit and is allowed to lend out the balance. This illustrates the concept known as: Fractional reserves. Demand deposits. Split reserves. Money laundering.Barter is the direct exchange of one good for another without the use of money. FALSE TRUEThe shape of the _____ curve determines the impact of an aggregate demand shift on prices and output. Aggregate supply Total cost Production possibilities Marginal revenueA change in the reserve requirement affects: Excess reserves and the discount rate. The discount rate and the federal funds rate. The money multiplier and excess reserves. The money multiplier and the federal funds rate.The chairman of the Federal Reserve Board of Governors: Is always closely tied to the same political party as the president. Will typically change following each presidential election. Is elected by U.S. voters. Serves a four-year term and can be reappointed.If the Fed wishes to decrease the money supply it can: Decrease the required reserve ratio. Decrease the federal funds rate. Buy bonds on the open market. Raise the discount rate.Which of the following approaches should the Fed use if it experiences large lags and mistakes in monetary policy? Fixed rules An eclectic approach Fiscal policy Discretionary policyCeteris paribus, if the Fed raises the discount rate, then: The lending capacity of the banking system increases. The incentive to borrow reserves decreases. Excess reserves decrease. The money multiplier decreases.Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.Table 14.1—Monetary data In Table 14.1, the level of total reserves is equal to: $80 billion. $880 billion. $920 billion. $1 trillion.According to the aggregate supply drawn under the monetarist view, which of the following would lead to a higher price level? A decrease in the money multiplier. The purchase of bonds in the open market by the Fed. An increase in the discount rate. An increase in the reserve requirement.For a given amount of total reserves, a decrease in required reserves causes an increase in excess reserves. TRUE FALSEUsing the aggregate supply drawn under the monetarist view, what should happen to the equilibrium price level and quantity of output if the Fed buys bonds? Equilibrium price level should increase, and equilibrium output should decrease. Equilibrium price level and equilibrium output should both increase. Equilibrium price level should decrease, and equilibrium output should increase. Equilibrium price level should increase and equilibrium output should stay constant.Answer the indicated questions on the basis of the information in Table 14.1. Each question is based on the original balance sheet.Table 14.1—Monetary data In Table 14.1, if the Fed changes the required reserve ratio to 5 percent, the lending capacity of the banking system will eventually: Fall by $800 billion. Fall by $40 billion. Rise by $40 billion. Rise by $800 billion.Aggregate demand is the: Total quantity of output demanded at alternative price levels. Quantity of new goods and services produced. Quantity of goods demanded by the largest corporations in the country. Total quantity of output demanded but only at full employment.The key decision maker for general Federal Reserve policy is the: Board of Governors. Regional Federal Reserve banks. Federal Advisory Council. Federal Open Market Committee.

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