MT 3: Fiscal Policy; Money, Banking and the Federal Reserve System; Monetary Policy | ECON 2006 - Principles of Economics, Quizzes of Introduction to Macroeconomics

Download MT 3: Fiscal Policy; Money, Banking and the Federal Reserve System; Monetary Policy | ECON 2006 - Principles of Economics and more Quizzes Introduction to Macroeconomics in PDF only on Docsity! TERM 1 Contractionary (example) DEFINITION 1 Several military bases around the country, which together employ tens of thousands of people, are closed. Is this an example of an expansionary or contractionary fiscal policy? TERM 2 expansionary (example) DEFINITION 2 The length of unemployment benefits is increased. Is this an example of an expansionary or contractionary fiscal policy? TERM 3 Contractionary (example) DEFINITION 3 A federal tax on gas is increased. Is this an example of an expansionary or contractionary fiscal policy? TERM 4 True DEFINITION 4 T/F: Federal disaster relief, which quickly disburses funds to victims of natural disasters will stabilize the economy more effectively after a disaster than relief that must be legislated. TERM 5 $20 Billion DEFINITION 5 Suppose that real GDP is $500 billion, potential outputis $600 billion and the MPC is 0.8. By how much must government spending change to close the gap? TERM 6 $25 Billion DEFINITION 6 Suppose that real GDP is $500 billion, potential output is $600 billion and the MPC is 0.8. By how much must taxes decrease to close the gap? TERM 7 An increase of $500 million in government purchases of goods and services DEFINITION 7 Which of the following three policies would generate the largest shift in aggregate demand? TERM 8 False DEFINITION 8 T/F: The country of Boldovia has no unemployment insurance benefits and a tax system using only lump-sum taxes. Moldovia has generous unemployment benefits and a proportional tax system. Moldovia will experience greater variation in real GDP in response to demand shocks. TERM 9 True DEFINITION 9 T/F: The cyclically adjusted budget balance is a better measure of the long-run sustainability of government policies than the actual budget balance. TERM 10 False DEFINITION 10 T/F: States that are required by their constitutions to balance their budgets are likely to experience fewer severe economic fluctuations than states not held to that requirement. TERM 21 Reserve Requirement DEFINITION 21 ______ are rules set by the federal reserve that determine the minimum reserve ratio for banks. TERM 22 Capital Requirements DEFINITION 22 ______ mean that a bank must have a certain amount of capital to protect depositors from loss. TERM 23 $0 DEFINITION 23 Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. How much is the change in the money supply? TERM 24 $400 DEFINITION 24 Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. How much does the bank need to keep in reserves? TERM 25 $1600 DEFINITION 25 Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. What is the maximum amount that this bank can loan, based on this deposit? TERM 26 5 DEFINITION 26 Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. What is the money multiplier? TERM 27 $8,000 DEFINITION 27 Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. What is the maximum expansion possible of the money supply? TERM 28 True DEFINITION 28 T/F: Banks create money because when currency is deposited in a bank, the bank can lend excess reserves out, which leads to new deposits in the banking system and a multiplier effect on the money supply. TERM 29 Deposits will increase by $1,000 DEFINITION 29 Assume that total reserves are equal to $200 and total bank deposits are equal to $1,000. Also assume that the public does not hold any currency. Now suppose that the required reserve ratio falls from 20% to 10%. What is the maximum possible change in deposits in response to the reserve requirement decrease? TERM 30 $450; $450 DEFINITION 30 Assume that $1000 in cash is deposited into First Street Bank and the required reserve ratio is 10%. Each time someone receives a bank loan, he or she keeps half of it in cash. If First Street Bank loans the maximum allowed, demand deposits will increase by $______ and cash will increase by $______ . TERM 31 10 DEFINITION 31 Assume that any money lent by a bank is always deposited in a checkable deposit and that the reserve ratio is 10%. The Fed purchases $100 million in Treasury bills. What is the size of the money multiplier? TERM 32 $1 billion increase DEFINITION 32 Assume that any money lent by a bank is always deposited in a checkable deposit and that the reserve ratio is 10%. The Fed purchases $100 million in Treasury bills. What is the effect on the value of checkable deposits? TERM 33 False DEFINITION 33 T/F:The Panic of 1907, the S&L crisis, and the crisis of 2008 were all due to too much regulation of the financial sector. TERM 34 True DEFINITION 34 T/F: The creation of the Federal Reserve failed to prevent bank runs during the Great Depression. TERM 35 False DEFINITION 35 T/F: The balance sheet effect describes the process through which banks create money in a fractional reserve system. TERM 46 increase DEFINITION 46 If there is an increase in the demand for money and the Fed wants to keep the federal funds rate constant, it should _______ the money supply.(Increase, decrease, or remain the same?) TERM 47 the money supply curve shifts to the right DEFINITION 47 What is the short-term effect of an expansionary monetary policy on the money supply curve if the economy is currently suffering from a recessionary gap? TERM 48 the equilibrium interest rate falls DEFINITION 48 What is the short-term effect of an expansionary monetary policy on the equilibrium interest rate if the economy is currently suffering from a recessionary gap? TERM 49 the investment spending rises DEFINITION 49 What is the short-term effect of an expansionary monetary policy on investment spending if the economy is currently suffering from a recessionary gap? TERM 50 the consumer spending rises DEFINITION 50 What is the short-term effect of an expansionary monetary policy on consumer spending if the economy is currently suffering from a recessionary gap? TERM 51 The aggregate output rises. DEFINITION 51 What is the short-term effect of an expansionary monetary policy on aggregate output if the economy is currently suffering from a recessionary gap? TERM 52 True DEFINITION 52 Changes in interest rates predicted by an application of the Taylor rule have always been in the same direction as actual changes in interest rates. TERM 53 False DEFINITION 53 In setting monetary policy, the Bank of England is likely to respond more directly to a financial crisis than the Fed. TERM 54 Aggregate output rises in the short run and falls back to potential output in the long run. DEFINITION 54 Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on aggregate output? TERM 55 Aggregate price level rises in the short run and in the long run. DEFINITION 55 Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on the aggregate price level? TERM 56 Real quantity of money rises in the short run and falls to its original level in the long run. DEFINITION 56 Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on the real value of the money supply? TERM 57 The interest rate rises falls in the short run and rises to its original level in the long run. DEFINITION 57 Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on the interest rate? TERM 58 False DEFINITION 58 Monetary policy affects the economy in the short run but not in the long run.