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STUDY GUIDE CH 11-13
Econ 2301 STUDY GUIDE, Chs 11 - 13
| Question | Answer |
|---|---|
| A federal budget surplus | occurs when tax revenues exceed government expenditures. |
| A federal budget deficit | occurs when government expenditures exceed tax revenues. |
| Suppose Congress increases income taxes. This is an example of | contractionary fiscal policy. |
| Expansionary fiscal policy actions include __________ government spending and/or __________ taxes, while contractionary fiscal policy actions include __________ government spending and/or __________ taxes. | increasing; decreasing; decreasing; increasing |
| Suppose aggregate demand is too low to bring about the Natural Real GDP level. A Keynesian policy prescription would call for a(n) _____________________ to close this recessionary gap | a or d |
| Suppose the economy is at a position below the physical production possibilities frontier but above the institutional production possibilities frontier. In response to this situation, Keynesian economists would propose that government enact __________ f | contractionary; inflationary; decreasing |
| Reductions in private spending as a result of increased government purchases or borrowing is called | increase; right; recessionary |
| 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 | complete crowding out. |
| The AD curve shifts to the right with a __________ in government purchases (G) or a __________ in taxes. | rise; fall |
| Which of the following illustrates the data lag? | The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006 |
| 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 exhibi | maintains its present position at AD |
| Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose | an increase in government purchases. |
| A curve showing the relationship between tax rates and tax revenues is called a __________ curve. | Laffer |
| Refer to Exhibit 11-2. At point A, if we cut tax rates slightly, tax revenues | decrease |
| All other things held constant, lower marginal (income) tax rates | increase the attractiveness of productive activities relative to leisure and tax- avoidance activities and shift the SRAS curve rightward. |
| Suppose the economy's current AD and SRAS curves intersect to the right of Natural Real GDP. Keynesians might advise a policy of tax __________ to shift __________. | increases; AD to the left |
| Supply-side economists believe reductions in tax rates can | increase output and lower prices. |
| An example of contractionary fiscal policy is | a decrease in government purchases, or an increase in taxes, or both. |
| Keynesians believe | b and c |
| The Laffer curve illustrates that | all of the above |
| If, based on the Laffer curve, an economist recommends that the government reduce the average tax rate in order to increase tax revenues, she is implicitly assuming that the economy is currently operating at a poin | on the downward-sloping portion of the Laffer curve. |
| Some economists believe that higher marginal income tax rates __________ the incentive to work and thus shift __________. | decrease; SRAS to the left |
| ln a certain nation the flat income tax rate of 40 percent is reduced to 35 percent and as a result taxable income rises from $400 billion to $600 billion. Tax revenues __________, indicating the nation is on the __________ portion of its Laffer curve | rise; downward-sloping |
| An enactment by Congress of a temporary, across-the-board cut in government purchases is an example of __________ policy | contractionary fiscal |
| Which of the following illustrates a barter transaction? | A bushel of oranges is traded for a bushel of apples. |
| Transaction costs are best defined as the | costs associated with the time and effort necessary to make an exchange. |
| If peanuts were widely accepted for purposes of exchange, then | a and c |
| According to the text, the good that emerged as money in World War II POW camps was | cigarettes |
| Compared to barter, money __________ transaction costs, making transactions __________ time- consuming | reduces; less |
| Historically, which of the following goods have evolved into money? | all of the above |
| A savings account functions as | a store of value. |
| Because money __________________, people are _________________ likely to specialize their work in a money economy. | eliminates the double coincidence of wants; more |
| In the history of banking, warehouse receipts refer to receipts | that goldsmiths once issued acknowledging that they held a customer's gold. |
| Fractional reserve banking is a term used to describe a banking system whereby | banks hold reserves equal to only a fraction of their deposit liabilities. |
| Required reserves are the amount of | reserves a bank must hold against its deposits as mandated by the Federal Reserve |
| If checkable deposits in Bank A total $520 million and the required reserve ratio is 10 percent, then required reserves at Bank A equal | $52 million. |
| 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? | $0 |
| Reserves held beyond the required amount are called __________ reserves. | excess |
| 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 | $2,000. |
| 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 | $11,111,111. |
| When a bank makes a loan to one of its customers, to the bank the loan is classified as | an asset |
| Which of the following is true? | b and c |
| The unit of account function of money refers to the | common denominator of measurement provided by money. |
| Money is defined by economists as | any good that is widely accepted in exchange and for the repayment of debts. |
| Bank A has checkable deposits of $10 million and reserves of $1 million. The required reserve ratio is 9 percent. The bank has excess reserves of | $100,000. |
| Bank A has $2,500 in required reserves. The required reserve ratio is 12.5 percent. Bank A has checkable deposits of | $20,000. |
| Fractional reserve banking originated | when goldsmiths realized they could issue warehouse receipts beyond gold on deposits. |
| When money is used to buy a computer, it is functioning as a | medium of exchange. |
| Federal Reserve = $40 billion, vault cash = $2 billion, required reserve ratio = 0.10, & total checkable deposits = $400 billion. It follows that reserves equal _______ billion (total) reserves equal ______ billion and excess reserves equal______ billion. | $40; $42; $2 |
| The Federal Reserve System is the | central bank of the United States. |
| The United States is divided into __________ Federal Reserve districts, each with a district bank. | twelve |
| Which of the following is not a major responsibility of the Fed | All of the above are major responsibilities of the Fed. |
| 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 __________ | Bank B; remain constant |
| If the Fed purchases government securities from commercial banks, the reserves of the banking system will immediately | increase by the amount of the purchase. |
| If the Fed purchases government securities from a commercial bank, which of the following will happen? | a and d |
| The sale of a government security by the Fed | decreases the supply of money. |
| An open market purchase by the Fed | increases the supply of money. |
| An "open market operation" is said to occur when the Fed | buys or sells government securities. |
| If banks are currently holding zero excess reserves and the Fed lowers the required reserve ratio, which of the following will happen? | Banks will have positive excess reserves. |
| The word that best describes the relationship between the required reserve ratio and the money supply is | inverse |
| When one commercial bank borrows from another commercial bank, it pays the __________ rate. | federal funds |
| The interest rate that a commercial bank pays when it borrows from the Fed is the __________ rate. | discount |
| Which of the following will increase the money supply? | a decrease in the required reserve ratio |
| The Federal Reserve System | all of the above |
| When the Fed purchases securities from a bank, it __________ reserves and ____________ the money supply | increases; increases |
| When the Fed sells government securities to a bank, the securities will be | an asset for the bank. |
| When the Fed increases the required reserve ratio, a bank's | excess reserves are decreased. |
| When commercial banks borrow from other commercial banks, the immediate impact is that reserves in the banking system | are unaffected. |
| An open market sale by the Fed will | reduce the money supply. |
| The discount rate is the interest rate | the Fed charges when it lends reserves to banks. |
| Which of the following is not a responsibility of the Fed? | issuing government securities |
| In controlling the nation's money supply, the Fed is obligated to seek the advice of | none of the above |
| Assuming no cash leakages and no excess reserves held by banks, a required reserve ratio of 0 percent would mean that the simple deposit multiplier is | infinity |
| The most important responsibility of the Fed is to | control the money supply. |
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