JOHN RAPP

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                          ECO 204--Part Three Test
 

True-False. Use A for true and B for false.

1.     A bank’s loans appear as a liability on its balance sheet.

2.     The banking system can expand loans by a multiple of the volume of excess reserves
         in the banking system.

3.     Members of the board of governors of the Federal Reserve are appointed for fourteen
        year terms, but can be removed by the President at any time.

4.     The Federal Reserve does not face any reserve requirements against the reserves and
        deposits it creates for the banking system.

5.     An increase in the money supply will lead to lower real rates of interest.

6.     Monetarists believe that the long run aggregate supply curve is vertical.

7.     The misery index is the sum of the unemployment rate and the inflation rate.

8.     Supply side economists favor tax reductions for businesses, while Keynesians do not
        think tax cuts are productive in fighting recession.

9.     Economic growth is measured by changes in real GDP or real GDP per capita.

10.  There is general agreement among economists that future economic growth should be
        limited by government policy because of the adverse effects of growth.

Assets	Liabilities and capital
Vault cash $20,000	Total deposits $250,000
Deposits at FR 40,000	Capital accounts 200,000
Loans 60,000
All other assets 330,000

15.   If the reserve requirement is 10 percent, the bank’s excess reserves are
        A.  $10,000.                                            D.  $400,000.
        B.  $35,000.                                            E.  none of the above
        C.  $250,000.

16.   If the reserve requirement is 20 percent (not 10 percent as in question 15), the bank could increase
        its loans by a maximum of
        A.  $10,000.                                            D.  $60,000.
        B.  $25,000.                                            E.  cannot be determined
        C.  $50,000.

17.  Using a 20 percent reserve requirement, the whole banking system could increase loans by a
        maximum of
        A.  $10,000.                                            D.  $100,000.
        B.  $25,000.                                            E.  $1,000,000.
        C.  $50,000.

18.  Which of the following is correct?
        A.  If the reserve requirement is 20 percent, the money multiplier is 2.
        B.  If the reserve requirement is 20 percent, the money multiplier is 5.
        C.  If the reserve requirement is 10 percent, the money multiplier is 1.
        D.  If the reserve requirement is 10 percent, the money multiplier is 5.

19.  The federal funds market is
        A.  where the Federal Reserve conducts open market operations.
        B.  where the treasury department borrows to finance the public debt.
        C.  where banks borrow overnight reserves from other banks.
        D.  a secondary market for government securities.

20.   The Federal Reserve System
        A.  clears checks for financial institutions.
        B.  provides paper currency.
        C.  can make loans to commercial banks.
        D.  all of the above
        E.  A and C, but not B

21.   If the Federal Reserve lowers the reserve requirement ratio,
        A.  banks’ excess reserves will increase and the size of the money multiplier will increase.
        B.  banks’ excess reserves will increase and the size of the money multiplier will decrease.
        C.  banks’ deposits at the Federal Reserve will decrease.
        D.  it will also engage in open market sales.

22.  Which of the following is correct?
        A.  The primary function of the Federal Reserve is to lend to the government.
        B.  The Federal Reserve sets the discount rate and the federal funds rate.
        C.  The rate of interest the Federal Reserve charges banks which borrow from the Fed is
             called the prime rate.
        D.  The rate of interest the Federal Reserve charges banks which borrow from the Fed is
             called the discount rate.

Cash held by the public	$240 billion
Deposits in financial institutions	$600 billion
Required reserves	$ 90 billion
Excess reserves	$ 30 billion
Government securities held by the public	$ 1 trillion

25.   "Announcement effects" refer to
        A.  the requirement that the Fed announce its intended policies well in advance.
        B.  the errors made by the Fed when it announces a change in reserve requirements.
        C.  the large impact of an announced change in reserve requirements.
        D.  the initial effect on interest rates of the announcement of a discount rate change, which
           typically signals the Fed’s intention to alter its open market policy.

26.   Assuming a 20 percent reserve requirement, a Federal Reserve purchase of $100,000 worth
        of government securities from government securities dealers would initially
        A.   increase banks’ actual reserves by $80,000.
        B.  decrease banks’ actual reserves by $100,000.
        C.  decrease banks’ actual reserves by $500,000.
        D.  increase banks’ actual reserves by $500,000.
        E.  none of the above

27.   According to your instructor, the Board of Governors of the Federal Reserve System
        A.  prefers reserve requirement changes as the primary monetary policy tool because the effects
             are quick and certain.
        B.  prefers a discount rate change since it is by far the most powerful monetary policy tool.
        C.  leaves monetary policy decisions to the twelve regional banks and only supervises Federal
             Reserve service functions.
        D.  uses open market operations to bring about money supply changes

28.   Money demanded for the purpose of making everyday market purchases is referred to as the
        A.  transactions demand for money.
        B.  precautionary demand for money.
        C.  speculative demand for money.
        D.  liquidity demand for money.
        E,  portfolio demand for money.   

29.   Which of the following shifts would be most likely if the Federal Reserve increased its volume
        of open market purchases and/or lowered the reserve requirement?
        A.  The supply of money curve would shift to the left.
        B.  The supply of money curve would shift to the right.
        C.  The demand for money curve would shift to the left.
        D.  The demand for money curve would shift to the right.

30.   Which of the following describes the steps by which an easy monetary policy is alleged to
         work in the short run, according to Keynesians?
        A.  increase in money supply (M) --> decrease interest rates (r) --> increase in investment (I)
        B.  increase M --> increase I --> increase r
        C.  decrease r --> decrease in --> M increase I
        D.  decrease M --> increase r --> increase I

31.    Keynesians believe that money supply changes are not of great importance because
         A.  money supply changes will not affect interest rates if the economy is in the liquidity trap.
         B.  interest rate changes have only a small effect on investment.
         C.  investment has only a small effect on output because the multiplier does not work
              for investment changes if the economy is in recession.
         D.  the Federal Reserve controls the money supply.
         E.  both A and B

32.    The equation of exchange states that
        A.  changes in M always cause changes in V.
        B.  the money supply times velocity equals total spending.
        C.  changes in P will always be accompanied by changes in Q.
        D.  inflation is always a monetary phenomenon.

33.   Since 1980, the income velocity of money has
        A.  stayed completely constant.
        B.  declined significantly.
        C.  increased at an average rate of about one percent per year.
        D.  increased more rapidly than the money supply.

34.   Monetarists believe that
        A.  that money supply changes can affect real output in the short run, but not prices.
        B.  in the long run, money supply changes affect prices but not real output.
        C.  in the long run, money supply changes are the dominant determinant of both
             nominal and real output.
        D.  price level changes do not affect nominal interest rates.

35.   A large increase in the money supply, according to monetarists,
        A.   will increase real and nominal output in the short run.
        B.  will increase nominal output in the long run.
        C.  is likely to be a problem because it will eventually cause inflation.
        D.  all of the above
        E.  none of the above

36.   The time lag for a money supply change to have an impact on prices is
        A.  long and unpredictable.
        B.  very short, typically not over a couple of months.
        C.  constant, at about four years.
        D.  immediate.
        E.  none of the above–Money changes don’t have an impact on prices.

37.   Monetarists recommend
        A.  the use of interest rate changes to fight unemployment or inflation.
        B.  the use of fiscal policy to stabilize output.
        C.  tax increases to fight inflation and achieve more equity in the tax system.
        D.  a constant rate of growth in the money supply of about 3 percent per year.
        E.  frequent changes in the rate of money supply growth to achieve stabilization.

38.   Supply side economists
        A.  believe that aggregate demand is upward sloping.
        B.  believe that aggregate demand is vertical.
        C.  believe that aggregate supply is upward sloping.
        D.  believe that aggregate supply is vertical.

39.   The Phillips curve shows
        A.  the tradeoff between unemployment and inflation.
        B.  the tradeoff between full employment and interest rates.
        C.  the effects of changing aggregate demand if the aggregate supply curve is vertical.
        D.  how increased government spending might crowd out private expenditure.
        E.  none of the above

40.   Supply side policies are designed to achieve
        A.  a movement down the Phillips curve to a lower inflation rate.
        B.  a movement down the aggregate supply curve.
        C.  a shift of the Phillips curve to the right.
        D.  a lower inflation rate and a lower unemployment rate.

41.  According to supply siders, which of the following would cause a rightward shift
        in the aggregate supply curve?
        A.  lower marginal tax rates
        B.  eliminating excessive OSHA regulations
        C.  more government expenditure on human capital, including affirmative action
        D.  all of the above
        E.  A and B above

42.  The Laffer curve suggests that
        A.  higher tax rates can actually reduce total tax revenue.
        B.  up to some point, higher tax rates yield higher total tax revenue.
        C.  it may be possible, in some cases, for government to increase revenue by lowering
             tax rates.
        D.  all of the above

43.  Both Keynesians and monetarists agree that
        A.  both monetary and fiscal policy primarily affect aggregate demand.
        B.  monetary policy affects aggregate demand, while fiscal policy affects aggregate supply.
        C.  monetary policy affects aggregate supply, while fiscal policy affects aggregate demand.
        D.  both monetary and fiscal policy primarily affect aggregate supply.

44.  Which of the following is correct?
        A.  Supply side economists believe that policies which primarily alter aggregate demand are
             problematical.
        B.  Monetarists believe that fiscal policy is effective and that there is no alleged crowding
             out of private expenditure.
        C.  Keynesians believe that money supply changes will significantly affect investment and output.
        D.  Supply siders and monetarists believe that tax cuts are not effective in promoting
             recovery from recession.

45.   Productivity is best measured using
        A.  nominal GDP.                                       C. real GDP per capita.
        B.  real GDP.                                             D. output per labor hour.

46.   In the United States,
        A.  real GDP has increased in recent years, although real GDP per capita has fallen.
        B.  increased productivity has played a major role in explaining economic growth.
        C.  technology has not played a major role in economic growth.
        D.  we have experienced economic growth in spite of a reduction in the amount of capital.

47.   The slowdown in labor productivity which occurred from the late 1970s until the late 1990s is
        partially explained by
        A.  a slowing of productivity growth in spite of increases in capital per worker.
        B.  required investment in anti-pollution equipment and worker safety devices.
        C.  fewer new entrants into the labor force than in earlier years.
        D.  too much money was funneled into research and development by business firms.

48.  Parson Malthus
        A.   saw population increasing arithmetically (1, 2, 3, 4, 5 . . .)
        B.  believed that productivity would grow rapidly thereby offsetting population growth.
        C.  thought that population growth would exceed food supply growth and there would
             ultimately be widespread starvation.
        D.  believed the supply curve for food was vertical.

49.  One reason why many are more optimistic than the doomsday forecasters is that
        A.  population is actually beginning to decrease.
        B.  the market system solves a number of problems.
        C.  the supply of land is not fixed.
        D.  technological advancements will foster economic growth.
        E.  both B and D