Test 5 Sections 5 & 6 Web Site Review Multiple Choice



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Test 5 - Sections 5 & 6 - Web Site Review
Multiple Choice

Identify the choice that best completes the statement or answers the question.
____ 1. When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n):

A.

medium of exchange.

B.

expander of economic activity.

C.

factor of production.

D.

store of value.

E.

instrument of barter.

____ 2. A bank run can “break a bank” because:



A.

borrowers default on their loans, and the bank's assets become worthless.

B.

banks can not convert quickly illiquid loans into liquid assets without facing a large financial loss.

C.

depositors' panic spreads to borrowers, who want to take additional loans from the bank.

D.

the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury bonds.

E.

the banks cannot quickly convert liquid assets like checking deposits to cover illiquid liabilities like loans.

____ 3. A bank run occurs when:



A.

too many people are trying to borrow more at one time.

B.

the assets of the bank are greater than the liabilities of the bank.

C.

interest rates start to increase.

D.

interest rates are higher than inflation rates.

E.

many bank depositors are trying to withdraw their funds from the bank.

____ 4. Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by:



A.

$500.

B.

$2,500.

C.

$100.

D.

$400.

E.

$300.



Assets

Liabilities

Loans

$900,000

Deposits $1,000,000

Reserves

$100,000




Scenario 25-3: Assets and Liabilities of the Banking System

____ 5. Use Scenario 25-3. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves, then _______ will be added to the money supply.



A.

$666,667

B.

$111,111

C.

$250,000

D.

$1,000,000

E.

$500,000

____ 6. If the Fed conducts an open-market purchase:



A.

bank reserves decrease and the money supply decreases.

B.

bank reserves increase and the money supply increases.

C.

bank reserves decrease and the money supply increases.

D.

bank reserves increase and the money supply decreases.

E.

bank reserves increase and the money supply does not change.

____ 7. If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market, and the reserve ratio is 10%, then at most the money supply will:



A.

increase by $2,500 million.

B.

remain unchanged.

C.

increase by only $250 million.

D.

increase by only $25 million.

E.

decrease by only $250 million.

____ 8. A decrease in the demand for money would result from:



A.

an increase in income.

B.

a decrease in real GDP.

C.

an increase in the price level.

D.

an increase in nominal GDP.

E.

an increase in the supply of money.

____ 9. All else equal, a 20% increase in the aggregate price level will increase the quantity of money demanded by:



A.

20%.

B.

the money multiplier.

C.

10%.

D.

half the money multiplier.

E.

20% of the money multiplier.

____ 10. The federal funds rate is the interest rate on ______, and is controlled by the _________.



A.

loans from the Fed to banks; Federal Open Market Committee

B.

reserves that banks lend to each other; Federal Open Market Committee

C.

loans from the Fed to banks; President and Congress

D.

reserves that banks lend to each other; President and Congress

E.

reserves that banks lend to each other; Treasury Department

____ 11. An increase in the supply of money, with no change in demand for money, will lead to _______ in the equilibrium quantity of money and _______ in the equilibrium interest rate.



A.

an increase; an increase

B.

an increase; a decrease

C.

a decrease; an increase

D.

a decrease; a decrease

E.

No change; an increase



Scenario 28-1: Money and Interest Rates

Banks decide to do away with fees charged to noncustomers when they use another bank's ATM.


____ 12. Use Scenario 28-1. The demand for money will _____, and the real supply of money will _____.

A.

increase; not change

B.

increase; decrease

C.

decrease; not change

D.

decrease; increase

E.

decrease; decrease



Figure 29-7: Market for Loanable Funds with Government Borrowing

____ 13. Use the “Market for Loanable Funds with Government Borrowing” Figure 29-7. According to the accompanying figure, after an increase in government borrowing, the new equilibrium interest rate will rise from ______ and the amount of private savings will _______.

A.

6% to 8%; stay the same

B.

6% to 8%; rise

C.

6% to 8%; fall

D.

6% to 8%; be indeterminate

E.

6% to 10%; rise

____ 14. Crowding out is a phenomenon:



A.

where an increase in government's budget surplus decreases the overall investment spending.

B.

where overproduction in the goods market leads to a sharp drop in the aggregate price level.

C.

where an increase in government spending causes an equal decrease in consumption spending.

D.

where an increase in imports causes the overall domestic production to fall.

E.

where an increase in government's budget deficit causes the overall investment spending to fall.

____ 15. In the loanable funds market, savers:



A.

demand funds.

B.

supply funds.

C.

represent borrowers of funds.

D.

pay the equilibrium interest rate.

E.

enjoy an inverse relationship between the quantity of funds saved and the interest rate.

____ 16. Expansionary fiscal policies:



A.

move a budget deficit closer to a balanced budget.

B.

make the budget deficit smaller.

C.

affect only taxes.

D.

affect only government spending.

E.

make the budget surplus smaller.

____ 17. If the government's total revenues are less than its total expenditures, then it has a budget:



A.

deficit.

B.

surplus.

C.

balance.

D.

equality.

E.

tariff.

____ 18. To fight a recession, the Fed should conduct _____ monetary policy to ______ interest rates and shift aggregate demand to the _____.



A.

expansionary; decrease; left

B.

contractionary; increase; left

C.

contractionary; decrease; right

D.

expansionary; decrease; right

E.

expansionary; increase; right

____ 19. Liquidity traps are most likely when the:



A.

economy is going through a recovery.

B.

economy is booming.

C.

public expects inflation.

D.

public expects deflation.

E.

public expects stagflation.

____ 20. The school of economics that dominated economic thinking prior to the Great Depression was the:



A.

business cycle theorists.

B.

classical school.

C.

post-Keynesian school.

D.

Marxists.

E.

monetarists.

____ 21. The main consequence of Keynesian economics is:



A.

economic policy rules.

B.

the rationale for macroeconomic policy activism.

C.

a consensus that fiscal policy is ineffective.

D.

a consensus that monetary policy is always effective.

E.

fiscal and monetary policy cannot smooth out the business cycle.

____ 22. Economic historians tend to agree that the main reason that the Great Depression ended was:



A.

effective monetary policy by the Fed under the leadership of Paul Volcker.

B.

the rise of Adolf Hitler in Germany in the 1930s.

C.

Winston Churchill's foreign policy.

D.

deficit spending in the United States to finance World War II.

E.

the population growth from the “baby boom”.

____ 23. The monetary policy rule suggests:



A.

we need to follow the rules set by the Fed.

B.

the Fed needs to follow the rules set by Congress.

C.

the interest rate needs to grow at a slow and steady pace.

D.

the money supply needs to grow at a slow and steady pace.

E.

the national debt needs to grow at a slow and steady pace.

____ 24. The Fed moved away from a monetary growth rule because:



A.

the economy was unstable.

B.

the money supply was unstable.

C.

the velocity of money was unstable.

D.

interest rates were unstable.

E.

government spending was unstable.

____ 25. Real business cycle theory suggests that changes in:



A.

aggregate demand cause business cycles.

B.

the growth of factor productivity cause business cycles.

C.

fiscal policy cause business cycles.

D.

monetary policy cause business cycles.

E.

the national debt cause business cycles.

Test 5 - Sections 5 & 6 - Web Site Review

Answer Section
MULTIPLE CHOICE
1. ANS: D PTS: 1 DIF: M REF: Module 23

SKL: Critical Thinking


2. ANS: B PTS: 1 DIF: M REF: Module 25

SKL: Fact-Based


3. ANS: E PTS: 1 DIF: E REF: Module 25

SKL: Definitional


4. ANS: D PTS: 1 DIF: E REF: Module 25

SKL: Critical Thinking


5. ANS: D PTS: 1 DIF: D REF: Module 25

SKL: Analytical Thinking


6. ANS: B PTS: 1 DIF: M REF: Module 27

SKL: Critical Thinking


7. ANS: A PTS: 1 DIF: M REF: Module 27

SKL: Analytical Thinking


8. ANS: B PTS: 1 DIF: M REF: Module 28

SKL: Concept-Based


9. ANS: A PTS: 1 DIF: M REF: Module 28

SKL: Critical Thinking


10. ANS: B PTS: 1 DIF: E REF: Module 28

SKL: Fact-Based


11. ANS: B PTS: 1 DIF: M REF: Module 28

SKL: Critical Thinking


12. ANS: C PTS: 1 DIF: M REF: Module 28

SKL: Critical Thinking


13. ANS: B PTS: 1 DIF: M REF: Module 29

SKL: Concept-Based


14. ANS: E PTS: 1 DIF: M REF: Module 29

SKL: Concept-Based


15. ANS: B PTS: 1 DIF: E REF: Module 29

SKL: Study Guide


16. ANS: E PTS: 1 DIF: M REF: Module 30

SKL: Critical Thinking


17. ANS: A PTS: 1 DIF: E REF: Module 30

SKL: Definitional


18. ANS: D PTS: 1 DIF: M REF: Module 31

SKL: Critical Thinking


19. ANS: D PTS: 1 DIF: M REF: Module 34

SKL: Fact-Based


20. ANS: B PTS: 1 DIF: E REF: Module 35

SKL: Fact-Based


21. ANS: B PTS: 1 DIF: M REF: Module 35

SKL: Concept-Based


22. ANS: D PTS: 1 DIF: M REF: Module 35

SKL: Fact-Based


23. ANS: D PTS: 1 DIF: E REF: Module 35

SKL: Fact-Based


24. ANS: C PTS: 1 DIF: E REF: Module 35

SKL: Fact-Based


25. ANS: B PTS: 1 DIF: E REF: Module 35

SKL: Definitional


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