1) Other things being equal, a reduction in taxes will
A) cause an increase in aggregate demand that is less than the increase in demand due to the due to an equal increase in government spending.
B) lead to a reduction in the long run aggregate supply curve as businesses enjoy greater profits.
C) lead to a corresponding reduction in interest rates increasing the crowding out effect.
D) influence the short run aggregate supply curve but not the aggregate demand curve
2) According to supply side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because
A) Lower tax rates have no effect on the opportunity cost of labor.
B) The crowding out effect does not apply to taxes
C) The lower marginal tax rates will be applied to a growing tax base due to economic growth.
D) The aggregate supply curve will shift inward to the left if the tax rates are lowered.
3) When government expenditures are greater than tax revenues, what can occur?
a.) is there a budget surplus
b.) automatic stabilizers do not kick in
c.) there will be budget deficit
d.) the public debt will be reduced
4) Suppose that the government of Springfield spends $2 trillion in 2011 and receives tax revenues of $1.5 trillion. Which of the following is true?
A) Springfield has a budget surplus of $0.5 trillion.
B) Springfield has a budget deficit of $0.5 trillion.
C) Springfield has a trade deficit of $0.5 trillion.
D) Springfield has a trade surplus of $0.5 trillion.
5) The fastest growing component of the annual federal budgets since 2000 is
A) Funding for NASA.
B) Entitlement payments.
C) Funding for health research.
D) The education budget.
6) The capital budget includes expenditures for
A) Current operations such as salaries.
B) Legislative and presidential office expenses including travel for members of Congress.
C) Interest payments.
D) Investing funding with long-term borrowing.
7) Which of the following correctly describes a way in which deficit spending can impose a burden on future generations?
I. Failure to allocate deficit spending to uses that boost future real Gross Domestic Product (GDP) will require taxing future generations at a higher rate to repay the resulting higher public debt.
II. Government deficits that lead to higher employment and real Gross Domestic Product (GDP) in the future will generate increased income taxes for future governments, which will respond by spending the higher tax revenues, creating higher future government budget deficits.
III. Other things being equal, deficit spending fuels increased consumption of goods and services by the current generation that crowds out capital investment, thereby leaving future generations with a smaller stock of capital than otherwise would have existed.
A) I only
B) II only
C) I and III only
D) II and III only
8) To move from gross public debt to net public debt, subtract
A) The amount owed to individuals and firms outside the United States
B) All government interagency borrowing.
C) The current year's budget deficit from the amount of public debt at the start of the year.
D) The interest paid annually on the public debt.
9) Financial intermediaries are important because
A) They bring lenders and borrowers together in a way that lowers transaction costs.
B) They increase costs for banks
C) They provide large funds to the stock market.
D) They employ large numbers of people.
10) The fact that individuals whose credit worthiness is less than it appears to be are those who are most willing to borrow funds at any given interest rate is an example of
A) Moral bonuses
B) Diverse origins
C) Adverse selection.
D) Symmetric information.
11) The Federal Deposit Insurance Corporation
A) Discourages banks from engaging in excessive risk taking.
B) Only insures deposits in money-center banks.
C) Increases the stability of the banking system by reducing the likelihood of bank runs.
D) Was established after the Panic of 1907.
12) The Board of Governors of the Federal Reserve System is
A) Elected by the members of the American Banking Association.
B) Appointed by the President with approval of the U.S. Senate.
C) Appointed by Congress.
D) Elected by the public.
13) Federal Reserve notes are
A) An asset to the Federal Reserve System.
B) Both an asset and a liability to the Federal Reserve System.
C) A liability to the United States Treasury.
D) A liability to the Federal Reserve System.
14) Which of the following relationships should always be true?
A) Legal reserves + required reserves = excess reserves
B) Legal reserves - required reserves = excess reserves
C) Excess reserves + required reserves = transactions deposits
D) Excess reserves = required reserves
15) Supposed that the required reserve ratio is 20 percent and that a bank is just meeting that requirement when $10,000 in cash is withdrawn from a demand deposit. The bank must now
A) Decrease its reserves by $2,000
B) Do nothing since both its assets and liabilities are affected equally.
C) Make $200,000 in new loans.
D) Increase its reserves by $8,000
16) The difference between assets and liabilities of a bank is known as
A) Reserves
B) Required reserves
C) Net worth
D) Legal reserves
17) All depository institutions must
A) Charge the interest rates and pay the interest rates determined by their Federal Reserve district bank.
B) Keep all of their deposits at the Federal Reserve district bank except their vault cash.
C) Keep a certain percentage of their deposits at the Federal Reserve district bank or as vault cash.
D) Limit their loans to households to a certain percentage of all their loans, and the limit is set by the Federal Open Market Committee.
18) The required reserve ratio is 10 percent. A bank with $100 million in deposits has $5 million in vault cash, $6 million on deposit with the Fed, government securities of $9 million, and other assets of $80 million If some deposits a check for $1 million in the bank, the maximum loan the bank can make is
A) $1.9 million.
B) $900,000
C) $1 million.
D) $2 million.
19) If a bank has $4 million in transactions deposits, and the required reserve ratio is 10 percent, then the bank's required reserves are
A) $600,000
B) $3,600,000
C) $40,000
D) $400,000
20) The required reserve ratio is 10 percent, banks desire to hold no excess reserves, and all loan proceeds are deposited in transactions accounts. A bond dealer has $100 million in deposits, $8 million in vault cash, and $7 million in deposits at the Fed. The Fed sells $1 million in securities to the bond dealer. As a result of this transaction alone,
A) The money supply falls by $1 million, total reserves fall by $900,000 and excess reserves fall by $900,000
B) The money supply falls by $1 million, but reserves don't change since the bank had $5 million in excess reserves before the transaction.
C) The money supply falls by $1 million, total reserves fall by $1 million, and excess reserves fall by $900,000
D) The money supply falls by $1 million, total reserves fall by $1 million and excess reserves fall by $1 million.
21) When the Federal Reserve Bank sells government securities, the immediate effect is that
A) The reserve requirement ratio initially decreases.
B) Excess reserves decrease.
C) The reserve requirement ratio initially increases.
D) Total reserves increase.
22) If the actual money multiplier equals the potential money multiplier and if the Federal Reserve wishes to increase the money supply by $500 when the required reserve ratio is 10 percent, it should
A) Sell $50 of government bonds.
B) Sell $5000 of government bonds.
C) Buy $5000 of government bonds.
D) Buy $50 of government bonds.
23) The required reserve ratio is 10 percent, Bank A has $1 million in excess reserves, and all other banks have zero excess reserves. If the Fed buys $1 million of U.S. government securities and the funds are deposited in Bank A, but Bank A refuses to grant any loans or buy any financial securities, then
A) The money supply increases by $900,000
B) The money supply increases by $1 million.
C) The money supply increases by more than $1 million.
D) The money supply does not increase.
24) If there are $5 million in excess reserves in the U.S. banking system and the required reserve ratio is $20 percent, then the most money supply can increase is
A) $25 million.
B) $5 million.
C) $20 million.
D) $0.
25) If the required reserve ratio is 10 percent, total deposits are $100 billion, banks decide they want to keep 10 percent of their deposits as reserves, and the Fed buys $5 billion in government securities, the money supply will
A) Increase by $25 billion.
B) Increase by $5 billion since the security purchase increases the money supply directly. However, there will be no new loans and no further expansion of the money supply.
C) Not change because the bank will make no loans.
D) Decrease by $25 billion.
26) Assume (other things constant) that the Fed increases the money supply. The mechanism through which aggregate demand increases is, according to interest-rate-based transmission mechanism, summarized as follows:
A) Increase in money supply -> decrease in money balances held -> decrease in interest rates -> increase in planned investment spending -> increase in aggregate demand.
B) Increase in money supply -> increase in money balances held -> decrease in interest rates ->decrease in planned investment spending -> increase in aggregate demand.
C) The money supply increases -> there is a drop in money balances held -> interest rates increase -> planned investment spending decreases -> aggregate demand increases.
D) Increase in money supply -> decrease in interest rates -> increase in planned investment spending ->increase in aggregate demand.
ABC Bank Balance Sheet
Assets -------------------------- Liabilities
__________________________________________________
Reserves $25,000 --------- Demand Deposits $100,000
Required $20,000
Excess $5,000
Loans $75,000
___________________________________________________
Total Assets $100,000--------Total Liabilities $100,000
27) According to this Table, the required reserve ratio for ABC Bank is
A) 10%
B) 15%
C) 5%
D) 20%
28) Suppose that $10,000 in new deposits is received by the ABC Bank. If there were no other changes in the balance sheet, then the bank would be in a position to make new loans in the amount of...
A) $15,000
B) $8,000
C) $10,000
D) $13,000
ABC Bank Balance Sheet
Assets -------------------------- Liabilities
__________________________________________________
Reserves $200,000 --------- Demand Deposits $2,000,000
Required $200,000
Excess $0
Securities $200,000
Loans $1,600,000
___________________________________________________
Total Assets $2,000,000--------Total Liabilities $2,000,000
29) According to this Table, the required reserve ratio for ABC Bank is
A) 10%
B) 15%
C) 1%
D) 20%