1. Banks create money when they:
A. add to their reserves in the Federal Reserve Bank.
B. accept deposits of cash.
C. sell government bonds.
D. exchange checkable deposits for the IOU's of businesses and individuals.
Answer the next question(s) on the basis of the following table for a commercial bank or thrift:
2. Refer to the above table. When the legal reserve ratio is 30 percent, the monetary multiplier is:
3. (Last Word) Which of the following represents a change in today's banking policies that should prevent a
recurrence of the bank panics of 1930–1933?
A. banks are more cautious lenders
B. banks keep large amounts of excess reserves on hand
C. the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw money when
individual banks have financial problems
D. the President now has the authority to close banks whenever panics occur
4. Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and
receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this
A. the supply of money is increased by $5,000.
B. the supply of money declines by the amount of the loan.
C. a claim has been "demonetized."
D. the Metro Bank acquires reserves from other banks.
5. In February 2006, the supply of money (M1) in the United States was about:
A. $247 billion.
B. $1600 billion.
C. $1375 billion.
D. $1236 billion.
6. Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation
decreases by $40 billion, the:
A. M1 money supply will decline.
B. M1 money supply will not change.
C. M2 money supply will decline.
D. MZM money supply will increase.
7. The twelve Federal Reserve Banks:
A. are owned and operated by the U.S. Treasury.
B. were created in 1776.
C. hold the reserve deposits of commercial banks.
D. are also known as national banks.
Answer the next question(s) on the basis of the following table:
8. Refer to the above table. The value of the dollar in year 2 is:
9. Assuming no other changes, if balances in money market mutual funds held by individuals decrease by $40
billion and money market mutual funds held by businesses increase by $40 billion, the:
A. M1 and M2 money supplies will not change.
B. M2 and MZM money supplies will increase.
C. M1, M2, and MZM money supplies will decline.
D. M2 money supply will decrease and MZM money supply will remain unchanged.
10. An economist who favors smaller government would recommend:
A. tax cuts during recession and reductions in government spending during inflation.
B. tax increases during recession and tax cuts during inflation.
C. tax cuts during recession and tax increases during inflation.
D. increases in government spending during recession and tax increases during inflation.
11. Suppose the price level is fixed, the MPC is .8, the GDP gap is a negative $200 billion. To achieve full-
employment output (exactly), government should:
A. increase government expenditures by $200 billion.
B. reduce taxes by $200 billion.
C. increase government expenditures by $40 billion.
D. reduce taxes by $160 billion.
12. To say that "the U.S. public debt is also a public credit" is to say that:
A. only interest payments on the public debt are an economic burden.
B. official figures understate the size of the public debt.
C. the bulk of the public debt is owned by U.S. citizens and institutions.
D. the public debt is equal to the land and buildings assets owned by the Federal government.
13. Refer to the above diagram. If the full-employment level of GDP is D, then it would be appropriate fiscal
policy for government to:
A. decrease spending and increase taxes.
B. decrease spending and decrease taxes.
C. increase spending and increase taxes.
D. increase spending and decrease taxes.
14. A contractionary fiscal policy is shown as a:
A. rightward shift in the economy's aggregate demand curve.
B. rightward shift in the economy's aggregate supply curve.
C. movement along an existing aggregate demand curve.
D. leftward shift in the economy's aggregate demand curve.
15. Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy would
be most appropriate if the economy's present aggregate demand curve were at:
A. AD0 .
B. AD1 .
C. AD2 .
D. AD3 .
16. A bank's actual reserves can be found by:
A. adding its required and excess reserves.
B. subtracting its required reserves from its excess reserves.
C. multiplying its excess reserves by the reserve ratio.
D. multiplying its checkable deposits by the reserve ratio.
17. If severe demand-pull inflation was occurring in the economy, proper government policies would involve a
A. deficit and the purchase of securities in the open market, a higher discount rate, and higher reserve
B. deficit and the sale of securities in the open market, a higher discount rate, and lower reserve requirements.
C. surplus and the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
D. surplus and the purchase of securities in the open market, a lower discount rate, and lower reserve
18. If the Fed were to increase the legal reserve ratio, we would expect:
A. lower interest rates, an expanded GDP, and depreciation of the dollar.
B. lower interest rates, an expanded GDP, and appreciation of the dollar.
C. higher interest rates, a contracted GDP, and appreciation of the dollar.
D. higher interest rates, a contracted GDP, and depreciation of the dollar.
19. On a diagram where the interest rate and the quantity of money demanded are s hown on the vertical and
horizontal axes respectively, the transactions demand for money can be represented by:
A. a line parallel to the horizontal axis.
B. a vertical line.
C. a downsloping line or curve from left to right.
D. an upsloping line or curve from left to right.
20. Other things equal, a restrictive monetary policy during a period of demand-pull inflation will:
A. lower the interest rate, increase investment, and reduce net exports.
B. lower the price level, increase investment, and increase aggregate demand.
C. increase productivity, aggregate supply, and real output.
D. increase the interest rate, reduce investment, and reduce aggregate demand.
Answer the next question(s) on the basis of the following consolidated balance sheet of the commercial
banking system. Assume that the reserve requirement is 10 percent. All figures are in billions and each question
should be answered independently of changes specified in the preceding ones.
21. Refer to the above data. The monetary multiplier for the commercial banking system is:
22. One policy dilemma posed by cost-push inflation is that:
A. an increase in aggregate demand will increase inflation and the unemployment rate simultaneously.
B. tax rates can be reduced without lowering tax revenues.
C. the reduction of aggregate demand to restrain inflation will cause a further reduction in the real GDP.
D. the adjustment of aggregate demand can neither increase real GDP nor reduce inflation.
23. When the actual rate of inflation is less than the expected rate:
A. the unemployment rate will temporarily rise.
B. firms will increase their output to recoup their falling profits.
C. the unemployment rate will temporarily fall.
D. firms will experience rising profits and thus increase their employment.
24. The traditional Phillips Curve suggests a tradeoff between:
A. price level stability and income equality.
B. the level of unemployment and price level stability.
C. unemployment and income equality.
D. economic growth and full employment.
25. Refer to the above diagram. The short-run aggregate supply is:
D. not represented in the diagram.
26. Other things equal, an increase in the price level will:
A. shift the aggregate supply curve to the right.
B. shift the aggregate demand curve to the right.
C. cause a movement up along a short-run aggregate supply curve.
D. cause a movement down an aggregate demand curve.