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									MACRO – OLD EXAM #5 - ch 15,16,18
1. The goldsmith's ability to create money was based on the fact that:
A. withdrawals of gold tended to exceed deposits of gold in any given time period.
B. consumers and merchants preferred to use gold for transactions, rather than paper money.
C. the goldsmith was required to keep 100 percent gold reserves.
-D. paper money in the form of gold receipts was rarely redeemed for gold.

 2. When the receipts given by goldsmiths to depositors were used to make purchases:
A. the gold standard was created.
B. existing banking laws were violated.
-C. the receipts became in effect paper money.
D. a fractional reserve banking system was created.

3. Which one of the following is presently a major deterrent to bank panics in the United States?
A. the legal reserve requirement
B. the fractional reserve system
C. the gold standard
-D. deposit insurance

4. The reserves of a commercial bank consist of:
A. the amount of money market funds it holds.
-B. deposits at the Federal Reserve Bank and vault cash.
C. government securities that the bank holds.
D. the bank's net worth.


5. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If
the bank's required and excess reserves are equal, then its actual reserves:
A. are $30,000.
B. are $10,000.
-C. are $20,000.
D. cannot be determined from the given information.

 6. 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:


       reserve requirement   checking deposits      actual reserves        excess reserves

        1.     W             $100,000               $10,000                $ 0
        2.    8%               X                     20,000                $12,000
        3.    12%            $200,000                 Y                    $8,000
        4.    20%            $300,000               $70,000                Z




23. Refer to row 1 in the above table. The number appropriate for space W is:
A. 4.
B. 6.
-C. 10.
D. 12.



24. Refer to row 2 in the above table. The number appropriate for space X is:
A. $20,000.
B. $60,000.
C. $200,000.
-D. $100,000.



25. Refer to row 3 in the above table. The number appropriate for space Y is:
A. $24,000.
-B. $32,000.
C. $48,000.
D. $96,000.
26. Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual
reserves of $500,000, the bank:
A. can safely lend out $500,000.
B. can safely lend out $5 million.
C. can safely lend out $50,000.
-D. cannot safely lend out more money.



27. Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual
reserves of $1 million, it can safely lend out:
A. $1 million.
B. $1.2 million.
-C. $200,000.
D. $800,000.



28. Assume the Continental National Bank's balance statement is as follows:




Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check
for $10,000 was drawn and cleared against it?
A. $3,000
B. $24,000
-C. $6,000
D. $16,000



29. Commercial banks create money when they:
A. accept cash deposits from the public.
B. purchase government securities from the central banks.
-C. create checkable deposits in exchange for IOUs.
D. raise their interest rates.
 Use the following balance sheet for the ABC National Bank in answering the next question(s). Assume the
required reserve ratio is 20 percent.




30. Refer to the above data. This commercial bank has excess reserves of:
A. $0.
B. $3,000.
C. $12,000.
-D. $5,000.



31. Refer to the above data. This bank can safely expand its loans by a maximum of:
A. $7,000.
B. $25,000.
C. $12,000.
-D. $5,000.



32. Refer to the above data. Assuming the bank loans out all of its remaining excess reserves as a checkable
deposit, and has a check cleared against it for that amount, its reserves and checkable deposits will now be:
A. $25,000 and $122,000 respectively.
-B. $22,000 and $110,000 respectively.
C. $32,000 and $115,000 respectively.
D. $22,000 and $105,000 respectively.



33. Refer to the above data. Assuming the bank loans out all of its remaining excess reserves as a checkable
deposit, and has a check cleared against it for that amount, the bank will now have excess reserves of:
-A. $0.
B. $3,000.
C. $12,000.
D. $5,000.
34. Refer to the above data. If the original balance sheet was for the commercial banking system, rather than a
single bank, loans and checkable deposits could have been expanded by a maximum of:
A. $8,000.
B. $15,000.
C. $48,000.
-D. $25,000.



35. When a commercial bank has excess reserves:
-A. it is in a position to make additional loans.
B. its actual reserves are less than its required reserves.
C. it is charging too high an interest rate on its loans.
D. its reserves exceed its assets.



36. The multiple by which the commercial banking system can expand the supply of money is equal to the
reciprocal of:
A. the MPS.
B. its actual reserves.
C. its excess reserves.
-D. the reserve ratio.



37. If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits,
the maximum money-creating potential of the commercial banking system will:
A. be equal to twice the reciprocal of the reserve ratio.
B. be unaffected.
C. increase.
-D. decrease.



38. (Last Word) The bank panics of 1930–1933:
A. resulted in the passage of the Smoot-Hawley Act.
B. boosted the nation's money supply, causing inflation.
-C. directly resulted in the Federal insured deposit program.
D. caused a significant outflow of gold from the United States.
39. (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



40. Reserves must be deposited in the Federal Reserve Banks by:
A. only commercial banks which are members of the Federal Reserve System.
-B. all depository institutions, that is, all commercial banks and thrift institutions.
C. state chartered commercial banks only.
D. federally chartered commercial banks only.



41. The securities held as assets by the Federal Reserve Banks consist mainly of:
A. corporate bonds.
-B. Treasury bills and Treasury bonds.
C. common stock.
D. certificates of deposit.



42. Which of the following will increase commercial bank reserves?
-A. the purchase of government bonds in the open market by the Federal Reserve Banks
B. a decrease in the reserve ratio
C. an increase in the discount rate
D. the sale of government bonds in the open market by the Federal Reserve Banks



43. The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits:
A. of commercial banks are unchanged, but their reserves increase.
-B. and reserves of commercial banks both decrease.
C. of commercial banks are unchanged, but their reserves decrease.
D. of commercial banks are both unchanged.



44. The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable
deposits:
-A. of commercial banks are unchanged, but their reserves increase.
B. and reserves of commercial banks both decrease.
C. of commercial banks are unchanged, but their reserves decrease.
D. and reserves of commercial banks are both unchanged.
45. The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable
deposits:
-A. of commercial banks are unchanged, but their reserves increase.
B. and reserves of commercial banks both decrease.
C. of commercial banks are unchanged, but their reserves decrease.
D. and reserves of commercial banks are both unchanged.



46. Commercial banks and thrifts usually hold only small amounts of excess reserves because:
A. the presence of such reserves tends to boost interest rates and reduce investment.
B. the Fed constantly uses open market operations to eliminate excess reserves.
-C. the Fed does not pay interest on reserves.
D. the Fed does not want commercial banks and thrifts to be too liquid.



47. The three main tools of monetary policy are:
A. tax rate changes, the discount rate, and open-market operations.
B. tax rate changes, changes in government expenditures, and open-market operations.
-C. the discount rate, the reserve ratio, and open-market operations.
D. changes in government expenditures, the reserve ratio, and the discount rate.



48. The Fed can change the money supply by:
A. changing bank reserves through the sale or purchase of government securities.
B. changing the quantities of required and excess reserves by altering the legal reserve ratio.
C. changing the discount rate so as to encourage or discourage commercial banks in borrowing from the central
banks.
-D. doing all of these.



49. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the
public, which deposits this amount into checking accounts. As a result of these transactions, the supply of
money is:
A. not directly affected, but the money-creating potential of the commercial banking system is increased by $12
million.
B. directly increased by $4 million and the money-creating potential of the commercial banking system is
increased by an additional $16 million.
C. directly reduced by $4 million and the money-creating potential of the commercial banking system is
decreased by an additional $12 million.
-D. directly increased by $4 million and the money-creating potential of the commercial banking system is
increased by an additional $12 million.
50. Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the
Federal Reserve Bank in its district. As a result:
-A. commercial bank reserves are increased by $10,000.
B. the supply of money automatically declines by $7,500.
C. commercial bank reserves are increased by $7,500.
D. the supply of money is automatically increased by $10,000.



51. Open-market operations change:
A. the size of the monetary multiplier, but not commercial bank reserves.
-B. commercial bank reserves, but not the size of the monetary multiplier.
C. neither commercial bank reserves nor the size of the monetary multiplier.
D. both commercial bank reserves and the size of the monetary multiplier.



52. A commercial bank can add to its actual reserves by:
A. lending money to bank customers.
B. buying government securities from the public.
C. buying government securities from a Federal Reserve Bank.
-D. borrowing from a Federal Reserve Bank.



53. Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of
Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called
the:
A. prime rate.
B. Federal funds rate.
C. Treasury bill rate.
-D. discount rate.



54. Suppose that, for every 1-percentage point decline of the discount rate, commercial banks collectively
borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 20 percent. If the
Fed increases the discount rate from 4.0 percent to 4.25 percent, bank reserves will:
A. increase by $.5 billion and the money supply will increase by $2.5 billion.
-B. decline by $.5 billion and the money supply will decline by $2.5 billion.
C. increase by $.75 billion and the money supply will increase by $3.75 billion.
D. increase by $1 billion and the money supply will increase by $5 billion.
55. Which of the following best describes the cause-effect chain of an expansionary monetary policy?
A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase
aggregate demand and GDP.
B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease
aggregate demand and GDP.
C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease
aggregate demand and GDP.
-D. An increase in the money supply will lower the interest rate, increase investment spending, and increase
aggregate demand and GDP.



56. Assuming government wishes to either increase or decrease the level of aggregate demand, which of the
following pairs are not consistent policy measures?
-A. a tax increase and an increase in the money supply
B. a tax reduction and an increase in the money supply
C. a reduction in government expenditures and a decline in the money supply
D. a tax increase and an increase in the interest rate



57. If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies
would be to:
-A. sell government securities, raise reserve requirements, and raise the discount rate.
B. buy government securities, raise reserve requirements, and raise the discount rate.
C. sell government securities, lower reserve requirements, and lower the discount rate.
D. sell government securities, raise reserve requirements, and lower the discount rate.



58. A contraction of the money supply:
-A. increases the interest rate and decreases aggregate demand.
B. increases both the interest rate and aggregate demand.
C. lowers the interest rate and increases aggregate demand.
D. lowers both the interest rate and aggregate demand.



59. If the Fed were to purchase government securities in the open market, we would anticipate:
-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 depreciation of the dollar.
D. lower interest rates, a contracted GDP, and appreciation of the dollar.
60. Which of the following best describes the cause-effect chain of a restrictive monetary policy?
A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase
aggregate demand and GDP.
-B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease
aggregate demand and GDP.
C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease
aggregate demand and GDP.
D. An increase in the money supply will lower the interest rate, decrease investment spending, and increase
aggregate demand and GDP.



61. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:
A. selling government securities, raising the reserve ratio, lowering the discount rate, and a budgetary surplus.
-B. buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.
C. buying government securities, raising the reserve ratio, raising the discount rate, and a budgetary surplus.
D. buying government securities, reducing the reserve ratio, raising the discount rate, and a budgetary deficit.



62. If severe demand-pull inflation was occurring in the economy, proper government policies would involve a
government:
A. deficit and the purchase of securities in the open market, a higher discount rate, and higher reserve
requirements.
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
requirements.
63. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the
levels of investment spending associated with each curve. All figures are in billions. If the money supply is MS1
and the goal of the monetary authorities is full-employment output Qf, they should:
-A. increase the money supply from $80 to $100.
B. increase the money supply from $80 to $120.
C. maintain the money supply at $80.
D. decrease the money supply from $80 to $60.



64. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the
levels of investment spending associated with each curve. All figures are in billions. If aggregate demand is
AD3 and the monetary authorities desire to reduce it to AD2, they should:
A. increase the interest rate from 3 percent to 9 percent.
B. increase the money supply from $100 to $120.
-C. decrease the money supply from $120 to $100.
D. decrease the interest rate from 3 percent to 9 percent.
65. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the
levels of investment spending associated with each curve. All figures are in billions. Which of the following
would shift the money supply curve from MS1 to MS3?
A. an increase in the discount rate
-B. purchases of U.S. securities by the Fed in the open market
C. sales of U.S. securities by the Fed in the open market
D. an increase in the reserve ratio



66. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the
levels of investment spending associated with each curve. All figures are in billions. If the MPC for the
economy described by the figures is .8:
-A. an increase in the money supply from $80 to $100 will shift the aggregate demand curve rightward by $50
billion at each price level.
B. an increase in the money supply from $80 to $100 will shift the aggregate demand curve leftward by $40
billion at each price level.
C. a decrease in the interest rate from 9 percent to 6 percent will shift the aggregate demand curve leftward by
$100 billion at each price level.
D. a decrease in the interest rate from 6 percent to 3 percent will shift the aggregate demand curve leftward by
$50 billion at each price level.



67. One of the strengths of monetary policy relative to fiscal policy is that monetary policy:
-A. can be implemented more quickly.
B. is subject to closer political scrutiny.
C. does not produce a net export effect.
D. entails a larger spending income multiplier effect on real GDP.



68. The problem of cyclical asymmetry refers to the idea that:
-A. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary
policy may not achieve an increase in the money supply.
B. the monetary authorities have been less willing to use an expansionary monetary policy than they have a
restrictive monetary policy.
C. cyclical downswings are typically of longer duration than cyclical upswings.
D. an expansionary monetary policy can force an expansion of the money supply, but a restrictive monetary
policy may not achieve a contraction of the money supply.



69. In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment
spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of:
A. the crowding-out effect.
B. "pulling on a string."
C. the Taylor rule.
-D. cyclical asymmetry.
70. An expansionary monetary policy may be less effective than a restrictive monetary policy because:
A. the Federal Reserve Banks are always willing to make loans to commercial banks which are short of
reserves.
B. fiscal policy always works at cross purposes with an expansionary monetary policy.
C. changes in exchange rates complicate an expansionary monetary policy more than it does a restrictive
monetary policy.
-D. commercial banks may not be able to find loan customers.

71. In a fractional reserve banking system:
A. bank panics cannot occur.
B. the monetary system must be backed by gold.
C. banks can create money through the lending process.
D. the Federal Reserve has no control over the amount of money in circulation.



72. The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. The bank
must have:
A. $90,000 in outstanding loans and $35,000 in reserves.
-B. $90,000 in checkable deposit liabilities and $32,000 in reserves.
C. $20,000 in checkable deposit liabilities and $10,000 in reserves.
D. $90,000 in checkable deposit liabilities and $35,000 in reserves.



73. When a check is drawn and cleared, the
A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check
are unchanged by this transaction.
-B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
C. bank receiving the check loses reserves and deposits equal to the amount of the check.
D. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.



74. Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the
bank finds that it can safely lend out $4,500, the reserve requirement must be:
A. zero.
-B. 10 percent.
C. 20 percent.
D. 25 percent.



75. A commercial bank can expand its excess reserves by:
-A. demanding and receiving payment on an overdue loan.
B. buying bonds from a Federal Reserve Bank.
C. buying bonds from the public.
D. paying back money borrowed from a Federal Reserve Bank.
76. Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same
day Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply
of money changed?
A. decreased by $600
B. increased by $1,800
C. increased by $600
-D. increased by $1,200



77. A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves
initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of:
A. $1,250.
B. $120,000.
C. $5,000.
-D. $3,750.



 78. If we both have checking accounts in the same commercial bank and I write a check in your favor for $200,
the bank's:
-A. balance sheet will be unchanged.
B. reserves and checkable deposits will both decline by $200.
C. liabilities will decline by $200, but its net worth will increase by $200.
D. assets and liabilities will both decline by $200.



79. Which of the following is correct?
A. Both the granting and repaying of bank loans expand the aggregate money supply.
B. Granting and repaying bank loans do not affect the money supply.
C. Granting a bank loan destroys money; repaying a bank loan creates money.
-D. Granting a bank loan creates money; repaying a bank loan destroys money.



80. In prosperous times banks are likely to hold very small amounts of excess reserves because:
A. the Fed wants commercial banks to increase the money supply during economic expansions.
B. it is very costly to transfer funds between commercial banks and the central banks.
-C. the Federal Reserve Banks do not pay interest on bank reserves.
D. the Federal Reserve Banks want to minimize their interest payments on such deposits.
81. If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5
percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system
will be:
A. 31/2.
B. 4.
-C. 5.
D. 10.



 Answer the next question(s) on the basis of the following information about a banking system: new currency
deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit =
$0.



82. Refer to the above information. The $40 billion deposit of currency into checking accounts will initially
create:
A. $8 billion of new checkable deposits.
B. $10 billion of new checkable deposits.
-C. $40 billion of new checkable deposits.
D. $160 billion of new checkable deposits.



83. Refer to the above information. The $40 billion deposit of currency into checking accounts will create
excess reserves of:
A. $20 billion.
-B. $32 billion.
C. $40 billion.
D. $0.



84. Refer to the above information. The banking system will be able to expand the money supply through loans
by:
-A. $160 billion.
B. $200 billion.
C. $40 billion.
D. $128 billion.



85. Refer to the above information. The $40 billion deposit of new currency will support total checkable
deposits of:
A. $160 billion.
-B. $200 billion.
C. $40 billion.
D. $128 billion.
86. If excess reserves in the banking system are $4,000, checkable deposits are $40,000, and the legal reserve
ratio is 10 percent, then actual reserves are:
A. $4,000.
B. $6,000.
-C. $8,000.
D. $5,000.



87. If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits
are $240,000, then the legal reserve requirement is:
A. 10 percent.
-B. 12.5 percent.
C. 20 percent.
D. 5 percent.



88. If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are
$225,000, then the monetary multiplier is:
A. 10.
B. 4.
-C. 5.
D. 2.



89. Banks destroy money when they:
A. buy government bonds.
B. accept deposits of cash into checkable accounts.
-C. fail to reissue loans that are paid off.
D. clear checks against another bank.



90. (Last Word) The bank panics of 1930–1933 and the resulting failures of many banks were caused by:
-A. the widespread conversion of checkable deposits to cash by the public.
B. the raising of the reserve requirement by the Board of Governors.
C. a massive inflow of gold bullion to the United States.
D. a massive inflow of cash into bank deposits by citizens who feared their money was losing its value.



91. The asset demand for money:
A. is unrelated to both the interest rate and the level of GDP.
-B. varies inversely with the rate of interest.
C. varies inversely with the level of real GDP.
D. varies directly with the level of nominal GDP.
92. On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and
horizontal axes respectively, the total demand for money can be found by:
-A. horizontally adding the transactions and the asset demand for money.
B. vertically subtracting the transactions demand from the asset demand for money.
C. horizontally subtracting the asset demand from the transactions demand for money.
D. vertically adding the transactions and the asset demand for money.



93. In which of the following situations is it certain that the quantity of money demanded by the public will
decrease?
A. nominal GDP decreases and the interest rate decreases
B. nominal GDP increases and the interest rate decreases
-C. nominal GDP decreases and the interest rate increases
D. nominal GDP increases and the interest rate increases



94. The opportunity cost of holding money:
A. is zero because money is not an economic resource.
B. varies inversely with the interest rate.
-C. varies directly with the interest rate.
D. varies inversely with the level of economic activity.




95. Refer to the above diagram of the market for money. The downward slope of the money demand curve Dm
is best explained in terms of the:
A. transactions demand for money.
B. direct or positive relationship between bond prices and interest rates.
-C. asset demand for money.
D. wealth or real-balances effect.
96. Refer to the above diagram of the market for money. The vertical money supply curve Sm reflects the fact
that:
A. bond prices and interest rates are inversely related.
-B. the stock of money is determined by the Federal Reserve System and does not change when the interest rate
changes.
C. the velocity of money is zero.
D. lower interest rates result in lower opportunity costs of supplying money.



 Answer the next question(s) on the basis of the following table in which columns (1) and (2) indicate the
transactions demand (Dt) for money and columns (1) and (3) show the asset demand (Da) for money:




97. Refer to the above data. If the money supply is $160, the equilibrium interest rate will be:
A. 10 percent.
B. 8 percent.
-C. 6 percent.
D. 4 percent.



98. If the Federal Reserve System buys government securities from commercial banks and the public:
A. commercial bank reserves will decline.
B. commercial bank reserves will be unaffected.
-C. it will be easier to obtain loans at commercial banks.
D. the money supply will contract.



99. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this
bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:
-A. $1,000.
B. $2,000.
C. $800.
D. $5,000.
100. Which of the following statements is correct?
A. The supply of money decreases when the Federal Reserve Banks buy government securities from households
or businesses.
-B. Excess reserves are the amount by which actual reserves exceed required reserves.
C. Commercial banks decrease the supply of money when they purchase government bonds from households or
businesses.
D. Commercial bank reserves are a liability to commercial banks but an asset to the Federal Reserve Banks.




101. Refer to the above balance sheets. If the reserve ratio is 25%, commercial banks have excess reserves of:
-A. $12.
B. $22.
C. $16.
D. $24.



102. Refer to the above balance sheets. If the reserve ratio is 25%, the maximum money-creating potential of
the commercial banking system is:
A. $36.
B. $17.
-C. $48.
D. $24.
103. Refer to the above balance sheets and assume the reserve ratio is 25%. Suppose the Federal Reserve Banks
buy $2 in securities from the public, which deposits this amount into checking accounts. As a result of these
transactions, the supply of money will:
A. be unaffected but the money-creating potential of the commercial banking system will increase by $6.
B. directly decrease by $2 and the money-creating potential of the commercial banking system will be
unaffected.
C. directly increase by $8 and the money-creating potential of the commercial banking system will increase by
an additional $32.
-D. directly increase by $2 and the money-creating potential of the commercial banking system will increase by
an additional $6.



104. Refer to the above balance sheets and assume the reserve ratio is 25%. Suppose the Federal Reserve Banks
sell $2 in securities directly to the commercial banks. As a result of this transaction the supply of money:
A. will decrease by $2, but the money-creating potential of the commercial banking system will not be affected.
-B. is not directly affected, but the money-creating potential of the commercial banking system will decrease by
$8.
C. will directly increase by $2 and the money-creating potential of the commercial banking system will
decrease by an additional $8.
D. will directly increase by $2 and the money-creating potential of the commercial banking system will increase
by an additional $8.



 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 20 percent. All figures are in billions and each question
should be answered independently of changes specified in all preceding ones.




105. Refer to the above data. Suppose the Fed wants to increase the money supply by $1000 billion to drive
down interest rates and stimulate the economy. To accomplish this it could lower the reserve requirement from
20 percent to:
-A. 10 percent.
B. 12 percent.
C. 14 percent.
D. 12 percent.
106. Suppose that, for every 1-percentage point decline in the discount rate, commercial banks collectively
borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 10 percent. If the
Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will:
A. increase by $1 billion and the money supply will increase by $5 billion.
B. decline by $1 billion and the money supply will decline by $10 billion.
-C. increase by $1 billion and the money supply will increase by $10 billion.
D. increase by $10 billion and the money supply will increase by $100 billion.



107. Which of the following statements is true?
A. The Federal Reserve sets the Federal funds rate.
B. The Federal Reserve sets the target for the Federal funds rate, and then uses the reserve ratio to push banks
toward that target.
-C. The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market
operations.
D. The Federal Reserve will set a higher target for the Federal funds rate if pursuing an expansionary monetary
policy.



108. The impact of monetary policy on investment spending may be weakened:
A. because of the Treasury's desire for high interest rates.
B. if velocity changes in the same direction as the money supply.
-C. if the investment-demand curve shifts to the right during inflation and to the left during recession.
D. if the investment-demand curve is very flat.



109. Inflation targeting consists of the Fed:
A. using monetary policy to reduce the annual inflation rate by a set amount each year until the rate of inflation
is zero.
B. using monetary policy to hold the price of a fixed basket of commodities (wheat, gold, pork, and so on) to a 1
to 2 percent annual increase.
C. identifying the sources of inflation and recommending structural changes in the economy that would relieve
upward price pressures.
-D. regularly stating an explicit goal for the rate of inflation over some future period, such as the following two
years.
110. 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.

111. In the extended analysis of aggregate supply, the short-run aggregate supply curve is:
A. vertical and the long-run aggregate supply curve is horizontal.
B. horizontal and the long-run aggregate supply curve is vertical.
-C. upward sloping and the long-run aggregate supply curve is vertical.
D. horizontal and the long-run aggregate supply curve is upward sloping.

112. The long-run aggregate supply curve is vertical:
A. because the rate of inflation is steady in the long run.
-B. because resource prices eventually rise and fall with product prices.
C. because product prices always increase at a faster rate than resource prices.
D. only when the money supply increases at the same rate as real GDP.

 113. The:
A. short-run aggregate supply curve is downward sloping.
B. short-run aggregate supply curve is vertical.
-C. long-run aggregate supply curve is vertical.
D. long-run aggregate supply curve is upsloping.




114. Refer to the above diagram relating to short-run and long-run aggregate supply. The
A. short-run aggregate supply curve is A.
-B. short-run aggregate supply curve is B.
C. long-run aggregate supply curve is B.
D. long-run aggregate supply curve is D.
115. Refer to the above diagram. If the price level rises above P1 because of an increase in aggregate demand,
the:
-A. economy will move up along curve B and output will temporarily increase.
B. long-run aggregate supply curve C will shift upward.
C. short-run aggregate supply curve B will automatically shift to the right.
D. economy's output first will decline, then increase, and finally return to Q1.



116. Refer to the above diagram. The long-run aggregate supply curve is:
-A. A.
B. B.
C. C.
D. D.

 117. The extended AD-AS model:
A. distinguishes between short-run and long-run aggregate demand.
B. explains inflation but not recession.
C. includes G and Xn whereas the simple AD-AD model does not.
-D. distinguishes between short-run and long-run aggregate supply.


118. In the extended aggregate demand-aggregate supply model:
A. long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply
curve.
B. the long-run aggregate supply curve is horizontal.
C. the price level is the same regardless of the location of the aggregate demand curve.
-D. long-run equilibrium occurs at the intersection of the aggregate demand curve, the short-run aggregate
supply curve, and the long run aggregate supply.
119. Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply
curve is AS1. Demand-pull inflation in the short run is best shown as:
-A. a shift of the aggregate demand curve from AD1 to AD2.
B. a move from d to b to a.
C. a move directly from d to a.
D. a shift of the aggregate supply curve from AS1 to AS2.



120. Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply
curve is AS1. In the long run, demand-pull inflation is best shown as:
-A. a shift of aggregate demand from AD1 to AD2 followed by a shift of aggregate supply from AS1 to AS2.
B. a move from d to b to a.
C. a shift of aggregate supply from AS1 to AS2 followed by a shift of aggregate demand from AD1 to AD2.
D. a move from a to d.



121. Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply
curve is AS1. Cost-push inflation in the short run is best represented as a:
-A. leftward shift of the aggregate supply curve from AS1 to AS2.
B. rightward shift of the aggregate demand curve from AD1 to AD2.
C. move from d to b to a.
D. move from d directly to a.



122. If government uses fiscal policy to restrain cost-push inflation, we can expect:
-A. the unemployment rate to rise.
B. the unemployment rate to fall.
C. the aggregate demand curve to shift rightward.
D. tax-rate declines and increases in government spending.



123. 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.



124. 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.
125. The basic problem portrayed by the traditional Phillips Curve is:
-A. that a level of aggregate demand sufficiently high to result in full employment may also cause inflation.
B. that changes in the composition of total labor demand tend to be deflationary.
C. that unemployment rises at the same time the general price level is rising.
D. the possibility that automation will increase the level of noncyclical unemployment.




126. Refer to the above diagram for a specific economy. The curve on this graph is known as a:
A. Laffer Curve.
-B. Phillips Curve.
C. labor demand curve.
D. production possibilities curve.



127. Refer to the above diagram for a specific economy. Which of the following best describes the relationship
shown by this curve?
A. The demand for labor is large when the rate of inflation is small.
B. When the rate of unemployment is high, the rate of inflation is high.
-C. The rate of inflation and the rate of unemployment are inversely related.
D. The rate of inflation and the rate of unemployment are directly related.



128. Refer to the above diagram for a specific economy. A reduction in structural unemployment or bottleneck
problems in labor markets will:
A. shift this curve to the right.
-B. shift this curve to the left.
C. move this economy southeast along the curve.
D. move this economy northwest along the curve.
129. Refer to the above diagram for a specific economy. An increase in aggregate demand will:
A. shift this curve to the right.
B. shift this curve to the left.
C. move this economy southeast along the curve.
-D. move this economy northwest along the curve.



130. Refer to the above diagram for a specific economy. Which of the following best describes a decision by
policymakers that moves this economy from point b to point a?
A. Policymakers have instituted an expansionary monetary policy and/or a budgetary deficit, thereby accepting
more unemployment to reduce the rate of inflation.
B. Policymakers have instituted a restrictive monetary policy and/or a budgetary surplus, thereby accepting a
higher rate of inflation to reduce unemployment.
-C. Policymakers have instituted an expansionary monetary and/or a budgetary deficit, thereby accepting a
higher rate of inflation to reduce unemployment.
D. Policymakers have instituted a restrictive monetary policy and/or a budgetary surplus, thereby accepting
more unemployment to reduce the rate of inflation.



131. Refer to the above diagram for a specific economy. The shape of this curve suggests that:
A. the price level rises at a diminishing rate as the level of aggregate demand increases.
B. full employment and price stability are compatible goals only when aggregate demand is falling.
C. each successive unit of decline in the unemployment rate is accompanied by a smaller increase in the rate of
inflation.
-D. each successive unit of decline in the unemployment rate is accompanied by a larger increase in the rate of
inflation.



132. A rightward shift of the traditional Phillips Curve would suggest that:
A. the productivity of labor increased.
-B. the rate of inflation is now higher at each rate of unemployment.
C. cost-push inflation decreased.
D. the rate of inflation is now lower at each rate of unemployment.



133. A major adverse aggregate supply shock:
A. automatically shifts the aggregate demand curve rightward.
-B. causes the Phillips Curve to shift rightward and upward.
C. can be caused by rising productivity.
D. can be caused by falling wages.
134. Which of the following is a true statement?
A. There is a long-run tradeoff between inflation and unemployment.
-B. There is no tradeoff between inflation and unemployment in the long run.
C. The short-run Phillips Curve is horizontal.
D. The long-run Phillips Curve is horizontal.




135. Refer to the above diagram. Supply-side economists believe that tax rates are:
A. such that an increase in tax rates will increase tax revenues.
B. at some level below b.
-C. at some level above b.
D. at d.

136. In terms of aggregate supply, the short run is a period in which:
A. the price level is constant.
B. employment is constant.
C. real output is constant.
-D. nominal wages and other resource prices are unresponsive to price-level changes.



137. In terms of aggregate supply, the difference between the long run and the short run is that in the long run:
A. the price level is variable.
B. employment is variable.
C. real output is variable.
-D. nominal wages and other input prices are fully responsive to price-level changes.



138. 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.
139. Other things equal, the short-run aggregate supply curve shifts positions when:
A. the price level changes.
B. the rate of inflation changes.
-C. nominal wages and other input prices change.
D. aggregate demand changes.




140. Refer to the above diagram and assume the economy is operating at equilibrium point w. In the short run,
an increase in the price level from P2 to P3 would move the economy from point w to point:
A. v.
-B. x.
C. u.
D. z.



141. Refer to the above diagram and assume the economy is operating at equilibrium point w. In the long run,
an increase in the price level from P2 to P3 would move the economy from point w to point:
A. v.
B. x.
-C. u.
D. y.



142. Refer to the above diagram and assume the economy is operating at equilibrium point w. In the short run, a
decrease in the price level from P2 to P1 would move the economy from point w to point:
-A. v.
B. x.
C. t.
D. y.
143. Refer to the above diagram and assume the economy is operating at equilibrium point w. If wages and
other resource prices are flexible downward, in the long run a decrease in the price level from P2 to P1 would
move the economy from point w to point:
A. v.
B. x.
C. t.
-D. y.



144. Refer to the above diagram. If drawn, the long-run aggregate supply curve would include points:
A. v, w, and u.
-B. w, u and y.
C. t, w, and z.
D. y, w, and x.




145. Refer to the above diagram and assume that prices and wages are flexible both upward and downward in
the economy. In the extended AD-AS model:
-A. demand-pull inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C.
B. cost-push inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C.
C. recession would involve a leftward shift of curve A, followed by a leftward shift of curve C.
D. recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C.



146. Refer to the above diagram and assume that prices and wages are flexible both upward and downward in
the economy. In the extended AD-AS model:
A. demand-pull inflation would involve a rightward shift of curve A, followed by a rightward shift of curve C.
B. cost-push inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C.
-C. recession would involve a leftward shift of curve A, followed by a rightward shift of curve C.
D. recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C.
147. Stagflation refers to:
-A. an increase in inflation accompanied by decreases in real output and employment.
B. a decline in the price level accompanied by increases in real output and employment.
C. a simultaneous increase in real output and the price level.
D. a simultaneous reduction in real output and the price level.



148. An adverse aggregate supply shock could result from:
A. a sharp rise in productivity.
-B. a rapid rise in oil prices.
C. a decline in wages.
D. an appreciation of the dollar.



149. Which of the following is a true statement?
-A. Under normal conditions there is a short-run tradeoff between inflation and unemployment.
B. There is a long-run tradeoff between inflation and unemployment.
C. The short-run Phillips Curve is vertical.
D. The long-run Phillips Curve is horizontal.




150. Refer to the above diagram. Assume that the natural rate of unemployment is 5 percent and that the
economy is initially operating at point a where the expected and actual rates of inflation are each 6 percent. If
the actual rate of inflation unexpectedly falls from 6 percent to 4 percent, then the unemployment rate will:
A. temporarily fall from 5 percent to 4 percent.
B. permanently fall from 5 percent to 4 percent.
-C. temporarily rise from 5 percent to 7 percent.
D. permanently rise from 5 percent to 7 percent.
151. Refer to the above diagram. Assume that the natural rate of unemployment is 5 percent and that the
economy is initially operating at point a where the expected and actual rates of inflation are each 6 percent. In
the long run, the decline in the actual rate of inflation from 6 percent to 4 percent will:
A. reduce the unemployment rate.
B. reduce corporate profits in real terms.
-C. have no effect on the unemployment rate.
D. reduce real domestic output.



152. Refer to the above diagram. Assume that the natural rate of unemployment is 5 percent and that the
economy is initially operating at point c where the expected and actual rates of inflation are each 4 percent. If
the actual rate of inflation unexpectedly rises from 4 percent to 6 percent, the economy will:
A. move from a to b and eventually to c.
B. move directly from c to b.
C. remain at a.
-D. move from c to d and eventually to a.




153. Refer to the above diagram. Point b on short-run Phillips Curve PC1 represents a rate of:
A. inflation below the natural rate.
B. inflation above the natural rate.
C. unemployment above the natural rate.
-D. unemployment below the natural rate.



154. Refer to the above diagram. Point b would not be permanent because the:
A. economy would move from b to a on PC1.
-B. short-run Phillips Curve would shift from PC1 to PC2 and unemployment would increase to the natural rate
at c.
C. economy would immediately move from b to c to d.
D. economy would move from b directly to d.
155. Which of the following is a tenet of supply-side economics?
-A. High marginal tax rates severely discourage work, saving, and investment.
B. Increases in social security taxes and other business taxes shift the aggregate supply curve to the right.
C. The Federal Reserve should adhere to a monetary rule that limits increases in the money supply to a 5
percent annual rate.
D. Transfer payments increase incentives to work.

								
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