A government can finance its budget deficit by doing all of the following except:
borrowing from its central bank.
According to some economists when a country’s debt-to-GDP ratio exceeds 90 percent:
the interest rate will fall, reducing debt service payments.
the government will have to purchase more long-term securities.
it will compel citizens to buy more U.S. debt.
the government will face financial instability
An expansionary monetary policy that affects the price level but not real output must result in the shift of:
both the AD and SAS curves.
only the AD curve.
only the SAS curve.
neither the SAS curve nor the AD curve.
An unanticipated increase in the inflation rate will most likely:
either increase or decrease the real value of the national debt, depending on the effect of inflation on capital gains and losses.
increase the real value of the national debt.
transfer wealth from bondholders to the government.
have no effect on the real value of the national debt.
Bank required reserves are:
a financial asset for the Fed.
a financial liability for the bank.
counted as money.
a financial liability for the Fed.
Banks hold people’s cash for free, and sometimes even pay for the privilege of holding it, because:
they are nice.
deposits allow banks to make profitable loans.
the Federal Reserve requires that they do so.
the cash can be deposited at the Federal Reserve Bank to earn interest.
Checking account balances are:
not included in M1.
included in M2 but not M1.
included in M1 and serve as a medium of exchange.
Debt is measured relative to GDP because:
the ability of a country to pay off its debt depends on its productive capacity.
the ability to produce output depends on the size of the nation’s debt.
GDP is always used as a reference point in economics.
as long as this ratio remains high, the government will have no trouble repaying the debt.
Deficits may be desirable in the short run if they:
help to stabilize the economy when the economy falls below potential output.
increase savings necessary for future investment and growth.
increase savings necessary for future consumption and demand.
help to stabilize the economy when the economy is above potential output.
Derivatives are financial instruments:
that are highly risky.
that are extremely safe.
whose value depends on the value of another financial instrument.
that are highly leveraged but which offer high returns.
From 2008 to 2009, the interest rate on 10-year government bonds fell to 2.75 percent, its lowest level in many years. This is most likely the result of:
higher inflationary expectations.
easier monetary policy.
higher nominal budget deficits.
higher real budget deficits.
How do companies most commonly pay for raw materials and wages they need to produce a product?
They sell long term bonds.
They get loans from the Federal Reserve.
They get short-term loans from financial institutions.
They issue stock options and use the funds from those.
If banks hold excess reserves whereas before they did not, the money multiplier:
will become larger.
will become smaller.
will be unaffected.
might increase or might decrease.
If people hang onto money rather than depositing it, the money multiplier will:
stay the same.
be increased by the Federal Reserve.
If the Fed increases the required reserves, financial institutions will likely lend out:
more than before, increasing the money supply.
less than before, decreasing the money supply.
more than before, decreasing the money supply.
less than before, increasing the money supply.
If the Federal Reserve reduced its reserve requirement from 6.5 percent to 5 percent, this policy would most likely:
increase both the money multiplier and the money supply.
increase the money multiplier but decrease the money supply.
decrease the money multiplier but increase the money supply.
decrease both the money multiplier and the money supply.
If the demand for bank loans suddenly declines, a defensive action on the part of the Fed to keep the federal funds rate constant would take the form of open market bond:
sales that would prevent the federal funds rate from increasing.
sales that would prevent the federal funds rate from decreasing.
purchases that would prevent the federal funds rate from increasing.
purchases that would prevent the federal funds rate from decreasing.
If the national debt increases in any given year, it follows that the government:
sold bonds in that year to finance a budget surplus.
bought bonds in that year to finance a budget surplus.
sold bonds in that year to finance a budget deficit.
bought bonds in that year to finance a budget deficit.
If the reserve requirement is 20 percent, and banks keep no excess reserves, an increase in an initial inflow of $100 into the banking system will cause an increase in the money supply of:
In 2007, the U.S. economy was operating close to potential. The budget deficits experienced by the United States in 2007 was:
primarily cyclical deficits.
primarily structural deficits.
neither structural nor cyclical deficits.
about evenly split between structural and cyclical deficits.
In 2008, the U.S. inflation rate increased unexpectedly. If revenues, expenditures, and nominal interest rates had remained unchanged, as a consequence of this increase:
both the U.S real and nominal budget deficits would have increased.
only the U.S. real budget deficit would have increased.
only the U.S. real budget deficit would have decreased.
both the U.S. real and nominal budget deficits would have decreased.
In some countries the financial sector maintains private reserves in addition to the required reserves. These reserves do not go back to the circular flow of the economy. In this case, this economy most likely will experience:
In the fall of 2008 the Federal Reserve lowered its target for the federal funds rate to close to 0 percent. What is the name of the group within the Federal Reserve that made this decision?
Federal Advisory Committee
Federal Deposit Insurance Corporation
Federal Funds Operating Group
Federal Open Market Committee
In the short run if the Fed undertakes contractionary monetary policy, the effect will be to shift the:
AD curve out to the right.
AD curve in to the left.
SAS curve up.
SAS curve down.
In the short run if the Fed undertakes expansionary monetary policy, the effect will be to shift the:
AD curve out to the right.
AD curve in to the left.
SAS curve up.
SAS curve down.
In the short-run framework, budget deficits should:
never be run since they slow economic growth over the long run.
never be run since they crowd out investment in the short run.
be run on a temporary basis whenever the economy is below potential output.
be run on a permanent basis since they can always be financed by printing money.
In the structural stagnation model where the world price level is below the domestic price level, expansionary monetary policy:
leads to higher interest rates.
increases the trade deficit.
lowers domestic output.
raises the price level.
Liability management refers to:
a bank’s handling of the assets in individual trust funds.
a bank’s handling of loans and other assets.
how a bank attracts deposits and what it pays for them.
how a bank manages its accounts receivable.
Most decisions about monetary policy are made by:
the chairman of the Fed only.
the president and Congress.
the Federal Open Market Committee.
Quantitative easing refers to:
a gradual reduction in interest rates by the Federal Reserve.
looser restrictions on banks’ investments in derivatives.
a gradual reduction in marginal tax rates.
non-standard monetary policy designed to extend credit in the economy.
Structural stagnationists believe:
the efficient market hypothesis is operational at all times.
people can be irrational at times.
people are generally irrational.
the efficient market hypothesis is never operational.
Suppose my financial adviser advises me to combine different financial assets, whose prices are not expected to move together, in an effort to reduce risk. This process is known as:
The act by Congress passed in 2007 to address the problems caused by the financial crisis is known as:
the Dodd-Frank Consumer Protection Act.
the Glass-Steagall Act.
The efficient market hypothesis suggests that:
Congress is unable to pass effective laws
the Fed will be unable to pop a bubble
bubbles are a normal part of an economy
bubbles won’t occur
The financial sector is of special concern to economists because:
it is like water to a car.
it is like oil to a car.
it is like gasoline to a car.
it is like an engine to a car.
The formula for the money multiplier is:
1/r where r is the reserve ratio.
1/r where r is the ratio of excess reserves to reserves.
1/(r+1) where r is the reserve ratio.
1/(r + 1) where r is the ratio of excess reserves to reserves.
The goldsmith’s ability to create money was based on the fact that:
gold receipts were rarely exchanged for gold.
the goldsmith was required to keep 100 percent gold reserves.
consumers preferred to use gold for transactions.
withdrawals of gold tended to exceed deposits of gold.
The real deficit depends on the:
level of government expenditures and receipts only.
rate of inflation only.
nominal deficit, the rate of inflation, and the government debt.
rate of interest only.
The real deficit is the nominal deficit adjusted for changes in:
the general price level.
The reserve requirement is the:
maximum ratio of reserves to deposits that a bank can have.
minimum ratio of reserves to deposits that a bank can have.
maximum level of reserves a bank can have.
minimum level of reserves a bank can have.
What makes it possible for a country to maintain a constant debt-to-GDP ratio and still have continual deficits is:
positive private savings.
real economic growth.
When a bubble bursts:
the amount of leverage in the economy generally increases.
the amount of leverage in the economy generally decreases.
nominal wealth generally increases.
real wealth generally decreases.
When a central bank is acting as a lender of last resort it is:
buying long-term Treasury bonds and selling short-term Treasury notes.
buying Treasury bills directly from the public.
providing banks with Treasury bills for free.
providing banks liquidity to meet their obligations.
When money is held as an asset, it is serving as a:
standard of value.
unit of account.
medium of exchange.
store of wealth.
When the Fed sells bonds, the money supply:
sometimes rises and sometimes falls.
Selling bonds does not have any effect on the money supply.
When the stock market crashed in 1929, most economists thought that:
an extremely deep depression was just about to begin.
stocks were going to bounce back immediately to previous highs.
a major fiscal expansion was needed immediately.
a mild recession would ensue.
Which is not a function of the Fed?
Conducting monetary policy
Serving as a lender of last resort
Providing financial services such as check clearing to commercial banks
Financing U.S. budget deficits
Which of the following is not a function of money?
Medium of exchange.
Unit of account.
Store of wealth.
Which of the following is not directly affected by monetary policy?
The money supply
The banking system
The availability of credit
The budget deficit
Which of the following was not a contributing factor to the housing market boom of the 2000s?
Low interest rates
Mortgages with no or little money down
The merging of large banks giving them more assets
Scant concern given to people’s ability to meet the mortgage payment
Why are financial-sector crises scarier than collapses in other sectors of the economy?
The financial sector is the biggest sector.
Financial-sector crises happen more often than collapses in other sectors.
Most people work in the financial sector.
If the financial sector fails, it can bring the whole economy down with it.
Why do banks package loans into securities?
Because banking regulations require them to do so
In order to get around adhering to current banking regulations
To spread the risk of default and increase liquidity
To take advantage of tax breaks passed by the federal government as part of stimulus packages
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