1. Each of the following is an expansionary fiscal policy EXCEPT:

an increase in Medicare payments given to the elderly.

an increase in tax rates on corporations.

an increase in social security payments.

an increase in defence expenditures.

2. Suppose the MPC = 0.8 and the government cuts taxes by $40 billion. Which of the following will be the likely effect?

Real GDP will contract by $160 billion.

Real GDP will contract by $200 billion.

Real GDP will expand by $160 billion.

Real GDP will expand by $200 billion.

3. The multiplier effect of increases in government transfers (or cutting taxes) is:

zero because transfer payments do not have an effect on aggregate demand.

less than the multiplier effect of an increase in government spending.

greater than the multiplier effect of an increase in government spending.

the same as an increase in government spending.

4. In which economy will a $1 cut in taxes have a greater impact on aggregate demand?

The MPC is 0.7

The tax cut is given to those who hold a large amount of wealth and have a high MPS.

The tax cut is given to households who consume three quarters of any increases in income.

The MPS is 0.2

The MPC is 0.9

5. The cyclically-adjusted budget balance is:

an estimate of the tax increase needed to compensate for larger government transfers so that the budget remains balanced.

an estimate of the contractionary fiscal policy needed to close an inflationary gap.

an estimate of the expansionary fiscal policy needed to close a recessionary gap.

an estimate of what the budget balance would be if real GDP was exactly equal to potential output.

6. If taxes are cut by $50 billion and unemployment compensation is decreased by $5 billion, the government's budget

deficit will increase by $45 billion

deficit will increase by $55 billion.

deficit will increase by $50 billion.

surplus will increase by $5 billion.

deficit will decrease by $5 billion.

7. If the economy is currently operating at an output level of $5000 billion and potential output is $4000 billion, given a marginal propensity to consume of 0.8, which of the following would be the most appropriate policy to return the economy to potential output?

Decreasing government spending by $500 billion

Increasing taxes by $250 billion

Cutting taxes by $200 billion

Increasing taxes by $1,000 billion ($1 Trillion)

Increasing government spending by $200 billion

8. If the government were to reduce the budget deficit,

the demand for loan able funds would increase.

interest rates would rise, unless the Federal Reserve has contractionary monetary policy.

interest rates would decrease further, unless the Federal Reserve has contractionary monetary policy.

inflation would increase, unless the Federal Reserve increased money supply.

the supply of loan able funds would decrease.

9. When we keep part of our wealth in a savings account, money is playing the role of:

unit of account.

medium of exchange.

barter.

store of value.

10. Checkable deposits (checking accounts) are included in which definition of the Money Supply?

M1 and M3 but not M2.

M1, M2, and M3.

M1 only

M1 and M2 but not M3.

M2 only

11. A bond is considered:

an asset for the owner of the bond that is not part of the money supply.

M1.

M2.

a liability for the owner of the bond that is part of the money supply.

12. When a person makes price comparisons among products, money is being used as a(n):

medium of exchange.

unit of account.

checkable deposit.

expander of economic activity.

13. Money whose value derives entirely from its official status as a means of exchange is known as:

commodity-backed money.

commodity money.

bank reserves.

fiat money.

14. If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is:

5%.

25%.

10%.

12.5%.

15. Reserve requirements:

are set by the American Bankers Association.

set the minimum amount of reserves a bank must hold.

are established by Congress.

set the maximum amount of reserves a bank must hold.

are set by the Federal Depository Insurance Corporation.

16. Table: Balance Sheet

r1-1.png

Reference: Ref 34-1

(Table: Balance Sheet) Refer to the information in the Table: Balance Sheet. If the reserve ratio is 25 percent and the bank is exactly meeting its reserve requirement and the bank is exactly meeting its reserve requirement, loans are:

$5000.

$15,000.

$60,000.

$80,000.

17. Suppose a bank has excess reserves of $800 and the reserve ratio is 20%. If Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly, that bank can lend an additional:

$2,400.

$1,000.

$800.

$200.