Download Miami Dade College ECO 2013 Section 2 Principles of

Miami Dade College
ECO 2013 Section 2 Principles of Macroeconomics - Fall 2014
Practice Test #3
1. According to Keynes, what determines the level of employment and income?
A) aggregate expenditures
B) aggregate savings
C) government spending
D) aggregate supply
2. In the Keynesian model, the price level is ___________; in the aggregate demand and
supply model, the price level is _______________.
A) fixed; fixed
B) flexible; flexible
C) flexible; fixed
D) fixed; flexible
3. The aggregate demand curve slopes _____ and has _____ on the vertical axis.
A) downward; output
B) downward; the price level
C) upward; output
D) upward; the price level
4. Because of the wealth effect, a rising aggregate price level ____ the purchasing power of
wealth and therefore _____ output demanded.
A) increases; increases
B) increases; reduces
C) reduces; increases
D) reduces; reduces
5. Which of the following items is NOT a determinant of aggregate demand?
A) consumption
B) investment
C) government saving
D) government spending
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6. The aggregate demand curve displays:
A) real GDP demanded at various price levels.
B) nominal GDP versus real GDP.
C) GDP demanded at various investment levels.
D) the business cycle.
7. The real GDP that firms will produce at varying price levels is:
A) aggregate demand.
B) individual product demand.
C) individual product supply.
D) aggregate supply.
8. Suppose consumers spend more than usual. In the short run, output will ____; in the long
run, output will _____ from its starting point.
A) increase; remain unchanged
B) increase; increase
C) remain unchanged; decrease
D) remain unchanged; increase
9. ________ inflation occurs when a supply shock reduces aggregate supply.
A) Cost-push
B) Demand-pull
C) Sticky
D) Demand-push
10. What would cause the price level to rise and employment to increase?
A) a shift to the left of the aggregate demand curve
B) a shift to the right of the aggregate demand curve
C) a shift to the left of the short-run aggregate supply curve
D) supply shift to the right of the short-run aggregate supply curve
11. ________ policy involves adjusting government spending and tax policies to move the
economy toward full employment, economic growth, and low inflation.
A) Goal-oriented fiscal
B) Classical economic
C) Monetary
D) Discretionary fiscal
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12. The $787 billion stimulus package passed in the United States in 2009 focused more on
spending than on taxes partly because:
A) increased spending leads to a larger increase in GDP than the same reduction in
taxes.
B) increased spending leads to a smaller increase in GDP than the same reduction in
taxes.
C) the government tax multiplier is more than the government spending multiplier.
D) the government revenue multiplier is about the same as the government tax
multiplier.
13. Without government spending, which of the following equations is TRUE?
A) Y = C + S
B) S – I = 1
C) I – S = 1
D) I + S = 1
14. Policies that __________ will expand the economy but also generate price pressures.
A) increase transfer payments
B) encourage the development and transfer of new technologies
C) encourage investment in research and development
D) trim burdensome business regulations
15. In terms of the Laffer curve, when tax rates are zero:
A) tax revenues are positive.
B) tax revenues are negative.
C) tax revenues are zero.
D) there is no relationship between tax revenues and tax rates.
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16. Figure: Laffer Curve
(Figure: Laffer Curve) The graph shows a hypothetical Laffer curve. If the tax rate is
80%:
A) the government should reduce the rate to about 50% to maximize tax revenue.
B) the tax rate should be increased to 100% (all income taken in taxes) to maximize tax
collection.
C) the tax rate is at its optimal level.
D) the tax rate should be reduced to zero to maximize tax revenue.
17. The advantage of automatic stabilizers over discretionary fiscal policy is that automatic
stabilizers:
A) have the full consent of the legislature.
B) have been vetted and approved by the courts.
C) do not require overt action by policymakers.
D) take longer to take effect than fiscal policy.
18. An automatic stabilizer:
A) injects money into the economy during booms.
B) extracts money from the economy during recessions.
C) is exemplified by a program such as unemployment compensation.
D) is exemplified by a program such as the Corps of Engineers dam-building program.
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19. Public debt includes debt that is held by:
A) the Social Security Administration.
B) the Treasury Department.
C) the Federal Reserve.
D) foreign governments.
20. Which of the following statements is NOT a potential problem associated with cyclically
balancing the federal budget?
A) Different phases of the business cycle are not of equal length or severity.
B) Forecasting the turning point of the economy is very difficult.
C) Inflationary pressures can take hold, leading to the need later to enact extreme
contractionary policy measures.
D) Politicians find it difficult to cut spending.
21. To say that interest rates represent the opportunity cost of holding money means that as
interest rates rise:
A) the demand for money shifts to the left.
B) the demand for money shifts to the right.
C) there is a movement upward along the demand curve for money.
D) there is a movement downward along the demand curve for money.
22. If the government issues receipts for goods and services and declares the receipts to be
money, then those receipts are fiat money.
A) True
B) False
23. An economist notices that M1 is rapidly rising. One conclusion she might draw is that:
A) depositors want to save for the long term.
B) interest rates on savings accounts are rising.
C) consumers are preparing to make more purchases.
D) banks are discouraging their customers from borrowing and spending.
24. Demand deposits are included in M1 but not M2.
A) True
B) False
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25. Kim recently purchased a perpetual bond for $1,000. The bond pays $50 in interest per
year. Suppose market interest rates rise to 7% after the purchase. The price of the bond:
A) falls to $700.
B) rises to $1,700.
C) falls to $714.
D) rises to $1,070.
26. The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200
is:
A) 5%.
B) 6%.
C) 12%.
D) 25%.
27. Which is NOT a way financial institutions reduce risk?
A) by performing credit checks on borrowers
B) by diversifying funds
C) by collecting information helpful for risk assessment
D) by guaranteeing a high rate of return for all lenders
28. The unit of account function of money:
A) requires a double coincidence of wants, as in barter.
B) eliminates the need to value every item in terms of every other item.
C) is the most important function of money.
D) refers to the value of money over time.
29. Because of the compounding effect, a large loan balance becomes smaller.
A) True
B) False
30. Roth Individual Retirement Accounts (IRAs) are taxed:
A) when you make contributions and again when you make withdrawals.
B) only when you make contributions.
C) only when you make withdrawals.
D) Roth IRAs are never taxed.
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31. In which city is the Federal Reserve's Board of Governors?
A) Boston
B) New York
C) Philadelphia
D) Washington, DC
32. If there is a general rise in fear of the financial system, then the POTENTIAL money
multiplier will fall.
A) True
B) False
Use the following to answer question 33:
SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully
loaned up.
Empathy State Bank
Assets
Liabilities
$2,500 Deposits
$100,000
Vault Cash
7,500
Deposits at the Federal Reserve
90,000
Loans
33. What is the amount of this bank's reserves?
A) $2,500
B) $7,500
C) $10,000
D) $100,000
34. There are 12 members of the Federal Open Market Committee.
A) True
B) False
35. The 12 regional Federal Reserve banks serve as the banker for the United States Treasury.
A) True
B) False
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36. The discount rate is:
A) now set below the federal funds rate.
B) the interest rate banks charge one another when they lend or borrow reserves.
C) the Fed's most effective monetary policy tool.
D) the rate regional Federal Reserve banks charge depository institutions to borrow
reserves.
37. A lower reserve requirement:
A) increases the ability of banks to make loans.
B) further limits deposit creation.
C) lowers the money multiplier.
D) restricts the borrowing capability of borrowers.
38. If the reserve requirement is 20%, then the money multiplier is five.
A) True
B) False
39. Which of the following lists represents monetary policy actions that are consistent with
one another?
A) buy government bonds, raise reserve requirements, raise the discount rate
B) sell government bonds, raise reserve requirements, lower the discount rate
C) sell government bonds, raise reserve requirements, raise the discount rate
D) buy government bonds, lower reserve requirements, raise the discount rate
40. Ibrahim deposits $2,000 cash into his checking account. If the reserve requirement is
15%, his bank's excess reserves change by $300.
A) True
B) False
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ECO 2013.002 Practice Test #3 - Answer Key
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