Download ECON 2030 Second Hour Exam Any Semester Pentamber 32, 2001

ECON 2030
Second Hour Exam
Any Semester
Pentamber 32, 2001
Prof. Roger W. Garrison
True of False:
Whereas Keynes wanted to use fiscal policy to
manipulate the economy, Friedman wants to use
monetary policy to manipulate the economy.
False
Friedman, who believes that market’s work and
the economy doesn’t need any manipulating,
points out that M is often--but shouldn’t be--used
as a countercyclical tool. Changing M is more
likely to cause cycles than to cure them.
2.The Federal Reserve is charged with managing the
money supply, which currently amounts to about
A. $120 billion in currency and coin plus $500
billion in checking-account money.
B. $500 billion in currency and coin plus about $600
billion in checking-account money.
C. $600 billion in currency and coin plus about $120
in commercial bank reserves.
D. $120 billion in commercial bank reserves plus
about $600 in checking-account money.
3. The fact that the money supply is much less
than the dollar value of the economy’s annual
income or output is a reflection of the fact that
A. the velocity of money is greater than zero but
less than one.
B. the velocity of money is considerably greater
than one.
C. the required reserve ratio is considerably less
than one.
D. the velocity of money is the reciprocal of the
required reserve ratio.
4. The claim that in normal times, the velocity of
money is stable and nearly constant
A. is accepted as true by neither Monetarists nor
Keynesians.
B. is accepted as true by Monetarists but rejected as
false by Keynesians.
C. is accepted as true by Keynesians and
Monetarists alike.
D. is accepted as true by Keynesians but rejected as
false by Monetarists.
5. Consider a period during which the level of
real output is trending upward. If there is no
change in the money supply and the velocity of
money is constant, then we would expect to see
A. a downward trend in prices.
B. an upward trend in prices.
C. a decreased use of cash relative to checkingaccount money.
D. an increased use of cash relative to checkingaccount money.
6. An increase in the velocity of money can be
understood as
A. a decrease in money hoards, which puts
upward pressure on prices.
B. an increase in money hoards, which puts
upward pressure on prices.
C. a decrease in money hoards, which puts
downward pressure on prices.
D. an increase in money hoards, which puts
downward pressure on prices.
7. The actual production of US currency is
accomplished
A. exclusively by the Federal Reserve Bank of
New York.
B. by each of the Federal Reserve Banks.
C. by the Department of Commerce, which
oversees the nation’s commercial banks.
D. by the Bureau of Engraving and Printing,
which is housed in the Department of the
Treasury.
8. Thinking in terms of the equation of
exchange and using Keynesian imagery, we
can say that a waning of the animal spirits is
most directly represented by
A. an increase in Q.
B. an increase in V.
C. a decrease in Q.
D. a decrease in V.
9. The claim that, in the long run, changes in the
price level are almost exclusively attributable to
changes in the money supply
A. is accepted and emphasized by both
Monetarists and Keynesians.
B. is accepted as true by neither Monetarists nor
Keynesians.
C. is accepted as true by Monetarists but is
rejected–or ignored–by Keynesians.
D. is seen as an important truth by Keynesians
but is seen as a trivial truth by Monetarists.
10. Suppose that unrest in the Middle East causes a
reduction in the supply of oil flowing to the U.S.,
which leads to a 20% increase in the price of oil.
Economists who accept the quantity theory of money
will claim that
A. prices in general will rise because everything
depends upon (is related to) oil.
B. the Federal Reserve should increase the money
supply so that people can pay the higher gas prices.
C. whatever the Federal Reserve does, there will be
substantial inflation–although not a 20% inflation rate.
D. there will be no inflation in the U.S. so long as the
Federal Reserve does not increase the money supply.
11. The Federal Reserve System was created
A. just after the civil war and consists of 12
regional banks.
B. just after the civil war and consists of 18
regional banks.
C. just before WWI and consists of 12 regional
banks.
D. just before WWI and consists of 18 regional
banks.
12. The ratio of Reserves-to-Deposits, symbolized
by R/D, is a ratio for which the Federal Reserve
sets
A. both a minimum and a maximum value.
B. neither a minimum nor a maximum value.
C. a minimum value but no maximum value.
D. a maximum value but no minimum value.
13. The Federal Reserve often increases the
money supply by “engaging in open market
operations.” That is,
A. the Fed increases the discount rate to decrease
the commercial banks’ willingness to make loans.
B. the Fed decreases the discount rate to increase
the commercial banks’ willingness to make loans.
C. the Fed sells Treasury bills that didn’t even
exist before it sold them.
D. the Fed buys Treasury bills with money that
didn’t even exist before the purchase was made.
14. There are three distinct policy tools, but these
tools are all alike in that they constitute different
ways of
A. changing the required reserve ratio.
B. lending money into existence.
C. transferring public debt to the central bank.
D. adding to the banking system’s total reserves.
15.Suppose we observe that the market price of a
one-year Treasury bill whose value-at-maturity is
$10,000 has fallen from $9,444 to $9,333. This
price change may be the consequence of
A. increased Treasury borrowing, which puts
downward pressure on interest rates.
B. decreased Treasury borrowing, which puts
downward pressure on interest rates.
C. increased Treasury borrowing, which puts
upward pressure on interest rates.
D. decreased Treasury borrowing, which puts
upward pressure on interest rates.
16. Suppose the government decides to “honor hard work
by raising the minimum wage.” As a consequence, many
would-be employees may become self-employed by
entering the growing arts-and-crafts business. Since sellers
at arts-and-crafts fairs deal primarily in cash, the growth of
this sector of the economy will
A. cause the money supply to rise, assuming the Federal
Reserve takes no counteraction.
B. cause the money supply to fall, assuming the Federal
Reserve takes no counteraction.
C. have no effect on the money supply, even if the Federal
Reserve takes no counteraction.
D. lead to a slight increase in the general price level, no
matter what the Federal Reserve does.
17. The Minnesota Federal Reserve Bank offers
an economics literacy test in which one question
is: “What would happen to employment if the
government mandated a minimum wage above
what employers currently pay?” The correct
answer, as reported by the Minnesota Fed, is
A. employment would go up.
B. employment would go down.
C. employment would stay the same.
D. employment may go up or go down.
Take the “Quiz just for fun” posted for March 12
18. The so-called “Federal-Funds Rate” is the rate
of interest that
A. the U.S. Treasury pays to borrow money from
the Federal Reserve.
B. commercial banks pay when they borrow
directly from the Federal Reserve.
C. the U.S. Treasury pays on T-bills held by
pension funds and other private non-bank
institutions.
D. commercial banks pay when they borrow from
other commercial banks to meet their reserve
requirements.
19. For the past six months, the Discount Rate
has been set at
A. 5.5%.
B. 6.0%.
C. 6.5%.
D. 7.0%.
Check with FRED in St. Louis.
Also check with the FOMC
for the STATEMENT of March 20, 2001
20. For the past six months, the Federal Funds
Rate has been kept in the vicinity of
A. 5.5%.
B. 6.0%.
C. 6.5%.
D. 7.0%.
Check with FRED in St. Louis.
Also check with the FOMC
for the STATEMENT of March 20, 2001
By the time you finally earn your
Ph.D. in Economics, the money
supply may have grown to $2,000
billion–with $800 billion in the form
of currency and coin.
Let’s assume that the required reserve ratio is still 0.20
and that banks are not holding any excess reserves.
Soon after graduation, you take a job at the Federal
Reserve and people lose their confidence in the
banking system. They immediately make withdrawals
in the amount of $40 billion.
Use this information to answer the next four questions.
M = $2,000 billion
C = $800 billion
r = 0.20
Withdrawals = /\C = $40 billion.
21. Before the $40 billion of withdrawals were made,
the total reserves in the banking system stood at
A. $640 billion.
M = C + R/r
B. $440 billion.
2000 = 800 + R/0.20
C. $240 billion.
D. $140 billion.
R/0.20 = 2000 - 800 = 1200
R = 240
M = $2,000 billion
C = $800 billion
r = 0.20
Withdrawals = /\C = $40 billion.
22. Absent Federal Reserve
counteraction, the withdrawals will cause the
money supply to
A. increase to $2,040 billion.
B. decrease to $1,840 billion.
C. increase to $2,160 billion.
D. decrease to $1,960 billion.
M = $2,000 billion
C = $800 billion
r = 0.20
Withdrawals = /\C = $40 billion.
22. Absent Federal Reserve
counteraction, the withdrawals will cause the
money supply to
M = C + R/r
M = 840 + 200/0.20
A. increase to $2,040 billion. M = 840 + 1000
B. decrease to $1,840 billion. M = 1840
C. increase to $2,160 billion.
D. decrease to $1,960 billion.
M = $2,000 billion
C = $800 billion
r = 0.20
Withdrawals = /\C = $40 billion.
23. The Federal Reserve could counteract the lossof-confidence effect on the money supply by
A. buying $32 billion worth of T-bills.
B. selling $32 billion worth of T-bills.
C. buying $40 billion worth of T-bills.
D. selling $40 billion worth of T-bills.
Or, what happens
to the money supply
when the Fed buys
Treasury Bills?
Or, what happens
to the money supply
when the Fed buys
Treasury Bills?
R has fallen from 240 to 200
What R is needed to make
M = 2000?
M = C + R/r
2000 = 840 + R/0.20
R/0.20 = 2000 - 840 = 1160
R = 232
/\R = 32
M = $2,000 billion
C = $800 billion
r = 0.20
Withdrawals = /\C = $40 billion.
23. The Federal Reserve could counteract the lossof-confidence effect on the money supply by
A. buying $32 billion worth of T-bills.
B. selling $32 billion worth of T-bills.
C. buying $40 billion worth of T-bills.
D. selling $40 billion worth of T-bills.
M = $2,000 billion
C = $800 billion
r = 0.20
Withdrawals = /\C = $40 billion.
24. Alternatively, the Federal Reserve could
counteract the withdrawals by (You don’t need a
calculator)
A. increasing the required reserve ratio to 24.17%
C. increasing the required reserve ratio to 27.14%.
B. increasing the required reserve ratio to 21.47%
D. decreasing the required reserve ratio to 17.24%.
R has fallen from 240 to 200
What r is needed to make
M = 2000?
M = C + R/r
2000 = 840 + 200/r
200/r = 2000 - 840 = 1160
r = 200/1160 = .1724
r = 17.24%
M = $2,000 billion
C = $800 billion
r = 0.20
Withdrawals = /\C = $40 billion.
24. Alternatively, the Federal Reserve could
counteract the withdrawals by (You don’t need a
calculator)
A. increasing the required reserve ratio to 24.17%
B. increasing the required reserve ratio to 21.47%.
C. increasing the required reserve ratio to 27.14%
D. decreasing the required reserve ratio to 17.24%.
25. The legislation that created the Federal Reserve
System included a provision for making the central
bank independent. The independence supposedly
follows from the fact that
A. Fed officials are prohibited from communicating
directly with the President or the Treasury Secretary.
B. each of the Federal Reserve Banks can formulate
and implement its own monetary policies.
C. the seven members of the Board of Governors
serve staggered fourteen-year terms.
D. Federal Reserve policy based on narrow political
objectives is strictly prohibited by the judiciary.
26. According to the Monetarists, there was
downward pressure on prices and wages during the
Hoover administration and the first Roosevelt
administration because
A. neither Hoover nor Roosevelt was aggressive
enough in implementing the appropriate fiscal
policies.
B. the Federal Reserve had allowed the money
supply to collapse.
C. surplus output from the "roaring '20s" had made
most all goods cheap.
D. there was an increased tendency on the part of
the public to hoard money.
27. In the worst years of the Great Depression, the
government orchestrated the burning of potatoes, the
killing of piglets, and the plowing under of cotton in
order to
A. keep the prices of those commodities from
falling.
B. make the prices of those commodities more
flexible.
C. ensure a fair price of those commodities to
consumers.
D. avoid the inflation that selling those commodities
at high market-clearing prices would entail.
28. In 1960, John Kennedy claimed that America
had entered upon a new era–meaning that the
Democrats had
A. committed themselves to the Equal Rights
Amendment.
B. promised to reject Keynesianism once and for all.
C. discovered a contradiction in Roosevelt’s view of
the economy.
D. realized that space exploration could take the
place of war as an object of government expenditure.
29. Faced with rising budget deficits and an
upcoming election (1964), Lyndon Johnson
undertook to
A. increase government spending and cut taxes.
B. raise taxes to cover the rising government
spending.
C. cut government spending in low-priority
areas.
D. establish an effective ceiling on government
spending.
30. If the Federal Reserve were to adopt the goal
of a constant money supply, it could achieve this
goal by
A. taking the discount rate as the appropriate target
for the federal funds rate.
B. buying Treasury bills when the interest rate falls
and selling them with it rises.
C. forbidding banks to hold excess reserves.
D. using any or all of its policy tools to offset
changes induced by the behavior of banks and
their depositors.
31. Suppose that new taxes on tobacco products
cause the tax-included price of cigarettes to
double. Microeconomists would predict that the
quantity of tobacco products bought will fall only
slightly and that total spending on cigarettes will
more-than-double. Monetarists would claim that
the tax will
A. result in a slightly higher rate of inflation.
B. cause the Federal Reserve to undertake
compensatory policy actions.
C. have no effect on the general price level.
D. result in a slightly higher velocity of money.
32. The rate of unemployment, widely publicized
on Friday, November 3,
A. remained at 3.9 %.
B. rose to 4.0 %.
C. rose to 4.1 %.
D. rose to 4.2 %.
Check with the BLS.