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1
GCC, ECN 211, Sample Final Exam Questions
(Questions from the final lecture are not included here, look for them soon.)
Money Supply, Banking, and the Fed:
70.
The elimination of the double coincidence of wants that arises in barter exchange is
accomplished by which of the following functions of money?
A.
B.
C.
D.
E.
71.
Which of the following assets is most liquid?
A.
C.
E.
72.
a U.S. savings bond
a savings account
is backed by gold or some other precious commodity
has value in uses other than money
is designated as money by the government
is money only because people are willing to accept and use it as a medium of exchange
both C. and D.
is on deposit in a demand deposit or other checkable type bank account.
has value in uses other than as money.
has no value in uses other than as money.
is owned by the bank.
is in the vault at the bank
In general, a nation's money supply typically includes
A.
B.
C.
D.
E.
81.
B.
D.
As a component of the money supply, bank money is money that:
A.
B.
C.
D.
E.
74.
a house
a checking account
a share of corporate stock
Fiat money
A.
B.
C.
D.
E.
73.
standard of deferred payment
unit of account
medium of exchange
store of value
any of the above can be used to eliminate a double coincidence of wants.
time deposits and currency
coin, currency, demand deposits, and other checkable deposits
coin, currency, and other non liquid assets
coin and currency only
stocks, bonds, and certificates of deposit
The interest-rate spread in commercial banking is the difference between
A.
B.
C.
D.
E.
the discount rate and the federal funds rate.
the interest rate at which banks lend and the interest rate at which banks borrow.
interest rates paid by commercial bands and those paid by savings and loans.
the prime interest rate paid by credit worthy business borrowers and the interest rate
charged on consumer loans.
rates earned on NOW accounts and regular checking accounts.
2
82.
Which of the following would constitute a liability of a commercial bank?
A.
C.
E.
a demand deposit
an outstanding loan
all of the above are assets
D.
B.
vault cash
a deposit at the Fed
Use the following table to answer the next 2 questions:
Assets
Liabilities
Vault Cash ................................ $25,000 Demand Deposits .................... $400,000
Deposits at Fed ........................... 45,000
Government Securities................. 50,000
Loans ....................................... 280,000
83.
If the reserve requirement on all deposits is .15, this bank has ______ in excess reserves.
A.
D.
84.
B.
C.
D.
E.
C.
$10,000
the money supply will
the money supply will
the money supply will
the money supply will
none of the above.
increase by $10,000.
increase by $66,666.67.
decrease by $10,000.
decrease by $66,666.67.
an increase in the money supply will lower interest rates and make banks in the system
more willing to loan out funds previously used as excess reserves
increases in investment spending have the indirect effect of increasing consumption
spending as national income increases
faced with an increase in the money supply, the Fed will generally increase bank reserves
each dollar of excess bank reserves can support several dollars of new demand deposits
for the banking system as a whole
none of the above
The money multiplier is smaller than the deposit multiplier because the money multiplier takes
account of
A.
B.
C.
D.
E.
87.
$45,000
none of the above
The deposit expansion multiplier for the commercial banking system is greater than one because
A.
86.
B.
E.
Assuming no cash leakages and that no banks hold excess reserves, as a $10,000 loan moves
through the banking system (new demand deposits, new excess reserves, and new loans) the
total impact on the money supply will be:
A.
B.
C.
D.
E.
85.
$25,000
$70,000
cash leakages and tax leakages.
banks holding excess reserves and the fact that assets and liabilities may not always be
equal.
cash leakages and banks holdings of excess reserves.
banks holding their excess reserves in the form of vault cash instead of at the Fed.
the fact that banks have less money than they have deposits.
Which of the following is not correct? The Federal Reserve System
A.
B.
C.
D.
E.
functions as America's "central bank"
can take actions independent of presidential or congressional approval.
appoints its own board of governors and chairman of the board of governors.
imposes reserve requirements on all depository institutions.
is run by a board of Governors who are appointed by the President.
3
88.
All of the following functions are performed by the Fed except
A.
B.
C.
D.
E.
89.
Which of the following statements is NOT correct?
A.
B.
C.
D.
E.
90.
open-market purchases and sales
reserve-requirement changes
changes in the discount rate
changes in the amount of spending undertaken by the Fed
all of the above are tools of the Fed
When the Fed buys $1 million of government bonds, the money supply ______ by ______ than
$1 million because of the ______.
A.
B.
C.
D.
E.
92.
commercial bank reserves are a liability of Federal Reserve banks
Federal Reserve banks increase the monetary base when they purchase government
bonds from the public (households, businesses, or private banks)
discount loans are one of the assets of Federal Reserve banks
the Fed’s assets and liabilities are equal and make up the monetary base of the US money
supply
all of the above statements are correct
Which of the following is not one of the Fed's tools for controlling the US money supply?
A.
B.
C.
D.
E.
91.
lending money to private banks
setting reserve requirements for private banks
conducting fiscal policy
supervising private banks
conducting monetary policy
increases; more; spending multiplier.
decreases; less; money multiplier.
decreases; more; money multiplier.
increases; more; money multiplier.
increases; less; money multiplier.
The discount rate is
A.
B.
C.
D.
E.
one of the tools of the Fed
the rate at which the Fed lends reserves to private banks
can be lowered in order to generate an increase in the money supply
all of the above
B. and C. are true but A. is false
Money Demand, the Money Market, and Monetary Policy
75.
Expect a question about wealth, assets and liabilities.
76.
The analysis of the demand for money suggests that, other things equal, you will want to hold
more money for transactions(spending) purposes if your income ______ and you will be willing
to hold more money if the interest rate ______.
A.
C.
E.
increases; decrease
B.
decreases; decreases
decreases; increases
D.
increases; increases
like the supply of money, the demand for money is independent of the level of income
and the interest rate.
4
77.
If a bond that sells for $7000 dollars carries a fixed annual coupon payment of $700, then the
current interest rate earned by that bond is:
A.
D.
78.
B.
C.
D.
E.
10%
drive
drive
drive
drive
drive
the
the
the
the
the
price
price
price
price
price
of
of
of
of
of
bonds
bonds
bonds
bonds
bonds
down and the interest rate up.
up and the interest rate up.
up and the interest rate down.
down and the interest rate down.
up but have no effect on the interest rate.
an increase in the equilibrium interest rate and a decrease in the equilibrium stock of
money
a decrease in the equilibrium stock of money and no change in the equilibrium interest
rate
an decrease in the equilibrium interest rate and a decrease in the equilibrium stock of
money
an increase in the equilibrium interest rate and no change in the equilibrium stock of
money
none of the above
money demand (MD) will increase and the equilibrium interest rate will rise
MD will increase and the equilibrium interest rate will fall
MD will decrease and the equilibrium interest rate will fall
MD will decrease and the equilibrium interest rate will rise
there will be no change in either MD or the equilibrium interest rate
Monetary policy is:
A.
B.
C.
D.
E.
94.
C.
For a given money supply, if income increases, then
A.
B.
C.
D.
E.
93.
6.67%
none of the above
For a given money demand curve, a decrease in the supply of money would result in
A.
80.
B.
E.
An increased demand for bonds will:
A.
B.
C.
D.
E.
79.
7%
12.5%
The deliberate control of the money supply for the purpose of achieving macroeconomic
goals.
The use of the government's regulatory powers for the purpose of improving economic
efficiency.
The provision of public goods for the purpose of improving economic efficiency.
The use of government taxation and expenditures policies for the purpose of achieving
macroeconomic goals.
The determination of how much new currency the Fed should print.
According to Keynesian monetary policy, a decrease in the money supply should lower GDP by
A.
B.
C.
D.
E.
raising the price level and causing consumers to spend less
directly decreasing consumer spending because consumers have less money
increasing the government deficit which causes spending to fall
raising interest rates which should lead to decreased private sector spending
raising taxes which causes consumer spending to fall
5
X.
81.
In the Keynesian system, an increase in the money supply is expected to increase GDP and
reduce unemployment by
A.
B.
C.
D.
E.
lowering the price level and causing consumers spend more.
directly increasing consumer spending because consumers have more money.
increasing the government deficit which causes spending to rise.
lowering interest rates which should lead to increased private sector spending.
lowering taxes which causes consumer spending to rise.
X.
A relatively flat investment demand curve implies that
A.
B.
C.
investment is not responsive to the interest rate
the interest rate plays a small part in the investment decision
economic policy should focus on shifting the investment demand curve (such as through
investment tax credits) instead of lowering the interest rate
changes in the money supply and the interest rate should have a strong impact on the
economy
all of the above
D.
E.
X.
In the figure, there are two interest rate-sensitive
spending curves: aIP DA & a IP DB . According to the
r
figure, monetary policy will be:
A.
B.
C.
D.
E.
X.
more effective if investment spending is highly
responsive to interest rates as indicated by curve A
more effective if investment spending is
unresponsive to interest rates as indicated by
curve A
more effective if investment spending is highly
responsive to interest rates as indicated by curve B
more effective if investment spending is
unresponsive to interest rates as indicated by
curve B
none of the above
r1
(a+IP)BD
(a+IP)AD
(a+IP)1
Interest-rate
sensitive spending
Expect a question about lags in monetary policy.
The Aggregate Expenditure (Keynesian) Model
37.
John Maynard Keynes rejected the classical notion that wages and prices
A.
B.
C.
D.
E.
38.
were constant
would adjust until full employment is reached.
were fair.
would equate saving and investment.
all of the above.
In contrast to the classical economists, Keynes argued that:
A.
B.
C.
D.
E.
the economy can become "stuck" at an equilibrium level of real GDP at which there was
excessive unemployment.
wages and prices would not fall so the economy would not be able to "fix itself."
the government could end the Great Depression by increasing government spending.
A., B., and C. are true of the classical economists, not Keynes.
A., B., and C. are true of Keynes.
6
39.
The original Keynesian model is particularly applicable to situations in which the economy
A.
B.
C.
D.
E.
40.
The consumption function shows that as disposable income increases,
A.
B.
C.
D.
E.
41.
consumption
consumption
consumption
consumption
consumption
increases by an even greater amount
increases by the same amount
increases by a smaller amount
remains constant
and disposable income are unrelated
When the consumption function is presented graphically, the marginal propensity to consume is:
A.
B.
C.
D.
E.
42.
is at full employment.
has low unemployment and high inflation.
has massive unemployment.
is operating on its production possibilities frontier.
all of the above.
the
the
the
the
the
point at which the consumption function line crosses the 45-degree line
slope of the consumption function line
vertical intercept of the consumption function line
variable measured on the vertical axis
variable measured on the horizontal axis
Using the consumption line and the 45 degree line in the figure:
Consumption
o
45
A.
B.
C.
D.
E.
43.
Which of the following changes would tend to make the
consumption line steeper?
A.
B.
C.
D.
E.
44.
The area between the 2 lines represented by a indicates
saving.
The area between the 2 lines represented by a indicates
dissaving.
the area between the 2 lines represented by a indicates
that consumption is less than income
cannot occur since consumption cannot be greater than
income
none of the above
an increase in the interest rate
an increase in consumption at each level of income
a decrease in saving at each level of income
an increase in the marginal propensity to consume
an increase in the marginal propensity to save
The consumption line will shift in response to all of the following except
A.
B.
C.
D.
E.
a
a
a
a
a
change
change
change
change
change
in
in
in
in
in
the interest rate
the level of government spending
the level of prices
the level of autonomous taxes
confidence about future employment conditions
e
b
C
a
Disposable income
7
45.
In the Keynesian model, to assume that private investment is autonomous is to assume that:
A.
B.
C.
D.
E.
46.
Adding autonomous investment to the consumption line in the income/expenditure model causes
the total planned spending line to:
A.
D.
47.
B.
C.
D.
E.
C.
shift up
the interest rate
expectations about future business conditions
business taxes
the current level of consumer spending
all of the above except D.
cause both the consumption (C) line and the planned aggregate expenditure (AEP) line to
shift up by the full amount of the tax decrease
cause both the C line and the AEP line to shift down by the full amount of the tax decrease
cause both the C line and the AEP line to shift down by an amount equal to the marginal
propensity to consume times the tax decrease
cause both the C line and the AEP line to shift up by an amount equal to the marginal
propensity to consume times the tax decrease
cause the C line and the AEP line to become flatter
shift down
become steeper
both A. and D. are true
B.
D.
shift up
become flatter
Which of the following is an injection into the income/spending stream?
A.
C.
E.
51.
B.
shift down
none of the above
Increased export spending causes the planned aggregate expenditure (AEp) line to
A.
C.
E.
50.
E.
A decrease in autonomous taxes paid by the household sector will
A.
49.
become steeper
become flatter
Which of the following factors are the primary determinants of planned investment spending in
the Keynesian model?
A.
B.
C.
D.
E.
48.
it does not depend on interest rates
it does not depend on the level of output & income in the economy
it is determined by the "animal spirits" of business decision-makers
it depends on saving
none of the above
savings
government spending
All of the above are leakages, not injections.
D.
B.
taxes
imports
If businesses and consumers reduce their planned spending because of increased pessimism, this
will:
A.
B.
C.
D.
E.
cause the aggregate expenditure (AEP) line to shift up and increase the equilibrium level of
income.
cause the AEP line to shift down and reduce the equilibrium level of income.
have no effect on either the AEP line or the equilibrium level of income.
cause the AEP line to become steeper and reduce the equilibrium level of income.
cause the AEP line to shift down and reduce the level of prices in the economy.
8
52.
In an economy consisting of household, business, government, and foreign sectors, real GDP will
be at its equilibrium level when
A.
B.
C.
D.
E.
53.
Which of the following must be true of an economy that is out of equilibrium
A.
B.
C.
D.
E.
54.
1/(1-MPC)
1/(RR)
E.
B.
1/(MPS)
either A. or B.
C.
-MPC/(1-MPC)
In the Keynesian model, an increase in autonomous spending has a multiplier effect on real GDP
because more spending causes
A.
B.
C.
D.
E.
57.
business will accumulate inventories and output will fall
business inventories will be depleted and output will increase
the president will automatically raise taxes to reduce spending.
the Federal Reserve will automatically raise interest rates to reduce spending.
all of the above
The Keynesian autonomous spending multiplier can be represented by the formula
A.
D.
56.
planned investment (IP) = unplanned investment (IU)
IU = 0
IU < 0
IU > 0
both A. and B.
In the Keynesian income/expenditure model, if planned aggregate expenditures are greater than
the current level of output, then:
A.
B.
C.
D.
E.
55.
total planned spending C + IP + G + (Ex - Im) equals output (Y)
planned leakages (S + T + Im) equal planned injections (IP + G + Ex)
unplanned inventory investment (IU) equals zero
all of the above are true
only A. and B. are true
less income which causes less spending which causes less income, etc.
prices to rise.
more income which causes more spending which causes more income, etc.
the money supply falls.
more saving which causes more investment.
The tax multiplier is, in absolute value,
A.
B.
C.
D.
E.
smaller than the spending multiplier because some people don't pay taxes
smaller than the spending multiplier because part of the change in taxes causes a change
in consumption and part of the change in taxes causes a change in saving
larger than the spending multiplier because some people don't pay taxes
larger than the spending multiplier because part of the change in taxes causes a change in
consumption and part of the change in taxes causes a change in saving
equal to the spending multiplier
9
Use the following information from a hypothetical economy to answer the next 6 questions.
Nationa Disposabl Planned
Planne Planned Governme Export Import
l
e
Consumptio
d
Investme
nt
s
s
Income Income
n
Saving
nt
Spending
700
660
635
25
65
60
55
65
800
760
710
50
65
60
55
65
900
860
785
75
65
60
55
65
1000
960
860
100
65
60
55
65
1100
1060
935
125
65
60
55
65
1200
1160
1010
150
65
60
55
65
58.
What is the level of taxes for this economy?
A.
E.
59.
900
C.
.85
0
700
1100
B.
E.
800
none of the above
.75
.95
B.
.80
D.
.90
905
920
B.
E.
1005
none of the above
C.
820
Suppose the government were to lower taxes by 5 while holding government spending
constant, what would be the new equilibrium level of income?
A.
D.
63.
C.
D.
Suppose the government were to increase government spending by 5 while holding taxes
constant, what would be the new equilibrium level of income?
A.
D.
62.
100
What is the value of the mpc for this economy?
A.
E.
61.
C.
What is the equilibrium level of income/output?
A.
D.
60.
60
B.
40
Depends on the level of income
915
905
B.
E.
895
none of the above
C.
1015
Suppose imports were to increase by 28, holding all other variables constant, what would be
the new equilibrium level of income?
A.
D.
872
972
B.
E.
907
none of the above
C.
788
Fiscal Policy
65.
Fiscal policy refers to:
A.
the deliberate control of the money supply for the purpose of achieving macroeconomic goals
B.
the use of the government's regulatory powers for the purpose of improving economic
efficiency
the provision of public goods for the purpose of improving economic efficiency
the use of federal government taxation and spending policies for the purpose of achieving
macroeconomic goals
the deliberate control of interest rates for the purpose of achieving macroeconomic goals
C.
D.
E.
10
64.
A contractionary (recessionary) gap occurs when
A.
B.
C.
D.
E.
66.
a low level of planned spending leads to an equilibrium level of output that has high
unemployment
a high level of planned spending leads to an equilibrium level of output that has low
unemployment
a high level of planned spending leads to an equilibrium level of output that has high
inflation
a low level of planned spending leads to an equilibrium level of output that has high
inflation
low prices cause the economy to contract
If the economy is experiencing a recession brought on by a contractionary gap, the federal
government can try to increase planned spending in the economy by
A.
B.
C.
D.
E.
increasing government spending
lowering taxes
decreasing government spending
increasing taxes
either A. or B.
Use the following figure to answer the next 2 questions.
1000
450
Aggregate Expenditures
AEP
900
800
700
600
500
400
300
200
100
0
0
67.
200
300
400
YF
500
Y1
600
700
800 900 1000
Y =Real GDP
If current GDP is Y1 = 500 and the full employment level of GDP is YF = 400, this economy is
experiencing
A.
B.
C.
D.
E.
68.
100
a contractionary (recessionary)gap.
an expansionary (inflationary) gap.
full employment equilibrium.
a normal gap.
all of the above.
An appropriate fiscal policy would be
A.
C.
E.
a decrease in government spending.
an increase in government spending
either B. or C.
B.
D.
an increase in taxes.
either A. or B.
11
69.
Some of the problems of using fiscal policy to stimulate the economy during a recession are:
A.
B.
C.
D.
E.
following an increase in government spending, higher interest rates may crowd out private
spending
a long lag between the time Congress begins discussing a bill to increase government
spending and the time when spending actually begins to take effect may mean that the
recession is already over before the increased government spending stimulates the
economy
the possibility that consumers will save their tax cut instead of spending it.
all of the above are potential fiscal policy problems
none of the above
Aggregate Demand and Aggregate Supply
24.
The aggregate demand curve
A.
B.
C.
D.
E.
25.
Using the final version of the circular flow model, aggregate quantity demanded (AD) at a given
price level is equal to
A.
C.
E.
26.
B.
D.
C + I + G + X - Im
C + S + T + X - Im
a reduction in taxes
a decrease in the real interest rate
an increase in government expenditures
growing optimism concerning the expected strength of future business conditions.
reduced wages
A vertical long-run aggregate supply curve (LRAS) indicates that
A.
B.
C.
D.
E.
28.
C+S
C + S + T + Im
C+I+G
Which of the following factors would not be likely to cause the aggregate demand curve (AD) to
shift to the right?
A.
B.
C.
D.
E.
27.
shows the total quantity of domestically produced goods and services that the economy is
willing to buy at each price level.
is downward sloping because of the real balance effect.
is downward sloping because of the interest rate effect.
is downward sloping because of the international trade effect.
all of the above.
the full employment level of output is determined by the price level and the tastes of the
population
producers are not motivated by profit in deciding how much to produce
real and nominal GDP are the same thing
the price level has no effect on the full-employment level of output which is determined by
real variables such as technology and the endowment of resources
none of the above
The short-run aggregate supply curve (SRAS) is upward sloping because when the price level
rises firms are willing to expand production because:
A.
B.
C.
D.
E.
potential revenue per unit increases because products can be sold for a higher prices.
fixed nominal wages lead to lower real wages and lower production costs.
potential profits rise as higher potential revenue and lower costs.
all of the above
none of the above
12
29.
Which of the following are factors that will cause the short-run aggregate supply curve to shift?
A.
D.
30.
B.
C.
D.
E.
C.
wages
short-run equilibrium occurs where the aggregate demand (AD) and short-run aggregate
supply (SRAS) curves intersect
long-run equilibrium occurs when the AD and SRAS curves intersect at the long-run
aggregate supply (LRAS) curve
long-run equilibrium occurs wherever the AD and SRAS curves intersect
short-run equilibrium occurs only when the AD and SRAS curves intersect at the LRAS
both A. and B.
a higher price level and a lower level of output
a lower price level and a higher level of output
a higher price level and a higher level of output
a lower price level with no change in output
none of the above
According to the AD/SRAS/LRAS model, the long run effect of an increase in aggregate demand
that causes actual real GDP to rise above the full-employment level of real GDP will be that:
A.
B.
C.
D.
E.
33.
government spending
all of the above
According to the AD/SRAS/LRAS model, if the economy is at or near the full employment level
of output, the short-run response to an increase in aggregate demand will be:
A.
B.
C.
D.
E.
32.
B.
E.
According to the AD/SRAS/LRAS model:
A.
31.
interest rates
the money supply
both the price level and real GDP will rise permanently
because of a lower price level, workers will eventually begin to accept lower wages
allowing the SRAS curve to shift down until the economy returns to the full-employment
level of real GDP
the price level will rise permanently but real GDP will eventually return to the fullemployment level of real GDP
the higher price level will cause the aggregate demand curve to return to its original
level
none of the above
According to the AD/SRAS/LRAS model, the long run effect of a decrease in aggregate demand
that causes actual real GDP to fall below the full-employment level of real GDP will be that:
A.
B.
C.
D.
E.
the price level will rise permanently but real GDP will return to its full-employment level
because of a lower price level, workers will eventually begin to accept lower wages
allowing the SRAS curve to shift down until the economy returns to the full-employment
level of real GDP
when the SRAS curve shifts down, the price level will fall to an even lower level
a lower price level will allow the aggregate demand curve to return to its original level
both B. and C.