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ECO 102 Macroeconomics Unit 3 Challenge 1,2 and 3 Sophia Course
Click below link for Answers
Unit 3 Challenge 1
Challenge 1
When store owners quote prices in terms of dollars, money is acting as a __________.
·       a.)
commodity
·       b.)
medium of exchange
·       c.)
store of value
·       d.)
unit of account
The double coincidence of wants challenge is faced when we __________.
·       a.)
use money as a medium of exchange
·       b.)
establish gold as a commodity
·       c.)
use gold as a unit of account
·       d.)
attempt to barter to attain goods
When I use money to purchase a movie ticket, my dollars are acting as a __________.
·       a.)
unit of account
·       b.)
store of value
·       c.)
bartering agreement
·       d.)
medium of exchange
Which of the following choices is a reason why gold became a form of currency?
·       a.)
It has little practical value.
·       b.)
It is the most liquid form of money.
·       c.)
It contributes to inflation.
·       d.)
It is almost impossible to counterfeit.
As the use of gold as currency became more standardized, what happened to the gold trade?
·       a.)
Americans lost faith in their currency and hoarded gold.
·       b.)
Banks printed paper money to represent a specific amount of gold in the vault.
·       c.)
Gold held little practical value other than as jewelry.
·       d.)
The dollar's convertibility was suspended.
Which of the following describes what happened to the gold trade as the use of gold as currency became more standardized?
·       a.)
People began to write checks instead of actually transferring gold.
·       b.)
Certain commodities became accepted as forms of exchange.
·       c.)
Banks figured out that they could print more money than gold that they had in their vaults.
·       d.)
Traders faced a double coincidence of wants.
What is the central issue that causes bank runs and panics?
·       a.)
Banks print more money than they have gold in their vaults
·       b.)
Banks fail to pay interest to their depositors
·       c.)
Banks withhold deposits from creditors
·       d.)
Banks do not loan out enough funds to stimulate the economy
Which of the following can be described as when a bank holds a part of its gold and loans out the rest?
·       a.)
Fiduciary money
·       b.)
Deposit account
·       c.)
Fiat currency
·       d.)
Fractional reserve
Which of the following statements about fiat currency is true?
·       a.)
Fiat currency has intrinsic value.
·       b.)
Fiat currency is dependent on trust that it will be widely accepted.
·       c.)
Fiat currency is not available in America today.
·       d.)
Fiduciary currency has value based on the trust of the Federal Reserve.
Which answer below explains why some might have FAVORED the old banking system?
·       a.)
Currency traders could make a lot of money by exchanging it between cities.
·       b.)
All of the account holders at a bank could create a run by asking to withdraw their funds at the same time.
·       c.)
The value of notes from unknown banks was unclear.
·       d.)
Prices were uncertain in trading over long distances.
Some of the founding fathers were initially against a Central Bank because __________.
·       a.)
the control of the English bank over the colonies
·       b.)
the 'Continental' currency had already been issued
·       c.)
different states wanted their own currency
·       d.)
they couldn't agree which branch of government would control a Central Bank
Before a Central Bank was established in the United States, people known as __________ were able to buy and sell the monies from individual states.
·       a.)
the Board of Governors
·       b.)
federal funds traders
·       c.)
equity salesmen
·       d.)
currency traders
Which of the following statements regarding central banks is true?
·       a.)
​As the value of the currency becomes more certain, people rely more on commodity standards.
·       b.)
A run could never happen at a central bank.
·       c.)
Banks are not required to maintain cash on hand.
·       d.)
​A central bank is charged with the regulation of money supply and interest rates.​
Which of the following statements regarding central banks is true?
·       a.)
Central banks undermine international trade.
·       b.)
Central banks require greater reliance on the gold standard.
·       c.)
A central bank has the sole authority with respect to the money supply.
·       d.)
A central bank controls the state and local bank locations and number of branches.
Which of the following describes a way that central banks strengthened the value of currency?
·       a.)
Banks lent out more money than is kept in reserves.
·       b.)
Over time, the banking system becomes less reliant on the gold standard.
·       c.)
Traders made a living by exchanging currency between cities.
·       d.)
People deposited paper money instead of gold in banks.
Which of the following statements about the Federal Reserve is true?
·       a.)
The members of the Board of Governors of the Federal Reserve are appointed for terms of 14 years.
·       b.)
The Federal Reserve Board of Governors are elected by the general public.
·       c.)
The Federal Reserve prints more money to prevent runs on banks.
·       d.)
The Federal Reserve is directly controlled by the government, as its members are all elected politicians.
How does the Federal Reserve prevent runs on banks?
·       a.)
It doesn't; banks need to establish good reputations on their own
·       b.)
By printing more money if necessary
·       c.)
By acting as a lender of last resort to member banks
·       d.)
By guaranteeing people's deposits
Which of the following statements is NOT true of the Federal Reserve?
·       a.)
The Federal Reserve prints more money to prevent runs on banks.
·       b.)
The Federal Reserve was created to sustain long term economic health.
·       c.)
The Federal Reserve is independent from the federal government.
·       d.)
The Federal Reserve prevents panics by allowing private banks to hold reserves at regional Federal Reserve banks.
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Challenge 2
Select the answer below that has the three examples of money in order from most liquid to least liquid.
·       a.)
Checking account balances, dollar bills, money market mutual funds
·       b.)
Savings account balances, checking account balances, dollar bills
·       c.)
Money market mutual funds, checking account balances, dollar bills
·       d.)
Dollar bills, checking account balances, money market mutual funds
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Which of the following statements regarding different types of money is true?
·       a.)
Different types of money all have the same level of liquidity.
·       b.)
Time deposits belong in the least liquid category of money.
·       c.)
There are five main categories of money, based on liquidity.
·       d.)
A checking account is a form of M0.
The M1 definition of money includes __________.
·       a.)
demand deposits and time deposits
·       b.)
physical currency only
·       c.)
demand deposits only
·       d.)
physical currency and demand deposits
If the reserve requirement of a bank is 50%, then the multiplier effect will be ________ and $100 in M1 will increase the money supply by ________.
·       a.)
2; $200
·       b.)
2; $50
·       c.)
0.5; $50
·       d.)
0.5; $200
If the reserve requirement of a bank is 25%, then the multiplier effect will be ________ and $200 in M1 will increase the money supply by ________.
·       a.)
25; $50
·       b.)
4; $800
·       c.)
4; $50
·       d.)
25; $800
If the reserve requirement of a bank is 20%, then the multiplier effect will be ________ and $50 in M1 will increase the money supply by ________.
·       a.)
20; $250
·       b.)
5; $250
·       c.)
20; $1,000
·       d.)
5; $1,000
Which statement is NOT true regarding the way that the Federal Reserve controls the money supply?
·       a.)
If the Fed wants to reduce the money supply, it sells bonds and shreds the money it receives.
·       b.)
The Fed gives bondholders cash in exchange for securities (bonds).
·       c.)
Money that is printed by the Bureau of Printing and Engraving is turned over to the Fed.
·       d.)
The U.S. Treasury sends the money it prints directly into circulation.
When the Fed sells bonds, the result is an increase in __________.
·       a.)
interest rates
·       b.)
money supply
·       c.)
consumption (C)
·       d.)
investment (I)
What is the result when the Federal Reserve buys Treasury bonds?
·       a.)
More currency in the hands of the public
·       b.)
Higher interest rates
·       c.)
Less consumption (C)
·       d.)
Fewer investments (I)
The federal funds rate is paid to __________.
·       a.)
the Federal Open Market Committee for overseeing the Federal Funds rate
·       b.)
banks who lend excess reserves to other member banks
·       c.)
depositors whose funds are loaned out to member banks
·       d.)
banks that need to borrow in order to meet the reserve requirement
Which of the following statements is true as it relates to banks and the federal funds market?
·       a.)
The FOMC uses taxation to control our money supply.
·       b.)
The federal funds market developed as banks lost customers.
·       c.)
Banks with less than the reserve requirement need overnight loans to meet their obligations.
·       d.)
The federal funds rate is charged on an annual basis.
Fed member banks enter the federal funds market in order to __________.
·       a.)
increase the interest rate they can charge on loans
·       b.)
boost profits
·       c.)
meet reserve requirements
·       d.)
increase their size and importance
Why would banks need to borrow directly from the Fed?
·       a.)
To meet monthly deposit target goals
·       b.)
To increase the interest rate they can charge to lenders
·       c.)
To meet the reserve requirement
·       d.)
To purchase Federal Treasury bonds on the open market
Which statement below is true about the discount rate?
·       a.)
It involves banks loaning funds to one another so that they can meet their reserve level.
·       b.)
It dictates the amount of money that banks should maintain in their vaults at all times.
·       c.)
It is influenced by the multiplier effect.
·       d.)
It is the rate that the Fed charges member banks for short term loans.
Which statement below is true about the discount rate?
·       a.)
It is the same as the fed funds rate.
·       b.)
This is the rate used when banks borrow directly from the Fed.
·       c.)
It is the rate that banks charge other banks to loan money overnight.
·       d.)
It is the interest rate that the federal government pays to the public via the sale of Treasury securities.
Which of the following statements regarding inflation is true?
·       a.)
When the unemployment rate is under 5%, inflation is not a concern anymore.
·       b.)
According to most economists, an annual inflation rate of 8% is normal and just fine.
·       c.)
Decreasing the discount rate is one way to combat inflation.
·       d.)
When inflation is extreme, it can destroy a country's currency.
Which of the following statements regarding goals of monetary policy is FALSE?
·       a.)
The Fed might seek to reduce inflation by increasing the money supply.
·       b.)
Extreme inflation has the potential to destroy a currency completely​.
·       c.)
Most economists say that a 2% annual inflation rate is normal.
·       d.)
One of the Fed's main goals is to promote economic stability.
Which of the following statements is associated with deflation?
·       a.)
In extreme cases, this can force people to revert back to a barter economy.
·       b.)
Prices fall, but loan payments stay the same.
·       c.)
It decreases the real value of debt.
·       d.)
Prices increase so quickly that it hurts trade.
All of the following are examples of expansionary policy EXCEPT __________.
·       a.)
increasing the money supply
·       b.)
selling Treasury bonds
·       c.)
lowering the discount rate
·       d.)
decreasing the reserve requirement
Which of the following is associated with contractionary monetary policy?
·       a.)
Buying Federal Treasury bonds
·       b.)
Increasing the reserve requirement
·       c.)
Lowering the discount rate
·       d.)
Increasing taxes
Expansionary policy is created in order to __________.
·       a.)
encourage households and businesses to spend money
·       b.)
reduce GDP
·       c.)
counteract inflation
·       d.)
slow down business investment in the economy
Challenge 3
Using the GDP model, which of the following often happens during a recession?
·       a.)
·       Â
Consumption (C) steadily increases.
·       b.)
·       Â
Net exports (X-M) will always increase.
·       c.)
·       Â
Government spending (G) will be greater than taxes (T).
·       d.)
·       Â
Consumption (C) will be less than savings (S).
Which of the following is NOT included in the expenditure approach for calculating GDP?
·       a.)
·       Â
Government purchases
·       b.)
·       Â
Business investments of capital
·       c.)
·       Â
Exports minus imports
·       d.)
·       Â
Consumer income
In the GDP model, investment (I) could be considered all of the following EXCEPT __________.
·       a.)
the building of a new factory
·       b.)
the increase in capital resources
·       c.)
the purchase of a stock
·       d.)
the purchase of a new restaurant
The Marginal Propensity to Consume (MPC) is __________.
·       a.)
·       Â
total expenditures minus savings in an economy
·       b.)
·       Â
the amount of savings that occurs as a result of a tax increase
·       c.)
·       Â
the amount of additional income spent in the economy
·       d.)
·       Â
the total expenditures in the economy
Which of the following statements about expansionary fiscal policy is true?
·       a.)
·       Â
It tends to increase the unemployment rate.
·       b.)
·       Â
It is used to curb inflation.
·       c.)
·       Â
It is when government expenditures exceeds tax revenues.
·       d.)
·       Â
It decreases the purchase of goods and services.
Which of the following is an example of expansionary policy?
·       a.)
·       Â
Decrease in taxes
·       b.)
·       Â
Decreasing the salaries of government workers
·       c.)
·       Â
Government cuts in spending
·       d.)
·       Â
Decrease in investment
The Phillips Curve shows the trade-off between __________.
·       a.)
·       Â
inflation and unemployment
·       b.)
·       Â
price level and GDP
·       c.)
·       Â
tax rates and government revenue
·       d.)
·       Â
labor and leisure
Using the GDP model, taxes initiated to finance government spending are subtracted from __________.
·       a.)
investment
·       b.)
consumption
·       c.)
consumption and investment and net exports
·       d.)
consumption and investment
Contractionary fiscal policy is enacted in order to __________.
·       a.)
lower the interest rate
·       b.)
decrease unemployment
·       c.)
fight inflation
·       d.)
encourage borrowing
Which of the following is true concerning government bonds?
·       a.)
·       Â
The yield increases when market price falls.
·       b.)
·       Â
The yield is always equal to the interest rate at the time of maturity.
·       c.)
·       Â
They are always paid off at maturity.
·       d.)
·       Â
The yield falls with the market price.
Government securities that are issued for a time period between one and 10 years are known as __________.
·       a.)
·       Â
notes
·       b.)
·       Â
bills
·       c.)
·       Â
commodity money
·       d.)
·       Â
bonds
U.S. debt in the form of bills, notes and bonds are sold by the __________.
·       a.)
Federal Open Market Committee
·       b.)
U.S. Treasury
·       c.)
Federal Reserve Member Banks
·       d.)
Congressional Budget Committee
How does treasury debt held by foreigners decrease economic growth?
·       a.)
·       Â
Interest payments to foreigners comes from U.S. tax revenues.
·       b.)
·       Â
Foreign nations do not charge interest on loans.
·       c.)
·       Â
Net exports decline as a result of foreign held debt.
·       d.)
·       Â
Foreigners pay capital gains tax on U.S. held securities to the U.S. government.
When the government finances debt, interest must be paid to __________.
·       a.)
·       Â
member banks with excess deposits
·       b.)
·       Â
stockholders
·       c.)
·       Â
bondholders
·       d.)
·       Â
fund transfer payments
Economic growth is measured by the __________.
·       a.)
growth in the skilled labor force
·       b.)
changes in the unemployment rate over time
·       c.)
percent increase in nominal GDP over time
·       d.)
GDP, adjusted for inflation over time
Deficit spending increases the interest rate because __________.
·       a.)
·       Â
the demand for loans decreases
·       b.)
·       Â
the Fed decreases the money supply
·       c.)
·       Â
the demand for loans increases
·       d.)
·       Â
the Fed increases the money supply
In order to offset interest rate increases as a result of government borrowing, the Federal Reserve would __________.
·       a.)
·       Â
lower the reserve requirement
·       b.)
·       Â
sell bonds to the public
·       c.)
·       Â
decrease the money supply
·       d.)
·       Â
increase the Fed Funds rate
Higher interest rates will __________.
·       a.)
·       Â
decrease the consumption in the economy
·       b.)
·       Â
increase investment in the stock market
·       c.)
·       Â
decrease the cost of borrowing money
·       d.)
·       Â
slow down government spending
Large budget deficits __________.
·       a.)
·       Â
occur when tax revenues are greater than government spending
·       b.)
·       Â
help alleviate the national debt
·       c.)
·       Â
reduce the value of domestic currency
·       d.)
·       Â
Decrease the interest rate
Large budget deficits can have a ______ effect on economic growth because they can cause interest rates to _______.
·       a.)
·       Â
positive; fall
·       b.)
·       Â
positive; rise
·       c.)
·       Â
negative; fall
·       d.)
·       Â
negative; rise
When the demand for a country's currency falls, the currency will __________.
·       a.)
have inflationary results at home
·       b.)
depreciate
·       c.)
appreciate
·       d.)
be more valuable to foreigners
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