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ECO 102 Macroeconomics Unit 3 Milestone 3 Sophia Course
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1
Which of the following could be the long run effect of budget deficits?
Lower interest rates
Slower economic growth
Stronger domestic currency
Increased investment
Interest Rates
2
If the MPC is 0.5 and the government increases spending by $250 billion, which of the following will be the effect this change has on the economy?
The economy will increase by $350 billion.
The economy will increase by $250 billion.
The economy will increase by $500 billion.
The economy will increase by $125 billion.
Expansionary Policy
3
If the reserve requirement of a bank is 33%, then $100 of M0 will lead to how much of M1?
$33
$300
$330
$1000
Reserve Requirement
4
Select the example below that is M1 type of money.
Money market mutual funds
Collectible silver coins
Time deposit
Checking account balance
M0, M1, M2
5
Which of the following represents an advantage of a central bank?
They reduce the risk of runs and panics.
They conduct bank examinations to make sure banks are not taking on too much risk.
They act as a lender of last resort.
All of the above are advantages of a central bank.
Central Banks
6
Which statement below about expansionary fiscal policy is true?
If it is based on a tax cut, it will trigger the multiplier effect.
It could include decreasing the reserve requirement.
It generally has a negative effect on GDP.
It could include lowering interest rates.
Expansionary Policy
7
Select the example below that is part of contractionary monetary policy.
Policies that reduce interest rates
Open market purchases of treasury securities
Policies that can reduce excessive inflation
Lowering the reserve requirement
Expansionary/Contractionary Policy and the Multiplier Effect
8
What happens during a bank run?
Creditors demand their accounts to be settled with banks.
Many depositors demand their funds to be repaid.
Depositors increase their accounts due to high-interest rates.
Banks lower interest rates to encourage loans to households and businesses.
Fractional Gold Standard/Fiat Currency
9
Which of the following is true about a fractional reserve banking system?
There are no regulations concerning the portion of reserves banks must hold.
It allows banks to loan out a portion of deposits and therefore create money.
It is likely to fail as most people demand all of their money each day.
The central bank does not allow for this type of system.
Central Banks
10
Which of the following regarding the federal funds market is NOT true?
FOMC meetings set a target for the federal funds rate.
Transactions influence the amount of money that banks have on hand to meet the reserve requirement at the end of the day.
The Fed directly controls the federal funds rate.
The federal funds market developed to help banks meet their reserves requirements at the end of the day.
Federal Funds Market
11
Gold and other precious metals are easy to store for long periods of time because they will not spoil, making them an example of which of the following?
Double coincidence of wants
Unit of account
Medium of exchange
Store of value
History of Money
12
Determine which scenario would NOT call for the Fed to intervene.
The economy is reaching hyperinflation.
Prices are decreasing quickly; real value of the currency is rising.
Prices are increasing rapidly; real value of the currency is falling.
Annual inflation is around 2%.
Goals of Monetary Policy
13
Which statement below corresponds to the term "Federal Reserve?"
This is independent from the U.S. government.
This acts as a central bank for its region of the country.
This directly sets all interest rates in the economy.
The leader of this is an elected official.
U.S. Central Bank: Federal Reserve
14
Which of the following is NOT one of the three ways that money can be spent that contribute to GDP?
Government savings
Government purchases
Business investments
Individual purchases
Expenditure and Income Equations
15
Which of the following is NOT a way that the government finances fiscal policy?
Rolling over debt
Sale of treasury securities
Tax revenue
Printing money
Funding Fiscal Policy
16
Which description corresponds to the term "gold standard?"
Which description corresponds to the term "gold standard?"
This holds value because it is a widely accepted medium of exchange.
This is the amount of money that must be maintained in a bank at all times.
This is based solely on the trust of the Federal Reserve.
This happens when a commodity creates the value of a currency.
Gold Standard
17
Which answer below is NOT one of the goals of monetary policy?
To promote stable prices
To avoid extremes of inflation and deflation
To change levels of government spending and taxation
To promote the maximum sustainable level of employment
Goals of Monetary Policy
18
Select the statement below that is true.
An increase in the money supply will decrease loanable funds.
Once money is printed, the U.S. Treasury spends it.
The Fed buys treasury securities as a way to circulate money.
An increase in the money supply will also increase interest rates.
Open Market Operations
19
Which of the following is the reason the United States had been opposed to the idea of central banks in the past?
The risk of runs and panics was still too high.
The British central bank had exerted control over the colonies.
It was easier to make money trading currency using the old banking methods.
The value of currency was uncertain.
History of the Central Bank
20
Which of the following definitions corresponds to economic growth?
The cost of money
The difference between tax revenue and government expenditures
The quantity of one type of money that corresponds to another
Percent change in value of the sum of a country's goods and services
Economic Growth
21
Which of the following is the Federal Reserve Committee responsible for making key decisions about interest rates and the money supply?
The Executive Branch
Federal Reserve Districts
FOMC
The House of Representatives
U.S. Central Bank: Federal Reserve
22
Using the expenditure approach and the information shown here, which of the following is the GDP?
Individual Purchases: $5 billion
Government purchases: $10 billion
Business investments: $5 billion
Imports: $5 billion
Exports: $10 billion
$15 billion
$45 billion
$35 billion
$25 billion
Expenditure and Income Equations
23
The discount rate is charged to __________.
bondholders who sell their bonds before they mature
depositors who cannot meet their reserve requirement
member banks for short term loans from the Fed
banks who borrow from other banks to meet liquidity needs
Discount Rate
1
Which of the following could be the long run effect of budget deficits?
Stronger domestic currency
Slower economic growth
Lower interest rates
Increased investment
Interest Rates
2
Using the expenditure approach and the information shown here, which of the following is the GDP?
Individual Purchases: $5 billion
Government purchases: $10 billion
Business investments: $5 billion
Imports: $5 billion
Exports: $10 billion
$35 billion
$25 billion
$15 billion
$45 billion
Expenditure and Income Equations
3
Which of the following statements applies to the discount rate?
The Fed does not directly control this rate.
The fed funds rate is the same as this rate.
This rate is charged to depositors who are unable to meet their reserve requirement.
This rate is used when banks borrow directly from the Fed.
Discount Rate
4
A(n) __________ is a system where banks in the United States eventually figured out that they could print more __________ than the gold that they had in their vaults.
fractional reserve; fiduciary currency
open market operation; fiduciary currency
open market operation; paper money
fractional reserve; paper money
Fractional Gold Standard/Fiat Currency
5
Which of the following is an example of medium of exchange?
A chicken farmer who wants a cow needs to find a cattle farmer who wants some chickens.
People in the Pacific Islands used cowrie shells as a form of payment for the things they wanted.
A restaurant lists a price for dinner in gold coins.
People invest in gold because it stays stable over time and does not tarnish, rust or deteriorate.
History of Money
6
Which of the choices below is NOT true about expansionary fiscal policy?
It can trigger the multiplier effect.
It is financed by selling treasury securities.
It often results in government expenditures exceeding tax revenues.
It will result in an increase in the unemployment rate.
Expansionary Policy
7
Which of the statements below about the Fed is NOT true?
Regional Federal Reserve banks act as central banks for their areas.
Federal Reserve banks control the money supply.
The Fed is controlled by the U.S. government.
The Fed can loan money to private banks as lender of last resort.
U.S. Central Bank: Federal Reserve
8
Which of the following represents an advantage of a central bank?
They reduce the risk of runs and panics.
They conduct bank examinations to make sure banks are not taking on too much risk.
They act as a lender of last resort.
All of the above are advantages of a central bank.
Central Banks
9
Which of the following is NOT a form of treasury security?
Notes
Bills
Bonds
Yield
Funding Fiscal Policy
10
What is the benefit of having a sole authority print currency?
Bank runs are much less likely.
It protects a country's economy because it creates a natural barrier to trade.
There could be multiple dollars in multiple checking accounts for every one dollar in reserve.
The value of the currency becomes more certain.
Central Banks
11
Which of the following is not a goal of monetary policy?
Promote the increase of printed paper currency
Promote maximum stable employment
Prevent destruction of the currency's value
Prevent deflation of the currency
Goals of Monetary Policy
12
Which of the following was an advantage associated with the free banking system in place in the United States during the 19th century prior to the development of the Central Bank?
The banking system created a very stable form of currency.
If a bank in one city went bankrupt, people in other cities would not hear about it for several weeks.
Individuals had difficulty judging the value of a note printed by an unknown bank.
Currency traders could make a living trading currency between cities.
History of the Central Bank
13
If a bank's reserve requirement is 5%, then $100 of M0 will lead to which of the following as the amount of M1?
$200
$50
$2,000
$5
Reserve Requirement
14
What does the expression Y - (C + T) represent?
Investments
Government savings
Public savings
GDP
Expenditure and Income Equations
15
Which of the following is an example of deflation?
Someone owes more on a house than it is worth.
Prices are increasing, so the purchasing power of the currency is falling.
Economic instability destroys the value of the currency.
People revert back to a barter economy.
Goals of Monetary Policy
16
If the MPC is 0.75 and the government increases spending by $100 billion, the effect this change has on the economy will be which of the following?
There will be an increase of $400 billion in economic activity.
There will be an increase of $133.3 billion throughout the economy.
There will be an increase of $75 billion in economic activity.
There will be an increase of $100 billion in economic activity.
Expansionary Policy
17
Which of the following are NOT ways that budget deficits can have a negative effect on future economic growth?
When they are financed with foreign-held treasury debt.
When the debt is held domestically.
When they are financed with an increase in taxes.
When interest payments are made to foreigners.
Economic Growth
18
Select the example below that is M1 type of money.
Checking account balance
Collectible silver coins
Money market mutual funds
Time deposit
M0, M1, M2
19
Select the statement below that is true.
An increase in the money supply will also increase interest rates.
Once money is printed, the U.S. Treasury spends it.
An increase in the money supply will decrease loanable funds.
The Fed buys treasury securities as a way to circulate money.
Open Market Operations
20
Select the statement below that is FALSE about the Federal Reserve.
It lets banks keep some of their reserves at regional branches.
It helps banks clear checks from other banks.
It authorizes banks to print money.
There are 12 regional banks that are part of the Federal Reserve.
U.S. Central Bank: Federal Reserve
21
Which of the following is true about the federal funds rate?
It is the rate at which treasury securities are bought and sold.
It is the rate that banks pay to borrow money from the Fed.
It is directly set by the Fed.
It is one of the many tools the Fed uses to control the money supply.
Federal Funds Market
22
Select the example below that is part of contractionary monetary policy.
Policies that reduce interest rates
Policies that can reduce excessive inflation
Lowering the reserve requirement
Open market purchases of treasury securities
Expansionary/Contractionary Policy and the Multiplier Effect
23
Which description corresponds to the term "gold standard?"
This is the amount of money that must be maintained in a bank at all times.
This is based solely on the trust of the Federal Reserve.
This holds value because it is a widely accepted medium of exchange.
This happens when a commodity creates the value of a currency.
Gold Standard
Which of the following is NOT a step in the development of the gold standard?
Gold functioned in limited ways; its primary use was in making jewelry.
Banks emerged as depositories.
Banks began to print paper money.
People wrote checks that could transfer ownership of gold without removing it from the vault.
Of the following true statements, which statement might be a reason that budget deficits make interest rates go up?
Large budget deficits reduce the strength of the domestic currency.
Tax revenue collected to make interest payments on the debt is given to Americans who can then use it to make purchases.
The increased demand for loanable funds in the private market will drive interest rates up.
They represent the difference between tax revenue and government expenditures.
What is the benefit of having a sole authority print currency?
Bank runs are much less likely.
It protects a country's economy because it creates a natural barrier to trade.
The value of the currency becomes more certain.
There could be multiple dollars in multiple checking accounts for every one dollar in reserve.
Which of the following is false about budget deficits?
They are financed with tax revenue or new debt.
They typically happen when using contractionary fiscal policy.
They can affect long run RGDP.
They represent the difference between tax revenue and government expenditures.
Under which of the following circumstances would a fractional reserve system fail?
As long as banks are able to make loans
As long as there is more gold than paper money
As long as the holders of paper currency demand more gold than what banks are holding as reserves
As long as banks are able to earn money on interest
Which of the following is an example of contractionary monetary policy?
Lowering interest rates
Policies taken in response to the housing crisis
Reducing reserve requirement
Open market sale of treasury securities
Which of the following is an example of expansionary fiscal policy?
If tax revenues exceed government expenditures
Increasing interest rates
Decreasing the reserve requirement
Reducing taxes
The discount rate is charged to __________.
depositors who cannot meet their reserve requirement
bondholders who sell their bonds before they mature
banks who borrow from other banks to meet liquidity needs
member banks for short term loans from the Fed
Which of the following is NOT a way that the Fed uses the open market to control the money supply?
The Fed dictates the amount of money that banks must keep in their vaults.
The Fed gives bondholders cash in exchange for securities.
The Fed buys U.S. Treasury securities.
To remove money from circulation, the Fed sells U.S. Treasury securities for cash.
The terms M0, M1, M2 classify money according to which of the following?
Adherence to the gold standard
Unit of account
Reserve requirement
Level of liquidity
1
Of the following true statements, which statement might be a reason that budget deficits make interest rates go up?
They represent the difference between tax revenue and government expenditures.
The increased demand for loanable funds in the private market will drive interest rates up.
Large budget deficits reduce the strength of the domestic currency.
Tax revenue collected to make interest payments on the debt is given to Americans who can then use it to make purchases.
Interest Rates
2
If the reserve requirement of a bank is 33%, then $100 of M0 will lead to how much of M1?
$300
$33
$1000
$330
Reserve Requirement
3
Which of the following is the reason why individuals are more certain of the value of their currency with central banks?
Central banks have tools that they use to control and stabilize the money supply.
Central banks lessen the reliance on the gold standard.
Central banks hold money in their reserves and make loans based on this money.
Central banks use paper money.
Central Banks
4
Under which of the following circumstances would a fractional reserve system fail?
As long as banks are able to make loans
As long as banks are able to earn money on interest
As long as the holders of paper currency demand more gold than what banks are holding as reserves
As long as there is more gold than paper money
Fractional Gold Standard/Fiat Currency
5
Gold and other precious metals are easy to store for long periods of time because they will not spoil, making them an example of which of the following?
Double coincidence of wants
Store of value
Unit of account
Medium of exchange
History of Money
6
Which of the following is an example of contractionary monetary policy?
Reducing reserve requirement
Policies taken in response to the housing crisis
Open market sale of treasury securities
Lowering interest rates
Expansionary/Contractionary Policy and the Multiplier Effect
7
Which statement below corresponds to the term "Federal Reserve?"
This is independent from the U.S. government.
The leader of this is an elected official.
This directly sets all interest rates in the economy.
This acts as a central bank for its region of the country.
U.S. Central Bank: Federal Reserve
8
The discount rate is charged to __________.
member banks for short term loans from the Fed
banks who borrow from other banks to meet liquidity needs
depositors who cannot meet their reserve requirement
bondholders who sell their bonds before they mature
Discount Rate
9
If the MPC is 0.75 and the government increases spending by $20 billion, which of the following will be the effect this change has on the economy?
It will increase the economy by $20 billion.
It will increase the economy by $15 billion.
It will increase the economy by $26.6 billion.
It will increase the economy by $80 billion.
Expansionary Policy
10
Which of the following is an example of expansionary fiscal policy?
If tax revenues exceed government expenditures
Increasing interest rates
Decreasing the reserve requirement
Reducing taxes
Expansionary Policy
11
Which of the following is NOT a way that the Fed uses the open market to control the money supply?
The Fed dictates the amount of money that banks must keep in their vaults.
To remove money from circulation, the Fed sells U.S. Treasury securities for cash.
The Fed buys U.S. Treasury securities.
The Fed gives bondholders cash in exchange for securities.
Open Market Operations
12
Using the expenditure approach and the information shown here, which of the following is the calculated GDP?
Individual Purchases: $150 billion
Government purchases: $200 billion
Business investments: $300 billion
Imports: $150 billion
Exports: $100 billion
$750 billion
$850 billion
$900 billion
$600 billion
Expenditure and Income Equations
13
Which of the following is NOT a step in the process of lending federal funds?
The Fed gives short term loans to banks to help them meet reserve requirements.
Banks with excess reserves loan money for one night to banks who cannot meet the reserve.
At the end of the day, deposits and withdrawals influence the reserve level.
The FOMC sets a target for the federal funds rate.
Federal Funds Market
14
Which of the following is false about budget deficits?
They are financed with tax revenue or new debt.
They typically happen when using contractionary fiscal policy.
They represent the difference between tax revenue and government expenditures.
They can affect long run RGDP.
Economic Growth
15
Which of the following is NOT a way that the government finances fiscal policy?
Tax revenue
Rolling over debt
Sale of treasury securities
Printing money
Funding Fiscal Policy
16
In which of the following ways does deflation create problems for the economy?
It can destroy the value of the currency.
The decline in prices can increase the real value of debt.
Unstable prices discourage people from holding onto money.
It can force people to revert back to a barter economy.
Goals of Monetary Policy
17
Which of the following is NOT one of the three ways that money can be spent that contribute to GDP?
Business investments
Individual purchases
Government savings
Government purchases
Expenditure and Income Equations
18
Which of the following is NOT a step in the development of the gold standard?
People wrote checks that could transfer ownership of gold without removing it from the vault.
Gold functioned in limited ways; its primary use was in making jewelry.
Banks began to print paper money.
Banks emerged as depositories.
Gold Standard
19
Which statement below corresponds to the term "central bank?"
This was developed by the founding fathers in order to ensure strict banking practices.
They allow a bank to loan out money to other banks.
They have a variety of tools that can be used to control the money supply.
This can happen when consumers lose confidence in the bank or the system as a whole.
Central Banks
20
Which of the following is the reason the United States had been opposed to the idea of central banks in the past?
The risk of runs and panics was still too high.
It was easier to make money trading currency using the old banking methods.
The value of currency was uncertain.
The British central bank had exerted control over the colonies.
History of the Central Bank
21
Money market mutual funds are an example of which of the following types of money?
M2
M3
M0
M1
M0, M1, M2
22
Which of the following is NOT a way that the Fed prevents runs from happening?
The Fed ensures that these private banks have access to currency needed for depositors who wish to withdraw cash.
Private banks can choose to “hold” their reserves at regional Federal Reserve banks.
Private banks rely on the Federal Government's oversight of the Federal Reserve's monetary policies.
If reserves run low, the Fed will loan money to the private banks.
U.S. Central Bank: Federal Reserve
23
Which statement below regarding monetary policy is false?
Monetary policy should promote maximum stable employment.
Stable prices facilitate trade.
Central banks aim for an inflation rate of 5%.
We classify our money supply according to liquidity.
What happens during a bank run?
Banks lower interest rates to encourage loans to households and businesses.
Depositors increase their accounts due to high-interest rates.
Many depositors demand their funds to be repaid.
Creditors demand their accounts to be settled with banks.
Which of the following is an example of the function of money as a unit of account?
As the use of gold evolved, people would list prices for products in gold.
During the Great Depression, Americans hoarded gold.
Pieces of gold were easy to transport and trade for other items.
Gold became a popular form of money because it could be stored for long periods of time without tarnishing or rusting.
The discount rate represents which of the following?
It is the rate that banks charge when they lend out money.
It is the rate that the Fed charges member banks in order to satisfy liquidity needs.
It is the same as the fed funds rate.
It is the rate that banks charge to one another to meet the reserve requirement.
Select the situation below where contractionary monetary policy would be needed.
People are holding onto their money rather than spending it.
Individuals reduce the frequency with which they spend and deposit money in banks.
People are reluctant to take out loans.
The inflation rate is growing rapidly.
Which of the following can offset rising interest rates due to government borrowing?
Lowering taxes
Promising future increases in government spending
Reducing the money supply
Expansionary monetary policy
Which of the following makes the Federal Reserve different from central banks in other countries?
The Federal Reserve is not directly controlled by the federal government.
The Federal Reserve can expand the money supply during recessions.
The Federal Reserve works to combat inflation.
The Federal Reserve has tools to manage the money supply.