Econ Final

[1] The U.S. tax code, including the regulations written by the IRS, covers approximately _____ pages.
1. 17,000
2. 1700 3. 7000 4. 700 5. 70

To combat a recession the government increases government purchases and temporarily cuts taxes. The impact on output is likely to be less than implied by the simple Keynesian multiplier. Which of 1 or 2, in part, explains this observation?
1. 2. 3. 4.
Each change must be financed with government borrowing. Each change will lead to higher taxes in the future. Each of 1 and 2 is an explanation. Neither of 1 nor 2 is an explanation.

[3] Which of 1-3 is a true statement about the economy from 2007 to 2011? 1. The M1 and M2 money multipliers fell. 2. M1 and M2 fell. 3. Bank reserves fell.
4. Each of 1-3 is true. 5. Neither of 1-3 is true, each is false.

[4] Which of 1-3 was not a part of the American Recovery and Reinvestment Act (the 2009 “stimulus” package)?
1. Federal purchases of goods and services. 2. Federal grants to state and local governments. 3. Permanent cuts in tax rates. 4. Neither of 1-3 was a part of the ARRA. 5. Each of 1-3 was a part of the ARRA..

The monetary base is defined as _____. 1. the total cash in bank vaults. 2. commercial bank deposits at the FED. 3. cash in the hands of the non-bank public 4. total bank reserves.
5. None of the above.

[6] If there is a positive excess demand for money (as the case when the interest rate is below its equilibrium level), there is a positive excess
1. supply of bonds and the price of bonds will increase.
2. supply of bonds and the price of bonds will decrease.
3. demand for bonds and the price of bonds will increase. 4. demand for bonds and the price of bonds will decrease. 5. None of the above.

In the country of Freedonia autonomous demand ( A ) is $600 and the marginal propensity to consume (the MPC) is 3/4. Use this information to answer questions 7-9. (These questions deal with the model of Chapter 11 in which we ignored the interest rate.)
[7] What is equilibrium output in Freedonia?
1. $2400.
2. $1800. 3. $800. 4. None of the above, as the answer cannot be determined with

[8] In Freedonia if output is $2800, aggregate spending (Y d ) will equal _____ and inventories will ______.
1. 2. 3. 4. 5.
$2100, increase by $700. $2100, decrease by $700.
$2700, increase by $100.
$2700, decrease by $100. None of the above.

[9] In Freedonia taxes are increased by $50 (T= $50). As a result, the aggregate expenditure line will shift _____ and equilibrium output will _____. 1. upward, increase by $200. 2. upward, increase by $150.
3. downward, decrease by $200.
4. downward, decrease by $150.
5. None of the above.

[10] Which of 1-3 is a false statement? 1. In terms of the decline in real output, the Great Depression was more severe in the
U.S. than in the rest of the world. 2. In comparison with the rest of the world the U.S. recovery from the Depression
was relatively slow. 3. Aspects of FDR’s New Deal prolonged the US recovery from the Great
Depression. 4. Each of 1-3 is false. 5. Neither of 1-3 is false, each is true.

[14] Which of 1-3 represents the Fed’s contribution to the 1937 recession? 1. An increase in the Fed’s discount rate. 2. An increase in the required reserve ratio. 3. An open market sale of bonds by the Fed.
4. Each of the above. 5. None of the above.

[15] Which of 1-3 is a false statement about the Fed? 1. Members of the Board of Governors are appointed to serve 12 year terms. 2. There are 9 members of the Board of Governors. 3. The Board of Governors determines the open market operations. 4. Each of 1-3 is false. 5. Each of 1-3 is true.

[16] In the early stages of the Great Depression (from 1929 to 1933) there was a dramatic decrease in the money supply. Which of 1-3 was not a contributing factor to this decrease? 1. The monetary base fell.
2. Banks increased the ratio of excess reserves to deposits. 3. Individuals wished to hold more of their money in the form of cash and less in the
form of bank deposits. 4. Each of 1-3 was a contributing factor. 5.. Neither of 1-3 was a contributing factor.

[17]If the required reserve ratio is 1/20, what is the demand deposit multiplier (the simple money multiplier)? 1. 19/20 2. 20/19
3. 19
4. 20

[18] Suppose there is an decrease in autonomous consumption, A = a <0. As a result, equilibrium output _____ and the rate of interest _____. 1. increases, increases. 2. increases, decreases.
3. decreases, increases.
4. decreases, decreases.
5. None of the above. The answer cannot be determined without more information.

[19] Assume a bank currently has $200 million in demand deposits, $15 million in vault cash and $20 million deposited at the Federal Reserve. If the required reserve ratio is .05 (1/20), the bank is holding excess reserves equal to 1. $5 million
2. $10 million 3. $15 million 4. $20 million 5. $25 million.

[20] A decrease in the price level would lead to which of 1-3? 1. an increase in the nominal demand for money. 2. an increase in the interest rate. 3. A increase in equilibrium output.
4. A decrease in the price level would cause neither of 1-3. 5. A decrease in the price level would cause each of 1-3

Suppose the Fed undertakes an open market sale of bonds. To explain what happens, answer questions 21-23.
[21] The equilibrium interest rate_____ .
1. increases.
2. decreases. 3. remains unchanged. 4. None of the above. The answer cannot be determined without more info.

Suppose the Fed undertakes an open market sale of bonds. To explain what happens, answer questions 21-23
[22] Equilibrium output _____. 1. increases. 2. decreases. 3. remains unchanged.
4. None of the above. The answer cannot be determined without more informati

Suppose the Fed undertakes an open market sale of bonds. To explain what happens, answer questions 21-23.
[23] Equilibrium consumption and investment _____. 1. increase. 2. decrease. 3. remain unchanged.
4. None of the above. The answer cannot be determined without more information.

[24] An upward shift of the aggregate expenditures line could be caused by a(n) 1. decrease in government purchases. 2. increase in output. 3. increase in the interest rate
4. decrease in the interest rate
5. None of the above.

[25] Suppose the Federal Reserve wishes to increase the money supply by $180 million. If the required reserve ratio is 0.10 (1/10), which of the following actions will achieve the Fed’s goal? (Assume the simple demand deposit multiplier holds.) 1. The Fed must purchase $20 million in bonds.
2. The Fed must sell $20 million in bonds.
3. The Fed must purchase $18 million in bonds.
4. The Fed must sell $18 million in bonds. 5. None of the above.

Suppose the Freedonian economy is in a recession. The government wishes to construct a policy or policies to pull the economy back to full employment. Consider the possibilities in 26 and 27.
[26] To combat the recession the government decides to decrease taxes,  T<0. As a result of this policy, there is an increase in output. In addition there is a(n) _____ in the interest rate and a(n) _____ in equilibrium investment. 1. increase, increase.
2. increase, decrease.
3. decrease, increase. 4. decrease, decrease. 5. None of the above. The answer cannot be determined without more information.

Suppose the Freedonian economy is in a recession. The government wishes to construct a policy or policies to pull the economy back to full employment. Consider the possibilities in 26 and 27.
[27] Which of the one of the following policies could end the recession and at the same time increase equilibrium planned investment? 1. An increase in G. 2. An increase in the money supply.
3. Each of 1 and 2 could end the recession and at the same time increase consumption and investment.
4. Neither 1 nor 2 could end the recession and at the same time increase consumption and investment.

[2] An exogenous decrease in money demand will cause ____.

In Freedonia the central bank undertakes an open market purchase. Given this fact, answer 5 and 6. Initially Y=Yf .
[5] As a result of the open market purchase, the short-run AS/AD model predicts that equilibrium consumption _____ and equilibrium investment _____. 1. increases, increases. 2. increases, decreases.
3. decreases, increases. 4. decreases, decreases. 5. None of the above. The answer cannot be determined without more information.

In Freedonia the central bank undertakes an open market purchase. Given this fact, answer 5 and 6. Initially Y=Yf .
[6] As a result of the open market purchase, the long-run, full employment nominal interest rate _____. 1. remains unchanged. 2. decreases.
3. increases 4. None of the above. The answer cannot be determined without more information.

In Freedonia there is a decrease in government purchases, ΔG<0. Given this change, answer questions 7-9. Initially Y=Yf .
[7] As a result of the decrease in G, the short-run AS/AD model (the flexible price, fixed wage model) predicts that the equilibrium price level _____ and equilibrium output _____. 1. increases, increases.
2. increases, decreases. 3. decreases, increases. 4. decreases, decreases. 5. None of the above. The answer cannot be determined without more information.

[8] After the decrease in G, in the long run, output returns to its full employment value. This happens as the nominal wage _____ and the AS curve shifts to the _____. 1. increases, right. 2. increases, left.
3. decreases, right.
4. decreases, left. 5. None of the above. The answer cannot be determined without more information.

[9] As a result of the decrease in G, the long-run, full employment real interest rate _____ and long-run investment _____. 1. increases, increases. 2. increases, decreases.
3. decreases, increases.
4. decreases, decreases. 5. None of the above. The answer cannot be determined without more information.

[10] In the long run, monetary policy can change _____. 1. the composition of output. 2. the long-run real interest rate. 3. the level of unemployment
4. the rate of inflation.
5. none of the above.

[11] The 1991 recession was caused by a negative _____ shock. As a result, the price level was _____ than it would have been absent the shock. 1. demand, larger. 2. demand, smaller.
3. supply,larger.
4. supply, smaller. 5. None of the above.

[12] In Freedonia there is an increase in the price of oil. Initially Y=Yf . As a result of
the oil price increase, the short run AS/AD model predicts that equilibrium price level _____ and equilibrium output _____. 1. increases, increases. 2. increases, decreases.
3. decreases, increases. 4. decreases, decreases. 5. None of the above. The answer cannot be determined without more information.

[13] In the long run, a decrease in the tax rate on corporate income will _____ long-run consumption and _____ long-run investment 1. increase, increase. 2. increase, decrease.
3. decrease, increase.
4. decrease, decrease. 5. None of the above. The answer cannot be determined without more information.

[14] Suppose there is an increase in the dollar price of the British pound. As a result, net exports _____ and the AD curve shifts to the _____. 1. increase, right. 2. increase, left.
3. decrease,right. 4. decrease, left. 5. None of the above. The answer cannot be determined without more information.

The Freedonian economy is in long-run equilibrium at full employment output. The Freedonian economy has 3% money growth, 3% expected inflation, 3% inflation, and 3% nominal wage growth (wage inflation). The Freedonian central bank decides to increase money growth. Say, for example, money growth permanently rises from 3% to 5%. By way of explaining what happens, answer questions 15 and 16.
[15] In the short-run AD/AS model, the money growth increase causes equilibrium output to _____. 1. remain unchanged. 2. increase.
3. decrease. 4. None of the above. The answer cannot be determined without more information.

The Freedonian economy is in long-run equilibrium at full employment output. The Freedonian economy has 3% money growth, 3% expected inflation, 3% inflation, and 3% nominal wage growth (wage inflation). The Freedonian central bank decides to increase money growth. Say, for example, money growth permanently rises from 3% to 5%. By way of explaining what happens, answer questions 15 and 16.
[16] The long-run, real interest rate that clears the output market at full employment output ( rf in our notes) will _____ and the long-run, nominal interest rate will _____.
1. increase, increase 2. increase, decrease 3. remain unchanged, increase 4. remain unchanged, decrease 5. None of the above.

In Freedonia there is an exogenous increase in consumption. Initially Y=Yf . Answer 17 and 18.
[17] As a result of the exogenous increase in consumption, the short run AS/AD model predicts that equilibrium output _____ and the price level _____. 1. increases, increases. 2. increases, decreases.
3. decreases, increases. 4. decreases, decreases. 5. None of the above. The answer cannot be determined without more information.

In Freedonia there is an exogenous increase in consumption. Initially Y=Yf . Answer 17 and 18.

[18] In the long-run when full employment output is again established, long-run consumption is _____ than its original long-run value and long-run investment is _____ it original long-run value. 1. greater than, greater than. 2. greater than, less than. 3. less than, greater than. 4. less than, less than. 5. None of the above. The answer cannot be determined without more information.

[19] Why do negative supply shocks present a difficulty for the Federal Reserve? 1. the Fed can choose to fight the falling price level, but this will result in lower output. 2. the Fed can choose to fight the rising output, but this will result in an even lower
price level. 3. the Fed can choose to fight the rising output, but this will result in an even higher
price level.
4. the Fed can choose to fight the falling output, but this will result in an even higher price level.

[20] The “Great Inflation” of the 1970s was caused by _____.. 1. excessive government spending. 2. excessive money growth due to the Fed’s unrealistic unemployment and
output goals.
3. excessive government deficits. 4. excessive increases in oil prices. 5. Neither of 1-4.

Suppose the Fed selects an interest rate target so to stabilize output at the full employment level. Initially output is at Y f . Answer questions 21-23.
[21] There is an autonomous increase in money demand. As a result, the Fed should _____. To stabilize output, the Fed should _____ the money supply. 1. decrease its interest rate target, increase. 2. decrease its interest rate target, decrease.
3. leave its interest rate target unchanged, increase.
4. leave its interest rate target unchanged, decrease. 5. None of the above. The answer cannot be determined without more information.

Suppose the Fed selects an interest rate target so to stabilize output at the full employment level. Initially output is at Y f . Answer questions 21-23.
[22] There is a decrease in the autonomous spending, A <0, caused, say, by a decrease in autonomous investment. As a result the Fed should _____. 1. increase its interest rate target. 2. decrease its interest rate target.
3. leave its interest rate target unchanged. 4. None of the above. The answer cannot be determined without more information.

Suppose the Fed selects an interest rate target so to stabilize output at the full employment level. Initially output is at Y f . Answer questions 21-23.
[23] Given the change in 22, to stabilize output, the Fed should undertake an open market _____ by way of _____ the money supply. 1. sale, increasing. 2. sale,decreasing.
3. purchase, increasing.
4. purchase,decreasing. 5. None of the above. The answer cannot be determined without more information.

[24] Which of 1-3 is a true statement about the difficulties in implementing countercyclical monetary and fiscal policy?
1. Fiscal policy is difficult to execute in a timely fashion. 2. Time lags exist as to the ultimate effects of a change in monetary policy. 3. The true value of full employment output is unknown. 4. Each of 1-3 is true. 5. Neither of 1-3 is truee. Each statement is false.

[25] An increase in expected inflation will 1. shift the long-run Phillips curve to the left. 2. shift the long-run Phillips curve to the right. 3. shift the short-run Phillips curve to the left. 4. shift the short-run Phillips curve to the right. 5. None of the above.

[26] The WIN program (Whip Inflation Now) was an anti-inflation program of the _____ administration.
1. Kennedy 2. Johnson 3. Nixon 4. Ford
5. Neither of 1-4.

[27] The Chairman of the Federal Reserve Bank from 1951 to 1970 was _____. (He famously said that the FED’s job was “to take away the punch bowl just as the party gets going.”)
1. William Henry Harrison 2. Abraham Martin John 3. William Jennings Bryan 4. William McChesney Martin 5. Neither of 1-4.