Question 1

A liquid asset is:

Accepted Answer

When the government conducts fiscal policy, it makes up for a decrease in  with:

Question 2

In a fractional reserve banking system, banks hold only a fraction of their

Accepted Answer

deposits as reserves.

Question 3

If a $500 increase in reserves ultimately leads to a $2,000 increase in the money supply, the
reserve ratio is:

Accepted Answer

0.25.

Question 4

When the Fed buys short-term Treasury securities, short-term interest rates

Accepted Answer

fall.

Question 5

.The Term Auction Facility involves the Federal Reserve:

Accepted Answer

providing reserves to banks through an auction

Question 6

When a bank has short-term liabilities that are greater than its short-term assets, but overall
its assets are greater than its liabilities, the bank is considered:

Accepted Answer

solvent and illiquid

Question 7

Which is a limitation of monetary policy in stabilizing the economy?

Accepted Answer

Monetary policy is subject to uncertain lags.

Question 8

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned;
and 20% on any additional income earned. The average tax rate for a person earning $35,000
is:

Accepted Answer

4.3%.

Question 9

The alternative minimum tax:

Accepted Answer

is a separate income tax code that began in 1969 to prevent the rich from not paying income
taxes.

Question 10

Whereas covers the elderly, covers the poor and the disabled

Accepted Answer

Medicare; Medicaid

Question 11

Fiscal policy can best be defined as the use of

Accepted Answer

government expenditure, borrowing, and taxation to influence the business cycle

Question 12

Which of these would help a government fight a recession?

Accepted Answer

cutting taxes

Question 13

When the government conducts fiscal policy, it can make up for a decrease in −→C with:

Accepted Answer

an increase in −→G

Question 14

What are the four major limits to fiscal policy?

Accepted Answer

crowding out, a drop in the bucket, a matter of timing, and real shocks

Question 15

The U.S. Social Security tax (FICA) is an example of a:

Accepted Answer

regressive tax

Question 16

Which is not a function of the Federal Reserve?

Accepted Answer

providing loans to small businesses

Question 17

Which is not included in the U.S. money supplies M1 and M2?

Accepted Answer

bond mutual funds

Question 18

To increase the money supply in the economy, the Fed would:

Accepted Answer

carry out open market purchases and/or lower the discount rate.

Question 19

Which is an example of quantitative easing by the Federal Reserve?

Accepted Answer

The Fed purchases $50,000 worth of long-term government bonds

Question 20

What is the overnight lending rate from one bank to another?

Accepted Answer

the Federal Funds rate

Question 21

Systemic risk is present when

Accepted Answer

the failure of one financial institution will bring down other institutions as well.

Question 22

The best type of negative shock for the Federal Reserve to respond to is a negative shock to:

Accepted Answer

AD.

Question 23

. An increase in money growth will cause the inflation rate to increase in:

Accepted Answer

both the short run and the long run

Question 24

The largest source of revenue for the U.S. federal government is

Accepted Answer

the individual income tax.

Question 25

The FICA tax burden is:

Accepted Answer

borne more by the employee even though the employer contributes an equal dollar amount.

Question 26

During what period did this economy experience deflation?

Accepted Answer

2003 to 2005

Question 27

During what period did this economy experience disinflation?

Accepted Answer

2001 to 2005

Question 28

The purpose of FICA taxes is to fund:

Accepted Answer

Social Security payments.

Question 29

.The time between which an economic shock is recognized and when the government passes a
plan to carry out a policy response is called the:

Accepted Answer

recognition lag

Question 30

This economy initially begins at point A and a negative supply shock takes it to point Y. If
the Fed reacts by increasing money growth by 9%, this would take the economy to:

Accepted Answer

point V

Question 31

This economy initially begins at point A and a negative supply shock takes it to point Y.
Taking the economy back to the original LRAS curve would require:

Accepted Answer

an inflation rate much greater than 16%

Question 32

Debt held outside the U.S. government is called the:

Accepted Answer

national debt held by the public

Question 33

Which statement pertains to the condition of crowding out?

Accepted Answer

Government raises taxes by $300 million to finance new spending on highway construction,
resulting in a decrease in investment spending by $270 million.

Question 34

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

Accepted Answer

Consumers used much of the rebate to pay off existing debt.

Question 35

The annual difference between federal spending and revenues is called the:

Accepted Answer

national deficit.

Question 36

What is the setting of the 1988 Christmas movie “Die Hard?”

Accepted Answer

Nakatomi Plaza

Question 37

The Federal Reserve can influence the economy by shifting:

Accepted Answer

the AD curve.

Question 38

Which asset would you classify as being most liquid?

Accepted Answer

demand deposits

Question 39

The main difference between M1 and M2 is that:

Accepted Answer

M2 includes some less liquid assets in addition to the assets in M1

Question 40

If the reserve ratio is 4%, the money multiplier is

Accepted Answer

25

Question 41

Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will:

Accepted Answer

increase by $1,000.

Question 42

The Federal Reserve's major tool(s) to control the money supply is(are)

Accepted Answer

open market operations, discount rate lending, and paying interest on reserves.

Question 43

To increase the money supply in the economy, the Fed would:

Accepted Answer

carry out open market purchases and/or lower the discount rate.

Question 44

To reduce the money supply in the economy, the Fed would:

Accepted Answer

increase the discount rate

Question 45

Which is an example of quantitative easing by the Federal Reserve?

Accepted Answer

The Fed purchases $50,000 worth of long-term government bonds.

Question 46

What is the overnight lending rate from one bank to another?

Accepted Answer

the Federal Funds rate

Question 47

If the total liabilities of Bank A are less than its total assets but its short-term liabilities are greater than its short-term assets, Bank A is:

Accepted Answer

illiquid, but solvent.

Question 48

The risk that the failure of one financial institution can lead to the failure of other financial institutions is called

Accepted Answer

systemic risk

Question 49

In the absence of monetary intervention following a negative shock to aggregate demand:

Accepted Answer

inflation, real growth, and nominal wage growth will all decrease.

Question 50

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

Accepted Answer

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown

Question 51

To offset the effect of negative growth in money velocity (-->v), the central bank should

Accepted Answer

increase the growth rate of the money supply.

Question 52

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:

Accepted Answer

inflation

Question 53

One of the Fed's greatest powers is its ability to

Accepted Answer

boost market confidence

Question 54

Some economists argue that the Fed should commit to keeping  +  fixed at a particular value, say 5%. How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?

Accepted Answer

increase ; do nothing

Question 55

In the long run, a negative real shock will cause output growth to:

Accepted Answer

decrease

Question 56

In the long run, a negative real shock will cause the inflation rate to:

Accepted Answer

increase

Question 57

What monetary policy philosophy is against tying the hands of the central bank?

Accepted Answer

discretion

Question 58

A nominal GDP rule says _____ should always grow at a constant rate.

Accepted Answer

Mv

Question 59

In the United States, the marginal tax rate for married couples:

Accepted Answer

exceeds the average tax rate for most income levels.

Question 60

The tax rate paid on an additional dollar of income is the:

Accepted Answer

marginal tax rate

Question 61

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. A person earning $35,000 pays an income tax of:

Accepted Answer

$1,500.

Question 62

The largest spending program for the U.S. federal government is

Accepted Answer

Social Security

Question 63

Which of the following statements about the Social Security program is correct?

Accepted Answer

Women, who generally live longer than men, benefit more from the system.

Question 64

The money you pay into Social Security goes to

Accepted Answer

pay current beneficiaries

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ECO Exam 4