FNCE 5151 – SUMMER 2017 NAME: Iftakher Hossain

FOURTH ASSIGNMENT
DUE ON OR BEFORE 7/3/2017
EACH QUESTION WORTH 1.49 POINTS

1) What are the two tools of fiscal policy that governments can use to stabilize an economy?
A) government spending and technology improvements
B) government spending and taxation
C) taxation and controlling imports
D) taxation and controlling exports

2) In order to ________, a government must increase spending and decrease taxation.

A) increase aggregate demand
B) decrease aggregate demand
C) increase aggregate supply
D) decrease aggregate supply

3) A decrease in the personal income tax rate ________ disposable income which ________
consumption.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

4) When the government develops policies to stabilize the economy

A) these policies are unaffected by the multiplier effect.
B) only expansionary fiscal policy is impacted by the multiplier effect.
C) it needs to consider the multiplier effect for all fiscal policies.
D) only contractionary fiscal policy is impacted by the multiplier effect.

5) What is the reason that stabilization policies do not have an immediate effect on an economy?
A) Consumers are slow to catch up on spending.
B) There is a time lag for policies to take effect.
C) Imports come into the country too fast.
D) Exports often are not shipped fast enough.

6) Which component of federal spending is included in GDP?

A) net exports
B) transfer payments
C) government purchases
D) capital supply

7) Why are transfer payments not included in GDP?

A) The amount is too low to have any effect.
B) Unemployment varies and can't be tracked.
C) They do not represent payments to those who contributed resources to currently produced goods or
services.
8) Which of the following is an example of government discretionary spending?
A) Social Security retirement payments
B) Medicare benefits for the elderly
C) defense spending
D) net interest paid on government debt held by the public

9) Who sets the rules for entitlements when spending is authorized under this category?
A) the President
B) the agency involved
C) the Congress when it appropriates the spending
D) each individual state

10) What is the largest component of the federal budget?

A) discretionary spending
B) entitlements and mandatory spending
C) net interest
D) defense spending

11) A White House proposal to increase infrastructure spending on roads, rail lines and runways is an
example of
A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) automatic stabilization.
D) insourcing policies.

12) Which of the following sources of revenue is used to fund government spending?
A) interest
B) taxation
C) corporate contributions
D) political party contributions

13) Individual income tax is the ________ single component of federal revenue.
A) largest
B) second largest
C) smallest
D) least important

14) One school of thought that emphasizes the role that taxes play in an economy's supply of output is
known as
A) demand-pull economics.
B) classical economics.
C) tax-and-spend economics.
D) supply-side economics.

15) The relationship between tax rates and tax revenues is shown on the
A) IRS curve.
B) Laffer curve.
C) production possibilities frontier.
D) Discretionary Spending curve.

16) A federal budget ________ occurs when the federal government spends more than it collects in
taxes.
A) surplus
B) deficit
C) equilibrium
D) ceiling

17) Suppose the government runs a budget surplus in a given year. It can reduce its overall federal debt
by
A) not buying anything on credit.
B) buying back bonds it sold to the public.
C) forcing a change in net exports.
D) increasing taxes on luxury items.

18) The government strives to operate at neither a deficit nor surplus budget in order to keep the
federal budget
A) balanced.
B) equal to inflation.
C) in line with the stock market.
D) equal to that of other countries.

19) Automatic stabilizers

A) require explicit actions by policy makers to become active.
B) work without the need for decisions from Congress or the White House.
C) magnify fluctuations in the economy.
D) increase taxes during recessions.

20) Suppose the economy is operating below potential output. If policy makers try to avoid a budget
deficit by raising taxes or reducing government spending, these actions would
A) increase inflation.
B) help pull an economy out of a depression.
C) make a recession worse.
D) negate the multiplier effect.

21) In the United States during the 1930s, politicians

A) relied on government spending and taxation to pull the economy out of the depression.
B) did not believe in using government spending and taxation because they feared the consequences of
budget deficits.
C) knew that the depression would eventually subside because of automatic stabilizers.
D) deliberately relied on government spending and taxation even though they knew the depression
would continue.

22) The supply-side motivated tax cuts of 1981 during the Reagan administration were aimed at
A) increasing aggregate demand.
B) increasing aggregate supply.
C) decreasing aggregate supply.
D) balancing the federal budget.

23) The Clinton administration inherited a budget deficit from its predecessor. President Clinton
instituted major tax increases that
A) increased the budget deficit during his entire term.
B) brought the budget into balance and eventually into a surplus.
C) reduced the budget deficit but increased the federal debt.
D) reduced the size of the deficit but could not eliminate it.

24) The prospect of future deficits

A) encourages government to conduct expansionary fiscal policy.
B) would prompt government to vastly expand discretionary spending.
C) requires a government to eliminate all entitlement spending.
D) limits the ability of government to conduct fiscal policy in the near future.

25) The supply of money in the U.S. economy is determined primarily by

A) decisions made by the Federal Reserve and the U.S. Treasury.
B) the actions of the Federal Reserve and the banking system.
C) consumers and the banking system.
D) the demand for money in the economy.

26) If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a
A) standard of value.
B) store of value.
C) medium of exchange.
D) unit of account.

27) Money that has no intrinsic value and is created by a government decree is called
A) barter money.
B) commodity money.
C) fiat money.
D) asset money.

28) What gives money value under a fiat system?

A) Fiat money is backed by gold.
B) The supply of fiat money is controlled by the government.
C) Fiat money is also a commodity.
D) Fiat money is the same as Treasury bonds.

29) Checking account balances are included in

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

30) Loans are examples of a bank's

A) assets.
B) liabilities.
C) net worth.
D) balance sheet.

31) The fraction of deposits that banks are required by law to hold and not lend out are called its
A) reserves.
B) excess reserves.
C) required reserves.
D) net worth.

32) By law, banks are required to

A) hold 100 percent of customer deposits as reserves.
B) hold a fraction of their reserves at the Federal Reserve bank.
C) hold a fraction of demand deposits as reserves.
D) lend out no more than the amount of their required reserves.

33) If the banking system has a required reserve ratio of 25 percent, then the money multiplier is
A) 2.
B) 4.
C) 5.
D) 10.

34) The money multiplier is equal to

A) the government spending multiplier.
B) the marginal propensity to consume.
C) the reserve ratio.
D) 1/(reserve ratio).

35) A bank may make loans until its

A) required reserves are exhausted.
B) excess reserves are exhausted.
C) total assets are exhausted.
D) total liabilities are exhausted.

36) Which of the following serves as the central bank for the United States?
A) the Federal Reserve System
B) the Treasury Department
C) the Federal Deposit Insurance Corporation
D) the Congress

37) The group responsible for deciding on monetary policy is the

A) Federal Open Market Committee.
B) Board of Governors only.
C) Federal Advisory Council.
D) group of 12 Federal Reserve Bank presidents only.

38) Studies by economists have tended to show that countries with more independent central banks
have
A) more inflation.
B) less inflation.
C) higher unemployment.
D) lower unemployment.

39) Generally, when the Federal Reserve lowers interest rates, investment spending ________ and GDP
________.
A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases

40) The nominal interest rate is determined in the

A) stock market.
B) money market.
C) exchange market.
D) bond market.

41) The opportunity cost of holding money is

A) heavy and awkward.
B) the probability of theft or loss.
C) the ease of conducting everyday business.
D) the return that could have been earned from holding wealth in other assets.

42) What is the motivation for individuals to hold money?

A) to reduce risk
B) to have liquidity
C) to facilitate transactions
D) all of the above

43) The one organization that has the power to change the total amount of reserves in the banking
system is the
A) Congress.
B) Executive Branch of the Federal Government.
C) U.S. Treasury.
D) Federal Reserve System.

44) From time to time, the Federal Reserve sells various quantities of government bonds to the private
sector through a process called
A) bond recall procedures.
B) backflip bond investments.
C) open market sales.
D) voluntary redemption procedures.

45) What would be a way for the Federal Reserve to stimulate a sluggish economy?
A) print more money
B) buy government bonds on the open market
C) sell more government bonds
D) encourage the stock market
46) To decrease the money supply using the reserve requirements, what would the Fed typically do?
A) raise the reserve requirement for banks
B) reduce the reserve requirement for banks
C) make each bank voluntarily set its own reserve levels
D) let each bank get less currency from the Treasury

47) The rate of interest charged to commercial banks by the Fed for loans is called the ________ rate.
A) federal funds
B) discount
C) prime
D) commercial paper

48) The federal funds rate is the interest rate that

A) the Fed charges to banks that borrow from it.
B) banks charge the Fed for using their reserves.
C) the Fed pays on bank reserves.
D) banks charge each other for borrowed money.

49) The Fed can change the money supply by buying or selling long-term Treasury bonds. Purchasing
long-term securities is commonly called
A) open market operations.
B) discount operations.
C) federal funds speculation.
D) quantitative easing.

50) If the Fed wished to decrease GDP, it could

A) increase the reserve requirement or conduct an open market sale.
B) increase the reserve requirement or conduct an open market purchase.
C) decrease the reserve requirement or conduct an open market sale.
D) decrease the reserve requirement or conduct an open market purchase.

51) An open market sale by the Fed causes the value of the dollar to
A) rise, increasing net exports.
B) rise, reducing net exports.
C) fall, increasing net exports.
D) fall, reducing net exports.

52) The ability of one person or nation to produce a good at a lower absolute cost than another is called
a(n)
A) market advantage.
B) comparative advantage.
C) absolute advantage.
D) specialization advantage.

53) The ability of one person or nation to produce a good at a lower opportunity cost than another is
called a(n)
A) market advantage.
B) comparative advantage.
C) absolute advantage.
D) specialization advantage.

54) Trade results from

A) comparative advantage.
B) absolute advantage.
C) self-sufficiency.
D) diminishing returns.

55) A rich nation will trade with a poor nation because the
A) rich nation has the absolute advantage in producing all products.
B) poor nation has the absolute advantage in producing all products.
C) poor nation has the comparative advantage in producing a product.
D) rich nation has the comparative advantage in producing all products.

56) When a U.S. company shifts some of its production to Mexico, it is engaging in
A) outsourcing.
B) insourcing.
C) self-sufficiency.
D) involuntary exchange.

57) An import quota

A) limits the amount of a good that can be imported, thus decreasing prices.
B) limits the amount of a good that can be imported, thus increasing prices.
C) increases the amount of a good imported, thus decreasing prices.
D) increases the amount of a good imported, thus increasing prices.

58) A(n) ________ is a tax on an imported good.

A) tariff
B) import quota
C) voluntary export restraint
D) export quota

59)The rate at which one currency can be traded for another is called the
A) terms of trade.
B) transfer rate.
C) exchange rate.
D) coupon rate.

60) An appreciation is
A) a decrease in the value of currency.
B) a decrease in the trade deficit.
C) an increase in the trade surplus.
D) an increase in the value of currency.

61) Spending on goods from a country will ________ as the value of its currency gets cheaper against
the U.S. dollar.
A) decrease
B) increase
C) reverse
D) go to other countries

62) A currency system in which governments try to keep the values of their currencies constant against
another is called a ________ exchange rate system.
A) fixed
B) stable
C) consistent
D) flexible

63) A country undertakes a devaluation in order to

A) increase its net exports.
B) decrease its net exports.
C) raise the value at which its currency is pegged.
D) move to a flexible exchange rate system.

FROM THE NOTES

Figure 9-15

64) Refer to Figure 9-15. Consumer surplus with trade and without a tariff is
a. A.
b. A + B.
c. A + C + G.
d. A + B + C + D + E + F.

65) Refer to Figure 9-15. Consumer surplus with the tariff is

a. A.
b. A + B.
c. A + C + G.
d. A + B + C + D +E + F.

66) Refer to Figure 9-15. The amount of government revenue created by the tariff is
a. B.
b. E.
c. D + F.
d. B + D + E + F.

67) Refer to Figure 9-15. As a result of the tariff, there is a deadweight loss that amounts to
a. B.
b. E.
c. D + F.
d. B + D + E + F.