ECON 2002.01 Study Guide - Midterm Guide: Federal Funds Rate, United States Treasury Security, Deflation

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Published on 28 Sep 2018
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Midterm 3 MASP15-1 Name __________________________________
Be certain that you have the correct scantron for your exam. Fill out your last name and first
name on the scantron sheet, including the bubbles. Fill in your answers on the scantron sheet.
1) The Federal Reserve System's four monetary policy goals are
A) low government budget deficits, low current account deficits, high employment, and a high
foreign exchange value of the dollar.
B) low rate of bank failures, high reserve ratios, price stability, and economic growth.
C) price stability, high employment, economic growth, and stability of financial markets and
institutions.
D) price stability, low government budget deficits, low current account deficits, and low rate of
bank failures.
2) The federal funds rate is
A) the interest rate the Fed charges commercial banks.
B) the interest rate a bank charges its best customers.
C) the interest rate banks charge each other for overnight loans.
D) the interest rate on a Treasury Bill.
3) In the figure above suppose the economy is initially at point A. The movement of the
economy to point B as shown in the graph illustrates the effect of which of the following policy
actions by the Federal Reserve?
A) a decrease in income taxes
B) an increase in the required reserve ratio
C) an open market purchase of Treasury bills
D) an open market sale of Treasury bills
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4) Expansionary monetary policy to prevent real GDP from falling below potential real GDP
would cause the inflation rate to be ________ and real GDP to be ________.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
5) While many analysts defended the actions taken by the Fed and the Treasury to respond to
the financial crisis in 2008, others were critical of these actions. The critics were concerned that
by not allowing large firms to fail,
A) smaller firms will resent not receiving similar assistance.
B) stockholders and bondholders of these firms were not allowed to receive the proceeds from
the sale of assets that would have occurred if the firms had declared bankruptcy.
C) there is an increased likelihood that other firms will engage in risky behavior in the future
with the expectation that they will also not be allowed to fail.
D) there will be less competition in the U.S. economy, which could led to higher prices for
consumers.
6) In the graph above, suppose the economy is initially at point A. The movement of the
economy to point B as shown in the graph illustrates the effect of which of the following policy
actions by the Congress and the president?
A) a decrease in income taxes
B) a decrease in interest rates
C) a decrease in government purchases
D) an increase in the money supply
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7) From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run
and short-run aggregate supply such that real GDP is expected to be below full employment
GDP, then Congress and the president would most likely
A) increase the required reserve ratio and decrease government spending.
B) decrease government spending.
C) decrease oil prices.
D) decrease taxes.
E) lower interest rates.
8) An increase in government purchases of $200 billion (assuming a positive multiplier effect)
will shift the aggregate demand curve to the right by
A) $200 billion.
B) less than $200 billion.
C) more than $200 billion.
D) None of the above are correct. This policy shifts the long-run aggregate supply curve.
9) The use of fiscal policy to stabilize the economy is limited because
A) changes in government spending and tax rates have a small effect on aggregate demand.
B) changes in government spending and tax rates have a small effect on interest rates.
C) the legislative process can be slow, which means that it is difficult to make fiscal policy
actions in a timely way.
D) the Internal Revenue Service (IRS) (the tax collecting agency for the U.S.) resists changes in
tax rates because of all the changes they would have to make to the tax code.
10) Suppose the government wants to maintain a balanced budget. To achieve this goal, when
the economy falls into recession government would need to ________ taxes in order to
maintain revenue, which would cause aggregate demand to ________.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
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