Questions:
1. The tax multiplier associated with a $10B reduction in taxes is _______ the spending multiplier associated with a $10B increase in government spending because __________
a. the same quantity as / a tax change will either put more income into or out of savings
b. smaller than / a tax change also involves a change in savings in the first round of spending
c. larger than / taxes cause more discretionary income to be spent whether it is a tax increase or a tax decrease
d. smaller than / the tax multiplier is usually very unstable
2. Each year the Tax Foundation calculates the day of the year the average income earner has to work in order to pay taxes. This is known as Tax Freedom Day. Last year's date, April 26, was three days later than the previous year's. The Tax Foundation says this is because of economic growth leading to higher incomes and higher taxes.
This observation makes sense since our income tax system is progressive and therefore ___________. This is also consistent with ____________.
a. takes a higher percent of income, the greater one's income - how automatic stabilizers work
b. takes a lower percent of income, the greater one's income - how automatic stabilizers work
c. takes a higher percent of income, the greater one's income - the discretionary tools of fiscal policy
d. takes a lower percent of income, the greater one's income - monetary policy
3. A house is a ______________ asset, and therefore this means that it takes ________ to recover its true value in the marketplace.
a. liquid -- much time
b. non-liquid -- much time
c. liquid - very little time
d. non-liquid -- very little time
4 ."An increase in national income increases aggregate demand more than the initial increase in spending." The preceding statement describes
a. microeconomic supply and demand curves.
b. macroeconomic supply and demand curves.
c. the spending multiplier.
d. the money multiplier.
e. both c) and d) are correct.
5. If the Fed buys $1,000 worth of bonds and the banking multiplier is 8, then
a. the reserve ratio is 12.5 percent.
b. the potential money supply increase is greater than $1,000.
c. there must also be a government spending increase or the Fed would not be buying the bonds.
d. all of the above.
e. both a) and b) are correct.
6. Both fiscal and monetary policy affect the money supply.
a. true
b. false
7. The Fed is considered "autonomous." In practice this means the Board of Governors
a. run for reelection every 4 years.
b. are more insulated from the wishes of the voters than Congress.
c. are less insulated from the wishes of the voters than Congress.
d. can do whatever they please since they have lifetime appointments.
8. Which of the policy combinations given below would consistently work in the direction of decreasing the rate of growth of the money supply?
a. Raise the discount rate, lower the reserve requirement and engage in open market sales.
b. Lower the discount rate, lower the reserve requirement and engage in open market purchases.
c. Lower the discount rate, raise the reserve requirement and engage in open market sales.
d. Raise the discount rate, raise the reserve requirement and engage in open market sales.
e. Raise the discount rate, raise the reserve requirement and engage in open market purchases.
9. Which of the following is associated with the sale of an open market security by the Fed?
a. Banks gain more excess reserves.
b. Interest rates increase.
c. Investment increases.
d. All of the above
10. What happens when a person initially makes a deposit into a checking account? (Assume the bank has yet to make a loan.)
a. The money supply has increased.
b. M1 has increased; but not M2.
c. M1 has remained the same.
d. Both a) and c) are correct.
Match the following. This is based on the macroeconomic "Schools of Thought" handout.
11. fooling workers with money illusion
12. efficiency wages
13. menu costs and efficiency wages
14. crowding out
Choices. One choice is not used.
a. reasons why price and wage falls do not occur quickly
b. why fiscal policy is ineffective according to the monetarists
c. The only reason why the unemployment can deviate from the natural rate of unemployment
d. Produces a negatively sloped Phillips' Curve effect in both the long-run and short-run
e. Insurance against workers shirking
15. Monetarism gained prominence in the 1970s because of which simultaneous problems that economic policy seemed unable to solve?
a. inflation and unemployment
b. inflation and poor quality goods
c. unemployment and poor quality goods
d. unemployment and too slow a rate of growth of the money supply
16. The monetarists argue that monetary policy should be structured so that the money supply grows at an annual rate of 3 to 5 percent. Which of the following is consistent with the monetarist policy rule?
a. Monetary policy has no real effect on spending and output. Fiscal policy is what affects output.
Therefore monetary policy should be passive.
b. There is no way out of the business cycle.
c. The Fed should not be making discretionary judgment about how much the money supply should grow.
d. Both a) and c) are correct.
17. The accelerationism model is an alternative interpretation of the ___________ model that was presented in class.
a. supply-side
b. Phillips' Curve
c. supply and demand
d. both b) and c) are correct.
18. The accelerationism model says that fiscal and monetary policy
a. can never affect the level of employment.
b. can affect the level of employment only in the short run.
c. can affect the level of employment only in the long run.
d. can affect the level of employment both in the short run and long run.
19. The natural rate of unemployment can occur
a. only with low inflation rates.
b. only with high inflation rates.
c. only with zero inflation.
d. at any inflation rate.
20. The natural rate of unemployment
a. can never change in quantity.
b. can change in quantity through fiscal and monetary policy.
c. can change in quantity but by some other means than fiscal and monetary policy.
d. can change in quantity with a shift of the aggregate demand curve.
21. The Laffer curve of supply-side economics shows that decreasing tax rates
a. will always increase tax revenue.
b. will never increase tax revenue.
c. may increase tax revenue if it has a favorable effect on work and investment incentives.
d. may increase tax revenue if it has an unfavorable effect on work and investment incentives.
22. Consider the equation MV=PQ. Assume that only V is constant (Q can vary.) If the money supply increases, which of the following must increase?
a. P
b. Q
c. Both P and Q
d. P times Q
23. In the simple model of the supply and demand for money, the money supply is drawn as a vertical line. The assumption behind the shape is
a. banks are more willing to lend as the interest rate increases.
b. banks are less willing to lend as the interest rate increases.
c. the Fed determines the money supply.
d. both a) and c) are correct.
24. Bonds are a good buy when interest rates are relatively high since that also implies
a. the price of bonds are low.
b. the price of bonds are high.
c. the real rate of interest is lower than the nominal rate.
d. both a) and c) are correct.
25. In the liquidity trap
a. all increases in the money supply go into transaction balances.
b. some of the increase in the money supply goes into transaction balances; some of it goes into speculative balances.
c. all increases in the money supply go into speculative balances.
d. an increase in the money supply lowers interest rates.
e. both c) and d) are correct.
26. The liquidity trap calls into the question the effectiveness of _________when interest rates are relatively _______.
a. monetary policy -- high
b. monetary policy -- low
c. fiscal policy -- high
d. fiscal policy -- low
27. An ideal supply side fiscal policy shifts aggregate _________ to the ____________.
a. demand / right
b. demand / left
c. supply / right
d. supply / left
The following three questions are based on the video Inside Job
28. The evil(s) that the video implies caused the housing and banking crisis was (were)
a. deregulation.
b. the Glass-Steagall Act.
c. outdated regulations.
d. both b) and c) are correct.
29. Which of the following is (are) true?
a. The Glass-Steagall Act overturned the Gramm-Leach-Bliley Act.
b. The Gramm-Leach-Bliley Act overturned the Glass-Steagall Act
c. The Glass-Steagall and Gramm-Leach-Bliley Act Acts came out about the same time but had contradictory aims.
d. The Glass-Steagall Act put a wall between commercial banking and the savings and loan industry.
e. Both a) and d) are correct.
30. The former Federal Reserve chair interviewed in the video who was critical of the growth of the financial system was ____________. The country mentioned in the video which suffered severely from its own housing and banking crisis was _______.
a. Paul Volcker - Spain
b. Alan Greenspan - Spain
c. Paul Volcker - Iceland
d. Alan Greenspan - Iceland
e. Tim Geithner - Mexico
The following four questions are based on COMMANDING HEIGHTS, "The Battle of Ideas."
31. Hayek's ROAD TO SERFDOM
a. showed that any type of economic intervention, even something as seemingly benign as what Keynes proposed, would eventually lead to a loss of freedom.
b. that as long as a society stayed away from Marxian socialism then government intervention into the economy was not harmful to freedom.
c. endorsed Keynes' GENERAL THEORY as the correct blueprint for running an economy.
d. said that no economy could operate efficiently without government planning.
32. Because of the hyperinflation of Germany in the 1920s
a. money was cheaper than wallpaper.
b. the savings rate increased.
c. wallpaper was cheaper than money.
d. there was continuous rounds of deflation.
33. Hayek's belief about macroeconomics was
a. he accepted monetarism but not Keynesian macroeconomics.
b. he did not believe in macroeconomics.
c. he treated macroeconomics as a complement to the free market beliefs of microeconomics.
d. he accepted any nonactivist macroeconomic school of thought.
34. The battle of ideas according to the video was won by __________. If we consider the Obama stimulus policy dominating macroeconomic thinking ______ won the battle of ideas.
a. Hayek - Keynes
b. Keynes - Hayek
c. Hayek - also Hayek
d. Keynes -- also Keynes
35. Why can the supply curve of wages be horizontal?
a. There are rigid downward.
b. Some industries pay efficiency wages.
c. They are based on the law of supply of labor.
d. both a) and b) are correct.
36. If the supply curve of wages is horizontal, then a decrease in demand for labor means
a. more unemployment and lower wages.
b. less unemployment and lower wages.
c. more unemployment and the same wage.
d. the same amount of unemployment and the same wage.
37. The article by the St. Louis Federal Reserve on professor productivity makes a total of four suggestions for increasing professor flexibility. One suggestion of the article is to make professors more productive by increasing __________ quality. Another is to increase ___________.
a. student -- class size
b. student -- flexibility of staffing
c. administrator - faculty pay
d. administrator - flexibility of staffing
38. An increase in ______ will cause economic growth, and economic growth will increase _______GDP.
a. the money supply - nominal
b. the money supply - real
c. labor productivity - nominal
d. labor productivity - real
39. Consider a period in which there is an alleged housing bubble. The frustration of NOT buying a house may be
a. the bubble may soon burst.
b. missing the last chance to buy an affordable house.
c. the Fed will ruin the appreciation of the asset value due to expansionary monetary policy.
d. fiscal policy will become contractionary.
40. Assume that initially the exchange rate for a dollar to a British pound is 1:1. If less Americans decide to visit Great Britain, then which of the following is an example of what might happen?
a. Under a flexible exchange rate system, the dollar now exchanges for 3 pounds
b. Under a flexible exchange rate system, the dollar now exchanges for 1/2 pound.
c. Under a fixed exchange rate system, there could be a surplus of pounds and a shortage of dollars if there is no exchange rate adjustment.
d. Both a) and c) are correct.
e. Both b) and c) are correct.
41. A central bank can uphold a fixed-exchange rate, but a possible negative consequence can be more unemployment.
a. true
b. false
42. Fiscal policy refers to the idea that total economic output and unemployment can be affected by changes
a. in the money supply.
b. in government spending and taxes.
c. in trade policy.
d. none of the above is correct.
43. Which of the following is not included in M1?
a. a $50 bill in your wallet.
b. $50 in your checking account.
c. $50 in your savings account.
d. a $50 bill in your friend's wallet.
44. An open market purchase of government bonds by the Federal Reserve results in __________ in the supply of money and __________ in interest rates.
a. an increase; a decrease.
b. a decrease; a decrease.
c. an increase; an increase.
d. a decrease; an increase.
45. When the U.S. central bank, the Federal Reserve, increases the supply of money:
a. U.S. interest rates fall which cause the U.S. dollar to depreciate against other currencies.
b. U.S. interest rates rise which cause the U.S. dollar to depreciate against other currencies.
c. U.S. interest rates fall which cause the U.S. dollar to appreciate against other currencies.
d. U.S. interest rates rise which cause the U.S. dollar to appreciate against other currencies.
46. Other things the same, if the exchange rate changes from 120 yen per dollar to 100 yen per dollar
a. Japanese made products will become cheaper for U.S. consumers.
b. U.S. made products will become cheaper for Japanese consumers.
c. exports from the U.S. to Japan will fall.
d. exports from Japan to the U.S. will rise.
47. The following passage is from Keynes' letter to President Roosevelt, which you read for the midterm exam. Take the statement and reword it in your own words. (Make it as easy to understand as possible.) Each statement should be no more than 20 words.
"It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor."
48. Find a recent newspaper editorial that applies to what we have studied. You need not turn in the article, but give the title of the article, date, source and columnist name if applicable. Then do the following:
a. Summarize the article in 50 words or less.
b. Take a statement in the article that you consider a positive statement. Reword in if, then form. The statement should be no more than 15 words.
c. Find one normative statement in the article OR tell what you think are the normative implications of the article.
d. Do you think it takes an activist stance or nonactivist stance? You may justify your response either by quoting one or several statements directly from the article (Put in quotation marks.) OR by writing a short paragraph (50 word-limit) justifying your response.