Question 1

Suppose the Federal Reserve lowers interest rates. According to the aggregate demand and aggregate supply model, what is the most likely short-run effect on inflation and GDP growth?

Accepted Answer

Higher inflation and higher GDP growth

Question 2

Smalltown Bank sees its deposits fall by $100. If the bank maintains a 10% reserve ratio, what is the immediate effect on its balance sheet?

Accepted Answer

Assets and liabilities both decrease by $100

Question 3

If a bank is not in compliance with the 10% reserve requirement and has $$4,900 in deposits but only 400 in $$reserves, how much does it need to borrow to meet the requirement?

Accepted Answer

$90

Question 4

Smalltown Bank borrows $90 from Big City Bank for one night to meet its reserve requirement. What interest rate will it pay?

Accepted Answer

The Fed Funds rate

Question 5

The Federal Reserve is targeting a fed funds rate of 4%, but banks are currently paying each other 3% to borrow money overnight. What should the Fed do to reach its target?

Accepted Answer

Sell bonds

Question 6

Which of the following best describes the role of a progressive income-tax system during a recession?

Accepted Answer

It serves as an automatic stabilizer for the economy

Question 7

Suppose the government decreases taxes. On an aggregate demand and aggregate supply diagram, how is this best illustrated?

Accepted Answer

Shift from AD$$_1 to AD$_2$$

Question 8

U.S. exports create a ____ in the foreign exchange markets.

Accepted Answer

supply of foreign currencies and a demand for dollars

Question 9

If the demand for pesos decreases in the exchange rate market, what happens to the price of pesos in dollars?

Accepted Answer

The price of pesos decreases

Question 10

Which of the following is a real-world example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment insurance payments

Question 11

If Senegal goes from importing almost all of its strawberries to producing most of them domestically, what is the most likely effect on its balance of trade?

Accepted Answer

Its imports will decrease, improving its trade balance

Question 12

Which of the following actions by the Fed would most likely decrease the money supply?

Accepted Answer

Selling government bonds

Question 13

If the reserve requirement is 10%, what is the maximum potential increase in the money supply from a $$1,000 deposit? Use the money multiplier formula m$$ = \frac{1}{r}$.

Accepted Answer

$$9,000$$

Question 14

Which of the following would most likely cause the aggregate demand curve to shift to the right?

Accepted Answer

A decrease in taxes

Question 15

If the Fed wants to lower the federal funds rate, which open market operation should it conduct?

Accepted Answer

Buy government bonds

Question 16

A tariff on Mexican automobiles would most likely have which effect on the exchange rate between the U.S. dollar and the Mexican peso?

Accepted Answer

Decrease demand for pesos, causing the peso to depreciate

Question 17

Which of the following best describes 'crowding out' in the context of fiscal policy?

Accepted Answer

Government borrowing raises interest rates, reducing private investment

Question 18

If the Fed increases the discount rate, what is the most likely effect on bank lending and the money supply?

Accepted Answer

Bank lending decreases and the money supply contracts

Question 19

Which of the following is NOT a tool of monetary policy used by the Federal Reserve?

Accepted Answer

Changing income tax rates

Question 20

Suppose the government increases spending by $$500 million and the marginal propensity to consume (MPC) is 0.8. What is the total increase in GDP, using the multiplier formula $$	ext{Multiplier} = \frac{1}{1 - MPC}$?

Accepted Answer

$$2,000$$ million

Macroeconomics Midterm 3: Application and Review Study Notes

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