Question 1

A bank has total deposits of $$500,000 and reserves of 75$$,000. If the required reserve ratio is 10%, what are the bank's excess reserves?

Accepted Answer

$25,000

Question 2

Suppose the required reserve ratio is 10% and a bank has $25,000 in excess reserves. What is the maximum potential increase in the money supply for the entire banking system?

Accepted Answer

$250,000

Question 3

If the Federal Reserve purchases $20,000 worth of bonds from a bank, what is the immediate effect on the bank's balance sheet?

Accepted Answer

Reserves increase by $$20,000; bonds decrease by 20$$,000

Question 4

If the U.S. economy is at potential output and foreign economies slow dramatically, which fiscal policy is most appropriate?

Accepted Answer

Increase government spending or cut taxes to offset falling net exports

Question 5

Suppose the economy is operating above potential output, causing inflationary pressures. Which fiscal policy should be implemented?

Accepted Answer

Decrease government spending or increase taxes (contractionary fiscal policy)

Question 6

A new technology significantly raises potential output. What is the likely effect on the long-run aggregate supply (LRAS) curve?

Accepted Answer

The LRAS curve shifts to the right

Question 7

If the Fed conducts an open market sale, what is the effect on interest rates and the money supply?

Accepted Answer

Interest rates rise and the money supply decreases

Question 8

Using the rule of 70, how many years will it take for a country’s real GDP to double if it grows at 5% per year?

Accepted Answer

14 years

Question 9

Which of the following is NOT a component of gross private domestic investment?

Accepted Answer

The purchase of stock in a company

Question 10

Suppose households decide to save more at every income level. What is the likely effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the left

Question 11

If the Fed wants to stimulate aggregate demand, which open market operation should it conduct?

Accepted Answer

Purchase government bonds to raise bond prices and lower interest rates

Question 12

Which of the following best describes the functions of money?

Accepted Answer

A store of value, a unit of account, and a medium of exchange

Question 13

Which of the following is an example of an investment in human capital?

Accepted Answer

Enrolling in a course to improve your computer skills

Question 14

Suppose the Fed wants to decrease the money supply to fight inflation. Which action should it take?

Accepted Answer

Sell government bonds in the open market

Question 15

If the cost of raw materials falls, what is the likely short-run effect on the economy using the AD-AS model?

Accepted Answer

Aggregate supply shifts right, price level falls, real GDP rises

Question 16

Which of the following is an example of a bank’s liability?

Accepted Answer

Checkable deposits

Question 17

If the required reserve ratio is $$r$$, and a bank receives a new deposit of $$D$$, what is the maximum amount the bank can lend out?

Accepted Answer

$$D 	imes (1 - r)$$

Question 18

Which of the following best explains why a $$10$$ billion increase in transfer payments has a smaller impact on aggregate demand than a $$10$$ billion increase in government purchases?

Accepted Answer

Households save part of an increase in income, but all government purchases are spent

Question 19

If the Fed wants to achieve a specific federal funds rate, what must it do?

Accepted Answer

Adjust the money supply to achieve the target rate

Question 20

During an economic expansion, what is the automatic effect on the government budget?

Accepted Answer

Higher tax revenues increase a budget surplus or reduce a budget deficit

Principles of Macroeconomics Exam #2 Review – Guided Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards