Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose government has a budget deficit of $500 billion. If there is no Ricardo-Barro effect, what occurs? A) The supply of loanable funds curve shifts leftward, the interest rate rises, and the quantity of loanable funds decreases. B) The supply of loanable funds curve shifts rightward, the interest rate falls, and the quantity of loanable funds increases. C) The demand for loanable funds curve shifts leftward, the interest rate falls, and the quantity of loanable funds decreases. D) The demand for loanable funds curve shifts rightward, the interest rate rises, and the quantity of loanable funds increases. E) The supply of loanable funds curve shifts leftward, the interest rate rises, and the quantity of loanable funds increases. 2) A country initially has an equilibrium real interest rate of 4 percent and an equilibrium quantity of investment of $2 trillion. The government then runs a budget deficit. According to the crowding-out effect, the A) demand for loanable funds curve shifts leftward, the real interest rate falls, and investment increases. B) supply of loanable funds curve shifts rightward, the real interest rate rises, and investment increases. C) demand for loanable funds curve shifts rightward, the real interest rate falls, and investment increases. D) supply of loanable funds curve shifts leftward, the real interest rate falls, and investment decreases. E) supply of loanable funds curve shifts leftward, the real interest rate rises, and investment decreases. 1) 2) 3) Government saving is equal to 3) A) the quantity of investment demanded. B) net taxes plus government expenditures. C) net taxes. D) net taxes minus government expenditures. E) private savings minus government expenditures. 4) If expectations about future disposable income change, there is 4) A) no change in saving until disposable income actually changes. B) a change in the quantity of loanable funds supplied and a movement along the supply of loanable funds curve. C) a decrease in saving if people expect disposable income to increase in the future. D) a decrease saving if people expect disposable income to decrease in the future. E) an increase in saving if people expect disposable income to increase in the future. 1
5) During 2009, suppose a country's total purchases of newly produced capital goods is $2,000 billion, issues $1,600 billion of stock, and has $500 billion in depreciation. Gross investment in this country equals A) $2,500 billion. B) $2,100 billion. C) $4,100 billion. D) $2,000 billion. E) $3,600 billion. 5) 6) The demand for loanable funds curve shifts rightward when 6) A) expected profit decreases. B) the real interest rate rises. C) the real interest rate falls. D) expected profit increases. E) wealth rises. 7) The supply of loanable funds curve has a slope and the demand for loanable funds curve has a slope. A) vertical; horizontal B) positive; negative C) positive; positive D) negative; positive E) negative; negative 8) Suppose the government has a budget deficit of $2 billion. If the Ricardo-Barro effect is correct, then how much crowding out of investment occurs? A) more than $2 billion B) exactly equal to $2 billion dollars C) no crowding out occurs and investment does not change D) no crowding out occurs because investment increases by $2 billion E) some crowding out occurs, but less than $2 billion 9) Crowding out can occur when a government budget raises the real interest rate and the equilibrium quantity of investment. A) deficit; increases B) surplus; increases C) deficit; decreases D) surplus; decreases E) surplus; does not change 7) 8) 9) 2
10) The figure above shows the loanable funds market. If the real interest rate equals 8 percent, then the 10) A) demand for loanable funds exceeds the supply of loanable funds. B) quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. C) quantity of loanable funds supplied exceeds the quantity of loanable funds demanded. D) supply of loanable funds exceeds the demand for loanable funds. E) demand for loanable funds curve will shift rightward. 11) The local Allied Moving Company begins 2008 with capital equal to $250,000. During 2008 the firm depreciates $150,000 worth of its capital and ends 2008 with capital equal to $250,000. Which statement correctly summarizes Allied Moving Company's investment? A) Allied Moving Company made no capital investment during the year. B) Allied Moving Company made gross investment of $250,000 during the year. C) Allied Moving Company made net investment of $150,000 during the year. D) Allied Moving Company made no gross investment during the year. E) Allied Moving Company made no net investment during the year. 12) When part of a bank loan does not return to the banking system but rather remains outside the banking system as currency, then the money multiplier in size and the amount of money created by an open market operation. A) does not change; increases B) increases; increases C) increases; decreases D) decreases; decreases E) decreases; does not change 11) 12) 13) The unit of account is defined as 13) A) an object that is accepted in return for goods and services. B) barter. C) the medium of exchange. D) the exchange of goods and services directly for other goods and services. E) an agreed upon measure for stating prices of goods and services. 14) Assume First Central Bank has a required reserve ratio of 15 percent; $80,000 in total deposits, loans equal to $60,000, and has $20,000 in actual reserves. First Central can make additional loans totaling A) $8,000. B) $80,000. C) $60,000. D) $12,000. E) $20,000. 14) 3
15) The goal of a commercial bank is to 15) A) accept only deposits made in money. B) make only safe, no-risk loans. C) maximize wealth for its stockholders. D) minimize its taxes paid to state governments. E) establish good regulations for commercial activities. 16) Because the Federal Reserve System is a central bank, it provides banking services to 16) A) businesses only. B) the government only. C) commercial banks. D) no one. E) consumers and business. 17) A debit card is 17) A) money because it is a means of payment. B) not money because it is not officially issued by the government. C) not money but transfers bank deposits which are money. D) money because it is generally accepted as a means of payment. E) part of the M2 money supply but not part of the M1 money supply. 18) The Federal Reserve System is organized into 18) A) three districts, one for each of the countries in North America. B) 12 districts, dividing up the countries in North America. C) 12 districts, dividing up the United States. D) 50 districts, one per state. E) one large district covering the entire United States. 19) The magnitude of the monetary multiplier is determined 19) A) by neither the Fed nor the public. B) by both the Fed and the public. C) the Fed and the U.S. Congress. D) only by the public. E) only by the Fed. 20) In the long run, the real interest rate is 3 percent, real GDP grows at 4 percent, velocity is constant, and the quantity of money grows at 6 percent. The nominal interest rate is A) 3 percent. B) 5 percent. C) 6 percent. D) 4 percent. E) 10 percent. 21) If inflation is making it difficult for people to estimate the true marginal benefits and true marginal costs of activities, inflation is leading to A) increased economic growth. B) shoe-leather costs. C) confusion costs. D) uncertainty costs. E) tax costs. 20) 21) 4
22) The supply of money curve is 22) A) horizontal because the Fed controls the quantity of money supplied. B) downward sloping, showing the negative influence of interest rates. C) upward sloping, showing the influence of interest rates. D) vertical because the quantity of money is fixed at any one point. E) horizontal because interest rates are fixed at any one point. 23) In the above figure, a movement from point A to point B represents 23) A) an increase in the quantity of money demanded. B) a decrease in the quantity of money demanded. C) an increase in the demand for money that might be the result of a fall in the price level. D) a decrease in the demand for money that might be the result of a fall in the price level. E) an increase in the demand for money that might be the result of an increase in real GDP. 24) Assume you have a credit card balance of $2,000 at 15 percent and the inflation rate is 3 percent. What are the nominal and real interest rates? A) 15 percent nominal and 12 percent real B) 3 percent nominal and 12 percent real C) 15 percent nominal and 18 percent real D) 12 percent nominal and 15 percent real E) 15 percent nominal and 3 percent real 25) If saving supply decreases, the equilibrium real interest rate and the equilibrium quantity of investment. A) falls; increases B) rises; decreases C) rises; increases D) falls; decreases E) does not change; does not change 24) 25) 5
26) During 2001, the United States federal government had a budget surplus. If there is no Ricardo-Barro effect, a budget surplus A) decreases total supply of loanable funds. B) decreases the demand for loanable funds. C) has no effect on the total supply of loanable funds. D) increases total supply of loanable funds. E) increases the demand for loanable funds. 26) 27) If there is no Ricardo-Barro effect, the government 27) A) has no effect because private saving changes to offset the effect that the government's budget deficit or surplus might otherwise have. B) plays no direct role in the loanable funds market because it doesn't affect either the demand for loanable funds or the supply of loanable funds. C) either increases or decreases total supply of loanable funds as its budget deficit or surplus shifts the supply of loanable funds curve. D) always has negative saving and therefore lowers the real interest rate. E) only affects the demand for loanable funds curve in the loanable funds market. 28) If the Fed makes an open market purchase of $1 million of government securities, the monetary base A) is increased by $1 million. B) is unchanged in size, though its composition changes. C) will decrease by a multiple of $1 million over time. D) will increase by a multiple of $1 million over time. E) is decreased by $1 million. 28) 29) The discount rate is the 29) A) name of the interest rate banks charge their most credit-worthy borrowers. B) rate banks charge the Fed when the Fed borrows from the banks. C) the interest paid on U.S. government securities. D) interest rate that banks must pay when they borrow reserves from the Fed. E) banks' real interest rate. 30) In the long run, an increase in the quantity of money, other things remaining the same, 30) A) decreases the price level. B) increases real GDP. C) increases the price level. D) decreases real GDP. E) has no effect on the price level or real GDP. 6
31) In the above figure, a movement from point B to point C represents 31) A) an increase in the demand for money that might be the result of an increase in real GDP. B) a increase in the quantity of money demanded. C) an increase in the demand for money that might be the result of a fall in the price level. D) a decrease in the demand for money that might be the result of an increase in real GDP. E) a decrease in the quantity of money demanded. 32) Suppose the government has a budget deficit of $2 billion. If there is no Ricardo-Barro effect, how much crowding out of investment occurs? A) exactly equal to $2 billion dollars B) no crowding out occurs because investment increases C) no crowding out occurs and investment does not change D) some crowding out occurs, but less than $2 billion E) more than $2 billion 32) 33) Barter requires the 33) A) use of commodity money as a medium of payment. B) use of fiat money as a medium of exchange. C) use of money as a unit of account. D) exchange of goods and services directly for other goods and services. E) the triple non-coincidence of wants. 34) Inflation decreases the growth of capital because i. when the after-tax real interest rate falls, savings decreases. ii. velocity increases when inflation increases. iii. the higher the inflation rate, the higher is the true income tax rate on income from capital. A) iii only B) i only C) i and iii D) ii only E) i, ii, and iii 34) 7
35) Lulu purchased a security that promises to pay $50 twice a year from January 15, 2009 to January 15, 2013 and then pay $1,000 on January 15, 2013. The security is a debt to the company that issued it. The security is a A) bond. B) physical capital. C) share of stock. D) net investment to the company that issued it. E) depreciating asset. 35) 8