Some economists have advocated replacing government deposit insurance with
100-percent- reserve banking. Under this plan, banks would hold all deposits as
reserves. Deposit insurance would no longer be necessary, because banks would always
have the reserves to meet customer withdrawals.
a. What would happen to the money supply (defined as currency and bank deposits) in
the transition from fractional-reserve to 100-percent-reserve, if this plan were
implemented, holding other factors constant?
b. What will be the value of the money multiplier?
According to the Taylor rule, when real GDP is below its natural level, the nominal
federal funds rate should be _____, and when inflation exceeds 2 percent, the nominal
federal funds rate should be _____.
A) raised; raised
B) raised; lowered
C) lowered; raised
D) lowered; lowered
Which of the following is the best example of a sticky price?
A) the price of a barrel of oil
B) the price of the U.S. dollar in terms of euros
C) the price of a share of stock
D) the price of a soda in a vending machine
In the dynamic model, the supply shock variable, ut, is a variable appearing in which of
the following equations of the model?
A) Fisher equation
B) Phillips curve
C) monetary-policy rule
D) adaptive expectations
It is a national income accounting rule that all expenditure on purchases of products in
the economy is necessarily equal to:
A) profits of firms.
B) wages of employees.
C) income of the producers of the products in the economy.
D) income of employees.
When a pizza maker lists the price of a pizza as $10, this is an example of using money
as a:
A) store of value.
B) unit of account.
C) medium of exchange.
D) flow of value.
Exhibit: IS*”LM* and AD
(Exhibit: IS*”LM* and AD)A small open economy with a floating exchange rate is
initially in equilibrium at A with
Holding all else constant, if the domestic price level decreases, then the _____
curve will shift to _____.
A) LM1*;
B) LM1*;
C) IS1*;
D) IS1*;
According to the Fisher equation, the real interest rate equals the nominal interest rate
minus the:
A) natural rate of interest
B) expected rate of inflation
C) expected rate of interest
D) ex ante rate of interest.
Assume that a country experiences a reduction in productivity that shifts the labor
demand curve downward and to the left. If the real wage were rigid, this would lead to:
A) no change in the real wage and a rise in unemployment.
B) no change in the real wage and no change in unemployment.
C) no change in the real wage and a fall in unemployment.
D) a decrease in the real wage.
The long and variable lag before a policy influences the economy makes the job of
economic forecasters:
A) impossible.
B) easier.
C) less important.
D) more important.
A movement along an aggregate demand curve corresponds to a change in income in
the IS“LM model ______, while a shift in an aggregate demand curve corresponds to a
change in income in the IS“LM model ______.
A) resulting from a change in monetary policy; resulting from a change in fiscal policy
B) resulting from a change in fiscal policy; resulting from a change in monetary policy
C) at a given price level; resulting from a change in the price level
D) resulting from a change in the price level; at a given price level
In Irving Fisher’s two-period consumption model, if Y1 = 20,000, Y2 = 15,000, and the
interest rate r is 0.50 (50 percent), then the maximum possible consumption in period
one is:
A) 20,000.
B) 25,000.
C) 30,000.
D) 35,000.
All of the following assets are included in M1 except:
A) currency.
B) demand deposits.
C) traveler’s checks.
D) money market deposit accounts.
The circular flow model shows that households use income for:
A) consumption, saving, and factor payments.
B) consumption, taxes, and factor payments.
C) taxes, saving, and factor payments.
D) consumption, taxes, and saving.
In the Keynesian-cross model, a decrease in the interest rate ______ planned investment
spending and ______ the equilibrium level of income.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Exhibit: The Capital”Labor Ratio
In this graph, starting from capital”labor ratio k1, the capital”labor ratio will:
A) decrease.
B) remain constant.
C) increase.
D) first decrease and then remain constant.
The IS“LM model simultaneously determines equilibrium in two markets.
a. Which two markets?
b. What two variables adjust to bring equilibrium in the markets?
According to Modigliani’s life-cycle hypothesis, if a consumer wants equal
consumption in every year and the interest rate is zero, then the marginal propensity to
consume out of wealth ______ as years ______ decrease.
A) increases; of life remaining
B) decreases; of life remaining
C) increases; until retirement
D) decreases; until retirement
The core inflation rate:
A) measures the change in producer prices.
B) is measured using a Paasche index.
C) excludes food and energy prices.
D) includes the price of exports and includes the price of imports.
When the demand for money parameter, k, is large, the velocity of money is ______
and money is changing hands ______
A) large; frequently
B) large; infrequently
C) small; frequently
D) small; infrequently
Data on unemployment in the United States show that:
A) most spells of unemployment are long.
B) most weeks of unemployment are attributable to the long-term unemployed.
C) members of the labor force over age 55 have the highest unemployment rates.
D) the duration of unemployment falls during recessions.
If the production function describing an economy is Y = 100 K.25L.75, then the share of
output going to labor:
A) is 25 percent.
B) is 75 percent.
C) depends on the quantities of labor and capital.
D) depends on the state of technology.
According to the Keynesian-cross analysis, if MPC stands for marginal propensity to
consume, then a rise in taxes of DT will:
A) decrease equilibrium income by DT.
B) decrease equilibrium income by DT/(1 ” MPC).
C) decrease equilibrium income by (DT)(MPC)/(1 ” MPC).
D) not affect equilibrium income at all.
Prices of items included in the CPI are:
A) averaged with the price of every item weighted equally.
B) weighted according to amount of the item produced in GDP.
C) weighted according to quantity of the item purchased by the typical household.
D) chained to the base year by the year-to-year growth rate of the item.
The equation may be solved for the equilibrium level of:
A) income.
B) consumption.
C) government purchases.
D) the interest rate.
If the production function exhibits increasing returns to scale in the steady state, an
increase in the rate of growth of population would lead to:
A) growth in total output and growth in output per worker.
B) growth in total output but no growth in output per worker.
C) growth in total output but a decrease in output per worker.
D) no growth in total output or in output per worker.
The quantity theory of money assumes that:
A) income is constant.
B) velocity is constant.
C) prices are constant.
D) the money supply is constant.
Monetary policy is linked to fiscal policy when government spending is financed by:
A) taxes.
B) borrowing from banks.
C) borrowing from foreigners.
D) printing money.
Suppose a household considers only current income in making consumption decisions.
This is an example of:
A) Ricardian equivalence.
B) the permanent-income hypothesis.
C) myopia.
D) the life-cycle model.
Assume that the money demand function is (M/P)d = 2,200 ” 200r, where r is the
interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the
price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set
the money supply at:
A) 2,000.
B) 1,800.
C) 1,600.
D) 1,400.
The initial steady-state level of capital per worker in Macroland is 5. The Golden Rule
level of capital per worker in Macroland is 8.
a. What must change in Macroland to achieve the Golden Rule steady state?
b. Why might the Golden Rule steady state be preferred to the initial steady state?
c. Why might some current workers in Macroland prefer the initial steady state to the
Golden Rule steady state?
In order to achieve the target for the nominal interest rate established by the monetary
policy rule, the central bank adjusts:
A) the inflation rate.
B) the natural rate of interest.
C) the money supply.
D) the inflation target.