MACROECONOMIC MODELS AND FISCAL POLICY 1. Which one of the following statements best describes the idea of a political business cycle? A. Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.
 B. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections. C. Politicians are more willing to cut taxes and increase government spending than they are to do the reverse. D. Fiscal policy will result in alternating budget deficits and surpluses. 2. In building the aggregate expenditures model, Keynes believed that
 A. government intervention into the economy is the primary cause of business cycle fluctuations.
 B. massive unemployment of labor and capital created conditions where sudden demand changes are unlikely to change prices. C. changes in aggregate expenditures are unable to affect the level of real output in the economy.
 D. economies are normally at full employment and thus frequently susceptible to bouts of inflation. 5. Which one of the following statements correctly describes the multiplier effect?
 A. The multiplier effect means that a change in consumption can cause a larger increase in investment.
 B. The multiplier effect means that a decline in the MPC can cause GDP to rise by several times that amount. C. The multiplier effect means that consumption is typically several times as large as saving.
 D. The multiplier effect means that an increase in investment can cause GDP to change by a larger amount. 7. The amount by which federal tax revenues exceed federal government expenditures during a particular year is the
 A. public debt.
 B. budget surplus. C. Federal Reserve. D. budget deficit. 9. Which one of the following statements about dissaving is correct? A. Dissaving occurs where saving exceeds consumption.
 B. Dissaving occurs where consumption exceeds income.
 C. Dissaving occurs where income exceeds consumption. ...

1. MACROECONOMIC MODELS AND FISCAL POLICY
1. Which one of the following statements best describes the idea
of a political business cycle?
A. Despite good intentions, various timing lags will cause fiscal
policy to reinforce the business cycle.
B. Politicians will use fiscal policy to cause output, real
incomes, and employment to be rising prior to elections.
C. Politicians are more willing to cut taxes and increase
government spending than they are to do the reverse.
D. Fiscal policy will result in alternating budget deficits and
surpluses.
2. In building the aggregate expenditures model, Keynes
believed that
A. government intervention into the economy is the primary
cause of business cycle fluctuations.
B. massive unemployment of labor and capital created
conditions where sudden demand changes are unlikely to change
prices. C. changes in aggregate expenditures are
unable to affect the level of real output in the economy.
D. economies are normally at full employment and thus
frequently susceptible to bouts of inflation.
5. Which one of the following statements correctly describes the
multiplier effect?
A. The multiplier effect means that a change in consumption
can cause a larger increase in investment.
B. The multiplier effect means that a decline in the MPC can
cause GDP to rise by several times that amount.
C. The multiplier effect means that consumption is typically
several times as large as saving.
D. The multiplier effect means that an increase in investment
can cause GDP to change by a larger amount.
7. The amount by which federal tax revenues exceed federal
government expenditures during a particular year is the
A. public debt. B. budget surplus.

2. C. Federal Reserve. D. budget deficit.
9. Which one of the following statements about dissaving is
correct?
A. Dissaving occurs where saving exceeds consumption.
B. Dissaving occurs where consumption exceeds income.
C. Dissaving occurs where income exceeds consumption.
D. Dissaving occurs where saving exceeds income.
11. Which one of the following statements about the interest-
rate effect is correct?A. The interest-rate effect suggests that an
increase in the price level will decrease the demand for money,
reduce interest rates, and increase consumption and investment
spending. B. The
interest-rate effect suggests that an increase in the price level
will increase the demand for money, increase interest rates, and
decrease consumption and investment spending
C. The interest-rate effect suggests that a decrease in the supply
of money will increase interest rates and reduce interest-
sensitive consumption and investment spending.
D. The interest-rate effect suggests that an increase in the price
level will increase the demand for money, reduce interest rates,
and decrease consumption and investment spending.
MONEY, BANKING AND MONETARY POLICY
1. Commercial banks and thrifts usually hold only small
amounts of excess reserves because
A. the Fed constantly uses open market operations to eliminate
excess reserves.
B. the Fed doesn't pay interest on reserves.
C. the presence of such reserves tends to boost interest rates and
reduce investment.
D. the Fed doesn't want commercial banks and thrifts to be too
liquid.
2. Which one of the following statements about risky
investments is correct?
A. Riskier investments tend to sell for higher prices so they
provide a higher expected rate of return to compensate for risk.

3. B. Riskier investments tend to sell for prices directly correlated
with expected rates of return.
C. Riskier investments tend to sell for higher prices; that is why
they are considered to be riskier.
D. Riskier investments tend to sell for lower prices so they
provide a higher expected rate of return to compensate for risk.
3. When economists say that money serves as a medium of
exchange, they mean that it's
A. a way to keep wealth in a readily spendable form for future
use. B. a monetary unit for measuring and comparing
the relative values of goods.
C. declared as legal tender by the government.
D. a means of payment.
4. The interest rate at which the Federal Reserve Banks lend to
commercial banks is called the _______ rate.
A. prime B. discount C. short-term D. federal funds
5. Suppose the reserve requirement is 10 percent. If a bank has
$5 million of checkable deposits and actual reserves of
$500,000, the bank
A. can't safely lend out more money. B. can safely lend out
$50,000. C. can safely lend out $5 million. D.
can safely lend out $500,000.
6. The Security Market Line depicts the relationship between
the
A. average expected rate of return on stocks and the average
expected rate of return on bonds.
B. average expected rate of return and risk level of a financial
asset. C. average expected rate of return of a
financial asset and the discount rate.
D. risk level of a financial asset and the prime interest rate.
7. If the Federal Reserve System buys government securities
from commercial banks and the public
A. commercial bank reserves will decline.
B. it will be easier to obtain loans at commercial banks.
C. commercial bank reserves will be unaffected.

4. D. the money supply will contract.
8. If a corporation goes bankrupt,
A. bondholders get paid from the sale of company assets before
stockholders do.
B. stockholders get paid from the sale of company assets before
bondholders do.
C. stockholders must honor the debts to bondholders out of
personal assets if necessary.
D. neither stockholders nor bondholders receive any money.
9. Between March 2001 and November 2002, the Fed reduced
the federal funds rate from 5 percent to just above 1 percent.
The Fed's purpose was to
A. reduce the public debt.
B. prevent rising inflation. C. promote recovery from
recession.
D. strengthen the international value of the dollar.
10. The basic policy-making body in the U.S. banking system is
the
A. Board of Governors of the Federal Reserve. B. Council
of Economic Advisers. C. Federal Open Market Committee
(FOMC). D. Federal Monetary Authority.
11. What concept describes how quickly an investment
increases in value when interest is paid not only on the original
amount invested, but also on the accumulated interest
payments? A. Future value B. Real rate of interest
C. Present value D. Compound interest
12. Payments to shareholders from corporate profits are known
as
A. capital gains. B. interest. C. appreciation. D. dividends.
13. An important routine function of the Federal Reserve Bank
is to A.
help large commercial banks develop correspondent
relationships with smaller
commercial banks.
B. advise commercial banks as to the most profitable ways of
reinvesting profits.

5. C. supervise the liquidation of the assets of bankrupt state
banks.
D. provide facilities by which commercial banks and thrift
institutions may collect checks.
14. In 1999 and 2000 the Fed increased the federal funds rate
several times. The Fed's purpose was to A.
strengthen the international value of the dollar. B. prevent
rising inflation.
C. stimulate economic growth. D. reduce the unemployment
rate.
15. If the economy were encountering a severe recession, proper
monetary and fiscal policies would call for
A. buying government securities, reducing the reserve ratio,
reducing the discount rate, increasing reserves available through
the term auction facility, and a budgetary deficit.
B. selling government securities, raising the reserve ratio,
lowering the discount rate, increasing reserves available
through the term auction facility, and a budgetary surplus.
C. buying government securities, reducing the reserve ratio,
raising the discount rate, reducing reserves available through
the term auction facility, and a budgetary deficit.
D. buying government securities, raising the reserve ratio,
raising the discount rate, reducing reserves available through
the term auction facility, and a budgetary surplus.
16. Which one of the following statements about open-market
operations is correct? A. Open-market operations refer to
purchases of stocks in the New York Stock Exchange. B.
Open-market operations refer to the purchase or sale of
government securities by the Fed. C. Open-market operations
refer to central bank lending to commercial banks.
D. Open-market operations refer to the specifying of loan
maximums on stock purchases.
17. When commercial banks use excess reserves to buy
government securities from the public, A. the money supply
falls. B. new money is created. C. commercial bank reserves
increase.

6. D. checkable deposits decline.
18. Checkable deposits are classified as money because
A. they can be readily used in purchasing goods and paying
debts.
B. banks hold currency equal to the value of their checkable
deposits.
C. they earn interest income for the depositor.
D. they're ultimately the obligations of the Treasury.
19. When economists say that money serves as a unit of
account, they mean that mean
that it's
A. a monetary unit for measuring and comparing the relative
values of goods.
B. a way to keep wealth in a readily spendable form for future
use. C. declared as legal tender by the government.
D. a means of payment.
20. If the Fed were to increase the legal reserve ratio, we would
expect A.
higher interest rates, a contracted GDP, and appreciation of the
dollar.
B. higher interest rates, a contracted GDP, and depreciation of
the dollar.
C. lower interest rates, an expanded GDP, and depreciation of
the dollar.
D. lower interest rates, an expanded GDP, and appreciation of
the dollar.
End of exam