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true or false.

____     1.   Aggregate demand is
the sum of total domestic spending by the private sector.

____     2.   Tax reductions
should also reduce the amount of consumer expenditures.

____     3.   The marginal
propensity to consume is calculated by dividing the change in
consumer spending by the change in disposable income.

____     4.   The relationship
between consumption and disposable income is very unreliable and
unpredictable.

____     5.   The typical value
for the MPC is less than 1.0.

____     6.   The MPC can be used
to predict the effect of a tax increase.

____     7.   A decrease in
disposable income causes a shift in the consumption function.

____     8.   If U.S. consumers
become more optimistic about their future income and wealth, the
consumption function will shift upward.

____     9.   Most observers
nowadays see monetary policy as much less important than fiscal
policy.

____   10.   A bank run involves a large
inflow of money into commercial banks.

____   11.   When people trade goods for
money, money is being used as a medium of exchange.

____   12.   Inflation increases the use of
money as a store of value.

____   13.   The lion’s share of purchases
and transactions in the U.S. economy are made with coins and paper
money.

____   14.   The amount of money held in
checking accounts is significantly greater than money in the form
of currency.

____   15.   Liquidity refers to the ability
of an asset to hold its value in periods of inflation.

____   16.   Fractional reserve banking has
three crucial features: bank profitability, bank discretion over
the money supply, and bank exposure to runs.

____   17.   Due to the private nature of
bank ownership, there is often a difference between bankers’ goals
and macroeconomic objectives.

____   18.   Most bank deposits in the
United States are insured by the Federal Deposit Insurance
Corporation (FDIC).

____   19.   Banks try to keep their excess
reserves at a maximum in order to maximize profits.

____   20.   The Federal Reserve’s principal
tool in the manipulation of aggregate demand is the personal income
tax.

____   21.   Unconventional monetary
policies include massive lending to banks and open-market purchases
of assets other than Treasury bills.

____   22.   The Federal Open Market
Committee oversees the money supply through the purchase and sale
of government securities.

____   23.   Open market operations affect
the supply of reserves.

____   24.   Specialization permits larger
outputs and offers economies of large-scale production.

____   25.   Trade occurs only when a
country has an absolute advantage and not just a comparative
advantage over another country.

____   26.   If all countries produce the
goods for which they have comparative advantages, all countries
benefit with the increased production of goods with no additional
resources being used.

____   27.   A country’s comparative
advantage can be illustrated by the graph of the production
possibilities frontier.

____   28.   Cheap labor is the source of
comparative advantages.

____   29.   A tariff is a limitation on the
amount of a good that can be imported.

____   30.   An export subsidy is a payment
by the government to exporters to permit them to charge lower
prices.

____   31.   A tariff is a tax on imports
imposed by the country that is importing the goods.

Multiple Choice

Identify the choice that best
completes the statement or answers the question.

____   32.   When aggregate demand decreases
rapidly, the economy is likely to experience

a.

inflation.

b.

an economic boom.

c.

economic growth.

d.

recession.

____   33.   Governments can affect the
level of aggregate demand in a direct way by changing

a.

government spending.

b.

exports.

c.

taxes.

d.

transfer payments.

____   34.   Consumer spending represents
about what fraction of total spending in the economy?

a.

one-fifth

b.

two-thirds

c.

one-third

d.

two-fifths

e.

three-fourths

____   35.   Aggregate demand is the total
demand for

a.

all intermediate and final goods.

b.

all monetary investments.

c.

real and financial investments.

d.

all final goods and services.

____   36.   If a U.S. citizen buys a car
produced in Germany, this transaction will add to

a.

U.S. aggregate demand.

b.

U.S. aggregate supply.

c.

German aggregate demand.

d.

German imports.

____   37.   Melissa purchases shares in a
government bond mutual fund. Is this included in the aggregate
demand component “Investment”?

a.

Yes, if it is a domestic mutual fund.

b.

Yes, if the purchase is made out of current income.

c.

No, unless the funds are deposited in a domestic financial
institution.

d.

No, it would never be included.

____   38.   The “investment” component of
aggregate demand will include all of the following except

a.

expenditures of business firms on new plants.

b.

expenditures of business firms on new equipment.

c.

resales of existing physical assets.

d.

household spending on new homes.

____   39.   Which of the following is
considered to be an investment in economists’ point of view?

a.

Serena buys bonds issued by Citibank.

b.

John purchases a new house.

c.

Venus invests hundred thousand dollars in Bear Stearns
stock.

d.

Allen sells the old truck he used for transporting goods.

____   40.   National income is

a.

the sum of all wages and salaries, interest, rent, and profits
in the economy.

b.

equal to the money value of national output.

c.

the before-tax income of all individuals in the economy.

d.

All of the above are correct.

____   41.   Which of the following would be
counted as investment in the national income accounts?

a.

the purchase of a newly issued stock

b.

the purchase of a newly built apartment house

c.

the purchase of a newly minted coin

d.

the payment of tuition at a private college

____   42.   The largest component of
aggregate demand is

a.

investment spending.

b.

consumer spending.

c.

government spending.

d.

total imports.

____   43.   Which of the following is a
transfer payment?

a.

Work-study students receive wages transferred from the
university budget.

b.

A company pays the moving expenses for a transferred
employee.

c.

A student transfers to another college and receives a tuition
rebate.

d.

A student receives a tuition grant from the federal
government.

____   44.   The relationship between
consumption and disposable income is such that as

a.

consumption rises, disposable income falls.

b.

disposable income rises, consumption rises.

c.

disposable income rises, consumption falls.

d.

disposable income rises, saving falls.

____   45.   The difference between
disposable income and consumption spending is

a.

transfer payments.

b.

personal taxes.

c.

net exports.

d.

personal investment.

e.

personal saving.

____   46.   If personal taxes are increased
by $10 billion, we can expect that consumers will reduce

a.

spending by $10 billion.

b.

spending by more than $10 billion.

c.

spending by less than $10 billion.

d.

saving by $10 billion.

e.

saving by more than $10 billion.

____   47.   In addition to fiscal policy,
the other main tool used to affect aggregate demand is

a.

trade policy.

b.

industrial policy.

c.

planning policy.

d.

monetary policy.

____   48.   Which of the following are
reasons that banks are so heavily regulated?

a.

Governments are concerned about the safety of deposits.

b.

The industry is a principal determinant of aggregate demand.

c.

Bank failures are contagious.

d.

All of the above are correct.

____   49.   Bankers’ business decisions
effect the money supply because bankers

a.

are respected men and women.

b.

have the ability to create money.

c.

use a special accounting system developed by the Federal Reserve
Board.

d.

All of the above are correct.

____   50.   Money’s principal function is
to serve as a

a.

standard for making loans.

b.

standard for credit reporting.

c.

medium of exchange.

d.

method for storing wealth.

____   51.   Liquidity refers to the

a.

rapidity with which money flows through the economy.

b.

ease with which an asset can be converted into cash.

c.

ease with which banks move funds from checking to savings
accounts.

d.

All of the above are correct.

____   52.   Fiat money is money

a.

backed by land.

b.

backed by gold or silver.

c.

that can be converted to gold or silver.

d.

because a government says it is.

____   53.   Price levels rarely remain the
same. This implies that

a.

money is an excellent medium of exchange.

b.

money is divisible.

c.

money is a good medium for measuring value.

d.

money is an imperfect medium for storing value.

____   54.   Which of the following
definitions of the money supply includes only the most liquid forms
of money?

a.

M1

b.

M2

c.

savings deposits.

d.

money market mutual deposits.

____   55.   “Near monies” are

a.

stocks, bonds, and real estate.

b.

U.S. notes and Federal Reserve notes.

c.

included in the M1 definition of the money supply.

d.

liquid assets that are close substitutes for money.

e.

All of the above are correct.

____   56.   In the modern U.S. economy,
most transactions are made with

a.

cash.

b.

gold and silver.

c.

credit cards.

d.

checking deposits.

____   57.   The Fed’s principal objective
is to

a.

make profits to pay into the U.S. Treasury.

b.

collect tax revenues.

c.

supervise the business decisions of banks.

d.

manage the money supply and interest rates.

____   58.   The Federal Open Market
Committee consists of

a.

the president and the Board of Governors.

b.

Congresspeople, Senators, and the Board of Governors.

c.

the Secretary of the Treasury and the Board of Governors.

d.

the Board of Governors and five district bank presidents.

____   59.   In making policies about the
nation’s money supply, the Federal Reserve Board

a.

operates as an independent entity.

b.

must consult each member bank.

c.

must consult with Congress.

d.

must coordinate all activity with the White House.

____   60.   The principal objective of the
Federal Reserve System is to

a.

circulate coins and paper Federal Reserve Notes.

b.

subsidize the income of member banks.

c.

help stabilize the economy through monetary policy.

d.

make profits to remit to the Treasury Department.

____   61.   The Federal Reserve Board of
Governors

a.

serve at the pleasure of the president similar to other cabinet
positions.

b.

report directly to Congress and are controlled by Congress.

c.

consists of 12 members, one from each district bank.

d.

is structurally independent of the executive and legislative
branches of the federal government.

____   62.   In practice, money supply and
short-term interest rates are determined by the

a.

Treasury and Commerce departments.

b.

Federal Open Market Committee.

c.

Board of Governors.

d.

House and Senate.

____   63.   Proponents of Fed independence
maintain that

a.

independence helps ensure low unemployment rates.

b.

money is too important to be left to the bankers.

c.

independence permits objective decisions not based on
politics.

d.

only the Federal Reserve knows how to act wisely.

____   64.   Open market operations have
their initial effect on bank

a.

lending.

b.

reserves.

c.

profits.

d.

revenues.

____   65.   Open market operations
generally involve the purchase and sales of

a.

government securities.

b.

stocks and bonds.

c.

coins and currency.

d.

Federal Reserve notes.

____   66.   The Fed relies on open market
operations, which work

a.

with the Treasury in creating money to finance bonds.

b.

through major stock exchanges to influence bond prices.

c.

directly through the nonbank public to change their assets.

d.

through the banking system by affecting their reserves.

____   67.   ____ is the rate that applies
when banks borrow and lend reserves to one another.

a.

The repo rate

b.

The discount rate

c.

The coupon rate

d.

The federal fund rate

____   68.   If the Fed sells a T-bill to a
commercial bank, how will this affect the money supply?

a.

It will increase the money supply.

b.

It will increase bank reserves.

c.

It will decrease the money supply.

d.

It will have no effect on the money supply.

____   69.   When the Fed wants to expand
the money supply through open market operation, it

a.

sells government securities to the Treasury.

b.

sells government securities to member banks.

c.

buys government securities from member banks.

d.

buys government securities from the Treasury.

____   70.   When the Fed purchases
government securities from a commercial bank, the bank

a.

loses its ability to make loans.

b.

automatically becomes poorer.

c.

loses equity in the Fed.

d.

receives reserves that can be loaned out.

____   71.   Which of the following is the
most frequently used tool of monetary policy?

a.

changing the discount rate

b.

changing reserve requirements

c.

open market operations

d.

interest rate changes

____   72.   In the past, when the United
States enjoyed a continuing trade surplus, wages in the United
States