ECO 230-05                                     Name __________________________

Quiz IV

Rusty Smith

Fall 2002

 

Section I: Multiple Choice (1 point each) Choose the one best answer from the choices provided and place the letter corresponding to that answer in the space provided to the left of the question number.

 

      1.  Which of the following is not part of the M1 money supply?

a.   Cash held in bank vaults.

b.   Checkable deposits.

c.   Cash held by the non-bank public.

d.   All of the above are part of the M1 money supply.

 

      2.  Which of the following actions would be likely to decrease the money supply?

a.   The Fed buying securities from banks

b.   A decrease in the required reserve ratio

c.   The Fed selling securities to banks

d.   either “a” or “b” would decrease the money supply.

 

Answer questions 3 & 4 on the basis of the following information.  A bank has deposits of $300 million. The required reserve ratio is 5%.  The bank has total reserves of $170 million.

 

      3.  The bank has required reserves of

a.   $300 million.

b.   $155 million.

c.   $15 million.

d.   $8.5 million.

 

      4.  If the bank’s deposits increased by $100 million and its total reserves increased by $80 million, its excess reserves

a.   would not be affected.

b.   would increase by $230 million.

c.   would increase by $5 million.

d.   would increase by $75 million.

 

      5.  Which of the following is not a function of the Fed?

a.   Conducting fiscal policy.

b.   Setting the required reserve ratio for banks.

c.   Distributing currency.

d.   All of the above are functions of the Fed.

 

      6.  How do banks create money?

a.   They have a printing press in the back room.

b.   Banks don't create money, only the government creates money.

c.   They accept deposits and start checking accounts.

d.   They grant loans.

 

Section II Short Answer/Essay   Use the information provided to completely answer the following questions.  Points as indicated.

 

1.          Answer parts a through f concerning the Fed and money. 

(8 points)

 

a.  What does FOMC stand for?

 

 

 

 

b.  How many district Federal Reserve banks are there?

 

 

 

 

1.           List three functions of the Fed.

 

 

 

 

 

 

 

 

 

d.       List and explain two reasons why money is superior to barter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.           What is the most necessary feature of money?

 

 

 

 

2.          Answer the following questions concerning the use and effectiveness of fiscal policy.  (10 points)

 

1.           Assume that actual real GDP is $750 million and full employment real GDP is $630 million.  Also assume that the MPS is .2.

 

1.           Should expansionary or contractionary fiscal policy be used?

 

 

 

2.           If transfer payments are changed, by what amount (if any) will they have to be changed to bring the economy back to full employment GDP, and will they need to be increased or decreased? 

 

 

 

 

3.           If government expenditures are changed, by what amount (if any) will they have to be changed to bring the economy back to full employment GDP, and will they need to be increased or decreased?

 

 

 

 

2.       Assume that actual real GDP is $720 million and full employment real GDP is $840 million.  Also assume that the MPC is .75.

 

1.           What type of “gap” exists in the economy?

                                                                                                       

 

 

 

2.           Suppose government expenditures will be altered to bring the economy back to full employment GDP.  By what amount (if any) will they need to be changed  and will they need to be increased or decreased?

 

 

 

 

3.           If taxes are changed, by what amount (if any) will they have to be changed to bring the economy back to full employment GDP, and will they need to be increased or decreased?