ECO 202-02

ECO 230-05 Name ______________________________

Fall 2004

Exam III

Rusty Smith

Please post my score for this exam and my “Pre-final average” for this course using the following four digit number on the Internet at https://www.angelfire.com/ky/rustyecon

Signed ___________________________

SECTION I: Multiple Choice (2 points each) Choose the one best answer from the choices provided and place the letter corresponding to that answer in the space to the left of the question number.

1. Paige goes to her bank and deposits $500 cash into her deposit account. Assuming the entire amount goes to reserves, Paige’s bank

a. sees both its excess reserves and required reserves decrease.

b. now has increased ability to create money.

c. must file an IRS report in accordance with banking law.

d. both "a" and "c" are correct.

2. A bank’s reserves consist of

a. vault cash plus deposits at the Fed.

b. checkable deposits plus vault cash.

c. deposits at the Fed plus U.S. Treasury bills.

d. excess reserves minus required reserves.

3. If the money supply were to remain constant while money demand increased, which of the following would be true?

a. Interest rates would increase.

b. Interest rates would not change.

c. Interest rates would decrease.

d. Money demand is fixed and can never increase or decrease.

4. The "father" of the Classical school of economics is

a. John M. Keynes.

b. David Ricardo.

c. Adam Smith.

d. Thomas Keynes.

5. M2 consists of:

a. cash and coins held by the non-bank public, and checkable deposits.

b. small time deposits.

c. only non-liquid forms of assets.

d. Both “a” and “b” comprise M2.

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.

7. When the face value of money is greater than its intrinsic value

a. the money is devalued and is completely useless.

b. it is token money.

c. the money has been counterfeited.

d. money’s face value is always equal to its intrinsic value.

Answer questions 8-10 on the basis of the following information. A bank has deposits of $400 million. The required reserve ratio is 5%. The bank has total reserves of $150 million.

8. The bank has required reserves of

a. $400 million.

b. $150 million.

c. $20 million.

d. $130 million.

9. If the bank’s deposits decreased by $40 million and its total reserves decreased by $40 million, its excess reserves

a. would not be affected.

b. would be equal to $92 million.

c. would be equal to $30 million.

d. would be equal to $110 million.

10. If the required reserve ratio were to increase to 10%:

a. required reserves would decrease and excess reserves would decrease.

b. required reserves would decrease and excess reserves would increase.

c. required reserves would increase and excess reserves would increase.

d. required reserves would increase and excess reserves would decrease.

11. Which of the following actions would be an example of “tight money” policies?

a. The Fed buying securities from banks

b. An increase in the required reserve ratio

c. The Fed selling securities to banks

d. Both “b” and “c” are examples of “tight money” policies.

12. Government spending increases by $45 million, and at the same time there is a $45 million increase in net taxes. If the MPC is .80, actual GDP

a. will increase by $225 million.

b. will increase by $180 million.

c. will increase by $405 million

d. will increase by $45 million.

13. According to the “Keynesian Transmission Mechanism” which of the following describes the impact of an increase in money demand?

a. Interest rates fall, investment increases and therefore GDP increases.

b. Interest rates rise, investment increases and therefore GDP increases.

c. Interest rates fall, investment decreases and therefore GDP decreases.

d. Interest rates rise, investment decreases, and therefore GDP decreases.

14. If the net tax multiplier is -4 and government expenditures are increased by $17 million, actual GDP will:

a. increase by $68 million.

b. decrease by $85 million.

c. increase by $85 million.

d. decrease by $68 million.

15. If the economy is self regulating, when actual real GDP is greater than full employment real GDP, it will “correct” when

a. wage rates rise and aggregate supply decreases in response.

b. wage rates fall and aggregate supply decreases in response.

c. wage rates rise and aggregate supply increases in response.

d. wage rates fall and aggregate supply increases in response.

16. Say's Law states that

a. the government should use fiscal policy in order to stabilize the economy.

b. the aggregate supply curve is perfectly horizontal.

c. supply creates its own demand.

d. aggregate demand is inherently unstable.

17. There is between the asset demand for money and the interest rate.

a. no relation

b. an inverse relationship

c. a direct relationship

d. either an inverse or direct relationship depending on the money supply.

18. Monetary policy

a. are attempts by the government to achieve specific macroeconomic goals by altering government expeditures and taxation.

b. will, if effective, change interest rates and therefore impact GDP.

c. was the basic thinking behind FDR's "New Deal".

d. All of the above are correct.

19. If the tax multiplier is -9 and transfer payments are decreased by $36 million, actual GDP will:

a. increase by $360 million.

b. decrease by $324 million.

c. decrease by $360 million.

d. increase by $324 million.

20. Where does the government obtain the money it uses to practice fiscal policy?

a. Taxes

b. Selling government bonds

c. Selling treasury securities

d. All of the above methods

21. What is the potential money supply growth if total deposits are equal to $400 million and total reserves are equal to $85 million when the required reserve ratio is equal to .05?

a. $77 million

b. $1,700 million ($1.7 billion)

c. $1,540 million ($1.56 billion)

d. $160 million

22. For something to function as money, it must

a. be issued by the government.

b. have intrinsic value.

c. be accepted in exchange for goods and services.

d. All of the above features are necessary.

Answer questions 23-25 on the basis of the following information.

Actual GDP is $890 million & full employment GDP is $740 million. The MPS is .25.

23. If the government were to increase taxes by $50 million

a. The economy would move to equilibrium at which actual GDP and full employment GDP were equal.

b. The economy would end up with an inflationary gap of $300 million.

c. Actual GDP would decrease by $200 million.

d. Actual GDP would increase by $200 million.

24. The simple spending multiplier would equal

a. .25

b. 4

c. -3

d. 1

25. Which of the following statements is true?

a. The economy initially had an inflationary gap of $90 million.

b. The economy initially had a recessionary gap of $150 million.

c. Initially a decrease in government expenditures of $37.5 million would have brought the economy back to equilibrium at which actual GDP and full employment GDP were equal.

d. Both “b” & “c” are true.

SECTION II Essay/Short Answer/Problems

Answer the following questions using the information provided. Use properly labeled graphs where necessary. Points as indicated.

1. Identities Briefly (but completely) define/identify FOUR OF THE FOLLOWING FIVE terms or concepts. Write “OMIT” by the two you choose not to answer. If you answer all five, I will only grade the first four. (5 points each)

M3-

Political business cycle-

Say’s Law (and the author and the meaning)-

Crowding Out-

Easy money (and one example of an easy money policy)-

3. Answer parts a through c concerning the use and effectiveness of fiscal policy. (12 points)

a. Assume that actual real GDP is $550 million and full employment real GDP is $640 million. Also assume that the MPS is .1.

1.Should expansionary or contractionary fiscal policy be used?

2.If government expenditures are changed, how much will it have to be changed to bring the economy back to full employment GDP? Also specify whether this requires an increase or a decrease in government expenditures.

3.If entitlement payments are changed, how much will it have to be changed to bring the economy back to full employment GDP? Also specify whether this requires an increase or a decrease in entitlement payments.

b. Assume that actual real GDP is $820 million and full employment real GDP is $740 million. Also assume that the MPC is .80.

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

2.If taxes are changed, how much will it have to be changed to bring the economy back to full employment GDP? Also specify whether this requires an increase or a decrease in taxes.

3.If government expenditures are changed, how much will it have to be changed to bring the economy back to full employment GDP? Also specify whether this requires an increase or a decrease in government expenditures.

c. Identify and briefly describe two of the “lag” criticisms of fiscal policy that were discussed in class.

4. Answer the following questions regarding the Federal Reserve System, the money supply, and money. (13 points)

A. How many people are on the Fed’s Board of Governors?

B. What does FOMC stand for?

C. What is the name of the current Chairman of the Federal Reserve’s Board of Governors?

D. List two of the functions of the Federal Reserve other than distributing currency.

E. Draw the money market graph in the space below and show an decrease in money demand and specify the impact that would have on interest rates.

F. List and explain the three functions of money.

G. List two things the Fed could do to decrease the money supply.