Econ 204 Exam 3 Practice Exam

Instructions: This practice exam contains the hardest possible questions related to exam
topics. If you can complete this exam you’re very well prepared for the exam, but again, these
are the hardest possible questions, intended to help you understand which topics you need more
practice on before the exam. This practice exam does not cover the Real World Macro
readings, but the final exam will contain 2-3 questions from each reading. Be sure to revisit
the recitation worksheets for sample RWM questions.

Chapter 12:
1. Which of the following policies will reduce the budget deficit while achieving greater
fiscal restraint?
a. More government expenditure and higher taxes.
b. More government expenditure and lower taxes.
c. Less government expenditure and higher taxes.
d. Less government expenditure and lower taxes.

2. With greater deficit spending, ceteris paribus,

a. Aggregate spending should fall.
b. Any inflationary gap will become larger.
c. There are greater leakages.
d. There is inadequate information to tell what happens to aggregate spending.

3. When there is excess aggregate demand, the appropriate fiscal policy would be for the
government to
a. make budget surpluses smaller. c. Make budget deficits larger.
b. Make budget surpluses larger. d. Increase the public debt.

4. Which of the following is an argument against balancing the federal budget?

a. The economy will self-adjust so deficit spending is not necessary.
b. An increase in government spending and taxes by the same amount does not
affect income.
c. Doing so may prevent the government from pulling the economy out of recession.
d. None of the choices are correct.

5. Much of each year's federal budget is considered "uncontrollable" because

a. It must be spent for purchases, as opposed to transfer payments.
b. Most of the current revenues and expenditures are the result of decisions made in
prior years.
c. It is determined by decision makers who do not have the power to change
spending and taxes.
d. None of the choices are correct.

6. Spending for unemployment compensation and welfare benefits increase automatically

a. When the economy expands.
b. When the economy goes into recession.
c. When voters make the decision to increase these items.
d. Only when the fiscal year begins.

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 Econ 204 Exam 3 Practice Exam

7. A progressive income tax system is particularly effective as an automatic stabilizer

because
a. It reduces demand when income falls.
b. In a booming economy, taxpayers move into higher tax brackets, which restrains
their spending.
c. During a recession, it causes the budget deficit to fall.
d. It falls more heavily on taxpayers with high MPCs, which stimulates aggregate
demand.

8. Crowding out is most likely to occur when the federal government

a. Runs a surplus and pays off part of the debt.
b. Has a balanced budget and refinances a portion of the debt that matures.
c. Runs a deficit and raises taxes to generate more revenue.
d. Runs a deficit and sells bonds to make up the difference.

9. The national debt

a. Is paid off each fiscal year when the debt is refinanced.
b. Will never be paid off in any given year, but it will be entirely paid off when it is
refinanced over a number of years.
c. Will be paid off when the budget is finally balanced.
d. Equals the dollar amount of outstanding U.S. Treasury bonds.

10. Policies designed to pay off the national debt will result in:
a. A higher level of aggregate demand.
b. A redistribution of income but not wealth.
c. A smaller level of aggregate demand
d. Inflation.

11. If the cyclical deficit shrank by $60 billion while the structural deficit increased by $35
billion, the total deficit
a. Fell by $25 billion. c. Grew by $95 billion.
b. Grew by $25 billion. d. Fell by $60 billion.

12. Suppose the economy is at a full-employment GDP of $1 trillion and the tax revenue
received by the federal government is always one-fifth of GDP. If planned government
expenditure is $300 billion, the structural
a. Deficit is zero. c. Surplus is $100 billion.
b. Deficit is $100 billion. d. Deficit is $500 billion.

13. The cost of servicing the debt may increase if

a. The debt shrinks.
b. Deficits become smaller.
c. Interest rates rise.
d. The debt is held internally.

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14. At the time it occurs, external financing of the debt allows the economy to
a. Consume beyond the production possibilities curve.
b. Reduce the deficit ceiling.
c. Export more goods and services.
d. Reduce the size of the national debt.

Chapter 13

15. Farmer Brown wants some bacon for breakfast. He gets the bacon from Farmer
Hernandez by giving her a dozen eggs. This type of transaction is referred to as
a. A farm transaction.
b. A money exchange.
c. Barter.
d. An efficient exchange of resources.

16. Money does all of the following except

a. Reduce the efficiency with which market exchanges take place.
b. Serve as a mechanism for transforming current income into future purchases.
c. Promote efficient division of labor.
d. Facilitate the continuous series of exchanges that characterizes a market economy.

17. Which of the following is not true about M1?

a. It includes the most liquid forms of money.
b. It is the narrowest definition of the money supply.
c. Savings accounts makes up approximately one-third of it.
d. Currency in circulation makes up approximately half of it.

18. The different components of the money supply reflect

a. Variations in liquidity and accessibility of assets.
b. Whether deposits are domestic or international.
c. How often depositors use their accounts.
d. Whether the deposits are earned or inherited.

19. Suppose Oscar withdraws $100 from his checking account and deposits it into his savings
account. This transaction causes M1 to
a. Increase by $100 and M2 to remain the same.
b. Decrease by $100 and M2 to remain the same.
c. Decrease by $100 and M2 to increase by $100.
d. Remain the same and M2 to increase by $100.

20. If bank customers decide as a group to pay off their loans and to not take out any new
loans, ceteris paribus,
a. Excess reserves will decrease.
b. The money multiplier will decrease.
c. The money supply will increase.
d. The money supply will decrease.

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 Econ 204 Exam 3 Practice Exam

21. Which of the following reflects the concept of required reserves?

a. The money multiplier is greater than 1.
b. Excess reserves are equal to 0.
c. Required reserves are equal to total reserves.
d. Banks can lend only their required reserves.

22. When the reserve requirement changes, which of the following will change for an
individual bank?
a. Transactions account balances and lending capacity.
b. Transactions account balances, total reserves, and excess reserves.
c. Total reserves, required reserves, and excess reserves.
d. Required reserves, excess reserves, and lending capacity.

23. Suppose a bank has $500,000 in deposits and a required reserve ratio of 10 percent. Then
required reserves are
a. $5,000,000. c. $50,000.
b. $500,000. d. $10,000.

24. A single bank with $10,000 of excess reserves and a reserve ratio of 25 percent could
support total transactions account balances of at most
a. $10,000. b. $5,000. c. $40,000. d. $25,000.

25. Suppose a bank has $2 million in deposits, a required reserve ratio of 10 percent, and
total reserves of $500,000. Then it has excess reserves of
a. $50,000. c. $500,000.
b. $200,000. d. $300,000.

Table 13.2: ABC Bank Balance Sheet

Assets Liabilities
Total reserves $80,000 Transactions accounts $200,000
Loans 120,000

26. Refer to Table 13.2. If ABC Bank has a required reserve ratio of 15 percent, it can legally
make a onetime maximum loan of
a. $30,000. c. $50,000.
b. $40,000. d. $80,000.

27. Refer to Table 13.2. With total reserves of $80,000 and a required reserve ratio of 25
percent, ABC Bank could support maximum transactions account balances of
a. $20,000. c. $50,000.
b. $320,000. d. $2,000,000.

28. Refer to Table 13.2. With a required reserve ratio of 10 percent, ABC Bank would have
excess reserves of
a. $20,000. c. $60,000.
b. $40,000. d. $140,000.

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29. Given a required reserve ratio of 0.25, what is the maximum amount by which the money
supply can increase in response to a $200 million increase in excess reserves for the
whole banking system?
a. $200 million. c. $500 million.
b. $250 million. d. $800 million.

Chapter 14:
30. Which of the following services is performed by the regional Federal Reserve banks?
a. Holding deposits for individuals. b. Providing loans to individuals.
c. Providing currency to private banks.
d. Check cashing for large nonbank corporations.

31. Which of the following provides evidence that the Federal Reserve System is politically
insulated?
a. The Fed governors are appointed by the president of the United States.
b. The Fed governors are appointed for 14-year terms and cannot be reappointed.
c. The Board of Governors is located in Washington, D.C.
d. The Fed acts as a clearinghouse between commercial banks.

32. Which of the following is responsible for buying and selling government securities to
influence reserves in the banking system?
a. Twelve Federal Reserve banks.
b. The executive branch of government.
c. The Federal Open Market Committee.
d. The Board of Governors of the Federal Reserve.

33. Which of the following represents the lending capacity of an entire banking system?
a. Required reserve ratio × total deposits.
b. Total reserves - required reserves.
c. (Total reserves - required reserves) × money multiplier.
d. 1 ÷ (required reserve ratio).

34. Discounting refers to the Fed's practice of

a. Selling securities at the federal funds rate.
b. Purchasing securities at the lowest available federal funds rate.
c. Lending reserves directly to private banks.
d. Lending at the prime rate.

35. When the Fed raises the discount rate, all of the following result except
a. The cost of borrowing reserves for member banks increases.
b. It sends a signal that it is moving toward a slower growth rate for the money
supply.
c. It sends a signal that it is reluctant to lend reserves.
d. It expands the lending capacity of the banking system.

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 Econ 204 Exam 3 Practice Exam

36. Which of the following is the principal mechanism used by the Federal Reserve to
directly alter the reserves of the banking system?
a. Changes in the discount rate.
b. Changes in the required reserve ratio.
c. Open market operations.
d. Foreign exchange operations.

37. Through open market operations, the Fed is able to influence

a. The stock market but not the bond market.
b. Automatic stabilizers.
c. Portfolio decisions.
d. Real output but not the price level.

38. If the annual interest rate printed on the face of a bond is 12 percent, the face value of the
bond is $1,000, and the current market price of the bond is $1,200, what is the current
yield on the bond?
a. 10.0% b. 12.0 % c. 8.5% d. 5.0%

39. If the Fed buys $25 billion of U.S. bonds in the open market and the reserve requirement
is 20 percent, M1 will eventually
a. Increase by $25 billion. c. Increase by $100 billion.
b. Decrease by $25 billion. d. Decrease by $100 billion.

40. An open market purchase occurs when the Fed

a. Buys bonds from the public, increasing bank reserves.
b. Sells bonds to the public, increasing bank reserves.
c. Buys bonds from the public, decreasing bank reserves.
d. Sells bonds to the public, decreasing bank reserves.

41. When the Fed buys bonds from the public, it

a. Decreases the flow of reserves to the banking system.
b. Increases the flow of reserves to the banking system.
c. Decreases the money supply. d. Decreases the discount rate.

42. Assume the reserve requirement is 10 percent, demand deposits are $200 million, and
total reserves are $18 million. If the reserve requirement is increased to 14 percent, the
banking system will have
a. Excess reserves equal to $10 million.
b. Excess reserves equal to $18 million.
c. An increase in the money multiplier.
d. A deficiency of reserves equal to $10 million.

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 Econ 204 Exam 3 Practice Exam

43. Suppose all of the banks in the Federal Reserve System have $100 billion in transactions
accounts, the required reserve ratio is 0.25, and there are no excess reserves in the
system. If the required reserve ratio is changed to 0.20, the total lending capacity of the
system is increased by
a. $25 billion. c. $10 billion.
b. $20 billion. d. $750 million.

Table 14.3: Monetary Aggregates of the U.S. Financial System

Item Amount (in billions (B))
Cash held by public $40
Transactions deposits $80
Required reserves $20
Excess reserves $0
U.S. bonds held by public $125

44. Assume an original balance sheet: On the basis of the information in Table 14.3, the
required reserve ratio is
a. 5 %. b. 15 %. c. 25 %. d. 20 %.

45. Assume an original balance sheet: In Table 14.3, if the Fed changes the required reserve
ratio to 10 percent, the lending capacity of the system would eventually
a. Increase by $12B. c. Decrease by $12B.
b. Increase by $120B. d. Decrease by $120B.

46. Assume an original balance sheet: The money supply (M1) in Table 14.3 is
a. $20B. b. $40B. c. $80B. d. $120B.

Chapter 15:
47. The choice to hold money in the form of cash
a. Has no opportunity cost. c. Results in increased interest income.
b. Results in forgone interest. d. Results in greater outstanding debt.

48. The transactions demand for money is most closely associated with which of the
following functions of money?
a. Standard of deferred payment. c. Standard of value.
b. Store of value. d. Medium of exchange.

49. Ceteris paribus, the quantities of money people are willing and able to hold
a. Decrease as interest rates fall.
b. Increase as interest rates fall.
c. Increase as the money supply decreases.
d. Decrease when the speculative demand increases.

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 Econ 204 Exam 3 Practice Exam

50. The normal market demand curve for money is

a. A horizontal curve at very high interest rates, where the quantity demanded
changes but the interest rate is constant.
b. An upward-sloping demand curve, where more money is held when interest rates
are higher.
c. A vertical demand curve, where the same amount of money is held regardless of
the interest rate.
d. A downward-sloping demand curve, where more money is held at lower interest
rates.

51. The money supply curve is determined by all of the following except
a. Federal Reserve policy.
b. The lending behavior of private banks.
c. The willingness of individuals to borrow money.
d. The demand for money.

52. The Fed can change the equilibrium rate of interest by changing
a. Government spending. b. Taxes. c. Tariffs.
d. Reserve requirements or the discount rate, or through open market operations.

53. Which shift should occur if the Fed raises the discount rate?
a. The investment demand curve should shift rightward.
b. The aggregate supply curve should shift rightward.
c. The aggregate demand curve should shift leftward.
d. The aggregate demand curve should shift rightward.

54. Which of the following is a series of events that accurately describes the steps by which
restrictive monetary policy is effective?
a. Decrease in interest rate, decrease in M1, and increase in investment.
b. Decrease in M1, increase in interest rate, and decrease in investment.
c. Increase in M1, decrease in investment, and decrease in interest rate.
d. Increase in M1, increase in interest rate, and increase in investment.

55. Monetary stimulus will fail if

a. Banks lend too much money.
b. Short-term interest rates are affected but long-term interest rates are not.
c. Consumers spend too much money, creating a shortage of money.
d. Lower interest rates cause households to not refinance mortgages and not apply
for new consumer loans.

56. When the money market is at an equilibrium in the liquidity trap,

a. An increase in the money supply does not affect interest rates.
b. The demand for money is perfectly insensitive to interest rates.
c. Investment spending falls to zero.
d. There is no speculative demand for money.

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 Econ 204 Exam 3 Practice Exam

57. In Fig 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6 percent
by
a. Selling bonds in the open market.
b. Reducing the discount rate.
c. Buying bonds in the open market.
d. Decreasing the reserve requirement.

58. In Fig 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6 percent
by
a. Buying bonds in the open market.
b. Decreasing the reserve requirement.
c. Raising the discount rate.
d. Increasing the amount of coins in circulation.

59. In Figure 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6
percent by doing all of the following except
a. Selling bonds in the open market. c. Raising the reserve requirement.
b. Raising the discount rate. d. Decreasing the federal funds rate.

60. In Fig 15.3, the Fed can decrease the equilibrium interest rate from 6 percent to 2 percent
by
a. Decreasing the reserve requirement. c. Selling bonds.
b. Decreasing the money supply. d. Increasing the discount rate

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 Econ 204 Exam 3 Practice Exam

61. According to the monetarist view and the equation of exchange, which of the following
will occur because the Fed sells securities in the open market?
a. A decrease in real interest rates.
b. A decrease in nominal aggregate spending.
c. A lower level of real output.
d. An increase in the price level.

62. According to the extreme monetarist position, using the equation of exchange, an
increase in the quantity of money in circulation will
a. Increase real GDP. c. Have no effect on the price level.
b. Decrease the velocity of money. d. Increase the price level.

63. Effective expansionary monetary policy, according to Keynesian theorists, will do all of
the following except
a. Increase bank lending capacity.
b. Lower real output.
c. Encourage people to borrow and spend money.
d. Reduce interest rates.

64. Which of the following is a monetarist solution for a recession?

a. Steady and predictable growth of the money supply.
b. A decrease in short-term interest rates.
c. An increase in the money supply alone.
d. An increase in the money supply along with an increase in government spending.

65. Using the equation of exchange, if real output increases by 5 percent per year and
velocity is stable, in order to keep the price level stable
a. The interest rate must increase by 5 percent per year.
b. Velocity must increase by 5 percent per year.
c. The money supply must increase by 5 percent per year.
d. The money supply must increase by more than 5 percent per year because
nominal output is greater than 5 percent.

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