Question: The Third National Bank has reserves of $

> Which of the following will shift the aggregate demand curve to the left? a. The government reduces personal income taxes. b. Interest rates rise. c. The government raises corporate profit taxes. d. There is an economic boom overseas that raises the inc

> Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers. What happened to the money supply? a. Increased. b. Decreased. c. Stayed the same.

> Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system? a. $0. b. $200 million. c.

> Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of twenty percent. In which country would $100 of initial excess reserves be able to cause a l

> The two conflicting goals facing commercial banks are: a. Profit and liquidity. b. Profit and loss. c. Deposits and withdrawals. d. Assets and liabilities.

> A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan _________________. a. Total reserves. b. Excess reserves. c. Total deposits. d. Excess deposits.

> The actual reason that banks must hold required reserves is: a. To enhance liquidity and deter bank runs. b. To help fund the Federal Deposit Insurance Corporation, which insures bank deposits. c. To give the Fed control over the lending ability of comm

> A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank’s excess reserves? a. $100 million. b. $88 million. c. $12 million. d. $2 million.

> A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued? a. 1/10. b. 1/5. c. 2/5. d. 5/5.

> Which of the following help to explain why the aggregate demand curve slopes downward? a. When the domestic price level rises, our goods and services become more expensive to foreigners. b. When government spending rises, the price level falls. c. There

> If the MPS rises, then the MPC will: a. Fall. b. Rise. c. Stay the same.

> What is rent seeking and how does it differ from the kinds of profit maximization and profit seeking that we discussed in previous chapters? Provide an actual or hypothetical example of rent seeking by firms in an industry. By a union. By a professional

> Compare the elasticity of a monopolistic competitor’s demand with that of a pure competitor and a pure monopolist. Assuming identical long-run costs, compare graphically the prices and outputs that would result in the long run under pure competition and

> What do economists mean when they say Social Security and Medicare are "pay-as-you-go" plans? What are the Social Security and Medicare trust funds, and how long will they have money left in them? What is the key long-run problem of both Social Security

> Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the stock of capital, and economic growth. How might investment in public capital and complementarities betw

> Why might economists be quite concerned if the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP?

> True or false? If false, explain why. a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP. b. An internally held public debt is like a debt of the left hand owed to the right hand. c. The Federal Reserve a

> How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the debt. How does an internally held public debt differ from an externally

> Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is

> Define the cyclically-adjusted budget, explain its significance, and state why it may differ from the actual budget. Suppose the full-employment, noninflationary level of real output is GDP3 (not GDP2) in the economy depicted in Figure 33.3. If the econo

> Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy’s built-in stability?

> Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contract

> In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam’s MPC out of his $500 raise? a. 0.50. b. 0.75. c. 0.80. d. 1.00.

> (For students who were assigned Chapter 29) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 29.7). Explain how equal-size increases

> What are government’s fiscal policy options for ending severe demand-pull inflation? Which of these fiscal options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large?

> What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy? Use an Internet search to find the names and university affiliations of the present members of the CEA.

> How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a mo

> Suppose that the investment demand curve in a certain economy is such that investment declines by $100 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $150 billio

> Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 1, a budget deficit of $20 billion in year 2, a budget surplus of $10 billion in year 3, and a budget deficit of $2 billion in year 4. What is the

> Refer to the table for Waxwania in problem 4. Suppose that Waxwania is producing $600 of real GDP, whereas the potential real GDP (or full-employment real GDP) is $700. How large is its budget deficit? Its cyclically adjusted budget deficit? Its cyclical

> Refer to the accompanying table for Waxwania: a. What is the marginal tax rate in Waxwania? The average tax rate? Which of the following describes the tax system: proportional, progressive, regressive? b. Suppose Waxwania is producing $600 of real GDP,

> (For students who were assigned Chapter 29) Assume that, without taxes, the consumption schedule for an economy is as shown below: a. Graph this consumption schedule. What is the size of the MPC? b. Assume that a lump-sum (regressive) tax of $10 billio

> Refer back to the table in Figure 30.7 in the previous chapter. Suppose that aggregate demand increases such that the amount of real output demanded rises by $7 billion at each price level. By what percent will the price level increase? Will this inflati

> What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? What is the fundamental reason that

> Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the sam

> Suppose GDP is $5.0 trillion, resource extraction is $0.5 trillion, production is $1.5 trillion, and distribution is $1.0 trillion. a. How big is GO? b. How big is GO minus GDP?

> On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1 percent, by how much does real GDP change? Are the decreases in real GDP caused by tax increases temporary or permanent? Does the intention of a tax incre

> Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?

> What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the economy’s location on the curve so important in assessing tax policy?

> What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.

> Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. Use the concept of the short-run Phillips Curve to exp

> Which of the following statements are true? Which are false? Explain why the false statements are untrue. a. Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output. b. The long-run aggregat

> Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?

> In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. A

> An increase in _______ GDP guarantees that more goods and services are being produced by an economy. a. Nominal. b. Real.

> If the required reserve ratio is 10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?

> Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 25 percent. a. What is the amount of excess reserves in this commercial bank

> The balance sheet at the top of the next page is for Big Bucks Bank. The reserve ratio is 20 percent. a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1′ how the bank’s b

> Suppose again that the Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in re

> Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank’s actual reserves?

> Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?

> Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, or operational lag. a. To fight a recession, Congress has passed a bill to increase

> Last year, while an economy was in a recession, government spending was $595 billion and government revenue was $505 billion. Economists estimate that if the economy had been at its full-employment level of GDP last year, government spending would have b

> During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers? a. Yes. b. No

> When discussing pure competition, the term long run refers to a period of time long enough to allow: a. Firms already in an industry to either expand or contract their capacities. b. New firms to enter or existing firms to leave. c. Both a and b. d. Non

> The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxe

> Which of the following would help a government reduce an inflationary output gap? a. Raising taxes. b. Lowering taxes. c. Increasing government spending. d. Decreasing government spending.

> Which of the following items will be included in official U.S. GDP statistics? Select one or more answers from the choices shown. a. Revenue generated by illegal marijuana growers in Oregon. b. Money spent to clean up a local toxic waste site in Ohio. c

> What are the major categories of firms that make up the U.S. financial services industry? Are there more or fewer banks today than before the start of the financial crisis of 2007-2008? Why are the lines between the categories of financial firms even mor

> What is TARP and how was it funded? What is meant by the term “lender of last resort” and how does it relate to the financial crisis of 2007-2008? How do government and Federal Reserve emergency loans relate to the concept of moral hazard?

> How do each of the following relate to the financial crisis of 2007-2008: declines in real estate values, subprime mortgage loans, mortgage backed securities, AIG.

> Identify three functions of the Federal Reserve of your choice, other than its main role of controlling the supply of money.

> Why do economists nearly uniformly support an independent Fed rather than one beholden directly to either the President or Congress?

> What is meant when economists say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers’ banks?

> The following are two hypothetical ways in which the Federal Reserve Board might be appointed. Would you favor either of these two methods over the present method? Why or why not? a. Upon taking office, the U.S. president appoints seven people to the Fed

> There are 300 purely competitive farms in the local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $24 for every $300 invested. What is their percentage rate of return? The other two dairies have a cost structur

> How is the chairperson of the Federal Reserve System selected? Describe the relationship between the Board of Governors of the Federal Reserve System and the 12 Federal Reserve Banks. What is the purpose of the Federal Open Market Committee (FOMC)? What

> Does leverage increase the total size of the gain or loss from an investment, or just the percentage rate of return on the part of the investment amount that was not borrowed? How would lowering leverage make the financial system more stable?

> How would a decrease in the reserve requirement affect the (a) size of the money multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposi

> Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the re

> Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. How might it temporarily remedy this situation through the Federal funds market? Now assume Mountain Star finds that its reserves wil

> “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.” Explain.

> “Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.” Do you agree? Explain why or why not.

> Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held

> What is the difference between an asset and a liability on a bank’s balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?

> Why is the banking system in the United States referred to as a fractional reserve bank system? What is the role of deposit insurance in a fractional reserve system?

> A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275. What are

> Explain why merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. What risk did goldsmiths introduce into the payments system by issuing loans in the form of gold receipts?

> What “backs” the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? Who in the United States is responsible for maintaining money’s purchasi

> Explain and evaluate the following statements: a. The invention of money is one of the great achievements of humankind, for without it the enrichment that comes from broadening trade would have been impossible. b. Money is whatever society says it is. c

> What are the components of the M1 money supply? What is the largest component? Which of the components of M1 is legal tender? Why is the face value of a coin greater than its intrinsic value? What near-monies are included in the M2 money supply?

> Which two of the following financial institutions offer checkable deposits included within the M1 money supply: mutual fund companies; insurance companies; commercial banks; securities firms; thrift institutions? Which of the following items is not inclu

> What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions.

> True or False: The financial crisis hastened the ongoing process in which the financial services industry was transforming from having a few large firms to many small firms.

> City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company’s chances for success are dubious, but City Bank makes the loan

> James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a state pension plan, which at the same time purchases an

> Which of the following is not a function of the Fed? a. Setting reserve requirements for banks. b. Advising Congress on fiscal policy. c. Regulating the supply of money. d. Serving as a lender of last resort.

> A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders. What is its percentage rate of return? Is the firm earning an e

> An important reason why members of the Federal Reserve’s Board of Governors are each given extremely long, 14-year terms is to: a. Insulate members from political pressures that could result in inflation. b. Help older members avoid job searches before

> Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates? a. The Federal Reserve System. b. The 12 Federal Reserve Banks. c. The Board of Governors of the Federal Reserve System. d. The Federal Op

> Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar? a. It will rise by a third (33.3 percent). b. It will rise b

> Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small denominated time deposits, and $30 million of money market mutual fund deposits. Fr

> The three functions of money are: a. Liquidity, store of value, and gifting. b. Medium of exchange, unit of account, and liquidity. c. Liquidity, unit of account, and gifting. d. Medium of exchange, unit of account, and store of value.

> Suppose that Lady Gaga goes to Las Vegas to play poker and at the last minute her record company says it will reimburse her for 50 percent of any gambling losses that she incurs. Will Lady Gaga wager more or less as a result of the reimbursement offer? W

> Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of existing financial securities at a geometric rate, specifically from $2 to $4 to $8 to $16 to $32 to $64 over a 6-year time period. Ove

> Suppose the price level and value of the U.S. dollar in year 1 are 1 and $1, respectively. If the price level rises to 1.25 in year 2, what is the new value of the dollar? If, instead, the price level falls to .50, what is the value of the dollar?

> Assume that Jimmy Cash has $2,000 in his checking account at Folsom Bank and uses his checking account card to withdraw $200 of cash from the bank’s ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated tr

> Assume that the following asset values (in millions of dollars) exist in Ironmania: Federal Reserve Notes in circulation = $700; Money market mutual funds (MMMFs) held by individuals = $400; Corporate bonds = $300; Iron ore deposits = $50; Currency in co

> How can patents speed up the process of creative destruction? How can patents slow down the process of creative destruction? How do differences in manufacturing costs affect which industries would be most likely to be affected by the removal of patents?

> Suppose that this year’s nominal GDP is $16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level five years ago. Using that index, we find that this year’s real GDP