Q&A Hero

Q: Suppose increased costs for security raised the costs of production for all firms. Explain how this would affect aggregate supply, output, and the price level in the short run and the long run.

Q: Banks face liquidity risk because A) they can have difficulty meeting their depositor's demands to withdraw money. B) they are unable to borrow from the Federal Reserve. C) households and businesses may seek to borrow a large amount of funds in a short period of time. D) governments tend to run high budget deficits.

Q: A bank panic occurs when A) a bank is worried that its loans will not be repaid. B) an individual bank cannot meet its reserve requirements. C) a bank lacks sufficient funds with which to make loans. D) the situation in which many banks experience a bank run simultaneously.

Q: Suppose ATM costs increased because of additional security required to prevent electronic fraud. Explain how this would affect money demand, aggregate demand, output, and the price level in the short run and the long run.

Q: Banks have a maturity mismatch since A) they borrow long term, but lend short term. B) they borrow short term, but lend long term. C) some of their loans are short term while others are long term. D) some of their borrowings are short term while others are long term.

Q: The process by which simultaneous withdrawals by a particular bank's depositors results in the bank closing is known as a A) contagion. B) bank run. C) financial crisis. D) bank panic.

Q: Suppose business firms collectively become pessimistic about prospects for future profits because of continued worries about terrorism. Explain how this would affect investment, aggregate demand, output, and the price level in the short run and the long run.

Q: The creation of a lender of last resort in the United States A) occurred in response to banking panics. B) was mandated in the U.S. Constitution. C) occurred in response to the S&L crisis of the 1980s. D) has been recommended by the Treasury in its report of late 1992.

Q: Which of the following is NOT true of an insolvent bank? A) Its net worth is negative. B) It may be unable to pay off its depositors. C) The value of its assets is less than the value of its liabilities. D) It must have no more deposits.

Q: Answer the questions below.a. Suppose the economy is initially in long-run equilibrium in the AD-ASmodel. Draw a diagram showing long-run equilibrium, including the AD, LRAS, and SRAS curves.b.Now suppose stock prices decline sharply. Draw a new diagram showing the AD,LRAS,and b. SRAScurves. How have the level of output and the price level changed? What happens to consumption spending and investment spending?c.Redraw your diagram from part b, then draw new lines to show what would happen if the Fed changed monetary policy to return the economy to full-employment equilibrium. Does the money supply increase or decrease? Which curve (AD, LRAS, or SRAS) shifts as a result of the Fed's policy change? What happens to the price level and level of output compared withwhat they were in part b? What happens to consumption spending and investment spending compared with what they were in part b?

Q: Congress created the Federal Reserve System A) to serve as a lender of last resort. B) to process the receipt of taxes received by the Internal Revenue Service. C) to regulate the value of the U.S. dollar against foreign currencies. D) to provide a source of mortgage loans to the residential housing market.

Q: A rise in the price level in an economya. shifts its long-run aggregate supply curve to the right. b. shifts its long-run aggregate supply curve to the left.c. does not have any effect on its long-run aggregate supply. d. does not have any effect on its aggregate demand.

Q: Which of the following is a difference in the views of Keynesian and classical economists?a. Keynesians believe that prices and wages adjust quickly, whereas the classicals believe they adjust slowly. b. Keynesians believe that policymakers have full knowledge about the state of an economy, whereas the classicals believe they don't.c. Keynesians believe that policymakers cannot offset shocks to an economy, whereas the classicals believe they can.d. Keynesians believe that most shocks to an economy are to long-run aggregate supply, whereas the classicals believe the shocks are to aggregate demand.

Q: What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?

Q: With the price level measured on the vertical axis and output measured on the horizontal axis, the long-run aggregate-supply curvea. is vertical.b. is upward-sloping. c. is horizontal.d. is downward-sloping.

Q: The believe that an economy will adjust on its own without any government policy interventions. a. Keynesiansb. classical economists c. monetaristsd. institutional economists

Q: Which of the following is an assumption of the aggregate demand-aggregate supply model?a. Capital stock cannot be varied in the short run.b. An economy is always at full-employment level in the short run.c. Producers are reluctant to change prices of their products even in the long run. d. Long-run aggregate supply curve slopes upward.

Q: The believe that it takes a long time for prices and wages to change to restore equilibrium in an economy. a. Keynesiansb. classical economists c. monetaristsd. institutional economists

Q: As a result of the financial crisis of 2007-2009, the size of the shadow banking system: A) became smaller than the commercial banking system B) became larger than the commercial banking system C) declined, but remained larger than the commercial banking system D) increased, but remained smaller than the commercial banking system

Q: Full-employment output is the amount of output produced when the economy is a. in recession.b. above the natural rate of unemployment. c. utilizing all of its labor and capital.d. in equilibrium.

Q: All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT: A) some trading of derivatives are required to take place on exchanges B) large hedge funds are required to register with the SEC C) firms selling mortgage-backed securities and similar assets are required to hold 5% of the credit risk D) securitized loans must now be insured

Q: The amount of output produced when the unemployment rate equals the natural rate of employment in an economy is called output.a. naturalb. aggregatec. full-employment d. long-run

Q: Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009? A) increased leverage B) government insuring money market deposits C) many firms borrowing long term for short-term investments D) trading of derivatives on exchanges

Q: Which government agency regulates futures markets? A) SEC B) Commodity Futures Trading Commission C) Board of Trade D) the Federal Futures Agency

Q: Which of the following is true of an economy at full employment?a. There is no job turnover in the economy.b. The unemployment rate in the economy is equal to the natural rate of unemployment. c. The economy's labor and capital are not fully utilized.d. An increase in price level increases the full-employment level of output.

Q: Which of the following is NOT a form of a short-term loan in the shadow banking system? A) repurchase agreements B) commercial paper C) money market mutual fund shares D) bank deposits

Q: Which of the following is likely to be more of a problem after the introduction of deposit insurance? A) moral hazard B) adverse selection C) contagion D) bank runs

Q: The unemployment rate reflecting normal job turnover is called a. the natural rate of unemployment.b. the non-accelerating investment rate of unemployment (NAIRU).c. frictional unemployment.d. structural unemployment.

Q: Which of the following is NOT a reason that firms in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 2007-2009? A) They could invest in riskier assets. B) Investors had no insurance against loss of principal. C) They made investments that would lose value if housing prices decline. D) They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.

Q: What was the primary reason that Congress initiated deposit insurance in the 1930s? A) protect the deposits of individual savers B) provide more of an incentive for depositors to monitor bank activities C) reduce systemic risk to the financial system D) reduce information problems in the banking system

Q: Which of the following equations is true of aggregate demand?a. Aggregate demand = consumption + investment - government spending - net exports b. Aggregate demand = consumption - investment - government spending - net exportsc. Aggregate demand = consumption + investment + government spending + net exports d. Aggregate demand = consumption - investment + government spending + net exports

Q: When all capital and labor are fully utilized, the economy is said to be a. at the peak of the business cycle.b. experiencing an expansion. c. at full employment.d. sustainable.

Q: What regulatory change did Congress approve in 2010 to reduce counterparty risk in the shadow banking system? A) push more trading of derivatives onto exchanges B) required investment banks to follow the same rules on leverage as commercial banks C) require increased collateral for those trading derivatives D) banned trading of mortgage-backed securities

Q: Which agency did Congress create in the 1930s to reduce information costs in financial markets? A) FDIC B) SEC C) Federal Reserve D) Consumer Financial Protection Agency

Q: The Federal Reserve's surveys of bank loan officers can help the Fed determine whether: A. a drop in the quantity of loans granted resulted from fewer applications or a tightening of credit standards.B. an increase in the quantity of loans granted resulted from fewer applications or a tightening of credit standards.C. climbing interest-rate spreads are the result of more borrowers or fewer loans being granted.D. an increase in the quantity of new loans was due to a decrease in supply or an increase in demand.

Q: The nominal interest rate in an economy decreases when a. the aggregate demand curve shifts to the left.b. the money supply curve shifts to the left.c. the aggregate supply curve shifts to the right. d. the money demand curve shifts to the left.

Q: The aggregate-demand curve shows the combinations of___ and___ that are consistent with equilibrium in the market for goods services and the market for money.a. the price level; outputb. the price level; the real interest ratec. the real interest rate; the money supplyd. the money supply; output

Q: The shadow banking system refers to A) commercial banks. B) community banks. C) pawn shops and institutions that offer payday loans. D) nonbank financial institutions such as investment banks and hedge funds.

Q: The Federal Reserve's surveys of bank loan officers contain questions about: A. the interest rates being charged.B. the supply of and demand for loans.C. the quantity and quality of loans.D. all of the answers given are correct.

Q: When the price level in an economy declinesa. the demand for money in the economy increases.b. the nominal interest rate in the economy increases. c. the total consumption in the economy reduces.d. the aggregate demand in the economy increases.

Q: Government spending consitutues about of U.S. economy's aggregate demand. a. 1/10b. 1/6 c. 1/4 d. 1/2

Q: How do defined-contribution plans differ from defined-benefit plans?

Q: The Federal Reserve surveys lending officers regularly to: A. determine the interest rates they charge.B. get a feel for the supply and demand for loans.C. get a feel for the quantity and quality of loans.D. all of the answers given are correct.

Q: With the price level measured on the vertical axis and output measured on the horizontal axis, the aggregate-demand curvea. is vertical.b. is downward-sloping. c. is horizontal.d. is upward-sloping.

Q: A rise in the incomes of domestic consumers causes net exports to a. decline.b. not change. c. rise.d. rise at first, then decline later.

Q: What are three reasons that employees may prefer to save through pensions provided by employers rather than through savings accounts?

Q: A defined benefits plan A) is always fully funded. B) may be underfunded but cannot be overfunded. C) may be overfunded but cannot be underfunded. D) may be either underfunded or overfunded.

Q: Which of the following statements is most correct? A. High real interest rates cause recessions.B. Central bankers raise real interest rates to cause recessions.C. There is no evidence that high real interest rates are followed by lower levels of growth.D. There is evidence that high real interest rates are followed by lower levels of growth.

Q: A rise in the incomes of foreign consumers, everything else remaining unchanged, causes net exports to a. decline.b. not change. c. rise.d. rise at first, then decline later.

Q: Which of the following are statisticians who compile statistics to predict the risk of an event occurring in the population? A) rocket scientists B) quants C) actuaries D) risk analysts

Q: The direct impact on spending of short-term interest rate changes by central banks is: A. definitely the strongest of all transmission mechanisms.B. not that powerful.C. only effective for consumption but not investment.D. only effective for net exports but not for investment and consumption.

Q: In a defined contribution pension plan, A) pension income varies depending on how well the plan's investments have done. B) the employee is promised an assigned benefit based on earnings and years of service. C) if the funds in the pension plan exceed the amount promised, the excess accrues to the issuing firm or institution. D) all earnings are taxable as regular income.

Q: A rise in the real interest rate, everything else remaining unchanged, will cause household investment in housing to a. decline.b. not change. c. rise.d. rise at first, then decline later.

Q: A specified amount of a claim that the insurance company does not need to pay is called: A) coinsurance B) deductible C) copayments D) premium

Q: Vesting refers to A) the right of the holder of an insurance policy to collect for an insurable event. B) the shielding of returns on whole life policies from taxation. C) the length of service required of an employee before he or she is eligible for a pension. D) the payments made by an employee into a pension plan.

Q: The impact of monetary policy on the exchange rate and net exports is best described as: A. the strongest of all the parts of the transmission mechanism.B. powerful, but lagging.C. difficult to forecast.D. nonexistent.

Q: A rise in wealth, everything else remaining unchanged, will cause household investment in housing to a. decline.b. not change. c. rise.d. fall at first, then rise later.

Q: What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions? A) 401(k) plans B) Social Security plans C) Early retirement plans D) 486(b) plans

Q: In which of the following have pension funds invested the most? A) corporate equities and mutual fund shares B) government securities C) corporate bonds D) mortgages

Q: With respect to consumer behavior, the interest-rate channel of monetary policy transmission appears to be: A. weak because people's decisions to purchase cars or houses depend more on short-term rates rather than long-term rates.B. weak because people's decisions to purchase cars or houses depend more on long-term rates rather than short-term rates.C. strong because people's decisions to purchase cars or houses depend on the short-term rates that policymakers can change.D. strong because it affects both spending and saving decisions.

Q: A rise in the real interest rate, everything else remaining unchanged, will cause business investment spending to a. decline.b. not change. c. rise.d. rise at first, then decline later.

Q: Investment spending on physical capital is about of aggregate demand. a. 1/10b. 1/6 c. 1/4 d. 1/2

Q: To deal with difficulties in administering pension funds, Congress in 1974 passed the A) Corrupt Pension Fund Reform Act. B) Securities and Exchange Act. C) Employee Retirement Income Security Act. D) Social Security Act.

Q: The largest institutional participants in capital markets are A) pension funds. B) insurance companies. C) consumer finance companies. D) business finance companies.

Q: Changing short-term interest rates have a(n): A. strong and immediate impact on household purchase decisions.B. no impact on household purchasing decisions.C. somewhat modest impact on household purchasing decisions.D. none of the answers provided is correct.

Q: An easing of monetary policy should: A. increase spending by households and businesses and increase net exports.B. raise net exports but lower spending by households and businesses.C. decrease spending by households and businesses as well as net exports.D. increase investment and household spending but lower net exports.

Q: A rise in future consumption spending, everything else remaining unchanged, will cause business investment spending toa. decline.b. not change. c. rise.d. fall at first, then rise later.

Q: A rise in the real interest rate will cause consumer spending to a. decline.b. not change.c. rise.d. rise at first, then decline later.

Q: All of the following are potential benefits of defined contribution plans EXCEPT: A) clear ownership rights to the balances of their 401Ks B) lower risk for employees C) if the employee's investments are profitable, the employee can have high income during retirement D) contributions to traditional 401Ks are tax deductible

Q: The interest-rate channel of monetary policy transmission appears to be: A. weak because the investment component of total spending isn't very sensitive to interest rates.B. weak because the investment component of total spending is very sensitive to interest rates.C. strong because the investment component of total spending isn't very sensitive to interest rates.D. strong because the investment component of total spending is very sensitive to interest rates.

Q: The monetary policy transmission mechanism refers to the concept that monetary policy: A. always seems to work the way central bankers think it will.B. works quickly.C. only works through changes consumption and investment.D. affects the economy in potentially many ways.

Q: Which of the following is an investment spending?a. Purchase of stocks b. Purchase of bondsc. Purchase of office buildingd. Purchase of refrigerator by a household

Q: A rise in income will cause consumer spending to a. decline.b. not change. c. rise.d. fall at first, then rise later.

Q: Which of the following traditional channels of monetary policy transmission can be described as powerful? A. The interest-rate channelB. The exchange-rate channelC. Both the interest-rate channel and the exchange-rate channel can be described as very powerfulD. Neither the interest-rate channel nor the exchange-rate channel can be described as very powerful

Q: The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of A) moral hazard. B) adverse selection. C) failure of policyholders to keep paying their premiums. D) excessive government regulation.

Q: All of the following could represent the transmission of monetary policy, except: A. households altering their spending on durable goods.B. income tax rates changing.C. firms altering their growth plans.D. net exports changing.

Q: The total amount of physical capital in all firms and households is called the a. human capital.b. capital stock.c. household income. d. physical product.

Q: Consumption spending is about of aggregate demand. a. 2/3b. 1/2 c. 3/4 d. 5/6

Q: Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of A) moral hazard. B) adverse selection. C) drunk driving. D) failure of policyholders to keep paying their premiums.

Q: Decreases in the real interest rate will result in a(n): A. increase in net exports because it will lead to a depreciation of the dollar.B. decrease in net exports because it will lead to a depreciation of the dollar.C. increase in net exports because it will lead to an appreciation of the dollar.D. decrease in net exports because it will lead to an appreciation of the dollar.