MULTIPLE CHOICE SECTION 1) A personal income tax cut: a. Generate...

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MULTIPLE CHOICE SECTION
1) A personal income tax cut:
a. Generates crowding out
b. Has the exact same effects as a corporate tax cut
c. Helps economies with inflationary gaps
d. Lowers government budget deficits

2) An increase in the required reserve ratio:
a. Is a form of expansionary monetary policy
b. Is a form of contractionary monetary policy
c. Makes interest rates fall
d . Makes net exports rise for sure

3) A decrease in the federal funds rate:
a. Makes net exports rise for sure
b. Is a form of expansionary monetary policy
c. Makes interest rates rise
d. Makes government deficits increase

4) If the minimum reserve requirement for all bank deposits is 25%, then the maximum multiple creation of deposits by the banking system as a whole following a cash deposit of $1,000 would be:
a. 100
b. 2100
c. 4000
d. 10,000

5) Which of the following definitions of the money supply includes only the most liquid forms of money?
a. M1
b. M2
c. savings deposits.
d. money market mutual deposits.

6) Banks try to keep their level of excess reserves low because
1. the Fed charges a penalty for holdings of excess reserves.
2. they are concerned that the money multiplier will become too large.
3. they wish to maximize profits.
4. bank regulators levy fines on the amount of excess reserves.

7) The government banking regulation that places an upper limit on the money supply is
1. deposit insurance by the FDIC.
2. reserve requirements on bank deposits.
3. periodic bank examinations and audits.
4. limitations on the types of assets that a bank may own.

8) A proponent of supply-side economics would advocate
1. increasing income taxes on saving.
2. reducing corporate income tax.
3. increasing capital gains tax.
4. increasing personal income tax.

9) The crowding-in effect depends on the fact that often a decrease in taxes causes a(n)
1. decrease in interest rates and an increase in the price of existing bonds.
2. increase in output, which induces more investment.
3. increase in interest rates and a decrease in the price of existing bonds.
4. decrease in interest rates and the price of existing bonds.

10) A federal budget deficit places a genuine burden on future generations when the
1. crowding-out effect is stronger than the crowding-in effect.
2. crowding-in effect is stronger than the crowding-out effect.
3. crowding-out and crowding-in effects work in opposite directions.
4. crowding-out and crowding-in effects operate in the same direction.

SHORT ANSWER SECTION
Question 1:
Consider the following bank’s balance sheet in a banking system with a required reserve ratio of 20% Assets Liabilities Cash: $500 Checking deposits: $10,000 Deposits with the Fed: $1,500 Loans: $8,000
a) What are the legal, required and excess (if any) reserves?
b) Starting with the initial balance sheet suppose John walks into his bank and deposits $300. What is the maximum change in the money supply that the economy can get based solely on his deposit? (Show your work)

Question 2:
The oversimplified deposit creation multiplier of 1 divided by the required reserve ratio represents the maximum amount of money supply creation that can be obtained out of a dollar of increase in deposits. The actual increase is smaller due to any of three reasons. List those reasons.

Question 3:
In Macroland public or government spending (G) is relatively unproductive, when compared to private real investment (I). Policy makers want to stimulate private investment, but politically they cannot accept inflation arising as a result of this policy. Therefore, they want to keep AD stable while still stimulating real investment. One of the members of the Council of Economic Advisors says there’s nothing they can do then.
a) Do you think he is right? Yes / No
b) If he is wrong, what is the best fiscal policy for the government and monetary authorities facing this situation?

Question 4:
Over the last few months the US economy has slipped into a recession fueled mainly by the burst of the bubble in the housing market and the crisis in Wall Street. In response, the Federal Reserve has been working on an expansionary monetary policy.
a) What is the way in which the Fed has conducted this policy? i.e. which is the particular monetary policy tool that the Fed has used this time?
b) Verbally work through the impact of this type of policy.

Question 5:
Explain some of the steps that a government would wish to adopt in an inflationary environment.

Question 6:
What is "crowding out"? Why is it important in discussions of fiscal policy?

Question 7:
How does a central bank influence the lending capacity of the banks?

Question 8:
Explain the linkages in the causal chain when the Fed conducts a contractionary monetary policy. What will be the ultimate effect on GDP?

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MULTIPLE CHOICE SECTION
1) A personal income tax cut:
a. Generates crowding out
Answer: b. Has the exact same effects as a corporate tax cut
c. Helps economies with inflationary gaps
d. Lowers government budget deficits

2) An increase in the required reserve ratio:
a. Is a form of expansionary monetary policy
Answer: b. Is a form of contractionary monetary policy
c. Makes interest rates fall
d. Makes net exports rise for sure...

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