ECO 372T Wk 4 – Practice: Knowledge Check

Government Spending   Tax Revenues  GDP

Year 1     $450       $425       $2,000

Year 2     500  450  3,000

Year 3     600  500  4,000

Year 4     640  620  5,000

Year 5     680  580  4,800

Year 6     600  620  5,000

The accompanying table gives budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. The budget deficit in year 3 is

Multiple Choice

• $175 billion.
• $3,050 billion.
• $100 billion.
• $295 billion.

The cyclically adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be

Multiple Choice

• balanced.
• in deficit.
• in surplus.
• expanding.

The basic requirement for an item to function as money is that it be

Multiple Choice

• backed by precious metals—gold or silver.
• authorized as legal tender by the central government.
• generally accepted as a medium of exchange.
• some form of debt or credit.

The government bailout of large institutions creates the problem of moral hazard, which means that these large firms will

Multiple Choice

• not be able to pay back the bailout money.
• have an incentive to make highly risky investments.
• now have to play it safer to reduce their risks.
• be limited in terms of the securities and services that they get involved in.

Theoretically, during a financial crisis, the Fed is supposed to act as a lender of last resort to

Multiple Choice

• all insolvent banks.
• insolvent banks that are illiquid.
• solvent banks that are illiquid.
• insolvent banks that are highly liquid.

If the economy has a cyclically adjusted budget surplus, this means that

Multiple Choice

• the public sector is exerting an expansionary impact on the economy.
• tax revenues would exceed government expenditures if full employment were achieved.
• the actual budget is necessarily also in surplus.
• the economy is actually operating at full employment.

(Consider This) Credit cards are

Multiple Choice

• the fastest-growing component of the M1 money supply.
• near monies that are part of the M2 money supply but not the M1 money supply.
• not money, as officially defined.
• also known as time deposits.

Year Actual Budget Deficit (-) or Surplus (+)      Cyclically Adjusted Deficit (-) or Surplus (+)

1     +1.4%     +0.1%

2     +2.5 +1.1

3     +1.3 +1.1

4     -1.5 -1.1

5     -3.4 -2.7

6     -3.5 -2.4

7     -2.6 -1.8

8     -1.9 -1.8

9     -1.3 -1.4

Refer to the data in the table. The direction of fiscal policy became more expansionary from

Multiple Choice

• Year 1 to 2.
• Year 6 to 7.
• Year 4 to 5.
• Year 5 to 6.

Refer to the graph. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?

Multiple Choice

• P2 and Q4
• P1 and Q1
• P2 and Q2
• P1 and Q3

A checking account entry is money because it

Multiple Choice

• is ensured by the Federal Deposit Insurance Corporation.
• has been declared as such by the federal government.
• performs the functions of money.
• can be sold for currency.

Time deposits of $100,000 or more are

Multiple Choice

• a component of M1.
• a component of M2 but not of M1.
• a component of M1 but not of M2.
• not a component of M1 or M2.

(Consider This) Which of the following is not part of the M2 money supply?

Multiple Choice

• currency in circulation
• credit card balances
• small-denominated time deposits of less than $100,000
• checkable deposits

Which of the following institutions does not provide checkable-deposit services to the general public?

Multiple Choice

• commercial banks
• savings and loan associations
• U.S. Treasury
• credit unions

Which of the following represents the most expansionary fiscal policy?

Multiple Choice

• a $10 billion tax cut
• a $10 billion increase in government spending
• a $10 billion tax increase
• a $10 billion decrease in government spending

The Financial Crisis of 2007–2008 started in which sector of the economy?

Multiple Choice

• foreign trade sector
• consumer durables sector
• dot-com and technology sector
• real estate and housing sector

Refer to the diagram. Discretionary fiscal policy designed to slow the economy is illustrated by

Multiple Choice

• the shift of curve T1 to T2.
• the shift of curve T2 to T1.
• a movement from a to c along curve T2.
• a movement from d to b along curve T1.

The American Recovery and Reinvestment Act of 2009 was implemented primarily to

Multiple Choice

• reduce inflationary pressure caused by oil price increases.
• curb the overspending by households that contributed to the Great Recession.
• bring the federal budget back into balance.
• stimulate aggregate demand and employment.

Which of the following fiscal policy changes would be the most contractionary?

Multiple Choice

• a $40 billion increase in taxes
• a $10 billion increase in taxes and a $30 billion cut in government spending
• a $20 billion increase in taxes and a $20 billion cut in government spending
• a $30 billion increase in taxes and a $10 billion cut in government spending

Discretionary fiscal policy will stabilize the economy most when

Multiple Choice

• deficits are incurred during recessions and surpluses during inflations.
• the budget is balanced each year.
• deficits are incurred during inflations and surpluses during recessions.
• budget surpluses are continuously incurred.

The money supply is backed

Multiple Choice

• by the government’s ability to control the supply of money and therefore to keep its value relatively stable.
• by government bonds.
• dollar-for-dollar by gold and silver.
• by gold reserves representing a fraction of the total value of dollars in circulation.