Question Question 1 A government can finance its budget deficit by doing all of the following except: buying bonds. borrowing from its central bank. selling bonds. printing money. 2 points Question 2 According to some economists when a country’s debt-to-GDP ratio exceeds 90 percent: the interest rate will fall, reducing debt service payments. the government will have to purchase more long-term securities. it will compel citizens to buy more U.S. debt. the government will face financial instability 2 points Question 3 An expansionary monetary policy that affects the price level but not real output must result in the shift of: both the AD and SAS curves. only the AD curve. only the SAS curve. neither the SAS curve nor the AD curve. 2 points Question 4 An unanticipated increase in the inflation rate will most likely: either increase or decrease the real value of the national debt, depending on the effect of inflation on capital gains and losses. increase the real value of the national debt. transfer wealth from bondholders to the government. have no effect on the real value of the national debt. 2 points Question 5 Bank required reserves are: a financial asset for the Fed. a financial liability for the bank. counted as money. a financial liability for the Fed. 2 points Question 6 Banks hold people’s cash for free, and sometimes even pay for the privilege of holding it, because: they are nice. deposits allow banks to make profitable loans. the Federal Reserve requires that they do so. the cash can be deposited at the Federal Reserve Bank to earn interest. 2 points Question 7 Checking account balances are: not money. not included in M1. included in M2 but not M1. included in M1 and serve as a medium of exchange. 2 points Question 8 Debt is measured relative to GDP because: the ability of a country to pay off its debt depends on its productive capacity. the ability to produce output depends on the size of the nation’s debt. GDP is always used as a reference point in economics. as long as this ratio remains high, the government will have no trouble repaying the debt. 2 points Question 9 Deficits may be desirable in the short run if they: help to stabilize the economy when the economy falls below potential output. increase savings necessary for future investment and growth. increase savings necessary for future consumption and demand. help to stabilize the economy when the economy is above potential output. 2 points Question 10 Derivatives are financial instruments: that are highly risky. that are extremely safe. whose value depends on the value of another financial instrument. that are highly leveraged but which offer high returns. 2 points Question 11 From 2008 to 2009, the interest rate on 10-year government bonds fell to 2.75 percent, its lowest level in many years. This is most likely the result of: higher inflationary expectations. easier monetary policy. higher nominal budget deficits. higher real budget deficits. 2 points Question 12 How do companies most commonly pay for raw materials and wages they need to produce a product? They sell long term bonds. They get loans from the Federal Reserve. They get short-term loans from financial institutions. They issue stock options and use the funds from those. 2 points Question 13 If banks hold excess reserves whereas before they did not, the money multiplier: will become larger. will become smaller. will be unaffected. might increase or might decrease. 2 points Question 14 If people hang onto money rather than depositing it, the money multiplier will: get larger. stay the same. get smaller. be increased by the Federal Reserve. 2 points Question 15 If the Fed increases the required reserves, financial institutions will likely lend out: more than before, increasing the money supply. less than before, decreasing the money supply. more than before, decreasing the money supply. less than
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