Exam 3 Practice Exam, Econ 204, Fall 2019
Exam 3 Practice Exam, Econ 204, Fall 2019
Exam 3 Practice Exam, Econ 204, Fall 2019
Instructions: This practice exam contains the hardest possible questions related to exam
topics. If you can complete this exam you’re very well prepared for the exam, but again, these
are the hardest possible questions, intended to help you understand which topics you need more
practice on before the exam. This practice exam does not cover the Real World Macro
readings, but the final exam will contain 2-3 questions from each reading. Be sure to revisit
the recitation worksheets for sample RWM questions.
Chapter 12:
1. Which of the following policies will reduce the budget deficit while achieving greater
fiscal restraint?
a. More government expenditure and higher taxes.
b. More government expenditure and lower taxes.
c. Less government expenditure and higher taxes.
d. Less government expenditure and lower taxes.
3. When there is excess aggregate demand, the appropriate fiscal policy would be for the
government to
a. make budget surpluses smaller. c. Make budget deficits larger.
b. Make budget surpluses larger. d. Increase the public debt.
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Econ 204 Exam 3 Practice Exam
10. Policies designed to pay off the national debt will result in:
a. A higher level of aggregate demand.
b. A redistribution of income but not wealth.
c. A smaller level of aggregate demand
d. Inflation.
11. If the cyclical deficit shrank by $60 billion while the structural deficit increased by $35
billion, the total deficit
a. Fell by $25 billion. c. Grew by $95 billion.
b. Grew by $25 billion. d. Fell by $60 billion.
12. Suppose the economy is at a full-employment GDP of $1 trillion and the tax revenue
received by the federal government is always one-fifth of GDP. If planned government
expenditure is $300 billion, the structural
a. Deficit is zero. c. Surplus is $100 billion.
b. Deficit is $100 billion. d. Deficit is $500 billion.
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Econ 204 Exam 3 Practice Exam
14. At the time it occurs, external financing of the debt allows the economy to
a. Consume beyond the production possibilities curve.
b. Reduce the deficit ceiling.
c. Export more goods and services.
d. Reduce the size of the national debt.
Chapter 13
15. Farmer Brown wants some bacon for breakfast. He gets the bacon from Farmer
Hernandez by giving her a dozen eggs. This type of transaction is referred to as
a. A farm transaction.
b. A money exchange.
c. Barter.
d. An efficient exchange of resources.
19. Suppose Oscar withdraws $100 from his checking account and deposits it into his savings
account. This transaction causes M1 to
a. Increase by $100 and M2 to remain the same.
b. Decrease by $100 and M2 to remain the same.
c. Decrease by $100 and M2 to increase by $100.
d. Remain the same and M2 to increase by $100.
20. If bank customers decide as a group to pay off their loans and to not take out any new
loans, ceteris paribus,
a. Excess reserves will decrease.
b. The money multiplier will decrease.
c. The money supply will increase.
d. The money supply will decrease.
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Econ 204 Exam 3 Practice Exam
22. When the reserve requirement changes, which of the following will change for an
individual bank?
a. Transactions account balances and lending capacity.
b. Transactions account balances, total reserves, and excess reserves.
c. Total reserves, required reserves, and excess reserves.
d. Required reserves, excess reserves, and lending capacity.
23. Suppose a bank has $500,000 in deposits and a required reserve ratio of 10 percent. Then
required reserves are
a. $5,000,000. c. $50,000.
b. $500,000. d. $10,000.
24. A single bank with $10,000 of excess reserves and a reserve ratio of 25 percent could
support total transactions account balances of at most
a. $10,000. b. $5,000. c. $40,000. d. $25,000.
25. Suppose a bank has $2 million in deposits, a required reserve ratio of 10 percent, and
total reserves of $500,000. Then it has excess reserves of
a. $50,000. c. $500,000.
b. $200,000. d. $300,000.
26. Refer to Table 13.2. If ABC Bank has a required reserve ratio of 15 percent, it can legally
make a onetime maximum loan of
a. $30,000. c. $50,000.
b. $40,000. d. $80,000.
27. Refer to Table 13.2. With total reserves of $80,000 and a required reserve ratio of 25
percent, ABC Bank could support maximum transactions account balances of
a. $20,000. c. $50,000.
b. $320,000. d. $2,000,000.
28. Refer to Table 13.2. With a required reserve ratio of 10 percent, ABC Bank would have
excess reserves of
a. $20,000. c. $60,000.
b. $40,000. d. $140,000.
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Econ 204 Exam 3 Practice Exam
29. Given a required reserve ratio of 0.25, what is the maximum amount by which the money
supply can increase in response to a $200 million increase in excess reserves for the
whole banking system?
a. $200 million. c. $500 million.
b. $250 million. d. $800 million.
Chapter 14:
30. Which of the following services is performed by the regional Federal Reserve banks?
a. Holding deposits for individuals. b. Providing loans to individuals.
c. Providing currency to private banks.
d. Check cashing for large nonbank corporations.
31. Which of the following provides evidence that the Federal Reserve System is politically
insulated?
a. The Fed governors are appointed by the president of the United States.
b. The Fed governors are appointed for 14-year terms and cannot be reappointed.
c. The Board of Governors is located in Washington, D.C.
d. The Fed acts as a clearinghouse between commercial banks.
32. Which of the following is responsible for buying and selling government securities to
influence reserves in the banking system?
a. Twelve Federal Reserve banks.
b. The executive branch of government.
c. The Federal Open Market Committee.
d. The Board of Governors of the Federal Reserve.
33. Which of the following represents the lending capacity of an entire banking system?
a. Required reserve ratio × total deposits.
b. Total reserves - required reserves.
c. (Total reserves - required reserves) × money multiplier.
d. 1 ÷ (required reserve ratio).
35. When the Fed raises the discount rate, all of the following result except
a. The cost of borrowing reserves for member banks increases.
b. It sends a signal that it is moving toward a slower growth rate for the money
supply.
c. It sends a signal that it is reluctant to lend reserves.
d. It expands the lending capacity of the banking system.
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Econ 204 Exam 3 Practice Exam
36. Which of the following is the principal mechanism used by the Federal Reserve to
directly alter the reserves of the banking system?
a. Changes in the discount rate.
b. Changes in the required reserve ratio.
c. Open market operations.
d. Foreign exchange operations.
38. If the annual interest rate printed on the face of a bond is 12 percent, the face value of the
bond is $1,000, and the current market price of the bond is $1,200, what is the current
yield on the bond?
a. 10.0% b. 12.0 % c. 8.5% d. 5.0%
39. If the Fed buys $25 billion of U.S. bonds in the open market and the reserve requirement
is 20 percent, M1 will eventually
a. Increase by $25 billion. c. Increase by $100 billion.
b. Decrease by $25 billion. d. Decrease by $100 billion.
42. Assume the reserve requirement is 10 percent, demand deposits are $200 million, and
total reserves are $18 million. If the reserve requirement is increased to 14 percent, the
banking system will have
a. Excess reserves equal to $10 million.
b. Excess reserves equal to $18 million.
c. An increase in the money multiplier.
d. A deficiency of reserves equal to $10 million.
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Econ 204 Exam 3 Practice Exam
43. Suppose all of the banks in the Federal Reserve System have $100 billion in transactions
accounts, the required reserve ratio is 0.25, and there are no excess reserves in the
system. If the required reserve ratio is changed to 0.20, the total lending capacity of the
system is increased by
a. $25 billion. c. $10 billion.
b. $20 billion. d. $750 million.
44. Assume an original balance sheet: On the basis of the information in Table 14.3, the
required reserve ratio is
a. 5 %. b. 15 %. c. 25 %. d. 20 %.
45. Assume an original balance sheet: In Table 14.3, if the Fed changes the required reserve
ratio to 10 percent, the lending capacity of the system would eventually
a. Increase by $12B. c. Decrease by $12B.
b. Increase by $120B. d. Decrease by $120B.
46. Assume an original balance sheet: The money supply (M1) in Table 14.3 is
a. $20B. b. $40B. c. $80B. d. $120B.
Chapter 15:
47. The choice to hold money in the form of cash
a. Has no opportunity cost. c. Results in increased interest income.
b. Results in forgone interest. d. Results in greater outstanding debt.
48. The transactions demand for money is most closely associated with which of the
following functions of money?
a. Standard of deferred payment. c. Standard of value.
b. Store of value. d. Medium of exchange.
49. Ceteris paribus, the quantities of money people are willing and able to hold
a. Decrease as interest rates fall.
b. Increase as interest rates fall.
c. Increase as the money supply decreases.
d. Decrease when the speculative demand increases.
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Econ 204 Exam 3 Practice Exam
51. The money supply curve is determined by all of the following except
a. Federal Reserve policy.
b. The lending behavior of private banks.
c. The willingness of individuals to borrow money.
d. The demand for money.
52. The Fed can change the equilibrium rate of interest by changing
a. Government spending. b. Taxes. c. Tariffs.
d. Reserve requirements or the discount rate, or through open market operations.
53. Which shift should occur if the Fed raises the discount rate?
a. The investment demand curve should shift rightward.
b. The aggregate supply curve should shift rightward.
c. The aggregate demand curve should shift leftward.
d. The aggregate demand curve should shift rightward.
54. Which of the following is a series of events that accurately describes the steps by which
restrictive monetary policy is effective?
a. Decrease in interest rate, decrease in M1, and increase in investment.
b. Decrease in M1, increase in interest rate, and decrease in investment.
c. Increase in M1, decrease in investment, and decrease in interest rate.
d. Increase in M1, increase in interest rate, and increase in investment.
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Econ 204 Exam 3 Practice Exam
57. In Fig 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6 percent
by
a. Selling bonds in the open market.
b. Reducing the discount rate.
c. Buying bonds in the open market.
d. Decreasing the reserve requirement.
58. In Fig 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6 percent
by
a. Buying bonds in the open market.
b. Decreasing the reserve requirement.
c. Raising the discount rate.
d. Increasing the amount of coins in circulation.
59. In Figure 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6
percent by doing all of the following except
a. Selling bonds in the open market. c. Raising the reserve requirement.
b. Raising the discount rate. d. Decreasing the federal funds rate.
60. In Fig 15.3, the Fed can decrease the equilibrium interest rate from 6 percent to 2 percent
by
a. Decreasing the reserve requirement. c. Selling bonds.
b. Decreasing the money supply. d. Increasing the discount rate
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Econ 204 Exam 3 Practice Exam
61. According to the monetarist view and the equation of exchange, which of the following
will occur because the Fed sells securities in the open market?
a. A decrease in real interest rates.
b. A decrease in nominal aggregate spending.
c. A lower level of real output.
d. An increase in the price level.
62. According to the extreme monetarist position, using the equation of exchange, an
increase in the quantity of money in circulation will
a. Increase real GDP. c. Have no effect on the price level.
b. Decrease the velocity of money. d. Increase the price level.
63. Effective expansionary monetary policy, according to Keynesian theorists, will do all of
the following except
a. Increase bank lending capacity.
b. Lower real output.
c. Encourage people to borrow and spend money.
d. Reduce interest rates.
65. Using the equation of exchange, if real output increases by 5 percent per year and
velocity is stable, in order to keep the price level stable
a. The interest rate must increase by 5 percent per year.
b. Velocity must increase by 5 percent per year.
c. The money supply must increase by 5 percent per year.
d. The money supply must increase by more than 5 percent per year because
nominal output is greater than 5 percent.
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