1.What is the best definition of a government budget deficit?

A. A government budget deficit occurs when government spending exceeds the tax revenues collected in one year

B. A government budget deficit occurs whenever the government increases its total public debt

C. A government budget deficit occurs when the tax revenues collected exceed government spending in one year

D. A government budget deficit occurs whenever there is a reduction in tax rates

2.Which of the following equations is the Equation of Exchange, which states the relationship between the financial sector of the economy (money) and the real sector (output)?

A. MV = PQ

B. S + T + M = I_g+ G + X

C. Y = C + I_g+ G + X_n

3.Which two of the following changes in the US economy would cause US currency toappreciate?

A. Interest rates are higher in the US faster than in our trading partners (monetary contraction)

B. Inflation is higher in the US than it is in our trading partners

C. Productivity is higher in the US that it is in our trading partners

D. The "Change in US Reserve Assets" Account is negative

4.Which of the following statements is true of the Marginal Propensity to Consumer (MPC) and the Marginal Propensity to Save (MPS)?

A. The MPS can be negative if more than half the population is so poor that they have to consume all of their income

B. Both the MPC and the MPS are positive fractions, and they sum to 1

C. The MPC and the MPS sum to less than one because the income that is left over is used by the government sector

D. The MPC is always a positive fraction but the MPS can equal zero if the economy is not heavily capitalized

5.What are some of the safeguards used in the US to protect our fractional reserve banking system against bank failures? Indicate all that apply.

Insurance to cover deposits

A. Transparent and uniform accounting practices by all bank lenders and business borrowers

B. A monetary authority that has the power to directly set all interest rates in the economy

C. A guarantee by the banks that the federal government can borrow at low interest rates

D. Adequate required reserves, so that customer demand for withdrawals can be met

6.Which of the following describes an Open Market Operation that is intended to lower the inflation rate?

A. The Federal Reserve Bank buys bonds from the banks; excess reserves increase and are loaned out at lower interest rates; investors borrow more and invest more

B. The Federal Reserve Bank sells bonds to the banks; excess reserves decrease, banks lend less until their reserves are restored, investors borrow less and invest less

7.Which of the following statements is true about the Consumption Function, the Savings Function, and the Investment Function?

A. Consumption and Savings are functions of Income, while Investment is a function of the interest rate alone

B. Investment and Consumption are functions of Income, while Savings is a function of the interest rate alone

C. Savings and Investment are functions of the interest rate alone, while Consumption is a function of Income

D. Consumption and Savings are functions of Income, while Investment is a function of expected profits given the interest rate on borrowed funds

8.What is the fundamental difference between Fiscal Policy and Monetary Policy?

A. Fiscal policy affects our currency valuation while Monetary Policy does not

B. Fiscal policy deals only in bonds that have already been issued while Monetary policy has the power to create new federal government debt

C. Fiscal policy operates directly through the public sector and Monetary policy operates indirectly through private sector banks and investors

D. Fiscal policy affects GDP for one year only, while Monetary policy affects GDP far into the future

9.Which of the following describes the formal measure of the Natural Rate of Unemployment?

A. The natural rate of unemployment is measured as the sum of frictional and structural unemployment; it reduces our estimate of Potential GDP

B. The natural rate of unemployment is the difference between the unemployment rate at the highest GDP level in the business cycle (peak) and the lowest GDP level in the business cycle (bottom of the recession)

C. The natural rate of unemployment is measured as the unemployment associated with the difference between actual GDP and Potential GDP

D. The natural rate of unemployment is measured as all unemployed workers minus those who have seasonal jobs and are only out of work for part of the year; it reduces our estimate of the U3 unemployment rate

10.Which of the following equations is the National Income Identity, which states that Incomes must equal Expenditures?

A. MV = PQ

B. S + T + M = I_g+ G + X

C. Y = C + I_g+ G + X_n

11.What are the main roles of the Federal Reserve Bank in the US economy?

A. The Federal Reserve Bank holds the checking account of the US government and issues checks for tax refunds, but otherwise it has nothing to do with our private banking system

B. The Federal Reserve Bank is the monetary authority in the US; it controls the money supply, it holds the reserves of the banking system, and it holds the checking and savings accounts of the US government

C. The Federal Reserve Bank makes payments of US currency to foreign countries when we import goods. Except for the trade sector it has nothing to do with US government transactions or the private banking system

D. The Federal Reserve Bank is the monetary authority in the US; it fixes prices and wages in industries that are important to national security and regulates the banking industry

12.What is transactions demand for money and how does it change over the business cycle?

A. Transactions demand is the demand for money by consumers and investors to make expenditures; it rises during upturns and falls during recessions

B. Transactions demand is demand by the banks for non-borrowed excess reserves; it rises during recessions and falls during downturns

C. Transactions demand is the demand for money by the Federal Government and no one else; it rises during recessions when the government runs budget deficits

D. Transactions demand is the demand by banks for funds borrowed from the Federal Reserve Bank at the discount window; it rises during upturns and falls during recessions