1. TRUE/FALSE 1. The Federal Reserve primarily uses open market operations to change the money supply. 2. If the Fed buys bonds in the open market, the money supply decreases. 3. If the Fed decreases reserve requirements, the money supply will increase. 4. Aggregate demand shifts to the left if the money supply decreases. 5. An increase in the money supply shifts the aggregate supply curve right. 6. The multiplier is found as MPC/(1 – MPC).

2. 7. The purchase of final goods and services by households is called investment. 8. The purchase of final goods and services by households is called public sector expenditure. 9. The purchase of final goods and services by households is called consumption. 10. GDP is represented by C + I + G. 11. GDP is represented by NX + G. 12. GDP is represented by I + G + NX. 13. GDP is represented by C + I + G + NX. 14. You pay a doctor $200 to treat an arm that you broke in an accident. How would this influence GDP? GDP would increase.

3. 15.You pay a doctor $200 to treat an arm that you broke in an accident. How would this influence GDP? GDP would decrease. 16.You pay a doctor $200 to treat an arm that you broke in an accident. How would this influence GDP? GDP would not be affected because a tangible good was not produced. 17.You pay a doctor $200 to treat an arm that you broke in an accident. How would this influence GDP? GDP would increase, but by less than $200 because a tangible good was not produced. 18. Government purchases are included in GDP. 19. Government purchases are not included in GDP.

4. 20. Government purchases are included in GDP only if the purchases are made by the federal government. 21. Government purchases are included in GDP only if the purchases are made by state and local governments. 22. The largest component of GDP is net exports. 23. The largest component of GDP is consumption. 24. The largest component of GDP is government purchases. 25.The largest component of GDP is investment. 26. Net exports is calculated as exports minus imports. 27. Net exports is calculated as imports minus exports. 28. Net exports is calculated as imports plus exports. 29. Compared to $100 next year, $100 this year is of equal value.

5. 30. Compared to $100 next year, $100 this year is of greater value. 31. Compared to $100 next year, $100 this year is of lesser value. 32.Compared to $100 next year, $100 this year is impossible to compare. 33.Other things being equal, when the Fed raises the reserve requirement, the money supply tends to fall. 34.Other things being equal, when the Fed raises the reserve requirement, bank reserves tend to expand. 35.Other things being equal, when the Fed raises the reserve requirement, bank lending tends to increase. 36.Other things being equal, when the Fed raises the reserve requirement, the money supply is not affected.

6. 37. When the Fed sells securities in the open market, The money supply will decrease. 38. Suppose the reserve ratio is 10%. There are $100,000 of excess reserves in the banking system. The maximum amount by which the money supply can expand is $10,000. 39.Suppose the reserve ratio is 10%. There are $100,000 of excess reserves in the banking system. The maximum amount by which the money supply can expand is $100,000. 40.Suppose the reserve ratio is 10%. There are $100,000 of excess reserves in the banking system. The maximum amount by which the money supply can expand is $900,000.

7. 41.Suppose the reserve ratio is 10%. There are $100,000 of excess reserves in the banking system. The maximum amount by which the money supply can expand is $1,000,000. 42. In all, how many Federal Reserve District Banks are there? 12. 43.In all, how many Federal Reserve District Banks are there? 7. 44.In all, how many Federal Reserve District Banks are there? 5 45.In all, how many Federal Reserve District Banks are there? 14. 46. The members of the Board of Governors are appointed for 20-year terms.

8. 47. The chairperson of the Board of Governors has an 8- year term as chair. 48. A medium of exchange is an economy-wide accepted asset that can purchase all other goods and services. 49. Suppose you find $50,000 cash in your closet and deposit it into your checking account in a commercial bank. then M-1 increases by $50,000. 50.Suppose you find $50,000 cash in your closet and deposit it into your checking account in a commercial bank. then M-1 remains constant. 51.Suppose you find $50,000 cash in your closet and deposit it into your checking account in a commercial bank. then M-1 decreases by $50,000.

9. 52.Suppose you find $50,000 cash in your closet and deposit it into your checking account in a commercial bank. If the reserve requirement is 10 percent, M-1 increases by $5,000. 53. If the Fed wishes to reduce the money supply it would most likely purchase securities through its open market operations. 54.If the Fed wishes to reduce the money supply it would most likely sell securities through its open market operations. 55.If the Fed wishes to reduce the money supply it would most likely lower the discount rate. 56.If the Fed wishes to reduce the money supply it would most likely lower the reserve requirement.

10. 57. The discount rate is the interest rate charged when one bank borrows from another bank. 58.The discount rate is the interest rate charged by the Fed on funds loaned to banks. 59. As the price level increases, real GDP will increase. 60. A decrease in the price level indicates that the economy has experienced deflation. 61.A decrease in the price level indicates the existence of inflation. 62.A decrease in the price level indicates a decline in real GDP. 63.A decrease in the price level indicates that either inflation or deflation may exist.

11. 64. If the marginal propensity to consume is 0.75, then the multiplier is 0.25. 65.If the marginal propensity to consume is 0.75, then the multiplier is 25. 66.If the marginal propensity to consume is 0.75, then the multiplier is 4. 67.If the marginal propensity to consume is 0.75, then the multiplier is 7.5. 68. Taking the multiplier effect into account, a $100 million increase in government spending will increase real output by less than $100. 69.Taking the multiplier effect into account, a $100 million increase in government spending will decrease real output by less than $100.

12. 70.Taking the multiplier effect into account, a $100 million increase in government spending will increase real output by more than $100. 71.Taking the multiplier effect into account, a $100 million increase in government spending will decrease real output by more than $100. 72. The marginal propensity to consume refers to the tendency to save relative to income. 73.The marginal propensity to consume refers to the fraction of GDP that is spent on consumption. 74.The marginal propensity to consume refers to the fraction of income that is spent on consumption. 75.The marginal propensity to consume refers to the fraction of extra income that is spent on consumption.