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ECO 372T Wk 4 - Practice: Knowledge Check

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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.

 

 

YearActual 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

 

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