Practice Exam 3  for ECON 2500 with Elaine Peterson

Use separate sheets of paper as needed to answer. Please be sure to put your name on your answer sheets and the part of the exam you are answering and the number of the question you are answering. Note there are 5 parts and the number of points for each part is noted below.

Part I: (25 points) Please explain the following briefly:
1. What 3 kinds of timing problems might we face in using proactive Keynesian fiscal policy?
2. Why does the Fed worry about inflation more when the stock market is rising in value rapidly?
3. Why is the Employment Act of 1946 important?
4. How can the actual budget be in deficit at the same time that the structural budget is in balance?
5. Why is state and local finance (fiscal policy) generally considered more procyclical than federal finance (fiscal policy)?

Part II: (15 Points) Use separate clearly labeled diagrams for each of the following:
1. Using a graph explain "crowding out".
2. How would a decrease in the money supply be likely to affect the AD and AS model?
3. What would be the effect of purchases of government securities by the FOMC on interest rates in the short run (to anyone except Rational Expectations Theorists).

Part III: (20 Points) Please explain each of the following briefly:
1. Who’s the current chairman of the Fed?
2. Is U.S. currency backed by gold?
3. What are the functions of money?
4. How many Federal Reserve Banks are there?
5. What is the monetary equation (explain any abbreviations)?

Part IV: (20 Points) Choose the best answer.
1. If the economy is to have built-in stability, when real GDP falls,

A) tax revenues and government transfer payments both should fall
B) tax revenues and government transfer payments both should rise
C) tax revenues should fall and government transfer payments should rise
D) tax revenues should rise and government transfer payments should fall
E) the federal budget should be balanced each year


2. Use the following table to answer about the money supply, given the following hypothetical data for the economy.  


Billions of dollars

Checkable deposits


Small time deposits




Large time deposits


Noncheckable savings deposits


Money market deposit accounts


Money market mutual funds


The size of the M1 money supply in billions of dollars is:

A) 1100  

B) 1400        

C) 2400      

D) 1350    

E) 1905



3. Based on the following information and assuming a required reserve ratio of 20%. If the Fed bought $20 of government securities from the bank with the balance sheet below and considering the maximum amount the bank could lend what’s the maximum expansion of the money supply?

Bank  Assets

Bank Liabilities

Total Reserves 260

Demand Deposits 1000

Loans 700

Savings Deposits 100

Government Securities 140


A) $80         B) $600         C) $1000         D) $100         E)$400


4. The notion that the government's fiscal policies can stabilize the economy began to gain acceptance:

A) Under the Reagan administration in the 1980s
B) During the depression of the 1930s
C) During the stagflation era of the 1970s
D) During the turbulent 1960s
E) During the early founding of U.S. institutional policies in 1785


Part V: (20 Points) Explain the following thoroughly.
1. Compare and contrast the basic tools of fiscal policy and monetary polic