Chapter 4
Which of the following statements is true?
A lender of last resort is supposed to prevent an outbreak of inflation by raising interest rates to stop excessive borrowing and lending.
A lender of last resort is supposed to prevent recessions by lowering interest rates to troubled borrowers.
A lender of last resort makes emergency loans to businesses and households when banks refuse to lend.
A lender of last resort bails out troubled financial institutions to prevent a financial panic.
A lender of last resort makes emergency loans to state and local governments to prevent massive layoffs.
Banks are vulnerable to failing because:
The Federal Reserve uses the banking system to create excessive amounts of money.
Banks take large risks with their depositors’ and creditors’ funds to earn their profits.
Banks are rife with fraud.
Banks are over-regulated and unable to make sufficient profits to survive.
Banks are too large and poorly managed.
The estate tax attempts to promote equity in the distribution of income and wealth by:
Taxing household income at rates that increase as income rises.
Taxing household wealth once it exceeds a certain threshold.
Taxing household income once it exceeds a certain threshold.
Taxing household wealth once it is transferred from one generation to the next.
Taxing capital gains on assets (capital gains are increases in an asset’s value) at a very high rate.
The social safety net of transfer payments in the U.S. is intended to:
Dramatically shift the distribution of income and wealth from affluent households to poor households.
Redistribute income and wealth from middle income households to the poor.
Reduce economic insecurity for the middle class and prevent poor households from falling into abject poverty.
Redistribute income and wealth from affluent households to middle income and poor households to prevent abject poverty.
Reduce crime and other social ills by aiding the poor.
A negative income tax is a tax where:
Tax rates are kept low for low income households.
Low income households receive payments from the government through the tax system.
Low income households pay no taxes.
Low income households are eligible for transfer payments.
Low income households receive a mix the transfer payments and low tax rates.
To contain inflation policy makers can:
Use the anti-trust laws to prevent large firms from raising their prices.
Promote competition and make it more difficult for firms to raise their prices.
Use expansionary monetary and fiscal policies to increase the supply of goods and services to reduce prices.
Use contractionary monetary and fiscal policies to decrease demand to contain wage and price inflation.
Enforce regulations on “price gouging” to contain price inflation.
A speculative bubble occurs when:
Buyers use credit to make purchases they cannot afford.
Investors buy an asset that they believe the market is undervaluing.
Investors bid up the price of an asset because they are overly optimistic that the price will continue rising.
Investors ignore obvious risks because they are foolish.
Investors are so afraid of taking risks that they buy only the safe assets.
To prevent the failure of large financial institutions from starting a financial panic and an economic crisis, policy makers can:
Make emergency loans to failing financial institutions to prevent the onset of the financial panic.
Raise interest rates to punish those borrowers with excessive debts to stop the panic.
Lower interest rates to encourage the use of credit to stop the panic.
Let the troubled financial institutions fail to prevent the spread of excessive risk taking.
Allow the troubled financial institutions to fail and then permit healthy financial institutions to take them over.
A progressive tax is a tax that:
Increases with income, meaning that the more one makes the more one pays.
Decreases with income, meaning the more one makes the lower the tax rate they pay.
Increases with income, meaning the more one makes their tax rate is unchanged.
Decreases with income, meaning the more one makes their tax rate increases.
Increases with income, meaning the more one makes their tax rate increases.
Expansionary monetary and fiscal policies are used by policy makers in a recession to:
Prevent recessions from occurring.
Keep inflation under control.
Keep people from falling into poverty.
Keep businesses profitable.
Keep recessions as short and mild as possible.
