2

If the economy's actual capital-labor ratio is less than the steady-state capital-labor ratio, growth from convergence

adds to the overall growth of the economy until the new steady-state is attained

The risk structure of interest rates refers to the relationship

among interest rates on bonds that have different characteristics but the same maturities

A decrease in the real wage would result in a

movement along the labor demand curve, causing an increase in the number of workers hired by the firm

An example of a financial intermediary is

mutual funds, insurance companies, commercial banks

If Jennifer withdraws $750 from her checking account and holds it as currency, then M1 will ______ and M2 will _______

not change; not change

Adverse selection occurs when

one party to a transaction takes advantage of knowing more than the other party

The price of a financial asset should equal the

present value of the payments to be received from owning the asset

If individuals save less because inflation lowers returns on savings, this should ________ real interest rates and _______ investment expenditures

raise; reduce

An increase in interest rates

reduces the prices of existing financial assets

Seigniorage is also known as the inflation tax because it

reduces the purchasing power of money

The demand for loanable funds is determined by

the willingness of firms to borrow money to engage in new investment projects

Both moral hazard and adverse selection problems occur when

there is asymmetric information

What is not a cost of expected inflation?

velocity costs

If the money supply grows at 6% and the inflation rate is 2%, the quantity theory predicts that the change in real GDP will be

4%

What is the difference between a stock variable and a flow variable?

A stock variable is measured at a point in time, while a flow variable is measured per time period.

What three actions by households and firms, banks, or the Federal Reserve will cause the value of the money multiplier to decrease?

An increase by households and firms in their holdings of currency relative to their holdings of checking account deposits; a increase in banks' ratio of excess reserves-to-deposits; and an increase in the Fed-mandated required reserve ratio

What benefits does securitization of mortgage loans provide for banks? What benefits does securitization provide for people who want to buy a home?

Banks can expand the number of loans they make and to earn larger profits; therefore it makes more funds available for individuals who want to buy a home.

Why does the Fed have greater control over the monetary base than over the money supply?

Because the money supply is influenced by the money multiplier which is in part affected by the nonbank public

Which of the following statements are TRUE, according to the Brookings Paper Low inflation or no inflation

Firms prefer some inflation, because real wages can be decreased by increasing the nominal wage by less than the inflation rate

Yield curves generally slope upward. A downward-sloping, or "inverted" yield curve is often thought to signal a future recession. Why might this be true?

If there is a recession, income will fall and thus money demand will fall, which will cause interest rates to fall. Thus an inverted yield curve may indicate that market participants expect a recession

Are only commercial banks subject to runs?

No, any financial institution that accepts short-term deposits and uses the funds to make long-term loans is subject to runs

What is deprication?

It is the reduction in the capital stock that occurs because capital goods (machinery equipment, etc.) become obsolete due to technological progress or break down or become worn out.

Explain under what circumstances lenders lose and borrowers gain if the actual inflation rate differs from the expected inflation rate

Lenders lose and borrowers gain when actual inflation exceeds expected inflation

The Federal Reserve publishes data on the M2 money supply even though currency, checking account deposits, and traveler's checks, which are the most liquid of assets, are already measured in M1. The Fed does this because

M2 is a broader measure of the money supply and therefore may convey additional information about economic activity that is not embodied in M1

Which of the following is one of the most important benefits of money in an economy

Money makes exchange easier, leading to more specialization and higher productivity

Other than pooling deposits and making loans, which of the following are the three key services that financial intermediaries perform for savers and borrowers?

Risk sharing, liquidity, and information

All else equal an increase in net exports accompanies by a decrease in expected future profits would cause which of the following shifts?

Supply of savings shifts left and demand investment shifts left

Which of the following actions is not performed by a central bank?

Taking deposits from the public

Which of the following statements is FALSE regarding information from Planet Money Podcast Anatomy of a Bank Takeover

The FDIC makes a public announcement that it will be taking over the Bank of Clark County

According to the Planet Money Podcast, "The Week America's Economy Almost Died," how did the economy freeze?

The commercial paper market froze, so that even low-risk businesses could not borrow

What is the difference between the quantity equation and the quantity theory of money?

The quantity theory of money assumes that velocity is constant, whereas the quantity equation does not require the same assumption

What is a bank run?

The simultaneous decision of many depositors to withdraw their money from a bank

What do economists mean by the time value of money?

The way that the value of a payment changes depending on when the payment is received

Moral hazard occurs when

actions people take after they have entered into a transaction make the other party worse off

Of the three actions that can decrease the money multiplier, the one most responsible for the drop in value of the money multiplier during the financial crisis of 2007-2009 was the increase in

banks' ratio of excess reserves-to-deposits

A financial intermediary:

borrows funds from savers and lends them to borrowers

The level of investment necessary to keep the capital-labor ratio constant is called

break-even investment

The break-even investment line becomes flatter when the depreciation growth rate ______ or the labor force growth rate _______.

decreases, decreases

The money demand curve will shift to the left if real GDP ________ or if the price level ________

decreases; decreases

In dealing with runs, a central bank's role as a lender of last resort

enables it to restore the confidence of depositors and makes it an ultimate source of credit to which banks can turn for loans

According to the Fisher effect, the nominal interest rate will increase by 8% if the

expected inflation rate increases by 8%

The supply of loanable funds is determined by the

extent of foreign saving that is invested in US financial markets, willingness of households to save, extent of government saving

The primary function of the financial system is to

facilitate the flow of funds from lenders to borrowers

If a government chooses to finance a budge deficit by borrowing and the expected inflation rate does not change, this will cause the real interest rate to ________ and the nominal interest rate to _________

increase, increase

When the growth rate of the labor force increases, the break-even level of investment

increases

As the capital-labor ratio increases, investment per worker

increases at a decreasing rate

Break even investment is the

investment rate that keeps the capital-labor ratio constant by offsetting the effects of both depreciation and labor force growth

A government may risk experiencing hyperinflation by printing money rather than issuing bonds to finance a large budge deficit because

investors refuse to buy the government's bonds on the belief that they will never be paid back

Why does the marginal product of capital decrease as more capital is added? As more capital is added to a fixed labor force, each new unit of capital has relatively

less labor to work with, so output increases at a decreasing rate

Securitization occurs when

loans are bundled together into securities that are resold to investors

The often made statement that inflation "greases the wheels of the labor market" means simply that

low inflation allows for real wage adjustments when nominal wages are sticky, thereby permitting labor market adjustments that improve the market's efficiency

The costs of inflation to firms due to reprinting price lists are known as

menu costs

All else equal, a decrease in the government's budget deficit will cause

supply of savings to shift left

In the article "Three Hurdles to 3 percent growth" the authors state that

sustainable growth is driven by changes in capital, labor, and total factor productivity

Seigniorage

the government's profit from issuing fiat money

In the loanable funds model, the supply curve is upward sloping because

the higher the real interest rate, the greater the reward to saving and hence the larger the quantity of funds household will save and a higher real interest rate increases the foreign exchange value of the dollar, which reduces net exports and, as a consequence, increases the quantity of foreign saving available to the domestic loanable funds market

In the loanable funds model, an explanation as to why the demand curve is downward sloping is that

the lower the real interest rate, the more investment projects firms can profitably undertake, and the greater the quantity of loanable funds they will demand

The demand for money is downward sloping because at lower interest rates,

the opportunity cost of holding money is lower

A major shortcoming of a barter economy is

the requirement of a double coincidence of wants