Econ exam 3
a country purchases $110 billion of foreign-produced goods and services and sells $120 billion of domestically produced goods and services to foreign countries. It has imports of
$110 billion and a trade surplus of $10 billion
The manager of the bank where you work tells you that the bank has $100 million in deposits and $22 million in loans. If the reserve requirement is 8% how much is the bank holding in excess reserves?
$14 Million --22 Million - (100 x 8%)
during some year a country had exports of $85 billion, imports of $60 billion, and investment of 130 billion. What was its saving during the year?
$155 billion (85 + 130 - 60)
If a bank with a required reserve ratio of 15 percent receives a deposit of $600, it now has a
$510 increase in excess reserves and a $90 increase in required reserves
Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5%, and excess reserves are $30 billion. What is the level of loans?
$5400 billion --(300-270) x 5%
If M=5,000 P=5.5 and Y= 9,000, what is velocity
10
How many banks does the federal reserve have
12
If the price level increased from 130 to 150, then what was the inflation rate
15.4 %(new price level - old price level) / old price level
A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the reserve requirement. It follows that the reserve requirement is
25%-- 1-(6000/8000)
The nominal interest rate is 6% and the inflation is 3%. What is the real interest rate?
3%
suppose that a country imports $120 million worth of goods and services and exports $160 million worth of goods and services. What is the value of net exports?
40 million
The board of governors has up to __ members who serve ____ year terms
7, 14
last year, you earned a nominal wage of $10 per hour and the price level was 120. This year your nominal wage is $11 per hour, buy you are unable to purchase the same amount of good as last year. The price level this year must be A: 135 B: 132 C: 125 D: 121
A: 135
which of the following is an example of a menu costs A: advertising new prices B: reduced money holdings C: decreased savings D: wrong consumption decisions
A: advertising new prices
suppose the market for money, drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, is in equilibrium. A decrease in the money supply creates an excess A: demand for money that is eliminated by falling prices B: supply for money that is eliminated by falling prices C: demand for money that is eliminated by rising prices D: supply for money that is eliminated by falling prices
A: demand for money that is eliminated by falling prices
which of the following is included in M2 but not M1 A: small time deposits B: demand deposits C: traveler's checks D: currency
A: small time deposits
If the reserve requirement is 10 percent, which of the following pairs of changes would both allow a bank to lend out an additional $10,000 A: the fed buys a $10,000 bond form the bank or the fed lends the bank $10,000 B: the fed sells a $10,000 bond to the bank or the fed lends the bank $10,000 C: the fed buys a $10,000 bond from the bank or someone deposits in the bank D: the fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank
A: the fed buys a $10,000 bond from the bank or the fed lends the bank $10,000
money is A: the most liquid asset but imperfect store of value B: the most liquid asset and a perfect store of value C: neither the most liquid and nor a perfect store of value D: not the most liquid asset but a perfect store of value
A: the most liquid asset but an imperfect store of value
under the assumptions of the fisher effect and monetary neutrality, if the money supply growth rate rises, then A: the nominal interest rate rises, but the real interest rate does not B: neither the nominal nor the real interest rate rise C: both the nominal and the real interest rate rise D: the real interest rate rises, but the nominal interest rate does not
A: the nominal interest rate rises, but the real interest rate does not
an associate professor oh physics gets $200 a month raise. With her new monthly salary she can buy more goods and services than she could buy last year. A: her real and nominal salary have risen B: her real salary has risen and her nominal salary has fallen C: her real salary has fallen and her nominal salary has risen D: her real and nominal salary have fallen
A; her real and nominal salary have risen
Which of the following is NOT included in M1 A: traveler's checks B: savings deposits C: demand deposits D: currency
B: savings deposits
Which of the following does the federal reserve NOT do? A: Serves as a bank regulator B: conduct monetary policy C: conduct fiscal policy D: act as a lender of last resort
C: conduct fiscal policy
If the Federal Open Market Committee decides to increase the money supply, it A: creates dollars and uses them to purchase various types of stocks and bonds from the public B: sells government bonds form its portfolio to the public C: creates dollars and uses them to purchase government bonds from the public D: sells various types of stocks and bonds from its portfolio to the public
C: creates dollars and uses them to purchase government bonds fro the public
which of the following is included in M2 A: credit cards B: corporate bonds C: money market mutual funds D: large time deposits
C: money market mutual funds
according to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also either a A: rise in output or a rise in velocity B: fall in output or fall in velocity C: rise in output or fall in velocity D: fall in output or rise in velocity
C: rise in output or fall in velocity
which of the following best represents fiat money? A: a gold bar B: baseball cards C: the euro D: monopoly money
C: the euro
which of the following groups meets to discuss changes in the economy and determine monetary policy? A: congress B: the president of the united states C: the federal open market committee D: the board of directors form each of the 12 regional federal reserve banks
C: the federal open market committee
Which of the following is NOT a function of money? A: unit of account B: medium of exchange C: store of value D: protection against inflation
D: protection against inflation
Which of the following policies can the fed follow to increase the money supply? A: reduce the quantity of funds available through the term auction facility B: Increase reserve requirements for banks C: sell government bonds D: reduce the interest rate on reserves
D: reduce the interest rate on reserves
which of the following is NOT an example of monetary policy? A; the federal open market committee decides to buy bonds B: the federal reserve reduces the reserve requirement C: the federal open market committee decides to sell bonds D the federal reserve facilitates bank transactions by clearing checks
D: the federal reserve facilitates bank transactions by clearing checks
in order to maintain stable prices, a central bank must A: maintain low interest rates B: keep unemployment low C: sell indexed bonds D: tightly control the money supply
D: tightly control the money supply
what is an example of US foreign portfolio investment
Erica, a US resident, buys bonds issued by the swiss government
If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?
It increases by $150,000
M2 Formula
M1 + savings deposits + small time deposits + money market mutual funds + money marked deposit accounts
you receive money as payment for mowing your neighbor's lawn. Which function of money does this best illustrate?
Medium of exchange
public institution owned by private commercial banks in the district that are members of the fed
Quasi
On a given morning, Franco sold 40 pairs of shoes for a total of $800 at his shoe store. Which variable is nominal and which is real?
The $800 is a nominal variable. The quantity of shoes is the real variable
an open economy's GDP can be expressed by this formula
Y= C + I + G + NX
taking advantage of price differences for the same item in different markets
arbitrage
Exports = imports
balanced trade
when you trade goods for other goods
barter
foreign investors or firms buy US financial assets or build a factory in the US
capital inflows
american investors or firms purchase foreign assets or a US firm builds a factory in another country
capital outflows
the theoretical separation of nominal and real variables
classical dichotomy
economy that does not interact with the rest of the world
closed economy
M1 formula
currency + travelers checks + demand deposits + other checkable deposits
a part of the money supply (stock concept)
currency in calculation
Monetary base formula
currency in circulation + reserves
During the 2008 financial crisis velocity decreased. This means that the rate at which money changed hands A: increased. other things the same, a decrease in velocity decreases the price level B: increased. Other things the same an increase in velocity increases the price level C: decreased. Other things the same, a decrease in velocity increases the price level.. D: decreased. other thigns the same, a decrease in velocity decreases the price level.
decreased. other things the same, a decrease in velocity decreases the price level.
if a country sells fewer goods and services abroad than it buys form other countries, it is said to have a trade
deficit and negative net exports
decrease in the overall level of prices
deflation
according to purchasing-power parity, inflation in the United states causes the dollar to
depreciate relative to currencies of countries that have lower inflation rates
If Y and V are constant and M doubles, the quantity equation implies that price level
doubles
what must something have to be considered liquid?
easily converted into cash; value does not fluctuate; low risk
if purchasing power parity holds, then the value of the real exchange rate
equals 1
goods & services that are produced domestically and are sold abroad
exports
suppose a country's net capital outflow does not change, but its investment declines by $420 billion. Its savings must have
fallen by $420 billion, but its net exports are unchanged
the banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10%. If the fed raises the reserve requirements by 12.5% and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?
falls by $12 billion
the interest rate at which depository institutions trade federal finds with each other over night
federal funds rate
the rate the fed wants to charge each other for overnight loans
federal funds target rate
if you are vacationing in spain and the dollar depreciates realtive to the euro, then the dollar buys
fewer euros. It will take more dollars to buy a good that costs 50 euros
one-for-one adjustment of nominal interest rate to inflation rate
fisher effect
when firms buy or build capital goods in foreign countries
foreign direct investment
when investors buy stock or bonds issued on a foreign country
foreign portfolio investment
extrordinary high rates of inflation
hyperinflation
goods and services that are produced abroad and sold domestically
imports
flow of earnings per unit in time (flow concept)
income
a company in panama pays a US architect to design a factory building. By itself this transaction
increases panama's imports and so decreases the panama's trade balance
when the price level rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls
increase in the overall level of prices
inflation
the rate at which the federal reserve banks pay interest on reserves balances
interest on reserves
net capital outflow
is always equal to net exports.
when the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, the price level increases if money demand shifts
left and decreases if money supply shifts left
function that money serves when people change money for goods and services
medium of exchange
what are the 3 functions of money
medium of exchange, unit of account, store of value
costs of changing prices
menu costs
changes in money supply don't affect real variables
monetary neutrality
anything that is generally accepted in payment for goods and services or in the repayment of debts
money
during the 1970's US prices rose by 7.8 % per year and real GDP increased. Holding velocity constand and using teh quantity equation, we conclude that
money growth must have been greater than the growth of income
You hold currency form a foreign country. If that country has a lower rate of inflation that the United States, then over time the foreign currency will buy
more goods in that country and buy more dollars
Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners
more willing to purchase US bonds, so US net capital outflow would fall
capital outflows minus capital inflows
net capital outflows
the value of a nation's exports minus the value of its imports; also called the trade balance
net exports
price level is which type of variable
nominal
rate at which one can trade currency of one country for currency of another
nominal rate of exchange
variables measured in monetary units (ex; dollar prices)
nominal variables
economy that interacts freely with other countries around the world so goods & services and financial claims flow across borders
open economy
To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the
quantity theory of money
suppose that foreign citizens decide to purchase more US pharmacuticals and US citizens decide to buy stock in foreign corporations. Other things the same, these actions
raise both US net exports and US net capital outflows
rate at which a person can trade goods of one country
real exchange rate
variables measured in physical units (ex: real wages, real prices or real interest rates)
real variables
in 2010 the US government was running a large deficit. Some were concerned that pressures might be put on the federal reserve to purchase government bonds to help the government finance this deficit. If the fed were to buy government bonds to help the government finance its expenditures, then the price level would
rise, so the value of money would fall
the dollar is said to appreciate against the euro if the exchange rate
rises. Other things the same it will cost more euros to buy US goods
the money supply decreases when the fed
sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
what are the 3 roles of the US central bank
serves as a bank for banks; serves as a regulator for the banking system; conducts monetary policy
resources wasted when inflation encourages people to reduce their money holdings
shoeleather costs
a store of purchasing power from the time income is received until it is spent
store of value
the interest rate the fed charges banks
the discount rate
Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
the inflation rate but not the nominal interest rate by the same number of percentage points
the revenue a government creates by printing money
the inflation tax
in the long run, money demand and money supply determine
the value of money but not the real interest rate
nominal exchange rate between currencies of 2 countries must reflect the price levels of those countries
theory of purchasing-power parity
country sells fewer goods abroad than it buys form other countries
trade deficit
country sells more goods abroad than it buys form other countries
trade surplus
lets us solve the constrained maximization problem
unit of account function
rate at which money changes hands
velocity of money
When colonists in Virginia used tobacco as money, their momey
was commodity money
the total collection of pieces of property that serve to store value (stock concept)
wealth