Econ exam 3 ch 7-10
The present value of $500, three years in the future if the interest rate is 3 percent is
$457.57.
If the monetary base increases by $1 million and the quantity of money increases by $2.5 million, then the money multiplier is _____
2.5
stock
A certificate of ownership and claim to a firm's profits
crawling peg
An exchange rate that follows a path determined by a decision of the government or central bank
fixed exchange rate
An exchange rate that's determined by a decision of the government or central bank
Flexible exchange rate
An exchange rate that's determined by supply and demand, with no direct intervention by the central bank
unit of account
Analogy: An inch is a unit of height
federal funds rate
Banks lend to each other at a special interest rate
Choose the correct statement.
Deposits are money, checks are not money, and credit cards are not money.
Fiscal policy
Government's attempt to influence the economy through taxes, transfer payments, and purchases.
debtor nation.
If a country has borrowed more from the rest of the world during its entire history than it has lent to the rest of the world
creditor nation
If a country has lent more to the rest of the world during its entire history than it has borrowed from the rest of the world
net borrower.
If a country is borrowing more from the rest of the world than it is lending to the rest of the world
net lender.
If a country is lending more to the rest of the world than it is borrowing from the rest of the world
Choose the correct statement.
Loans are funds committed for an agreed dash upon period of time.
currency in circulation
Notes and coins held by individuals and businesses
Which of the following statements illustrate monetary policy?
The Fed has raised the federal funds rate by 0.3 percent.
lender of last resort
The Fed is the lender of last resort- depository institutions that are short of reserves can borrow from the Fed
Which of the following statements illustrate fiscal policy?
The US government has proposed a hike in the corporate tax rate.
How can the change in U.S. wealth differ from U.S. saving?
The change in wealth includes changes in the prices of assets owned and saving excludes these items.
Federal Open Market Committee (FOMC):
The main policy-making body of the Fed.
Required reserve ratio
The minimum percentage of deposits that depository institutions must hold as reserves
Foreign currency
The money of other countries, including notes, coins, and bank deposits
Joe has a term deposit that pays 6 percent a year and its value after two years will be $2, 500. What is the present value of Joe's term deposit?
The present value of Joe's term deposit is $ 2224.99.
open market operations
The purchase or sale of securities by the Fed in the loanable funds market
aggregate demand.
The relationship between the quantity of real GDP demanded and the price level
above full-employment equilibrium
When the short-run equilibrium puts real GDP above potential GDP
below full-employment equilibrium
When the short-run equilibrium puts real GDP below potential GDP
mortgage-backed security
a debt security created by pooling together a group of mortgage loans whose periodic payments belong to the holders of the security
Examples of monetary policy that decrease aggregate demand include ______.
a decrease in the quantity of money and an increase in interest rates
financial institution
a firm that borrows and lends
A rise in the money wage rate with no change in potential GDP creates ______.
a leftward shift of the SAS curve and no change in the LAS curve
The United States is ______.
a net borrower and a debtor nation
Inflation results from ______.
a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate supply
loanable funds market
aggregate of all the individual financial markets.
saving
amount of income that is not paid in taxes or spent on consumption goods and services
A macroeconomic equilibrium in which real GDP exceeds potential GDP is _____ equilibrium. And one in which real GDP is less than potential GDP is _____ equilibrium.
an above full-employment; a below full-employment
Examples of fiscal policy that increase aggregate demand include ______.
an increase in government expenditure, a decrease in taxes, and an increase in transfer payments
If the U.S. exchange rate changes from $1.20 Canadian to $1.25 Canadian, then the U.S. dollar has _______ and the Canadian dollar has _______.
appreciated; depreciated
The Fed is the lender of last resort, which means that if _____ is short of reserves, it can borrow from the _____.
a bank; Fed
Classical macroeconomists
believe that the economy does a perfect job of regulating itself
Monetarist macroeconomists
believe that the economy is self-regulating and will normally operate at full employment
bond markets
bonds traded here
store of value
can be held and exchanged later for goods and services
The functions of depository institutions include _____
creating liquidity
Depository institutions provide four benefits, which are ______
creating liquidity, lowering the cost of borrowing, lowering the cost of monitoring borrowers, and pooling risk
We call the leakage of bank reserves into currency the currency drain, and we call the ratio of _____ to _____ the currency drain ratio.
currency; deposits
Aggregate demand _______ when a decrease in the quantity of money occurs. Aggregate demand _______ when an increase in expected inflation occurs.
decreases; increases
A rise in the expected future exchange rate ______ the supply of U.S. dollars. An increase in the world demand for U.S. exports ______ the supply of U.S. dollars.
decreases; does not change
A decrease in U.S. demand for imports ______ the supply of U.S. dollars. A fall in the U.S. interest rate differential ______ the supply of U.S. dollars.
decreases; increases
In the long run, an increase in the quantity of money _______ the interest rate.
does not change
If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long-run
The loanable funds market is the aggregate of all the individual _____ markets.
financial
A depository institution is a _______.
financial firm that takes deposits from households and firms
Depository institutions
financial firms that take deposits from households and firms.
A financial institution is a firm that operates on both sides of the markets for _____: It _____ in one market and _____ in another.
financial capital; borrows; lends
A crawling peg exchange rate policy is one that _______. A crawling peg exchange rate is achieved _______.
follows a path determined by a decision of the government or the central bank; by central bank intervention in the foreign exchange market
financial capital
funds that firms use to buy physical capital....and that households sue to buy a home or invest in human capital
medium of exchange
generally accepted in exchange for goods and services.
The _______, the greater is the amount that a household decides to save.
greater a household's disposable income and the smaller a household's expected future income
A mortgage is a legal contract that gives ownership of a _____ to the _____ in the event that the _____ fails to meet the agreed loan payments (repayments and interest).
home; lender; borrower
An increase in expected future profits _______.
increases aggregate demand today
An increase in expected future income _______. An increase in the expected future inflation rate _______.
increases aggregate demand today; increases aggregate demand today
Starting from a full-employment equilibrium, an increase in aggregate demand ______, and creates ______ gap.
increases real GDP above potential GDP; an inflationary
A government budget deficit _______ loanable funds.
increases the demand for
A government budget surplus _______ loanable funds.
increases the supply of
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ potential GDP.
increases; decreases real GDP below
if the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
increases; short-run
A central bank _______. A commercial bank _______.
is a bank's bank; is a firm that takes deposits from households and firms
A flexible exchange rate is one that _______. It works _______.
is determined by demand and supply in the foreign exchange market; with no direct intervention by the central bank
A fixed exchange rate is one that _______. A fixed exchange rate is achieved _______.
is set by the government or the central bank; by central bank intervention in the foreign exchange market
mortgage
legal agreement that lender will get the home if the borrower fails to make agreed payments
Net worth is the total market value of what a financial institution has _____ minus the market value of what it has __
lent; borrowed
When potential GDP increases,
long-run aggregate supply and short-run aggregate supply increase. The LAS and the SAS curve shift rightward
The quantity theory of money is that in the _______, an increase in the quantity of money brings an equal percentage increase in the _______.
long run; increase in the price level
A government budget surplus _______ the real interest rate, decreases ______
lowers; private saving, and increases investment
Keynesian macroeconomists
macroeconomists believe that the economy is rarely at full employment.
Monetary policy
means the Fed's attempt to influence the economy by changing interest rates and the quantity of money.
means of payment
money can be used to settle debt
Saving is the amount of income that is _____ in net taxes or spent on _____ goods and services.
not paid; consumption
Short-run macroeconomic equilibrium
occurs when Quantity of real GDP demanded = Quantity of real GDP supplied
Long-run macroeconomic equilibrium
occurs when Real GDP = Potential GDP
the aggregate demand curve slopes downward because _______.
of the wealth effect and the substitution effect
inflationary gap
output gap is positive
Wealth is the value of all the things that people
own
A stock is a certificate of _____ and claim to the _____ that a firm makes.
ownership; profits
Starting from a short-run equilibrium, when the Fed increases the quantity of money, _______.
people enter the loanable funds market and buy bonds
An international substitution effect arises because when the U.S. price level rises, _______.
people spend less on the more expensive U.S.-made items and they spend more on the less expensive foreign-made items
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
Monetarist macroeconomists recommend _____
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
Net present value is the
present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision
The sum of _____ is called national saving.
private saving and government saving
bond
promise to make specified payments on specified dates
If a shortage of U.S. dollars occurs in the foreign exchange market, the _______ and the exchange rate _______.
quantity of U.S. dollars demanded decreases and the quantity of U.S. dollars supplied increases; rises
If a surplus of U.S. dollars occurs in the foreign exchange market, the _______ and the exchange rate _______.
quantity of U.S. dollars demanded increases and the quantity of U.S. dollars supplied decreases; falls
When the real interest rate rises, the ______ because the ______ is the opportunity cost of loanable funds.
quantity of loanable funds demanded decreases; real interest rate
A government budget deficit _______ the real interest rate, increases ______
raises; private saving, and decreases investment
The defining feature of the Keynesian view of macroeconomics is that the economy is _____
rarely at full employment
The crowding-out effect is the tendency for a government budget deficit to raise the _____ and _____ investment.
real interest rate; decrease
Short-run aggregate supply (SAS)
relationship between the quantity of real GDP supplied and the price level when the following things all remain constant: The money wage rate The prices of other resources Potential GDP
Long-run aggregate supply (LAS)
relationship between the quantity of real GDP supplied and the price level when the two previous bullet points are true.
Aggregate supply
relationship between the quantity of real GDP supplied and the price level.
The risk that a borrower, also known as a creditor, might not _____ is called credit risk or default risk.
repay a loan
The demand for loanable funds increases and the supply of loanable funds increases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______.
rises, falls, or remains the same; increases
The demand for loanable funds increases and the supply of loanable funds decreases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______.
rises; increases, decreases, or remains the same
The price of a bond ______ and the interest rate in the short run ______.
rises; falls
The supply of loanable funds is determined by the _________. The supply of loanable funds changes when _______.
saving decisions of households, which are influenced by the real interest rate, disposable income, expected future income, wealth, and default risk; disposable income, expected future income, wealth, or default risk change
quantity theory of money
says that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level.
The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full employment
The defining feature of the monetarist view of macroeconomics is that the economy is______.
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
stock markets
stocks traded here
The long-run historical evidence and international evidence show us that the relationship between money growth and the inflation rate ______.
supports the quantity theory, but the correlation is not perfect
State the financial decision rule: If the net present value is positive _______ and if the net present value is negative _______.
take the action; do not take the action
real interest rate
takes nominal interest rate and adjusts it to remove the effects of inflation.
crowding out effect
tendency for a government budget deficit to raise the real interest rate and decrease investment
When the price level, the money wage rate, and other factor prices rise by the same percentage, there is a movement along ______. Potential GDP ______.
the LAS curve; does not change
When the price level rises but the money wage rate and other factor prices remain the same, there is a movement along ______. The quantity of real GDP supplied ______.
the SAS curve; increases
Net taxes are taxes paid to the government minus ____
the cash transfers received from governments
federal reserve system (fed)
the central bank of the US.
The main influences on the supply of U.S. dollars in the foreign exchange market include ______.
the exchange rate, U.S. demand for imports, interest rates in the United States and other countries, and the expected future exchange rate
potential GDP increases when _______.
the full-employment quantity of labor increases
The quantity of money that the banking system can create is limited by _______.
the monetary base, desired reserves, and desired currency holdings
recessionary gap
the output gap is negative
The demand for loanable funds is the relationship between _____ demanded and the _____ when all other influences on borrowing plans remain the same
the quantity of loanable funds; real interest rate
The supply of loanable funds is the relationship between _____ supplied and the _____ when all other influences on lending plans remain the same.
the quantity of loanable funds; real interest rate
When a shortage or a surplus arises in the loanable funds market _______
the real interest rate is pulled to the new equilibrium level
demand for money
the relationship between the quantity of real money demanded and the nominal interest rate.
monetary base
the sum of currency and the reserves of depository institutions.
quantity of real GDP demanded
the total amount of final goods and services produced in the US that people, businesses, government, and foreigners plan to buy.
quantity of real GDP supplied
total quantity of goods and services that firms plan to produce in a given period
wealth
value of things people own
The net present value is the _______ flows of money from a financial decision minus _
value today of all future; the initial cost of the decision
foreign exchange market
where Different countries' currencies are traded for one another constantly
If the annual interest paid on a $500 loan is $25, the nominal interest rate is _____ percent per year. If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a year, the real interest rate is _____ per year.
5; 3
An open market purchase ______ the monetary base. An open market sale ______ the monetary base.
increases; decreases
In times of recession, the Fed _______ the interest rate and __________ the quantity of money.
lowers; increases
In the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to a full-employment equilibrium.
rises; decreases
In an economy, there is $150 million in currency held outside banks, $125 million in traveler's checks, $250 million in currency held inside the banks, $100 million in checking deposits, $800 million in savings deposits, $2 comma 000 million in time deposits, and $1 comma 000 million in money market mutual funds and other deposits. the value of M1 is ______ and the value of M2 is ______.
$375 million; $4,175 million
