Econ final

price of a domestic basket of goods relative to price of a foreign basket of goods

(nominal exchange rate x US price level) / foreign price level

real exchange rate

(nominal exchange rate x domestic price) / foreign price

Which of the following costs is NOT the cost of deflation? A. Shoeleather costs B. Menu costs C. Relative-price variability costs D. Cost of unexpected deflation, arbitrary redistribution of wealth

A. Shoeleather costs

Which of the following results if the U.S. removes an import quota on computer components? A. U.S. exports and U.S. imports both increase B. U.S. exports increase but U.S. imports are unchanged C. U.S. imports increase but U.S. exports are unchanged D. None of the above are correct

A. U.S. exports and U.S. imports both increase

A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is ______ A. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply. B. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the money supply. C. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money supply. D. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the money supply.

A. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply.

The members of the Federal Reserve's Board of Governors ______ A. are appointed by the president of the U.S. and confirmed by the U.S. Senate. B. serve six-year terms. C. are also the presidents of the regional Federal Reserve banks. D. share power equally, with no governor having any more influence or power than any other governor.

A. are appointed by the president of the U.S. and confirmed by the U.S. Senate.

Which of the following lists is included in what economists call "money"? A. cash B. cash and stocks and bonds C. cash and stocks and bonds and real estate D. cash and stocks and bonds and real estate and all other assets

A. cash

You are the CEO of a U.S. firm considering building a factory in Chile. If the dollar appreciates relative to the Chilean peso, then other things the same, _______ A. it takes fewer dollars to build the factory. By itself building the factory increases U.S. net capital outflow. B. it takes fewer dollars to build the factory. By itself building the factory decreases U.S. net capital outflow. C. it takes more dollars to build the factory. By itself building the factory increases U.S. net capital outflow. D. it takes more dollars to build the factory. By itself building the factory decreases U.S. net capital outflow.

A. it takes fewer dollars to build the factory. By itself building the factory increases U.S. net capital outflow.

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks. As a result of these changes, ______ A. M1 increases by $2,500 and M2 decreases by $2,500. B. M1 increases by $2,500 and M2 stays the same. C. M1 and M2 stay the same. D. M1 decreases by $2,500 and M2 increases by $2,500.

B. M1 increases by $2,500 and M2 stays the same.

Savings deposits are included in ______ A. M1 but not M2. B. M2 but not M1. C. M1 and M2. D. neither M1 nor M2.

B. M2 but not M1.

Exchange rates are 100 yen per dollar, 0.8 euro per dollar, and 12 pesos per dollar. A bottle of beer in New York costs 6 dollars, 500 yen in Tokyo, 6 euro in Munich, and 84 pesos in Cancun. Where is the most expensive and the cheapest beer, in that order? A. Cancun, New York B. Munich, Tokyo C. Tokyo, Munich D. New York, Cancun

B. Munich, Tokyo

Which of the following is included in the supply of U.S. dollars in the market for foreign-currency exchange in the open-economy macroeconomic model? A. a U.S. bank loans dollars to Tom to buy a U.S. made motorcycle B. a U.S. tire maker wants to build a new factory in China C. a U.S. company wants to import goods to sell in its retail stores D. All of the above are correct.

B. a U.S. tire maker wants to build a new factory in China

The law of one price states that ______ A. a good must sell at the price fixed by law. B. a good must sell at the same price at all locations. C. a good cannot sell for a price greater than the legal price ceiling. D. nominal exchange rates will not vary.

B. a good must sell at the same price at all locations.

When deciding how much to save, people care most about ______, and inflation will ______ people's incentive to save. A. after-tax nominal interest rate, encourage B. after-tax real interest rates, discourage C. after-tax nominal interest rates, discourage D. after-tax real interest rates, encourage

B. after-tax real interest rates, discourage

If you go to the bank and notice that the nominal exchange rate changes from E(Japanese yen/$)=107 to E(Japanese yen/$)=110, then the dollar has _______ A. appreciated. Other things the same, the appreciation would make Americans less likely to travel to Japan. B. appreciated. Other things the same, the appreciation would make Americans more likely to travel to Japan. C. depreciated. Other things the same, the depreciation would make Americans less likely to travel to Japan. D. depreciated. Other things the same, the depreciation would make Americans more likely to travel to Japan.

B. appreciated. Other things the same, the appreciation would make Americans more likely to travel to Japan.

In a system of 100-percent-reserve banking, ______ A. banks do not accept deposits. B. banks do not influence the supply of money. C. loans are the only asset item for banks. D. All of the above are correct.

B. banks do not influence the supply of money.

The confidence you have that a retailer will accept dollars in exchange for goods is based primarily on money ______ A. being a unit of account. B. being a medium of exchange. C. serving as a store of value. D. having intrinsic value.

B. being a medium of exchange

When prisoners use cigarettes or some other good as money, cigarettes become ______ A. commodity money, but do not function as a unit of account. B. commodity money and function as a unit of account. C. fiat money, but do not function as a unit of account. D. fiat money and function as a unit of account.

B. commodity money and function as a unit of account.

According to purchasing-power parity, inflation in the U.S. causes the dollar to ______ A. depreciate relative to all other currencies. B. depreciate relative to currencies of countries that have lower inflation rates. C. appreciate relative to all other countries. D. appreciate relative to currencies of countries that have lower inflation rates.

B. depreciate relative to currencies of countries that have lower inflation rates.

If the nominal exchange rate e is home currency per foreign currency, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as _______ A. e(P*/P). B. e(P/P*). C. e + P*/P. D. e - P/P*.

B. e(P/P*).

In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange comes from ______ A. net exports B. net capital outflow C. net exports + net capital outflow D. net exports - net capital outflow

B. net capital outflow

Other things the same, the real exchange rate between American and French goods would be lower if ______ A. prices of French goods were higher, or the number of euros a dollar purchased was higher. B. prices of French goods were higher, or the number of euros a dollar purchased was lower. C. prices of French goods were lower, or the number of euros a dollar purchased was higher. D. prices of French goods were lower, or the number of euros a dollar purchased was lower.

B. prices of French goods were higher, or the number of euros a dollar purchased was lower.

If the real exchange rate between the U.S. and Argentina is 1, then ______ A. purchasing-power parity holds, and 1 U.S. dollar buys 1 Argentinean bolivar. B. purchasing-power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina. C. purchasing-power parity does not hold, but 1 U.S. dollar buys 1 Argentinean bolivar. D. purchasing-power parity does not hold, but the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.

B. purchasing-power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.

The Federal Reserve ______ A. was created in 1836. B. serves as a lender of last resort. C. was created to facilitate the federal government's collection of taxes as well as its expenditures. D. All of the above are correct.

B. serves as a lender of last resort.

Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy? A. the Board of Governors B. the FOMC C. the regional Federal Reserve Bank presidents D. the Central Bank Policy Commission

B. the FOMC

According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level? A. the real exchange rate, but not the nominal exchange rate B. the nominal exchange rate, but not the real exchange rate C. the real exchange rate and the nominal exchange rate D. neither the real exchange rate nor the nominal exchange rate

B. the nominal exchange rate, but not the real exchange rate

If the reserve ratio is 4 percent, then the money multiplier is ______ A.24 B.25 C.26 D.4

B.25

If the exchange rate is .60 British pounds = $1, a cup of coffee that costs 3 pounds costs _______ A. $1.80 B. $4.80 C. $5 D. None of the above is correct.

C. $5

If the exchange rate is .70 euro per dollar, the price of an MP3 player in Paris is 150 euros and the price of an MP3 player in the U.S. is $150, then what is the real exchange rate? A. 1/.70 French MP3 players per U.S. MP3 player B. 1 French MP3 players per U.S. MP3 player C. .70 French MP3 players per U.S. MP3 player. D. None of the above are correct.

C. .70 French MP3 players per U.S. MP3 player.

You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 35 percent. What is your after-tax real rate of interest? A. 5.25 percent B. 3.05 percent C. 2.55 percent D. 1.25 percent

C. 2.55 percent

Which of the following does the Federal Reserve not do? A. It controls the supply of money. B. It acts as a lender of last resort to banks. C. It makes loans to any qualified business that requests one. D. It tries to ensure the health of the banking system.

C. It makes loans to any qualified business that requests one.

In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had reached 24,000 percent, which of the following statements is NOT correct? A. Zimbabwe prints too much money to compensate its huge government budget deficit. B. Excessive money growth triggers this hyperinflation in Zimbabwe. C. Zimbabwe may experience extreme low level of nominal interest rate and households are afraid to save in local banks, they prefer to change for US dollars. D. If Zimbabwe borrowed money from loanable funds market, then it would raise the real interest rate in that market and "crowds out" private investors.

C. Zimbabwe may experience extreme low level of nominal interest rate and households are afraid to save in local banks, they prefer to change for US dollars.

You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced _______ A. both a nominal gain and a real gain, and you paid taxes on the nominal gain. B. both a nominal gain and a real gain, and you paid taxes only on the real gain. C. a nominal gain, but no real gain, and you paid taxes on the nominal gain. D. a nominal gain, but no real gain, and you paid no taxes on the transaction.

C. a nominal gain, but no real gain, and you paid taxes on the nominal gain.

The primary difference between commodity money and fiat money is that ______ A. commodity money is a medium of exchange but fiat money is not. B. fiat money is a medium of exchange but commodity money is not. C. commodity money has intrinsic value but fiat money does not. D. fiat money has intrinsic value but commodity money does not.

C. commodity money has intrinsic value but fiat money does not.

Jim transfers money from his money market account to his savings account. This action ______ A. reduced M1 and increases M2. B. increases M1 and reduces M2. C. has no effect on M1 or M2. D. increases M1 and M2.

C. has no effect on M1 or M2.

Dollar bills, rare paintings, and emerald necklaces are all ______ A. medium of exchange. B. units of account. C. stores of value. D. All of the above are correct.

C. stores of value

The shoeleather cost of inflation refers to ______ A. the redistributional effects of unexpected inflation. B. the time spent searching for low prices when inflation rises. C. the waste of resources used to maintain lower money holdings. D. the increased cost to the government of printing more money.

C. the waste of resources used to maintain lower money holdings.

During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1.5 percent, but people had been expecting 1 percent . This difference between actual and expected inflation _______ A. transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected. B. transferred wealth from the borrower to you and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected. C. transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected. D. transferred wealth from you to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected.

C. transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected.

In equilibrium a country has a net capital outflow of $200 billion and domestic investment of $150 billion. What is the quantity of loanable funds demanded? A. $50 billion B. $150 billion C. $200 billion D. $350 billion

D. $350 billion

A bank's reserve ratio is 5 percent and the bank has $2,280 in reserve. Its deposits amount to _____ A. $114. B. $2,166. C. $2,400. D. $45,600.

D. $45,600.

If the price level increased from 120 to 130, then what was the inflation rate? A. 1.1 percent B. 7.7 percent C. 10.0 percent D. 8.3 percent

D. 8.3 percent

Which of the following is included in both M1 and M2? A. currency B. demand deposits C. other checkable deposits D. All of the above are correct.

D. All of the above are correct.

Which of the following statements is NOT correct? A. If there is inflation, then a firm that has kept its price fixed for some time will have a low relative price. B. Relative-price variability rises with inflation, leading to a misallocation of resources. C. Higher inflation makes relative prices more variable, making it less likely that resources will be allocated to their best use. D. Relative-price variability costs are costs incurred by people trying to protect themselves from the effects of inflation

D. Relative-price variability costs are costs incurred by people trying to protect themselves from the effects of inflation

Other things the same, if the exchange rate changes from .8 euros per dollar to .9 euros per dollar, the dollar _______ A. depreciates so U.S. goods become less expensive relative to foreign goods. B. depreciates so U.S. goods become more expensive relative to foreign goods. C. appreciates so U.S. goods become less expensive relative to foreign goods. D. appreciates so U.S. goods become more expensive relative to foreign goods.

D. appreciates so U.S. goods become more expensive relative to foreign goods.

Deflation ______ A. increases incomes and enhances the ability of debtors to pay off their debts. B. increases incomes and reduces the ability of debtors to pay off their debts. C. decreases incomes and enhances the ability of debtors to pay off their debts. D. decreases incomes and reduces the ability of debtors to pay off their debts.

D. decreases incomes and reduces the ability of debtors to pay off their debts.

Wealth is redistributed from debtors to creditors when inflation was expected to be _______ A. high and it turns out to be high. B. low and it turns out to be low. C. low and it turns out to be high. D. high and it turns out to be low.

D. high and it turns out to be low.

Shoeleather costs arise when higher inflation rates induce people to ______ A. spend more time looking for bargains. B. spend less time looking for bargains. C. hold more money. D. hold less money.

D. hold less money.

The costs of changing price tags and price listings are known as ______ A. inflation-induced tax distortions. B. relative-price variability costs. C. shoeleather costs. D. menu costs.

D. menu costs.

If U.S. net exports are negative, then net capital outflow is _______ A. positive, so foreign assets bought by Americans are greater than American assets bought by foreigners. B. positive, so American assets bought by foreigners are greater than foreign assets bought by Americans. C. negative, so foreign assets bought by Americans are greater than American assets bought by foreigners. D. negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

D. negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

If a country raises its budget deficit, then its ______ A. net capital outflow and net exports rise. B. net capital outflow rises and net exports fall. C. net capital outflow falls and net exports rise. D. net capital outflow and net exports fall.

D. net capital outflow and net exports fall.

. Other things the same, a decrease in the interest rate _______ A. reduces domestic investment which reduces the quantity of loanable funds supplied. B. reduces domestic investment which reduces the quantity of loan funds demanded. C. raises domestic investment which raises the quantity of loanable funds supplied. D. raises domestic investment which raises the quantity of loanable funds demanded.

D. raises domestic investment which raises the quantity of loanable funds demanded.

Which of the following would tend to shift the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model to the right? A. the exchange rate rises B. the exchange rate falls C. the expected rate of return on U.S. assets rises D. the expected rate of return on U.S. assets falls

D. the expected rate of return on U.S. assets falls

Which of the following groups is largely responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system? A. FOMC B. the Board of Governors C. the New York Fed D. the regional Federal Reserve Banks

D. the regional Federal Reserve Banks

Sam deposits $20,000 in the First National Bank, the reserve ratio is 12%, then he withdraws all the money(principal without interest) and deposits in the Second National Bank, and then withdraws and deposits again. Suppose this process continues and all the banks' reserve ratios are all 12%, how much money supply is generated through all the banking systems?________ A.98,166 B.122,238 C.135,511 D.166,667

D.166,667

Suppose the economy has one good: candy bar. The real GDP is 1,000 candy bars, velocity is constant over years. In 2016, the money supply is $1,500, price level is $1.5 per candy bar. In 2017, the Fed manipulates open-market operations to increase the money supply by 10%. Compute the 2017 values of nominal GDP and price. Compute the inflation rate for 2016-2017. Suppose the real GDP increases from 1,000 to 1,025 candy bars, compute 2016-2017 inflation rate.

Nominal GDP: 1500 Price: 1.5 Inflation: 10% Inflation: 7.33%

Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Explain in words how this U.S. policy affects the amount of imports, exports, and net exports.

The expenditure necessary to fund the exports subsidy increases the fiscal deficit, thereby decreasing the public saving. To provide relief to people, the government gives various subsidies which represent an increase in the government expenditure. The increase in government expenditure increases the fiscal deficit. This causes the supply of dollars in the foreign exchange market to decrease, the real exchange rate to increase, and he equilibrium level of net exports to decrease.

Suppose the French suddenly develop a strong taste for California wines. What happens to U.S. net exports?

This results in a demand increase for dollars in the foreign currency market at any given real exchange rate and the real exchange rate rises.

depreciation

a decrease in the value of a currency measured by the amount of foreign currency it can buy

capital requirement

a government regulation specifying a minimum amount of bank capital intended to ensure banks will be able to pay off depositors and debts

capital flight

a large and sudden reduction in the demand for assets located in a country

purchasing power parity

a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries

If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate in each of the following cases. a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent. b. The nominal interest rate is 6 percent, and the inflation rate is 2 percent. c. The nominal interest rate is 4 percent, and the inflation rate is 1 percent.

a. 1% b. 1.6% c. 1.4%

appreciation

an increase in the value of a currency as measured by the amount of foreign currency it can buy

central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

store of value

an item that people can use to transfer purchasing power from the present to the future

demand deposits

balances in bank accounts that depositors can access on demand by writing a check

fractional reserve banking

banks hold only a fraction of deposits as reserves (creates money but not wealth)

excess reserve

banks may hold reserves above the legal minimum

money

currency and demand deposits

The FOMC increases the target for the federal funds rate (increases or decreases money supply)

decreases

The Fed increases the reserve requirement (increases or decreases money supply)

decreases

The discount rate that the Fed makes loans to the banks serving as reserves increases (increases or decreases money supply)

decreases

saving

domestic investment + net capital outflow

net exports

exports - imports

menu costs

firms change prices infrequently because there are costs to changing prices

relative price variability and the misallocation of resources

firms don't all raise prices at the same time, so relative prices can vary

money demand

how much wealth people want to hold in liquid form

The Fed buys government bonds in open-market operations (increases or decreases money supply)

increases

The Fed decreases the interest rate it pays on reserves (increases or decreases money supply)

increases

price level

measures the umber of dollars needed to buy a basket of goods and services

the Friedman rule

moderate deflation will lower the nominal interest rate, reduce the cost of holding money, and minimize the shoe leather costs of holding money

fiat money

money without intrinsic value that is used as money because of government decree

real interest rate

nominal interest rate - inflation rate

commodity money

objects that have value in themselves and that are also used as money

nominal GDP

price level x the quantity of output

nominal interest rate

real interest rate + inflation rate

the law of one price

states that in the absence of trade frictions (such as transport costs and tariffs) and under conditions of free competition and price flexibility (where no individual sellers or buyers have power to manipulate prices and prices can freely adjust) identical goods sold in different locations must sell for the same prices when prices are expressed in a common currency

inflation induced tax distortions

taxes are based on nominal income and inflation causes people to pay more taxes even when their incomes don't increase

the money multiplier

the amount of money the banking system generates with each dollar of reserves 1/reserve ratio

reserve ratio

the fraction of deposits that banks hold as reserves

discount rate

the interest rate on the loans that the Fed makes to banks

reserve requirement

the minimum about of reserves that banks must hold (set by the Fed)

the fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

money neutrality

the proposition that changes in the money supply do not affect real variables

open market operations

the purchase and sale of US government bonds by the Fed

quantity theory of money

the quantity of money available in the economy determines the price level

leverage ratio

the ratio of assets to bank capital

bank capital

the resources a bank obtains by issuing equity to its owners bank assets - bank liabilities

shoe leather costs

the resources wasted when inflation encourages people to reduce their money holdings

the velocity of money

the speed at which the typical dollar bill travels around the economy from wallet to wallet (price level x the quantity of output) / money supply

the classic dichotomy

the theoretical separation of nominal and real variables

arbitrary redistributions of wealth

the unexpected changes in prices redistribute wealth among debtors and creditors

leverage

the use of borrowed funds to supplement existing funds for investment purposes

unit of accounts

the yardstick people use to post prices and record debts