Econ Final Exam

Tenth National Bank holds $235,000,000 in checkable deposits and $25,500,000 in reserves. With a required reserve ratio of 10 percent, how much in excess reserves is Tenth National holding?

$2,000,000

If checkable deposits in Bank A total $100 million and the required reserve ratio is 9 percent, then required reserves at Bank A equal

$9.0 million.

An American computer is priced at $1,000. If the exchange rate between the U.S. dollar and the Mexican peso is $0.093 = 1 peso, approximately how many pesos will a Mexican buyer pay for the computer?

10,753 pesos

Each of the governors of the Federal Reserve System is appointed for a term of __________ years. The Board of Governors is comprised of _____________ members and the FOMC is comprised of __________ members.

14; 7; 12

Refer to Exhibit 34-1. The opportunity cost of one unit of Y in the United States is

2/3X

Refer to Exhibit 34-4. The opportunity cost of one unit of good B is __________ for country 1 and __________ for country 2.

2A; 1A

Refer to Exhibit 34-1. The opportunity cost of one unit of Y in France is

3X

An individual buys a bond for $1,000 and sells it one year later for $1,080. What is the interest rate return that this individual has received?

7.4 percent

A required reserve ratio of 12 percent gives rise to a simple deposit multiplier of

8.33.

Most Keynesians believe that it is more likely that an economy will self-regulate itself out of an inflationary gap than a recessionary gap. Why?

Because they believe that wages and prices are more flexible upward than downward.

Paper money is printed at the _______________________, but it is issued to commercial banks by the ______________________________.

Bureau of Engraving and Printing; 12 Federal Reserve District Banks

Which of the following will not increase the money supply in the United States?

Fed sales of government securities on the open market

The Board of Governors of the Federal Reserve is part of a larger policy-making group called the

Federal Open Market Committee.

Refer to Exhibit 34-1. If the United States is to specialize in the production of one of the two goods (and then trade that good to France), which good should it be and why? If France is to specialize in the production of one of the two goods (and then trade that good to the United States), which good should it be and why?

Good Y for the United States because the United States is the lower opportunity cost producer of good Y; good X for France because France is the lower opportunity cost producer of good X.

When economists say that banks must hold a percentage of their total deposits in reserve form, what does this mean?

It means that banks must hold a fraction of their customers' deposits either as bank deposits at the Federal Reserve, or as vault cash, or both.

The money supply increased and the AD curve did not shift to the right. This is consistent with the

Keynesian transmission mechanism when there is either a liquidity trap or interest-insensitive investment.

M2 is comprised of

M1 + small-denomination time deposits + savings deposits + retail money market mutual funds.

Refer to Exhibit 15-2. At which point would there be an excess supply of money?

Point B

Which best describes the Keynesian transmission mechanism when the money supply rises?

The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve rightward.

A unit of account is

a common measurement in which values are expressed.

A quota is

a legal limit on the amount of a good that can be imported.

If a person uses money to buy a pair of shoes, money is functioning as

a medium of exchange.

In the Yap civilization of the South Pacific prior to 1920, large, heavy stones in the shape of a wheel were used as money. Which function of money was probably least served by this form of money?

a medium of exchange.

A savings account functions as

a store of value.

Money is defined by economists as

any good that is widely accepted in exchange and for the repayment of debts.

The members of the Board of Governors of the Federal Reserve are

appointed by the President of the United States with approval by the Senate.

The potential buyer of a house has less information about the house than the seller of the house. This is a case of

asymmetric information.

Total bank reserves equal

bank deposits at the Federal Reserve + vault cash.

Fractional reserve banking is a term used to describe a banking system whereby

banks hold reserves equal to only a fraction of their deposit liabilities.

Consumers' surplus is the difference between the price

buyers pay for a good and the maximum price they would have paid for the good

Open market operations are the

buying and selling of government securities by the Fed.

The Federal Reserve System is the

central bank of the United States.

Monetary policy refers to

changes in the money supply to achieve particular economic goals.

One criticism of monetary policy based on a predetermined steady growth rate in money supply is that

changes in velocity, if not accounted for, can then be a source of price instability.

he most important responsibility of the Fed is to

control the money supply.

Transaction costs are best defined as the

costs associated with the time and effort necessary to make an exchange.

Suppose that the Fed undertakes an open market sale, selling $3 million worth of securities to a bank. If the required reserve ratio is 11%, checkable deposits (or the money supply), would _______________ by ________________ million, assuming that there are no cash leakages and that banks hold zero excess reserves.

decline; $27

Your neighbor has knowledge of economics and you would like her to share it with you. You own a car, a CD player and a new pair of running shoes. You wish to make a trade, but the neighbor does not want what you have. The problem can be stated as follows: You are not satisfying the

double coincidence of wants.

The sale of goods abroad at a price below their cost and below the price charged in the domestic market is called

dumping

Reserves held beyond the required amount are called __________ reserves.

excess

If the interest rate falls, the opportunity cost of holding money __________ and the quantity demanded of money __________.

falls, rises

When one commercial bank borrows from another commercial bank, it pays the __________ rate.

federal funds

Under the gold standard, exchange rates were determined by

governments, when they defined their currency in terms of gold.

A tariff is a tax on

imports

If the Fed purchases government securities from commercial banks, the reserves of the banking system will immediately

increase by the amount of the purchase.

Refer to Exhibit 15-2. A(n)__________ in the money supply from S1 to S2 would have a tendency to __________ the amount of investment, assuming investment is sensitive to changes in the interest rate.

increase, raise

As the opportunity cost of holding money decreases, the quantity demanded of money

increases

The quantity demanded of money is

inversely related to the interest rate.

A change in the money supply will change investment when

investment is a function of the interest rate.

One country has a comparative advantage over another country in the production of a good if it

is a lower opportunity cost producer of the good.

Economists who propose a constant-money-growth-rate rule often argue that setting the annual growth rate in the money supply equal to the average annual growth rate in Real GDP

maintains price level stability over time.

If merchandise exports in a given year are $400 billion and merchandise imports are $450 billion, then the

merchandise trade balance is -$50 billion and it is in deficit.

Economic fine-tuning is the (usually frequent) use of

monetary and fiscal policies to counteract even small undesirable movements in economic activity.

A general definition of the "transmission mechanism" is: the routes or channels that ripple effects created in the

money market travel to affect the market for goods and services

The "balance of payments" is a periodic statement of the

money value of all transactions between residents of one country and residents of another country.

If the Fed wants to increase the money supply through an open market operation, it will

purchase government securities

Assume that because of a long policy lag, the government starts implementing expansionary monetary policy too late, i.e., at a time when the economy is already healing itself. As a result, the economy will probably move from an initial

recessionary gap to an inflationary gap.

Required reserves are the amount of

reserves a bank must hold against its deposits as mandated by the Federal Reserve.

Suppose the banking system has $40 billion in reserves. Also assume that there are no cash leakages or excess reserves. If the central bank lowers the required reserve ratio from 20 percent to 16 percent, checkable deposits (the money supply) will ultimately __________ by _______________.

rise; $50 billion.

Producers' surplus is the difference between the price

sellers receive for a good and the minimum price for which they could have sold the good.

The Fed has been called "the lender of last resort" because it

serves as the last place to acquire loans for banks suffering cash management, or liquidity, problems.

The Board of Governors of the Federal Reserve is comprised of

seven persons, each appointed to a fourteen-year term.

The object of inflation targeting is for the Fed to try to keep the inflation rate near

some predetermined level.

ccording to Keynesian economists, monetary policy is __________ effective at changing the price level and Real GDP.

sometimes

Inflation does the greatest harm to money's function as a

store of value.

In the history of banking, warehouse receipts refer to receipts

that goldsmiths once issued acknowledging that they held a customer's gold.

Suppose the Fed sells a $50,000 U.S. Treasury security to Martha, a member of the public. If Martha writes a check to the Fed in order to buy this security, the money in her checking account will be transferred to

the Fed, and now it is as if the money doesn't exist

Open Market Operations are conducted by

the Federal Reserve Bank of New York.

When a commercial bank borrows from the Fed,

the bank can make more loans.

The Mexican demand for American goods leads to

the demand for U.S. dollars and the supply of Mexican pesos on the foreign exchange market.

Suppose that prices in Japan increase by 15 percent while prices in the United States remain stable. We would expect that

the dollar will appreciate and the yen will depreciate

There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that

the dollar will depreciate and the peso will appreciate.

To know whether the dollar is overvalued, we need to know

the equilibrium exchange rate between the dollar and the foreign currency the dollar is being compared with.

The Taylor Rule provides policymakers with a target for

the federal funds rate.

A "devaluation" occurs when

the official price of a currency is lowered.

The Fed can change the money supply by changing

the required reserve ratio.

Equilibrium in the money market exists when

the supply of money curve intersects the demand for money curve at the prevailing interest rate.

Saying that it takes twice as many dollars to buy one ticket for a concert than two tickets for a movie refers to the use of money as a

unit of account.

Fractional reserve banking originate

when goldsmiths realized they could issue warehouse receipts beyond gold on deposits.

You go on vacation to Mexico and take $1,000 with you. During your time in Mexico, the peso appreciates in value relative to the dollar. It follows that

you will be able to buy fewer goods and services in Mexico