macro chapter 14, Economic - Chapter 9: inflation, Macroeconomics Chapter 8 (add-on), Chapter 14 Money and Banking, Money and Banking Chapter 14, Macro Chapter 8, Money and Banking Chapter 15

Refer to the information. Money supply M2 for this economy is: a.) $480. b.) $130. c.) $490. d.) $630.

(a) $480

Checkable deposits are: a.) included in M1. b.) not included in either Ml or M2. c.) considered to be a near money. d.) also called time deposits.

(a) included in M1

When economists say that money serves as a store of value, they mean that it is: a.) way to keep wealth in a readily spendable form for future use. b.) a means of payment. (c.)a monetary unit for measuring and comparing the relative values of goods. d.) declared as legal tender by the government.

(a) way to keep wealth in a readily spendable form for future use.

Refer to the information. Money supply M1 for this economy is: a.) $60. b.) $70. c.) $130. d.) $140.

(c) $130

How to the % change in the CPI over the year?

(current CPI - previous CPI) ÷ previous CPI x 100

What are the main causes of inflation:

- Demand-pull inflation - Cost-push inflation - Inflationary expectations - Imported inflation - Other causes

What are the other causes of inflation?

- Government policies - excessive increases in money supply

Effect of inflation of economic growth:

- Inflation creates a major constraint on economic growth such as creating cost pressures and restrict AS

What are the positive and negative effects of inflation?

- Unemployment - economic growth and uncertainty - Wage and income distribution - International competitiveness and exchange rates

What are the causes of imported inflation?

- higher global inflation - a depreciation of the AUD - an increase in import prices

What caused demand pull inflation?

- increases in consumption - increases in investment - increases in the money supply caused by RBA - increases in net government expenditure

What is the advantage of using the underlying inflation?

- removes the effects of one-off, seasonal or volatile price movements for better indicator - Better picture of long term trend - More reliable forecast - Can help with putting better suited policies to tackle

What is the advantage of using CPI?

- simple - Widespread recognition - Biggest benefit - reflection of price pressures at a specific point in time - Tells us what the cost of living is right now

What microeconomic policies help sustain low inflation?

- through structural changes in product and factor markets, which have led to higher levels of productivity, efficiency and competitiveness in the economy

What is the disadvantages of using the CPI?

- volatile, short term trends- give impression that inflation problems come and goes - misleading

Answer the question on the basis of the following list of assets: 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults Refer to the given list. The assets that are not included in either M1 or M2 are: a.) Items 1, 5, 9, and 10. b.) Items 2, 5, 8, and 9. c.) Items 1, 3, 5, 7, and 9. d.) All of the ten items listed.

a

As it relates to Federal Reserve activities, the acronym FOMC describes the: a.) Federal Open Market Committee. b.) Federal Options Market Committee. c.) Federal Organization for Monetary Control. a.) Federal Organization for Money Creation.

a

Checkable deposits are classified as money because: a.) they can be readily used in purchasing goods and paying debts. b.) banks hold currency equal to the value of their checkable deposits. c.) they are ultimately the obligations of the Treasury. d.) they earn interest income for the depositor.

a

The purchasing power of money and the price level vary: a.) inversely. b.) directly during recessions but inversely during inflations. c.) directly but not proportionately. d.) directly and proportionately.

a

To say that the Federal Reserve Banks are quasi-public banks means that: a.) they are privately owned but managed in the public interest. b.) they deal only with banks of foreign nations and do not have direct business contact with U.S. banks. c.) they deal only with commercial banks, and not the public. d.) they are publicly owned but privately managed.

a

What does it mean when economists say that home buyers are "underwater" on their mortgages? a.) Buyers owe more on their mortgage than the properties are worth. b.) Buyers are financially incapable of repaying their mortgages and bankruptcy is inevitable. c.) Buyers are purchasing homes on flood plains and are highly susceptible to financial losses. d.) Buyers are paying interest rates substantially higher than current market interest rates, creating interest payments that create financial hardship.

a

Which one of the following is true about the U.S. Federal Reserve System? a.) There are 12 regional Federal Reserve Banks. b.) The head of the U.S. Treasury also chairs the Federal Reserve Board. c.) There are 14 members of the Federal Reserve Board. d.) The Open Market Committee is smaller in size than the Federal Reserve Board.

a

What is inflation?

a general increase in prices and fall in the purchasing value of money.

(Consider This) Which of the following is not part of the M2 money supply? a.) Currency in circulation. b.) Credit card balances. c.) Small-denominated time deposits of less than $100,000. d.) Checkable deposits.

b

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the: a.) M1 money supply will decline. b.) M1 money supply will not change. c.) M2 money supply will decline. d.) M2 money supply will increase.

b

If P equals the price level expressed as an index number and $V equals the value of the dollar, then: a.) P = $V - 1. b.) $V = 1/P. c.) 1 = $V/P. d.) $V = P - 1.

b

If you place a part of your summer earnings in a savings account, you are using money primarily as a: a.) medium of exchange. b.) store of value. c.) unit of account. d.) standard of value.

b

In the U.S. economy, the money supply is controlled by the: a.) U.S. Treasury. b.) Federal Reserve System. c.) Senate Committee on Banking and Finance. d.) Congress.

b

Money market deposit accounts are included in: a.) M1 only. b.) M2 only. c.) neither M1 nor M2. d.) both M1 and M2.

b

Near-monies: a.) include all financial and real assets that can be easily converted into currency. b.) are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1. c.) are excluded from M2 because they are highly liquid. d.) are defined as monetary balances that are immediately available, at zero cost, for household and business transactions.

b

Refer to the table. The value of the dollar in year 3 is: a.) $1.20. b.) $1.25. c.) $0.80. d.) $1.10.

b

Stock market price quotations best exemplify money serving as a: a.) store of value. b.) unit of account. c.) medium of exchange. d.) index of satisfaction.

b

The difference between M1 and M2 is that: a.) the former includes time deposits. b.) the latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances. c.) the latter includes negotiable government bonds. d.) the latter includes cash held by commercial banks and the U.S. Treasury.

b

To say money is socially defined means that: a.) money has been defined in a Constitutional amendment. b.) whatever performs the functions of money extremely well is considered to be money. c.) the money supply includes all public and private securities purchased by society. d.) society, acting through Congress, specifies what shall be included in the money supply.

b

Answer the question on the basis of the following list of assets: 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults Refer to the given list. The M1 definition of money comprises item(s): a.) 6 only. b.) 3, 4, and 6. c.) 3 and 6. d.) 3, 6, and 10.

c

If the price index rises from 100 to 120, the purchasing power value of the dollar: a.) may either rise or fall. b.) will rise by one-sixth. c.) will fall by one-sixth. d.) will rise by 20 percent.

c

If you are estimating your total expenses for school next semester, you are using money primarily as: a.) a medium of exchange. b.) a store of value. c.) a unit of account. d.) an economic investment.

c

In defining money as M1, economists exclude time deposits because: a.) the intrinsic value of time deposits is nil. b.) the purchasing power of time deposits is much less stable than that of checkable deposits and currency. c.) they are not directly or immediately a medium of exchange. d.) they are not recognized by the federal government as legal tender.

c

Refer to the table. The value of the dollar in year 2 is: a.) $1.25. b.) $1.33. c.) $0.80. d.) $0.75.

c

Stabilizing a nation's price level and the purchasing power of its money can be achieved: a.) only with fiscal policy. b.) only with monetary policy. c.) with both fiscal and monetary policy. d.) with neither fiscal nor monetary policy.

c

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in: a.) mutual fund companies and pension fund companies. b.) thrifts and insurance companies. c.) commercial banks and thrifts. d.) securities firms and insurance companies.

c

Currency held in the vault of First National Bank is: a.) counted as part of M1. b.) counted as part of M2 but not M1. c.) only counted as part of M1 if it was deposited into a checking account. d.) not counted as part of the money supply.

d

Currency in circulation is part of: a.) M1 only. b.) M2 not including M1. c.) neither M1 nor M2. d.) both M1 and M2.

d

During periods of rapid inflation, money may cease to work as a medium of exchange: a.) unless it has been designated legal tender. b.) unless it is backed by gold. c.) because it is too scarce for everyone to have enough for transactions. d.) because people and businesses will not want to accept it in transactions.

d

Money functions as: a.) a store of value. b.) a unit of account. c.) a medium of exchange. d.) all of these.

d

The M2 money supply includes: a.) stock certificates. b.) currency in bank vaults. c.) the cash value of life insurance policies. d.) individual shares in money market mutual funds.

d

The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is the: a.) Federal Deposit Insurance Corporation (FDIC). b.) Federal Bond Sale Authority. c.) Council of Economic Advisers. d.) Federal Open Market Committee (FOMC).

d

The paper money used in the United States is: a.) National Bank Notes. b.) Treasury Notes. c.) United States Notes. d.) Federal Reserve Notes.

d

Which of the following is not part of the M2 money supply? a.) Money market mutual fund balances. b.) Money market deposit accounts. c.) Currency. d.) Large-denominated time deposits

d

The Natural Unemployment Rate

includes only frictional and structural unemployment.

What is imported inflation?

increases in domestic inflation resulting from an increase in the price of imports

How does the consumer price index measure inflation?

measures the movement in the prices of a basket of goods and services, weighted according to their significance for the average Australian household

When the economy is at full employment, the

natural unemployment rate equals the unemployment rate.

What is the negative consequence of deflation?

o it gives consumers an incentive to delay purchases, which can cause a fall in consumption and economic downturn o it increases the real value of debt, adversely impacting indebted households and firms, and discouraging further borrowing

What is stagflation?

phenomenon of lower growth, higher inflation and rising unemployment

What are the benefits of low but positive rates of inflation?

reduces the likelihood of the economy experiencing falling prices or deflation

After 15 years with Ford Motor Corporation, one summer Cameron loses his job. His boss explained that his position has been downsized after the technological advances in automobile production. Cameron is best considered

structurally unemployed.

What is used to measure inflation in Australia?

the Consumer Price Index (CPI) and the underlying inflation

If a nation's labor force receives a significant influx of young workers:

the natural rate of unemployment is likely to increase.

In 2011, real GDP in the United States was below potential GDP. This fact definitely means that

the unemployment rate was above the natural unemployment rate.

The unemployment rate measures

unemployed workers as a percentage of the labor force

Frictional Unemployment is

unemployment that is due to normal turnover in the labor market.

The _________________ argument points out that if an employer reacts to poor business conditions by reducing pay for all workers, then the best workers, with the best employment alternatives at other firms, are the most likely to leave and the least-attractive workers, with fewer employment alternatives, are more likely to stay.

Adverse selection of wage cuts

B. Many small investors cannot adequately judge the soundness of their bank.

An economic rationale for government protection of small investors is that: a. large investors can better afford losses. b. many small investors cannot adequately judge the soundness of their bank. c. there is inadequate competition to ensure a bank is operating efficiently. d. banks are often run by unethical managers who will often exploit small investors.

C. Recessions when many borrowers have a difficult time repaying loans and lending activity slows.

Bank failures tend to occur most often during periods of: a. stock market run ups when, like many companies, banks tend to be overvalued. b. high inflation when the fixed rate loans of many banks cause their real returns to decrease. c. recessions when many borrowers have a difficult time repaying loans and lending activity slows. d. wars and other civil unrest.

C. Both rumors and real economic events.

Bank panics have often begun as a result of: a. rumors only. b. real economic events only. c. both rumors and real economic events. d. neither rumors nor economic events.

A. The failure of one bank spreading to other banks through depositors withdrawing of funds.

Contagion is: a. the failure of one bank spreading to other banks through depositors withdrawing of funds. b. the phenomenon that if one bank loan defaults it will cause other bank loans to default. c. the rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve. d. the rapid inflation that results from the printing of money.

The natural unemployment rate is the unemployment rate that exists when there is no

Cyclical Unemployment

The type of unemployment that occurs because of a recession is called:

Cyclical Unemployment

D. Depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand.

Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because: a. customers will not want to obtain loans from this bank. b. equity investors will not be able to sell the bank's stock. c. regulators will scrutinize the bank heavily looking for something wrong. d. depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand.

A. Information asymmetries.

The reason that a run on a single bank can turn into a bank panic that threatens the entire financial system is: a. information asymmetries. b. moral hazard. c. the lack of regulation. d. the increased reliance on web-based funds transfers.

A. To protect the bank's monopoly position.

The reasons for the government to get involved in the financial system include each of the following, except: a. to protect the bank's monopoly position. b. to protect investors. c. to ensure the stability of the financial system. d. to protect bank customers from monopolistic exploitation.

Insofar as government public policy is concerned, the best way to battle unemployment would be __________________.

To minimize recessions

What are the recent trends in inflation?

Trending downwards since inflation targeting - 10.5% in the 1970s - 8.1% in the 1980s - 1.5% in 2008-09 - 3.1% in 2009-2010 - 1.5% in 2019

In November 2010 the labor force in Siouxtown, was 14,800. There were 14,483 persons employed. The local unemployment rate:

Was 2.1%

C. The liquidity of the bank.

What matters most during a bank run is: a. the number of loans outstanding. b. the solvency of the bank. c. the liquidity of the bank. d. the size of the bank's assets.

What is demand pull inflation?

When demand outpaces the economy's ability to produce goods & services.

B. Households and small businesses.

When healthy banks fail due to widespread bank panics, those who are likely to be hurt are: a. government regulators. b. households and small businesses. c. the FDIC. d. the Federal Reserve.

The development of a nationwide computerized job bank listing of all job openings would be most likely to reduce:

Frictional Unemployment

The extent of _______________________ will depend on how easy it is for workers to learn about alternative jobs, which may reflect the ease of communications about job prospects in the economy.

Frictional Unemployment

A welder who quits his job and moves from Pittsburgh to Madison to try to get a better welding job is said to be:

Frictionally Unemployed

When the unemployment rate is lower than the natural unemployment rate, real GDP is

Greater than potential GDP

Effects of inflation on international competitiveness and exchange rates:

High inflation o causes Australia's exports to become more expensive relative to those of foreign producers. o Not internationally competitive enough Short-term - may result in an appreciation of the exchange rate, as speculators anticipate the RBA raising interest rates in response, attracting greater financial inflows Long-term: § generally causes the currency to depreciate over time, with exchange rates tending to change to reflect their real purchasing power in the long run

Effect of inflation on wage and income distribution:

High inflation o workers will seek larger wage increases to compensate for the erosion in the purchasing power of their nominal wages tend to increase inequality in the distribution

Effects of inflation on unemployment:

High inflation: o can constrain economic growth, discourage business investment and lead to excessive wage demands, all of which reduce the demand for labour and increase unemployment Low inflation o tends to increase demand for labour and reduce unemployment by creating conditions more conducive to sustained economic growth, encouraging business investment and leading to more moderate wage increases.

C. Most of the information on bank loans is private and based on sophisticated models.

It is difficult for depositors to know the true health of banks because: a. regulations prohibit banks making their financial statements publicly available. b. the financial statements of banks are too difficult for most people to understand. c. most of the information on bank loans is private and based on sophisticated models. d. banking is competitive and financial records of banks are not divulged to prevent competitor banks from having an advantage.

What are the policies used to sustain low inflation?

Macro and micro economic policies

The unemployment rate may underestimate the true extent of unemployment if

Many part-time employees would like to work fulltime, but are unable to get the additional work.

What macroeconomic policies help sustain low inflation?

Monetary policy - inflation targeting - changing the cash rate Fiscal policy - discretionary changes

Reginald looked for work for six months but could not find a job to his liking. He now spends his time at the beach. For purposes of employment he is considered:

Out of the Labor Force

C. Bank capital increases.

Recession can cause widespread bank crises for all of the following reasons except: a. there is less business investment as banks make fewer loans. b. borrowers' default rates increase. c. bank capital increases. d. the negative effect on banks' balance sheets.

Which type of unemployment is a permanent and healthy phenomenon in a dynamic economy?

Frictional

The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. But over time, the unemployment rate seems to return to a range of ____________.

4%-6%

Craigburg has a working age population of 20 million. Of those, 11 million are employed and 1 million are unemployed. The unemployment rate is ________ and the participation rate is __________.

8.3%; 60%.

C. A large number of depositors withdrawing their funds during a short time span.

A bank run involves: a. illegal activities on the part of the bank's officers. b. a bank being forced into bankruptcy. c. a large number of depositors withdrawing their funds during a short time span. d. a bank's return on assets being below the acceptable level.

What is cost-push inflation?

A rise in the general price level resulting from an increase in the cost of production

D. Information asymmetry problems decrease during deflationary periods.

Deflation can cause widespread bank crises for all of the following reasons except: a. a decline in the value of borrowers' net worth but not their liabilities. b. borrowers' default rates increase. c. bank balance sheets deteriorate as the level of economic activity decreases. d. information asymmetry problems decrease during deflationary periods.

C. Have a negative impact on economic growth for years.

Empirical evidence points to the fact that financial crises: a. are newsworthy but have no impact on economic growth. b. have a negative impact on economic growth only for the year of the crisis. c. have a negative impact on economic growth for years. d. can have a positive impact on economic growth as weak borrowers are weeded out.

D. Banks are of great importance in enabling the economy to operate efficiently.

The federal government is concerned about the health of the banking system for many reasons, the most important of which may be: a. banks are where government bonds are traded. b. a significant number of people are employed in the banking industry. c. many people earn the majority of their income from interest on bank deposits. d. banks are of great importance in enabling the economy to operate efficiently.

The most significant real economic cost of high unemployment is

The potential goods and services that might have been produced but weren't