Macro-Economics Exam 2
The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial matters:
"Diversify."
Suppose a closed economy had public saving of −$1 trillion and private saving of $3 trillion. What are national saving and investment for this country?
$2 trillion, $2 trillion
In a closed economy, if Y, C, and T remained the same, a decrease in G would
increase public saving but not private saving.
If the Fed raised the reserve requirement, the demand for reserves would
increase, so the federal funds rate would rise.
In a closed economy, public saving is the amount of
tax revenue that the government has left after paying for its spending.
A problem that the Fed faces when it attempts to control the money supply is that
the Fed does not control the amount of money that households choose to hold as deposits in banks.
In a closed economy, private saving is
the amount of income that households have left after paying for their taxes and consumption.
The economy's two most important financial markets are
the bond market and the stock market.
When conducting an open-market purchase, the Fed
buys government bonds, and in so doing increases the money supply.
Based on the quantity equation, if Y = 3,000, P = 3, and V = 4, then M =
$2,250.
Last year a country had exports of $100 billion, imports of $70 billion, and purchased $60 billion worth of foreign assets. What was the value of domestic assets purchased by foreigners?
$30 billion
A country has I = $200 billion, S = $400 billion, and purchased $600 billion of foreign assets, how many of its assets did foreigners purchase?
$400 billion
Which of the following will help to prevent bank runs?
100% reserve banking
If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?
2 gallons of Argentinean milk/1 gallon of U.S. milk
If velocity = 4, the quantity of money = 20,000, and the price level = 2.5, then the real value of output is
32,000.
Katarina puts money into an account. One year later she sees that she has 6 percent more dollars and that her money will buy 4 percent more goods. The nominal interest rate was
6 percent and the inflation rate was 2 percent.
Which of the following is an example of barter?
A barber gives a plumber a haircut in exchange for the plumber fixing the barber's leaky faucet.
Which of the following both increase the money supply?
A decrease in the discount rate and a decrease in the interest rate on reserves
Which of the following is an example of menu costs?
Advertising new prices
Which of the following does the Federal Reserve not do?
Conduct fiscal policy
Which of the following increase when the Fed makes open market purchases?
Currency and reserves
An associate professor of physics gets a $200 a month raise. With her new monthly salary she can buy more goods and services than she could buy last year.
Her real and nominal salary have risen.
In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes?
The supply of loanable funds shifted rightward.
Which of the following helps to explain why the "inflation fallacy" is a fallacy?
Nominal incomes tend to rise at the same time that the price level is rising, leaving real income unchanged.
In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would happen to public and national saving?
Public and national saving would fall.
Which of the following is NOT an example of monetary policy?
The Federal Reserve facilitates bank transactions by clearing checks.
Which of the following is correct?
The Federal Reserve has 12 regional banks. The Board of Governors has up to 7 members who serve 14-year terms.
If a country experiences capital flight, which of the following curves shift right?
The demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.
Consider the expressions T − G and Y − T − C. Which of the following statements is correct?
The first of these is public saving; the second one is private saving.
Suppose private saving in a closed economy is $12b and investment is $10b.
The government budget deficit must equal $2b.
According to the classical dichotomy, which of the following increases when the money supply increases?
The nominal wage
Which of the following can a country increase in the long run by increasing its money growth rate?
The nominal wage
What would happen, all else equal, in the market for loanable funds if the government were to decrease the tax rate on interest income?
There would be an increase in the equilibrium quantity of loanable funds.
If real interest rates rose more in Japan than in the United States, then other things the same
U.S. citizens would buy more Japanese bonds and Japanese citizens would buy fewer U.S. bonds.
Other things the same, as the maturity of a bond becomes longer, the bond will pay
a higher interest rate because it has more risk.
The inflation tax falls mostly heavily on those who hold
a lot of currency but accounts for a small share of U.S. government revenue.
When the Fed decreases the discount rate, banks will
borrow more from the Fed and lend more to the public. The money supply increases.
The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is explained by the
classical dichotomy.
If the public decides to hold more currency and fewer deposits in banks, bank reserves
decrease and the money supply eventually decreases.
If a country sells fewer goods and services abroad than it buys from other countries, it is said to have a trade
deficit and negative net exports.
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.
Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the money supply to
fall. To reduce the impact of this the Fed could buy Treasury bonds.
If you are vacationing in France and the dollar depreciates relative to the euro, then the dollar buys
fewer euros. It will take more dollars to buy a good that costs 50 euros.
Other things the same, an increase in the U.S. real interest rate induces
foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.
According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money
gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.
Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be
higher interest rates and lower investment.
When Microsoft, a U.S. company, establishes a distribution center in France, U.S. net capital outflow
increases because Microsoft makes a foreign direct investment in France.
Other things the same, if reserve requirements are increased, the reserve ratio
increases, the money multiplier decreases, and the money supply decreases.
Net capital outflow
is always equal to net exports.
The source of the supply of loanable funds
is saving and the source of demand for loanable funds is investment.
Esther is considering expanding her dress shop. If interest rates rise she is
less likely to expand. This illustrates why the demand for loanable funds slopes downward.
Other things the same, a higher real interest rate raises the quantity of
loanable funds supplied.
During the 1970s, U.S. prices rose by 7.8 percent per year and real GDP increased. Holding velocity constant and using the quantity equation, we conclude that
money growth must have been greater than the growth of real income.
When the government's budget deficit increases the government is borrowing
more and public savings falls.
A depreciation of the U.S. real exchange rate induces U.S. consumers to buy
more domestic goods and fewer foreign goods.
If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold
more reserves, so the reserve ratio will rise.
Other things the same, when the interest rate rises, people would want to lend
more, making the quantity of loanable funds supplied increase.
If a country raises its budget deficit, then its
net capital outflow and net exports fall.
According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then
nominal GDP would fall by 7 percent; real GDP would be unchanged.
The Fisher effect is crucial for understanding changes over time in the
nominal interest rate.
In 2002, the United States placed higher tariffs on imports of steel. According to the open-economy macroeconomic model this policy reduced imports
of steel into the United States, but reduced U.S. exports of other goods by an equal amount.
In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by
purchasing bonds on the open market, which would have lowered the value of money.
If the supply of dollars in the market for foreign-currency exchange shifts left, then the exchange rate
rises and the quantity of dollars exchanged for foreign currency falls.
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 U.S. goods.
Given that Monika's income exceeds her expenditures, Monika is best described as a
saver or as a supplier of funds.
As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,
sell bonds.
If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by
selling bonds. This selling would reduce reserves.
When conducting an open-market sale, the Fed
sells government bonds, and in so doing decreases the money supply.
If at a given real interest rate desired national saving is $140 billion, domestic investment is $90 billion, and net capital outflow is $60 billion, then at that real interest rate in the loanable funds market there is a
shortage. The real interest rate will rise.
In the market for foreign-currency exchange, capital flight shifts the
supply curve right.
If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, there is a
surplus and the interest rate is above the equilibrium level.
Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
the inflation rate and the nominal interest rate by the same number of percentage points.
The discount rate is
the interest rate the Fed charges banks.
The principle of monetary neutrality implies that an increase in the money supply will increase
the price level, but not real GDP.
In the long run, money demand and money supply determine
the value of money but not the real interest rate.
In order to maintain stable prices, a central bank must
tightly control the money supply.
Wealth is redistributed from creditors to debtors when inflation is
unexpectedly high.
The shoeleather cost of inflation refers to the
waste of resources used to maintain lower money holdings.
Which of the following policies can the Fed follow to increase the money supply?
Reduce the interest rate on reserves
David and Asher buy the same pair of sneakers, but each in the wrong size. David proposes a size swap with Asher. This is an example of
barter, since the sneakers in the correct size have intrinsic value to both David and Asher.
