Macro Test 2 Problem Sets

Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion, and a balance on the current account of - $200 billion. The balance on the capital and financial account will be:

$200 billion

A country has national saving of $70 billion, government expenditures of $20 billion, domestic investment of $30 billion, and net capital outflow of $40 billion. What is its equilibrium quantity supplied of loanable funds?

$40 billion

In a closed economy's saving and investment market, the prevailing price is the:

real interest rate.

The U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s can be explained by a...

rightward shift of aggregate demand and a rightward shift of aggregate supply.

When the market is pessimistic in its expectations about the future economy,

saving increases and investment decreases.

If, at some interest rate, the quantity of money demanded is greater than the quantity of money supplied, people will desire to...

sell interest-bearing assets, causing the interest rate to increase.

When a currency is undervalued, the quantity of currency ______ is lower than the quantity of currency ___ at this exchange rate. To maintain the fixed rate, the government__________. This leads to a net ________ in the government's stock of foreign reserves.

supplied; demanded; supplies additional currency by buying foreign reserves; increase

Whenever AD or AS shifts and puts the economy out of long-run equilibrium, AS has a natural tendency to shift in such a way as to bring the economy back into long-run equilibrium. If the economy always eventually comes back to long-run equilibrium, the reason that the government even tries to implement policies to bring the economy into equilibrium is that:

the appropriate government response can eliminate the long-run effect on prices and can speed up the process of reducing unemployment.

The term debt finance is associated with....

the bond market, and the term equity finance is associated with the stock market

If the exchange rate was fixed instead, then:

the central bank would not be able to use monetary policy to affect economic activity.

The real exchange rate is:

the exchange rate adjusted for purchasing power parity.

According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes....

the interest rate to rise, so aggregate demand shifts left.

The percentage by which consumption increases when income increases is called:

the marginal propensity to consume

For a given quantity of bank reserves, the Federal Reserve decreases the required reserve ratio?

the quantity of required reserves falls and the quantity of excess reserves rises.

If there is a surplus of loanable funds, then

the quantity supplied is greater than the quantity demanded and the interest rate will fall.

Suppose the government increases government purchases and there is some crowding out. As a result,

the rightward shift of the aggregate demand curve due to increased government purchases is offset to some degree by the crowding out effect.

Suppose the Fed conducts an open market purchase. If banks hold no excess reserves before the open market purchase, in the market for bank reserves,

the supply of reserves increases which causes the federal funds rate to fall.

Why is the ideal fiscal stimulus temporary?

to avoid raising inflation and to minimize the adverse long-term effects of a larger budget deficit.

Firms have an incentive to reduce production if:

unplanned inventory investment is positive.

Foreign reserves (also called international reserves) are:

foreign currency assets held by a government for the purpose of purchasing domestic currency in the foreign exchange market.

Government transfer payments do not count as part of the.....

government spending component of GDP.

When an economy uses silver as money, then that economy's money

has intrinsic value.

Why is planned investment sometimes different from actual investment?

-Actual investment includes unplanned inventory accumulation and planned investment does -Unexpected changes in demand will cause planned investment to differ from actual investment.checked

Which of the following is a benefit of government debt?

-Debt allows flexibility in offsetting an economic shocks -The ability to pay for investments that lead to economic growth

Demonstrate the change in the market for U.S. dollars that occurs as a result of the labor unrest.

-Demand decreases and the value of the U.S. dollar would depreciate.

Lilyland and Broding are exclusive trading partners. If interest rates suddenly increase in Broding but stay constant in Lilyland, net capital outflows in Lilyland will likely.....

increase

Which of the following are examples of a problem that could be caused by lack of financial liquidity?

-Fernando finds a great investment opportunity, but can't invest in it because his money is all tied up in his printing business.checked -Emily is on vacation on a remote island and finds a piece of art she really wants. However, since she did not bring enough cash with her, she is unable to buy it.

What happens to equilibrium output in each of the following cases? Does it increase, decrease or remain unchanged?

-If the real interest rate increases, equilibrium output will decrease -If the level of government spending increases, equilibrium output will increase -If the level of expected future income decreases, equilibrium output will decrease

People will want to hold more money if the price level...

increases or if the interest rate decreases.

If the Fed buys U.S. Treasury securities, then this

increases reserves, encourages banks to make more loans, and increases the money supply.

The opportunity cost of holding money...

increases when the interest rate increases, so people desire to hold less of it.

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.

increases; increases

For each of the following, indicate what happens to the long-run aggregate supply (LRAS) curve and the Short-run aggregate supply (SRAS) curve.

-Technological advancements that increase productivity: The LRAS curve shift right and the the SRAS curve shift right -Economic agents expect the price level to rise: The LRAS curve no change and the the SRAS curve shift left -An outbreak of war that destroys lives and infrastructure: The LRAS curve shift left and the the SRAS curve shift left

Indicate whether each of the following is an example of an automatic stabilizer or discretionary fiscal policy.

-The government increases the top income tax bracket to 35%. discretionary fiscal policy -The tax rate paid by an individual falls from 20% to 15% when his pay is reduced during a recession. automatic stabilizer -A person qualifies for unemployment compensation when she loses her job during a recession. automatic stabilizer -The government votes to increase military spending. discretionary fiscal policy

Consider the trade partners of the country that fell into recession. What happens to each of the following variables?

-Their exports to the country in recession: Decrease -Their level of production and income: Decreases -When one country in the world falls into a recession, this tends to cause other countries to also fall into a recession. True

The indirect costs of government debt involve:

-a distorted credit market.checked -slow economic growth.checked -crowding out.checked

What could have caused the AD curve to shift from AD1 to AD2?

-businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. -a housing crisis that results in major consumer asset losses -a decrease in the money supply which leads to higher interest rates

Taxpayers are clamoring for their government to be more responsible and many strongly support a balanced-budget amendment. This would mean the country could no longer spend more than it takes in each year. A balanced-budget amendment will:

-force the government to cut back on its spending. -limit the flexibility of the government in engaging in expansionary fiscal policy. -reduce the cost of borrowing

If H & M borrows $8 million from a bank to finance the construction of a new store, this is an example of

indirect finance through an intermediary.

Which components of planned aggregate expenditure do not directly depend on current income?

investment and government spending

Public saving:

is identical to the government budget surplus.

The government borrows money by....

issuing new Treasury securities

You go to the bank and purchase a $1,000 certificate of deposit (CD). In this case, you are acting as a....

lender and the bank is acting as a borrower.

Small businesses use these to raise funds for investment.....

loan

Which of the following is an example of fiscal restraint (contractionary policy)?

An increase in taxes and a decrease in government spending.

Which of the following statements is correct?

Bondholders have prior claim to the assets of a company over share holders.

Should the country allow the exchange rate to float?

Both of these answers are correct

Suppose Canada's central bank fixes the Canada-U.S. exchange rate between the limits of Can$1.10 and Cdn$1.20 to the U.S dollar. If the free market equilibrium exchange rate would otherwise be Can$1.05, then

Canada's central bank must buy U.S. dollars.

Suppose the government deficit increases, but the interest rate remains the same. Which of the following things might have happened simultaneously to keep interest rates the same?

Consumers decide to decrease consumption and work more.

When more people qualify for unemployment insurance, which component(s) of planned aggregate expenditure is(are) affected?

Consumption

Through which component(s) of aggregate demand (Consumption, Investment, Government Spending, or Net Exports) will the change occur?

Consumption, Government Spending, Investment

Suppose the U.S. economy slips into a recession. In response, the Federal Reserve cuts the federal funds rate in order to avoid unemployment. Consider what happens to the following under a floating exchange-rate regime.

Domestic investment would increase . b. Capital inflow would decrease . c. Capital outflow would increase . d. The exchange rate would decrease . e. Net exports would increase . f. Aggregate demand would increase .

Given AD1 and AS1 in Figure 8.3, the Keynesian approach to achieving a higher level of output would be to...

Employ an expansionary fiscal policy.

Assuming that unemployment is high and spending is low, answer the following questions.a. Should the government pursue expansionary or contractionary fiscal policy?

Expansionary fiscal policy which will shift the aggregate demand curve To the right .

At the equilibrium level of aggregate expenditure, which of the following are true?

Firms have no incentive to change the level of their output and Unplanned investment is zero.

Which of the following statements is correct?

For a closed economy, the sum of private saving and public saving must equal investment.

What are the primary components of aggregate expenditure?

Government Spending, Net Exports, Investment, Consumption.

The control the Federal Reserve has in manipulating the money supply by setting the minimum reserve ratio is limited because: I. Banks can decide to have a desired reserve ratio greater than the minimum reserve ratio. II. More people use credit cards than cash. III. People might not hold their money in banks, which limits the loanability of that cash.

I and III only.

When the economy is operating below full employment, which of the following policy actions will allow aggregate spending to increase but will not increase government spending budget in the process?

Increase government spending and taxes by the same amount.

What is the intended effect of expansionary OMO?

Increase in aggregate demand.

People become more optimistic regarding their future prospects: What happens to planned aggregate expenditure?

Increases

The investment category of GDP measures three different types of expenditures. What are they?

Inventory accumulation, Purchases of newly built homes, Purchases of new capital.

How is the risk-free interest rate determined?

It is equal to the interest rate on U.S. government debt.

What is the benefit of diversification?

It protects one against idiosyncratic, or firm-specific, risk.

Which of the following actions would decrease Joan's money demand by $200?

Joan writes a check for $200 to purchase additional shares of stock.

Suppose a closed economy had public saving of $3 trillion and private saving of $2 trillion. What are national saving and investment for this country?

National Saving = $5 trillion, Investment = $5 trillion

China experiences an economic boom: Which component of planned aggregate expenditure is affected?

Net Exports

Suppose that in the United States last season's hot holiday gift was the iPad (which is made primarily in China) while this season's big gift is media content for the iPad (which is made in the U.S.). Determine whether there will be an increase, decrease, or no change for each of the following variables compared to last year.

Net exports for the U.S. would increase or decrease .d. Net capital outflows for the U.S. would either rise or fall.

Define each of the following as direct or portfolio foreign investment.

Nike (a U.S. company) builds new factories in Cambodia: Direct investment, A U.S. hedge fund purchases 30 percent of the shares of a Brazilian paper manufacturer: Portfolio investment, Mercedes-Benz (a German company) builds a manufacturing plant in Alabama: Direct investment, A British chocolate maker buys a smaller U.S. rival: Portfolio investment.

Suppose the nominal U.S. exchange rate with Canada is US$0.80 per Canadian dollar. Does purchasing power parity hold between the two countries?

No, it does not hold because the Canadian Big Mac costs less in terms of U.S. dollars.

Which of the following are examples of government transfer payments?

Payments to unemployed workers, food assistance to families with low incomes, payments to retired workers.

The theory of Ricardian equivalence predicts that:

Reductions in income taxes will not increase aggregate demand because people will save the majority of the extra income.

Which of following would help minimize moral hazard in the financial market?

Requiring an insurance policyholder to carry a deductible

In the long run, how does the economy's self correcting mechanism work?

Resource owners will accept lower wages and prices of inputs reduce the cost of production, so the short-run aggregate supply will shift to the right.

Which of the following explain why an increase in interest that bank receive from the Fed on the required and excess reserves that banks hold with the Fed, would also increase the interest rates that commercial banks charge their borrowers?

Since the interest that bank's receive from the Fed on excess reserves represents an opportunity cost for banks when lending to their borrowers, a higher rate from Fed will require a higher reward for banks when lending to consumers.

Suppose policy makers decide to take no action. What happens in the long run?

The SRAS curve shifts right, the price level falls and output increases to potential GDP.

Suppose the Federal Reserve raises its target for the overnight interest rate from 3% to 3.25%, while interest rates in other countries do not change. How will this policy action affect U.S.'s imports and exports?

The U.S. dollar will appreciate and encourage imports into the U.S.

An economy's national debt is....

The accumulation of all annual deficit and surplus flows.

What does a timely fiscal stimulus mean?

The effects of the stimulus are felt while the economy is below its potential output

You have a choice between a 6-month CD and a 2-year CD. Which of the following is true regarding the interest rate paid on each of the CDs?

The interest rate on the 2-year CD will be higher because the opportunity cost of buying the 2-year CD is greater than the opportunity cost of buying the 6-month CD.

When comparing the interest rate on credit card debt to the interest rate on a mortgage, which of the following is the most accurate?

The interest rate on the credit card debt is higher because the risk of default is higher.

Which of the following might help explain why some Americans would have increased their holdings of U.S. dollars as a store of wealth after 2016?

The political system was perceived as significantly less stable.

Bollywood movies become extremely popular in the United States, increasing demand for foreign movies.....

The supply curve shifts to the right.

Suppose the new CEO for Apple Inc. decides to produce all the company's products in the U.S. instead of China.

The supply of U.S. dollars will shift to the left The demand for U.S. dollars will shift to the right The value of the U.S. dollar will appreciate.

Which of the following is not a reason that banks keep reserves?

To keep the interest rate from becoming too low.

True or false, Unemployment insurance helps reduce the severity of recessions.

True

Which of the following contains a list only of things that increase when the budget deficit of the U.S. increases?

U.S. imports, U.S. interest rates, the real exchange rate of the dollar

Suppose the exchange rate value of the dollar depreciates.

Who are the Winners: Firms that export goods, People who travel to this country, People who want to buy assets in this country. Who are losers: Firms that import goods, People who travel abroad, People who want to buy foreign assets.

Categorize each of the following as a type of savings or investment in the economic sense.

You buy 100 shares of Apple Computer stock: Savings . b. You place part of your income in a mutual fund: Savings . c. A delivery service buys 1,000 new trucks: Investment . d. You put $1,000 in a certificate of deposit, by giving money to the bank in exchange for a set amount of return: Savings .

In which of the following cases is money being used as a medium of exchange?

You pay your neighbor $10 for clearing the snow from your driveway with his snowblower, A farmer buys seed to plant his crops, A wealthy alumna donates $1 million to her alma mater.

If the United States has a $300 billion trade deficit, then there must be:

a and b are correct

A "demand-side" recession (i.e., a recession caused by a fall in aggregate demand) could be caused by:

a collapse in wealth a stock market collapse a housing market crash a fall in consumer or business confidence an increase in taxes an increase in interest rates a decrease in exports a fall in government spending

For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include...

a cut in government spending.

Policies designed to pay off the national debt will result in:

a smaller level of aggregate demand.

Time lags can impede the effectiveness of fiscal policy. Select the source of the time lag for each of the following situations.

a)The parliament in a European country passes a massive infrastructure development appropriation to stimulate the economy. However, the engineering firms in the country become backlogged with the extra work. Implementation lag b. Congress passes a tax cut bill to help stimulate the economy, but the president vetoes the bill because he favors spending increases over tax cuts. Formulation lag c. In September, the Bureau of Labor Statistics revises the unemployment numbers from July. Information lag

Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets:

a. A U.S. airline firm purchases several Airbus planes assembled in France. Demand for euros b. A German automobile firm decides to build an assembly plant in South Carolina. Supply of euros c. A U.S. college student decides to spend a year studying at the Sorbonne in Paris. Demand for euros d. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter. Supply of euros

Which of the following items appear in the current account and which appear in the capital and financial account?

a. U.S. purchases of assets abroad: Capital and financial account b. U.S. services imports: Current account c. Foreign purchases of assets in the United States: Capital and financial account d. U.S. goods exports: Current account

The money demand curve relates ____ to the ________.

aggregate demand; nominal interest rate

For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include...

an increase in taxes.

Automatic stabilizers....

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.

The elements of the federal budget not determined by past legislative or executive commitments are

automatic stabilizer

If a nation's goods exports are $55 billion, while its goods imports are $50 billion, we can conclude with certainty that this nation has a

balance of trade (goods) surplus.

It pays some form of interest, and principal is paid at maturity....

bond

We can think of this as a more liquid version of a loan....

bond

Under a fixed exchange-rate regime, the central bank.....

cannot use monetary policy to influence economic activity.

Net capital inflows equal:

capital inflows minus capital outflows.

The M1 measure of money supply includes

currency plus checking account balances plus traveler's checks.

A nation that is a net borrower each year over time will become a ________ nation. A nation that is a net lender each year over time will become a ________ nation. Since the early 1980s, the United States has been a ________ due to the current account ________.

debtor; creditor; net borrower; deficits

According to the "real-balances effect," or the "real wealth" effect, if prices....

decline, the purchasing power of assets will rise, so spending at each income level should rise.

When firms take out loans to pay for capital improvements, any increase in the interest rate will....

decrease

A country operates under a flexible exchange rate system. When the central bank lowers the interest rate during a recession, investment spending will increase , the exchange rate value of the currency will...

decrease , and net exports will increase.

There is a negative relationship between aggregate demand and the price level because when the price level rises, planned aggregate expenditure will....

decrease , causing firms to decrease production of goods and services.

Assume the money market is initially in equilibrium. If the price level increases, then according to liquidity preference theory there is an excess

demand for money until the interest rate increases.

When a currency is overvalued, the quantity of currency ______ is lower than the quantity of currency ___ at this exchange rate. To maintain the fixed rate, the government__________. This leads to a net ________ in the government's stock of foreign reserves.

demanded; supplied; purchases currency by selling its foreign reserves; decrease

Under a flexible exchange rate system a decline in the value of a currency relative to other currencies is a called a(n) _______ and under a fixed exchange rate system a decrease in the official value of a currency is called a(n) ________.

depreciation; devaluation

Suppose the government of New Country fixes the exchange rate of its currency, the Newo, in terms of the U.S. dollar. Initially the exchange rate is set at $0.50 per Newo. In a crisis, the government changes the exchange rate to $0.25 per Newo. This is an example of a(n):

devaluation

A country has a fixed exchange rate. If world interest rates rise, the country will have to buy....

domestic currency and sell foreign currency to maintain the fixed exchange rate. The fixed exchange rate has become relatively more overvalued.

The demand for loanable funds comes from which of the following?

domestic investment and foreign investment

The U. S. national debt

equals the dollar amount of outstanding U.S. Treasury bonds.

If the central bank pegs the exchange rate below its free-market equilibrium level, there will be a(n) ________ of/for foreign exchange and the central bank will ________ foreign currency.

excess demand; sell

If the central bank pegs the exchange rate above its free-market equilibrium level, there will be a(n) ________ of foreign exchange and the central bank will ________ foreign currency.

excess supply; purchase

A "supply-side" recession (i.e., a recession caused by a fall in aggregate supply) could be caused by:

famine migration war large increases in oil or food prices significant increases in corporate taxes.

When one party to a transaction takes actions that a trading partner cannot observe but that nonetheless affect that trading partner, this is called

moral hazard

At the equilibrium GDP....

net exports may be either positive or negative.

Critics of the North American Free Trade Agreement argued that opening our borders to free trade with Mexico would result in U.S. firms moving all of their factories to Mexico and the U.S. running large trade deficits with Mexico. Comment on the concerns of these critics using your knowledge of international trade and net capital flows. This criticism should:

not be a concern. As domestic firms increase their direct investment in Mexico, net capital outflows and net exports rise; If the U.S. runs large trade deficits with Mexico, net capital outflows fall in order to keep the economy in equilibrium.

Income and government spending: not directly related and Interest rates and government spending:

not directly related

The difference between planned aggregate expenditure (PAE) and actual output (Y) is:

planned and actual inventory investment.

Open market operations (OMO) refer to the buying and selling of ________ by the ________ to control the money supply.

previously issued Treasury securities; Federal Reserve

All else constant, the real exchange rate between American and British goods would be higher if

prices of British goods were lower, or the number of pounds a dollar purchased was higher.

From the point of view of a particular country, capital inflows are:

purchases of domestic assets by foreigners.

From the point of view of a particular country, capital outflows are:

purchases of foreign assets by domestic households or firms.

Suppose a country is in the midst of an economic boom and is running large budget surpluses. The president suggests that due to the good economic conditions, the time is ripe for a large tax cut. In this case, a tax cut will:

push AD to the right and increase output. increase the price level and costs. eventually cause a leftward shift of SRAS.

When the central bank contracts the money supply in response to expansionary fiscal policy, this is known as....

A monetary offset.