ECO 102 Exam 3

Suppose a bank facing a reserve requirement of 20% currently holds $100,000 in deposits and zero excess reserves. When a customer withdraws $5,000, the bank has to reduce its loans by $_______.

20000

In Country X, real GDP is $12 billion. The GDP deflator is 1.5. Consumption spending in Country B is $4 billion. People tend to hold about a third of their annual income as money. The money supply is $______ billion.

6

How many members of the Federal Reserve's board of governors are there?

7

The quantity theory of money predicts that since velocity should be stable, a doubling of the money supply, all else equal should result in A. A doubling of the price level B. A doubling of GDP C. A 50% increase in GDP and a 50% increase in the price level D. A the price level should fall by half.

A. A doubling of the price level

An increase in the world's perception of the U.S. as a good, safe place to invest causes which of the following? Multiple answers are accepted for this question A. A surplus in the financial account due to a rise in demand for financial assets B. A surplus in the current account due to a rise in demand for financial assets C. A decline in the current account as the trade deficit widens D. A surplus in the current account as the trade deficit narrows

A. A surplus in the financial account due to a rise in demand for financial assets C. A decline in the current account as the trade deficit widens

Which event would cause the dollar to appreciate against the euro, if everything else remains the same? A. An increase in interest rates in the U.S. B. An increase in interest rates in Europe C. A decline in interest rates in the U.S. D. A decline in prices in Europe

A. An increase in interest rates in the U.S.

In the 1980s, the current account and fiscal (government) deficits moved together, but in the 2000s they diverged. What could have accounted for the divergence? A. Household savings may have changed. B. The fiscal deficit became a surplus. C. The current account deficit declined. D. The current account deficit increased.

A. Household savings may have changed.

An increase in income in Europe with an increase in European prices will do which of the following? A. Increase U.S. exports and decrease U.S. imports. B. Increase U.S. exports and imports. C. Decrease U.S. exports and imports. D. Decrease U.S. exports and increase U.S. imports. E. No change in U.S. imports and increase in U.S. exports. F. No change in U.S. exports and decrease in U.S. imports.

A. Increase U.S. exports and decrease U.S. imports.

Assuming banks have little or no excess reserves, if the Federal Reserve raises the required reserve ratio, what will likely happen to the M1 money supply? A. It will fall B. It will not change C. It will rise D. It may rise or fall

A. It will fall

A country may try to fix its exchange rate in order to do which of the following? Multiple answers are accepted for this question A. Prevent large swings in the demand for its exports B. Reduce uncertainty for businesses involved in international trade C. Maintain an independent monetary policy

A. Prevent large swings in the demand for its exports B. Reduce uncertainty for businesses involved in international trade

Which monetary policy tool has not been used in over 20 years? A. Required reserve ratio B. Interest on excess reserves C. Open market operations D. The discount rate

A. Required reserve ratio

If the U.S. alone were to reduce tariffs on imported goods, how would imports and the value of the dollar be affected? A. U.S. imports would increase and the value of the dollar would fall. B. U.S. imports would increase and the value of the dollar would rise. C. U.S. imports would decrease and the value of the dollar would fall. D. U.S. imports would decrease and the value of the dollar would rise.

A. U.S. imports would increase and the value of the dollar would fall.

The Federal Reserve should do which of the following if it wishes to increase employment in the economy? A. buy bonds and lower the required reserve ratio B. sell bonds and lower the required reserve ratio. C. sell bonds and raise the required reserve ratio D. buy bonds and raise the required reserve ratio E. None of the above is logical.

A. buy bonds and lower the required reserve ratio

A Federal Reserve purchase of bonds will have the smallest effect on real GDP if the amount of currency normally held as a percentage of money ______________ and the tax rate ______________. A. increases; increases B. decreases; increases C. increases; decreases D. decreases; decreases E. The change in the tax rate will not affect the result; the change in currency will.

A. increases; increases

Suppose the minimum reserve ratio for private banks is lowered. As a result, banks can make loans, and money supply . A. more; increases B. more; decreases C. more; remains the same D. less; increases E. less; decreases F. less; remains the same

A. more; increases

The discount rate is ___________. A. the interest rate that the Federal Reserve charges banks when banks borrow reserves from the Federal Reserve B. the market interest rate that banks pay each other when they borrow reserves from each other C. the interest rate that the Federal Reserve pays on banks' required reserves D. the interest rate that the Federal Reserve pays on banks' excess reserves

A. the interest rate that the Federal Reserve charges banks when banks borrow reserves from the Federal Reserve

If the interest rate is 5%, which is worth more A. $1000 paid today B. $1050 paid 1 year from today C. $1130 paid 2 years from today

C. $1130 paid 2 years from today

Which of the following will likely cause the U.S. dollar to increase in value relative to other currencies? A. Higher taxes B. Lower interest rates C. Increased government spending D. Higher U.S. prices

C. Increased government spending

How is commodity money different from real money? Select all that apply. A. It has intrinsic value. B. It can be used to exchange for goods and services. C. It can be used in a barter economy. D. All of the above. E. None of the above.

C. It can be used in a barter economy.

The US dollar is a A. commodity backed currency. B. the strongest currency in the world. C. a Fiat currency. D. the only currency used in the developed world.

C. a Fiat currency.

Which of the following explains why purchasing power parity does not hold? A. Not all goods are traded. B. Shipping costs could explain differences in exchange rates. C. There may be import taxes or restrictions which alter prices. D. All of the above are reasons why purchasing power parity does not

D. All of the above are reasons why purchasing power parity does not

Assume that the economy is producing at full employment output with a large federal budget deficit and a large trade deficit. What should be the proper combination of monetary and fiscal policy, if your goals are to reduce both deficits and to maintain full employment without inflation? A. Expansionary monetary policy and contractionary fiscal policy B. Contractionary monetary policy and expansionary fiscal policy C. Contractionary monetary policy and contractionary fiscal policy D. Expansionary monetary policy and expansionary fiscal policy

D. Expansionary monetary policy and expansionary fiscal policy

The Federal Reserve System consists ofI. 12 Regional BanksII. The Board of GovernorsIII. The US National Bank A. I only B. II only C. II and III D. I and II only E. All of the above

D. I and II only

Which of the following features are required to qualify an asset as money?I. It is a store of valueII. It has intrinsic valueIII. It is easy to transportIV. Accepted as a means of paymentV. Easily createdVI. It is a unit of account A. All of the above B. II only C. II and III D. I, IV, and VI

D. I, IV, and VI

Suppose the FOMC increases the target for the federal funds rate. What will happen to bond prices and interest rates? A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

D. decrease; increase

Contractionary monetary policy will likely be accompanied by a(n) ______________ in interest rates and that change in interest rates will cause a(n) ______________ in the value of the dollar. A. decrease; decrease B. increase; decrease C. decrease; increase D. increase; increase

D. increase; increase

Which of the following would be considered expansionary or simulative monetary policy? A. Open market purchases B. Open market sales C. Reducing the interest on excess reserves D. All of the above E. A and C only

E. A and C only

What is the value of the current account? A. $120 B. $165 C. -$165 D. $140

B. $165

Which event would cause the dollar to appreciate against the Euro, assuming that everything else remains the same? A. An improvement in investment opportunities in Europe B. An improvement in investment opportunities in the U.S. C. Increased inflation in the U.S. D. Higher interest rates in Europe

B. An improvement in investment opportunities in the U.S.

An increase in the British demand for U.S.-produced products will have which of the following effects on the value of the dollar and the equilibrium quantity of dollars in the international exchange markets? A. An increase in the value of the dollar and a decrease in the equilibrium quantity of U.S. dollars in international markets B. An increase in the value of the dollar and an increase in the equilibrium quantity C. A decrease in the value of the dollar and an increase in the equilibrium quantity D. A decrease in the value of the dollar and a decrease in the equilibrium quantity

B. An increase in the value of the dollar and an increase in the equilibrium quantity

A decrease in how much of their reserves banks wish to loan out will have which of the following effects on consumption spending and investment spending? A. Both will increase. B. Both will decrease. C. Consumption will increase; investment will decrease. D. Consumption will decrease; investment will increase. E. Neither will change.

B. Both will decrease.

A more rapid decrease in real incomes and prices abroad than in the U.S. will affect U.S. net exports in what manner? A. Increase net exports. B. Decrease net exports. C. Not affect net exports. D. Need more information to answer.

B. Decrease net exports.

When bond prices rise, interest rates have ______________. A. Increased B. Decreased C. One cannot tell D. Not changed

B. Decreased

If the Federal Reserve decreased the required reserve ratio, and banks were holding no excess reserves, the M1 money supply would likely: A. Decrease B. Increase C. Remain unchanged D. Become difficult to measure.

B. Increase

Suppose a person deposits $4,200 in an account offering an annual interest rate of 5.5%. Three years later, the person plans to book a $5,000 vacation and wants to withdraw all the money. Will the person have enough for the vacation? A. Yes B. No C. Not enough information is given.

B. No

In the case of continuous inflation, which of the following will most likely happen? A. Rapid decline of bond prices. B. Rapid rise of bond prices. C. Minor fluctuation of bond prices. D. None of the above.

B. Rapid rise of bond prices.

Suppose that the real exchange rate between the dollar and the yen is 0.7 (Japanese goods per U.S good). Purchasing power parity predicts which of the following? Multiple answers are accepted for this question A. The U.S. dollar will depreciate. B. The U.S. dollar will appreciate. C. The U.S. price level will rise. D. The U.S. price level will fall. E. The Japanese price level will rise. F. The Japanese price level will fall.

B. The U.S. dollar will appreciate. C. The U.S. price level will rise. F. The Japanese price level will fall.

If investment opportunities improve in Europe relative to the U.S., what would we expect to happen? Multiple answers are accepted for this question A. A nominal appreciation in the dollar B. The nominal value of the dollar to depreciate C. A nominal depreciation of the euro D. The nominal value of the euro to appreciate

B. The nominal value of the dollar to depreciate D. The nominal value of the euro to appreciate

Individuals decide to increase their saving as a percentage of their income. As a result, a specific monetary policy action will have ______________ effect on total spending. A. a larger B. a smaller C. the same D. One cannot tell.

B. a smaller

An expansionary monetary policy might include a(n) in the discount rate and a(n) _______ in the Federal Reserve interest rates paid on reserves. A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase

B. decrease; decrease

A sale of $100 billion of bonds by the Fed will have the largest effect on real GDP if the marginal propensity to consume is ______________. A. low B. high C. the marginal propensity to consume does not matter.

B. high

A strong dollar increases ______________ and reduces ______________. A. exports; imports B. imports; exports C. imports; imports D. exports; exports

B. imports; exports

Assume individuals can choose to place their savings in bank accounts in Paris (in euros) or in New York (in dollars). What will happen to the exchange rate (euros per dollar) if real interest rates on bank accounts in New York increase? The exchange rate, euros per dollar, will likely: A. decrease B. increase C. no change D. one cannot tell

B. increase

A ______________ saving rate and a ______________ required reserve ratio will mean that a Federal Reserve purchase of bonds will have a greater effect on spending. A. higher; higher. B. lower; lower C. higher; lower D. lower; higher E. the saving rate does not affect monetary policy; higher

B. lower; lower

If the economy is operating at full employment and there is a substantial increase in the money supply, the quantity theory of money predicts an increase in which of the following? A. interest rates B. price level C. unemployment D. real output E. investment

B. price level

Quantitative easing refers to ___________. A. the purchase of short term bonds on the open market by a central bank to increase money supply and encourage lending and investment B. the purchase of long term bonds on the open market by a central bank to increase money supply and encourage lending and investment C. when the central bank relaxes an aggressive monetary policy position D. the sale of long term bonds on the open market by a central bank to increase money supply and encourage lending and investment E. the sale of long term bonds on the open market by a central bank to reduce money supply and cool down the economy

B. the purchase of long term bonds on the open market by a central bank to increase money supply and encourage lending and investment

Net exports increase when _____________. A. the value of imports of goods and services increases. B. the value of imports of goods and services decreases. C. the value of exports of goods and services minus imports of goods and services decreases. D. the value of exports of goods and services decreases.

B. the value of imports of goods and services decreases.

Since the 1990s, the U.S. has had a significant ________. A. trade surplus. B. trade deficit. C. current account surplus. D. financial account deficit.

B. trade deficit.

Suppose a country's nominal GDP is $16 billion. On average, people in this country hold a quarter of their annual income as currency and deposits. The money supply is $______billion.

4

Suppose a country's nominal GDP is $290 billion. Investment spending is $70 billion. Net exports is -$10 billion. On average, people in this country hold a quarter of their annual income as currency and deposits. What is the velocity of money?

4