ECON 102 Exam 3

Which part of the Federal Reserve System meets every 6 weeks to determine the nation's monetary policy?

Federal Open Market Committee

Which of the following are major influences on the expected profit from an investment? I. technology advances II. stock market behavior III. accounting practices

I only

Which of the following are included in the supply of loanable funds? I. private saving II. government budget surplus III. international borrowing

I, II and III

The term "foreign currency" refers to foreign I. coins II. notes III. bank deposits

I, II, and III

1) Which of the following items are considered physical capital? I. shares of Ford stock traded on the New York Stock Exchange II. the Taco Bell store nearest you III. the rental cars owned by Hertz Rental-A-Car IV. the salaries paid to Intel executives

II and III

Investment is financed by which of the following? I. Government spending II. National saving III. Borrowing from the rest of the world

II and III only

The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet?

Securities decrease by $100 million and reserves increase by $100 million.

The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet?

Securities increase by $100 million and reserves of Bank A increase by $100 million.

In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in financial innovation such as the introduction of ATMs?

The demand for money curve would shift leftward to MD0.

In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in the use of credit cards?

The demand for money curve would shift leftward to MD0.

Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is CORRECT?

The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.

In the above figure, the economy is at the equilibrium point on the supply of loanable funds curve SLF and demand for loanable funds curve DLF. What happens if disposable income decreases?

The supply of loanable funds curve would shift leftward.

In the above figure, the economy is at the equilibrium point on the supply of loanable funds curve SLF and demand for loanable funds curve DLF. What happens if real wealth decreases?

The supply of loanable funds curve would shift rightward.

As a result of the recession in 2008, the default risk increased. How did this change affect the loanable funds market?

There was a leftward shift in the supply of loanable funds curve.

Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the

U.S. dollar depreciates by 2 percent a year

Suppose the United States spends more on foreign goods and services than foreigners spend on our goods and services and the United States sells no foreign assets. Then the

United States must borrow an amount equal to imports minus exports.

In the figure above, suppose the demand for dollars temporarily decreases so that the demand curve shifts to D2. To maintain the target exchange rate, the Fed

can buy dollars

In the above figure, suppose the demand for dollars temporarily increases so that the demand curve shifts to D1. To maintain the target exchange rate, the Fed

can sell dollars

Which of the following exchange rate policies uses a target exchange rate, but allows the target to change?

crawling peg

Depository institutions do all the following EXCEPT

create required reserve ratios.

A rise in the real interest rate

creates a movement upward along the demand for loanable funds curve.

The monetary base is the sum of

currency and reserves of depository institutions.

In the above figure, suppose the economy is at point a. If there is an increase in real GDP, there is a movement to point such as

d

A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from

decreases in the expected profit.

If the world real interest rate falls, then a country that is an international lender

decreases the amount of its lending

An increase in the currency drain

decreases the size of the money multiplier.

In the foreign exchange market, an increase in the world demand for U.S. exports shifts the

demand curve for U.S. dollars rightward.

When a good is imported into the United States, a ________is created.

demand for foreign currencies and a supply of dollars

In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess

demand for money and bond prices will fall.

When people who are holding the money of some other country want to exchange it for U.S. dollars, they ________ U.S. dollars and ________ that other country's money.

demand; supply

Suppose a British bank offers a 3 percent interest rate while a U.S. bank offers a 7 percent interest rate. People must expect the U.S. dollar will

depreciate 4 percent

If 100 Japanese yen buy more U.S. dollars today than yesterday, the dollar has ________ and the yen has ________.

depreciated; appreciated

A small country is an international borrower and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's international borrowing ________.

does not change; decreases

A small country is an international lender and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's international lending ________.

does not change; increases

A factor determining the supply of U.S. dollars in the foreign exchange market is the

expected future exchange rate

Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond

falls from $2,500 to $2,000.

Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond

falls from 10 percent to 8 percent.

The funds used to buy and operate physical capital are

financial capital.

If foreigners spend more on U.S.-made goods and services than we spend on theirs

foreigners must borrow from the United States or sell U.S. assets to make up the difference.

The Ricardo-Barro effect says that

government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government.

The crowding-out effect refers to

government investment crowding out private investment.

The lower the exchange rate today, ceteris paribus, the

greater is the expected profit from buying U.S. dollars today and holding them.

When a government has a budget surplus, the surplus

helps finance investment.

In the absence of the Ricardo-Barro effect, an increase in the government deficit results in a ________ real interest rate and a ________ equilibrium quantity of investment.

higher; lower

According to the Ricardo-Barro effect

households increase their personal saving when governments run budget deficits.

If an economy has a velocity of circulation of 3, then

in a year the average dollar is exchanged 3 times to purchase goods and services in GDP.

If the Fed wants to depreciate the dollar against the yen, the Fed will

increase the supply of dollars by buying yen

When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________.

increase; stay the same

In the figure above, suppose the economy is initially at point B. Then the interest rate in Japan rises relative to the interest rate in the United States. This change ________ the supply of dollars and the market moves to a point such as ________.

increases; C

In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment.

increases; decreases

The quantity of real money demanded is

independent of the price level.

The required reserve ratio

is the fraction of a bank's total deposits that is required to be held in reserves.

With everything else the same, in the foreign exchange market the

larger the value of U.S. exports, the greater is the quantity of dollars demanded.

Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve.

leftward; demand for

When the U.S. exchange rate falls, U.S. goods become ________ to foreign residents and U.S. exports ________.

less expensive; increase

When the U.S. exchange rate rises, foreign goods become ________ and U.S. imports ________.

less expensive; increase

In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion

less money than the quantity supplied and bond prices will rise.

Aside from being a means of payment, the other functions of money are

medium of exchange, unit of account, and store of value.

The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a

medium of exchange.

Controlling the quantity of money and interest rates to influence aggregate economic activity is called

monetary policy.

A nation's investment must be financed by

national saving plus borrowing from the rest of the world.

If the economy's capital stock increases over time

net investment is positive.

The capital stock increases whenever

net investment is positive.

Credit cards are

not part of money because they represent a loan of money to the user.

In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An increase in the expected profit would

only shift the demand for loanable funds curve rightward to a curve such as DLF1.

The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 6 percent. The effect of this interest rate in the money market is that

people buy bonds and the interest rate falls.

In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when

people expect that the dollar will appreciate

In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when

people expect that the dollar will depreciate

The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 3 percent. The effect of this interest rate in the money market is that

people sell bonds and the interest rate rises.

In the above figure, suppose the economy is initially at point A. The interest rate in Japan rises relative to the interest rate in the United States. As a result, there will be a change from point A to a point such as ________.

point E

Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________.

point c; an increase in the use of credit cards

The term "crowding out" relates to the decrease in

private investment from a government budget deficit.

U.S. investment is financed from

private saving, government budget surpluses, and borrowing from the rest of the world.

Arbitrage in the foreign exchange market, international loans markets, and goods markets results in

purchasing power parity, interest rate parity and law of one price

According to the quantity theory of money, in the long run, changes in the price level are the result of changes in the

quantity of money.

When the nominal interest rate rises, the opportunity cost of holding money

rises and people hold less money.

In the loanable funds market, the supply comes from

saving, the government budget surplus and international borrowing.

In the figure above, an increase in the monetary base would create a change such as a

shift from the supply of money curve MS0 to the supply of money curve MS1.

In the figure above, a decrease in the monetary base would create a change such as a

shift from the supply of money curve MS1 to the supply of money curve MS0.

In the above figure, new expectations of booming business conditions and a higher expected profit will

shift the demand for loanable funds curve rightward.

In the above figure, technological progress that increases the expected profit will

shift the demand for loanable funds curve rightward.

In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An economic expansion that raises disposable income and the expected profit would

shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1.

Greater optimism about the expected profits from investment projects

shifts the demand for loanable funds curve rightward.

The higher the exchange rate today, the

smaller is the expected profit from buying U.S. dollars today and holding them.

The larger the public's currency drain from the banking system, the

smaller is the money multiplier.

The demand for Mexican tomatoes by an American food grocery chain creates a

supply of U.S. dollars

The table above gives some of the entries in the national income and product accounts. The government sector has a ________, and the private sector has a ________.

surplus of $50 billion; surplus of $25 billion

If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________.

surplus; positive

If the People's Bank of China adopted a flexible exchange rate policy

the U.S. dollar would depreciate

In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when

the U.S. interest rate differential increases

For a commercial bank, the term "reserves" refers to

the cash in its vaults and its deposits at the Federal Reserve.

Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result

the demand curve for European euros and the supply curve for Indian rupees both shift rightward.

If the European Central Bank increases interest rates

the demand curve for European euros shifts rightward and the supply curve of European euros shifts leftward

If the Federal Reserve increases interest rates

the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward

In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when

the expected future exchange rate falls

In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could occur when

the expected future exchange rate rises

The opportunity cost of holding money refers to

the interest that could have been earned if the money balances had been changed into an interest-bearing asset.

A country's balance of payments accounts records

the international trading, borrowing, and lending positions of a country over a period of time

According to the quantity theory of money, in the long run, an increase in the quantity of money results in an equal percentage increase in ________.

the price level

If the real interest rate increases from 3 percent to 5 percent

there will be a movement up along the demand for loanable funds curve.

Frank spends Saturday afternoon at the Dodge dealership looking at new trucks. The model that he is interested in has a sticker price of $29,000. The fact that the price is quoted in dollars is an example of money used as a

unit of account

If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent

you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan.

Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 20 percent. How many deposits can Bank A create?

zero, because Bank A has no excess reserves

If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP?

$12 trillion

The data in the table above are the U.S. balance of payments. The current account balance is

$140 billion

In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's gross investment totaled

$200,000

Use the information in the table above to calculate the value of private saving.

$25 million

The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is ________.

$27 million

Use the information in the table above to calculate the value of government saving.

$5 million

Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loans can Bank A create at Bank A?

$50

The table above shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, Ralph's Bank has excess reserves of ________.

$50

The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10 percent, how much does this bank have in excess reserves?

$60

According to the table above, the value of M1 is ________ and the value of M2 is ________.

$813 billion; $3303 billion

According to the table above, the value of M1 is ________ and the value of M2 is ________.

$910 billion; $3,660 billion

In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's net investment totaled

-$100,000.

At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled

1 machine.

The above table presents the balance sheet of the TBK commercial bank. What is this bank's actual reserve ratio?

20 percent

The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve ratio equals ________.

25 percent

At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled

3 machines.

When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals

5

If the price level in the U.S. is 120, the price level in South Africa is 140, and the nominal exchange rate is 7 South African rands per dollar, then the real exchange rate is

6 South African goods per U.S. good

If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately

6 percent

If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately

6 percent

Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 9 yuan, the price of this airplane to China Airlines is

855 million yuan

Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 10 yuan, the price of this airplane to China Airlines is

950 million yuan

This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in this year is $300 million. Pizza Hut's gross investment is ________ and its net investment is ________.

$1.3 billion; $1.0 billion

Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?

A lower real interest rate makes more investment projects profitable.

When a bank has excess reserves

Both answers A and B are correct.

Which of the following is TRUE? I. as the real interest rate increases, people increase the quality they save II. the supply of loanable funds curve is downward sloping III. as disposable income increases, the supply of loanable funds curve becomes steeper

C) I only

When part of the quantity of money is held in currency, then

a currency drain occurs.

Which of the following will shift the supply of loanable funds curve leftward?

a decrease in disposable income

Which of the following shifts the demand for loanable funds curve leftward?

a decrease in the expected profit

If a nation's central bank increased domestic interest rates, the nation's exchange rate would change if the country's exchange rate was a

a flexible exchange rate

When the Fed is ________ it is ________.

adjusting the amount of money in circulation; conducting monetary policy

Using the table above, if the current market value of the dollar is 70 francs

all three investors hold dollars

Using the table above, if the current market value of the dollar is 125 francs

all three investors hold francs.

According to purchasing power parity, a rise in inflation in the United States relative to the rest of the world will lead to

an exchange rate depreciation

Which of the following will lead to an appreciation of the U.S. dollar against the British pound?

an increase in British demand for U.S. imports

When the Fed lowers the federal funds rate, it can lead to

an increase in lending by banks.

The sale of $1 billion of securities to a bank or some other business by the Fed is an example of

an open market operation.

Last year the exchange rate between U.S. dollars and Mexican pesos was 10 pesos per dollar. Today is it 11 pesos per dollar. Here, the dollar ________ against the peso, and the peso ________ against the dollar

appreciated; depreciated

Suppose the peso-dollar foreign exchange rate changes from 50 pesos per dollar to 30 pesos per dollar. Then the peso has ________ against the dollar and the dollar has ________ against the peso.

appreciated; depreciated

The demand curve for U.S. dollars slopes downward because as the dollar ________ U.S. goods become ________ expensive to foreign residents, so they purchase fewer U.S. goods, and the quantity of dollars demanded decreases.

appreciates; more

Checks are NOT money because they

are merely instructions to transfer money.

In the foreign exchange market, the supply curve for dollars slopes upwards because

as the exchange rate rises, imports become cheaper, and more dollars are supplied to pay for the increase in the quantity of imports.

In the short run, when the Fed decreases the quantity of money

bond prices fall and the interest rate rises.

In the short run, when the Fed increases the quantity of money

bond prices rise and the interest rate falls.

Which of the following is TRUE regarding the real interest rate? I. The real interest rate is the opportunity cost of borrowed funds. II. The real interest rate equals the nominal interest rate adjusted for inflation.

both I and II

Suppose the Fed wants to fix the U.S. dollar/Mexican peso rate at 11 pesos per dollar under a fixed exchange rate policy. If the exchange rate falls to 10 pesos per dollar, the Fed can

buy dollars

Suppose Mitsubishi Bank (a Japanese bank) expects the exchange rate to be 125 yen per U.S. dollar at the end of the year. If today's exchange rate is 120 yen per U.S. dollar, Mitsubishi bank

buys U.S. dollars today because it expects profit from buying U.S. dollars and holding them.