ECON 202 EXAM 2

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, there is a shortage of loanable funds and the interest rate is below the equilibrium level. True False

T

Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date. True False

T

Suppose that Congress repeals an investment tax credit. The demand curve for loanable funds shifts to the left causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to decrease. True False

T

The economy's stock market is associated with equity finance. True False

T

The higher the expected future profitability of a corporation, the higher the demand for that corporation's stock. True False

T

An increase in the value of money decreases the price of goods and services measured in terms of money. True False

T If P is the price of goods and services measured in terms of money, then 1/P is the value of money measured in terms of goods and services. If P decreases, the value of money increases. And vice versa

national saving (saving)

The income that remains after consumption expenditures and government purchases

When it buys government bonds to increase the money supply, the Fed is conducting an open-market sale. regulating a bank. conducting an open-market purchase. enacting fiscal policy.

When it buys government bonds to increase the money supply, the Fed is A. conducting an open-market sale. B. regulating a bank. C. conducting an open-market purchase. d. enacting fiscal policy.

One cost of deflation is ____ a. the redistribution of wealth toward creditors and away from debtors. b. the redistribution of wealth toward debtors and away from creditors. C. a tax on those who hold money. d. that it discourages consumption.

A Deflation causes the value of debts to increase in real terms, transferring money from debtors to creditors.

To decrease the money supply the Fed can conduct open-market sales. Alternatively, the Fed can a. increase the discount rate. b. not change the discount rate. c. decrease the discount rate. d. stop lending money to banks.

A The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed increases the discount rate, banks will tend to borrow less money from the Fed since the interest they have to pay back has increased. This will lead to decreased borrowing from the Fed, and therefore less money will end up in bank reserves. This will reduce the ability of banks to make loans as well. In the end, the money supply will decrease if the fed increases the discount rate.

bank

A for-profit institution that offers personal loans, mortgages, and other services.

stock

A share of ownership in a corporation

If $200 of new reserves generates $1,000 of new money in the economy, then the reserve ratio is 20 percent. 100 percent. 12.5 percent. 5 percent.

A. The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If $1,000 of new money is created from $200 of new reserves, the money multiplier must be 5. In order for the money multiplier to be 5 the reserve ratio must be 0.2 or 20 percent. Then 1/R would be 1/0.2 = 5. This would lead to $1,000 in new money generated by $200 in new reserves since $200 X (1/0.2) = $1,000 in new money in the economy.

When it sells government bonds to decrease the money supply, the Fed is conducting an open-market sale. regulating a bank. conducting an open-market purchase. enacting fiscal policy.

A. If the FOMC at the Fed decides to decrease the money supply, the Fed sells government bonds from its portfolio to the public in the bond market. After the sale, the dollars the Fed receives for the bonds are out of circulation in the general economy and the overall money supply decreases. Because the Fed does this through selling bonds, this is known as an open-market sale.

You sell your old smartphone online for cash. The fact that you accept cash for your old smartphone best illustrates which function of money? medium of exchange measure of equity unit of account liquidity

A. A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. Money, in most industrialized countries, is the commonly accepted medium of exchange. This function of money allows individuals to exchange money for goods, like smartphones, because they know others have also accepted money as the medium of exchange. In other words, this transaction is possible because both you and the potential buyers of your phone have accepted money as the medium of exchange. This is an example of how money is a used as a medium of exchange.

A perpetuity is distinguished from other bonds in that it a. will be used to purchase another bond when it matures unless the owner specifies otherwise. b. never matures. c. pays continuously compounded interest. d. pays interest only when it matures.

B

People whose consumption exceeds their income are savers. True False

F

True or False: The Federal Open Market Committee (FOMC) is responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system. True False

F

The immediate effect of a monetary injection increases the economy's ability to supply goods and services. True False

F The immediate effect of a monetary injection is an excess supply of money. The economy's ability to supply goods and services, however, does not change as it is determined by the available labor, physical capital, human capital, natural resources, and technological knowledge. None of these is altered by the injection of money.

bond

a certificate of indebtedness or iou

budget deficit

a shortfall of tax revenue from government spending causing public savings to be negative

closed economy

an economy that does not interact with other economies in the world

budget surplus

an excess of tax revenue over government spending

mutual fund

an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

medium of exchange

anything that is used to determine value during the exchange of goods and services

In order to increase the money supply, the Fed can use open market operations to___________ from Correct the public.

buy bonds In order to increase the money supply, the Fed uses open market operations to buy bonds from the public. By buying bonds, the Fed takes bonds from the public and replaces them with money, thereby increasing the amount of money in circulation. The new money supply curve is a vertical line at $7 billion.

First Bank of Zogua, a fictional bank, has just received a $100 deposit from an individual. This deposit appears on what part of T-account of the First Bank of Zogua? assets. contingent considerations. liabilities. reserves.

c Deposits are liabilities and are noted as such in the T-account of the bank. The deposits are liabilities because they represent money owed by the bank to the depositors who initially deposited the funds.

Ch 23: Measuring a Nation's Income What are things students may care about, that are not included in GDP? a) Collecting especially shiny and rare rocks b) Frolicking on the beach thinking about economics and technology c) Huts built by owners d) All of the above

d) All of the above GDP = Only includes goods and services purchased

Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one cup of tea, one biscuit, and one magazine. In year one, the basket costs $10.00. In year two, the price of the same basket is $9.00. From year one to year two, there is________ Correct at an annual rate of _______ Correct

deflation 10.00% The percentage change in the price level from year one to year two is calculated as follows: Inflation Rate = 100×($9.00−$10.00)$10.00 = 100×(−$1.00)$10.00 = −10.00%

financial markets

financial institutions through which savers can directly provide funds to borrowers

Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is_________ Correct than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will ________Correct people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will_____ Correct and the value of money will_______ Correct .

greater increase rise fall

An increase in the overall level of prices is called_______ . Negative inflation, or a decrease in the overall level of prices, is called_________ .

inflation deflation

financial intermediaries

institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers

A national chain of grocery stores with limited internal funds plans to expand by opening several new stores. Which of the following describes how the chain will likely raise the required funds? 1. Invest in research and development. 2. Buy stocks of financially sound corporations. 3. Buy government bonds. 4. Issue bonds.

issues bonds

The tax revenue that the government has left after paying for its spending

public savings

financial system

the group of institutions in the economy that help to match one person's saving with another person's investment (borrowers and lenders)

private saving

the income remaining after households pay their taxes and pay for consumption

public saving

the tax revenue that the government has left after paying for its spending

Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits? $950 billion $500 billion $105 billion 5 billion

950 Since $5 billion, of the $100 billion of reserves, are excess reserves, the required reserves are only $95 billion. $95 billion * (1/10% required reserves) = $950 billion in deposits. In other words, if $950 billion dollars are deposited, a 10% reserve requirement requires the bank to keep at least $95 dollars. If they hold an extra $5 billion, reserves will equal $100 billion.

Consider a closed economy, in which S = (Y - T - C) + (T - G) holds. What does this identity imply if the government's tax revenue is equal to its expenditures? a. National saving and private saving are equal. b. After paying their taxes and paying for their consumption, households have nothing left. c. Private saving is equal to government expenditures. d. Public saving is equal to investment.

A

Nominal variables are measured in monetary units. Any price or wage denominated in money, such as Rina's $27.00 per hour wage, is an example of a nominal variable. Real variables are measured in physical units. Any price or wage stated in terms of goods is a real variable. For example, in 2015, the relative price of a mandarin is 0.33 paperback novels. Suppose that the Fed sharply increases the money supply between 2015 and 2020. In 2020, Rina's wage has risen to $54.00 per hour. The price of a paperback novel is $18.00 and the price of a mandarin is $6.00. In 2020, the relative price of a paperback novel is ___________ Correct . Points: 1 / 1 Between 2015 and 2020, the nominal value of Rina's wage___________Correct , and the real value of her wage remains the same Correct . Points: 0.5 / 1 Monetary neutrality is the proposition that a change in the money supply ___________ Correct nominal variables and does not affect Correct real

3 mandarins increases affects

In year one, $50.00 will buy______ Correct baskets, and in year two, $50.00 will buy______Correct baskets.

5 5.56 In year one, $50.00 can purchase $50.00$10.00 per basket=5 baskets . In year two, $50.00 can purchase $50.00$9.00 per basket=5.56 baskets . Notice that $50.00 purchases fewer baskets in year one. As the price level falls from year one to year two, the value of money rises.

Which of the following is not true in a system of 100-percent-reserve banking? banks accept deposits. banks do not make loans. banks influence the supply of money. banks hold all deposits in reserves until the depositor withdraws the funds.

C Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account with a check or debit card. Each deposit in a bank reduces currency, since the money will no longer be in the hands of the public, and increases the demand deposit portion of M1 by the same amount. Each withdrawal decreases the demand deposits of M1, but increases currency by the same amount. Therefore banks do not influence the money supply in a system of 100-percent-reserve banking.

Which of the following describes the effect of an increase in the money supply? A. The money supply curve shifts to the left, the price level decreases causing the value of money to increase. B. The money supply curve shifts to the left, the price level increases causing the value of money to decrease. C. The money supply curve shifts to the right, the price level decreases causing the value of money to increase. D. The money supply curve shifts to the right, the price level increases causing the value of money to decrease.

D An increase in the money supply shifts the money supply curve to the right, the value of money and the price level adjust to bring supply and demand back into balance. An increase in the money supply makes dollars more plentiful, the price level increases, making each dollar less valuable.

Bertha lends $1,000 to Danko for 2 years and charges an annual interest rate of 6%. Bertha had anticipated the inflation rate of 2%, but it actually turned to be 2.5%. In two years, as a result of the higher-than-expected inflation, A. Both Bertha and Danko are better off. B. Both Bertha and Danko are worse off. c. Bertha is better off at the expense of Danko. d. Danko is better off at the expense of Bertha.

D Higher than expected inflation makes borrowers better off at the expense of the lenders because it diminishes the real value of the debt: Danko can repay the loan in dollars that are less valuable than anticipated. Therefore Danko is better off at the expense of Bertha. This is because the real interest rate is the difference between the nominal interest rate and the inflation rate.

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level decreased from 147 to 140. What is Bertha's before-tax real capital gain? a. $17. b. $5. c. $19. d. $21.

D The inflation rate is 100 x ((140 - 147)/147) = -5%. Bertha paid $5 for five shares last year. Now, she sold them making 5 x $5 = $25, gaining $25 - $5 = $20. However, since the price level has decreased, Bertha is actually gaining more: $20 - ($20 x (-0.05)) = $21.

When the Fed sells U.S. government bonds, it has conducted open market purchases, which increase the money supply. open market sales, which increase the money supply. open market purchases, which decrease the money supply. open market sales, which decrease the money supply.

D When the Fed sells government bonds, it is conducting open market sales. Because the Fed sells government bonds in the public bond market, individuals give currency to the Fed and the currency is no longer in circulation in the general public. Because currency is included in M1, M1 decreases and the money supply is reduced. Additionally, since individuals may withdraw money from their banks to make these purchases, the reserves at banks decrease along with lending.

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level increased from 140 to 147. What is Bertha's before-tax real capital gain? a. $25. b 5%. c. $20. d. $19.

D. The inflation rate is 100 x ((147 - 140)/140) = 5%. Bertha paid $5 for five shares last year. Now, she sold them for $5 per share, making 5 x $5 = $25 while gaining $25 - $5 = $20. Of her $20 gain, 5% is lost to inflation: $20 - $20 x 0.05 = $19.

Which of the following reforms would allow for the taxation of only real interest earnings? a. Eliminating the marginal tax rate. b. Allow investing only in government bonds. c. Pay workers only real wages. d. Indexing the tax system to take into account the effects of inflation.

D. The tax laws could be reformed to adjust the purchase price using a price index and assess the tax only on the real gain. In the case of interest income, the government could tax only real interest income by excluding that portion of the interest income that merely compensates for inflation.

Which of the following describes the relationship between the value of money and the price level? A. As the price level falls, the value of money does not change. B. As the price level rises, the value of money rises. c. As the price level falls, the value of money falls. d. As the price level rises, the value of money falls.

D. As the price level rises, the value of money falls because more money is needed to buy a representative basket of goods.

Suppose P denotes the price of goods and services measured in terms of money. A. P can be interpreted as the inflation rate. B. An increase in the value of money is associated with an increase in P. C. A decrease in the value of money is associated with a decrease in P. d. A decrease in the value of money is associated with an increase in P.

D. If P is the price of goods and services measured in terms of money, then 1/P is the value of money measured in terms of goods and services. If P decreases, the value of money increases. And vice versa.

Consider an economy with GDP = $8.7 trillion, consumption spending = $6.1 trillion, taxes net of transfers = $1.0 trillion, and government purchases = $0.8 trillion. Which of the following is true for the described economy? a. Private saving is $2.6 trillion and the quantity of loanable funds demanded is $1.8 trillion. b. Private saving is $1.8 trillion and the quantity of loanable funds demanded is $1.6 trillion. c. Private saving is $0.2 trillion and the quantity of loanable funds demanded is $1.8 trillion. d. Private saving is $1.6 trillion and the quantity of loanable funds demanded is $1.8 trillion.

Private saving is GDP net taxes and consumption: Y - T - C = $8.7 trillion - $1.0 trillion - $6.1 trillion = $1.6 trillion. Investment is the source of the demand for loanable funds, which is I = Y - C - G = $8.7 trillion - $6.1 trillion - $0.8 trillion = $1.8 trillion. D