ECON exam 3 quiz + practice questions

If the reserve ratio is 5 percent, then $500 of additional reserves would ultimately generate

$10,000 of money.

A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank, what is the value of the money supply?

$150

Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits?

$4,937.5 billion

In an open economy, gross domestic product equals $2,450 billion, consumption expenditure equals $1,390 billion, government expenditure equals $325 billion, investment equals $510 billion, and net capital outflow equals $225 billion. What is national saving?

$735 billion

If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as

(eP)/P* .

Refer to Figure 30-2. If the relevant money-demand curve is the one labeled MD , then the equilibrium value of money is1

0.5 and the equilibrium price level is 2.

Suppose ice cream cones costs $3. Molly holds $60. What is the real value of the money she holds?

20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold more dollars.

In the nation of Wiknam, the money supply is $80,000 and reserves are $18,000. Assuming that people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve requirement is

22.5 percent.

If the real exchange rate for coal is 1.5, the price of coal in the United States is $50 per ton, and the price of coal in Britain is 20 British pounds per ton, what is the nominal exchange rate?

3/5 or 0.6 pounds per dollar

If velocity = 4, the quantity of money = 20,000, and the price level = 2.5, then the real value of output is

32,000.

If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate?

4 percent

Assets reserves: 1200 loans: 8000 Short term securities: 800 Liabilities deposits: 9000 Debt: 800 Capital (equity):200 Refer to Table 29-5. This bank's leverage ratio is

50

Refer to Figure 30-3. At the end of 2009 the relevant money-supply curve was the one labeled MS . At the end of 2010, the relevant money-supply curve was the one labeled MS . Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010?

50 percent

Refer to Figure 30-3. Suppose the relevant money-supply curve is the one labeled MS 1 ; also suppose the economy's real GDP is 30,000 for the year. If the market for money is in equilibrium, then the velocity of money is approximately

6.0

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

80 florin

Which of the following is an example of U.S. foreign direct investment?

A U.S. company opens an auto parts factory in Canada.

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 functions as both a store of value and a medium of exchange?

Cash but not stocks

Which of the following does the Federal Reserve not do?

Conduct fiscal policy

The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the

Fisher Effect.

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?

For a given amount of saving, a decrease in net capital outflow must decrease domestic investment.

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve requirement.

It has $800 in reserves and $9,200 in loans.

Jen and Alica are both U.S. citizens. Jen opens a cafe in France. Alicia buys equipment from a company in Canada to use in a U.S.-based factory.Whose action is an example of U.S. foreign direct investment?

Jen ' s but not Alicia ' s

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks. As a result of these changes,

M1 increases by $2,500 and M2 stays the same.

Which of the following is included in M2?

Money market mutual funds

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 .

Which of the following policies can the Fed follow to increase the money supply?

Reduce the interest rate on reserves

Which of the following equations is correct?

S = I + NCO

Which of the following is not included in M1?

Savings deposits

Suppose a Starbucks tall latte costs $4.00 in the United States and 2.50 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.50 in theUnited States and 3.60 euros in the Euro area. If the nominal exchange rate is 0.80 euros per dollar, which goods have prices that are consistent with purchasing-power parity?

The Big Mac but not the tall latte

Which of the following groups meets to discuss changes in the economy and determine monetary policy?

The Federal Open Market Committee

Which of the following can a country increase in the long run by increasing its money growth rate?

The nominal wage

Which of the following is not included in either M1 or M2?

U.S. Treasury bills

Which of the following is correct? Since 1950

U.S. exports and U.S. imports each have increased significantly.

The "law of one price" states that

a good must sell at the same price at all locations

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as

arbitrage.

When inflation causes relative-price variability consumer decisions,

are distorted and the ability of markets to efficiently allocate factors of production is impaired.

In a system of 100-percent-reserve banking,

banks do not influence the supply of money.

Changes in nominal variables are determined mostly by the quantity of money and the monetary system according to

both the classical dichotomy and the quantity theory of money.

When the price level falls, the number of dollars needed to buy a representative basket of goods

decreases, so the value of money rises

In the last part of the 1800s

deflation made it harder for farmers to pay off their debt.

When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis , the money demand curve slopes

downward, because at higher prices people want to hold more money.

Suppose the market for money, drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis , is in equilibrium. If the money supply increases, then at the old value of money there is an

excess supply of money that will result in an increase in spending.

Purchasing-power parity describes the forces that determine

exchange rates in the long run.

If the exchange rate is expressed as euros/dollar, t he dollar is said to depreciate against the euro if the exchange rate

falls. Other things the same, it will cost fewer euros to buy U.S. goods.

You hold currency from a foreign country. If that country has a higher rate of inflation than the United States, then over time the foreign currency will buy

fewer goods in that country and buy fewer dollars

The purchase of U.S. government bonds by Egyptians is an example of

foreign portfolio investment by Egyptians.

Refer to Table 29-5. Suppose the bank faces a reserve requirement of 10 percent. Starting from the situation as depicted by the T-account, a customer deposits an additional $60,000 into his account at the bank. If the bank takes no other action it will

have $64,000 in excess reserves.

A company in Panama pays for a U.S. architect to design a factory building. By itself this transaction

increases U.S. exports and so increases the U.S. trade balance.

When Microsoft establishes a distribution center in France, U.S. net capital outflow

increases because Microsoft makes a foreign direct investment in France.

A country's trade balance

is greater than zero only if exports are greater than imports.

When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis , the price level increases if money demand shifts

left and decreases if money supply shifts left.

Purchasing-power parity theory does not hold at all times because

many goods are not easily transported and the same goods produced in different countries may be imperfect substitutes.

A depreciation of the U.S. real exchange rate induces U.S. consumers to buy

more domestic goods and fewer foreign goods.

Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners

more willing to purchase U.S. bonds, so U.S. net capital outflow would fall.

If the value of goods and services that Australia purchases from the United States are less than the value of goods and services that the United States purchases from Australia, then the United States has

negative net exports with Australia and a trade deficit with Australia.

According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then

nominal GDP would rise by 5 percent; real GDP would be unchanged.

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

quantity theory of money.

If purchasing-power parity holds, then the value of the

real exchange rate is equal to one.

A country's trade balance will fall if either

saving falls or investment rises.

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.

Dollar bills, rare paintings, and emerald necklaces are all

stores of value.

If saving is greater than domestic investment, then there is a trade

surplus and Y > C + I + G.

Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2,

the equilibrium value of money decreases

Bank capital is

the resources that owners have put into the bank.

The inflation tax refers to

the revenue a government creates by printing money.

In the long run, money demand and money supply determine

the value of money but not the real interest rate.

When colonists in Virginia used tobacco as money, their money

was commodity money.

The shoe-leather cost of inflation refers to the

waste of resources used to maintain lower money holdings.