Econ Final Exam
A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are
$100,000
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. The claims of owners in the commercial banking system are equal to
$135 billion.
If nominal GDP is $200 and the interest rate is 6 percent, the total amount of money that households and businesses will want to hold is
$160
Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve ratio = 0.20, excess reserves prior to the currency deposit = $0. The $40 billion deposit of new currency will support total checkable deposits of
$200 billion.
Which of the following is included as part of the M1 money supply?
$200,000 balance in the checking account of Main Street Trading Corp.
$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?
$255.26
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The maximum amount by which the commercial banking system can expand the supply of money by lending is
$30 billion
A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities?
$300 million
Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. First National Bank can make new loans of up to
$32,000
What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?
$338.42
The accompanying table contains hypothetical data for an economy. The size of the M2 money supply is
$4,330 billion
Suppose a credit union has checkable deposits of $500,000 and the legal reserve ratio is 10 percent. If the institution has excess reserves of $4,000, then its actual reserves are
$54,000
The figures in the table are for a single commercial bank. All figures are in thousands of dollars. This bank has liabilities and net worth totaling
$580 million
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of
$600 million, but by $800 million if the securities are purchased directly from commercial banks.
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The commercial banking system has excess reserves of
$9 billion
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. After the deposit of $10 billion of new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is
$90 billion
Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?
(1 + i)^tX
Suppose the Fed wants to increase the money supply by $1,000 billion to drive down interest rates and stimulate the economy. To accomplish this, it could lower the reserve requirement from 20 percent to
10 percent
If the price index rises from 100 to 130, then the purchasing power of the dollar will fall by about
23 percent
f an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is
30 percent
A bond that is currently selling at $1,000 offers to pay $50 annually. What is the percentage rate of return on the bond?
5 percent
Mark buys a bond for $8,000 and receives interest payments of $100 every three months. The interest rate on the bond is approximately
5 percent
Suppose the world economy is composed of just two countries: Italy and Greece. Each can produce steel or chemicals, but at different levels of economic efficiency. The production possibilities curves for the two countries are shown in the graphs. Assume that prior to specialization and trade, Italy and Greece preferred points I and G on their respective production possibilities curves. As a result of complete specialization according to comparative advantage, the resulting gains in total output will be
5 steel and 15 chemicals
If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000, then the monetary multiplier is
5.
Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons. His expected rate of return per year on the bond is
7 percent
An inflation rate of 8 percent would erode the purchasing power of the dollar by
7.4 percent
Suppose the world economy is composed of just two countries: Italy and Greece. Each can produce steel or chemicals, but at different levels of economic efficiency. The production possibilities curves for the two countries are shown in the graphs. If Italy and Greece open up trade with each other, which of the following terms of trade is mutually beneficial?
9 tons of chemicals = 5 tons of steel
Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000. What is Pigou's per-year rate of return?
9.8 percent
In Germany, one worker can produce either one cuckoo clock or one beer mug. In Taiwan, one worker can produce either two cuckoo clocks or three beer mugs. Who has the comparative advantage in each good?
Germany in clocks and Taiwan in mugs
The accompanying productivity table shows how many bushels of either wheat or rice can be produced in India and Canada with 1 unit of input. To achieve gains from specialization and trade,
India should export rice to Canada and import Canadian wheat.
Which of the following financial institutions declared bankruptcy as a result of the financial crisis of 2007-2008?
Lehman Brothers
The conduct of monetary policy in the United States is the main responsibility of the
The Federal Reserve System
After the 2008 financial crisis, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?
The increase in excess reserves in the banking system virtually eliminated the need for banks to borrow in the federal funds market.
Which of the following best describes what occurs when monetary authorities sell government securities?
There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP.
The functions of money are to serve as a
Unit of account, store of value, and medium of exchange
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
a downsloping line or curve from left to right
When economists say that money serves as a unit of account, they mean that it is
a monetary unit for measuring and comparing the relative values of goods.
Adam Smith recognized the benefits from trade based on ____, and David Ricardo recognized the benefits from trade based on ____.
absolute advantage, comparative advantage
(Last Word) Before being adjusted for costs,
actively managed funds and index funds perform about the same.
Members of the Federal Reserve Board of Governors are
appointed by the president to staggered 14 year terms
The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called
arbitrage
Index funds
are passively managed
Arbitrage is the process by which investors simultaneously sell
assets with lower rates of return and buy otherwise identical assets with higher rates of return.
Bond payments are generally more predictable than stocks because
bond owners know the size and timing of payments they will receive.
A commercial bank can add to its actual reserves by
borrowing from a Federal Reserve Bank
if severe demand-pull inflation was occurring in the economy, proper government policies would involve a government
budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.Correct
If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?
buy bonds in the open market
"Thrifts" refers to the following institutions except
commercial banks
The principal concept behind comparative advantage is that a nation should
concentrate production on those products for which it has the lowest domestic opportunity cost.
In the accompanying diagrams, solid lines are production possibilities curves, and the dashed lines are trading possibilities curves. The data contained in the production possibilities curves are based on the assumption of
constant costs
In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the
cyclical asymmetry of policy
The sale of government bonds by the Federal Reserve Banks to commercial banks will
decrease aggregate demand
A nation will neither export nor import a specific product when its
domestic price equals the world price
Refer to the diagram, which pertains to two nations and a specific product. Point G is the
domestic price for the nation represented by lines GB and GD
Suppose two corporate bonds with similar risk pay different rates of return. The process of arbitrage should
eventually eqilaize their rates of return
If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's
expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio.
Suppose the domestic price (no-international-trade price) of wheat is $3.50 a bushel in the United States while the world price is $4.00 a bushel. Assuming no transportation costs, the United States will
export wheat
Overnight loans from one bank to another for reserve purposes entail an interest rate called the
federal funds rate
According to the Taylor rule, if there is no unemployment gap and
if inflation rises to 4 percent, the Fed should raise its targeted interest rate to 7 percent.
The U.S. federal government is unlikely to default on its bond payments because
if necessary, it can print the money needed to make payments on time
If the demand for an asset increases, its price will
increase and the rate of return for new investors of this asset will decrease.
If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will
increase the interest rate and reduce the price level, assuming it is flexible downward.
Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should
increase the interest rate from 4 percent to 6 percent.
Before the financial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market
increased and the Federal funds rate decreased.
Henry deposits $2,000 in currency in the First Street Bank. Later that same day, Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has
increased by $5,400
Arbitrage equalizes rates of return across similar investments because
investors will want to replace lower rate of return assets with those generating higher rates of return.
Time value of money refers to the idea that a specific amount of money
is more valuable the sooner it is received
In the theory of comparative advantage, a good should be produced in that nation where
its cost is least in terms of alternative goods that might otherwise be produced.
The commercial banking system can lend by a multiple of its excess reserves primarily because
its required reserves are fractional
According to the Taylor rule, when the economy is at full employment and inflation is at its target rate of 2 percent, the Fed should
keep their targeted interest rate at 4 percent
Which of the following Fed actions increases the excess reserves of commercial banks?
lowering the reserve ratio
If a nation has a comparative advantage in the production of X, this means the nation
must give up less of other goods than other nations in producing a unit of X.
The domestic opportunity cost of producing a television in the United States is 20 bushels of wheat. In Korea, the domestic opportunity cost of producing a television is 10 bushels of wheat. In this case,
mutual gains from trade can be obtained if the United States imports televisions from Korea and Korea imports wheat from the United States.
The Fed can regularly influence and change the risk-free rate of financial investments through its
open-market operations
Which of the following tools of monetary policy is considered the most important on a day-to-day basis?
open-market operations
Lottery winners who take the lump-sum payouts instead of payments spread out over many years
prefer immediate to delayed returns
If the monetary authorities want to reduce the monetary multiplier, they should
raise the required reserve ratio.
When the receipts given by goldsmiths to depositors were used to make purchases,
receipts became in effect paper money
Portfolio diversification
reduces the likelihood that the entire amount invested will be lost.
The reserve ratio refers to the ratio of a bank's
required reserves to its checkable-deposit liabilities.
A basic assumption in comparing the production possibilities curves of two nations is that those possibilities curves reflect differences in
resource availability and technological capabilities.
Which of the following Fed actions will decrease the money supply?
reverse repos
If, in the market for money, the quantity of money demanded exceeds the money supply, the interest rate will
rise, causing households and businesses to hold less money.
Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would
sell bonds, which would cause bond prices to fall and the interest rate to rise.
The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily for
setting the Fed's monetary policy and directing the purchase and sale of government securities.
The limited liability rule means that if a corporation goes bankrupt,
shareholders can only lose the amount they invested
The last transaction in the federal funds market occurred in 2008 because
since the financial crisis, nearly every bank has significant excess reserves.
Suppose stock A sells for $30 per share and pays dividends of $1 per share per year. Stock B sells for $40 per share and pays dividends of $2 per share per year. Through the process of arbitrage, we would expect the price of
stock A to fall and/or the price of stock B to rise
If you place a part of your summer earnings in a savings account, you are using money primarily as a
store of value
Refer to the table, in which investment is in billions. Which of the following scenarios would be consistent with the occurrence of cyclical asymmetry?
the Fed lowering the interest rate from 7 to 6 percent, while investment demand changes from columns (1) and (2) to columns (1) and (3)
When a commercial bank borrows from a Federal Reserve Bank,
the commercial bank's lending ability is increased.
Which of the following was not one of the principles on which the General Agreement on Tariffs and Trade (GATT) was established?
the formation of international trade contracts to alleviate global poverty
Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?
the purchase of government securities in the open market and an increase in government spending
Refer to the graph. The intercept of the three Security Market Lines is determined by
the risk-free interest rate
In defining money as M1, economists exclude time deposits because
they are not directly or immediately a medium of exchange.
Short-term U.S. government securities are practically risk-free, and thus their rates of return are payments solely for
time preference
A $70 price tag on a sweater in a department store window is an example of money functioning as a
unit of account
(Last Word) The term "leverage" refers to
using borrowed money in an attempt to increase profits
Interest paid on excess reserves held at the Fed
will incentivize financial institutions to hold more reserves and reduce risky lending.
Stabilizing a nation's price level and the purchasing power of its money can be achieved
with both fiscal and monetary policy