Econ practice questions

Assume an economy begins with zero inflation, a 25 percent income tax rate, and a real interest rate of 4 percent. If inflation rises to 4 percent, the nominal interest rate becomes ________ percent and the after-tax real interest becomes ________ percent.

8;2

The monetary base is equal to

Federal Reserve notes plus coins plus banks' reserves at the Fed.

Which of the following is a policy tool of the Fed? i. setting the required reserve ratios ii. conducting open market operations iii. quantitative easing

I, ii, and iii

Which of the following is an argument that is used for protection from free trade? i. the national security argument ii. the infant-industry argument iii. the dumping argument

I, ii, and iii

the demand for loanable funds includes demand for i. loans ii. stocks iii. bonds

I, ii, and iii

to acquire financial capital, a firm can i. obtain a loan from a bank ii. issue stock iii. issue bonds

I, ii, and iii

If tomato growers in Florida lobby the U.S. government to impose an import quota on Mexican tomatoes, who gains from such a quota?

U.S. growers

Velocity is V, the quantity of money is M, the price level is P, and real GDP is Y. Which of the following formulas is correct?

V = (P × Y) ÷ M

If the United States imports purses, then the quantity of purses produced in the United States will ________ and the quantity of purses purchased by consumers in the United States will ________.

decrease; increase

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

decreases and there is a movement downward along the demand for money curve.

If the Fed wants to raise the interest rate, in the short run in the money market the Fed

decreases the quantity of money

A decrease in households' disposable income ________ saving supply, and the supply of loanable funds curve ________.

decreases; shifts leftward

if the price level increases, the

demand for money increases

the decrease in the value of the capital that results from its use and obsolescence is

depreciation

Riley deposits $4,000 cash in her checkable deposit at Fershur Bank. If the desired reserve ratio is 5 percent, Fershur Bank's

desired reserves increase by $200 and its excess reserves increase by $3,800.

actual reserves are equal to

desired reserves plus excess reserves

comparative advantage is based on

differences in opportunity costs between two countries

If the quantity of money supplied ________ the quantity demanded, in the long run the value of 24) money ________.

exceeds; falls as people spend their surplus money

When real GDP equals potential GDP, the quantity theory of money says that an increase in the quantity of money brings an equal percentage

increase in the price level

The required reserve ratio is 10 percent and Charlie deposits $3,000 in her checking account. The bank must

increase reserves by $300.

If the real interest rate falls, people decide to ________ because the opportunity cost of ________.

increase their consumption expenditure; consumption has decreased

A country with a comparative advantage in the production of a good will ________ production of the good and ________.

increase; export the good

The imposition of a tariff will typically ________ government revenue and ________ domestic production of the good.

increase; increase

As the economy enters a strong expansion, then firms' demand for loanable funds

increases because expected profit increases.

If the money multiplier is 3.0, a $1,000 increase in the monetary base

increases quantity of money by $3,000.

Other things remaining the same, the ________ the real interest rate, the ________.

lower; greater the quantity of loanable funds demanded

banks create money by

making loans

When you use currency to buy lunch, money is performing which function?

medium of exchange

The functions of money are

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

Other things the same, if the Fed increases the quantity of money, the supply of money curve shifts

rightward and the nominal interest rate decreases

A decrease in expected future income leads to a

rightward shift of the supply of loanable funds curve.

During this year, Barbara earned $60,000 as a financial analyst, paid taxes of $5,000 and consumed $53,000. If Barbara's wealth was $4,000 at the beginning of the year, at the end of the year Barbara's wealth was

$ 6,000

If a firm wants to borrow $10 million and the real interest rate increases from 5 percent to 6 percent, then the cost of the investment has increased by

$100,000 per year

Suppose you can earn 5 percent on your savings account if you deposit $500 in it. The inflation rate is 3 percent. The opportunity cost of holding the $500 as money rather than in your savings account is

$25

You have a $500 saving bond. The nominal interest rate is 10 percent, and the inflation rate is 4 percent. After a year, in real terms you have earned

$30

The Zonamo company produces waste disposal machines and sells them to militaries all over the world. The company started last year with $10 million of capital on hand and invested $15 million in new capital throughout the year. At the end of the year, the company's capital stock was $17 million. Hence, for the year, depreciation equaled ________ and net investment equaled ________.

$8 million; $7 million

C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals

(1+C/D) / (R/D + C/D)

If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of circulation is

1.5

Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's capital at the end of the year is _____ mowers

27

If the currency drain ratio is 30 percent and the desired reserve ratio is 10 percent, the money multiplier is

3.25

Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's net investment is ________ mowers.

7

What is the national security argument to support protection from international trade?

Any firm necessary in wartime must be protected.

While high-paid American workers fear competition with low-paid foreign workers, low-paid foreign workers fear competition with high-paid American workers. Why?

Because high wages reflect high worker productivity and the low-paid foreign workers are not as productive.

Of the following, which group is hurt by a tariff? A) domestic government B) foreign government C) domestic producers of the good D) domestic consumers of the good E) foreign consumers of the good

D

Which of the following chain of events occurs when a tariff is imposed on a good? A) Domestic prices fall, decreasing the domestic quantity supplied and increasing the quantity demanded. B) Domestic prices rise, shifting the demand curve leftward and the domestic supply curve rightward. C) Domestic prices fall, shifting the demand curve rightward, and consumers buy more of the good. D) Domestic prices rise, shifting the domestic supply curve rightward. E) Domestic prices rise, decreasing the quantity demanded and increasing the domestic quantity supplied.

E

As the central bank, the Federal Reserve System provides banking services to

banks and regulates financial institutions and markets.

a document that promises to pay specified sums of money on specified dates and is a debt to the issuer is called

a bond

One of the major reasons why the United States exports jet airplanes is because Boeing faces ________ opportunity cost than firms in other nations in the production of such aircraft

a lower

The required reserve ratio is the

amount of reserves banks are required by the Fed to be held as a percentage of the bank's deposits.

the quantity of money demanded is the

amount that people and businesses choose to hold

As the economy enters an expansion so that people's expected future incomes rise, there will be

an increase in the supply of loanable funds.

The "velocity of circulation" refers to the

average number of times in a year each dollar is used to buy goods and services

international trade benefits

both the exporter and the importer.

a share of stock is a

certificate of ownership and claim to the profits made by a firm

The fundamental force that generates international trade is

comparative advantage

if a surplus of loanable funds exists in the loanable funds market, the real interest rate ________ and the quantity of saving ________.

falls; decreases

the distinction between physical and financial capital is that

financial capital is used to purchase and operate physical capital

The United States imports t-shirts because

foreign nations have a lower opportunity cost of production.

Dumping is defined as the situation in which

foreign producers sell a product at a price below the cost of production.

Money is any commodity or token that is

generally accepted as a means of payment.

If you buy a television produced in Japan, a

good was exported by Japan and imported by the United States

the total amount spent to buy new physical capital and replace old capital is referred to as

gross investment

net investment is

gross investment minus depreciation

For a government to add to the supply of loanable funds, it must

have a budget surplus.

which of the following are typically financed in a "bond market"? i. a mortgage for a house ii. state government borrowing for a new road project iii. your purchase of 4,000 shares of stock in Google

ii only

When protection is encouraged to protect a growing domestic industry; which of the following is being used?

infant-industry argument

discount rate is the

interest rate at which the Fed will loan reserves to commercial banks.

_____ increases the quantity of capital, and ______ decreases the quantity of capital

investment; depreciation

Federal Express's purchase of trucks and planes

is an example of physical capital.

If the Fed makes an open market purchase of $1 million of government securities, the monetary base

is increases by $1 million

Suppose that the equilibrium nominal interest rate is 4 percent and the equilibrium quantity of money is $1 trillion. At any interest rate above 4 percent

less than $1 trillion will be demanded and bond prices will increase.

Suppose that there is an increase in disposable income and simultaneously an increase in the expected profitability of investment. As a result, the equilibrium real interest rate ________ and the equilibrium quantity of loanable funds ________.

might rise, fall, or remain unchanged; increases

If the Federal Reserve lowers the required reserve ratio, people will end up taking out ________ because the interest rates ________.

more loans; will fall

Government saving is equal to

net taxes minus government expenditures

The Fed buys $100 million U.S. government securities from Bank of America. Bank of America's balance sheet shows this transaction as ________ in total assets and ________ in reserves.

no change; a $100 million increase

The opportunity cost of holding money is the

nominal interest rate

the real interest rate equals the

nominal interest rate - inflation rate

When the opportunity cost of holding money increases, then

people want to hold less money.

in the long run, the nominal interest rate is

positively related to the inflation rate

The real interest rate is ________ related to the supply of loanable funds because ________.

positively; the opportunity cost of consumption expenditure increases as the real interest rate rises

open market operations are the

purchase or sale of government securities by the Fed.

During a(n) ________ the demand for money decreases because ________.

recession; real GDP decreases

A currency drain ________ the amount of bank reserves available to banks to make loans because ________.

reduces; people are holding more money outside of the banks

Suppose that there is an increase in expected future disposable income and simultaneously an increase in the expected profitability of investment. As a result, the equilibrium real interest rate________ and the equilibrium quantity of loanable funds ________.

rises; might increase, decrease, or not change

If the real interest rate is less than the equilibrium real interest rate, there is a ________ of loanable funds, and ________.

shortage; some borrowers cannot find the funds they want

When we keep part of our wealth in a bank checking account, we are using money as a

store of value

A tax on a good that is imposed by the importing country is called a

tariff

The amount of loans that a bank can create is limited by

the bank's excess reserves.

Suppose that the price level does not change while real GDP decreases. As a result

the demand for money decreases so that households and firms hold smaller amounts of money.

barter is

the exchange of goods and services directly for other goods and services.

fiat money means

the government has decreed that something is money.

In the money market, if the nominal interest rate is below the equilibrium level

the quantity of money demanded exceeds the quantity of money supplied.

Economists use the word capital to mean

the tools, instruments, and other produced goods used to produce goods and services.

wealth is

the value of all the things that a persons owns

In the long-run, money market equilibrium determines

the value of money

a country exports a good if

the world price of the good is above the country's no-trade equilibrium price.

If you shop for a car online and compare car prices across dealerships, money is functioning as a

unit of account.

An increase in real GDP affects the demand for money because

when real GDP increases, more money is needed to make expenditures.

If the world price of a good is below the no-trade domestic price, a country

will benefit from importing the good.

After a tariff is imposed, consumers must pay a price equal to the

world market price plus the tariff.