Economics Chap 12-16

Use the information in the chart to calculate the real exchange rate between the U.S. dollar and the Indian rupee. Round to the nearest whole number. What was the real exchange rate in 2014? What was the real exchange rate in 2015? What was the real exchange rate in 2016?

(U.S. price index/Indian price index)*rupees/dollar 53.47 55.19 53.76

The term liquidity trap describes a macroeconomic scenario in which

low interest rates cause people to hoard money, making output and employment stagnate.

Transmission mechanisms are the method by which In addition to the short-run interest rate, there are other potential transmission mechanisms. For example, monetary stimulus can

money affects the economy. depreciate a currency.

A jobless recovery means that

gross domestic product (GDP) increases while there is no increase in employment.

Please complete the statements using the labels provided. Suppose that the Federal Reserve Bank wants to address high levels of unemployment in the economy. To do so, it would likely seek to increase ____________. If the Federal Reserve Bank is able to instigate the growth it desires, it will likely come at the cost of increasing __________. Suppose that the Federal Reserve Bank achieves the growth it wants, but also experiences the negative consequences.As a result, it will seek to decrease __________, at the risk of leading the economy into a __________.

Aggregate Demand Inflation Inflation Recession

The Phillips curve illustrates which relationship?

As unemployment decreases, inflation increases.

Subprime lending is thought to be a contributing factor to the recent housing bubble. Which is an example of subprime lending?

Bradley is a first‑time homebuyer who does not have enough money for the usual 20% required for a down payment. Nonetheless, a bank offers Bradley a loan because his income is sufficient and home prices have historically increased.

Identify which are goals of monetary policy, and which are not.

Goals of monetary policy price stability maximum employment financial market stability economic growth Not goals of monetary policy high inflation improving banks profits increasing the size of the financial sector Which two goals are often called the dual mandate of the Federal Reserve? price stability and maximum employment

Which of the statements best describes the monetary rule, as proposed by the economist Milton Friedman?

Inflation is kept in check in the long run by keeping the growth of M1 and M2 on a steady path.

Suppose wages in Ruritania rose 2.50% last year, while labor productivity changed by −1.6%. What was the inflation rate? Round your answer to one decimal.

Inflation rate: 2.50--1.6=4.1

Suppose the exchange rate between Canada and the United Kingdom is equal to 1.50 Canadian dollars (CAD) required to buy 1 British pound. Calculate the missing prices assuming that purchasing power parity (PPP) holds

Price of a kilo of kiwis in the United Kingdom: 6.23 pounds Price of a kilo of bananas in Canada: 4.02 CAD Price of a kilo of strawberries in Canada: 5.67 CAD Price of a kilo of oranges in the United Kingdom: 2.54 1/1.5=.67 to find pounds multiply CAD by .67 to find CAD divide pounds by .67

The graph below shows the long-run aggregate supply (LRAS), the short-run aggregate supply (SRAS), and aggregate demand (AD) curves for a given economy. Manipulate the curves to show the long run effect of an increase in money supply In the long run, an increase in the money supply will result in the following:

Real GDP: Stays same Aggregate price level: Increases Graph: LRAS STAYS, AD to the right, SRAS to left.

Which market was the catalyst for the financial crisis of 2007-2009? To whom does the term subprime borrowers refer?

market for home mortgages borrowers who have poor credit histories

What are the goals of monetary policy? The Federal Reserve seeks to achieve these goals by

maximum employment and stable prices targeting short-term interest rates and the money supply.

The share of deposits that banks must have in reserves is the The interest rate banks charge each other for very short-term loans is the The interest rate the Federal Reserve charges commercial banks for loans is the

reserve requirement federal funds rate discount rate

Canada is considering imposing a tax on imports of Chinese solar panels. This action would be best described as a In general, which of the statements is most likely to occur as a result of the proposed tax on imported solar panels?

tariff. Consumers in Canada will face higher prices for solar panels.

Suppose that Paulie and Vinny each can produce ice cream or t-shirts. The table shows the quantity of each good that Paulie and Vinny each can produce in 1 hour, respectively, if they devote all of their time and effort into making the good. Round all answers to two decimal places. a. What is Paulie's opportunity cost of producing a cup of ice cream? b. What is Vinny's opportunity cost of producing a t-shirt? c. Paulie has a comparative advantage in and Vinny has a comparative advantage in

3.613 18/5 .76 10/13 t-shirts, ice cream.

The graph depicts the market for oil, with the assumption that the United States can import any amount of oil it chooses at the world free trade price. Adjust the graph to reflect what happens when a 50% import tax is imposed on oil. Approximately how many million barrels are imported before the tax is imposed? Approximately how many million barrels are imported after the tax is imposed?

6.5 4.5 import price moves up

The equation of exchange, M×V=P×Q, relates to the quantity theory of money. In this equation, M represents the supply of money, V represents the velocity of money, P represents the price level, and Q is real output. Which of the statements describes an implication of this equation in the long run?

Changes in the money supply (ΔM) will balance out with changes in prices (ΔP)

If the economy has just experienced a severe recession, which type of Fed policymaker would be more focused on a quick recovery?

Doves

The statements are related to international trade. Label each statement as either true or false. Each term may be used more than once. . Due in part to big differences in the cost of medical procedures in different countries, medical tourism is increasing. The General Agreement on Tariffs and Trade (GATT) has globally increased tariffs, trade, and the standard of living since 1947. Since the 1950s, the U.S has had a trade deficit. The majority of the U.S public agrees that trade barriers should be maintained to protect American jobs.

True False False False

Suppose that a central bank pursues expansionary monetary policy by purchasing bonds. Classify each of the variables listed by the policy's short run effect upon them. a. The equilibrium interest rate b. Real GDP c. Investment spending d. The marginal propensity to consume e. The demand for loanable funds f. The supply of money e. The price level

a. Decreases b. increases c. increases. d. is unaffected. e. is unaffected. f. increases. e. increases.

Categorize each transaction according to the U.S. account to which it belongs and the direction in which money flows. a. If an English company purchases a U.S. confectionary manufacturer, payments foreigners flow into the U.S. account. b. If profits are earned by a U.S.-based mining company operating in Mexico, payments foreigners flow into the U.S. account. c. If the Federal Reserve buys $2 billion worth of euros, payments foreigners flow into the U.S. account. d. If an Australian company buys steel from a U.S. firm, payments foreigners flow into the U.S. account.

a. from, financial b. from, current c. to ,financial d. from, current

Phil Frugal has been saving his pennies since he was 5 years old. He is now 45 and deposits his savings in a bank. His pennies total $5,000. Using this information and your knowledge of the banking system, select the best match for each item. Then calculate the values of reserves, required reserves, and excess reserves. Assume a required reserve ratio of 10%. a. The amount of interest the bank must charge on a loan b. The amount of funds banks must, by law, hold in reserve c. The amount a bank has on hand to fulfill the cash demands of its customers and the reserve requirements of the Fed d. The amount of reserves the bank owes to other banks e. The maximum amount of reserves available for loans f. The amount of reserves the bank must set aside to loan to member banks Enter the values of reserves, excess reserves, and required reserves.

a. none of these b. required reserves c. reserves d. none of these e. excess reserves f. none of these Reserves: $5000 Excess reserves: $4500 Required reserves: $500

Suppose that you are employed as an advisor to the central bank. Select the proper policy recommendation or economic prediction for each of the following scenarios. Which policy is appropriate when a rising aggregate price level is a concern but GDP is growing at an acceptable rate? Which policy is appropriate when a rising aggregate price level is a concern and GDP is not growing at an acceptable rate? Contractionary or restrictive monetary policy (tight money policy) will cause interest rates to

contractionary or restrictive monetary policy (tight money policy) It is unclear which type of monetary policy is appropriate. increase.

The original Phillips curve After several years of current data lying along the same Phillips curve, economists plot the newest statistics and find that their points lie well above the old curve. Which statement is the best explanation? When the newest economic data lies to the right of the Phillips curve, that likely means the Phillips curve

illustrates the short‑run trade‑off between inflation and unemployment. Increases in the prices of essential raw materials led people to expect higher inflation in the future. has shifted upwards.

Suppose you have the information about the productivity of industries in the U.S. and Japan. The numbers in the table are the units of output per hour of work. Use the data to answer the questions. The U.S. has an absolute advantage The U.S. has a comparative advantage

in neither good in steel .

Determine if each scenario will cause U.S. net exports to increase or decrease.

increase: The yen‑to‑dollar exchange rate decreases from 120 yen/dollar to 95 yen/dollar. The growth rate of Chinese GDP exceeds the growth rate of U.S. GDP. Inflation in the United States is less than inflation in Brazil. Decrease: The U.S. dollar increases in value against the British pound. Inflation in the United States exceeds inflation in Taiwan.

Suppose Robina Bank receives a deposit of $54,589 and the reserve requirement is 7%. Answer the questions using this information. Round your answers to two decimal places. What is the amount that Robina Bank must keep on hand as required by the Federal Reserve (Fed)? What is the amount that Robina Bank must have in excess reserves from this initial deposit? What is the total change in the M1 money supply from this one deposit?

keep on hand: $3821.23 54589*0.07 excess reserves: $50767.77 54589-3821.23 total change: $725253.85 50767.77/0.07

Suppose that the central bank finds that the economy is operating as depicted in the accompanying macroeconomy graph and they wish to conduct expansionary monetary policy. Adjust the graph for the market for loanable funds and the macroeconomy to depict how successful expansionary monetary policy will impact both.

left: supply moves right right: AD moves right

Leniency Bank wishes to cater to the demands of the residents of Prudence Island, a savings‑minded clientele with an unusual appetite for government securities. To this end, Leniency Bank is planning to purchase a large amount of government bonds, which later will be offered to its account holders. The bonds are purchased with the reserves of the bank. The balance sheet describes the bank's current financial situation in millions of dollars. Suppose that the required reserve ratio set by the Fed is 10%. What is the largest government securities purchase Leniency Bank could make before it becomes fully loaned up?

46 million

Your economics instructor has decided that you are the best person to assist the Federal Reserve with a problem they have related to United States monetary policy. The Federal Reserve has collected some data for the years 2005 and 2010 in relation to the actual federal funds rate, the inflation rate, and the output gap. They have also estimated the inflation rate and the output gap for 2015. Using the information in the table, answer the questions according to the Taylor rule for monetary policy

6.785 higher than the AFFR. 8.38

What is a liquidity trap? Which of these statements about liquidity traps is false?

When nominal interest rates cannot be lowered any further. Firms are unlikely to undertake investment during liquidity traps because interest rates are prohibitively high.

Please indicate whether each individual or group of individuals is part of the Federal Open Market Committee (FOMC).

a. The seven members of the Board of Governors: part of FOMC b. The president of the Los Angeles Federal Reserve Bank: not part of FOMC c. A group of four district bank presidents: part of FOMC d. The Treasurer of the United States: not part of FOMC e. The chairman of the Securities and Exchange Commission (SEC): not part of FOMC

Which term refers to the interest the Federal Reserve Bank (Fed) charges banks for loans? Select the charge the Fed levies on banks borrowing funds that would result in the largest increase in the money supply.

discount rate two percentage points below the private level

Classify each statement about the Federal Reserve System as either true or false. The Federal Reserve was established by the U.S. Constitution in the late 1700s. The national objectives of the Federal Reserve include promoting economic growth, full employment, stable prices, and moderate interest rates. All Federal Reserve actions are subject to veto by the executive branch. The Federal Reserve determines monetary policy in the United States. The Federal Reserve was created by the Federal Reserve Act of 1913.

f t f t t

The new chairman of the Ionian Central Bank (ICB) is preparing for her first board meeting. She is expected to recommend a monetary policy for the board to pursue. She decides to use the Taylor rule, which was originally developed for the U.S. Federal Reserve. Ionia's potential GDP is 100 million drachma, but current GDP is 98 million . What is Ionia's output gap?

-2 1 fed funds 5.5 federal funds rate target=2+inflation+(0.5×inflation gap)+(0.5×output gap) selling securities

Projected future expenditures on entitlement programs such as Social Security and Medicare are expected to lead to increasingly large federal budget deficits in future decades. Factors behind this trend include

Increasing life expectancy A growing proportion of retirees to workers

You have just begun a new job as a bank teller at Santa's Elf Bank. Your supervisor asks you what the difference is between reserves and excess reserves in terms of banking. You want to impress your supervisor, so you recall what you learned in your economics course in order to form your response. What is the difference between reserves and excess reserves in terms of banking?

Reserves refer to the cash banks have on hand to satisfy the Federal Reserve requirements. Excess reserves refer to the amount of reserves that banks have in excess of the legally required reserves.

Which best describes the barrier to trade known as dumping?

Selling exports abroad at a lower price than the domestic price.

Which of the choices describes how the effects of import tariffs and import quotas are different?

Some foreign producers receive some of the benefits generated by an import quota.

Which is a key difference between a rational expectations perspective and an adaptive expectations perspective?

The adaptive expectations perspective assumes individuals have limited access to economic data, whereas the rational expectations perspective assumes that individuals have complete access to economic data.

The graph represents a short‑run Phillips curve (SRPC). Label the axes using the given terms.

Y-axis=inflation rate, x-axis= unemployment rate

Indicate which group within the Federal Reserve System has responsibility for each action listed below, a. Supervises and regulates member banks b. Distributes coin and currency c. Appointed by the president to serve 14 year terms d. Oversees national banking and consumer credit regulation e. Oversees the buying and selling of government securities as a form of monetary policy. f. Comprises the Board of Governors and five regional bank presidents g. Provides information on regional economic conditions through the Beige Book report

a. Regional Federal Reserve District Banks b. Regional Federal Reserve District Banks c. Board of Governors of the Federal Reserve System d. Board of Governors of the Federal Reserve System e. Federal Open Market Committee f. Federal Open Market Committee g. Regional Federal Reserve District Banks

Which statement best describes an infant industry?

an emerging or underdeveloped industry that needs protection to survive and become competitive

Efficiency wages are The efficiency wage model illuminates why

an incentive scheme designed to motivate and retain workers. some workers are offered wages above the market‑clearing level.

Chaletland should _____ interest rates during a recession and _____ interest rates during an economic boom in order to maintain long-run equilibrium.

decrease; increase

The interest rate that the Federal Reserve Bank (the Fed) charges member banks for loans is known as the The Fed can ___ the money supply by lowering this rate.

discount rate increase

In many countries, one of the roles of the central bank is to provide loans to distressed financial institutions. What is the term for this? Another potential role of central banks is to foster confidence in the banking system by making sure that people can retrieve their money even if a bank goes bankrupt. What is the term for this?

lender of last resort deposit insurance

This question has two parts and concerns the permanent income hypothesis. 1. Which statement best defines the permanent income hypothesis? 2. According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending, and which would result in no change in consumer spending? a) New technology that will raise income .b)Expect more layoffs next year than anticipated. c) Gov gives a tax refund, however everyone already knew this would happen and would have to be paid back .d) Breakthrough in skill training, for more high skilled valuable jobs.

1. consumer spending depends on both the income and wealth of people in the economy. 2. a) increase b) decrease c) no change d) increase

The Fed __1__ controls the money supply through open market operations. For instance, when the Fed buys bonds, this __2__ in demand for bonds causes nominal interest rates to __3__ . When the Fed buys bonds, bank reserves __4__ , which reduces the need for banks to borrow. This causes the federal funds rate to __5__ .

1. indirectly 2. increase 3. decrease 4. increase 5. decrease

The graph shows the domestic demand and domestic supply for soybeans. Assume this country is open to international trade, that soybeans are a perfectly competitive good, and that the world price of soybeans is $30. Suppose a tariff of $10 is imposed. What price will result in this country? After the tariff is imposed, how many units of soybeans will be imported?

40 20

If people act with rational expectations, an expansionary monetary policy will have what effect?

People will anticipate inflation and jump to higher prices without changing output.

The graph shows the long-run aggregate supply (LRAS), short-run aggregate supply (SRAS), and aggregate demand (AD) curves for a given economy. Manipulate the curves to show the short-run effect of an increase in money supply.

Decrease increase increase AD moves right

If England is said to have an absolute advantage over Mexico in the production of wheat, this means that, given the same resources,

England can produce more wheat than Mexico.

Identify each statement as either true or false. In the United States, banks keep the entire value of all customer deposits in the bank vault to meet customer withdrawals. Banks typically loan out a portion of customer deposits. Bank runs occur when many customers attempt to withdraw deposits from a bank at the same time and the bank is unable to pay all customer withdrawals. The Federal Deposit Insurance Corporation (FDIC) protects bank depositors from bank failure. The fractional reserve banking system requires all banks to keep the total value of customer deposits in their vaults to prevent bank runs.

False True True True False

There were many causes of the Financial Crisis of 2007-2008 in the United States. Which statement most accurately describes the role of leverage in contributing to this crisis?

Leverage refers to the extent to which a person or firm has borrowed in order to purchase investments. Investment firms were highly leveraged in the time period leading up to the financial crisis, meaning they had borrowed a lot relative to the value of their assets. This was caused, in part, by lending money to people for homes that they could not afford. This made firms quite vulnerable to even relatively small declines in asset values.

International trade is the subject of much debate. Many economist favor encouraging international trade, citing the benefits gained by trade. However, there are economic arguments for limiting international trade with protectionism. Classify the given statements into the appropriate category.

Promoting The ability of a nation to consume more than it can produce domestically. Changes in productivity associated with specialization. Limiting Job loss in some labor markets. / Worries about domestic labor markets. The national defense argument. The potential for other governments to subsidize firms, enabling them to charge lower prices than domestic firms can. The infant industry argument.

In some simple models of trade, a country may choose to specialize in the production of a single good. Which is not an argument against specializing in a single good in the real world?

Specialization in a single good makes dumping easier and more effective.

Although both tariffs and quotas are tools used to restrict or reduce trade, which of the statements best describes their differences?

Tariffs are a tax on imported goods, and quotas are limits on the number of imported goods.

Given the equation of exchange set forth by the quantity theory of money (M×V=P×Q) , where M is the supply of money, V is the velocity of money, P is the price level, and Q is real output, which of the statements best defines M?

The total amount of currency, coins, and banking sector.

M1 is the narrowest definition of the money supply. It includes currency in circulation, checking account deposits and travelers checks. The statements refer to factors that can affect the money multiplier. Label each statement as true or false. The total change in the M1 brought about by the money multiplier is affected by the amount of deposits made by households and businesses. Banks must lend out all their excess reserves in order to change the M1 money supply. The Federal Reserve (Fed) has very little effect on the money multiplier. The state of the economy can affect the amount of excess reserves that banks keep on reserve, thereby affecting the impact of the money multiplier.

True False False True

Table 1 shows the financial position of the Smithville Bank once $2957.00 has been deposited. Assume that the required reserve ratio is 9.00% . The bank manager decides to lend Billy Bob Smith all of the bank's excess reserves. Billy Bob takes the funds to Eula Mae's Used Machines and buys a pickup truck. Eula Mae then deposits the money in her account back at the Smithville Bank. Table 2 should show the bank's accounts after the loan is made and the funds again deposited. Round all answers to the nearest cent.

What are the bank's loans in Table 2? $2690.87 $2957×(100%−9.00%)=$2690.87 What are the bank's reserves in Table 2? $2957 ($2957×9.00%)+$2690.87=$2957 What are the bank's deposits in Table 2? $5647.87

Classify the actions described as examples of expansionary monetary policy intended to stimulate the economy, contractionary or restrictive monetary policy meant to slow down the economy, or not an example of monetary policy. .a. The Federal Reserve selling bonds on the open market is a b. The President signing legislation that extends the duration of unemployment benefits for people who are out of work c. The Federal Reserve purchasing bonds on the open market is d. The Federal Reserve decreasing the discount rate is e. A major credit card company lowering the interest rate on outstanding credit card balances is f. The Federal Reserve increasing the percentage of deposits that commercial banks are required to keep in their vaults is. g. The President signing a tax-cut bill intended to encourage additional consumer spending is h. The Federal Reserve reducing the rate of interest that it charges to commercial banks on loans is

a. contractionary monetary policy. b. is not an example of monetary policy. c. an expansionary monetary policy. d. an expansionary monetary policy. e. not an example of monetary policy. f. a contractionary monetary policy g. not an example of monetary policy. h.an expansionary monetary policy.

Mortgage‑backed securities are Suppose that Second National Bank owns a large number of mortgage‑backed securities. What would happen to the value of these securities if the housing market continues to grow steadily and homeowners continue to pay their mortgage payments?

asset‑backed securities that represent a claim on the payments of mortgages by homeowners. Their value would increase.

Shown are three currency exchange markets operating under the Bretton Woods System. Match the label to the graph that describes the best course of action by each country's central bank to bring about equilibrium in each market.

below -revaluation above -devaluation equal -none

Label the scenarios with the type of monetary policy lag represented in each. Despite numerous data trends suggesting a recessions, the FOMC waits until their monthly scheduled meeting to change the direction of current monetary policy. Significant revisions to quarterly GDP data and monthly unemployment data delay the identifications of the start of a recession. recognition lag Data on GDP is release quarterly, meaning that an economic downturn beginning in January may not be identified until more than three months later. Once the Federal Reserve lowers interest rates, businesses and consumers are slow to increase borrowing as a result.

decision lag recognition lag information lag implementation lag

Suppose the Fed sells $500 billion in government securities, which results in a $5000 billion decrease in the money supply. In the long run, the decrease in the money supply will cause the price level in the economy to ___and real GDP to ____.

decrease; remain unchanged.

Complete the statement regarding conversions between different countries' currencies. The amount of one currency needed to purchase a unit of another currency is the . When a country's currency it becomes more valuable vis-a-vis another currency. The goods and services its citizens buys from other countries become expensive.

exchange rate appreciates less

Classify the statements as true or false. a. The process of specialization and trade has positive net benefits and is, therefore, beneficial to everyone. b. A nation will not have a comparative advantage in a product if it does not also have an absolute advantage in the production of that good. c. It can be mutually beneficial for two nations to specialize in goods for which they have a comparative advantage and then trade with one another. d. Countries specialize in the production of goods for which they have a comparative advantage. e. Absolute advantage is the source of the potential gains from specialization and trade.

false false true true false

How can the Federal Reserve raise interest rates?

use open market operations to reduce the money supply

The diagram shows the market equilibrium exchange rate between the Chinese yuan and the U.S. dollar (USD) under a floating exchange rate regime. Suppose China's central bank decides to increase interest rates. Shift the demand and supply curves as appropriate. This increase in Chinese interest rates will lead to This increase in Chinese interest rates will lead to

~ GRAPH:(D) shifts RIGHT(S) shifts LEFT ~ a decrease in domestic Chinese aggregate demand, which will be made worse by the change in exchange rates. the yuan appreciating and the dollar depreciating.

The tables contain the current account data for a small country. All values are in millions of dollars. Use the tables to answer the questions. What is the value of the balance of trade? What is the value of the current account balance?

-20 -30 balance of trade=exports of goods+exports of services−imports of goods−imports of services current account balance=balance of trade+balance on income+net transfers

Suppose you win on a scratch‑off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve requirement is 5% . What is the maximum possible increase in the money supply as a result of your bank deposit? Which events could cause the increase in the money supply to be less than its potential?

3500*0.05 = 175 3500 - 175 = 3325 1/0.05 = 20 20*3325 = 66500 Banks decide to keep some excess reserves on hand. Some loan recipients choose to hold some cash instead of depositing all of it in banks.

Consider the graphs, which show aggregate supply (AS) and the change in aggregate demand (AD) fromAD1 to AD2 that will result from different monetary policies. Match each policy with the graph showing the corresponding shift. The central bank decreases the discount rate. The central bank sells bonds on the open market. The central bank uses open market operations to conduct expansionary monetary policy. The central bank increases the money supply. The central bank increases the required reserve ratio. The central bank buys bonds from private banks.

Graph A Graph B Graph A Graph A Graph B Graph A

Suppose the economy starts at point 1 in the aggregate supply-aggregate demand (AS-AD) graph and at point A on the Phillips curve graph. Points 2 and 3 start out stacked on point 1, but they will need to be moved to the proper locations that reflect steps 2 and 3 described below. Likewise for points B and C. The AS-AD graph reflects two aggregate demand curves (AD1 and AD2), the long-run aggregate supply curve (LAS) and two short-run aggregate supply curves (SAS1 and SAS 2). The Phillips curve graph reflects the long-run Phillips curve (LRPC) and the short-run Phillips curve (SRPC). The central bank decides to lower the unemployment rate below the natural rate by decreasing the interest rate. Place point 2 on the AS-AD graph and point B on the Phillips curve graph to describe the short‑run macroeconomic equilibrium that results. Likewise, place points 3 and C to describe the long‑run full‑employment equilibrium.

Left graph: 2 goes at intersection of SAS and AD2 3 goes at intersection of SAS2, AD2 and LAS Right graph: C goes at intersection of SRPC2 and LRPC B goes to the left of A on the SRPC1 line

Suppose there are only two goods produced in an economy: phones and meals. Maria is adept at assembling electronics but has poor skills at preparing food. Mike is an accomplished chef but is not very skilled at assembling electronics. Currently Mike and Maria each work independently, and they each produce both meals and phones. However, they are considering trading some of their respective output with each other, but only if that would allow each person to become more prosperous. Which statement is not true?

Mike and Maria will both gain only if they trade the same number of phones for the same number of meals.

Juan Valdez, a coffee farmer in Colombia, sells his coffee to Cafe Emporium, a U.S. firm which specializes in gourmet coffee blends. What must be true of this arrangement? What can be inferred from the fact that Juan has voluntarily entered into a contract with Cafe Emporium?

None of these statements must be true. Juan is better off as a result of his deal with Cafe Emporium.

Table 1 shows the financial position of Bank Uno once $3617.00 has been deposited. Assume that the required reserve ratio is 6.00%, that banks do not keep excess reserves, and that all the money loaned out from Bank Uno is deposited into Bank Duo (whose loans go to other banks not shown here). Once the lending and depositing process is complete, what will the accounts look like in Tables 2 and 3? Specify all answers to two decimal places.

What are Bank Uno's deposits in Table 2? $3617 deposits in table 1 What are Bank Uno's reserves in Table 2? $216.42 Deposits in Table 1 * Required reserve ratio What are Bank Duo's loans in Table 3? $3196.54 Deposits in Table 3 = Loans in Table 2 Reserve in Table 3 = Deposits in Table 3 * Required reserve ratio Loans in Table 3 = Deposits in Table 3 - Reserve in Table 3 What are Bank Uno's loans in Table 2? $3400.58 Deposits in Table 1 - Reserve in Table 2

Consider the exchange rate between Jamaica and Pakistan. Typically, exchange rates vary over time, sometimes quite dramatically. The scenarios present various changes that may affect the exchange rate. Indicate whether each scenario will tend to cause an appreciation or depreciation of, or have no effect on, the value of Jamaican dollars relative to Pakistani rupees. The magazine The Economist publishes an article indicating that analysts expect the value of Pakistani rupees to rise relative to Jamaican dollars. The central bank in Jamaica announces that it will raise interest rates on government bonds. Based on a World Bank report, the inflation rate in Jamaica will be 5% next year, whereas the inflation rate in Pakistan will be 6.5%. The price of a specific basket of goods in Jamaica is roughly 2.0 times higher than the price of an identical basket of goods in Pakistan, even after adjusting for the exchange rate.

depreciate appreciate appreciate depreciate

The table shows the hypothetical demand and supply for coffee beans in two countries: Guatemala and Armenia. In autarky, what would the equilibrium price and quantity be in Guatemala and Armenia?

equilibrium price in Guatemala: $4 equilibrium quantity in Guatemala: 320lb equilibrium price in Armenia: $7 equilibrium quantity in Armenia: 180lb

a. Rhode Island‑based Joe's Lobster Shack hires Villagebank (a London investment bank) to handle its initial public offering (IPO). b. Scotland sends $50 million to help the New Jersey Hurricane Relief Program. c. Nancy is a U.S. citizen. She earned $800 in dividends last year from her investment portfolio of European shipping companies. d. Svetlana works at Coke headquarters in Atlanta. She sends 10% of her salary to her parents in Bulgaria. e. Dennis lives and works in San Diego. He uses his holiday bonus to buy an Italian handbag for his wife. f. Chicago‑based Boeing, sells 12 new aircraft to Beijing Airlines. g. Jim, an NYU student, studied abroad at the University of Barcelona this summer. the University of Barcelona this summer. While there, he worked part‑time at the college's bookstore. h. Cliff and Emily's Social Security checks are mailed to their new home in Cost Rica.

import monetary transfer income monetary transfer import export income monetary transfer

Banks in Ruritania have a required reserve ratio of 5% . Round all answers to one place after the decimal. What is the simple money multiplier? simple money multiplier: Money leakages, however, are quite high. Required reserves and leakages amount to 33% of deposits. What is the leakage-adjusted money multiplier? leakage‑adjusted money multiplier If a financial crisis develops in Ruritania, with numerous loans going into default, is the money multiplier likely to increase or decrease? Which example does not represent a leakage from the money multiplier process?

1/.05=20 1/0.33=3 decrease cash held by the Fed

Which of the statements best describes the economic condition known as "stagflation"?

A deep recession can lead to both inflation and a sputtering economy, a situation called stagflation.

Which of the following is true of a central bank that employs inflation targeting?

A target rate of annual inflation is maintained by expanding or contracting the money supply.

Suppose that the central bank increases interest rates in an economy. How would this affect aggregate demand and inflation?

Aggregate demand would fall and inflation would fall.

Answer the questions concerning decision‑making strategies for monetary policy. The Taylor Rule is an example of The Federal Reserve currently uses

an instrument rule. a targeting rule.

Classify each of the tasks according to whether or not they are tasks of the Federal Reserve.

Tasks of the Federal Reserve: - Managing the U.S. money supply - Acting as a lender of last resort - Engaging in monetary policy Not tasks of the Federal Reserve: - Creating the federal budget - Minting coin currency - Engaging in fiscal policy - Managing China's money supply

The recent recessions in the US have been referred to as jobless recoveries. What factors allow for, or contribute to, a jobless recovery?

Temporary employees are easier to hire and fire as needed. Technology allows fewer workers to be equally productive.

You just deposited $4,000 in cash into a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar. If the reserve requirement is 12%, how much will your deposit increase the total value of checkable bank deposits? $ If the reserve requirement is 4%, how much will your deposit increase the total value of checkable deposits?

(4000/.12)-4000 29333 (4000/.04)-4000 96000 decreases

Managers at the Bank of Quebec are afraid that the bank will not have enough reserves at the end of the business day to meet withdrawals tomorrow. It currently has two options to borrow money overnight. First, it could borrow money from the Bank of Canada (BOC) at a rate of 1.35% . Second, it could borrow money from other banks at a rate of 0.65% . Using this information, answer the questions. What is the overnight rate? What is the bank rate? What would happen to other short‑term interest rates if the Bank of Canada increases its overnight rate target?

.65 1.35 They would also increase.

The Bank of Key West is not going to have enough reserves at the end of the business day to meet its reserve requirement of 10%. It currently has two options to borrow money overnight in order to meet the requirement. First, it could borrow money from the Federal Reserve at a rate of 0.95% . Second, it could borrow money from other banks at a rate of 0.25% . What is the federal funds rate, and what is the discount rate?

0.25 .95 they will also increase

1. Suppose OPEC decides to halve oil production suddenly. In the first graph, please show the effect this will have on SRAS and AD. In the second graph, please show what will happen to the short‑run Phillips curve. 2. If policymakers choose to contract AD in response to OPEC's actions:

1. Sras to the left/up, AD stays same.2nd graph, Phillips curve to the right 2. unemployment will increase

Suppose that the required reserve ratio is 4.00%. What is the simple money (deposit) multiplier? Round to two decimal places. Increasing the reserve ratio will the money multiplier.

1/0.04= 25 decrease

If the reserve requirement is 10%, what is the money multiplier?

10

Suppose that Russia produces 10,000,000 barrels of oil and 1,000 bushels of wheat each week. Suppose that China produces 8809 barrels of oil and 8809 bushels of wheat each week. In autarky, what is the largest amount of wheat Russia can consume every week?

1000 a situation where one country does not engage in trade with other countries

Suppose that a bank has accepted $20,000 in checking deposits, $40,000 in savings deposits, has $10,000 in cash reserves, and made $50,000 in loans. What is the bank's reserve ratio?

16.6%

A farmer produces both beans and corn on her farm. If she must give up 16 bushels of corn to be able to get 6 bushels of beans, then her opportunity cost of 1 bushel of beans is

2.67

Suppose 11 pesos can be exchanged for $1. A Mexican businessman is interested in buying a home in Texas. If the price of the home in Texas is $200,000, how many Mexican pesos must he have to buy this home? Suppose 0.50 euros can be exchanged for $1. A French entrepreneur is interested in buying a home in Rhode Island. If the price of the home in Rhode Island is $300,000, how many euros must she have to buy this home?

2200000 pesos 200000*11 150000 300000/.5

Leniency Bank wishes to cater to the demands of the residents of Prudence Island, RI, a savings‑minded clientele with an unusual appetite for government securities. To this end, Leniency Bank is planning a large government bonds purchase, which later will be offered to its account holders. The bonds are purchased with the reserves of the bank. The balance sheet describes the bank's current financial situation in millions of dollars. Suppose that the required reserve ratio set by the Fed is 10%. What would be the largest government securities purchase Leniency Bank could afford before it becomes fully loaned up?

41 mil

Find the velocity of money when M=$622, P=107, and YR=$33. M is the money supply, v is the velocity of money, P is the price level, and YR is the real gross domestic product (GDP). Round your answer to 2 decimal places.

5.68

Several European countries suffered from financial crises at the same time as the United States. Select the country that matches each particular crisis. a. In 2013, suffered from an unemployment rate of 25% and huge amounts of debt. b. suffered under interest rates of 25% after the recession hit the shipping industry hard. c. In, the newest member of the Eurozone, politicians have a great deal of control over the banking industry. d. was unable to cut the government budget because the courts overturned key laws. e. The crisis in began much as it did in the United States, when a housing bubble burst. f. In spite of many bank failures, the people of did not want investors and banks to receive a government bailout. g. remained in a recession longer than other nations, due to very slow economic growth.

A - 'Spain' B - 'Greece' C - 'Slovenia' D - 'Portugal' E - 'Ireland' F - 'Cypress' G - 'Italy'.

Which of the scenarios best reflects the meaning of the term inflation targeting?

A central bank is expected to achieve a 3% annual inflation rate.

What does it mean to dollarize a currency?

A foreign country uses the U.S. dollar as its currency.

There were many causes that contributed to the financial crisis of 2007-2008. Which of the statements most accurately describes the role of collateralized debt obligations, referred to as CDOs, in contributing to the crisis?

Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these collateralized debt obligations was often much higher than the purchaser thought.

This question has two parts and concerns the permanent income hypothesis. a. Which statement best defines the permanent income hypothesis? According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending, and which would result in no change in consumer spending?

Consumer spending depends on both the income and wealth of people in the economy. increase decrease not change increase

Which of the following is an example of the Fed making monetary policy?

Decreasing the discount rate to 2%

Determine which of the given statements about inflation, unemployment, and the Phillips curve are true and which are false. By carefully monitoring the rate of money supply growth, policymakers can keep the economy functioning at any inflation-unemployment combination on the short‑run Phillips curve. The cost of keeping unemployment below the natural rate of unemployment is accelerating inflation. In order to push unemployment below the natural rate, inflation must be lower than expected. Reducing unemployment is easier under adaptive expectations than it would be under rational expectations. Reducing inflation is easier under adaptive expectations than it would be under rational expectations.

False True False True False

Classify the scenarios as part of the U.S. capital account or the U.S. current account. 1. Al, a U.S. citizen, purchases a vacation home in Ixtapa, Mexico. 2. A U.S. company exports its product. 3. Moira, a U.S. citizen, purchases an imported doll house for her daughter. 4. The Canadian government purchases U.S. Treasury securities. 5. Margarita, a Mexican citizen, receives dividends on stock she owns in Apple, a U.S. company.

Financial Current Current Financial Current

Central bankers in Widgetsa have decided that inflation is too high and contractionary monetary policy is needed. First, position LRAS where it would be if contractionary policy is needed. Then, show the short‑run results of this policy action by shifting the appropriate curves on the graphs.

GRAPH: 1. keep demand same, decrease supply. 2. LRAS left from middle, keep sras, decrease AD sell bonds to banks, increase interest rate for last resort spending.

Consider the hypothetical trade data presented in the accompanying table. Given the data presented in the table, which countries have open economies? Which country is running a trade surplus?

Mexico Panama Honduras Mexico

The accompanying Production Possibilities Frontiers (PPF) represent hypothetical levels of production for Honduras and Brazil. Assume the two countries are initially producing and consuming in autarky at point A on each of their PPFs. Suppose these countries decide to trade. Each country will specialize in the production of the good for which it has a comparative advantage. a. What will each country produce? b. Suppose each country specializes in the production of the good for which it has a comparative advantage, and they trade at a price of of 4,000 tons of steel for 6,000 tons of bananas. Place the points labeled "Post Trade Consumption" to show the amounts of bananas and steel each country will have to consume after they trade.

Honduras will produce bananas and Brazil steel. Left: (4,000, 2,000) Right: (5,000. 6,000)

For each scenario, determine if it is an example of an import, export, income, or transfer. Assume that the United States is the domestic country.

IMPORT: -Rhode Island based Joe's Lobster Shack hires Villagebank ( a London investment bank) to handle its initial public offering (IPO) EXPORT: -Chicago based Boeing sells 12 new aircraft to Beijing Airlines INCOME: -Nancy is a U.S citizen. She earned $800 in dividends last year from her investment portfolio of European shipping companies. - Jim, an NYU student, studied abroad at the University of Barcelona this summer. While there, he worked part-time at the college's bookstore. TRANSFER: -Scotland sends $50 million to help the New Jersey Hurricane Relief Program -Ohio Tech University pays $30 million in stipends to its international students.

Determine whether the examples describe fixed exchange rate systems, flexible (or floating) exchange rate systems, or neither. Consider each example based only on the information given.

In a fixed exchange rate system, the government determines how many units of its currency can be exchanged for another country's currency, using macroeconomic policy to maintain it. The importance of monetary policy increases under a flexible exchange rate system, which reinforces the objectives of monetary policy's. Today, the values of most world currencies are determined by market forces, but governments occasionally intervene to manage their currencies' values. Today's system could best be described as neither exchange rate system. The Bretton Woods system in an example of a a fixed exchange rate system. Supply and demand in the foreign exchange market determine the exchange rates between countries using a flexible exchange rate system. The demand for dollars increases, but one Turkish lira still exchanges for $0.49. Turkey operates under a fixed exchange rate system.

Suppose that your friend Julia has taken a few courses in economics and, because she finds the field so interesting, is always interested in debating economic policy. Julia feels that monetary policy should be used instead of fiscal policy to address economic problems. To support her thinking, Julia argues that a difficulty with fiscal policy is the existence of lags. Which argument is an appropriate response to Julia's claim?

It is true that fiscal policy is subject to lags. However, monetary policy is associated with some lags too. In particular, monetary policy is subject to the recognition lag and operational lag.

You are Chair of the Federal Reserve Board. In your meeting with the Federal Open Market Committee, the committee unanimously votes to increase the money supply using open market operations (OMOs). During the press conference after the meeting, a reporter asks you to explain what OMOs are and how you will use them to increase the money supply.

OMOs are the selling and buying of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system.

As it relates to the European Union, what is the ECB?

The European Central Bank, responsible for monetary policy within the European Union.

Which statement best describes the Federal Reserve's current level of transparency to the American public?

The Fed is extremely transparent with regard to monetary policy and discloses goals, targets, and predictions for the macroeconomy.

Which statement is an example of an open market operation?

The Federal Reserve sells bonds via the commercial banking system. or The central bank sells bonds to the public via the commercial banking system.

Select the statement that best defines required reserves.

The amount banks are required by law to hold on each deposit.

Which of the statements about free trade's effects on the environment is not commonly given as an argument against trade liberalization?

The international trade of agricultural products harms local agriculture in all countries.

Suppose that research finds a link between high fructose corn syrup (HFCS) and obesity, which then leads American consumers to switch from HFCS products to pure cane sugar products. The graphs show the markets for cane sugar in Haiti and the United States before the studies were divulged. Shift the curves in the graphs, including the horizontal world price curve, to describe the new trade equilibrium that results after the switch in preferences of American households, and then answer the follow‑up question. Assume that the United States and Haiti are the only non‑HFCS sugar trading parties in the world and that there are no quotas, subsidies, or tariffs distorting these markets. According to your graphs, at the new equilibrium

United states: demand shifts right world price goes up one notch on both graphs cane sugar producers in Haiti benefit.

The balance sheet represents the current financial situation of a commercial bank named Novatia Bank. Suppose that a 15‑year‑old girl takes the $150 cash that she received for her birthday and deposits it in her checking account at Novatia Bank. What will happen to the bank's liabilities after the $150 deposit? What will happen to the bank's assets after the $150 deposit?

The value of checkable deposits will increase by $150. The value of cash holdings will increase by $150

Table 1 shows the financial position of the Smithville Bank once $⁢3617.00 has been deposited. Assume that the required reserve ratio is 8.00%.8.00%. The bank manager decides to lend Billy Bob Smith all of the bank's excess reserves. Billy Bob takes the funds to Eula Mae's Used Machines and buys a pickup truck. Eula Mae then deposits the money in her account back at the Smithville Bank. Table 2 shows the bank's accounts after the loan is made and the funds are again deposited. *For all following questions, please round your answer to the nearest hundredth. *

What are the bank's loans in Table 2? loans: $3327.64 What are the bank's reserves in Table 2? reserves: $3617.00 What are the bank's deposits in Table 2? deposits: $6944.64

What are the results of contractionary monetary policy, which intends to slow down the economy, and what are not? a. Increased investment spending b. A higher interest rate c. An increase in aggregate demand in the short run d. A reduction in the money supply e. Increased consumer spending f. An increase in real GDP in the short run

a. does not b. results c. does not d. results e. does not f. does not

In the years leading up to the financial crisis of 2008-2009, the market for housing can be best described as

booming, driven by rising prices and increased demand due to low interest rates.

When current output is greater than potential output, which of the given monetary policies is the Federal Reserve (the Fed) likely to enact? Which of the given statements is the most direct result of the correct monetary policy from the first question?

decreasing reserves to increase interest rates decreases in investment and a slowing of output growth

The graph represents the foreign exchange market for the dollar against the euro. Manipulate the appropriate curve to depict the effect on the foreign exchange rate (euros per dollar) if Europeans consider American products to be more fashionable than they did previously.

demand moves right

In the accompanying table, for each pattern of changes in output and inflation, diagnose whether the economy is undergoing a demand shock (demand-pull inflation) or a supply shock.

demand pull, supply shock supply shock, demand pull

The Bretton Woods System is an exchange rate system where

exchange rates are pegged to the United States dollar.

Determine whether each of the following statements is true or false. The Federal Reserve chooses how much banks lend. The federal funds rate matters only to banks. The Federal Reserve loans money to banks. The Federal Reserve sets a target for the federal funds rate. The Federal Reserve has more influence over short-term interest rates than long-term interest rates.

false false true true true

Determine if the statements are true or false. The Bank of Canada chooses how much banks lend. The Bank of Canada serves as the lender of last resort. The Bank of Canada loans money to banks. The Bank of Canada sets the overnight rate. The overnight rate only matters to banks.

false true true false false

In which exchange rate system is the exchange rate determined entirely by the supply of and demand for a currency?

flexible exchange rate system

Greece, Spain, and Italy all underwent severe economic hardship in the aftermath of the 2008 financial crisis. Determine which statement describes each country by matching the description to the country. Europe's troubles started with this country, which has a history of fiscal irresponsibility. Several otherEuropean countries bailed out this country in return for increased austerity measures. This country seemed fiscally sound prior to the financial crisis. However, this country had a housing bubble which burst and sent this country's economy into a deep downturn. This country has a history of a high debt to GPD ratio but in years just prior to the financial crisis had low levels of debt. Investors began to worry that this country's economy was growing too slowly in the aftermath of the financial crisis for it to be able to repay its debts.

greece spain italy

Identify whether the given items are examples of imports, exports, or neither. Assume the United States is considered the domestic country. Colby lives in the United States and purchases a video game produced in Japan. Lucy lives in Tennessee and buys an orange grown in Florida. A Chinese consumer purchases a television produced in China. A farmer in Iowa sells corn to a food processing plant in China. ConocoPhillips drills for oil in the United States and sells this oil to refineries in Brazil and Mexico.

import neither neither export export

The graph shows the supply and demand of possum, the currency of the hypothetical country Possumtopia, and the price as dollars per possum. Shift the appropriate curve or curves to show what the market will look like when the Central Bank of Possumtopia increases the supply of possum, all else equal. What is the exchange rate in dollars to possum after the increase in the supply of possum? This decrease in the exchange rate means

move supply right 0.3 the possum depreciates and the dollar appreciates.

The table shows the demand and supply for cocoa beans in two countries: Cameroon and Nigeria. Use the information in the table to answer the questions. What would be the equilibrium price and quantity in Cameroon and Nigeria if free trade existed between the two countries?

price, Cameroon: $5 quantity demanded, Cameroon: 280lb price, Nigeria: $5 quantity demanded, Nigeria: 220lb

Please determine whether each statement supports (pro) or opposes (con) setting monetary policy according to rule. The current system of monetary policy development allows too much room for incompetence and abuse of power. Requiring particular goals or ranges does not allow monetary policy the flexibility it needs to respond to crises. Problems with discretion are in the realm of possibility, but nothing is guaranteed. Sometimes, just the opposite of what you expect happens. Under the current method, central bankers can be tempted to use monetary policy to influence political outcomes.

pro con con pro

Various participants in the foreign exchange market for U.S. dollars are listed. Classify each participant as a supplier or demander of U.S. dollars. a. A tourist from the United States goes on vacation to France. b. An investor in the United States wants to deposit funds in a bank in Estonia c. A person from Vietnam wants to purchase a share of a company in the United States. d. Investors from Peru want to buy bonds from the United States. e. A company based in Taiwan exports exclusively to the United States. f. A firm based in the United States exports toasters to Columbia. g. A wealthy investor in the United States attempts to purchase an entire t‑shirt firm in Zambia. h. People from Namibia are visiting their relatives in the United States.

supplier supplier demander demander supplier demander supplier demander

Determine whether each statement is TRUE or FALSE and place it in the correct bin. In each scenario, everything else is held constant so that the only change you need to consider is the one presented in a given scenario.

true: When South Korea's currency (the won) appreciates, falling exports cause South Korean aggregate demand to decrease, leading to a drop in the price level Incomes in Old World increase by 15%, while incomes in New world increase by 18%. New World's current account will worsen as a result false: If Japan's price level increases more than China's price level, Japan will see its current account improve The interest rate in Hong Kong drops by 2% while the interest rate in Germany drops by 3%. Germany's financial markets will experience a net inflow of capital. A financial website states that the Indian rupee is expected to depreciate against the Japanese yen. Upon reading this, Matthew concludes that capital will flow from Japan to India.