Macro Exam II
Which equation represents the equation of exchage?
MV=PY
Suppose the exchange rate of the U.S. dollar was 1.50 British pounds = $1.00 (U.S.) on Wednesday, and on the following Monday the exchange rate was $0.75 (U.S.) = 1.00 British pound. Which of the following best describes what happened between Wednesday and the following Monday?
The U.S dollar depreciated against the British pound and the British pound appreciated against the U.S. dollar.
If nominal GDP is $12 trillion, the price level is 120, and the quantity of money is $4 trillion, what is the velocity of circulation?
3
In January, suppose that a share of stock in Meyer, Inc. had a price of $50 and that each share entitled its owner to $2 of Meyer, Inc.'s profit. During the year, the price of a share of a Meyer's stock rose to $100. The interest paid on the share in January was
4%
In a world with no money, costs are expressed in terms of other goods. If one video game costs two hamburgers, and a hamburger costs three sodas, how many sodas would it take to buy a video game?
6
The term "foreign currency" refers to foreign I. coins II. notes III. bank deposits
I, II, and III
Which of the following is NOT considered a function of money?
It allows banks to lend out funds.
unit of account
agreed measure for stating the prices of goods and services
quantity of money demanded (money market)
amount of money people plan to hold during any given time. depends on nominal interest rate.
Checks __ money and credit cards __ money.
are not; are not
Foreign Exchange Market
competitive market where the currency of one country is traded for the currency of another country
Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond
falls from 10% to 8%
quantity of money supplied
federal reserve is the only institution that controls the money supply. thus money supply curve is vertical and independent of the interest rate.
The funds used to buy and operate physical capital are
financial capital
In November 2008, automobile executives from Ford, GM, and Chrysler testified to Congress that their firms needed a $25 billion bailout to prevent bankruptcies. The executives stated that part of the cash would be used to re-design production lines. The $25 billion is ___ and the re-designed production lines are ___.
financial capital; physical capital
quantity theory of money
increase in the quantity of money brings an equal percentage increase in price level
If the exchange rate falls, then the expected profit from holding the domestic currency
increases
In the foreign exchange market, the higher the dollar's exchange rate, the
larger the quantity supplied of dollars.
store of value
money can be held for a time and alter exchanged for goods and services
A financial decision should be pursued when
net present value is positive
real interest rate
nominal interest adjusted for inflation (interest rate-inflation rate)
Suppose that the exchange rate between the dollar and the peso changed from 6 pesos per dollar to 8 pesos per dollar. This change means that the
peso depreciated
In July 2016, a British pound could buy $2. By October 2016, a pound could buy $1.55. Over the four months, the
pound depreciated against the dollar.
The exchange rate is the
price of one country's currency expressed in terms of another country's currency.
The "double coincidence of wants" problem is
resolved by the use of money
The higher the exchange rate today, the
smaller is the expected profit from buying U.S. dollars today and holding them.
The velocity of circulation is
the average number of times a dollar bill is used in a year to buy the goods and services in GDP.
law of supply (foreign exchange market)
the higher the exchange rate, the greater is the quantity of us dollars supplied in the foreign exchange market
exchange rates
the price at which one currency trade for another currency; fall in the value of a currency is depreciation; opposite is appreciation
What is physical capital?
the tools, instruments, machines, buildings, and other items that are used to produce goods and services
gross investment
total amount spent on purchases of new capital and on replacing depreciated capital
wealth
value of all the things that people own
If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with
yuan, the Chinese currency.
If the velocity of circulation is 6 and the quantity of money is $3 trillion, what is nominal GDP?
$18 trillion
The present value of $200 one year from now when the interest rate is 7% is
$187
If V = 5, P = $3, and Y = 50, then the quantity of money equals
$30
In an economy, there is $200 million in currency held outside banks, $100 million in traveler's checks, $250 million in currency held inside the banks, $300 million in checking deposits, and $600 million in savings deposits. The value of M1 is
$600 million
Suppose the money growth rate is 3 percent, the velocity of circulation is constant, and real GDP is growing at 2 percent. What is the inflation rate?
1%
function of money
1. medium of exchange 2. unit of account 3. store of value
A share of Apple stock has a price of $430 and gives $43 of Apple profit to its owner. The interest rate on this share is
10%
foreign currency
Foreign bank notes, coins, and bank deposits
Read the following statements and determine if they are true or false.I. According to the quantity theory of money, an increase in the growth rate of the quantity of money increases inflation in the long run.II. Historical and international data show that there is no correlation between inflation and money growth.
I is true and II is false.
Interest Rates and Asset Prices Relationship
IF the price of the asset rises, the interest rate falls. If the price of the asset falls, the interest rate rises.
savings
amount of income that is not paid in taxes or spent on consumption of goods and services
financial innovation demand curve shift
an increase in financial innovation reduces the demand for money. leftward shift. (credit cards, ATM's)
real gdp demand curve shift
an increase in real gdp increases income and then increases demand for money. rightward shift
price level demand curve shift
an increase in the price level increases the demand for money. rightward shift.
medium of exchange
an object that is generally accepted in exchange for goods and services. barter is used.
money
any commodity or token that is generally acceptable as a means of payment
The demand curve for U.S dollars slopes downward because as the dollar __ U.S. goods become __ expensive to foreign residents, so they purchase fewer U.S. goods and the quantity of dollars demanded decreases.
appreciates; more
velocity of circulation
average number of times a dollar is used to purchase goods and services in GDP in a year
Americans demand Japanese yen in order to
buy Japanese products.
net investment
change in the quantity of capital
M1 (narrow money)
currency, travelers checks, and checking deposits owned by individuals and businesses
depreciation
decrease in the quantity of capital that results from wear and tear
Exports of U.S. goods create a __ U.S. dollars and create a __ foreign currencies.
demand for; supply of
What is financial capital?
funds that firms used to buy physical capital
Other things remaining the same, the __ the exchange rate for dollars, the greater the __ in the foreign exchange market.
higher; quantity of dollars supplied
nominal interest rate
interest rate before taxing inflation into account
what are the 3 financial capital markets?
loan, bond, and stock markets
import effect(foreign exchange supply)
the higher the exchange rate, the higher the value of imports, so the greater the quantity of us dollars supplied
expected profit effect (foreign exchange supply)
the higher the exchange rate, the lower the expected profit, thus the higher the quantity of us dollars supplied
law of demand foreign exchange market
the higher the exchange rate, the lower the quantity demanded of us dollars.
M2 (broad money)
M1 and time deposits, saving deposits, money market mutual funds, and other deposits.
When do you make the investment?
If net present is positive, make the investment. If NPV is below zero, DO NOT make the investment.
What does positive and negative net worth indicate?
If net worth is positive, then the institute's is solvent and liquid. If net worth is negative, then the institution is insolvent and illiquid.
Sam has $500 in traveler's checks. He cashes a $100 traveler check, deposits $150 into his checking account at a Savings and Loan Association, and deposits the remaining $250 into a savings account at a credit union. Immediately,
M1 decreases by $250 and M2 does not change.
Money Market Equilibrium
point where demand and supply of money curve touch. increase in money demand increases the interest rates. increase in money supply will reduce interest rates.
the law of demand (money market)
rise in the nominal interest rate will reduce the quantity demanded of money. fall in the nominal interest rate will increase the quantity demanded of money.
With everything else the same, in the foreign exchange market the
the larger the value of U.S exports, the greater is the quantity of dollars demanded.
expected profit effect (law of demand foreign exchange market)
the lower the exchange rate, the greater is the expected profit, so the greater the quantity of us dollars demanded
export effect (law of demand foreign exchange market)
the lower the exchange rate, the greater is the value of us exports, so the greater is the quantity of us dollars demanded
Which of the following applies to money when it serves as a store of value?
the more stable money's value is, the better it serves as a store of value.
The term "capital", as used in macroeconomics, refers to ...
the plant, equipment, buildings, and inventories of raw materials and semi-finished goods.
