macro mt 3

A bank's reserve ratio is 5 percent and the bank has $1,000 in deposits. Its reserves amount to

$50

In an open economy, gross domestic product equals $1,950 billion, government expenditure equals $280 billion, investment equals $500, and net capital outflow equals $280 billion. What is consumption expenditure?

$890 billion

The nominal interest rate is 4%, the inflation rate is 1% and the tax rate is 20%. Given U.S. tax laws, how is after-tax real return computed?

.04(1 - .20) - .01

If the exchange rate is .70 euro per dollar, the price of an MP3 player in Paris is 150 euros and the price of an MP3 player in the U.S. is $150, then what is the real exchange rate?

.70 French MP3 players per U.S. MP3 player.

The nominal interest rate is 3.5 percent and the inflation rate is 2 percent. What is the real interest rate?

1.5 percent

If the reserve ratio is 8 percent, then an additional $1,000 of reserves can increase the money supply by as much as

12,500.

If the reserve ratio is 5 percent, then the money multiplier is

20

The manager of the bank where you work tells you that your bank has $10 million in excess reserves. She also tells you that the bank has $400 million in deposits and $355 million dollars in loans. Given this information you find that the reserve requirement must be

35/400.

Over the last 70 years, the average annual U.S. inflation rate was about

4 percent, implying that prices increased about 16-fold.

The nominal interest rate is 6 percent and the real interest rate is 2 percent. What is the inflation rate?

4 percent.

If the reserve ratio is 2.5 percent, then the money multiplier is

40

At any meeting of the Federal Open Market Committee, that committee's voting members consist of

5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors.

If the price level increased from 120 to 126, then what was the inflation rate?

5 percent

If M = 5,000, P = 3, and Y = 10,000, what is velocity?

6

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

A U.S. based restaurant chain opens new restaurants in India.

Evidence concerning hyperinflation indicates a clear link between the money supply and the price level for

Austria in the 1920's. Hungary in the 1920's. Poland in the 1920's. All of the above are correct

18)During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits.

Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease.

A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800 euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has purchasing-power parity with the U.S.?

Japan but not Belgium

Given the following information, what are the values of M1 and M2? Small time deposits $650 billion Demand deposits and other checkable deposits $300 billion Savings deposits $750 billion Money market mutual funds $600 billion Traveler's checks $25 billion Large time deposits $600 billion Currency $100 billion Miscellaneous categories in M2 $25 billion

M1 = $425 billion, M2 = $2, 450 billion.

On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.

The $80 is a nominal variable. The quantity of shoes is a real variable.

An open economy's GDP is always given by

Y = C + I + G + NX.

You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced

a nominal gain, but no real gain, and you paid taxes on the nominal gain.

You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced

a nominal loss and a real gain.

Most financial assets other than money function as

a store of value, but not a unit of account nor a medium of exchange

A country sells more to foreign countries than it buys from them. It has

a trade surplus and positive net exports.

The classical dichotomy argues that changes in the money supply

affect nominal variables, but not real variables.

If the exchange rate changes from 148 Kazakhstan tenge per dollar to 155 Kazakhstan tenge per dollar, the dollar has

appreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods.

Bank runs

are a problem because banks only hold a fraction of deposits as reserves.

The members of the Federal Reserve's Board of Governors

are appointed by the president of the U.S. and confirmed by the U.S. Senate.

Interest rates adjusted for the effects of inflation

are real variables; inflation is a nominal variable.

If purchasing-power parity holds, a dollar will buy

as many goods in foreign countries as it does in the United States.

5)During the Great Depression in the early 1930s,

bank runs closed many banks.

The federal funds rate is the interest rate

banks charge each other for short-term loans of reserves.

U.S. tax laws allow taxpayers, in computing the amount of tax they owe, to use the real value, asopposed to the nominal value, of

both interest income and capital gains.

Treasury Bonds are

both liquid and a store of value.

The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?

buy bonds to increase reserves

9)If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

buying bonds. This buying would increase reserves.

When the Federal Reserve conducts open-market operations to increase the money supply, it

buys government bonds from the public.

If the U.S. has exports of $1.5 trillion and imports of $2.2 trillion, then the U.S.

buys more from overseas then it sells overseas; it has a trade deficit.

Which of the following is a store of value?

cash and stocks

Higher inflation

causes firms to change prices more frequently and makes relative prices more variable.

Demand deposits are a type of

checking account

When prisoners use cigarettes or some other good as money, cigarettes become

commodity money and function as a store of value.

23)If an economy used gold as money, its money would be

commodity money, but not fiat money.

When inflation causes relative-price variability,

consumer decisions are distorted, but markets are still able to efficiently allocate factors of production.

The ease with which an asset can be

converted into the economy's medium of exchange determines the liquidity of that asset.

If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve

creates dollars and uses them to purchase government bonds from the public.

If the economy unexpectedly went from inflation to deflation,

creditors would gain at the expense of debtors.

If inflation is higher than what was expected,

debtors pay a higher real interest rate than they had anticipated.

If the reserve ratio is 10 percent, banks do not hold excess reserves, people hold only deposits and no currency, then when the Fed sells $10 million worth of bonds to the public, bank reserves

decrease by $10 million and the money supply eventually decreases by $100 million.

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $65 million worth of bonds to the public, bank reserves

decrease by $65 million and the money supply eventually decreases by $433.33 million.

For a given real interest rate, a decrease in the inflation rate would

decrease the after-tax real interest rate and so decrease saving.

To increase the money supply, the Fed could

decrease the discount rate.

For a given real interest rate, an increase in inflation makes the after-tax real interest rate

decrease, which discourages savings.

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

decreases, so the value of money rises.

As the reserve ratio increases, the money multiplier

decreases.

Credit cards

defer payments

When prices are falling, economists say that there is

deflation.

24)Which of the following is included in both M1 and M2?

demand deposits

According to purchasing power parity, inflation in the U.S. causes the dollar to

depreciate relative to currencies of countries that have lower inflation rates.

Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation

does not change the real interest rate but raises the after tax real rate of interest.

An appreciation of the U.S. real exchange rate induces U.S. consumers to buy

fewer domestic goods and more foreign goods.

Relative-price variability is "automatic" when

firms change prices only once in a while.

High and unexpected inflation has a greater cost

for savers rather than borrowers.

An Italian company builds and operates a pasta factory in the United States. This is an example of Italian

foreign direct investment that increases Italian net capital outflow.

Net exports of a country are the value of

goods and services exported minus the value of goods and services imported.

The existence of money leads to

greater specialization and to a higher standard of living.

Fiat Money

has no intrinsic value.

7)You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency

has no intrinsic value. The exchange is not an example of barter.

Wealth is redistributed from debtors to creditors when inflation was expected to be

high and it turns out to be low.

If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves

increase by $20 million and the money supply eventually increases by $250 million.

In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have

increased both the money multiplier and the money supply.

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply

increased. The central bank could have reduced the size of this increase by selling bonds.

An open-market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

11)An open-market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money

increases, so the quantity of money demanded decreases.

Sheri, a U.S. citizen, builds and operates a bookstore in Spain. This action is an example of

investment for Sheri and U.S. foreign direct investment.

If an economy uses silver as money, then that economy's money

is commodity money.

A country's trade balance

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

money

is more efficient than barter. makes trades easier. allows greater specialization. All of the above are correct

Money

is more efficient than barter. makes trades easier. allows greater specialization. All of the above are correct.

A double coincidence of wants

is required when there is no item in an economy that is widely accepted in exchange for goods and services. is required in an economy that relies on barter. is a hindrance to the allocation of resources when it is required for trade. All of the above are correct

20)A double coincidence of wants

is required when there is no item in an economy that is widely accepted in exchange for goods and services. is required in an economy that relies on barter. is a hindrance to the allocation of resources when it is required for trade. All of the above are correct.

The Federal Reserve

is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks.

15)The reserve requirement is 4%, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 of bonds what happens to the money supply?

it decreases by $250,000

The reserve requirement is 4%, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 of bonds what happens to the money supply?

it decreases by $250,000

According to purchasing power parity which of the following would happen if a country raised its money supply growth rate?

its nominal exchange rate would fall

The Fed can directly protect a bank during a bank run by

lending reserves to the bank.

Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be. The real interest rate she pays is

lower then she had expected, and the real value of the loan is lower than she had expected.

The money supply increases when the Fed

lowers the discount rate. The increase will be larger the smaller the reserve ratio is.

You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate?

medium of exchange

12)Which of the following does the U.S. president appoint and the U.S. Senate confirm?

members of the Board of Governors but not the regional Federal Reserve Bank Presidents.

The price level rises if either

money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a fall in the value of money.

Which of the following items is included in M2?

money market mutual funds

When inflation rises, people tend to go to the bank

more often, giving rise to shoeleather costs.

Which of the following are U.S. taxpayers allowed to adjust for inflation for the purpose of income taxes?

neither interest income nor capital gains.

Other things the same, if a country saves less, then

net capital outflow falls, so net exports fall.

Other things the same, if a country saves more, then

net capital outflow rises, so net exports rise.

If the real exchange rate is greater than 1, then the

nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in the U.S. would buy more then enough foreign currency to buy the same good overseas.

In the U.S., taxes on capital gains are computed using

nominal gains. This is one way by which higher inflation discourages saving.

Economic variables whose values are measured in goods are called

nominal variables.

Which tool of monetary policy does the Federal Reserve use most often?

open-market operations

If a country has Y > C + I + G, then it has

positive net capital outflow and positive net exports.

The New York Federal Reserve Bank

president always gets to vote at the FOMC meetings. conducts open market transactions. is one of 12 regional Federal Reserve Banks. All the of above are correct.

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

quantity theory of money.

Governments may prefer an inflation tax to some other type of tax because the inflation tax

reduces inflation.

6)In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds,

reserves increase by $100 million and the money supply increases by more than $100 million.

The value of money rises as the price level

rises, because the number of dollars needed to buy a representative basket of goods rises.

Mark, a U.S. citizen, buys stock in a British Shipping company. This purchase is an example of

saving for Mark and U.S. foreign portfolio investment.

To decrease the money supply, the Fed could

sell government bonds. increase the discount rate. increase the reserve requirement. All of the above are correct

The money supply decreases if the Fed

sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

A decrease in the money supply might indicate that the Fed had

sold bonds in an attempt to increase the federal funds rate.

Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?

store of value

Figure 30-1 Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess

supply of money that is represented by the distance between points A and B.

Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?

the FOMC

A problem that the Fed faces when it attempts to control the money supply is that

the Fed does not control the amount of money that households choose to hold as deposits in banks.

If the money multiplier decreased from 20 to 12.5, then

the Fed increased the reserve ratio from 5 percent to 8 percent.

The agency responsible for regulating the money supply in the United States is

the Federal Reserve.

Menu costs refers to

the cost of more frequent price changes induced by higher inflation.

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

the demand for goods and services decreases. the economy's ability to produce goods and services increases. the equilibrium price level decreases. None of the above is correct

You are staying in London over the summer and you have a number of dollars with you. If the dollar depreciates relative to the British pound, then other things the same,

the dollar would buy fewer pounds. The depreciation would discourage you from buying as many British goods and services.

In recent years the Federal Open Market Committee has focused on a target for

the federal funds rate.

Today, bank runs are not a major problem for the U.S. banking system because

the federal government now guarantees the safety of deposits at most banks.

Net capital outflow measures

the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.

The discount rate is

the interest rate the Fed charges banks.

The velocity of money is

the money supply divided by nominal GDP.

According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?

the nominal exchange rate, but not the real exchange rate

According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

the price level and nominal wages

Figure 30-1 Refer to Figure 30-1. If the money supply is MS 2 and the value of money is 2, then

the quantity of money supplied is greater than the quantity demanded; the price level will rise.

If a dollar buys more potatoes in the U.S. than in France, then

the real exchange rate is less than 1; a profit might be made by buying potatoes in the U.S. and selling them in France.

Figure 30-1 Refer to Figure 30-1. If the current money supply is MS1, then

there is no excess supply or excess demand if the value of money is 2.

In an economy that relies upon barter,

there is no item in the economy that is widely accepted in exchange for goods and services.

One surprising thing about the U.S. money stock is that

there is so much currency per person.

10)Economists use the term "money" to refer to

those types of wealth that are regularly accepted by sellers in exchange for goods and services.

When we measure and record economic value, we use money as the

unit of account.

The measure of the money stock called M1 includes

wealth held by people in their checking accounts.