Macro Practice Test 3 + Study Guide
Value of money
1/P (P=price level)
Population number/number of employed/labor force participation rate are all given to you. Calculate the unemployment rate.
100 x (# of unemployed/labor force=u-rate 100 x (labor force/adult population)=labor force participation rate
Suppose some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were employed?
28.5 million
If M = 10,000, P = 2, and Y= 20,000, then velocity =
4. Velocity will rise if money changes hands more frequently.
The exchange rate is 1.5 Bosnian markas per U.S. dollar. The price of a refrigerator in Bosnia is 1,200 markas while in the U.S. it is $1,000. The real exchange rate is
5/4
If the exchange rate is 5 units of Peruvian currency per dollar and a hotel room in Lima costs 300 units of Peruvian currency, then how many dollars do yo u need to get a room?
60 and your purchase will increase Peru's net exports.
The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the
Fisher Effect.
John is a stockbroker. He has had several job offers, but he has turned them down because he thinks he can find a firm that better matches his tastes and skills. Curtis has looked for work as an accountant for some time. While the demand for accountants doesn't appear to be falling, there seems to be more people applying than jobs available.
John is frictionally unemployed, and Curtis is structurally unemployed.
Fiat money
Money without intrinsic value, used as money because of govt decree
Real exchange rate
P = domestic price P^ = foreign price (in foreign currency) e = nominal exchange rate, i.e., foreign currency per unit of domestic currency (e x P)/P ^
In the open-economy macroeconomic model, the market for loanable funds identity can be written as
S = I + NCO
Capital requirement
a govt regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts.
In a system of 100-percent-reserve banking,
banks do not influence the supply of money.
When the government uses bonds..
buy bonds from the public to increase money supply, sell bonds to public to decrease money supply
According to the quantity theory of money, a 2 percent increase in the money supply...
causes the price level to rise by 2 percent.
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.
Other things the same if reserve requirements are decreased, the reserve ratio
decreases, the money multiplier increases, and the money supply increases.
Net capital outflow (NCO)
domestic residents' purchases of foreign assets minus foreigners' purchases of domestic assets =net exports
Purchasing Power Parity (PPP)
e x P = P^ e= P^/P
An increase in real interest rates in the United States
encourages both U.S. and foreign residents to buy U.S. assets.
Currently, U.S. currency is...
fiat money with no intrinsic value.
Reserve ratio, R
fraction of deposits that banks hold as reserves, total reserves as a percentage of total deposits
From time to time, the demand for workers has risen in one region of the United States and fallen in another. This illustrates...
frictional unemployment created by sectoral shifts.
Net exports of a country are the value of
goods and services exported minus the value of goods and services imported.
Cyclical unemployment...
has a different explanation than does the natural rate of unemployment, refers to the year to year fluctuation in unemployment around an economy's natural rate of unemployment, and is closely associated with short-run ups and downs of economic activity.
Nominal interest rate
inflation rate + real interest rate Fisher effect: nominal interest rate adjusts one-for-one with the inflation rate
You put money in the bank. The increase in the dollar value of your savings
is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable.
Net capital outflow is always equal to...
is always equal to net exports.
If a country has a trade surplus
it has positive net exports and positive net capital outflow.
Which of the following is not an explanation for the existence of structural unemployment?
job search
Wealth is redistributed from creditors to debtors when inflation was expected to be
low and it turns out to be high.
Money supply
money multiplier x bank reserves
If net exports are positive, then
net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.
According to the classical dichotomy, which of the following is affected by monetary factors?
nominal wages the price level nominal GDP
structural unemployment
occurs when there are fewer jobs than workers, usually longer-term (minimum wage laws, unions, efficiency wages)
frictional unemployment
occurs when workers spend time searching for the jobs that best suit their skills and tastes, short-term for most workers
The supply curve of money is vertical because the quantity of money supplied increases
only if the central bank increases the money supply.
If a country has positive net capital outflows, then its net exports are
positive, and its saving is larger than its domestic investment.
inflation tax
printing money causes inflation, which is like a tax on everyone who holds money.
If the real exchange rate between the U.S. and Argentina is 1, then
purchasing power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.
The nominal exchange rate is the
rate at which a person can trade the currency of one country for another.
Reserve requirements
regulations on the minimum amount of reserves banks must hold against deposits.
Commodity money
takes the form of a commodity with intrinsic value
Which of the following lists two things that both increase the money supply?
the Fed buys bonds and lowers the discount rate.
The discount rate is the interest rate that
the Fed charges banks for loans.
Money multiplier
the amount of money the banking system generates with each dollar of reserves (1/R)
Which of the following is not an explanation for the existence of unemployment in the long run?
the business cycle
Menu costs
the costs of changing prices, Printing new menus, mailing new catalogs, etc.
According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then
the price level would rise by 5 percent and real GDP would be unchanged.
Monetary neutrality
the proposition that changes in the money supply do not affect real variables
Net capital outflow equals
the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreign residents
Velocity of money
the rate at which money changes hands P x Y = nominal GDP = (price level) x (real GDP) M = money supply V = velocity Velocity formula: V= (P x Y)/M
Nominal exchange rate
the rate at which one country's currency trades for another
Shoeleather costs
the resources wasted when inflation encourages people to reduce their money holdings, Includes the time and transactions costs of more frequent bank withdrawals
The inflation tax refers to
the revenue a government creates by printing money.
Classical dichotomy
the theoretical separation of nominal and real variables
The shoeleather cost of inflation refers to
the waste of resources used to maintain lower money holdings.
If saving is greater than domestic investment, then
there is a trade surplus and Y > C + I + G.
Suppose that the real return from operating factories in Ghana rises relative to the real rate of return in the United States. Other things the same,
this will increases U.S. net capital outflow and decrease Ghanan net capital outflow.
Today, bank runs are
uncommon because of FDIC deposit insurance.
The Federal Reserve
was created in 1913, has more than one specific job to perform, is an example of a central bank.
Suppose that banks desire to hold no excess reserves, the reserve requirement is 5 percent, and a bank receives a new deposit of $1,000. This bank
will increase its required reserves by $50, will initially see its total reserves increase by $1,000, will be able to make a new loan of $950.
In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by the public...
would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.
