ch.15-21

A bank which must hold 100 percent reserves opens in an economy that had no banks and a total initial money supply (currency) of $1,000. If customers deposit $87 into the bank, what is the value of the money supply?

$1,000 Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account with a check or debit card. Each deposit in a bank reduces currency, since the money will no longer be in the hands of the public, and increases the demand deposit portion of M1 by the same amount. Each withdrawal decreases the demand deposits of M1, but increases currency by the same amount. Therefore banks do not influence the money supply in a system of 100-percent-reserve banking. In this case, if a customer deposits $87 into her checking account, currency will decrease by $87 but at the same time demand deposits will increase by $87 leaving M1 unchanged. Therefore, the money supply does not change and remains at $1,000.

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level decreased from 147 to 140. What is Bertha's before-tax real capital gain?

$21. The inflation rate is 100 x ((140 - 147)/147) = -5%. Bertha paid $5 for five shares last year. Now, she sold them making 5 x $5 = $25, gaining $25 - $5 = $20. However, since the price level has decreased, Bertha is actually gaining more: $20 - ($20 x (-0.05)) = $21.

Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much did Bertha earn?

$242.5. Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Of this amount, 3% is lost to inflation, which means that Bertha earns only $250 x (1 - 0.03) = $242.5

During some year a country had $120 billion in domestic assets purchased by foreigners, had exports of $200 billion, and had imports of $70 billion. What was the value of foreign assets purchased by the country?

$250 billion With exports of $200 billion and imports of $70 billion, the country had net exports of $130 billion, so it had net capital outflow of $130 billion. Since net capital outflow is the difference between the value of foreign assets purchased by the country and the value of domestic assets purchased by foreigners, the value of foreign assets purchased by the country equals the value of domestic assets purchased by foreigners ($120 billion) plus net capital outflow ($130 billion), which is $250 billion.

If the reserve ratio is 20 percent, then $150 of new reserves can generate

$750 of new money in the economy. The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If the reserve ratio is 20 percent, the money multiplier is 1/0.2=5. Therefore, $150 in new reserves can generate 5 X $150 =$750.

The labor force participation rate is computed as 100 x

(the number of people employed + the number of people unemployed) divided by the adult noninstitutionalized population.

True or False: The Fed most often influences the money supply by changing reserve requirements for banks.

False The Fed most frequently influences the money supply using open market operations

Under what system do banks generally lend out the majority of the funds deposited?

Fractional reserve banking.

Which of the following describes how inflation is usually measured?

Percentage change in the consumer price index.

Which of the following would fit an economist's definition of "money"?

a $20 bill.

All else equal, which of the following will cause the money supply to fall?

banks decide to hold more excess reserves relative to deposits.

According to 2012 data for U.S. teenagers (ages 16-19) ______ had the highest unemployment rate and _______ had the lowest unemployment rate.

black males, white females.

Suppose there are a large number of teens who used to work or seek work who now no longer do either, but instead focus on school work to prepare for college and careers. Other things the same, this makes

both the number of people unemployed and the labor force fall.

The natural rate of unemployment includes

both unemployment created by job search and unemployment created by above equilibrium wages.

According to purchasing-power parity, if the price level in the U.S. rises more than in New Zealand, then which of the following falls?

the U.S. nominal exchange rate, but not the U.S. real exchange rate

The rate charged at the Fed's "discount window" is known as the

the discount rate.

The U.S. minimum-wage laws has a large effect on the employment of workers with some basic skills and experience.

False

The primary reason for unemployment in the U.S. is the minimum wage

False

About 25% of U.S. workers belong to unions.

False About 11% of workers belong to unions.

If a Starbucks Grande latte costs 3 Swiss francs in Switzerland and $4 in the United States, then purchasing-power parity implies the nominal exchange rate is how many Swiss francs per U.S. dollar?

0.75 If the exchange rate is less than this, it costs more U.S. dollars to buy a grande latte in Switzerland than in the U.S. Purchasing-power parity implies that the nominal exchange rate equals the ratio of foreign prices to domestic prices. In this case, this ratio is 3 Swiss francs/$4 = 0.75 francs per dollar. At this nominal exchange rate, $4 can buy a latte in the United States or, when converted to Swiss francs, buy a latte in Switzerland. If the exchange rate were less than 0.75, converting $4 into Swiss francs would get you less than 3 Swiss francs, so it would cost more dollars to buy a grande latte in Switzerland.

Spells of unemployment end with job seekers exiting the labor force about

1/2 of the time.

The real interest rate is 4%, inflation is 2%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?

2.5% The income tax treats this entire nominal interest of 4% + 2% = 6% as income, the government takes 25% of it, leaving an after-tax nominal interest rate of only 6% - (6% x 0.25) = 4.5%. The after-tax real interest rate is 4.5% - 2% = 2.5%.

Suppose that a basket of goods cost $100 in the U.S., and that taking $100 and converting it into Thai bhat would allow you to buy 3/4 of the same basket of goods in Thailand. The real exchange rate would be computed as how many Thai goods per U.S. goods?

3/4 The real exchange rate measures the ratio of how goods in one country can be converted to goods in another country. In this case, a basket of goods in the U.S. converts into ¾ of a basket of goods in Thailand, so the real exchange rate is ¾.

A typical American worker covered by unemployment insurance receives _____ percent of his former wages for up to ________ weeks.

50, 26

Unemployment generated by the existence of labor unions is frictional unemployment and so contributes to the natural rate of unemployment.

False

When inflation was expected to be high and it turns out to be low, wealth is redistributed from creditors to debtors.

False

If the real exchange rate between India and Thailand is 1 and purchasing-power parity holds, then 1 Indian rupee buys 1 Thai bhat.

False

In the U.S., people are required to pay taxes on real capital gains irrespective of their nominal capital gains.

False

Most economists believe unions are good for the economy as a whole.

False

People who report not being in the labor force but who, in fact, want to work but have given up trying to find a job after an unsuccessful search cause the reported unemployment rate to be higher than otherwise.

False

Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 2% but it actually turned to be 4%.

Her real interest rate was lower than expected, and the real value of the loan is lower than expected. Unexpected changes in prices redistribute wealth among debtors and creditors. Higher than expected inflation makes debtors (borrowers) better off at the expense of the creditors (lenders) because it diminishes the real value of the debt: Borrowers can repay the loan in dollars that are less valuable than they anticipated as the real interest rate is the difference between the nominal interest rate and the inflation rate.

Which of the following is true about the inflation tax in the United States?

It falls most heavily on those who hold a lot of currency but accounts for a small share of U.S. government revenue.

Sam quit his job because he wanted to move somewhere else. Amy just started looking for work after being out of the labor market for a couple of years. Mason was laid off because his employer's sales had fallen due to economic conditions. Who is currently eligible for unemployment insurance benefits?

Only Mason.

Why do people believe in the inflation fallacy?

People tend to forget that inflation in prices goes hand in hand with inflation in incomes.

The Bureau of Labor Statistics classifies some marginally attached workers as discouraged workers. What additional criteria has to be met for a marginally attached worker to be a discouraged worker?

She provides a job-market related reason for not looking for work. Marginally attached workers are persons who are currently not looking for work but are available for work and have looked for work sometime in the past (but more than four weeks ago). Discouraged workers are marginally attached workers who give a job-market related reason for not looking for work.

Which of the following explains why the supply curve for money is vertical?

The quantity of money supplied is fixed by the Federal Reserve.

Which of the following theories can explain both inflation and hyperinflation?

The quantity theory of money.

Refer to the Table. The required reserve ratio is 10 percent. Which of the following is true?

This banks reserve ratio is 20 percent. Its excess reserves are $1,000. The required reserve ratio is 10 percent, which means that of the $10,000 in deposits the bank is only required to hold $1,000 in reserves. Since it is now holding $2,000 in reserves the bank's excess reserves amount to $1,000 and its reserves ratio is $2,000/$10,000 = 20 percent.

Troy is looking for work after school, but everywhere he fills out an application, the managers say they always have a lot more applications than open positions. Ben has a business degree. Several companies have made him offers, but he thinks he might be able to find a job in a more desirable location.

Troy is structurally unemployed, and Ben is frictionally unemployed. Troy can't find work at the going wage indicating a surplus of workers created by above equilibrium wages, this is structural unemployment. Ben can find jobs, but is searching for a good match, this is frictional unemployment.

In the U.S., the income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation.

True

Most economists agree that eliminating unemployment insurance would decrease the amount of unemployment in the economy.

True

When inflation rises, the nominal interest rate rises, and people desire to hold less money

True With the high inflation rate, people do not have the luxury of holding cash as a store of value. Rather they have to quickly convert cash into goods or keep it in the bank to earn some interest. Either way, people will hold less money

True or False: When the Fed purchases government bonds the money supply increases and the federal funds rate decreases.

True If the Fed buys bonds, bank reserves increase and banks needs fewer overnight loans from each other to comply with reserve requirements. The fall in demand for these types of overnight loans leads to a decrease in the cost of these loans, or, in other words, a decrease in the federal funds rate. The increase in reserves from banks also allows for more loans to be made, which increases the money supply.

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 20 percent. If the Fed lowers the reserve requirement to 10 percent and at the same time buys $20 billion worth of bonds, then by how much does the money supply change?

Under these assumptions, if the banking system holds $200 billion in reserves, then a reserve requirement of 20 percent implies that the banking system has had $1,000 billion in deposits. If the fed lowers the reserve requirement to 10 percent, then banking system is only required to hold 0.1 X $1,000 billion = $100 billion in deposits, and can thus lend out the remaining $100 billion of the original $200 billion. Meanwhile, if the Fed buys $20 billion worth of bonds, this will result in another $20 billion in new money. The money multiplier is 1/0.1 = 10. This means the money supply will increase by 10 X ($100 billion + $20 billion) = $1,200 billion.

Which of the following is not correct

Union membership is very small in most European countries.

Which of the following does the Federal Reserve do?

act as a lender of last resort to banks

Which of the following is an example of an efficiency wage?

an above-equilibrium wage offered by a firm to attract a more talented pool of job applicants.

Other things the same, if the U.S. real exchange rate depreciates, U.S. net capital outflow

and U.S. net exports both increase. When the U.S. real exchange rate depreciates, U.S. goods become cheaper for foreigners, so U.S. exports increase. At the same time, foreign goods become more expensive for U.S. residents, so U.S. imports decrease. As a result, net exports increase, and when net exports increase, net capital outflow also increases.

Tony has just finished high school and started looking for his first job, but has not yet found one. Other things the same, when Tony starts looking for work the unemployment rate

and the labor-force participation rate both increase.

According to purchasing-power parity, if it took 5 Swedish kroner to buy a dollar today, but it took 4.75 kroner to buy it a year ago, then the dollar has

appreciated, indicating inflation was lower in the U.S. than in Sweden.

Unions

are cartels and they may balance a firm's power and so protect workers.

Incorrect Question 88 First Bank of Zogua, a fictional bank, has made a $1 million loan. This loan appears on what part of T-account of the First Bank of Zogua

assets.

In order to ensure banks can pay back depositors, Bank regulators impose

capital requirements.

The Fed conducts open market operations that cause bank withdrawals and lending to decrease. The Fed has

conducted open market sales.

One issue with using changes in U-3 as evidence of the health of the labor market is that an increase in the number of unemployed persons who become disabled will ____

decrease U-3, all else being equal, because they are not counted in the labor force.

Which of the following is not correct about the Fed?

the Federal Reserve Chair is appointed by the speaker of the house to a four-year term.

Suppose that in a country people lose confidence in the banking system and so hold relatively more currency and less deposits. As a result, bank reserves will

decrease and the money supply will eventually decrease. One issue with the Fed's ability to control the money supply is that it has little control over how much households choose to deposit in banks. For example, if the public loses confidence in the banking system and withdraws money from their bank accounts, choosing instead to hold more currency. Banking reserves fall, leading to fewer loans and less money created through fractional reserve banking. The result is a decrease in the money supply with no action on the part of the Fed.

The Fed changes the discount rate and, as a direct result, reserves have increased. The Fed has most likely

decreased the discount rate. The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed decreases the discount rate, banks have a stronger incentive to borrow more money from the Fed since the interest they have to pay back has decreased. This will lead to increased borrowing from the Fed, and the money borrowed will end up in reserves at other banks. This means, as the Fed decreases the discount rate, borrowing increases and reserves increase.

As the reserve ratio increases, the money multiplier

decreases.

Funds in an account where you can access by writing a check or through your debit card are best described as

demand deposits

Central banks are institutions

designed to oversee the banking system and regulate the quantity of money in the economy

Discouraged workers, as defined by the Bureau of Labor Statistics, are

excluded from both the number of unemployed and the labor force.

Since the 1940's U.S. union membership has

fallen. This decline should have reduced the natural rate of unemployment

Since the 1940's U.S. union membership has

fallen. Union membership is lower in the U.S. than Europe.

Suppose that consumers decide to ride buses more often and own fewer cars. Bus companies hire more drivers, while automobile companies lay off workers. The unemployment this creates is an example of

frictional unemployment created by sectoral shifts.

Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills is called

frictional unemployment.

Government-run employment agencies and public job training programs are intended primarily to reduce

frictional unemployment. Some economists claim that government can't do these things better than private firms and individuals.

The money supply increases if

households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.

One issue with using changes in U-3 as evidence of the health of the labor market is that an increase in the number of people working part-time who were working full-time (and would still like to work full-time) will ____

not change U-3, all else being equal, because part-time and full-time work are both counted as employed.

Refer to the Table. The required reserve ratio is 10 percent and First National Bank sells $200 of its short-term securities to the Federal Reserve. This action will initially

increase First National's reserves by $200. Its excess reserves are $1,200. The required reserve ratio is 10 percent, which means that of the $10,000 in deposits the bank is only required to hold $1,000 in reserves. Since it is now holding $2,000 in reserves the bank's excess reserves amount to $1,000 and its reserves ratio is $2,000/$10,000 = 20 percent. If the bank sells $200 of its short term securities, its reserves will increase by that same amount ($200). Since the additional reserves have not yet been loaned out, the bank's excess reserves increase by $200 from $1,000 to $1,200.

Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will

increase by more than $50,000. . If the Fed purchases $50,000 worth of government bonds from the public, the $50,000 of currency ends up in the hands of the public. When the public deposits this money into banks in the United States, bank reserves increase by $50,000. When these banks make loans with these new reserves, new money is created on top of the initial $50,000 increase. Therefore, the money supply increases by more than $50,000 in this case.

Suppose that coffehouse employees are not unionized. If they unionize, then the supply of labor in other sectors of the economy will

increase, reducing wages in industries that are not unionized.

The worker health version of the efficiency wage theory is

less relevant for explaining unemployment in developed countries than in less developed countries.

According to 2012 data on the U.S. population, which of the following was correct for the adult population of prime working age, ages 25-54? White females had a

lower unemployment rate than black females but a similar labor force participation rate.

If outsiders had more say in union contracts then it is likely that union wages would be

lower which would make structural unemployment lower. Outsiders are those who become unemployed when the union raises wages.

As inflation rises,

menu costs and shoeleather costs of inflation increase.

An Australian firm buys pineapples from Indonesia with Indonesian rupiah it got in exchange for Australian dollars. Indonesian residents then use these dollars to purchase wool from Australia. Which of the following increases?

neither Indonesia's net exports nor Indonesia's net capital outflow

Which of the following decrease when the Fed makes open market purchases?

neither currency nor reserves

According to purchasing-power parity, if the price of a basket of goods in the U.S. rose from $1,200 to $1,260 and the price of the same basket of goods rose from 11,000 Mexican pesos to 11,440 Mexican pesos in Mexico, then the

nominal exchange rate would depreciate. In this case, the price level has increased 5% in the United States and 4% in Mexico. When purchasing-power parity holds, changes in the price level between countries do not change the real exchange rate. Purchasing-power parity also means that the nominal exchange rate is equal to the price level in other countries divided by the price level in the United States, so if the price level in other countries rises by less than in the United States, the nominal exchange rate will fall (because the denominator is rising faster than the numerator), which is called depreciation.

Mary manages a data entry center. Workers sometimes play games on the internet, check their personal email, or go slow. According to efficiency wage theory to reduce this shirking Mary could

pay above equilibrium wages. This would raise unemployment.

The New York Federal Reserve Bank

president always gets to vote at the FOMC meetings.

Other things the same, according to purchasing-power parity, if over the next few years Nigeria has a lower money supply growth rate than South Africa, then

prices in Nigeria will rise by a smaller percentage than in South Africa. So, the Nigerian naira will appreciate against the South African rand. If Nigeria has a lower money supply growth rate than South Africa, prices in Nigeria will rise by a smaller percentage than in South Africa. If purchasing-power parity holds between South Africa and Nigeria, the nominal exchange rate between Nigerian naira and South African rand will equal the Nigerian price level divided by the South African price level. As a result, if the price level rises in Nigeria by a smaller percentage than in South Africa, the nominal exchange rate will decrease, meaning that the Nigerian naira will appreciate against the South African rand.

In response to the credit crunch in 2008 and 2009, the U.S. Treasury ____

put public funds into the banking system to increase the amount of bank capital.

Efficiency wages

raise structural unemployment.

Ben Bernanke was

reappointed Chair of the Board of Governors in 2009 by President Barack Obama.

If the minimum wage were currently above equilibrium, then a decrease in the minimum wage would

reduce structural unemployment. Above equilibrium wages create structural unemployment by creating a surplus in the labor market. If the minimum wage falls, the surplus will fall so unemployment will fall.

During the 1770s, the United States ____

relied heavily on the inflation tax.

Unionization in one industry causes wages to

rise in that industry causing labor supply to rise in industries that are not unionized.

Minimum wages create

structural unemployment if they create a surplus in the labor market.

People who are unemployed because wages are, for some reason, set above the level that brings labor supply and demand into equilibrium are best classified as

structurally unemployed.

In the U.S. minimum-wage laws create significant unemployment for

teenagers but not workers such as experienced plumbers.

Which of the following best describes what occurs under the Fed's Term Auction Facility?

the Fed auctions a set amount of funds, and the bank that offers to pay the highest rate for the funds will get to borrow from the Fed.

If the price of a good in the U.S. is $20 and the unit of foreign currency is the rupee, in which case is the real exchange rate 5/6?

the exchange rate is 50 rupees per dollar and the foreign price is 1200 rupees Since the real exchange rate is calculated as (Nominal exchange rate X Domestic price)/Foreign price, for the real exchange rate to equal 5/6 when the domestic price is $20, the ratio of the nominal exchange rate to the foreign price must be (5/6)/20 = 5/120. An exchange rate of 50 rupees per dollar and a foreign price of 1200 rupees satisfies this ratio.

The interest rate at which banks lend reserves to each other overnight is known as

the federal funds rate

When a union bargains successfully with employers, in that industry,

the quantity of labor demanded falls and the quantity of labor supplied rises.

One cost of deflation is ____

the redistribution of wealth toward creditors and away from debtors.

Unemployment data are collected

through a regular survey of about 60,000 households.

Suppose a bank is operating with a leverage rate of 20. A 4 percent increase in the value of assets

will result in a 80 percent increase in owner's equity. A leverage ratio of 20 means that when the value of assets rises by 4 percent, owner's equity will increase by 20 X 4 percent = 80 percent.

Over the past several decades in the United States, the labor force participation rate(s) of

women has increased while that of men has decreased.

In which of the following situations is a firm most likely to see the largest benefits by paying above equilibrium wages?

worker turnover is high, the cost of hiring and training new workers is high.