ECN 102 Exam 2

Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?

$5,000

Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?

0

true or false. Inflation makes it harder for people to pay off their debts.

false

true or false. Over the long run, there is a weak relationship between a country's inflation rate and nominal exchange rate to the dollar.

false

true or false. When there is a trade surplus, there are capital inflows.

false

true or false. the leverage ratio describes how many dollars of bank capital for each dollar of assets

false

true or false: Cryptocuriencies serve none of the functions of money

false

Commodity money

has intrinsic value

Most economists believe that the classical dichotomy and money neutrality holds

in the long run but not the short run

If the Fed purchases government bonds, which of the following has only actions that would each counter the effect of government bond purchases on the money supply?

increase reserve requirements, increase the discount rate

Holding all else constant, an increase in US real interest rates will

increase the real exchange rate.

store of value

item that people can use to transfer purchasing power from the present to the future.

A US mutual fund sells Canadian stocks and buys American stocks. Holding all else constant, in the market for foreign-currency exchange

supply of dollars falls

. Inflation causes tax distortions because

taxes are set in nominal terms, leading to different real returns based on tax rates.

To insulate the Federal Reserve from political pressure,

the Board of Governors are appointed to fourteen-year terms.

All else constant, as more international students from China choose to go to universities in Europe instead of the United States, what would happen

the Chinese currency would appreciate against the dollar and depreciate against the euro

True or false. Money velocity has been stable with the introduction of new forms of electronic payment.

true

true or false According to the Fisher effect, a decrease in the inflation rate would decrease nominal interest rates.

true

true or false. Abhijit Banerjee, Esther Duflo, and Michael Kremer won the 2019 Sveriges Riksbank in Economic Sciences in Memory of Alfred Nobel.

true

true or false. An example of capital outflow for the US would be a US bank buying a German government bond.

true

true or false. The "twin" deficits that the US economy has experienced in recent history are the federal budget deficit and trade deficit

true

true or fasle. For a closed economy, national savings always equals domestic investment.

true

The Board of Governors of the Federal Reserve System consists of

up to seven members appointed by the president.

As the Fed increases the money supply,

value of money decrease and the price level increase

If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements,

we cannot be certain what will happen to the money supply.

If the reserve ratio is 25 percent, the value of the money multiplier is

4

monetary policy

Decisions by policymakers concerning the money supply constitute

fiat money

Money without intrinsic value is called

Which of the following would cause both the equilibrium interest rate and quantity of loanable funds increase?

Net capital outflows increase

Which of the following is not a function of money?

Protection against inflation

money supply

The Fed's second job is to control the quantity of money that is made available in the economy

When more American students choose to go on spring break in Mexico instead of Florida

US net exports fall and the US trade deficit becomes further from balanced trade

Which of the following statements is true?

a. The FOMC meets once per year to discuss monetary policy. b. When the Fed sells government bonds, the money supply decreases. c. The primary tool of monetary policy is the reserve requirement. d. The Federal Reserve was created in 1871 in response to the Civil War. b. When the Fed sells government bonds, the money supply decreases.

In open economy, what is the effect of a government budget deficit?

all of the above

central bank

an institution designed to oversee the banking system and regulate the quantity of money.

medium of exchnage

an item that buyers give to sellers when they purchase goods and services.

demand deposit

balances in bank accounts that depositors can access on demand simply by writing a check or swiping a debit card at a store.

For which reason(s) might purchasing-power parity not hold?

both of the above

Which of the following is true about a country with a trade surplus?

capital outflows are greater than capital inflows

The M1 money supply is composed of

currency, demand deposits, traveler's checks, and other checkable accounts.

Liquidity

ease with which an asset can be converted into the economy's medium of exchange

If the Fed increases reserve requirements, the money supply will increase. True or false

false

true or false As banks create money with new loans, they do create wealth.

false

true or false. For a country with a trade deficit, domestic saving is greater than domestic investment

false

true or false. If the government budget deficit decreases, then the foreign-exchange price of the dollar will rise.

false

Trade policies, like import tariffs and export quotas, affect

specific firms and industries.

The inflation tax refers to

the revenue the government creates by printing money

unit of account

yardstick people use to post prices and record debts.

Suppose the reserve requirement in a fractional reserve banking system is 20%. If you took $100 of currency and deposited it in the bank, how much additional money could be created?

$400

An investment bank before the financial crisis had $100 billion in assets and $90 billion in debt. What would be the value of bank capital if the value of assets falls to $95 billion?

$5 billion

Which of the following statements about a bank's balance sheet is true?

Assets minus liabilities equals owner's equity or capital.

What item from McDonald's does the weekly magazine, The Economist, use to test purchasing-power parity?

Big mac

Which of the following policy combinations would consistently work to increase the money supply?

buy government bonds, decrease reserve requirements, decrease the discount rate

There is currently political unrest in Chile, we would expect

Chilean net capital outflow to rise so Chilean interest rates rise.

commodity money

When money takes the form of a commodity with intrinsic value, it is called

What is the primary difference between the M2 and M1 measures of the money supply?

assets in m1 are more liquid than m2

Using the quantity theory of money, if the rate of real GDP growth is greater than the rate of money growth, then there would be

deflation

Required reserves of banks are a fixed percentage of their

deposits

In 2012, for each $1 you could get 2 Brazilian Reais. Today, for each $1 you can get 4 Brazilian Reais. Everything else constant, the Brazilian Reais has

depreciated and can buy fewer US goods and services.

intrinsic value

means that the item would have value even if it were not used as money.

Sometimes economists label "medium of deferred payment" as a fourth function of money, but it is really just a combination of which two functions:

medium of exchange, store of value

Assume the economy produces only oranges. There is a money supply of $6000. The economy produces 6000 oranges that sell for $3 each. What is nominal GDP and money velocity?

nominal GDP=#18,000, velocity=3

The purchase and sale of government bonds by the central bank refers to

open market operations

The Fed's tools of monetary control are

open-market operations, lending to banks, reserve requirements, and paying interest on reserves.

An example of fiat money is

paper dollars

Which of the following policy actions by the Fed is likely to increase the money supply?

reducing reserve requirements

federal reserve

the central bank of the United States

The discount rate is

the interest rate the Fed charges on loans to banks.

If banks increase their holdings of excess reserves

the money multiplier and the money supply decrease.

A decrease in the reserve requirement causes

the money multiplier to rise.

Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank,

the money supply is unaffected

currency

the paper bills and coins in the hands of the public

If the exchange rate is 8 Moroccan dirhams per US $, a crate of oranges costs 400 dirhams in Morocco, and a crate of oranges costs $45 in Florida, then

the real exchange rate is less than one and there is an arbitrage opportunity to buy oranges in Florida and sell in Morocco