ECON 102: Final Exam

If a bank has just enough reserves to meet the required reserve ratio of 25 percent, and receives a deposit of $800, it has initially experienced a 1.) $600 increase in excess reserves and a $200 increase in required reserves. 2.) $800 increase in excess reserves and no increase in required reserves. 3.) $800 increase in required reserves and no increase in excess reserves. 4.) $200 increase in excess reserves and a $600 increase in required reserves.

1.) $600 increase in excess reserves and a $200 increase in required reserves; it only needs to keep $200 in required reserves ($800 x .25), so the rest goes to excess in the short-term.

Which of the following describes monetary neutrality? 1.) Changes in the supply of money affect nominal variables but not real ones. 2.) Changes in the money supply affect only real variables but have no effect on nominal variables. 3.) Changes in the supply of money affect real variables in the short-run but not in the long-run. 4.) Changes in the money supply immediately affect the economy's ability to supply goods and services.

1.) Changes in the supply of money affect nominal variables but not real ones.

Which of the following is true about the inflation tax in the United States? 1.) It falls most heavily on those who hold a lot of currency but accounts for a small share of U.S. government revenue. 2.) It falls most heavily on those who hold a lot of currency and account for a large share of U.S. government revenue. 3.) It falls most heavily on those who hold little of currency and account for a large share of U.S. government revenue. 4.) It falls most heavily on those who hold little of currency but accounts for a small share of U.S. government revenue.

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

Which of the following explains why the demand curve for money is downward sloping? 1.) People want to hold a larger quantity of money when each dollar buys less. 2.) The quantity of money supplied is fixed by the consumer demand. 3.) People want to hold a larger quantity of money when each dollar buys more. 4.) The quantity of money supplied is fixed by the Federal Reserve.

1.) People want to hold a larger quantity of money when each dollar buys less. When each dollar buys fewer items, money is worth more because it's value is higher.

Which of the following will make banks want to hold more reserves at the Fed, causing the money multiplier to decrease? 1.) The Fed increases the interest rate on bank deposits held at the Fed. 2.) The Fed does not allow banks to keep reserves at the Fed. 3.) The Fed decreases the interest rate on bank deposits held at the Fed. 4.) The Fed keeps the interest rate on bank deposits held at the Fed constant.

1.) The Fed increases the interest rate on bank deposits held at the Fed because they will get more back on their returns, and therefore, want to put their money there.

Which of the following describes the effect of a decrease in the money supply? 1.) The money supply curve shifts to the left, the price level decreases causing the value of money to increase. 2.) The money supply curve shifts to the right, the price level decreases causing the value of money to increase. 3.) The money supply curve shifts to the right, the price level increases causing the value of money to decrease. 4.) The money supply curve shifts to the left, the price level increases causing the value of money to decrease.

1.) The money supply curve shifts to the left, the price level decreases causing the value of money to increase. Money is more scarce, so it's worth more and you need less of it to buy things.

Which of the following describes the effect of an increase in the money supply? 1.) The money supply curve shifts to the right, the price level increases causing the value of money to decrease. 2.) The money supply curve shifts to the right, the price level decreases causing the value of money to increase. 3.) The money supply curve shifts to the left, the price level decreases causing the value of money to increase. 4.) The money supply curve shifts to the left, the price level increases causing the value of money to decrease.

1.) The money supply curve shifts to the right, the price level increases causing the value of money to decrease; the value of money is on the left axis and goes from low-high.

The principle of monetary neutrality implies that 1.) an increase in the money supply will increase the price level, but not real GDP. 2.) a decrease in the money supply will increase the price level, but not real GDP. 3.) an increase in the money supply will increase the price level and real GDP. 4.) an increase in the money supply will decrease the price level, but not real GDP.

1.) an increase in the money supply will increase the price level, but not real GDP. A nominal value can only affect other nominal variables.

Banks can borrow money from the Fed's discount window. Alternatively banks can 1.) borrow money from the Fed's Term Auction Facility 2.) borrow money from foreign governments at the Fed's Term Auction Facility 3.) borrow money from commercial banks at the Fed's Term Auction Facility 4.) participate in auctions at the Fed's discount window.

1.) borrow money from the Fed's Term Auction Facility

An increase in the capital stock shifts 1.) both short-run and long-run aggregate-supply curve to the right. 2.) long-run aggregate-supply curve to the right but does not shift short-run aggregate-supply curve. 3.) short-run aggregate-supply curve to the left and long-run aggregate-supply curve to the right. 4.) short-run aggregate-supply curve to the right but does not shift long-run aggregate-supply curve.

1.) both short-run and long-run aggregate-supply curve to the right.

The aggregate-demand curve shows that an increase in the price level 1.) decreases the real value of goods and services demanded in the economy. 2.) increases the real value of goods and services demanded in the economy. 3.) increases the dollar value of goods and services demanded in the economy. 4.) decreases the dollar value of goods and services demanded in the economy.

1.) decreases the real value of goods and services demanded in the economy

In a system of fractional-reserve banking, the amount of money in the economy depends on the behavior of ____ 1.) depositors and bankers, which prevents the Fed from perfectly controlling the money supply. 2.) only depositors. 3.) only bankers. 4.) depositors and bankers but does not prevent the Fed from perfectly controlling the money supply.

1.) depositors and bankers, which prevents the Fed from perfectly controlling the money supply.

Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will 1.) increase by more than $50,000. 2.) decrease by less than $50,000 3.) increase by exactly $50,000. 4.) increase by less than $50,000.

1.) increase by more than $50,000 because the money multiplier will increase it.

When the price level rises less than expected, a firm with a sticky price will sell its output at a price that is 1.) less than the firm desires and decrease its production. 2.) less than the firm desires and increase its production. 3.) more than the firm desires and increase its production. 4.) more than the firm desires and decrease its production.

1.) less than the firm desires and decrease its production; people expected it to rise more and so set higher prices, but will decrease its production because of declining sales

If wages are sticky, then a smaller than expected increase in the price level 1.) raises the real costs of production, so the aggregate quantity of goods and services declines. 2.) reduces the real costs of production, so the short-run aggregate supply curve shifts right. 3.) reduces the real costs of production, so the aggregate quantity of goods and services rises. 4.) raises the real costs of production, so the short-run aggregate supply curve shifts left.

1.) raises the real costs of production, so the aggregate quantity of goods and services declines; because the costs of production are raised, so they will be producing fewer items.

Ben Bernanke was 1.) reappointed Chair of the Board of Governors in 2009 by President Barack Obama. 2.) appointed Chair of the Board of Governors in 1991 by President George H.W. Bush 3.) appointed Chair of the Board of Governors in 1995 by President Bill Clinton 4.) reappointed Chair of the Board of Governors in 1985 by President Ronald Reagan

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

During the 1770s, the United States ____ 1.) relied heavily on the inflation tax. 2.) started the income tax. 3.) did not need to raise tax revenues because the budget was in surplus. 4.) created the Internal Revenue Service.

1.) relied heavily on the inflation tax.

Which of the following is NOT correct about the Fed? 1.) the Federal Reserve Chair is appointed by the speaker of the house to a four-year term. 2.) The Board of Governors has 7 members 3.) members of the Board of Governors serve 14-year terms. 4.) the Federal Reserve has 12 regional banks.

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

As the price level increases, 1.) the value of money decreases. 2.) the value of money does not change but the quantity of money decreases. 3.) the value of money decreases but the quantity of money does not change. 4.) the quantity of money decreases.

1.) the value of money decreases; so people must have more money to buy goods and services.

As the price level decreases, 1.) the value of money increases. 2.) the value of money decreases. 3.) the value of money increases but the quantity of money must not change. 4.)the quantity of money increases.

1.) the value of money increases; so people need less money to buy goods and services

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.) $913 2.) $1,000 3.) $1,087 4.) $87

2.) $1,000; the deposit is subtracted from the currency, but is still in the money supply. There is no new money created because it is an 100% reserve banking system.

Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits? 1.) $500 billion 2.) $950 billion 3.) $105 billion 4.) $5 billion

2.) $950 billion. (all reserves - excess reserves = required reserves; required reserves/reserve requirement = deposits).

Which of the following shifts short-run aggregate-supply curve to the right? 1.) an increase in the actual price level 2.) a decrease in price expectations 3.) an increase in the price of oil 4.) a decrease in the money supply

2.) a decrease in price expectations brings up quantity of goods and services

In the short run, an increase in the money supply will likely cause 1.) an increase in the unemployment rate and a decrease in inflation. 2.) a decrease in the unemployment rate and an increase in inflation. 3.) an increase in the unemployment rate and an increase in inflation. 4.) a decrease in the unemployment rate and a decrease in inflation.

2.) a decrease in the unemployment rate and an increase in inflation; more money leads to more inflation. There is a short-term tradeoff between inflation and unemployment, so as inflation increases, unemployment decreases in the short run.

The Central Bank of Wiknam decreases the money supply at the same time the Parliament of Wiknam repeals a new investment tax credit. Which of these policies shifts aggregate-demand curve to the left? 1.) the investment tax credit repeal but not the money supply decrease 2.) both the money supply decrease and the investment tax credit repeal 3.) neither the investment tax credit repeal nor the money supply decrease 4.) the money supply decrease but not the investment tax credit repeal

2.) both the money supply decrease and the investment tax credit repeal; the taxes would mean less investment and the money supply would be smaller, so the price level would be higher because money is more scarce.

In order to ensure banks can pay back depositors, Bank regulators impose 1.) loans. 2.) capital requirements. 3.) leverage. 4.) short-term securities.

2.) capital requirements require banks to hold a certain amount of capital.

The best description of the economy in the long run comes from which macroeconomic theory? 1.) aggregate supply 2.) classical 3.) aggregate demand 4.) Keynesian

2.) classical

In a 100-percent-reserve banking system, if an individual deposits money in their checking account, currency would 1.) decrease, while demand deposits would increase by less and M1 would decrease. 2.) decrease, but demand deposits would increase by the same amount and M1 would not change. 3.) increase, but demand deposits would decrease by the same amount and M1 would not change. 4.) increase, while demand deposits would decrease by less and M1 would increase.

2.) decrease, but demand deposits would increase by the same amount and M1 would not change; currency decreases because there is less in circulation. M1 doesn't change because demand deposits are a part of M1.

The money supply increases if 1.) households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans. 2.) households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans. 3.) households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans. 4.) households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans.

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

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 1.) increase First National's loans by $200. Its reserves decrease by $200. 2.) increase First National's reserves by $200. Its excess reserves are $1,200. 3.) decrease First National's reserves by 200. Its excess reserves are $0. 4.) decrease First National's loans by $200. Its reserves increase by $200.

2.) increase First National's reserves by $200. Its excess reserves are $1,200; the extra money goes to the reserves as excess

Which of the following decrease when the Fed makes open market purchases? 1.) currency and reserves 2.) neither currency nor reserves 3.) currency but not reserves 4.) reserves but not currency

2.) neither currency nor reserves because currency increases and reserves increase people are putting their money in the bank.

From 2001 to 2005 there was a dramatic change in the price of houses. This change made people feel wealthier and shifted aggregate demand curve to the right. The price of houses must have 1.) fallen. 2.) risen. 3.) remained constant. 4.) the price of houses has no effect on wealth and aggregate demand.

2.) risen; prices of houses rise, so price levels have risen. Because price levels are high, people felt wealthier and therefore, the aggregate demand curved to the right.

The long-run effect of a decrease in household consumption is to lower 1.) both real output and the price level. 2.) the price level and leave real output unchanged. 3.) real output and leave the price level unchanged. 4.) real output and raise the price level.

2.) the price level and leave real output unchanged because the AD will shift left and the SRAS curve will shift left, meaning lower prices

The manager of the bank where you work tells you that the bank has $500 million in deposits and $350 million dollars in loans. If the reserve requirement is 5 percent, how much is the bank holding in excess reserves? 1.) $125 million 2.) $50 million 3.) $150 million 4.) $25 million

3.) $150 million. $500 mil deposits - $350 mil loans = $150 reserves. 0.05 reserve requirement x $150 mil reserves = $25 mil requires reserves. $150 mil reserves - $25 mil required = $125 mil excess

A bank's reserve ratio is 20 percent and the bank has $1,000 in deposits. Its reserves amount to 1.) $2,000. 2.) $50. 3.) $200. 4.) $20.

3.) $200 because their reserve ratio is 20%; .20 x $1,000 = $200

Below are pairs of GDP growth rates and unemployment rates. Economists would not be shocked to see most of these pairs in the U.S. Which pair of GDP growth rates and unemployment rates is not realistic? 1.) -1 percent; 8 percent 2.) 10 percent; 5 percent 3.) -2 percent; 2 percent 4.) 3 percent; 6 percent

3.) -2 percent; 2 percent because the average unemployment rate is 5%.

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 $200 million in deposits and $165 million in loans. Given this information you find that the reserve requirement must be 1.) 35/200. 2.) 10/200. 3.) 25/200. 4.) 15/200.

3.) 25/200 because deposits - loans = $35 million in reserves. Reserves - excess reserves = $25 million. So, is it $25 million/$200 million.

If businesses in general decide that they have underbuilt and so now have too little capital, their response to this would initially shift 1.) aggregate-supply curve to the right. 2.) aggregate-supply curve to the left. 3.) aggregate-demand curve to the right. 4.) aggregate-demand curve to the left.

3.) aggregate-demand curve to the right because they'd be building more

Which of the following increases in response to the interest-rate effect from a decrease in the price level? 1.) investment but not consumption 2.) neither investment nor consumption 3.) both investment and consumption 4.) consumption but not investment

3.) both investment and consumption because interest rates fall, so people borrow more and can therefore buy more

Suppose the economy is in long-run equilibrium. If the government decreases its expenditures, eventually the decrease in aggregate demand causes price expectations to 1.) rise. This rise in price expectations shifts the short-run aggregate-supply curve to the right. 2.) fall. This fall in price expectations shifts the short-run aggregate-supply curve to the right. 3.) fall. This fall in price expectations shifts the short-run aggregate-supply curve to the left. 4.) rise. This rise in price expectations shifts the short-run aggregate-supply curve to the left.

3.) fall. This fall in price expectations shifts the short-run aggregate-supply curve to the left; decrease AD causes prices to fall, which causes SRAS to eventually shift left.

In a 100-percent-reserve banking system, if an individual withdraws money from their checking account, currency would 1.) decrease, while demand deposits would increase by less and M1 would decrease. 2.) decrease, but demand deposits would increase by the same amount and M1 would not change. 3.) increase, but demand deposits would decrease by the same amount and M1 would not change. 4.) increase, while demand deposits would decrease by less and M1 would increase.

3.) increase, but demand deposits would decrease by the same amount and M1 would not change; currency would increase because there is more money in circulation, but M1 would not increase because the money switched from demand deposit to currency, which are both categories in M1.

If the economy is initially at long-run equilibrium and aggregate demand expands, then in the long run the price level 1.) and output are higher than in the original long-run equilibrium. 2.) and output are lower than in the original long-run equilibrium. 3.) is higher and output is the same as the original long-run equilibrium. 4.) is the same and output is lower than in the original long-run equilibrium.

3.) is higher and output is the same as the original long-run equilibrium.

Other things the same, if the money supply rises by 5% and people were expecting it to rise by 2%, then some firms have 1.) lower than desired prices, which depresses their sales. 2.) higher than desired prices, which depresses their sales. 3.) lower than desired prices, which increases their sales. 4.) higher than desired prices, which increases their sales.

3.) lower than desired prices, which increases their sales; they have more demand

The sticky-wage theory of the short-run aggregate-supply curve says that when the price level is higher than expected, 1.) relative to prices wages are lower and employment falls. 2.) relative to prices wages are higher and employment falls. 3.) relative to prices wages are lower and employment rises. 4.) relative to prices wages are higher and employment rises.

3.) relative to prices wages are lower and employment rises; the prices are too low and firms are reducing output, so they will hire people.

The interest rate at which banks lend reserves to each other overnight is known as 1.) the prime rate. 2.) the LIBOR. 3.) the federal funds rate. 4.) the discount rate.

3.) the federal funds rate.

Imagine two economies that are identical except that, for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $1,500 billion. It follows that 1.) neither the price level or real GDP is higher in country B. 2.) real GDP, but not the price level, is higher in country B. 3.) the price level, but not real GDP is higher in country B. 4.) real GDP and the price level are higher in country B.

3.) the price level, but not real GDP is higher in country B because the economies are equal, so they have the same real GDP.

Suppose the nominal interest rate is 6% and the inflation rate is 2%. What is the real interest rate? 4% 3% 2%. 8%

4% because real interest rate = nominate interest rate - inflation rate.

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? 1.) It rises by $110 billion. 2.) It decreases by $100 billion. 3.) It rises by $2,400 billion. 4.) It rises by $1,200 billion.

4.) It rises by $1,200 billion. $200B reserves/.20 reserve requirement = $1T deposits. $1T deposits x .10 new requirement = $100B reserves. Money multiplier is 10, 10 x (OMP of $20B + $100B reserves) = $1,200B.

Which of the following would cause prices and real GDP to fall in the short run? 1.) short-run aggregate-supply curve shifts to the right 2.) short-run aggregate-supply curve shifts to the left 3.) aggregate-demand curve shifts to the right 4.) aggregate-demand curve shifts to the left

4.) aggregate-demand curve shifts to the left

Which of the following shifts the short-run but not the long-run aggregate-supply curve left? 1.) an appreciation of the dollar 2.) a decrease in the expected price level 3.) a decrease in how much people want to consume 4.) an increase in the expected price level

4.) an increase in the expected price level because it reduces the quantity of goods/services supplied in the short-run.

Suppose that there is a decrease in the costs of production that shifts the short-run aggregate-supply curve right. If there is no policy response, then eventually 1.) because unemployment is low, wages will be bid up and short-run aggregate-supply curve will shift right. 2.) because unemployment is high, wages will be bid up and short-run aggregate-supply curve will shift right. 3.) because unemployment is high, wages will be bid down and short-run aggregate-supply curve will shift right. 4.) because unemployment is low, wages will be bid up and short-run aggregate-supply curve will shift left.

4.) because unemployment is low, wages will be bid up and short-run aggregate-supply curve will shift left; the shift is more than the natural rate of unemployment, so wages will increase to raise the costs of production and shift the SRAS left

If the Federal Reserve announces it will be decreasing the money supply through its monetary policy tools, it tells us the Federal Reserve is 1.) hoping to stimulate the demand for goods and services. 2.) attempting to decrease the unemployment rate. 3.) concerned that the economy is not growing quickly enough. 4.) concerned about inflation.

4.) concerned about inflation; an decrease in the money supply would lead to decreased inflation

In the context of the aggregate-demand curve, when the price level increases, households increase their holdings of money, interest rates increase, and spending on investment goods decreases because of the ________ effect. 1.) wealth 2.) exchange-rate 3.) net-export 4.) interest-rate

4.) interest-rate

When analyzing the economy as a whole, ________ substitution from one market to another is impossible. 1.) aggregate 2.) macroeconomic 3.) externality 4.) microeconomic

4.) microeconomic because it wouldn't be the economy as a whole.

The Fed has decreased the money supply through open market operations. Which of the following has occurred? 1.) open market sales, and bank reserves increase. 2.) open market purchases and bank reserves decrease. 3.) open market purchases, and bank reserves increase. 4.) open market sales, and bank reserves decrease.

4.) open market sales, and bank reserves decrease because bank reserves decrease during a sale.

Because the price level does not affect the long-run determinants of real GDP, the long-run aggregate-supply curve is upward-sloping. True False

False because it's vertical.

True or False: The Federal Open Market Committee (FOMC) is responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system.

False; the Fed monitors each bank's financial condition and facilitates bank transactions by clearing checks. Banks carry out Fed's tasks of regulating banks and ensuring the health of the financial system.

An increase in the value of money decreases the price of goods and services measured in terms of money. True False

True because 1/P decreases P.

Aggregate-demand curve shifts to the left if the money supply decreases. True/False

True because adding more money raises the interest rate, which stimulates consumption and interest.