ECON 202 exam 3

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Suppose the Fed requires to hold 9% of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only requires reserves?

$27,000

If the reserve ratio is 10 percent, $1,400 of addition reserves can create up to

14,000 of new money

A central bank's setting (or altering) of the money supply is known as a.open-market operation. b.employment policy. c.monetary policy. d.interest rate policy.

C. monetary policy

All FED purchases and sales of a. corporate stocks and bonds b.government bonds are conducted at the New York Fed's trading desk. c.real estate and other real assets are conducted by the Federal Open Market Committee. d.All of the above are correct.

Government bonds are conducted at the New York Fed's trading desk

fractional-reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

Capital requirement

a government regulation specifying a minimum amount of bank capital

quantity theory of money

a theory asserting that the quantity of money available determines the prices level and that the growth rate in the quantity of money available determines the inflation rate

A reduction in the inflation rate would make relative prices a.less variable, making it more likely that resources will be allocated to their best use. b.more variable, making it less likely that resources will be allocated to their best use. c.less variable, making it less likely that resources will be allocated to their best use. d.more variable, making it more likely that resources will be allocated to their best use

a. less variable, making it more likely that resources will be allocated to their best use

Most economists believe the principle of monetary neutrality is a. mostly relevant in the long run b. irrelevant to both the short and long run c. mostly relevant to the short run d. relevant to both the short and long run

a. mostly relevant to the long run

Credit card limits are included in a. neither M1 nor M2 b. M2 but not M1 c. M1 but not M2 d. M1 and M2

a. neither M1 nor M2

Imagine an economy in which: (1) pieces of paper called yollars are the only thing that buyers give to sellers when they buy goods and services, so it would be common to use, say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so you might walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3) yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. In this economy, a.the yardstick is a unit of account but it cannot serve as a store of value. b.the yardstick is a medium of exchange but it cannot serve as a store of value, and the yollar is a unit of account. c. the yardstick is a medium of exchange but it cannot serve as a unit of account. d. the yollar is a unit of account, but it is not a medium of exchange and it is not a liquid asset.

a. the yardstick is a unit of account but it cannot serve as a store of value

Kaitlyn purchased one share of Northwest Energy stock for $200; one year later she sold that share for $400. The inflation rate over the year was 50 percent. The tax rate on nominal capital gains is 50 percent. What was the tax on Kaitlyn's capital gain? a. 100 b.75 c.200 d.50

a.100

Central bank

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

medium of exchange

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

store of value

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

in a fractional-reserve banking system, an increase in reserve requirements a. increases the money multiplier, but decreases the money supply b. decreases both the money multiplier and the money supply c. increases both the money multiplier and the money supply d. decreases the money multiplier, but increases the money supply

b. decreases both thee money multiplier and the money supply

Fiat money a. is any close substitute for currency such as checkable deposits b. has no intrinsic value c. is a medium of exchange but not a unit of account d. is backed by gold

b. has no intrinsic value

A decrease in the money supply might indicate that the fed had a. sold bonds to increase banks reserve b. sold bonds to decrease bank reserves c. purchased bonds increase bank reserves d. purchased bonds to decrease banks reserves

b. sold bonds to decrease banks reserves

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans? a.they rise $220 million b.they fall $200 million c.they rise $200 million d.they fall $220 million

b. they fall 200 million

demand deposits

balances in bank accounts that depositors can access on demand by writing a check

if a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then a. the expected real interest rate is 1.33 percent b. the expected real interest rate is 12 percent c. the expected real interest rate is 1 percent d. the expected real interest rate is 7 percent

c. 1 percent

Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory, a.inflation averaged 11% per year and the real rate of return was 17%. b.inflation averaged 1% per year and the real rate of return was 6%. c.inflation averaged 5% per year and the real rate of return was 4%. d.inflation averaged 8% per year and the real rate of return was 9%.

c. inflation average 5% per year and the real rate of return was 4%

according to the principle of monetary neutrality, a decrease in the money supply will not change a. nominal GDP b. the price level c. unemployment d. all of the above

c. unemployment

During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits a.The decision to hold relatively more currency would make the money supply increase. The decision to hold relatively more excess reserves would make the money supply decrease. b.The decision to hold relatively more currency would make the money supply increase. The decision to hold relatively more excess reserves would make the money supply decrease. c.Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease. d.Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply increase.

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

Based on the quantity equation, if M=150, V=4, and y=300, then p= a. 8 b.0.5 c. 3 d. 2

d. 2

which of the following is an asset of a bank and a liability for its customers? a. neither the deposits of its customers nor the loans of its customers b. deposits of its customers but not the loans to its customers c. deposits of its customers and loans to its customers d. Loans to its customers but not the deposits of its customers

d. Loans to its customers but not the deposits if it customers

According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increases a. nominal interest rates and real interest rates, but does not change inflation b.inflation, nominal interest rates, and real interest rates. c.inflation and real interest rates, but does not change nominal interest rates. d.inflation and nominal interest rates, but does not change real interest rates.

d. inflation and nominal interest rates, but does not change real interest rates

In the US, taxes on capital gains are computed using a.real gains. This is one way by which higher inflation discourages saving. b.nominal gains. This is one way by which higher inflation encourages saving. c.real gains. This is one way by which higher inflation encourages saving d.nominal gains. This is one way by which higher inflation discourages saving.

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

Which of the following is not a central bank? a. the federal reserve b. the bank of japan c. the bank of England d. the bank of America

d. the bank of america

During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1.5 percent, but people had been expecting 1 percent . This difference between actual and expected inflation a.transferred wealth from the borrower to you and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected. b.transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected. c.transferred wealth from you to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected. d.transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected

d. transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected

reserves

deposits that banks have received but not loaned out

A bank has a 20 percent reserve requirement, $8,000 in loans, and has loaned out all it can given the reserve requirement

it has 10,000 in deposits

If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $1,000

it will be able to make a new loans up to a maximum of $880

The cost of changing price tags and price listings are known as

menu costs

commodity money

money that takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value that is used as money because of government decree no intrinsic value

reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits

money multiplier

the amount of money the banking system generates with each dollar of reserves

Federal Reserve (Fed)

the central bank of the United States

liquidity

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

quantity equation

the equation MxV=PxY, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services

reserve ratio

the fraction of deposits that banks hold as reserves

discount rate

the interest rate on the loans that the Fed makes to banks

federal funds rate

the interest rate which banks make overnight loans to one another

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

currency

the paper bills and coins in the hands of the public

in 2010 the u.s. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then

the price level would rise, so the value of money would fall

monetary neutrality

the proposition that changes in the money supply do not affect real variables

open-market operations

the purchase and sale of U.S. government bonds by the Fed.

money supply

the quantity of money available in the economy

velocity of money

the rate at which money changes hands

leverage ratio

the ratio of assets to bank capital

shoe-leather cost

the resources wasted when inflation encourages people to reduce their money holdings

inflation tax

the revenue the government raises by creating money

money

the set of assets in an economy that people regularly use to buy goods and services from other people

monetary policy

the setting of the money supply by policymakers in the central bank

classical dichotomy

the theoretical separation of nominal and real variable

leverage

the use of borrowed money to supplement existing funds for purposes of investment

unit of account

the yardstick people use to post prices and record debts

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

real variables

variables measures in physical units

suppose that M is fixed. according to the quantity equation, which of the following would make the price level higher

y falls or v rises


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