ECON 2203 Exam 3
If the reserve ratio is 8 percent, then an additional $1,000 of reserves can increase the money supply by as much as
$12,500
If a country has net exports of $8 billion and sold $40 billion of goods and services abroad, then it has
$40 billion of exports and $32 billion of imports.
A bank's reserve ratio is 5 percent and the bank has $1,000 in deposits. Its reserves amount to
$50
In an open economy, gross domestic product equals $1,950 billion, government expenditure equals $280 billion, investment equals $500, and net capital outflow equals $280 billion. What is consumption expenditure? Question 8 options:
$890 billion
The nominal interest rate is 4%, the inflation rate is 1% and the tax rate is 20%. Given U.S. tax laws, how is after-tax real return computed?
.04(1 - .20) - .01
If the exchange rate is .70 euro per dollar, the price of an MP3 player in Paris is 150 euros and the price of an MP3 player in the U.S. is $150, then what is the real exchange rate?
.70 French MP3 players per U.S. MP3 player.
The nominal interest rate is 3.5 percent and the inflation rate is 2 percent. What is the real interest rate?
1.5%
If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?
2.25%
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 $400 million in deposits and $355 million dollars in loans. Given this information you find that the reserve requirement must be
35/400
The nominal interest rate is 6 percent and the real interest rate is 2 percent. What is the inflation rate?
4 percent
Over the last 70 years, the average annual U.S. inflation rate was about
4 percent, implying that prices increased about 16-fold.
At any meeting of the Federal Open Market Committee, that committee's voting members consist of
5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors.
If the price level increased from 120 to 126, then what was the inflation rate?
5 percent
If M = 5,000, P = 3, and Y = 10,000, what is velocity?
6
If M = 3,000, P = 2, and Y = 12,000, what is velocity?
8
Suppose each good costs $5 per unit and Megan holds $40. What is the real value of the money she holds?
8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.
To decrease the money supply, the Fed could
All of the above are correct
During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits.
Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease.
Given the following information, what are the values of M1 and M2? Small time deposits$650 billion Demand deposits and other checkable deposits$300 billion Savings deposits$750 billion Money market mutual funds$600 billion Traveler's checks$25 billion Large time deposits$600 billion Currency$100 billion Miscellaneous categories in M2$25 billion
M1 = $425 billion, M2 = $2, 450 billion.
If a country has a trade deficit then
S < I and Y < C + I + G.
On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.
The $80 is a nominal variable. The quantity of shoes is a real variable.
The agency responsible for regulating the money supply in the United States is
The Federal Reserve
The discount rate is
The interest rate the fed charges banks
An open economy's GDP is always given by
Y = C + I + G + NX.
The law of one price states that
a good must sell at the same price at all locations.
You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced
a nominal gain, but no real gain, and you paid taxes on the nominal gain.
You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced
a nominal loss and a real gain.
The term hyperinflation refers to
a period of very high inflation
Most financial assets other than money function as
a store of value, but not a unit of account nor a medium of exchange
The classical dichotomy argues that changes in the money supply
affect nominal variables, but not real variables.
When deciding how much to save, people care most about
after-tax real interest rates.
A double coincidence of wants
all of the above are correct
Evidence concerning hyperinflation indicates a clear link between the money supply and the price level for
all of the above are correct
money
all of the above are correct
If the exchange rate changes from 148 Kazakhstan tenge per dollar to 155 Kazakhstan tenge per dollar, the dollar has Question 6 options:
appreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods.
bank runs
are a problem because banks only hold a fraction of deposits as reserves.
The members of the Federal Reserve's Board of Governors
are appointed by the president of the U.S. and confirmed by the U.S. Senate.
Interest rates adjusted for the effects of inflation
are real variables; inflation is a nominal variable.
If purchasing-power parity holds, a dollar will buy
as many goods in foreign countries as it does in the United States.
During the Great Depression in the early 1930s,
bank runs closed many banks
The federal funds rate is the interest rate
banks charge each other for short-term loans of reserves.
Treasure bonds are
both liquid and a store of value.
If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by
buying bonds. This buying would increase reserves.
When the Federal Reserve conducts open-market operations to increase the money supply, it
buys government bonds from the public
If the U.S. has exports of $1.5 trillion and imports of $2.2 trillion, then the U.S.
buys more from overseas then it sells overseas; it has a trade deficit.
Which of the following is a store of value?
cash and stocks
When prisoners use cigarettes or some other good as money, cigarettes become
commodity money and function as a store of value.
If an economy used gold as money, its money would be
commodity money but not fiat money
When inflation causes relative-price variability,
consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired.
If inflation is higher than what was expected,
creditors receive a lower real interest rate than they had anticipated.
If the economy unexpectedly went from inflation to deflation,
creditors would gain at the expense of debtors.
If the reserve ratio is 10 percent, banks do not hold excess reserves, people hold only deposits and no currency, then when the Fed sells $10 million worth of bonds to the public, bank reserves
decrease by $10 million and the money supply eventually decreases by $100 million.
If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $65 million worth of bonds to the public, bank reserves
decrease by $65 million and the money supply eventually decreases by $433.33 million.
As the reserve ratio increases, the money multiplier
decreases
When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money
decreases, so the quantity of money demanded increases.
When the price level falls, the number of dollars needed to buy a representative basket of goods
decreases, so the value of money rises
credit cards
defer payments
When prices are falling, economists say that there is
deflation
Which of the following is included in both M1 and M2?
demand deposits
According to purchasing power parity, inflation in the U.S. causes the dollar to
depreciate relative to currencies of countries that have lower inflation rates.
Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation
does not change the real interest rate but reduces the after-tax real rate of interest.
During a hyperinflation the real domestic value of a country's currency
falls and its nominal exchange rate depreciates.
The value of money rises as the price level
falls, because the number of dollars needed to buy a representative basket of goods falls.
An appreciation of the U.S. real exchange rate induces U.S. consumers to buy
fewer domestic goods and more foreign goods.
Relative-price variability is "automatic" when
firms change prices only once in a while.
High and unexpected inflation has a greater cost
for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation.
An Italian company builds and operates a pasta factory in the United States. This is an example of Italian
foreign direct investment that increases Italian net capital outflow.
The existence of money leads to
greater specialization and to a higher standard of living.
fiat money
has no intrinsic value
You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency
has no intrinsic value. The exchange is not an example of barter.
Wealth is redistributed from debtors to creditors when inflation was expected to be
high and it turns out to be low.
If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves
increase by $20 million and the money supply eventually increases by $250 million.
For a given real interest rate, a decrease in the inflation rate would
increase the after-tax real interest rate and so increase saving.
an open market purchase
increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.
Sheri, a U.S. citizen, builds and operates a bookstore in Spain. This action is an example of
investment for Sheri and U.S. foreign direct investment.
Governments may prefer an inflation tax to some other type of tax because the inflation tax
is easier to impose
A country's trade balance
is greater than zero only if exports are greater than imports
The federal reserve
is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks.
The reserve requirement is 4%, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 of bonds what happens to the money supply?
it decreases by $250,000
The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 20 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?
it falls by $45 billion
According to purchasing power parity which of the following would happen if a country raised its money supply growth rate?
its nominal exchange rate would fall
A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800 euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has purchasing-power parity with the U.S.?
japan but not belgium
The Fed can directly protect a bank during a bank run by
lending reserves to the bank
The price level rises if either
money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money.
Which of the following items is included in M2? Question 2 options:
money market mutual funds
When inflation rises, people tend to go to the bank
more often, giving rise to shoeleather costs.
U.S. tax laws allow taxpayers, in computing the amount of tax they owe, to use the real value, as opposed to the nominal value, of
neither interest income nor capital gains.
Which of the following are U.S. taxpayers allowed to adjust for inflation for the purpose of income taxes?
neither interest income nor capital gains.
Other things the same, if a country saves less, then
net capital outflow falls, so net exports fall.
Other things the same, if a country saves more, then
net capital outflow rises, so net exports rise.
If the real exchange rate is greater than 1, then the
nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in the U.S. would buy more then enough foreign currency to buy the same good overseas.
In the U.S., taxes on capital gains are computed using
nominal gains. This is one way by which higher inflation discourages saving.
IMAGE When the money supply curve shifts from MS1 to MS2,
none of the above are correct
Which tool of monetary policy does the Federal Reserve use most often?
open market operations
If a country has Y > C + I + G, then it has
positive net capital outflow and positive net exports.
To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the
quantity theory of money.
Economic variables whose values are measured in goods are called
real variables.
In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds
reserves increase by $100 million and the money supply increases by more than $100 million.
Mark, a U.S. citizen, buys stock in a British Shipping company. This purchase is an example of
saving for Mark and U.S. foreign portfolio investment.
The money supply decreases if the Fed
sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
A decrease in the money supply might indicate that the Fed had
sold bonds in an attempt to increase the federal funds rate.
Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess
supply of money that is represented by the distance between points A and B.
Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?
the FOMC
A problem that the Fed faces when it attempts to control the money supply is that
the Fed does not control the amount of money that households choose to hold as deposits in banks.
If the money multiplier decreased from 20 to 12.5, then
the Fed increased the reserve ratio from 5 percent to 8 percent.
The supply of money increases when
the Fed makes open-market purchases.
The velocity of money is
the average number of times per year a dollar is spent.
The president of each regional Federal Reserve Bank is appointed by
the board of directors of that regional Federal Reserve Bank.
Menu costs refers to
the cost of more frequent price changes induced by higher inflation.
You are staying in London over the summer and you have a number of dollars with you. If the dollar depreciates relative to the British pound, then other things the same,
the dollar would buy fewer pounds. The depreciation would discourage you from buying as many British goods and services.
In recent years the Federal Open Market Committee has focused on a target for
the federal funds rate
According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?
the nominal exchange rate, but not the real exchange rate
According to the classical dichotomy, when the money supply doubles, which of the following also doubles?
the price level and nominal wages
Money demand depends on
the price level and the interest rate.
When the money market is drawn with the value of money on the vertical axis, as the price level increases which of the following increases?
the quantity of money demanded but not the quantity of money supplied
Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then
the quantity of money supplied is greater than the quantity demanded; the price level will rise.
Refer to Figure 30-1. If the current money supply is MS1, then
there is no excess supply or excess demand if the value of money is 2.
in a company that relies upon barter,
there is no item in the economy that is widely accepted in exchange for goods and services.
Economists use the term "money" to refer to
those types of wealth that are regularly accepted by sellers in exchange for goods and services.
In order to maintain stable prices, a central bank must
tightly control the money supply
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
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.
When we measure and record economic value, we use money as the
unit of account
Nominal exchange rates
vary substantially over time.
The measure of the money stock called M1 includes
wealth held by people in their checking accounts.
