ECON 3351 EXAM 2

financial intermediation

The process by which resources are allocated from those individuals who wish to save some of their income for future consumption to those individuals and firms who wish to borrow to buy investment goods for future production.

raises the money multiplier and the money supply

What does a decrease in the reserve-deposit ratio do to the money multiplier and money supply?

reserve-deposit ratio

rr is the fraction of deposits that banks hold in reserve. It is determined by the business policies of banks and the laws regulating banks

5%

If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then the number of effective workers is growing approximately at a rate of: -2 percent. -3 percent. -5 percent. -6 percent.

the level of real money balances depends on the expected rate of inflation

What does this equation state: M/P = L(r+Epi,Y)?

current growth in money supply and its expected future growth

What is inflation driven by?

steady state

a condition in which key variables are not changing

money demand function

a function showing the determinants of the demand for real money balances

money multiplier

the amount of money available usually as determined by the central bank and the banking system

monetary policy

the central bank's choice regarding the supply of money

menu costs

the cost of changing a price

Fisher equation

the equation stating that the nominal interest rate is the sum of the real interest rate and expected inflation

discount rate

the interest rate that the fed charges when it makes loans to banks

term auction facility

the monetary policy procedure used by the Federal Reserve, in which commercial banks anonymously bid to obtain loans being made available by the Fed as a way to expand reserves in the banking system

Fisher effect

the one-for-one influence of expected inflation on the nominal interest rate

monetary neutrality

the property that a change in the money supply does not influence real variables

real money balances

the quantity of money expressed in terms of the quantity of goods and services it can buy; the quantity of money divided by the price level (M/P)

income velocity of money

the ratio of national income, as measured by GDP, to the money supply

leverage ratio

the ratio of the bank's total assets to bank capital

transactions velocity of money

the ratio of the dollar value of all transactions to the money supply

ex post real interest rate

the real interest rate actually realized; the nominal interest rate minus actual inflation

ex ante real interest rate

the real interest rate anticipated when a loan is made; the nominal interest rate minus expected inflation

real interest rate

the return to saving and the cost of borrowing after adjustment for inflation

nominal interest rate

the return to saving and the cost of borrowing without adjustment for inflation

seigniorage

the revenue raised by the government through the creation of money; also called the inflation tax

simple money demand function

(M/P)^d = kY

money

the stock of assets that can be readily used to make transactions

larger capital stock and a higher level of output in the long run.

A higher saving rate leads to a: -higher rate of economic growth in both the short run and the long run. -higher rate of economic growth only in the long run. -higher rate of economic growth in the short run but a decline in the long run. -larger capital stock and a higher level of output in the long run.

capital requirement

A minimum amount of bank capital mandated by regulators

Solow growth Model

A model showing how saving, population growth, and technological progress determine the level of and growth in the standard of living.

100 percent reserve banking

A system in which banks keep all deposits on reserve

efficiency of labor

A variable in the Solow growth model that measures the health, education, skills, and knowledge of the labor force.

labor-augmenting technological progress

Advances in productive capability that raise the efficiency of labor.

way to display wealth

All of the following are considered major functions of money except as a: -medium of exchange. -way to display wealth. -unit of account. -store of value.

decreases the steady-state level of capital per worker

An increase in the rate of population growth with no change in the saving rate: -increases the steady-state level of capital per worker. -decreases the steady-state level of capital per worker. -does not affect the steady-state level of capital per worker. -decreases the rate of output growth in the short run.

have a lower level of income per worker than countries with low population growth

Analysis of population growth around the world concludes that countries with high population growth tend to: -have high income per worker. -have a lower level of income per worker than countries with low population growth. -have the same standard of living as other parts of the world. -tend to be the high-income-producing nations of the world.

demand deposits

Assets that are held in banks and can be used on demand to make transactions, such as checking accounts.

country A's capital-labor ratio will be 4, whereas country B's will be 16

Assume that two countries both have the per-worker production function y = k1/2, neither has population growth or technological progress, depreciation is 5 percent of capital in both countries, and country A saves 10 percent of output whereas country B saves 20 percent. If country A starts out with a capital-labor ratio of 4 and country B starts out with a capital-labor ratio of 2, in the long run: -both country A and country B will have capital-labor ratios of 4. -both country A and country B will have capital-labor ratios of 16. -country A's capital-labor ratio will be 4, whereas country B's will be 16. -country A's capital-labor ratio will be 16, whereas country B's will be 4.

a higher; the same

Assume that two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state the country with the higher saving rate will have ______ level of output per person and ______ rate of growth of output per worker compared to the country with the lower saving rate. -the same; the same -the same; a higher -a higher; the same -a higher; a higher

V is large and k is small

Describe k and V in terms of V = 1/k when people want to hold a little bit of money

V is small and k is large

Describe k and V in terms of V = 1/k when people want to hold a lot of money

private return to research is less than the social return to research

Empirical results justify substantial government subsidies to research based on the finding that the: -private return to research is greater than the social return to research. -private return to research is approximately equal to the social return to research. -private return to research is less than the social return to research. -private return to research is positive, but the social return to research is negative.

high saving rates lead to high levels of capital per worker

Examination of recent data for many countries shows that countries with high saving rates generally have high levels of output per person because: -high saving rates mean permanently higher growth rates of output. -high saving rates lead to high levels of capital per worker. -countries with high levels of output per worker can afford to save a lot. -countries with large amounts of natural resources have both high output levels and high saving rates.

the same level of output per person as before

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that output will grow and that the new steady state will approach: -a higher level of output per person than before. -the same level of output per person as before. -a lower level of output per person than before. -the Golden Rule level of output per person.

190

If the capital stock equals 200 units in year 1 and the depreciation rate is 5 percent per year, then in year 2, assuming no new or replacement investment, the capital stock would equal _____ units. -210 -200 -195 -190

will be at the same level as in the steady state of the high capital economy

If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock: -will be at a lower level than in the steady state of the high capital economy. -will be at a higher level than in the steady state of the high capital economy. -will be at the same level as in the steady state of the high capital economy. -will be proportional to the ratio of the capital stocks in the two economies.

will be at a lower level than in the steady state of the high-saving economy

If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate: -will be at a lower level than in the steady state of the high-saving economy. -will be at a higher level than in the steady state of the high-saving economy. -will be at the same level as in the steady state of the high-saving economy. -will grow at a slower rate than in the high-saving economy.

sf (k) / (d + n + g).

In a steady-state economy with a saving rate s, population growth n, depreciation rate d, and labor-augmenting technological progress g, the formula for the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f (k*)), is -sf (k) / (d + n + g). -s / ((f (k))(d + n + g)). -f (k) / ((s)(d + n + g)). -(s - f (k)) / (d + n + g).

regardless of the starting level of capital

In the Solow growth model of Chapter 8, the economy ends up with a steady-state level of capital: -only if it starts from a level of capital below the steady-state level. -only if it starts from a level of capital above the steady-state level. -only if it starts from a steady-state level of capital. -regardless of the starting level of capital.

plus consumption

In the Solow growth model the demand for goods equals investment: -minus depreciation. -plus saving. -plus consumption. -plus depreciation.

production function; saving rate

In the Solow growth model, for any given capital stock, the ______ determines how much output the economy produces, and the ______ determines the allocation of output between consumption and investment. -saving rate; production function -depreciation rate; population growth rate -production function; saving rate -population growth rate; saving rate

increase; increase

In the Solow growth model, if investment exceeds depreciation, the capital stock will ______, and output will ______ until the steady state is attained. -increase; increase -increase; decrease -decrease; decrease -decrease; increase

saving

In the Solow growth model, investment equals: -output. -consumption. -the marginal product of capital. -saving.

zero, the rate of technological progress

In the Solow growth model, the steady-state growth rate of output per effective worker is ______, and the steady-state growth rate of output per actual worker is ______. -the sum of the rate of technological progress plus the rate of population growth; zero -zero; the rate of technological progress -zero; zero -the rate of technological progress; the rate of population growth

capital per worker is constant

In the Solow growth model, the steady-state occurs when: -capital per worker is constant. -the saving rate equals the depreciation rate. -output per worker equals consumption per worker. -consumption per worker is maximized.

The Federal Reserve

In the United States, monetary policy is conducted by: -the president. -the Congress. -the Federal Reserve. -the Treasury Department.

money

Macroeconomists call assets used to make transactions: -real income. -nominal income. -money. -consumption.

endogenous growth theory

Models of economic growth that try to explain the rate of technological change.

fiat money

Money that is not intrinsically useful and is valued only because it is used as money

money can be converted into goods and services

Money's liquidity refers to the ease with which: -coins can be melted down. -illegally obtained money can be laundered. -loans can be floated. -money can be converted into goods and services.

running a budget deficit

Other things being equal, all of the following government policies are likely to increase national saving except: -decreasing taxes on savings accounts. -running a budget deficit. -running a budget surplus. -retiring part of the national debt.

hold money to transfer purchasing power into the future

People use money as a store of value when they: -hold money to transfer purchasing power into the future. -use money as a measure of economic transactions. -use money to buy goods and services. -hold money to gain power and esteem.

use money as a measure of economic transactions

People use money as a unit of account when they: -hold money to transfer purchasing power into the future. -use money as a measure of economic transactions. -use money to buy goods and services. -hold money to gain power and esteem.

technology shocks are an important source of short-run economic fluctuations

Prescott interpreted fluctuations in the Solow residual as evidence that: -technology shocks are an important source of short-run economic fluctuations. -the Solow growth model does not converge to a steady-state equilibrium. -endogenous growth models are better explanations of growth than the Solow model. -the marginal product of labor fluctuates more than the marginal product of capital.

reserve requirements

Regulations imposed on banks by the central bank that specify a minimum reserve-deposit ratio

increase until the new steady state is reached

Starting from a steady-state situation, if the saving rate increases, capital per worker will: -increase and continue to increase unabated. -increase until the new steady state is reached. -decrease until the new steady state is reached. -decrease and continue to decrease unabated.

how saving, population growth, and technological change affect output over time

The Solow growth model describes: -how output is determined at a fixed point in time. -how output is determined with fixed amounts of capital and labor. -how saving, population growth, and technological change affect output over time. -the static allocation, production, and distribution of the economy's output.

capital and labor

The Solow residual measures the portion of output growth that cannot be explained by growth in: -capital and labor. -technology. -the money supply. -the saving rate.

money supply

The amount of money available, usually as determined by the central bank and the banking system.

Labor-augmenting technological progress

The assumption that technological progress increases the efficiency of labor is called: -endogenous technological progress. -the efficiency-wage model of economic growth. -labor-augmenting technological progress. -the Golden Rule model of economic growth.

Federal Reserve

The central bank in the United States is the: -Bank of America. -U.S. Treasury. -U.S. National Bank. -Federal Reserve.

interest on reserves

The central bank's policy of paying banks an interest rate for the deposits that they hold as reserves.

constant proportion of income

The consumption function in the Solow model assumes that society saves a: -constant proportion of income. -smaller proportion of income as it becomes richer. -larger proportion of income as it becomes richer. -larger proportion of income when the interest rate is higher.

shoeleather cost

The cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank.

quantity theory of money

The doctrine emphasizing that changes in the quantity of money lead to changes in nominal expenditure.

depends on the knowledge, health and skills of labor

The efficiency of labor: -is the marginal product of labor. -is the rate of growth of the labor force. -depends on the knowledge, health, and skills of labor. -equals output per worker.

quantity equation

The identity stating that the product of the money supply and the velocity of money equals nominal expenditure (MV = PY); coupled with the assumption of stable velocity, an explanation of nominal expenditure called the quantity theory of money.

central bank

The institution responsible for the conduct of monetary policy, such as the Federal Reserve in the United States.

reserves

The money that banks have received from depositors but have not used to make loans.

0

The steady-state level of capital occurs when the change in the capital stock per worker (Dk) equals: -0. -the saving rate. -the depreciation rate. -the population growth rate.

significant determinants of the rate of economic growth in a country

The type of legal system and the level of corruption in a country have been found to be: -unrelated to the rate of economic growth in a country. -significant determinants of the rate of economic growth in a country. -important topics for political discussion, but not economic explanations of growth. -important variables explaining the Golden Rule level of capital.

buys government bonds

To increase the money supply, the Federal Reserve: -buys government bonds. -sells government bonds. -buys corporate stocks. -sells corporate stocks.

increase by the same percentage

What does an increase in the monetary base do to the money supply?

weighted average of the current money supply and the money supply expected to prevail in the future

What does the price level depend on?

gold standard

a monetary system in which gold serves as money or in which all money is convertible into gold at a fixed rate

fractional reserve banking

a system in which banks keep only some of their deposits on reserve

currency-deposit ratio

cr is the amount of currency C people hold as a fraction of their holdings of demand deposits D. It reflects the preferences of households about the form of money they wish to hold

investment

expenditure on new plant and equipment and it causes the capital stock to rise

commodity money

money that is intrinsically useful and would be valued even if it did not serve as money

excess reserves

reserves held by banks above the amount mandated by reserve requirements

golden rule

the savings rate in the solow growth model that leads to the steady state in which consumption per worker is maximized

high-powered money

the sum of currency and bank reserves; also called the monetary base

currency

the sum of outstanding paper money and coins

classical dichotomy

the theoretical separation of nominal and real variables

monetary base

the total number of dollars held by the public as currency C and by the banks as reserves R. It is directly controlled by the Federal reserve

leverage

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

depreciation

the wearing out of old capital due to aging and use and it causes the capital stock to fall

raises the money multiplier and the money supply

what does a decrease in the currency-deposit ratio do to the money multiplier and money supply?

lender of last resort

when the fed lends to a bank that is having trouble obtaining funds from elsewhere