Econ Exam 3

Consider the following information about a closed economy: GDP is $1,000 million, taxes are $50 million, consumption is $850 million, and government spending is $100 million. Calculate the following variables for this economy: private Savings =

$100 million

Consider the following information about a closed economy: GDP is $1,000 million, taxes are $50 million, consumption is $850 million, and government spending is $100 million. Calculate the following variables for this economy: National saving =

$50 million

Consider the following information about a closed economy: GDP is $1,000 million, taxes are $50 million, consumption is $850 million, and government spending is $100 million. Calculate the following variables for this economy: Public Savings =

$50 million

Consider the following information about a closed economy: GDP is $1,000 million, taxes are $50 million, consumption is $850 million, and government spending is $100 million. Calculate the following variables for this economy: investment =

$50 million

Suppose government spending was $3.80 trillion, tax revenue was $4.50 trillion, GDP was $14.12 trillion, and total consumer spending was $10.50 trillion. a. If the economy has no exports or imports, what was the national savings?

-0.18 trillion

In 2018, U.S. government spending was $3.90 trillion, tax revenue was $4.50 trillion, GDP was $14.02 trillion, and total consumer spending was $10.75 trillion. If the economy has no exports or imports, what was the national savings in 2018? How much was public savings? How much was private savings? a. If the economy has no exports or imports, what was the national savings in 2018?

-0.60 ± 0.05 trillion

Suppose government spending was $3.80 trillion, tax revenue was $4.50 trillion, GDP was $14.12 trillion, and total consumer spending was $10.50 trillion. c. How much was private savings?

-0.88 trillion

In 2018, U.S. government spending was $3.90 trillion, tax revenue was $4.50 trillion, GDP was $14.02 trillion, and total consumer spending was $10.75 trillion. If the economy has no exports or imports, what was the national savings in 2018? How much was public savings? How much was private savings? c. How much was private savings?

-1.20 ± 0.05 trillion

In 2018, U.S. government spending was $3.90 trillion, tax revenue was $4.50 trillion, GDP was $14.02 trillion, and total consumer spending was $10.75 trillion. If the economy has no exports or imports, what was the national savings in 2018? How much was public savings? How much was private savings? b. How much was public savings?

0.60 ± 0.05 trillion

Suppose government spending was $3.80 trillion, tax revenue was $4.50 trillion, GDP was $14.12 trillion, and total consumer spending was $10.50 trillion. b. How much was public savings?

0.70 trillion

You decide to take $400 out of your piggy bank at home and place it in the bank. If the reserve requirement is 2 percent, how much can your $400 increase the amount of money in the economy?

19,600

Consider a country where all money is currently held as cash and the money supply has a value of $5,000. A banking system is developed, and the residents of the country deposit the $5,000 of cash into the banking system and decide they no longer want to hold any cash. If the reserve ratio is equal to 10%, how much can the $5,000 increase the amount of money in the economy The money supply in the economy will be equal to $______ . The banking system has the ability to create $_____ of new money.

50,000 45,000

Assume that $1 million is deposited into a bank with a reserve requirement of 15 percent. a. What is the money supply as a result? b. What would change if the government decides to raise the reserve requirement to 30 percent?

6.67 ± 0.05 million Only $3.33 million in new money would be created.

You decide to take $500 out of your piggy bank at home and place it in the bank. If the reserve requirement is 5 percent, how much can your $500 increase the amount of money in the economy?

9,500

You decide to buy a new car instead of a used car because you are worried about the quality of the used car.

Adverse Selection

You sell your condominium because you fear there will be a large special assessment next year. There has been no official notice of an upcoming assessment.

Adverse Selection

Which of the following is true regarding the target inflation rate? A target inflation rate of zero is a good policy because this will keep prices stable. A positive target inflation rate increases the risk of deflation. A positive target inflation rate is preferred because the country will be able to better avoid a liquidity trap. A positive target inflation rate increases the likelihood that firms will need to reduce nominal wages when the demand for labor falls.

A positive target inflation rate is preferred because the country will be able to better avoid a liquidity trap.

Buyers and sellers have different information about the quality of a good

Adverse Selection

The owners of a company suspect there will be more competition from foreign producers in upcoming years. They have just issued new shares of stock in their company.

Adverse Selection

Transactions that would have been possible are not undertaken

Adverse Selection

"Listen," your buddy says. "Have you ever noticed that you can get the same type and size of tire for $30 cheaper in the next county over? I've got a way to make profits for years—we'll buy the tires where they're cheaper and bring them back here to sell." a. What is the term for the transaction your friend wants to make?

Arbitrage

When Collins Inc. uses the proceeds from issuing bonds to purchase equipment needed to start a new product line, this is an example of:

Investment

The U.S. government offers to pay investors a 3 percent return rate next year if they finance its debt today:

Bond

If a government encourages saving among its citizens, there will be:

Investment and Economic growth, a higher level of investment, lower interest rates

Determine whether the Federal Reserve would pursue contractionary monetary policy, expansionary monetary policy, or no change in policy in each of the following situations. a. Inflation is 10 percent, above its average of 3 percent in the last several years: (Click to select) b. The output gap is positive: (Click to select) c. Unemployment is at a record high: (Click to select) d. The economy is experiencing full employment: (Click to select) e. The economy is on the brink of deflation: (Click to select) f. A new technology causes output to surge: (Click to select)

Contractionary Monetary Policy Contractionary Monetary Policy Expansionary Monetary Policy No Change in Policy Expansionary Monetary Policy No Change in Policy

How is the risk-free interest rate determined?

It is equal to the interest rate on U.S. government debt.

The economy is in recession and the Federal Reserve wants to increase the money supply. Should it increase or decrease the following? a. Reserve requirements: (Click to select) Increase Decrease . b. The discount rate: (Click to select) Increase Decrease . c. Purchases of bonds in the open market: (Click to select) Decrease Increase .

Decrease Decrease Increase

Answer each of the following questions assuming the economy is experiencing a negative output gap. a. Is inflation decreasing, increasing, or stable? (Click to select) Increasing Decreasing Stable b. Is actual output greater than or less than potential output? (Click to select) Less Greater c. Is unemployment rising or falling? (Click to select) Falling Rising d. Is the Federal Reserve more likely to pursue expansionary or contractionary monetary policy? (Click to select) Contractionary Expansionary e. Is the economy likely experiencing an expansion or contradiction? (Click to select) Contradiction Expansion

Decreasing Less Rising Expansionary Contractionary

Which of the following statements is true? Deflation is a decrease in the rate of increase of overall prices, disinflation is a decrease in the rate of inflation. Disinflation is a decrease in overall prices, deflation is a decrease in the rate of inflation. Deflation is a decrease in overall prices, disinflation is a decrease in the rate of inflation. Deflation is a decrease in the rate of increase of overall prices, disinflation is a decrease in overall prices.

Deflation is a decrease in overall prices, disinflation is a decrease in the rate of inflation.

Instead of lending all his savings out to one borrower, Xander's bank makes the money in his savings account available to a variety of firms, with different characteristics and risk profiles, wishing to invest.

Diversify Risk

If M1 increases, M2 must also increase. T/F

False

Market risk can be minimized with a well-diversified portfolio. T/F

False

Risk is measured by looking at the expected value (average) of an asset's returns over time. T/F

False

Answer each of the following questions assuming the economy is experiencing a positive output gap. a. Is Inflation decreasing, increasing, or stable? (Click to select) b. Is actual output greater than or less than potential output? (Click to select) c. Is unemployment rising or falling? (Click to select) d. Is the Federal Reserve more likely to pursue expansionary or contractionary monetary policy? (Click to select) e. Is the economy likely experiencing an expansion or contraction? (Click to select)

Increasing Greater Falling Contractionary Expansion

Zirwat can get start-up funds for her new hair salon from a bank, instead of having to find people in her neighborhood willing to lend their extra money.

Intermediary between savers and borrowers

A delivery service buys 1,000 new trucks

Investment

a. Checkable deposits: b. Dollar bills: c. Money in your checking account: d. Money in your savings account: e. Certificates of deposit under $100,000: f. Traveler's checks: Not attempted.

M1/2 M1/2 M1/2 M2 M2 M1/2

a. You swipe your debit card to purchase gasoline for your lawn mower: (Click to select) b. You stuff your earnings from mowing lawns into a piggy bank: (Click to select) c. You pay your friend Cornelius $5 to help you mow lawns: (Click to select) d. You calculate your net earnings for the year on your tax return: (Click to select) e. You determine how much value your new lawn mower has added to your business: (Click to select)

Medium of Exchange Store of Value Medium of Exchange Unit of account Unit Account

A firm that has purchased a large insurance policy becomes careless about setting the security alarm.

Moral Hazard

A number of households find themselves owing more on their mortgages than their houses are currently worth. Some of them decide to abandon the house and walk away.

Moral Hazard

People drive more recklessly when they have insurance

Moral Hazard

People renege on contracts when they do not face the full consequences of their actions.

Moral Hazard

The owner of a company has just secured a new line of credit from the bank. He decides to change his business plan and open a second office in a foreign country.

Moral Hazard

A family borrows money to pay for a house:

Mortgage

"Listen," your buddy says. "Have you ever noticed that you can get the same type and size of tire for $30 cheaper in the next county over? I've got a way to make profits for years—we'll buy the tires where they're cheaper and bring them back here to sell. b. Would the efficient-market hypothesis predict it will be as profitable as he says?

No, soon others will enter the tire-reselling business to take advantage of the difference in prices, and profits will disappear.

In each of the following examples say whether the market is behaving within the principles of the efficient-market hypothesis. a. The day after unrest in the Middle East, the source of supply for much of the world's oil, the price of oil falls.

No, the expected decrease in the supply of oil would push oil prices upward, not downward.

In each of the following examples say whether the market is behaving within the principles of the efficient-market hypothesis. c. The Dow Jones Industrial Average, a major stock market index, changes in value by 5 percent for an entire week, even though very little economic news is released.

No, the hypothesis says that changes in securities prices should reflect news about markets and securities.

Which tool of monetary policy is most likely being described by each of the following statements? a. It's the major way the Federal Reserve System enacts monetary policy: (Click to select) b. This tool is good for emergency situations that require major, large-scale action: (Click to select) c. This tool goes through the Federal Reserve's role as lender of last resort: (Click to select) d. This tool is best for everyday monetary policy: (Click to select) . e. A major disadvantage of this tool is that it requires that banks want to borrow from the Fed: (Click to select) f. Even if they aren't interested in buying, selling, or borrowing from the Fed, changes in this tool may inconvenience bank managers: (Click to select)

Open-market operations Changing the reserve requirement Discount window policy Open-market operations Discount window policy Changing the reserve requirement

a. The central bank buys government securities from banks: (Click to select) b. The central bank raises the cost of borrowing money: (Click to select) c. The central bank changes the amount of money banks must hold from their depositors: (Click to select)

Open-market operations Discount window policy Changing the reserve requirement

When Yao's car suddenly breaks down, she can quickly withdraw funds from her savings account to pay the mechanic and rent a car.

Provide Liquidity

Wyatt can get cash out of the ATM at any time of day or night.

Provide liquidity

What is the basic trade-off in valuing any asset?

Risk and Return

If Daisy buys some of the Collins Inc. bonds, her purchase is an example of:

Saving

You buy 100 shares of Apple Computer stock:

Savings

You place part of your income in a mutual fund:

Savings

You put $1,000 in a certificate of deposit, by giving money to the bank in exchange for a set amount of return

Savings

A new tech start-up offers investors the ability to purchase a small part of the company to raise needed capital

Stock

A change that makes people want to save less will shift the quantity of loanable funds (Click to select) demanded supplied to the (Click to select) right left . The resulting new equilibrium in the market for loanable funds would be a (Click to select) higher lower interest rate and a (Click to select) lower higher quantity of funds saved and invested.

Supplied, left, higher, lower

A change that makes people want to save more will shift the quantity of loanable funds (Click to select) supplied demanded to the (Click to select) right left . The resulting new equilibrium in the market for loanable funds would be a (Click to select) higher lower interest rate and a (Click to select) lower higher quantity of funds saved and invested.

Supplied, right, lower, higher

You have a choice between a 6-month CD and a 2-year CD. Which of the following is true regarding the interest rate paid on each of the CDs?

The interest rate on the 2-year CD will be higher because the opportunity cost of buying the 2-year CD is greater than the opportunity cost of buying the 6-month CD.

In financial markets, what is the simplest method for evaluating risk?

The standard deviation of the return over time Correct

A portfolio of well-diversified assets will often be less risky for the same level of return when compared to an individual asset. T/F

True

Idiosyncratic risk is unique to a particular asset rather than the market as a whole T/F

True

In each of the following examples say whether the market is behaving within the principles of the efficient-market hypothesis. b. Investors find very few opportunities for arbitrage in the foreign exchange market.

Yes, the hypothesis predicts that all arbitrage opportunities will dry up, as market information is reflected in securities prices.

"Monetary policy is incredible," your friend says. "Just a little manipulation of the money supply and interest rates, and we end up at just the right price level and amount of output." Is your friend overstating or understating the Fed's control over price levels and output?

Your friend is overstating the effectiveness of monetary policy because lower interest rates do not always increase spending.

An analyst has gathered an extensive amount of data on the past prices of a particular stock, and is attempting to find patterns to predict the stock's future price. The analyst is performing (Click to select) a technical an arbitrage a fundamental analysis.

a technical

If banks kept 100 percent of deposits on hand as reserves, the reserve requirement ratio: Banks would:

and the multiplier would be 1. not be able to create new money.

A country's government has been running a deficit for the past few years. Suppose this country decides to increase its government spending. Compare the impact of the increase in government spending in a closed economy and an open economy. Considering your answers to the above questions, crowding out is more likely to be observed in (Click to select) a closed an open economy because investment spending will be (Click to select) lower higher .

closed, lower

Securitization refers to:

combining several loans or other financial assets into a bundle and then selling that bundle in whole or in parts to financial investors. Correct

For each of the following situations, identify whether the Federal Reserve is likely to pursue an expansionary or a contractionary monetary policy. a. The unemployment rate is at 0.5 percent: (Click to select) Contractionary Expansionary . b. The economy is experiencing record growth in GDP: (Click to select) Contractionary Expansionary . c. The unemployment rate is at 15 percent: (Click to select) Contractionary Expansionary . d. Inflation has reached 10 percent, a recent high: (Click to select) Expansionary Contractionary . e. A hurricane recently demolished a major city, causing a major recession: (Click to select) Contractionary Expansionary .

contractionary contractionary expansionary contractionary expansionary

In a closed economy, if government spending increases while private savings and taxes remain constant, then investment spending must (Click to select) increase decrease stay constant .

decrease

What would happen to each of these components of the liquidity-preference model if the Federal Reserve decides to raise the reserve requirement? a. Money supply: (Click to select) Decrease Increase . b. Interest rates: (Click to select) Increase Decrease . c. Quantity of money in the economy: (Click to select) Increase Decrease . d. Money demand curve: (Click to select) Movement down Movement up .

decrease increase decrease movement up

If Nancy is carrying $300 in cash and she deposits it into her savings account, M1 will (Click to select) while M2 will (Click to select)

decrease stay the same

Some analysts use the short-run and long-run effects on the aggregate demand-aggregate supply model to argue that expansionary monetary policy can't affect employment in the long run because in the short run, monetary policy shifts the aggregate:

demand curve to the right, but over time the increase in prices shifts aggregate supply to the left so that GDP will end up going back to its same level of output with a higher price level.

A change that makes firms want to invest less will shift the quantity of loanable funds (Click to select) supplied demanded to the (Click to select) right left . The resulting new equilibrium in the market for loanable funds would be a (Click to select) lower higher interest rate and a (Click to select) lower higher quantity of funds saved and invested.

demanded, left, lower, lower

A change that makes firms want to invest more will shift the quantity of loanable funds (Click to select) supplied demanded to the (Click to select) left right . The resulting new equilibrium in the market for loanable funds would be a (Click to select) lower higher interest rate and a (Click to select) higher lower quantity of funds saved and invested.

demanded, right, higher, higher

If the government and Federal Reserve had not intervened in the economy in the years during and after the 2007-2009 recession, it is likely that the:

drop in consumption and investment would have reduced aggregate demand causing deflation.Not attemptedCorrect

A persistent government budget deficit can hurt a closed economy's ability to engage in economic investment because in a closed economy, national savings is:

equal to investment. Correct

If the quantity theory of money is represented as MV = PY:

expansionary monetary policy can be inflationary if we assume that velocity and real output Y are unchanging.

When there is a negative output gap, the proper short run monetary policy response is: This policy response is intended to:

expansionary monetary policy. lower interest rates to boost borrowing and spending while increasing production and employment.Not attemptedCorrect

In the short-run aggregate demand and supply model, one important difference between monetary and fiscal policy is that monetary policy:

has shorter lags than fiscal policy, so monetary policy may impact the economy more quickly than fiscal policy.

The Federal Reserve could (Click to select) hold constant the amount of money circulating in the economy by reducing the reserve ratio. However, doing this could increase the risk of banks becoming insolvent if (Click to select)

increase a bank run

The velocity of money might increase around the holidays because people: If the Federal Reserve wants to avoid inflation in those times, it should:

increase their spending, which may mean that each dollar of income is spent more times. lower the money supply.

A country's government has been running a deficit for the past few years. Suppose this country decides to increase its government spending. Compare the impact of the increase in government spending in a closed economy and an open economy. In a closed economy, an increase in government spending will (Click to select) increase decrease the (Click to select) demand supply for loanable funds. All else the same, this will (Click to select) decrease have no effect on increase the equilibrium interest rate.

increase, demand, increase

A country's government has been running a deficit for the past few years. Suppose this country decides to increase its government spending. Compare the impact of the increase in government spending in a closed economy and an open economy. In an open economy, an increase in government spending will (Click to select) decrease increase the (Click to select) demand supply for loanable funds. All else the same, this will (Click to select) have no effect on increase decrease the equilibrium interest rate. As a result of this change in the interest rate, capital inflow can be expected to (Click to select) decrease increase and this will cause the (Click to select) demand for supply of loanable funds curve to shift to the (Click to select) right left .

increase, demand, increase, increase, supply of, right

Changes in reserve requirements to conduct monetary policy in the United States:

is not a good idea because this tool is powerful and makes it difficult for bank managers to plan for the future.

Using the liquidity-preference model, the Federal Reserve can react to the threat of exceedingly high inflation via monetary policy by shifting the supply of money to the:

left with contractionary monetary policy, increasing the interest rate and lowering the equilibrium quantity of money.

You go to the bank and purchase a $1,000 certificate of deposit (CD). In this case, you are acting as a (Click to select) lender borrower and the bank is acting as a (Click to select) lender borrower .

lender, borrower

When depositors change the way they hold assets this could increase the M1 measure of the money supply while leaving M2 unchanged if depositors:

moved assets from savings to checking. Correct

The monetary policy used most frequently by the Federal Reserve System is: This tool is the best choice in most circumstances because it is performed on:

open-market operations. a daily basis, doesn't inconvenience bank managers, and doesn't require banks to take loans from the Fed.

In financial markets, the buyers are:

people or organizations that have a need to spend on something now but don't have cash on hand to do so.

In financial markets, the sellers are:

people or organizations that have cash on hand and are willing to let others use it for a price.

Diversification refers to:

putting one's savings into a variety of financial investments

During the recent housing market crisis, lenders:

relied too much on securitization to diversify their financial investments.

A country with poorly developed financial markets might have a hard time sustaining economic growth because:

savers will not find a safe place to put their funds and investors will not be able to get the funds they need; thus, economic opportunities will be lost.

If the Federal Open Market Committee wants to decrease the money supply, it should use open-market operations to (Click to select) government bonds

sell

A bank keeping a reserve ratio of zero would be a very bad idea because:

the bank would quickly find itself unable to meet its customers' liquidity needs and would not be in business long.

The risk premium measures:

the extra interest paid on a risky financial asset. Correct

During a recession, what is likely to happen to the risk premium?

the risk premium will be higher because the risk of default is greater Correct

Your senators claim that lowering prices would be good for everyone—"Who doesn't like lower prices, after all?" They tell you they plan to lobby for deflation. Falling prices could lead to a bad situation because:

they make debt harder to pay back because the real interest rate will be rising, leading to less borrowing and less spending.