Econ Final

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ____ Swiss good(s) per U.S. good.

2.5 The real exchange rate = (e x P)/P*. e = 5; P = 1; P* = 2.

According to the classical dichotomy, which of the following is influenced by monetary factors?

Money supply growth only affects nominal variables, but not real ones. Economists believe that this is true in the long run, but not in the short run.

Which of the following executes open-market operations?

New York Federal Reserve Bank The FOMC decides about the federal funds rate target, but the New York Federal Reserve Bank executes open-market operations to hit the target decided by the FOMC.

To make a trade in a barter economy, it requires ____

a double coincidence of wants.

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap). If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be ____

8.5% Just apply the Taylor given in the question. Please refer to Stabilization Policy Debates power points and video.

3 major functions of money

1) store of value. 2) medium of exchange. 3) unit of account.

The initial impact of an increase in an investment tax credit is to shift ____

aggregate demand right. An increase in investment tax credit increases investment, and thus AD shifts right.

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting ____

aggregate demand right. The question is about stabilization policy. If there is a recession (economic contraction), policy makers will use expansionary monetary of fiscal policy to shift the aggregate demand curve to the right.

If the real exchange rate is high, foreign goods ____

are relatively cheap and domestic goods are relatively expensive.

the minimum amount of owners' equity in a bank mandated by regulators is called a ____ requirement.

capital

If taxes increase

consumption decreases, aggregate demand shifts left.

The money supply consists of ____

currency plus demand deposits.

The value of net exports is also the value of ____

the excess of national saving over domestic investment.

Suppose the economy is in long-run equilibrium. In a short span of time, there is a decline in the money supply, a tax increase, a pessimistic revision of expectations about future business conditions, and a rise in the value of the dollar. In the short run, we would expect

the price level and real GDP both to fall.

Currency equals

the sum of coins and paper money.

Liabilities of banks include

demand deposits.

net capital outflow is equal to the amount that ____

domestic investors lend abroad minus the amount that foreign investors lend here.

The concerns of economists who favor passive over active policy are most closely associated with their ____

doubt that the correct policy will be implemented at the correct time.

Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire ____

increased consumption, which shifts the aggregate demand curve right.

A U.S. pharmacy buys drugs from a British company and pays for them with US dollars. This transaction ____.

increases British net exports, and decreases U.S. net capital outflow

When the Fed increases the interest rate paid on reserves, it ____

increases the reserve-deposit ratio. When the Fed increases the interest rate paid on reserves, banks have greater incentive to hold more reserve at the Fed and that the reserve-deposit ratio increases (banks will make less loans in this case).

The most frequently used tool of monetary policy is ____.

open-market operations.

If there is bad weather for farming or some other temporary decrease in the availability of raw materials, ____

output falls in the short run.

keeping the money supply constant over the business cycle is an example of ____

passive monetary policy. This policy does not respond to economic fluctuations (money supply does not increase during a recession, for instance).

a monetary policy rule that targets nominal GDP would ____ money growth when nominal GDP rises above the target and ____ money growth when nominal GDP falls below the target.

reduce; raise

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply ____

remains the same. In a 100-percent-reserve banking system, banks do not make loans, and hence do not create money or change money supply.

The money supply will increase if the ____

required reserve decreases.

A decrease in government spending initially and primarily shifts ____

aggregate demand left.

If countries that imported goods and services from the United States went into recession, we would expect that U.S. net exports would ____

fall, making aggregate demand shift left. If countries that imported goods and services from the United States went into recession, then U.S. exports to these countries drop (because people in these countries will have less income due to the recession, and hence will import less from U.S.), and therefore the AD shifts left.

The law of one price states that ____.

good must sell at the same price at all locations

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:

increasing the money supply, but at the cost of permanently higher prices. the drought in this example shifts the short-run aggregate supply to the left, resulting in stagflation. The Fed could respond (stabilization policy) by shifting the aggregate-demand curve to the right, using expansionary monetary policy, moving the economy more rapidly back to full employment output. The cost of stabilizing output and unemployment in this case is higher inflation.

The shift of the short-run aggregate-supply curve to the right

might be caused by a decrease in the expected price level.

Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the ____

money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.

If a country has a high rate of inflation relative to the United States, the dollar will buy ____

more of the foreign currency over time.

If Argentina's domestic investment exceeds national saving, then Argentina has ____

negative net capital outflows and negative net exports.

To reduce the money supply, the Federal Reserve ____

sells government bonds.