Economics Chapter 29-33

Economic variables whose values are measured in goods are called Select one: a. dichotomous variables. b. nominal variables. c. classical variables. d. read. real variables.l variables.

Economic variables whose values are measured in goods are called Select one: a. dichotomous variables. b. nominal variables. c. classical variables. d. real variables.

If a bushel of wheat costs $6.40 in the United States, costs 40 pesos in Mexico, and the nominal exchange rate is 10 pesos per dollar, then the real exchange rate is Select one: a. 1.60 b. 1.25 c. .625 d. None of the above is correct.

a. 1.60

If a country has Y > C + I + G, then Select one: a. S > I and it has a trade surplus. b. S > I and it has a trade deficit. c. S < I and it has a trade surplus. d. S < I and it has a trade deficit.

a. S > I and it has a trade surplus.

Which movie is an allegory about late 19th century monetary policy? Select one: a. The Wizard of Oz b. Mary Poppins c. It's a Wonderful Life d. Trading Places

a. The Wizard of Oz

Which of the following best illustrates the unit of account function of money? Select one: a. You list prices for candy sold on your Web site, www.sweettooth.com, in dollars. b. You pay for your theater tickets with dollars. c. You hold currency even though you don't intend to spend it right away. d. None of the above is correct.

a. You list prices for candy sold on your Web site, www.sweettooth.com, in dollars

When conducting an open-market purchase, the Fed Select one: a. buys government bonds, and in so doing increases the money supply. b. buys government bonds, and in so doing decreases the money supply. c. sells government bonds, and in so doing increases the money supply. d. sells government bonds, and in so doing decreases the money supply.

a. buys government bonds, and in so doing increases the money supply.

Demand deposits are a type of Select one: a. checking account. b. time deposit. c. money market mutual fund. d. savings deposit.

a. checking account.

If an economy used gold as money, its money would be Select one: a. commodity money, but not fiat money. b. fiat money, but not commodity money. c. both fiat and commodity money. d. functioning as a store of value and as a unit of account, but not as a medium of exchange.

a. commodity money, but not fiat money.

If inflation is higher than what was expected, Select one: a. creditors receive a lower real interest rate than they had anticipated. b. creditors pay a lower real interest rate than they had anticipated. c. debtors receive a higher real interest rate than they had anticipated. d. debtors pay a higher real interest rate than they had anticipated.

a. creditors receive a lower real interest rate than they had anticipated.

If people decide to hold more currency relative to deposits, the money supply Select one: a. falls. The Fed could lessen the impact of this by buying Treasury bonds. b. falls. The Fed could lessen the impact of this by selling Treasury bonds. c. rises. The Fed could lessen the impact of this by buying Treasury bonds. d. rises. The Fed could lessen the impact of the by selling Treasury bonds.

a. falls. The Fed could lessen the impact of this by buying Treasury bonds.

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

a. has no intrinsic value.

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

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

Governments may prefer an inflation tax to some other type of tax because the inflation tax Select one: a. is easier to impose. b. reduces inflation. c. falls mainly on high-income individuals. d. reduces the real cost of government expenditure.

a. is easier to impose.

According to purchasing-power parity which of the following would happen if a country raised its money supply growth rate? Select one: a. its nominal exchange rate would fall b. its real exchange rate would fall c. its real net exports would rise d. All of the above would happen.

a. its nominal exchange rate would fall

Indexing the tax system to take into account the effects of inflation would by itself Select one: a. mean that only real interest earnings are taxed. b. mean an end to taxing capital gains. c. mean an increase in average tax rates. d. All of the above are correct.

a. mean that only real interest earnings are taxed.

A country's saving is greater than its domestic investment. This difference means that its Select one: a. net capital outflow and net exports are positive. b. net capital outflow and net exports are negative. c. net capital outflow is positive and net exports are negative. d. net capital outflow is negative and net exports are positive.

a. net capital outflow and net exports are positive.

In the U.S., taxes on capital gains are computed using Select one: a. nominal 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 discourages saving. d. real gains. This is one way by which higher inflation encourages saving.

a. nominal gains. This is one way by which higher inflation discourages saving.

Currency includes Select one: a. paper bills and coins. b. demand deposits. c. credit cards. d. Both (a) and (b) are correct

a. paper bills and coins.

Liquidity refers to Select one: a. the ease with which an asset is converted to the medium of exchange. b. the measurement of the intrinsic value of commodity money. c. the measurement of the durability of a good. d. how many time a dollar circulates in a given year.

a. the ease with which an asset is converted to the medium of exchange.

A Big Mac in Japan costs 400 yen while it costs $4.50 in the U.S.. The nominal exchange rate is 100 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity? Select one: a. the price of Big Macs in the U.S. falls, the nominal exchange rate falls b. the price of Big Macs in the U.S. falls, the nominal exchange rate rises c. the price of Big Macs in the U.S. rises, the nominal exchange rate falls d. the price of Big Macs in the U.S. rises, the nominal exchange rate rises

a. the price of Big Macs in the U.S. falls, the nominal exchange rate falls

For purposes of analyzing the money stock and its relationship to relevant economic variables, money is best thought of as Select one: a. those items that can be readily accessed and used to buy goods and services. b. currency only. c. currency plus all bank accounts. d. currency plus all bank accounts plus bonds.

a. those items that can be readily accessed and used to buy goods and services.

In measuring the stock of money in the U.S., M1 includes Select one: a. traveler's checks. b. savings deposits. c. credit cards d. none of the above.

a. traveler's checks.

If the reserve ratio is 5 percent, then $500 of additional reserves can create up to Select one: a. $10,500 of new money. b. $10,000 of new money. c. $9,500 of new money. d. $2,500 of new money.

b. $10,000 of new money.

In the 1970s, the U.S. inflation rate reached about Select one: a. 7 percent per year. b. 10 percent per year. c. 14 percent per year. d. 20 percent per year.

b. 10 percent per year.

If the reserve ratio is 10 percent, the money multiplier is Select one: a. 100. b. 10. c. 9/10. d. 1/10.

b. 10.

Which of the following helps to explain why the inflation fallacy is a fallacy? Select one: a. Increases in the price level can be created by increases in money demand. b. Nominal incomes tend to rise at the same time that the price level is rising. c. As the price level rises, the value of a dollar falls. d. Inflation only changes nominal variables.

b. Nominal incomes tend to rise at the same time that the price level is rising.

The law of one price states that Select one: a. a good must sell at the price fixed by law. b. a good must sell at the same price at all locations. c. a good cannot sell for a price greater than the legal price ceiling. d. nominal exchange rates will not vary.

b. a good must sell at the same price at all locations.

The "yardstick" people use to post prices and record debts is called Select one: a. a medium of exchange. b. a unit of account. c. a store of value. d. liquidity.

b. a unit of account.

If purchasing-power parity holds, a dollar will buy Select one: a. more goods in foreign countries than in the United States. b. as many goods in foreign countries as it does in the United States. c. fewer goods in foreign countries than it does in the United States. d. None of the above is implied by purchasing-power parity.

b. as many goods in foreign countries as it does in the United States.

Which of the following is a liability of a bank and an asset of its customers? Select one: a. deposits of its customers and loans to its customers b. deposits of its customers but not loans to its customers c. loans of its customers but not the deposits of its customers d. neither the deposits of its customers nor the loans to its customers

b. deposits of its customers but not loans to its customers

Monetary neutrality means that a change in the money supply Select one: a. does not change real variables. Most economists think this is a good description of the economy in the short run and in the long run. b. does not change real variables. Most economists think this is a good description of the economy in the long run but not the short run. c. does not change nominal variables. Most economists think this is a good description of the economy in the short-run and the long run. d. does not change nominal variables. Most economists think this is a good description of the economy in the long run but not the short run.

b. does not change real variables. Most economists think this is a good description of the economy in the long run but not the short run.

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also Select one: a. either a rise in output or a rise in velocity. b. either a rise in output or a fall in velocity. c. either a fall in output or a rise in velocity. d. either a fall in output or a fall in velocity.

b. either a rise in output or a fall in velocity.

Currently, U.S. currency is Select one: a. fiat money with intrinsic value. b. fiat money with no intrinsic value. c. commodity money with intrinsic value. d. commodity money with no intrinsic value.

b. fiat money with no intrinsic value.

Net capital outflow measures the imbalance between the amount of Select one: a. foreign assets held by domestic residents and domestic assets held by foreign residents. b. foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners. c. foreign assets bought by domestic residents and the amount of domestic goods and services sold to foreigners. d. None of the above is correct.

b. foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.

A depreciation of the U.S. real exchange rate induces U.S. consumers to buy Select one: a. fewer domestic goods and fewer foreign goods. b. more domestic goods and fewer foreign goods. c. fewer domestic goods and more foreign goods. d. more domestic goods and more foreign goods.

b. more domestic goods and fewer foreign goods.

According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then Select one: a. nominal and real GDP would rise by 5 percent. b. nominal GDP would rise by 5 percent; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would rise by 5 percent. d. neither nominal GDP nor real GDP would change.

b. nominal GDP would rise by 5 percent; real GDP would be unchanged.

Economic variables whose values are measured in monetary units are called Select one: a. dichotomous variables. b. nominal variables. c. classical variables. d. real variables.

b. nominal variables.

According to the classical dichotomy, which of the following is not influenced by monetary factors? Select one: a. the price level b. real GDP c. nominal interest rates d. All of the above are correct.

b. real GDP

Relative-price variability Select one: a. rises with inflation, leading to an improved allocation of resources. b. rises with inflation, leading to a misallocation of resources. c. falls with inflation, leading to an improved allocation of resources. d. falls with inflation, leading to a misallocation of resources.

b. rises with inflation, leading to a misallocation of resources.

Net exports measures the difference between a country's Select one: a. income and expenditures. b. sale of goods and services abroad and purchase of foreign goods and services. c. sale of domestic assets abroad and purchase of foreign assets. d. All of the above are correct.

b. sale of goods and services abroad and purchase of foreign goods and services.

The Fisher effect Select one: a. says the government can generate revenue by printing money. b. says there is a one for one adjustment of the nominal interest rate to the inflation rate. c. explains how higher money supply growth leads to higher inflation. d. explains how prices adjust to obtain equilibrium in the money market.

b. says there is a one for one adjustment of the nominal interest rate to the inflation rate.

Nominal GDP measures Select one: a. the total quantity of final goods and services produced. b. the dollar value of the economy's output of final goods and services. c. the total income received from producing final goods and services measured in constant dollars. d. the overall level of prices.

b. the dollar value of the economy's output of final goods and services.

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

b. the expected real interest rate is 1 percent.

The inflation tax falls mostly heavily on Select one: a. those who hold a lot of currency and accounts for a large share of U.S. government revenue. b. those who hold a lot of currency but accounts for a small share of U.S. government revenue. c. those who hold little currency and accounts for a large share of U.S. government revenue. d. those who hold little currency but accounts for a small share of U.S. government revenue.

b. those who hold a lot of currency but accounts for a small share of U.S. government revenue

Nominal exchange rates Select one: a. vary little over time. b. vary substantially over time. c. appreciate over time for most countries. d. depreciate over time for most countries.

b. vary substantially over time.

Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P = Select one: a. 1. b. 1.5. c. 2. d. 4.5.

c

A country has $100 million of net exports and $170 million of saving. Net capital outflow is Select one: a. $70 million and domestic investment is $170 million. b. $70 million and domestic investment is $270 million. c. $100 million and domestic investment is $70 million. d. None of the above is correct.

c. $100 million and domestic investment is $70 million.

The nominal exchange rate is .80 euros per dollar and the real exchange rate is 4/3. Which of the following prices for a particular good are consistent with these exchange rates? Select one: a. $4 in the U.S. and 3 euros in Italy. b. $4 in the U.S. and 3.75 euros in Italy. c. $5 in the U.S. and 3 euros in Italy. d. $6 in the U.S. and 2.50 euros in Italy

c. $5 in the U.S. and 3 euros in Italy.

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? Select one: a. 1/.70 French MP3 players per U.S. MP3 player b. 1 French MP3 players per U.S. MP3 player c. .70 French MP3 players per U.S. MP3 player. d. None of the above are correct.

c. .70 French MP3 players per U.S. MP3 player.

Given the following information, what are the values of M1 and M2? Small time deposits $600 billion Demand deposits and other checkable deposits $400 billion Savings deposits $800 billion Money market mutual funds $700 billion Traveler's checks $30 billion Large time deposits $400 billion Currency $250 billion Miscellaneous categories in M2 $20 billion Select one: a. M1 = $650 billion, M2 = $2,830 billion. b. M1 = $400 billion, M2 = $3,080 billion. c. M1 = $680 billion, M2 = $2,800 billion. d. M1 = $680 billion, M2 = $3,200 billion.

c. M1 = $680 billion, M2 = $2,800 billion.

In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then Select one: a. M1 would increase. b. M1 would decrease. c. M1 would not change. d. M1 might rise or fall.

c. M1 would not change.

Which of the following best illustrates the concept of a store of value? Select one: a. You are a precious-metals dealer, and you are always aware of how many ounces of platinum trade for an ounce of gold. b. You sell items on eBay, and your prices are stated in terms of dollars. c. You keep 6 ounces of gold in your safe-deposit box at the bank for emergencies. d. None of the above is correct.

c. You keep 6 ounces of gold in your safe-deposit box at the bank for emergencies.

Which of the following best illustrates the medium of exchange function of money? Select one: a. You keep some money hidden in your shoe. b. You keep track of the value of your assets in terms of currency. c. You pay for your oil change using currency. d. None of the above is correct.

c. You pay for your oil change using currency.

The Fed's primary tool to change the money supply is Select one: a. changing the interest rate on reserves. b. changing the reserve requirement. c. conducting open market operations. d. redeeming Federal Reserve notes.

c. conducting open market operations.

Which of the following does the Federal Reserve not do? Select one: a. conduct monetary policy b. act as a lender of last resort c. convert Federal Reserve Notes into gold d. serve as a bank regulator

c. convert Federal Reserve Notes into gold

A country's trade balance Select one: a. must be zero. b. must be greater than zero. c. is greater than zero only if exports are greater than imports. d. is greater than zero only if imports are greater than exports.

c. is greater than zero only if exports are greater than imports.

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

c. monetary policy.

Commodity money is Select one: a. backed by gold. b. the principal type of money in use today. c. money with intrinsic value. d. receipts created in international trade that are used as a medium of exchange.

c. money with intrinsic value.

A country has a trade deficit. Which of the following must also be true? Select one: a. net capital outflow is positive and domestic investment is larger than saving b. net capital outflow is positive and saving is larger than domestic investment c. net capital outflow is negative and domestic investment is larger than saving d. net capital outflow is negative and saving is larger than domestic investment

c. net capital outflow is negative and domestic investment is larger than saving

People can reduce the inflation tax by Select one: a. reducing savings. b. increasing deductions on their income tax. c. reducing cash holdings. d. None of the above is correct.

c. reducing cash holdings.

Market economies rely on which of the following to allocate scarce resources? Select one: a. government b. consumers c. relative prices d. real interest rates

c. relative prices

Shoeleather cost refers to Select one: a. the cost of more frequent price changes induced by higher inflation. b. the distortion in resource allocation created by distortions in relative prices due to inflation. c. resources used to maintain lower money holdings when inflation is high. d. the tendency to expend more effort searching for the lowest price when inflation is high.

c. resources used to maintain lower money holdings when inflation is high.

he discount rate is the interest rate that Select one: a. banks charge one another for loans. b. banks charge the Fed for loans. c. the Fed charges banks for loans. d. the Fed charges Congress for loans.

c. the Fed charges banks for loans.

If a bank has a reserve ratio of 8 percent, then Select one: a. government regulation requires the bank to use at least 8 percent of its deposits to make loans. b. the bank's ratio of loans to deposits is 8 percent. c. the bank keeps 8 percent of its deposits as reserves and loans out the rest. d. the bank keeps 8 percent of its assets as reserves and loans out the rest.

c. the bank keeps 8 percent of its deposits as reserves and loans out the rest.

If the nominal interest rate is 4 percent and expected inflation is 2.5 percent, then what is the expected real interest rate? Select one: a. 1.6 percent b. 10 percent c. 6.5 percent d. 1.5 percent

d. 1.5 percent

A double coincidence of wants Select one: a. is required when there is no item in an economy that is widely accepted in exchange for goods and services. b. is required in an economy that relies on barter. c. is a hindrance to the allocation of resources when it is required for trade. d. All of the above are correct.

d. All of the above are correct.

According to the classical dichotomy, when the money supply doubles, which of the following also doubles? Select one: a. the price level b. nominal wages c. nominal GDP d. All of the above are correct.

d. All of the above are correct.

The price of a basket of goods and services in the U.S. is $600. In Canada the same basket of goods costs 700 Canadian dollars. If the nominal exchange rate were 1.2 Canadian dollars per U.S. dollar, what would be the real exchange rate? Select one: a. 700/600 b. 600/700 c. 700/720 d. None of the above is correct

d. None of the above is correct

a. increase and the money supply increases. b. increase and the money supply decreases. c. decrease and the money supply increases. d. decrease and the money supply decreases.

d. decrease and the money supply decreases.

Deflation Select one: a. increases incomes and enhances the ability of debtors to pay off their debts. b. increases incomes and reduces the ability of debtors to pay off their debts. c. decreases incomes and enhances the ability of debtors to pay off their debts. d. decreases incomes and reduces the ability of debtors to pay off their debts.

d. decreases incomes and reduces the ability of debtors to pay off their debts.

Reserves are Select one: a. the central bank of the U.S. b. deposits that banks hold in excess of the required amount. c. the purchase of bonds by the Federal Open Market Committee. d. deposits that banks have received but have not yet loaned out

d. deposits that banks have received but have not yet loaned out

Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation Select one: a. increases the real interest rate and the after-tax real rate of interest. b. increases the real interest rate and the after-tax real rate of interest. c. does not change the real interest rate but raises the after tax real rate of interest. d. does not change the real interest rate but reduces the after-tax real rate of interest.

d. does not change the real interest rate but reduces the after-tax real rate of interest.

The Fed can reduce the federal funds rate by Select one: a. decreasing the money supply. To decrease the money supply it could sell bonds. b. decreasing the money supply. To decrease the money supply it could buy bonds. c. increasing the money supply. To increase the money supply it could sell bonds. d. increasing the money supply. To increase the money supply it could buy bonds

d. increasing the money supply. To increase the money supply it could buy bonds

The federal funds rate is the Select one: a. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities. b. percentage of deposits that banks must hold as reserves. c. interest rate at which the Federal Reserve makes short-term loans to banks. d. interest rate at which banks lend reserves to each other overnight.

d. interest rate at which banks lend reserves to each other overnight.

If the discount rate is raised then banks borrow Select one: a. more from the Fed so reserves increase. b. more from the Fed so reserves decrease. c. less from the Fed so reserves increase. d. less from the Fed so reserves decrease.

d. less from the Fed so reserves decrease.

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

d. neither M1 nor M2

If sales of Saudi Arabian oil to the rest of the world increase and Saudis use the proceeds to buy foreign goods, which of the following increases? Select one: a. Saudi Arabian net exports but not Saudi Arabian net capital outflow b. Saudi Arabian net capital outflow but not Saudi Arabian net exports c. both Saudi Arabian net exports and net capital outflow d. neither Saudi Arabian net exports nor net capital outflow

d. neither Saudi Arabian net exports nor net capital outflow

A country has a trade deficit. Its Select one: a. net capital outflow must be positive, and saving is larger than investment. b. net capital outflow must be positive and saving is smaller than investment. c. net capital outflow must be negative and saving is larger than investment. d. net capital outflow must be negative and saving is smaller than investment

d. net capital outflow must be negative and saving is smaller than investment

When conducting an open-market sale, the Fed Select one: a. buys government bonds, and in so doing increases the money supply. b. buys government bonds, and in so doing decreases the money supply. c. sells government bonds, and in so doing increases the money supply. d. sells government bonds, and in so doing decreases the money supply

d. sells government bonds, and in so doing decreases the money supply

The velocity of money is Select one: a. the rate at which the Fed puts money into the economy. b. the same thing as the long-term growth rate of the money supply. c. the money supply divided by nominal GDP. d. the average number of times per year a dollar is spent.

d. the average number of times per year a dollar is spent.

Menu costs refers to Select one: a. resources used by people to maintain lower money holdings when inflation is high. b. resources used to price shop during times of high inflation. c. the distortion in incentives created by inflation when taxes do not adjust for inflation. d. the cost of more frequent price changes induced by higher inflation

d. the cost of more frequent price changes induced by higher inflation

You are planning a graduation trip to Mexico. Other things the same, if the dollar depreciates relative to the peso, then Select one: a. the dollar buys fewer pesos. Your hotel room in Mexico will require fewer dollars. b. the dollar buys fewer pesos. Your hotel room in Mexico will require more dollars. c. the dollar buys more pesos. Your hotel room in Mexico will require fewer dollars. d. the dollar buys more pesos. Your hotel room in Mexico will require more dollars.

d. the dollar buys more pesos. Your hotel room in Mexico will require more dollars.

Today, bank runs are not a major problem for the U.S. banking system because Select one: a. bank runs are now illegal. b. banks now hold 100 percent of their deposits in reserve. c. banks are now all government-operated. d. the federal government now guarantees the safety of deposits at most banks.

d. the federal government now guarantees the safety of deposits at most banks.

Economists use the term "money" to refer to Select one: a. all wealth. b. all assets, including real assets and financial assets. c. all financial assets, but not real assets. d. those types of wealth that are regularly accepted by sellers in exchange for goods and services.

d. those types of wealth that are regularly accepted by sellers in exchange for goods and services.

Wealth is redistributed from debtors to creditors when inflation is Select one: a. high, whether it is expected or not. b. low, whether it is expected or not. c. unexpectedly high. d. unexpectedly low.

d. unexpectedly low.