EXAM 3 QUESTIONS

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A government that generates revenue mostly through an inflation tax faces the risk of ________. A) hyperinflation B) mass tax evasion C) rapidly falling prices D) a sudden fall in revenue

A well-capitalized bank ________. A) owns far more than it owes B) does not have stockholders' equity C) is prone to bank runs D) only accepts deposits but does not advance loans

According to the quantity theory of money, when the gap between the growth rate of money supply and the growth rate of real GDP widens, ________. A) the inflation rate increases B) the inflation rate decreases C) real interest rates increase D) nominal interest rates decrease

After which of the following shifts would we know which direction interest rates would change? A) Government decides cut back on its borrowing and households that are uncertain about the future decide to save more money in case of an emergency. B) People expect their incomes in the future to be higher and the population ages so that many more people are saving for retirement. C) Firms find new investment opportunities that they want to borrow money to invest in and the population ages so that many more people are saving for retirement. D) Government introduces subsidies for greater capital investment and businesses are uncertain about the future business environment and so retain more of their earnings.

All else equal, we might expect generous unemployment benefits (payments to workers who are unemployed but looking for work) to ________ frictional unemployment because they would ________ the opportunity cost of remaining unemployed and waiting for a better job-match. A) increase; decrease B) increase; Increase C) decrease; increase D) decrease; decrease

An early-stage venture capital (VC) firm invests 100M dollars equally across 5 different new start-ups. Each of the start-ups has an equal and independent probability of succeeding or failing. If any single start up succeeds, the VC firm will get 100x their initial investment (i.e., for every $1 they have invested, they get $100). If a start-up fails, the VC loses all the money it has invested. The VC has a goal of at least quadrupling their overall investment portfolio by next year. What is the minimum probability of success that each start-up needs to have for this to happen? A) 4% B) 50% C) 40% D) 10%

An economy has a potential workforce of 100M people and a labor-force participation rate of 80%. There are currently 8M people classified as unemployed. The next month, the potential workforce remains the same size and no new people enter the labor force. The economy generates 2M new jobs. However, 4M unemployed workers become discouraged with not being able to find a job and stop looking for work. What is the new unemployment rate? A) 2.6% B) 7.5% C) 6% D) 4%

An employed individual is one who ________. A) has a full-time or part-time paid job B) has been actively looking for jobs C) was previously employed but has quit the job voluntarily D) has been performing household chores for free

Any change that causes a decrease in the demand for labor at a given wage rate will be represented by a(n) ________ the labor demand curve, assuming all else equal. A) left shift of B) right shift of C) downward movement along D) upward movement along

Any change that increases the quantity of labor supplied at all wage rates will ________, assuming all else equal. A) shift the labor supply curve to the right B) shift the labor supply curve to the left C) cause a downward movement along the labor supply curve D) cause an upward movement along the labor supply curve

Artificial Intelligence and associated automation is thought to increase the productivity of high-skill workers and allow firms to replace low-skill workers. If this is TRUE, (assuming all else equal and a competitive labor market for both), labor demand for the high-skill workers would shift to the ________ and labor demand for low-skill workers would shift to the ________ A) Right; left B) Right; right C) Left; right D) Left; left

Assuming all else equal, if a firm decides to pay more dividends and lowers the amount of retained earnings it holds, it will cause ________. A) the current credit supply curve of the firm to shift to the left B) the current credit supply curve of the firm to shift to the right C) an upward movement along the current credit supply curve of the firm D) a downward movement along the current credit supply curve of the firm

Assuming all else equal, if the real interest rate increases, it will lead to ________. A) a decrease in the quantity of credit demanded by a firm B) an increase in the quantity of credit demanded by a firm C) a right shift of the credit demand curve of a firm D) a left shift of the credit demand curve of a firm

Assuming all else equal, what is likely to happen to the demand curve for reserves in an economy if the economy goes through a period of rapid expansion? A) The demand curve for reserves will shift to the right. B) The demand curve for reserves will shift to the left. C) There will be a downward movement along the demand curve for reserves. D) There will be an upward movement along the demand curve for reserves.

Assuming competitive labor markets, which of the following would you not expect to increase long-term, structural unemployment? A) Lower productivity B) Increase in wage-rigidity C) More stringent minimum wage laws D) Stronger collective bargaining

At a fixed level of worker productivity, ________. A) higher wages reduce profits B) higher wages reduce the cost of production C) lower wages reduce the quantity of labor demanded D) lower wages increase the quantity of labor supplied

Betsy enters a roadside cafeteria and orders a medium-sized cappuccino and a chicken burger. She hands over $5 at the cash counter and collects the food. In this example, money serves the function of ________. A) a medium of exchange B) a store of value C) a measure of inflation D) a means of deferred payment

Consider an economy where the growth rate of money supply is 2 percent and the inflation rate is 2 percent. If the quantity theory of money holds, the growth rate of real GDP in the economy will be ________. A) 0 percent B) 1 percent C) 2 percent D) 4 percent

Consider an economy where the growth rate of real GDP is 6 percent and the growth rate of money supply is 8 percent. If the quantity theory of money holds, the inflation rate in the economy will be ________. A) 2 percent B) 6 percent C) 8 percent D) 14 percent

Consider two banks: Bank A and Bank B. Suppose the value of liabilities of both the banks is equal. However, Bank A is solvent, while Bank B is insolvent. This would imply that ________. A) Bank A's assets exceed Bank B's assets B) Bank B's assets exceed Bank A's assets C) Bank A's liabilities exceed Bank A's assets D) Bank B's assets exceed Bank B's liabilities

Consider two countries: Country A and Country B. If the gap between the growth rate of money supply and growth rate of real GDP is larger in Country A than in Country B, then, according to the quantity theory of money, ________. A) the inflation rate will be higher in Country A B) the inflation rate will be lower in Country A C) real interest rates will be higher in Country A D) nominal interest rates will be lower in Country A

Consider two economies: A and B. The nominal interest rate is the same in both economies, but the rate of inflation is higher in economy B. Which of the following statements will then be TRUE? A) The real interest rate will be higher in economy A. B) The real interest rate will be higher in economy B. C) The real interest rate will be the same in both economies. D) The number of borrowers in both economies will depend on whether the real interest rate is higher in economy A or economy B.

Credit is ________. A) the loan that a debtor receives B) the income that an employee earns C) the value of the assets inherited by individuals from their parents D) the annual cost of maintaining an asset

Data confirm that the quantity theory of money ________. A) holds in the long run B) holds only in the short run C) holds both in the long run and the short run D) does not hold in either the short run or the long run

Demand deposits have a ________ maturity. A) 0-year B) 1-year C) 2-year D) 3-year

Downward wage rigidity is likely to ________ in an economy. A) increase unemployment B) decrease unemployment C) increase wage rates D) decrease wage rates

Efficiency wages ________. A) can lead to wage rigidity B) can be used to reduce wage rigidity C) can increase profits if the productivity of workers is fixed D) can decrease costs if workers' productivity varies directly with wage rates

Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit demand curve shifts to the right? A) Both the equilibrium rate of interest and quantity of credit will increase. B) Both the equilibrium rate of interest and quantity of credit will decrease. C) The equilibrium rate of interest will increase, and the equilibrium quantity of credit will decrease. D) The equilibrium rate of interest will decrease, and the equilibrium quantity of credit will increase.

Excessive dependence on cheap foreign imports can cause a(n) ________ in certain sectors of the economy. A) left shift in the domestic labor demand curve B) right shift in the domestic labor demand curve C) downward movement along the domestic labor demand curve D) upward movement along the domestic labor demand curve

For the textile industries of England in 1811, the invention of new technology that allowed workers to complete tasks that had previously taken hours in minutes resulted in a(n) ________ in these industries. A) decrease in the demand for labor B) increase in the demand for labor C) decrease in the quantity of labor demanded D) increase in the quantity of labor demanded

Government revenue from printing money is referred to as ________. A) seigniorage B) menu costs C) shoe leather costs D) excise tax

If a bank borrows funds for 3 years, the borrowing will be classified as ________. A) long-term debt B) dividend payments C) stockholders' equity D) short-term borrowing

If an individual borrows $100 and pays back $100 after a year to settle his loan, it implies that the rate of interest is ________. A) 0 percent B) 1 percent C) 10 percent D) 100 percent

If an individual borrows $100 at an annual rate of interest of 5 percent, how much interest will he have to pay at the end of 1 year? A) $5 B) $10 C) $20 D) $50

If the Fed conducted open market operations, what would the direct effect of this be? A) Changing the quantity of reserves supplied B) Changing the reserve requirement C) Changing the interest rate paid on reserves D) Any of the above

If the Fed sells government bonds in the open market, it will cause ________. A) the supply curve for reserves to shift to the left B) the supply curve for reserves to shift to the right C) an upward movement along the supply curve for reserves D) a downward movement along the supply curve for reserves

If the Fed successfully conducts open market operations to increase the supply of reserves by buying additional US Treasury bills from banks and other investors, all else being equal, how would this affect the market for US Treasuries? A) It would shift the demand for US Treasuries to the right, increasing their price. B) It would shift the supply of US Treasuries to the right, decreasing their price. C) It would shift the supply for US Treasuries to the left, increasing their price. D) It would shift the demand for US Treasuries to the left, decreasing their price.

The value of the marginal product of the tenth worker hired by a firm is $50. What is the maximum wage that should be paid to the worker? A) $5 B) $50 C) $0.20 D) $500

If the Fed took actions that indirectly grew the money supply by 10%, but real GDP growth was 5%, what would this mean it terms of its price stability mandate? A) It would overshoot inflation by 3%. B) It would undershoot inflation by 3%. C) It would hit its inflation target. D) It would overshoot inflation by 8%.

If the natural rate of unemployment in a country is 6 percent and the unemployment rate in the country is 8 percent, the cyclical unemployment in the country must be ________. A) 2 percent B) 6 percent C) 8 percent D) 14 percent

If the nominal interest rate in an economy is 4 percent and the real interest rate in the economy is 2 percent, the rate of inflation in the economy must be ________. A) 2 percent B) 4 percent C) −2 percent D) 0.5 percent

If the nominal interest rate in an economy is 6 percent and the inflation rate in the economy is 10 percent, then the real interest rate is ________. A) ‒4 percent B) ‒6 percent C) 6 percent D) 10 percent

If the nominal interest rate in an economy is 6 percent and the rate of inflation in the economy is 4 percent, the real interest rate in the economy is ________. A) 2 percent B) 24 percent C) 1.5 percent D) 10 percent

If the nominal interest rate in an economy is 8 percent and the real interest rate is 4 percent, the inflation in the economy is ________. A) 4 percent B) 8 percent C) 12 percent D) 32 percent

If the nominal interest rate in an economy is 9 percent and the expected inflation rate is 6 percent, then the expected real interest rate in the economy is ________. A) 3 percent B) 6 percent C) 9 percent D) 15 percent

If the nominal interest rate is greater than the real interest rate in an economy, ________. A) the inflation rate must be positive in the economy B) the inflation rate must be negative in the economy C) the inflation rate must be zero in the economy D) the real interest rate in the economy must be negative

If the number of potential workers in a country is 25 million and the size of the labor force in the country is 17 million, the number of adults not in the labor force will equal ________. A) 8 million B) 17 million C) 25 million D) 43 million

If the opportunity cost of working outside the home increases, then ________ the labor supply curve, assuming all else equal. A) there will be a left shift in B) there will be a right shift in C) there will be an upward movement along D) there will be a downward movement along

If the quantity of labor demanded exceeds the quantity of labor supplied, ________. A) the wage rate will rise B) the wage rate will fall C) the aggregate price index will rise D) the aggregate price index will fall

If the real interest rate is equal to the nominal interest rate in an economy, ________. A) the inflation rate must be zero in the economy B) the inflation rate must be positive in the economy C) the inflation rate must be negative in the economy D) the nominal interest rate must be zero in the economy

If the realized real interest rate in an economy is 6 percent, the nominal interest rate is 8 percent, and the expected inflation rate is 8 percent, then the realized inflation rate in the economy is ________. A) 2 percent B) 4 percent C) 6 percent D) 8 percent

If the unemployment rate among workers without a high school diploma in the United States is represented by NS, the unemployment rate among workers with a high school diploma in the United States is represented by HS, and the unemployment rate among workers with a bachelor's degree in the United States is represented by BS, then which of the following statements is TRUE? A) NS > HS > BS B) HS > NS > BS C) BS > HS > NS D) NS > BS > HS

If there are no changes in inflation expectations, a sale of government bonds by the Fed in the open market will cause ________. A) both the federal funds rate and the long-term expected real interest rate to rise B) both the federal funds rate and the long-term expected real interest rate to fall C) the federal funds rate to rise and the long-term expected real interest rate to fall D) the federal funds rate to fall and the long-term expected real interest rate to rise

If there is a new technology that increases worker productivity, labor demand would shift to the ________, and we would likely expect a ________ in voluntary unemployment among those who are counted as unemployed. A) right; decrease B) right; increase C) left; decrease D) left; increase

Imagine a central bank that wants the inflation rate to be 2%. In this country real GDP growth was 4%, but then suddenly slowed to 2%. If the central bank continued to grow the money supply at the rate consistent with 2% inflation and 4% real GDP growth, what will happen? A) Inflation will overshoot by 2%. B) Inflation will undershoot by 2%. C) Inflation will overshoot by 3%. D) Inflation will stay at 2%.

Imagine that we observe deflation in the country of Newlandia. All else being equal we would expect a(n) ________ in real wages and a ________ shift in the labor demand curve. A) Increase; leftward B) Increase; rightward C) Decrease; rightward D) Decrease; leftward

In Swaziland, the nominal GDP growth rate is 5 percent and the inflation rate is 7 percent. The real GDP growth rate in Swaziland is approximately ________. A) −2 percent B) 2 percent C) 12 percent D) 35 percent

In the Federal Funds Market model, the y-axis shows the ________, while the x-axis shows the ________. A) federal funds rate; quantity of reserves B) quantity of reserves; federal funds rate C) inflation rate; quantity of reserves D) quantity of reserves; inflation rate

Suppose that the Federal Reserve increases the federal funds rate by 1 percent. What would we expect to happen to the long-term expected real interest rate? A) It would increase by less than 1 percent. B) It would not change. C) It would decrease by less than 1 percent. D) It would decrease by exactly 1 percent.

Suppose that the money supply increases by 10 percent while real GDP increases by 6 percent. What does the quantity theory of money predict the inflation rate will be? A) 4 percent B) 6 percent C) 10 percent D) 16 percent

In the famous study of the impact of minimum wage laws on employment in NJ and Pennsylvania, why did the authors (Card and Kreuger) need to set up a study comparing employment in NJ and Pennsylvania rather than just looking at the effect on employment before and after the minimum wage law in just NJ? A) Since Pennsylvania had not increased its minimum wage, this created a natural experiment that could help understand causality better. B) The authors needed to know the impacts in multiple states to make sure their results were robust in different areas. C) Studying two states increased the sample size for the study. D) The before and after study in just NJ would have been better but the authors did not have the data for doing this analysis.

Investment pools gathered from a small number of very wealthy individuals or institutions are referred to as ________. A) hedge funds B) fixed deposits C) capital investment D) institutional savings

Janice grows apples but wants to buy oranges. Yussef grows oranges but wants to buy bananas. Marco grows bananas but wants to buy apples. If the three of them cannot meet at the same time and do not trust each other to write IOUs, what function of money would help them trade with each other? A) Medium of exchange B) Unit of account C) Store of value D) Convertability to gold

John makes it a point to save a portion of his salary every month. Assuming all else equal, if the real interest rate increases, it is likely to cause ________. A) an upward movement along John's credit supply curve B) a downward movement along John's credit supply curve C) John's credit supply curve to shift to the left D) John's credit supply curve to shift to the right

Menu costs refer to the ________. A) costs businesses incur when they change prices B) decrease in the purchasing power of a unit of currency C) difficulty people have in learning about new prices D) risk of a government adopting counterproductive policies like price controls

Newlandia's nominal GDP grew from 120 billion dollars to 132 billion dollars in one year. Which of the following is NOT a possible combination of growth in real GDP and inflation that this might reflect? A) 6% growth in real GDP and 7% inflation B) 10% growth in real GDP and 0% inflation C) 5% growth in real GDP and 5% inflation D) 2% growth in real GDP and 8% inflation

Online job platforms like Taskrabbit, LinkedIn, Indeed, etc. which try to help employers match with potential employees faster and more seamlessly, could reduce ________ unemployment by ________ the time it takes for workers to find jobs. A) frictional; reducing B) voluntary; increasing C) cyclical; reducing D) frictional; increasing

Recall the inflation equation and assume the quantity theory of money holds. If a Central Bank targets a 2% inflation rate and the economy tends to have a real GDP growth rate of 5%, what would money supply growth need to be? A) 7% B) 3% C) 2% D) 5%

Scenario: 100 people live in Country X, and 60 of these people are working full time. Tara and Jen have been able to find only part-time jobs. John, Peter, and Luna just had to close their coffee shop; and John and Peter are looking for a new business venture. Luna has inherited a large sum of money and feels that she does not need to work anymore. Her sister Sara feels the same way. Four people in Country X are living in care facilities. Ten people are full-time students, and two of them currently are hoping to find a job. All other people are retirees or under the age of 16. Refer to the scenario above. How many people in Country X are NOT considered to be potential workers? A) 26 B) 22 C) 36 D) 40

Scenario: Alpha Bank has $100,000 in total assets and $45,000 in total liabilities. Beta Bank has $250,000 in total assets and $220,000 in total liabilities. Refer to the scenario above. If Beta Bank is faced with a bank run, what must it do? A) Liquidate its long-term, illiquid assets B) Not pay out the deposits that are being withdrawn C) Rely on the FDIC to pay out the withdrawn deposits D) Invest more of its short-term assets in long-term assets to protect them

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each. Refer to the scenario above. Real GDP growth in Bookland from 1990 to 1991 was closest to ________. A) 10 percent B) 20 percent C) 30 percent D) 40 percent

Scenario: Consider Country A with a population of 2 million people. In Country A, there are 1.5 million people employed; 0.3 million younger than 18, in school or retired; 0.1 million voluntarily unemployed; and 0.1 million people officially unemployed. Refer to the scenario above. If country A is at a labor market equilibrium, which of the following should be the only reason that a person is officially unemployed? A) There is imperfect information between employers and workers, so the person is not able to find a job. B) The person is not willing to work at the market clearing wage rate. C) The person is in school and chooses not to work. D) The person is retired.

Scenario: Suppose an economy consists of only the following economic agents: 2 million full-time workers, 1 million part-time workers, 1 million people who have been laid off by their employers but are currently looking for employment, 1 million children aged 15 years or younger, and 2 million housewives not looking for jobs. Refer to the scenario above. What is the number of unemployed workers in the economy? A) 1 million B) 2 million C) 3 million D) 4 million

Scenario: The unemployment rate in Country Y is 6 percent, and the labor force is equals about 200 million people. 11) Refer to the scenario above. Which statement is TRUE about Country Y? A) About 188 million people have a job. B) About 212 million people are considered potential workers. C) The labor force participation rate is about 94 percent. D) There are fewer than 200 million potential workers.

Stores that accept Bitcoin as an alternative form of payment often list prices in USD and then charge the equivalent amount of Bitcoin based on the prevailing price of Bitcoin. This means that though Bitcoin is being used as a ________, in this case these stores are not using it as a ________. A) Medium of exchange; unit of account B) Unit of account; store of value C) Unit of account; medium of exchange D) Medium of exchange; store of value

Suppose that inflation were 6 percent and unemployment were 4 percent. Which of the elements of the Fed's dual mandate would it be failing? A) Price stability B) Maximum (sustainable) employment C) Both D) Neither

Suppose that we produce a graph with the annual inflation rate on the y-axis and the growth rate of the money supply minus the growth rate of real GDP on the x-axis. We plot the averages of each of these quantities over the past 50 years on the graph. If the countries' points all lie approximately on the 45° line, then this lends support to the ________. A) quantity theory of money being correct B) quantity theory of money being incorrect C) social cost of inflation outweighing the social benefit of inflation D) social benefit of inflation outweighing the social cost of inflation

Suppose you have borrowed money from a bank to buy a house. Which of the following will happen if the inflation rate unexpectedly rises? A) You will be better off. B) You will be worse off. C) The bank's shareholders will be better off. D) The real cost of your mortgage will rise.

The "gold standard" is a system in which ________. A) paper currency is backed by gold B) people use gold as a medium of exchange C) gold mining firms own the right to print currency D) gold is imported into the United States in exchange for paper currency

The European Central Bank ________. A) puts more emphasis on controlling inflation than on controlling employment B) puts more emphasis on controlling employment than on controlling inflation C) emphasizes maintaining interest rates below 5 percent D) emphasizes maintaining unemployment rates below 5 percent

The Fed pursues its key objectives by ________. A) influencing short-run and long-term interest rates B) determining the efficient level of government spending C) influencing market prices through price ceilings and price floors D) providing loans to new firms and businesses at extremely low rates of interest

The Federal Reserve conducts "stress tests" to determine what? A) Whether the portfolio of assets a private bank holds is too risky B) Whether the economy could withstand a substantial negative shock C) Whether a bank is qualified to accept deposits D) Whether bank regulators at the Federal Reserve have been subject to regulatory capture

The Federal Reserve determines and implements the ________ policy of the United States. A) monetary B) fiscal C) regulatory D) financial

The U.S. Federal Reserve system was founded ________. A) before the Great Depression B) after the Great Depression but before World War II C) after World War II but before 1980 D) since 1980

The US unemployment rate has averaged about 5.8% over the past 50 plus years. In April 2020, at the peak of the Covid-19 recession, unemployment was 14.7%. What was the cyclical component of unemployment? A) 8.9% B) 6.5% C) 9.6% D) 3.5%

The claims that economic agents have against banks are known as the bank's ________. A) liabilities B) assets C) deposits D) capital

The federal funds market refers to the market where ________. A) banks obtain loans of reserves from one another B) the federal government borrows overnight funds from the Fed C) the Fed obtains loans of reserves from the central banks of other nations D) there are no predetermined rates of interest on loans and the highest bidding borrower gets the loan

The government institutes a minimum-wage above the equilibrium wage rate in a perfectly competitive labor market. If the labor demand curve is perfectly inelastic, what will the minimum wage do to structural unemployment and the wage rate? A) It will increase structural unemployment and raise the wage rate. B) It will do nothing to structural unemployment and raise the wage rate. C) It will lower structural unemployment and lower the wage rate. D) It will do nothing to structural unemployment and lower the wage rate.

The labor demand curve represents the relationship between the quantity of labor demanded and the ________. A) wage B) price of the good that uses labor as an input C) number of workers available in the market D) average product of labor

The potential adult labor force includes the ________. A) civilian non-institutional population aged 16 years and older B) non-institutional population aged 18 years and older C) non-institutional population aged 16 years and older plus people on active duty in the military D) non-institutional population aged 13 years and older plus people on active duty in the military

The rate at which a price index decreases is referred to as the ________. A) deflation rate B) depreciation rate C) federal funds rate D) discount rate

The slope of the supply curve of reserves can be attributed to the fact that ________. A) the Fed fixes the supply of reserves B) the quantity of reserves supplied increases with the federal funds rate C) the quantity of reserves supplied decreases with the federal funds rate D) the supply of reserves is arbitrarily set by the World Bank

The statement of the assets and liabilities of an entity is referred to as ________. A) a balance sheet B) the balance of payments C) an asset-liability sheet D) a profit and loss statement

The unemployment rate is defined as the percentage of the ________ that is unemployed. A) labor force B) total population C) civilian non-institutionalized population aged 12 or older D) civilian non-institutionalized population aged 14 or older

The value of a worker's marginal product ________. A) is the additional revenue that the worker brings in to a firm B) is always equal to the maximum price at which the product produced by the worker can be sold in a market C) is the increment in the total cost of a firm when the worker is hired D) equals the average product of a firm that hires the worker divided by the marginal product of the worker

There is a rush of people who put in additional money into demand deposits at a local community bank. All else remaining equal, which of the following is NOT a corresponding change that could occur to keep the bank's balance sheet in balance? A) Increase in stock-holder equity B) Decrease in stock-holder equity C) Increase in reserves and cash equivalents D) Increase in loans given out by the bank

Wages that are higher than the current market wage ________. A) dissuade workers from shirking B) lower the productivity of workers C) lower the aggregate price index D) reduce the cost of production of various goods

What is meant by the commonly used phrase "too big to fail"? A) Governments will likely be politically motivated to bail out large banks if they fail due to systemic risk. B) Large banks typically have enough equity to avoid failure. C) Large banks typically have enough potential lenders to increase solvency if faced with a threat of failure. D) Large banks are more strictly regulated by the government and thus less likely to fail.

What makes a U.S. $100 bill valuable? A) People are likely to accept a $100 bill as payment. B) It is expensive to produce a $100 bill. C) A $100 bill can be exchanged on demand for a given amount of gold. D) A $100 bill is pretty to look at.

What was one of the reasons for creating the FDIC regulatory system in 1933? A) To provide a modicum of bank confidence for depositors during the Great Depression B) To discourage banks to take irresponsible risks with their depositors' money C) To encourage banks to achieve greater returns on investment D) To restructure the financial system

When Tara visited Canada recently, she made sure she had some Canadian currency on hand in order to buy things. In this sense, she was using the currency as a ________. A) medium of exchange B) store of value C) unit of account D) loanable fund

When an asset enables people to transfer purchasing power into the future, it serves the function of a ________. A) store of value B) unit of account C) medium of exchange D) measure of inflation

When an economist describes the "money supply," she is referring to ________. A) many forms of assets that can be immediately drawn on to purchase goods and services B) only the physical currency in circulation that can be immediately drawn on to purchase goods and services C) only the bank account assets that can be immediately drawn on to purchase goods and services D) the physical currency held by banks to pay off depositors

Which is the Federal Reserve more concerned about, the inflation rate or the money supply? A) The Fed is more concerned about the inflation rate. B) The Fed is more concerned about the money supply. C) The Fed is equally concerned about the inflation rate and the money supply. D) The Fed is more concerned about the inflation rate during expansions and the money supply during recessions.

Which of the following describes an organization that would not be considered a financial intermediary? A) A firm that sells critical machine parts to an auto manufacturer B) A company which takes money from pension funds and retirement accounts and invests it into mutual funds C) An organization that takes money from high-net worth individuals and uses it to buy struggling companies with the hopes that these companies will turn around and become profitable D) A firm that borrows money from insurance companies and creates new financial products to sell to other institutional investors

Which of the following equations best approximates the growth rate of nominal GDP, the growth rate of real GDP, and the inflation rate? A) Growth rate of nominal GDP = Inflation rate + Growth rate of real GDP B) Growth rate of nominal GDP = Inflation rate - Growth rate of real GDP C) Growth rate of real GDP = Inflation rate + Growth rate of nominal GDP D) Growth rate of real GDP = Inflation rate - Growth rate of nominal GDP

Which of the following equations is correct? A) Stockholders' equity + Total liabilities = Total assets B) Stockholders' equity ÷ Total liabilities = Total assets C) Stockholders' equity × Total liabilities = Total assets D) Stockholders' equity − Total liabilities = Total assets

Which of the following financial organizations has the ability to influence the supply of reserves in the United States? A) The Fed B) Private commercial banks C) Public sector banks D) The World Bank

Which of the following holds the reserves of private banks in the United States? A) The Fed B) The Pentagon C) The Treasury Department D) Venture capitalists

Which of the following is NOT a potential benefit of a modest about of surprise inflation for a firm? A) Having to change prices on a more frequent basis B) A reduction in real wages C) The real burden of any loans is reduced. D) It might generate more economic activity in the economy as a whole.

Which of the following is NOT an example of a bank's function as a financial intermediary? A) A bank keeps vaults for storing valuables B) A bank gives out loans to many different types of businesses which are unlikely to fail all at once C) A bank seeks out local businesses that need money but could be profitable D) A bank takes on deposits from the public and makes long-term investments

Which of the following is TRUE of fiat money? A) Fiat money is not backed by a physical commodity. B) Fiat money is illegal and difficult to counterfeit. C) The technology required to produce fiat money is not widely available. D) The raw materials required for the production of fiat money are available only in a few countries.

Which of the following is likely to happen if the annualized growth rate of money supply increases while real GDP remains unchanged? A) The inflation rate will rise. B) The inflation rate will fall. C) Nominal GDP will fall. D) The unemployment rate will rise.

Which of the following is likely to shift the demand curve for carpenters leftward, assuming all else equal? A) A rise in the prices of the tools used by carpenters B) A fall in the prices of the tools used by carpenters C) A rise in the wage rate of carpenters D) A fall in the wage rate of carpenters

Which of the following is likely to shift the demand curve for carpenters rightward, assuming all else equal? A) A fall in the price of wood B) A rise in the price of wood C) A rise in the wage rate of carpenters D) A fall in the wage rate of carpenters

Which of the following methods for influencing the federal funds rate is most commonly used by the Federal Reserve? A) Changing the quantity of reserves supplied B) Changing the reserve requirement C) Changing the interest rate paid on reserves D) All three of the above are equally common.

Which of the following statements is TRUE of frictionless labor markets? A) In such markets, firms can instantly hire and fire workers. B) In such markets, all firms pay below the equilibrium wage rate. C) In such markets, the quantity of labor demanded always exceeds the quantity of labor supplied. D) In such markets, the quantity of labor supplied always exceeds the quantity of labor demanded.

Which of the following statements is TRUE of money? A) Paper money was invented around 1000 AD in China. B) Fiat money was used in the barter system of exchange. C) Paper money was the first form of money to be invented. D) One of the limitations of paper money is that it does not function as a store of value.

Which of the following statements is TRUE? A) An increase in the real interest rate might discourage savings. B) An increase in the real interest rate always encourages higher savings. C) In an economy with a positive inflation rate, the real wage rate is always greater than the nominal wage rate. D) An increase in the nominal wage rate leads to a decrease in the real wage rate if the price level is stable.

Which of the following statements is TRUE? A) As the rate of unemployment decreases, an economy is expected to see growth in GDP. B) As the rate of unemployment increases, an economy is expected to see growth in GDP. C) The unemployment rate in a country always remains constant. D) The unemployment rate in a country is not correlated with the level of economic activity in the country.

Which of the following statements is TRUE? A) Both employees and employers have complete information about each other in a frictionless labor market. B) The market wage rate is always below the equilibrium wage rate in a frictionless labor market. C) There is always some unemployment in a frictionless labor market. D) Labor markets in the United States are frictionless.

Which of the following statements is TRUE? A) Firms usually tend to lay off workers instead of cutting wages to reduce costs. B) Firms usually tend to cut wages instead of laying off people to cut costs. C) Firms tend to increase wages in periods of contracting economic activity to boost morale. D) Firms tend to decrease wages in periods of contracting economic activity to boost labor productivity.

Which of the following statements is TRUE? A) If the opportunity cost of current consumption is high, people will save more. B) If the opportunity cost of current consumption is high, people will save less. C) If the opportunity cost of current consumption is high, the inflation rate will increase. D) If the opportunity cost of current consumption is high, the unemployment rate will decrease.

Which of the following statements is TRUE? A) If the real interest rate increases, the opportunity cost of current consumption increases. B) If the nominal wage rate increases, the opportunity cost of current consumption decreases. C) If the real wage rate increases, the opportunity cost of current consumption decreases. D) If the unemployment rate increases, the opportunity cost of current consumption decreases.

Which of the following statements is TRUE? A) Lack of information relating to the job market can lead to unemployment. B) There is no voluntary unemployment at the equilibrium wage rate. C) If the supply of labor exceeds the demand for labor, wage rates tend to rise. D) If the demand for labor exceeds the supply of labor, wage rates tend to fall.

Which of the following will NOT be included in a bank's liabilities? A) Cash equivalents of the bank B) Long-term debt of the bank C) Short-term borrowing by the bank D) Demand deposits held with the bank

Workers who are underemployed are ________. A) considered employed B) considered unemployed C) not counted in the labor force D) considered discouraged workers

You withdraw $10 from your checking account and pay $10 in cash to your friend for lunch, who then deposits it into their checking account. What happens to the money supply (M2)? A) There is no change. B) It increases. C) It decreases. D) It first increases and then decreases and then increases again.

Zakhona has a bank account with Bank A. She writes a check for $10,000 dollars to Anais who deposits that check with Bank B. How would the Fed settle this transaction? A) If Bank A has enough reserves, it would transfer $10,000 worth of reserves from the account held by Bank A into the account held by Bank B. B) The Fed has no role in settling this transaction. C) The Fed would print additional money to make sure Bank B gets the money from Bank A. D) The Fed would buy bonds as part of open market operations to settle the transaction.

Differentiate between a solvent bank and an insolvent bank. Which of the two is likely to have greater stockholders' equity?

A bank is solvent when the value of the bank's assets is greater than the value of its liabilities. A bank becomes insolvent when the value of the bank's assets is less than the value of its liabilities. Since stockholders' equity is defined as the total assets of a bank minus the total liabilities, a solvent bank is likely to have greater stockholders' equity than an insolvent bank has.

Consider two banks: Bank A and Bank B. Bank A has total assets worth $50,000 and total liabilities worth $24,000. In contrast, Bank B has total assets worth $100,000 and total liabilities worth $90,000. Given this information, which of the two banks is more prone to bank runs and why?

A bank run occurs when a bank experiences extraordinarily large volumes of withdrawals driven by a concern that the bank will run out of liquid assets with which to pay its depositors. This implies that bank runs are more likely to occur when depositors do not have much confidence in the solvency of a bank. Hence, one of the key methods to prevent such bank runs is to have lots of stockholders' equity and be well capitalized. A bank is said to be well capitalized if it owns far more than it owes. From the given information, the stockholders' equity for both banks can be calculated: Bank A's stockholders' equity = $50,000 − $24,000 = $26,000. Bank B's stockholders' equity = $100,000 − $90,000 = $10,000. The values of the stockholders' equity indicate that Bank A and Bank B own more than they owe, but Bank B has much less in bank equity. Hence, Bank B is more prone to bank runs than Bank A.

Differentiate between asset management companies and venture capital funds.

Asset management companies enable investors to use their savings to buy financial securities like stocks and bonds. In contrast, venture capital funds are a particular kind of private equity fund that invests in new companies that are just starting up and therefore have no track record.

List the various categories into which a bank's assets are divided.

A bank's assets are divided into the following: i) Bank reserves: These include vault cash and a bank's holdings on deposit at the central bank of the country. ii) Cash equivalents: These are riskless, liquid assets that the bank can immediately access, like deposits with other banks. iii) Long-term investments: These mostly comprise loans to households and firms and also include things like the value of the real estate that the bank uses for its operations.

List the various categories into which a bank's liabilities are divided.

A bank's liabilities are divided into the following: i) Demand deposits: These are funds loaned to a bank by depositors. ii) Short-term borrowing: This comprises short-term loans that a bank has obtained from other financial institutions iii) Long-term debt: This is defined as debt that is to be repaid in a year or more. iv) Stockholders' equity: This is defined as the difference between a bank's total assets and liabilities.

How is the wage to be paid to a worker determined by a profit-maximizing firm? If a marginal worker creates 8 units of a product in a month that is sold for $5 per unit, calculate the maximum wage that should be paid to him.

A profit-maximizing firm will pay a worker the value of the worker's marginal product, which is defined as the incremental income that this worker will generate for the firm. The value of the marginal product of the worker is 8 × $5 = $40. Hence, the maximum wage that should be paid to the worker is $40.

If, at a given wage, the quantity of labor supplied exceeds the quantity of labor demanded, ________. A) the wage rate will increase B) the wage rate will fall C) the aggregate price index will rise D) the aggregate price index will fall

The growth rate of a country's money supply in a particular year was 8.5 percent. What was the growth rate of real GDP if the inflation rate in the same year was 4 percent?

According to the quantity theory of money, the ratio of money supply to nominal GDP is constant. Therefore, the rate of growth of money supply must equal the rate of growth of nominal GDP. However, the growth rate of nominal GDP is the sum of the growth rate of real GDP and the inflation rate. Thus, Rate of growth in money supply = Rate of growth in real GDP + Inflation rate. So the growth rate of real GDP in this case is 8.5 percent ‒ 4 percent = 4.5 percent.

Why is the labor demand curve downward-sloping?

An employer will pay the labor it hires a wage equal to the value of the marginal product of the labor. Since firms experience diminishing marginal product of labor, the value of the marginal product of labor decreases when the employer hires more and more labor. Hence, as more and more labor is demanded, the wage rate paid to the additional labor decreases. This causes the labor demand curve to be downward-sloping.

What causes the labor demand curve to shift? List three factors that can cause the labor demand curve to shift right.

Any change that affects the entire schedule relating the quantity of labor and the value of the marginal product of labor will shift the labor demand curve. Factors that can cause the labor demand curve to shift right are as follows: i) Increase in output prices: if the price of the output that the labor is used to produce increases, the labor demand curve shifts right. ii) Technology and productivity: if technological progress increases labor productivity, the demand schedule for labor shifts to the right. iii) Falling input prices: if there is a fall in the price of inputs that are combined with labor to produce output, the labor demand curve shifts right.

How can technological innovations be a source of unemployment?

At times, technological innovations can be a source of unemployment, because new technology can replace manual workers and reduce a firm's demand for labor. The introduction of such technologies in a particular industry can make workers redundant in that industry, thereby creating unemployment.

A business's cost of changing prices is referred to as ________. A) shoe leather costs B) menu costs C) intangible costs D) inflation taxes

A commercial bank's last resort for borrowing reserves is ________. A) the federal funds market B) the discount window C) the central government D) foreign banks

A downward movement along the labor demand curve occurs when ________, assuming all else equal. A) the wage rate increases B) the wage rate decreases C) the price of the output that the labor is used to produce increases D) the price of the output that the labor is used to produce decreases

A profit-maximizing firm will pay a worker ________. A) the revenue that it earns by selling one unit of the product B) the value of the worker's marginal product C) less than the value of the worker's marginal product D) more than the value of the average revenue of the firm

A reduction in wage is most likely to ________. A) increase worker productivity B) lower worker productivity C) increase the quantity of labor supplied D) decrease the quantity of labor demanded

A researcher finds that, for an economy, the nominal GDP in the year 2015 equaled the nominal GDP in the year 2016. She also finds that the output of the economy was the same over the two years. A situation like this is possible only if ________. A) the annual inflation rate in the economy is negative B) the annual inflation rate in the economy is 0 percent C) the annual interest rate in the economy is negative D) the annual interest rate in the economy is 0 percent

A retired worker receives a pension that is not indexed to inflation. Which of the following will happen if the rate of inflation rises? A) The retiree will be better off. B) The retiree's purchasing power will fall. C) The retiree's purchasing power will increase. D) The shareholders of the firm she worked in will lose.

A worker has negotiated a nominal wage contract with his employer for a period of 3 years. Which of the following will happen if the rate of inflation rises beyond the worker's expectations during this period? A) The worker will be better off. B) The worker will be worse off. C) The worker's real wage will increase. D) The company's shareholders will be worse off

According to the quantity theory of money, if the growth rate of money supply is 6 percent and the growth rate of real GDP is 9 percent, then the growth rate of nominal GDP in the economy will be ________. A) 3 percent B) 6 percent C) 9 percent D) 15 percent

All else being equal, an increase in government borrowing is likely to cause a(n) ________. A) left shift of the credit demand curve B) right shift of the credit demand curve C) upward movement along the credit demand curve D) downward movement along the credit demand curve

An individual can borrow a certain sum of money from any of the three banks in her town—Bank 1, Bank 2, and Bank 3. Bank 1 offers her loans at an annual interest rate of 5 percent, Bank 2 offers her loans at an annual interest rate of 3 percent, and Bank 3 offers her a loan at an annual interest rate of 10 percent. A rational individual will ________. A) borrow from Bank 1 B) borrow from Bank 2 C) borrow from Bank 3 D) be indifferent about borrowing from any of the three banks

Any change that affects the entire schedule relating the quantity of labor and the value of the marginal product of labor will ________, assuming all else equal. A) cause a rotation in the labor demand curve B) shift the labor demand curve C) be caused by a change in the wage rate D) cause the labor demand curve to become vertical

Any change that causes an increase in the demand for labor at a given wage rate will be represented by a(n) ________ the labor demand curve, assuming all else equal. A) left shift of B) right shift of C) downward movement along D) upward movement along

Assuming all else equal, a rise in the rate of interest ________. A) results in a fall in the cost of borrowing B) results in a fall in the quantity of credit demanded C) results in an increase in the number of potential debtors D) results in a fall in the amount of interest accumulated on a loan

Assuming all else equal, the demand curve for reserves in an economy shifts to the left. Which of the following could explain this shift? A) Rapid expansion of the economy B) Rapid contraction of the economy C) An increase in the federal funds rate D) A decrease in the federal funds rate

Before developing inflation expectations, Jenny reads through all available material on consumer price indexes and producer price indexes. Later, she also reads through recent magazines and newspapers to identify factors that could affect the inflation rate in the coming days. Jenny can be said to have ________. A) adaptive expectations B) rational expectations C) marginal expectations D) conditional expectations

Bitcoin is a cryptocurrency (a virtual currency that is protected from counterfeiting and theft by computer code). Is Bitcoin an example of a fiat money? A) No, because Bitcoin cannot be converted into gold on demand. B) No, because Bitcoin is not guaranteed by the government C) Yes, because Bitcoin cannot be converted into gold on demand. D) Yes, because Bitcoin can be converted into gold on demand.

Borrowed funds that are to be repaid in a year or more are referred to as ________. A) annual debt B) long-term debt C) loanable funds D) stockholders' equity

Cash equivalents are ________. A) a part of a bank's liabilities B) riskless, liquid assets that banks can immediately access C) the amount of deposits held by the public in a particular bank D) assets that do not attract interest and, hence, generate no additional revenue

In Swaziland, the nominal GDP growth rate is 7 percent and the inflation rate is 5 percent. The real GDP growth rate in Swaziland is approximately ________. A) −2 percent B) 2 percent C) 12 percent D) 35 percent

Changes in the federal funds rate ________. A) have no effect on the long-term expected interest rate B) change the long-term expected interest rates in the same direction C) change the long-term expected interest rates in the opposite direction D) can change the long-term expected interest rate in any direction, depending on the magnitude of the change in the federal funds rate

Collective bargaining between unions and employers often leads to ________. A) wages that are lower than what workers would have received at equilibrium B) wages that are higher than what workers would have received at equilibrium C) wages equal to what workers would have received at equilibrium D) a reduction in the unemployment rate

Collective bargaining can ________. A) reduce wages B) increase unemployment C) increase the profitability of firms D) make it easier for workers outside a union to get jobs

Deposits made by the public into a savings account are referred to as ________. A) overdrafts B) demand deposits C) current deposits D) stockholders' equity

Economic agents who borrow funds are known as ________. A) creditors B) debtors C) receivers D) investors

Economists often refer to the government revenue obtained from money creation as ________. A) liquid revenue B) seigniorage C) windfall revenue D) a supplementary tax

Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit demand curve shifts to the left? A) Both the equilibrium rate of interest and quantity of credit will increase. B) Both the equilibrium rate of interest and quantity of credit will decrease. C) The equilibrium rate of interest will increase, and the equilibrium quantity of credit will decrease. D) The equilibrium rate of interest will decrease, and the equilibrium quantity of credit will increase.

Hyperinflation results when ________. A) the money supply grows very slowly B) the money supply grows very rapidly C) real GDP grows very slowly D) real GDP grows very rapidly

If a firm introduces technology that substitutes capital for labor, ________ the labor demand curve of the firm, assuming all else equal. A) there will be a right shift of B) there will be a left shift of C) there will be a downward movement along D) there will be an upward movement along

If an increase in the demand for reserves causes a deviation in the federal funds rate from a target rate, the Fed can maintain the target by ________. A) causing the supply curve of reserves to shift to the left B) causing the supply curve of reserves to shift to the right C) causing an upward movement along the supply curve of reserves D) causing a downward movement along the supply curve of reserves

If real wages fall, ________. A) consumer demand is likely to increase B) employers are likely to hire more workers C) economic production will decrease D) economic production will increase

If the Fed buys government bonds from the open market, it will cause ________. A) the supply curve for reserves to shift to the left B) the supply curve for reserves to shift to the right C) an upward movement along the supply curve for reserves D) a downward movement along the supply curve for reserves

If the annual inflation rate in an economy is positive, the purchasing power of a dollar kept in a bank ________. A) will increase over time B) will decrease over time C) will remain the same over time D) will increase or decrease, depending on the economic growth rate

If the growth rate of nominal GDP and the rate of inflation in an economy are 4 percent and 1 percent, respectively, the growth rate of real GDP in the economy must be ________. A) 1 percent B) 3 percent C) 4 percent D) 5 percent

If the nominal interest rate increases without any change in the rate of inflation in an economy, ________. A) the real interest rate in the economy decreases B) the real interest rate in the economy increases C) the real interest rate in the economy remains the same D) the ratio of real interest rate to nominal interest rate increases

If the number of employed workers in an economy is 8 million, the number of potential workers in the economy is 12 million, and the number of adults not in the labor force is 1 million, the number of unemployed people in the economy will equal ________. A) 1 million B) 3 million C) 5 million D) 7 million

If the number of potential workers in an economy increases while the size of the labor force remains unchanged, ________. A) the natural rate of unemployment will increase B) the labor force participation rate will fall C) the labor force participation rate will increase D) the labor force participation rate will remain unaffected

If the opportunity cost of working outside the home decreases, then ________ the labor supply curve is likely, assuming all else equal. A) a left shift of B) a right shift of C) a downward movement along D) an upward movement along

If the quantity of credit demanded in a market exceeds the quantity of credit supplied in the market, ________. A) the real rate of interest tends to fall B) the real rate of interest tends to rise C) the rate of inflation tends to rise D) the unemployment rate tends to fall

If the quantity theory of money holds, then in an economy, then ________. A) Inflation = Growth rate of money supply + Growth rate of real GDP B) Inflation = Growth rate of money supply ‒ Growth rate of real GDP C) Inflation = Growth rate of money supply + Growth rate of nominal GDP D) Inflation = Growth rate of money supply ‒ Growth rate of nominal GDP

If the total assets of a bank equal $50,000 and the total liabilities of the bank equal $20,000, stockholders' equity will equal ________. A) $20,000 B) $30,000 C) $50,000 D) $70,000

If there are 48 million people in a country's labor force and the number of potential adult workers in the country is 80 million, the labor force participation rate in the economy is ________. A) 48 percent B) 60 percent C) 80 percent D) 90 percent

In a perfectly competitive labor market, at the equilibrium wage rate, ________. A) Involuntary unemployment is positive B) Involuntary unemployment is zero C) cyclical unemployment is positive D) cyclical unemployment is negative

In an economy, investment is most likely to be dependent on ________. A) the short-term real interest rate B) the long-term real interest rate C) the short-term nominal interest rate D) the long-term nominal interest rate

In the Federal Funds Market model, the demand for federal funds is a ________ line, while the supply of federal funds is a(n) ________ line. A) downward-sloping; upward-sloping B) downward-sloping; vertical C) vertical; upward-sloping D) horizontal; upward-sloping

In the United States, bank reserves include ________. A) vault cash and the currency held by the public B) vault cash and the bank's holdings on deposit at the Federal Reserve Bank C) the currency held by the public and bank's holdings on deposit at the Federal Reserve Bank D) vault cash, the currency held by the public, and the bank's holdings on deposit at the Federal Reserve Bank

In the United States, if a customer of Bank of America writes a check and the recipient of the check deposits it in HSBC North America Holdings, then the check is cleared by ________. A) Bank of America B) the Fed C) HSBC North America Holdings D) either Bank of America or HSBC North America Holdings

In the United States, the money supply is most commonly referred to as ________. A) M1 B) M2 C) M3 D) M4

Jane got paid in cash for a programming job. Jane didn't need to buy anything that week, but put the money in her purse to use when she needed it. Jane was using the money as a ________. A) medium of exchange B) store of value C) unit of account D) loanable fund

M2 adds together ________. A) currency in circulation, savings accounts, and currency held by foreigners B) currency in circulation, checking accounts, savings accounts, travelers' checks, and money market accounts C) currency in circulation, checking accounts, savings accounts, travelers' checks, and currency held by foreigners D) currency in circulation and currency held by foreigners

Many economists believe that ________ is useful to stimulate the economy in the short run by cutting real wages and real interest rates. A) hyperinflation B) modest inflation C) negative inflation D) zero inflation

Minimum wage laws ________. A) are used to solve the problem of wage rigidity B) can give rise to wage rigidity C) can cause the quantity of labor demanded to exceed the quantity of labor supplied D) help equate the quantity of labor demanded and the quantity of labor supplied

Money or goods that parents leave to their children in their wills are referred to as ________. A) charity B) bequests C) interest D) transfers

One of the main reasons for hyperinflation episodes is ________. A) high tax rates B) large government budget deficits C) a decrease in real GDP D) a decrease in the demand for consumer goods

One of the risks of maturity transformation is that ________. A) it discourages savings B) it can lead to bank runs C) it can increase the rate of inflation D) it reduces the profitability of banks

Physical currency in circulation makes up approximately what percentage of the U.S. money supply (as measured by M2)? A) ~5 percent B) ~10 percent C) ~25 percent D) ~50 percent

Rapid unemployment increases ________. A) happen in all areas of the United States at the same time B) may happen in one area but not in adjacent areas C) only happen if there is a recession D) may be the consequence of a small increase in the minimum wage

Ryan saved $50,000 last year so that he could buy a car this year. In this case, money served the function of a ________. A) medium of exchange B) store of value C) unit of account D) measure of inflation

Scenario: 100 people live in Country X, and 60 of these people are working full time. Tara and Jen have been able to find only part-time jobs. John, Peter, and Luna just had to close their coffee shop; and John and Peter are looking for a new business venture. Luna has inherited a large sum of money and feels that she does need to work anymore. Her sister Sara feels the same way. Four people in Country X are living in care facilities. Ten people are full-time students, and two of them currently are hoping to find a job. All other people are retirees or under the age of 16. Refer to the scenario above. How would the unemployment rate change if two more students decide to look for work? A) It would remain the same, because students are not part of the labor force. B) It would increase by about 3 percent. C) It would decrease by about 3 percent. D) It would increase by more than 3 percent.

Scenario: 100 people live in Country X, and 60 of these people are working full time. Tara and Jen have been able to find only part-time jobs. John, Peter, and Luna just had to close their coffee shop; and John and Peter are looking for a new business venture. Luna has inherited a large sum of money and feels that she does need to work anymore. Her sister Sara feels the same way. Four people in Country X are living in care facilities. Ten people are full-time students, and two of them currently are hoping to find a job. All other people are retirees or under the age of 16. Refer to the scenario above. What is the labor force participation rate in Country X? A) 95 percent B) 86 percent C) 81 percent D) 82 percent

The real interest rate is equal to ________. A) the nominal interest rate adjusted for tax rates B) the nominal interest rate adjusted for inflation C) the nominal interest rate adjusted for income changes D) the nominal interest rate adjusted for changes in exchange rate

Scenario: 100 people live in Country X, and 60 of these people are working full time. Tara and Jen have been able to find only part-time jobs. John, Peter, and Luna just had to close their coffee shop; and John and Peter are looking for a new business venture. Luna has inherited a large sum of money and feels that she does not need to work anymore. Her sister Sara feels the same way. Four people in Country X are living in care facilities. Ten people are full-time students, and two of them currently are hoping to find a job. All other people are retirees or under the age of 16. Refer to the scenario above. What is the size of the labor force in Country X? A) 55 B) 64 C) 70 D) 78

Scenario: Alpha Bank has $100,000 in total assets and $45,000 in total liabilities. Beta Bank has $250,000 in total assets and $220,000 in total liabilities. 23) Refer to the scenario above. What is Alpha Bank's Stockholders' equity? A) $45,000 B) $55,000 C) $65,000 D) $145,000

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180. Refer to the scenario above. Using 2015 as the base year, what was the real GDP of the economy in 2015? A) $45,000 B) $55,000 C) $57,500 D) $75,000

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180. Refer to the scenario above. Using 2016 as the base year, what was the real GDP of the economy in 2015? A) $40,500 B) $49,500 C) $50,000 D) $52,500

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each. 15) Refer to the scenario above. The nominal GDP in Bookland in 1990 was ________. A) $10,000 B) $100,000 C) $110,000 D) $120,000

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each. Refer to the scenario above. The rate of inflation in Bookland from 1990 to 1991 was closest to ________. A) 10 percent B) 20 percent C) 30 percent D) 40 percent

Scenario: Jim, Pam, Michael, and Angela all worked for a paper company until the company went out of business. Jim was a salesman, Pam was a receptionist, Michael was the manager, and Angela was an accountant. Once the company went out of business, they all had to look for and consider other work opportunities. Refer to the scenario above. Which of the following will NOT likely be a part of the job search process that these unemployed people go through? A) Sending resumes to other potential employers B) Going back to school to be re-educated in a new field C) Getting references from their previous job D) Going to interviews with the new potential employers

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings. 84) Refer to the scenario above. Which of the following statements is correct? A) The $120,000 that John has already can be referred to as credit. B) John could be a debtor or a lender. C) The bank is considered the lender. D) John's brothers are considered private debtors.

Scenario: Suppose an economy consists of only the following economic agents: 2 million full-time workers, 1 million part-time workers, 1 million people who have been laid off by their employers but are currently looking for employment, 1 million children aged 15 years or younger, and 2 million housewives not looking for jobs. Refer to the scenario above. What is the size of the labor force in the economy? A) 3 million B) 4 million C) 5 million D) 6 million

Scenario: The unemployment rate in Country Y is 6 percent, and the labor force is equals about 200 million people. Refer to the scenario above. Who is considered part of the 6 percent of unemployed workers in Country Y? A) Amanda, who works 20 hours per week at a coffee shop but wants to work full time B) Peter, an engineer who became a stay-at-home husband after his start-up company went bankrupt, but he wants to find a new engineering job C) John, who is taking a year off to travel after college D) All of the above

Scenario: The unemployment rate in Country Y is 6 percent, and the labor force is equals about 200 million people. Refer to the scenario above. Why might policy makers in Country Y most likely introduce policies that require unemployed workers to participate in job training programs? A) Country Y's economy likely suffers a recession. B) To mitigate the social costs of unemployment C) To decrease the labor force D) To be able to track unemployment more easily

Shifts in the demand curve of labor due to increased competition from Chinese imports are comparable to shifts in the demand curve due to ________. A) increased skills of the labor force B) technological developments that replace manual labor C) minimum wage negotiations D) increased population growth

Suppose Bank A holds $50,000 in deposits with other banks. On its balance sheet, this amount will be accounted as Bank A's ________. A) reserves B) cash equivalents C) long-term investments D) short-term borrowing

Suppose that General Motors is deciding whether to build a new large automobile plant. It intends to borrow money to finance the new plant. Which of the following is NOT known to General Motors when it decides whether to build the new plant? A) The expected real interest rate B) The realized real interest rate C) The expected nominal interest rate D) The expected inflation rate

Suppose that inflation were 2 percent and unemployment were 10 percent. Which of the elements of the Fed's dual mandate would it be failing? A) Price stability B) Maximum (sustainable) employment C) Both D) Neither

Suppose that we produce a graph with the annual inflation rate on the y-axis and the growth rate of the money supply minus the growth rate of real GDP on the x-axis. We plot the averages of each of these quantities over the past 50 years on the graph. If the countries' points do not lie approximately on the 45° line, then this lends support to the ________. A) quantity theory of money being correct B) quantity theory of money being incorrect C) social cost of inflation outweighing the social benefit of inflation D) social benefit of inflation outweighing the social cost of inflation

The European counterpart of the Federal Reserve is called the ________. A) European Union Reserve B) European Central Bank C) European Reserve Bank D) European Reserve

The Federal Reserve Bank ________. A) is controlled by the federal government B) has its headquarters in Washington, D.C. C) controls the total volume of public debt in the country D) comprises twenty regional banks

The Federal Reserve attempts to keep inflation ________ and ________. A) high and predictable B) low and predictable C) high and unpredictable D) low and unpredictable

The German hyperinflation during 1922-1923 can be attributed to the ________. A) absence of financial intermediaries in Germany B) German government printing money to pay its bills C) emergence of a large number of monopolies in Germany D) restrictive trade policy of Germany

The ________ is the interest rate that banks charge each other for overnight loans. A) spot interest rate B) federal funds rate C) discount window interest rate D) subsidized banking interest rate

The biggest wave of bank failures in the United States occurred ________. A) before the Great Depression B) during the Great Depression C) in the early 1990s D) during 2007 to 2009

The cost of inflation will be minimized if ________. A) the growth rate of inflation exceeds the growth rate of wages B) the growth rate of inflation equals the growth rate of wages C) the money supply is increased during times of high inflation D) taxes are increased during the periods of high inflation

The funds being lent in the federal funds market comprise ________. A) bank deposits of domestic households B) reserves kept by commercial banks with the Fed C) investments by foreign firms in domestic companies D) tax revenues earned by the federal government

The investments that a bank makes are known as ________. A) liabilities B) assets C) deposits D) capital

The loanable funds market is also referred to as the ________. A) spot market B) credit market C) capital market D) exchange market

The long-run unemployment rate ________. A) is constant B) is the average of the unemployment rate in a country over time C) is always less than the level of cyclical unemployment in an economy D) is determined by adding the unemployment rates in all countries and then dividing it by the number of countries

The market where borrowers obtain funds from savers is referred to as the ________. A) spot market B) credit market C) capital market D) exchange market

The model of expectations in which the current level of inflation depends on past levels is referred to as the ________. A) composite expectations model B) adaptive expectations model C) rational expectations model D) realized real expectations model

The number of adults not in the labor force of a country equals 6 million, and the number of individuals employed is 5 million. If there are 12 million potential adult workers in the economy, what is the current unemployment rate in this country? A) 12.45 percent B) 16.67 percent C) 21 percent D) 30.55 percent

The paper currency that is currently used in the United States is an example of ________ money. A) hard B) fiat C) commodity D) price-indexed

The quantity theory of money assumes a constant ratio of ________. A) real GDP to nominal GDP B) money supply to nominal GDP C) money supply to real GDP D) money demand to money supply

The quantity theory of money implies that the growth rate of ________. A) money demand is equal to the growth rate of money supply B) money supply is equal to the growth rate of nominal GDP C) money supply is equal to the growth rate of real GDP D) currency in circulation is equal to the growth rate of the price level

The transfer of short-term liabilities into long-term investments is called ________. A) risk transformation B) maturity transformation C) investment restructuring D) intertemporal transformation

Throughout the past century, what can be said about financial crises in the United States? A) Almost all financial crises resulted from a housing bubble created by politically motivated government policies. B) Each financial crisis resulted in the failure of a number of banks. C) Each financial crisis resulted in the failure of some of the largest banks. D) Only the most recent financial crisis resulted in bank failures.

U.S. currency is not currently convertible into gold. What does this mean? A) It is impossible/illegal to buy gold with U.S. currency. B) Individuals or banks cannot exchange their currency for gold from the government C) The price of gold in U.S. currency does not change from day to day. D) The price of gold in U.S. currency fluctuates from day to day.

Unemployment that arises when there is a mismatch between the quantity of labor demanded and the quantity of labor supplied is referred to as ________. A) frictional unemployment B) structural unemployment C) cyclical unemployment D) the natural rate of unemployment

When Terry retired from Caterpillar, he received a pension: Caterpillar would pay him $50,000 the first year he was retired, with the amount increasing by 5 percent each year thereafter. If inflation turned out to be 2 percent each year, what would happen to the real value of Terry's pension? A) It would increase each year by 5 percent. B) It would increase each year by 3 percent. C) It would decrease each year by 5 percent. D) It would decrease each year by 3 percent.

When an asset is used as a universal yardstick for expressing the worth of different goods and services, it serves the function of a ________. A) store of value B) unit of account C) medium of exchange D) loanable fund

When examining the effects of interest rates on borrowing decisions, we distinguish between the short-term and the long-term. How long is the long-term in this context? A) 100 years or more B) 10 years or more C) 1 year or more D) Anything longer than an overnight (24-hour) loan

Which is higher, the federal funds rate or interest rate on loans made from the Fed's discount window? A) The federal funds rate is higher. B) The interest rate on loans made from the Fed's discount window is higher. C) Both rates are equal. D) Sometimes one is higher, and sometimes the other is higher.

Which of the following equations is correct? A) Growth rate of nominal GDP = Inflation ‒ Growth rate of real GDP. B) Growth rate of nominal GDP = Inflation + Growth rate of real GDP. C) Growth rate of nominal GDP = Inflation ÷ Growth rate of interest rates. D) Growth rate of nominal GDP = Growth rate of interest rates ÷ Inflation.

Which of the following equations is correct? A) Real interest rate = Nominal interest rate + Inflation rate B) Real interest rate = Nominal interest rate − Inflation rate C) Real interest rate = Nominal interest rate × Inflation rate D) Real interest rate = Nominal interest rate ÷ Inflation rate

Which of the following groups of people is included in the labor force of a country? A) Retirees B) Part-time paid workers C) Adults who are full-time students D) Disabled workers who can no longer work

Which of the following groups of people would NOT be considered employed? A) Teachers in public schools B) A parent raising kids at home C) Paid workers in the agricultural sector of a country D) Government representatives earning a fixed salary every month

Which of the following is NOT an asset of a bank? A) Official bank reserves B) Stockholders' equity C) Cash equivalents of the bank D) Long-term investments made by the bank

Which of the following is TRUE of the quantity of reserves demanded? A) The quantity of reserves demanded is constant over time for almost every bank. B) The quantity of reserves demanded increases as the federal funds rate falls. C) The quantity of reserves demanded increases as the inflation rate increases. D) The quantity of reserves demanded increases at a constant rate over time.

Which of the following is likely to happen when the Fed lowers the Fed funds rate and expanding the money supply? A) The equilibrium wage rate will fall. B) The labor demand curve will shift to the right. C) Economic activity will reduce. D) The nominal GDP will decrease.

Which of the following is likely to shift the labor supply curve to the right, assuming all else equal? A) A fall in the population of a country due to a natural disaster B) A rise in the immigration of workers in search of better work opportunities C) A fall in the wage rate D) A rise in the wage rate

Which of the following methods for influencing the federal funds rate has NOT been used by the Federal Reserve in the past 20 years? A) Changing the quantity of reserves supplied B) Changing the reserve requirement C) Changing the interest rate paid on reserves D) All of the above have been used in the past 20 years.

Which of the following people would be classified as being voluntarily unemployed? A) Sally, who is not working because she wants to be at home with her kids B) Joey, who would be willing to work for $20 an hour but the market clearing wage rate is $15 an hour C) Jackie, who does not want to work, because she is traveling the world D) Tom, who married a rich widow so that he would not have to work at all

Which of the following statements correctly differentiates between unemployed workers and discouraged workers? A) Unemployed workers do not have a paid job, while discouraged workers have a paid job. B) Unemployed workers are counted in the labor force, but discouraged workers are excluded from the labor force. C) Unemployed workers consist of skilled workers who have been laid off, while discouraged workers refer to the unskilled workers who have lost their jobs. D) The unemployment benefits received by unemployed workers are not capped, while the unemployment benefits received by discouraged workers are capped at a maximum.

Which of the following statements is TRUE of the federal funds market? A) No banks are refused loans in the federal funds market. B) In the federal funds market, banks with a shortage of reserves borrow funds, while banks with an excess of reserves lend them out. C) The interbank lending system works more efficiently in periods of financial panic than in periods of financial stability. D) Although the federal funds market aims to provide liquidity to needy banks, it is not very popular as overnight loans are logistically inefficient for large banks.

Which of the following statements is TRUE of the quantity theory of money? A) The theory is applicable only in the short run. B) Predictions of the theory can be verified with data. C) The theory states that inflation will always be positive. D) The theory explains the relationship between growth in real GDP and changes in nominal interest rates.

Which of the following statements is TRUE of the unemployment rate in a country? A) It normally increases during periods of economic expansion and decreases during periods of economic contraction. B) It normally decreases during periods of economic expansion and increases during periods of economic contraction. C) It normally decreases during periods of both economic expansion and contraction. D) It is not correlated with the level of economic activity in a country.

Which of the following statements is TRUE when wages are above the market-clearing wage? A) The larger the gap between the current market wage and the market-clearing wage, the lesser will be the amount of unemployment. B) The larger the gap between the current market wage and the market-clearing wage, the greater will be the amount of unemployment. C) At wage rates above the market-clearing wage rate, there is an excess demand for workers. D) At wage rates below the market-clearing wage rate, there is an excess supply of workers.

Which of the following statements is TRUE? A) All else being equal, the incentive to look for a job is higher for an individual with a lower opportunity cost of time. B) All else being equal, the incentive to look for a job is lower for an individual with a lower opportunity cost of time. C) All else being equal, a worker who earned a higher income previously but is now unemployed will have a lower opportunity cost of time than someone who had a lower income but is now unemployed. D) All else being equal, a worker who earned a higher income previously but is now unemployed will have the same opportunity cost of time as someone who had a lower income but is now unemployed.

Which of the following statements is TRUE? A) An excess supply of credit exerts an upward pressure on the real rate of interest. B) An excess demand for credit exerts an upward pressure on the real rate of interest. C) At rates of interest below the equilibrium rate, there is an excess supply of credit. D) At rates of interest above the equilibrium rate, there is an excess demand for credit.

Which of the following statements is TRUE? A) Cuts in wages boost worker morale. B) Wage rigidity can cause unemployment. C) Workers normally resist increases in wages. D) Firms normally prefer wage cuts over layoffs.

Which of the following statements is TRUE? A) If a firm deposits a sum of $500 in a bank, the sum is a part of the bank's assets. B) If a firm deposits a sum of $500 in a bank, the sum is a part of the bank's liabilities. C) If a bank lends a sum of $600 to a firm, the sum is a part of the bank's liabilities. D) If a bank lends a sum of $200 to a household, the sum is a part of the bank's liabilities.

Which of the following statements is TRUE? A) Job search is normally a month-long process. B) Job search refers to the activities that workers undertake to find appropriate jobs. C) It is easier to find full-time suitable employment than to find seasonal part-time employment. D) In a competitive market, workers who demand a wage higher than the equilibrium wage rate are likely to find employment more quickly.

Which of the following statements is TRUE? A) One of the limitations of using money is that it does not allow for the transfer of purchasing power into the future. B) The necessary condition required for money to function as a medium of exchange is that it also needs to be a store of value. C) The hours of labor that go into producing a product are a better unit of account than paper money. D) When money is used as a yardstick to describe the price of various goods and services, it serves as a store of value.

Which of the following statements is TRUE? A) Technological innovation always leads to unemployment in an economy as a whole. B) Technological innovation can cause wages to fall for some workers in an economy. C) Technological innovation increases wages for all workers in an economy. D) Technological innovation reduces the demand for goods and services in an economy.

Which of the following statements is TRUE? A) The currency in circulation in any economy is likely to be equal to the total money supply in the economy. B) The currency in circulation in any economy is likely to be less than the total money supply in the economy. C) In the United States, currency in circulation accounts for more than 50 percent of the total money supply. D) In the United States, currency in circulation accounts for less than 1 percent of the money supply.

Which of the following statements is TRUE? A) The unemployment rate in a country normally increases when the country's economy expands. B) Unemployment is higher among groups with lower educational attainment. C) More-educated workers have a lower opportunity cost of time than less-educated workers. D) In the United States, the unemployment rate among bachelor degree holders is higher than that among high school diploma holders.

Which of the following statements is TRUE? A) The unemployment rate in an economy is constant in the long run. B) There always exists some amount of unemployment in an economy. C) In almost every economy, each job opening is instantly filled by a qualified worker. D) Unemployment in an economy normally increases during times of expansion and decreases during times of contraction.

________ money refers to something that is used as money but is otherwise worthless and typically has the backing of the government or a central bank. A) Commodity B) Fiat C) Representative D) Federal

________ refers to funds available for immediate payment. A) Physical capital B) Liquidity C) Term deposit D) Fiat money

An asset is said to be riskless if ________. A) it offers a positive rate of interest B) it can be easily converted into cash C) its value does not change from day to day D) its value is more likely to fall in future

An institutional bank run is most likely to occur when ________. A) households deposit their money in a weak bank B) households withdraw their money from a weak bank C) firms and other banks withdraw money from a weak bank D) firms and other banks deposit their money in a weak bank

An asset is liquid if ________. A) it offers a positive rate of interest B) its value does not change from day to day C) it can be easily converted into cash without loss of value D) its value is more likely to increase in future

A debtor's quantity of credit demanded, and the rate of interest are likely to be ________. A) unrelated B) positively correlated C) negatively correlated D) positively related if the rate of interest is below 10 percent and negatively related if it is above 10 percent.

A firm takes out a 2-year loan at a nominal interest rate of 7 percent. It believes that the inflation rate will be 2 percent this year and 4 percent next year. What annual average real interest rate does the firm expect to pay? A) 2 percent B) 3 percent C) 4 percent D) 5 percent

An optimizing economic agent will use the ________ rate when calculating the economic cost of a loan. A) tax B) exchange C) real interest D) nominal interest

Anna, Barry, and Clara grew up together in Michigan. After college, they each went overseas to countries that had different currencies. They had a group chat in which they were comparing costs of living. So that they could understand one another, they each converted their costs into U.S. dollars. What purpose did the U.S. dollar serve in their conversation? A) Medium of exchange B) Store of value C) Unit of account D) Loanable fund

As a goal for the Federal Reserve, price stability is usually interpreted as annual inflation of approximately ________. A) 0 percent B) 1 percent C) 2 percent D) 3 percent

As per the records of the Bureau of Labor Statistics (BLS), which of the following was TRUE of the U.S. economy in 2016? A) The number of unemployed workers > The number of employed workers > The number of adults out of the labor force B) The number of employed workers > The number of unemployed workers > The number of adults out of the labor force C) The number of employed workers > The number of adults out of the labor force > The number of unemployed workers D) The number of unemployed workers > The number of adults out of the labor force > The number of employed workers

As the wage rate increases, the ________, assuming all else equal. A) supply of labor increases B) demand for labor increases C) quantity of labor supplied increases D) quantity of labor demanded increases

Assume that the inflation rate in an economy is measured on the y-axis on a graph, and the annualized growth rate of money supply minus the annualized growth rate of real GDP is measured on the x-axis. If a curve is plotted to establish the relationship between both variables, the curve is likely to be ________. A) vertical B) horizontal C) upward-sloping D) downward-sloping

Assuming all else equal, a contraction in the quantity of bank account balances will cause ________. A) a downward movement along the demand curve for reserves B) an upward movement along the demand curve for reserves C) the demand curve for reserves to shift left D) the demand curve for reserves to shift right

Assuming all else equal, a decrease in the real interest rate will cause ________. A) the credit demand curve to shift to the right B) the credit demand curve to shift to the left C) a downward movement along the credit demand curve D) an upward movement along the credit demand curve

Assuming all else equal, an increase in the real interest rate will cause ________. A) a leftward shift of the credit supply curve B) a rightward shift of the credit supply curve C) an upward movement along the credit supply curve D) a downward movement along the credit supply curve

Assuming all else equal, if a bank expects a bank run in the future, ________. A) there will be a downward movement along its demand curve for reserves B) there will be an upward movement along its demand curve for reserves C) its demand curve for reserves will shift to the right D) its demand curve for reserves will shift to the left

Assuming all else equal, if a household is pessimistic about future income, it is likely to cause a(n) ________ the current credit supply curve of the household. A) downward movement along B) upward movement along C) right shift of D) left shift of

Assuming all else equal, if an airline company decides to purchase new planes, it is likely to cause ________. A) a downward movement along its credit demand curve B) an upward movement along its credit demand curve C) its credit demand curve to shift to the right D) its credit demand curve to shift to the left

Assuming all else equal, if households are optimistic about their future income, it is likely to cause a(n) ________. A) downward movement along their credit demand curve B) upward movement along their credit demand curve C) right shift of their credit demand curve D) left shift of their credit demand curve

Assuming all else equal, if there is an increase in the real interest rate, ________. A) the credit demand curve will shift to the left B) the credit demand curve will shift to the right C) there will be an upward movement along the credit demand curve D) there will be a downward movement along the credit demand curve

Assuming all else equal, inflation can ________. A) reduce the real interest rate and increase the real wage rate B) increase the real interest rate and reduce the real wage rate C) reduce both the real interest rate and the real wage rate D) increase both the real interest rate and the real wage rate

At the equilibrium rate of interest, ________. A) the quantity of credit demanded is zero B) the quantity of credit supplied is zero C) the quantity of credit demanded equals the quantity of credit supplied D) the quantity of credit demanded falls short of the quantity of credit supplied

At the federal funds market equilibrium, ________. A) both the federal funds rate and the total quantity of reserves tend to fall automatically B) both the federal funds rate and the total quantity of reserves tend to rise automatically C) the equilibrium quantity of reserves demanded is equal to the equilibrium quantity of reserves supplied by the Fed D) the equilibrium quantity of reserves demanded exceeds the equilibrium quantity of reserves supplied by the Fed

Before he went to college, Jon bought a car from his brother Tony. They agreed that Jon would pay Tony $10,000 when Jon graduated from college. While Jon was at college, inflation was higher than expected. Thinking only about the car transaction, this unexpectedly high inflation was ________. A) good for both Jon and Tony B) bad for both Jon and Tony C) good for Jon but bad for Tony D) bad for Jon but good for Tony

Consider an economy over the years 2008 and 2009. The output in the economy remained constant over these two years, but the prices of all goods and services halved. In such a situation, ________. A) the nominal GDP of the economy increased over the two years B) the nominal GDP of the economy remained the same over the two years C) the real GDP of the economy increased over the two years D) the real GDP of the economy stayed the same over the two years

Consider an economy that only produces wooden chairs. In 2012, the economy produced 100 wooden chairs priced at $10 each. The nominal GDP of the economy for the year 2012 is ________. A) $10 B) $100 C) $1,000 D) $10,000

Demand deposits are so termed because ________. A) depositors can demand any rate of interest on such deposits B) most consumers want to open such accounts as they are greatly in demand C) depositors can withdraw money from such deposits at any point of time D) there are no limitations on the amount of money that can be deposited into such accounts

Downward wage rigidity arises when ________. A) workers expect wages to increase because of economic expansion B) the quantity of labor demanded exceeds the quantity of labor supplied C) workers and firms resist wage cuts D) firms resist increasing wages

Everything else remaining unchanged, if the demand curve for reserves shifts to the left and the value of borrowed reserves is zero, ________. A) there will be an increase in both the federal funds rate and the quantity of reserves B) there will be a decrease in both the federal funds rate and the quantity of reserves C) there will be a decrease in the federal funds rate but no change in the quantity of reserves D) there will be an increase in the federal funds rate but no change in the quantity of reserves

Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and the equilibrium quantity of credit if the credit supply curve shifts to the left? A) Both the equilibrium rate of interest and quantity of credit will increase. B) Both the equilibrium rate of interest and quantity of credit will decrease. C) The equilibrium rate of interest will increase, and the equilibrium quantity of credit will decrease. D) The equilibrium rate of interest will decrease, and the equilibrium quantity of credit will increase.

Everything else remaining unchanged, what will happen if the Fed sells government bonds in the open market and the value of borrowed reserves is zero? A) It will cause the equilibrium federal funds rate to rise, but there will be no change in the equilibrium quantity of reserves. B) It will cause the equilibrium federal funds rate to fall, but there will be no change in the equilibrium quantity of reserves. C) It will cause the equilibrium federal funds rate to rise and the equilibrium quantity of reserves to fall. D) It will cause both the equilibrium federal funds rate and the equilibrium quantity of reserves to fall.

George believes that the inflation rate will be around 9 percent this year because it was around 9 percent in the previous year. George can be said to have ________. A) marginal expectations B) rational expectations C) adaptive expectations D) composite expectations

Hyperinflationary episodes are always related to extremely rapid growth of ________. A) real GDP B) interest rates C) money supply D) money demand

If a bank has $6 billion in reserves and loans $2 billion to another bank, then the total quantity of reserves demanded is ________. A) $2 billion B) $4 billion C) $6 billion D) $8 billion

If a firm hires a worker by paying him a wage higher than the value of the marginal product of the worker, ________. A) the firm is making an optimum decision B) firing the worker will reduce the firm's profits C) firing the worker will increase the firm's profits D) the firm will earn higher profits

If the expected real interest rate in an economy is 6 percent and the expected inflation rate is 4 percent, then the nominal interest rate in the economy is ________. A) 4 percent B) 6 percent C) 10 percent D) 14 percent

If the growth rate of real GDP and the rate of inflation in an economy are 2 percent and 1 percent, respectively, the growth rate of nominal GDP in the economy must be ________. A) 1 percent B) 2 percent C) 3 percent D) 5 percent

If the growth rates of nominal GDP and real GDP in an economy are 6 percent and 2 percent, respectively, the inflation rate in the economy must be ________. A) 2 percent B) 3 percent C) 4 percent D) 8 percent

If the labor force participation rate in an economy is 50 percent and there are 100 million potential adult workers in the economy, then the size of the labor force in the economy will equal ________. A) 2 million B) 10 million C) 50 million D) 100 million

If the labor market is perfectly competitive, ________. A) there is always some unemployment B) the quantity of labor demanded always exceeds the quantity of labor supplied C) a worker willing to work at the equilibrium wage rate can instantly find work D) the labor demand curve is upward-sloping and the labor supply curve is downward-sloping

If the number of unemployed workers in an economy is 4 million and the size of the labor force in the economy is 16 million, then the unemployment rate in the economy is ________. A) 4 percent B) 8 percent C) 25 percent D) 30 percent

If the real interest rate is greater than the equilibrium real interest rate, ________. A) interest rates tend to rise further B) the quantity of credit demanded equals the quantity of credit supplied C) the quantity of credit demanded falls short of the quantity of credit supplied D) the quantity of credit supplied falls short of the quantity of credit demanded

If the realized real interest rate in an economy is 6 percent, the realized inflation rate is 8 percent, and the expected inflation rate is 8 percent, then the nominal interest rate in the economy is ________. A) 2 percent B) 8 percent C) 14 percent D) 20 percent

If there are no changes in inflation expectations, a fall in the federal funds rate ________. A) decreases the long-term nominal interest rate and increases the long-term expected interest rate B) increases the long-term nominal interest rate and decreases the long-term expected interest rate C) decreases both the long-term nominal interest rate and the long-term expected interest rate D) increases both the long-term nominal interest rate and the long-term expected interest rate

If two variables have the same rate of growth over the long run, their ratio will ________. A) increase over the long run B) decrease over the long run C) remain constant over the long run D) initially decrease and then increase over the long run

In a frictionless labor market, ________. A) there is always a surplus of workers B) there is always a shortage of workers C) the wage adjusts instantly to clear the market D) the ongoing wage rate does not change for long periods of time

In part because of Germany's terrible experience with hyperinflation, the European Central Bank places more emphasis on ________ than does the Federal Reserve. A) minimum employment levels B) maximum employment levels C) price stability D) zero inflation

In the United States, the key policy lever of the Federal Reserve is ________. A) conducting stress tests on banks B) allowing or disallowing interbank transfers C) the manipulation of the quantity of bank reserves D) changing the reserve requirement

In the case of banks, "living wills" spell out ________. A) the amount of bank resources to be retained as stockholders' equity B) the balance sheets of systemically important financial institutions C) how a bank would sell its assets and pay off its creditors in the event of a shutdown D) the long-term business development plans of systematically important financial institutions

Inflation expectations are an economic agent's beliefs about ________. A) past inflation rates B) present inflation rates C) future inflation rates D) all of the above

Institutions that channel funds from suppliers of financial capital to users of financial capital are referred to as ________. A) central banks B) mutual funds C) financial intermediaries D) deposit insurance committees

Minimum wages ________. A) benefit all workers in an economy B) can reduce wage rigidity in the labor market C) can increase unemployment in an economy D) are usually set below equilibrium wages in the labor market

Normally, the Federal Deposit Insurance Corporation would shut down a bank when the ________. A) stockholders' equity of the bank is greater than zero B) assets of the bank exceed the liabilities of the bank C) liabilities of the bank exceed the assets of the bank D) assets of the bank equal the liabilities of the bank

One advantage of using an inflation tax over other methods of tax collection is that ________. A) the revenue from inflation tax is extremely high B) the collection of inflation tax is more organized C) people who evade other taxes also feel the burden of an inflation tax D) inflation tax only affects individuals with a high income

One of the impacts of maturity transformation is that ________. A) it increases the rate of inflation B) it decreases the rate of inflation C) relatively liquid assets become relatively illiquid D) relatively illiquid assets become relatively liquid

Scenario: 100 people live in Country X, and 60 of these people are working full time. Tara and Jen have been able to find only part-time jobs. John, Peter, and Luna just had to close their coffee shop; and John and Peter are looking for a new business venture. Luna has inherited a large sum of money and feels that she does need to work anymore. Her sister Sara feels the same way. Four people in Country X are living in care facilities. Ten people are full-time students, and two of them currently are hoping to find a job. All other people are retirees or under the age of 16. Refer to the scenario above. The unemployment rate in Country X indicates that ________. A) the country is in an economic crisis B) there is no unemployment C) unemployment attributes to a well-functioning economy D) the economy cannot be expanding

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180. 3) Refer to the scenario above. What is the nominal GDP of the economy in 2015? A) $47,000 B) $49,500 C) $55,000 D) $56,000

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180. Refer to the scenario above. What is the nominal GDP of the economy in 2016? A) $47,000 B) $50,000 C) $50,400 D) $55,000

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each. Refer to the scenario above. Nominal GDP growth in Bookland from 1990 to 1991 was closest to ________. A) 10 percent B) 20 percent C) 30 percent D) 40 percent

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each. Refer to the scenario above. The nominal GDP in Bookland in 1991 was ________. A) $110,000 B) $120,000 C) $132,000 D) $144,000

Scenario: Consider Country A with a population of 2 million people. In Country A, there are 1.5 million people employed; 0.3 million younger than 18, in school or retired; 0.1 million voluntarily unemployed; and 0.1 million people officially unemployed. Refer to the scenario above. If the market clearing wage rate in Country A decreases, what is most likely to happen to the number of voluntarily unemployed people and the number of officially unemployed people? A) Both numbers would increase. B) The number of voluntarily unemployed people would decrease, and the number of officially unemployed people would increase. C) The number of voluntarily unemployed people would increase, and the number of officially unemployed people would decrease. D) The number of voluntarily unemployed people would stay the same, and the number of officially unemployed people would increase.

Scenario: Jim, Pam, Michael, and Angela all worked for a paper company until the company went out of business. Jim was a salesman, Pam was a receptionist, Michael was the manager, and Angela was an accountant. Once the company went out of business, they all had to look for and consider other work opportunities. Refer to the scenario above. Which of the following situations would lead to the person no longer being considered unemployed? A) Jim does not accept a job as a car salesman, because he wants to continue selling paper. B) Michael is unable to find another company willing to hire him as a manager, so he starts looking for other employment opportunities. C) Pam learns that she is pregnant and postpones her job search. D) Angela turns down a job offer from Planned Parenthood because it goes against her moral principles.

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings. Refer to the scenario above. Assume John has to pay a 5 percent sales tax on his house. He uses the remainder of his cash and borrows the remaining amount of money. At the end of each year, he pays $50,000 toward the loan. How much interest will he end up paying in total? A) $28,593 B) $20,593 C) $27,593 D) $17,593

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings. Refer to the scenario above. If John takes a loan to cover the difference between the cost of the new house and his savings and makes annual end-of-year payments of $50,000, how much will John owe after 3 years? A) $41,251 B) $40,000 C) $50,748 D) $42,146

Scenario: Suppose an economy consists of only the following economic agents: 2 million full-time workers, 1 million part-time workers, 1 million people who have been laid off by their employers but are currently looking for employment, 1 million children aged 15 years or younger, and 2 million housewives not looking for jobs. 22) Refer to the scenario above. What is the number of employed workers in the economy? A) 1 million B) 2 million C) 3 million D) 4 million

Scenario: The unemployment rate in Country Y is 6 percent, and the labor force is equals about 200 million people. Refer to the scenario above. What can we say about the labor force participation rate? A) It is equal to 94 percent. B) It is greater than 94 percent if there are no discouraged workers. C) It is smaller than 94 percent if 80 percent of the 400 people in County Y are considered potential workers. D) It may be smaller, equal to, or greater than 94 percent if 80 percent of the 400 people in Country Y are considered potential workers.

Scenario: The unemployment rate in Country Y is 6 percent, and the labor force is equals about 200 million people. Refer to the scenario above. Who of the people listed below would be considered part of the work force in Country Y? A) John, who is a stay-at-home dad B) Mary, who takes care of her sick mother at home C) Peter, who is currently finishing his degree in economics and has a part-time job D) All of the above

Suppose that inflation were 6 percent and unemployment were 10 percent. Which of the elements of the Fed's dual mandate would it be failing? A) Price stability B) Maximum (sustainable) employment C) Both D) Neither

Suppose that the Federal Reserve decreases the federal funds rate by 1 percent. What would we expect to happen to the long-term expected real interest rate? A) It would increase by less than 1 percent. B) It would not change. C) It would decrease by less than 1 percent. D) It would decrease by exactly 1 percent.

Suppose that the money supply increases by 20 percent. If there is no inflation, what does the quantity theory of money tell us must happen to real GDP? A) It must increase by more than 20 percent. B) It must increase by less than 20 percent. C) It must increase by exactly 20 percent. D) None of the above are correct.

Systemically important financial institutions refer to ________. A) all banks whose assets exceed their of liabilities B) all banks whose liabilities exceed their assets C) large banks that have become large market powers D) banks that are owned and run by the government

The Federal Reserve can influence the federal funds rate by shifting ________. A) only the quantity of reserves supplied B) only the demand curve for reserves C) either the quantity of reserves supplied or the demand curve for reserves D) neither the quantity of reserves supplied nor the demand curve for reserves

The U.S. central bank is the government institution that ________. A) controls the money supply and invests in foreign assets B) monitors financial institutions, controls the money supply, and invests in foreign assets C) monitors financial institutions, controls the money supply, and sets certain key interest rates D) monitors financial institutions, controls the money supply, sets certain key interest rates, and decides political targets

The additional payment a borrower has to make on a loan is referred to as ________. A) credit B) stock C) interest D) principal

The annual price of a $1 loan is referred to as ________. A) principal B) service tax C) the rate of interest D) the discount value

The credit demand curve is the schedule that reports the relationship between the quantity of credit demanded and ________ in an economy, assuming all else equal. A) the average tax rate B) the annual inflation rate C) the real rate of interest D) the nominal rate of interest

The credit supply curve is ________. A) vertical B) horizontal C) upward-sloping D) downward-sloping

The difference between a bank's assets and liabilities is referred to as ________. A) net profits B) gross profits C) retained earnings D) stockholders' equity

The impact of a decrease in the wage rate on labor supply will be represented by ________, assuming all else equal. A) a right shift of the labor supply curve B) a left shift of the labor supply curve C) a downward movement along the labor supply curve D) an upward movement along the labor supply curve

The labor supply curve is ________. A) perpendicular to the x-axis B) parallel to the x-axis C) upward-sloping D) downward-sloping

The model that states that individuals develop their inflation expectations after considering all available information is referred to as the ________. A) composite expectations model B) adaptive expectations model C) rational expectations model D) marginal expectations model

The most established theory of stock prices relates a company's asset prices to the ________. A) future value of inflation and interest rates B) past earnings of companies and past values of interest rates C) future earning prospects of companies and future values of interest rates D) future earning prospects of companies and future values of inflation rates

The opportunity cost of current consumption is ________. A) the inflation rate B) the real wage rate C) the real interest rate D) the nominal wage rate

The paper currency used by the United States at the beginning of the Civil War was referred to as a demand note because ________. A) it was used to create the demand for various goods and services B) demand for the currency was kept constant over the entire period of Civil War C) the currency could be exchanged for gold as and when demanded D) it was limited in supply and there was always an excess demand for the currency in the country

The quantity theory of money assumes that two things grow at the same rate. Which two things? A) Real GDP and nominal GDP B) Nominal GDP and prices C) The money supply and nominal GDP D) Real GDP and the money supply

The size of the labor force in a country is equal to the ________. A) number of employed workers in the country B) number of unemployed workers in the country C) number of employed workers plus the number of unemployed workers in the country D) number of employed workers minus the number of unemployed workers in the country

The supply curve of reserves is a(n) ________ line. A) downward-sloping B) upward-sloping C) vertical D) horizontal

The theory of efficient markets suggests that ________. A) interest rates and inflation rates are inversely related B) systemically important financial institutions are more likely to fail C) all movements in stock markets are based on rational appraisals of new information D) long-term investments by banks are more profitable than short-term investments

The total interest that a borrower has to pay on a loan is equal to ________. A) principal plus the rate of interest B) principal minus the rate of interest C) principal times the rate of interest D) principal divided by the rate of interest

The value of the real estate that a bank uses for its operations will be included in the bank's ________. A) reserves B) cash equivalents C) long-term investments D) short-term borrowing

Unemployment arising from job search is called ________. A) cyclical unemployment B) structural unemployment C) frictional unemployment D) seasonal unemployment

Unemployment normally arises when ________. A) wages are equal to the market-clearing wage level B) wages are below the market-clearing wage level C) wages are above the market-clearing wage level D) labor markets are frictionless

What will happen to the demand curve for workers in cotton farms if the price of cotton falls, assuming all else equal? A) There will be a downward movement along the demand curve for these workers. B) There will be an upward movement along the demand curve for these workers. C) There will be a left shift of the demand curve for these workers. D) There will be a right shift of the demand curve for these workers.

What will happen to the demand curve for workers in steel mills if some technology that increases their productivity is introduced, assuming all else equal? A) There will be a downward movement along the demand curve for the workers. B) There will be an upward movement along the demand curve for the workers. C) There will be a right shift of the demand curve for the workers. D) There will be a left shift of the demand curve for the workers.

Which of the following equations is correct? A) Realized real interest rate = Nominal interest rate ‒ Realized nominal interest rate. B) Realized real interest rate = Nominal interest rate + Realized inflation rate. C) Realized real interest rate = Nominal interest rate ‒ Realized inflation rate. D) Realized real interest rate = Realized inflation rate.

Which of the following explains why frictional unemployment exists in an economy? A) Most workers shirk at work. B) Unemployment benefits encourage workers not to look for jobs. C) It takes time for an unemployed worker to find a firm with a well-matched job vacancy. D) Job search is a supply-side phenomenon in the labor market, and firms make no attempts to advertise for the vacancies they have.

Which of the following is NOT a function of the Fed? A) It oversees interbank payment systems. B) It monitors the stockholders' equity of commercial banks. C) It regulates the various stock markets in the economy. D) It ensures that commercial banks report their assets and liabilities with accuracy.

Which of the following is a role of the Federal Deposit Insurance Corporation of the United States? A) It monitors the money supply. B) It controls the real rate of interest. C) It regulates banks that are insolvent. D) It determines the monetary policy of the country.

Which of the following is a role of the Federal Deposit Insurance Corporation of the United States? A) It monitors the unemployment rate in the economy. B) It controls the volume of public debt. C) It safeguards deposits held with banks. D) It determines the monetary policy of the country.

Which of the following is a role played by the Fed in the U.S. economy? A) It acts as a direct source of funds for new businesses and startups. B) It makes political decisions during periods of recessions. C) It acts as a lender of last resort in case of bank runs. D) It determines the import duty on raw materials being imported into the country.

Which of the following is likely to cause an upward movement along the labor supply curve, assuming all else equal? A) A decrease in the labor population B) An increase in the labor population C) A rise in the wage rate D) A fall in the wage rate

Which of the following is likely to shift the credit demand curve of a computer manufacturer to the left, assuming all else equal? A) An increase in the real interest rate B) A decrease in the real interest rate C) A decrease in the scale of production D) An increase in the scale of production

Which of the following is likely to shift the credit demand curve of an automobile manufacturer to the right, assuming all else equal? A) A decrease in the real interest rate B) An increase in the real interest rate C) A plan to increase production and expand to newer markets D) A plan to decrease production and exit from existing markets

Which of the following is likely to shift the demand curve for workers on rice farms to the right, assuming all else equal? A) An increase in the wage rate of workers on rice farms B) A decrease in the wage rate of workers on rice farms C) An increase in the price of rice D) A decrease in the price of rice

Which of the following methods for influencing the federal funds rate was first approved by Congress for use by the Federal Reserve during the 2007−2009 recession? A) Changing the quantity of reserves supplied B) Changing the reserve requirement C) Changing the interest rate paid on reserves D) None of the above

Which of the following statements best defines hyperinflation? A) The annual rate of inflation in an economy is negative. B) The annual rate of inflation in an economy is zero. C) Inflation in an economy results in prices doubling within 3 years. D) Inflation in an economy results in prices doubling within 1 year.

Which of the following statements correctly highlights a difference between real GDP and nominal GDP? A) Real GDP includes the value of goods and services produced by foreign firms, while nominal GDP does not include the value of goods and services produced by foreign firms. B) Real GDP includes the value of goods and services produced by domestic firms in foreign countries, while nominal GDP does not include the value of goods and services produced by domestic firms in foreign countries. C) Real GDP strips out the effect of changing prices on the value of goods and services produced, while nominal GDP does not strip out the effect of changing prices on the value of goods and services produced. D) Real GDP does not take into account the value of goods and services provided, while nominal GDP takes these into account.

Which of the following statements is TRUE? A) At the equilibrium wage rate, the quantity of labor demanded exceeds the quantity of labor supplied. B) At the equilibrium wage rate, the quantity of labor supplied exceeds the quantity of labor demanded. C) At wages above the equilibrium wage rate, the quantity of labor supplied exceeds the quantity of labor demanded. D) At wages below the equilibrium wage rate, the quantity of labor supplied exceeds the quantity of labor demanded.

Which of the following statements is TRUE? A) Technological innovation is generally cost inefficient. B) Technological innovation always acts as a substitute for labor. C) Technological innovation can cause unemployment in a single industry. D) Technological innovation would lower overall labor productivity

Which of the following statements is TRUE? A) The Fed has the power to dictate the amount of deposits held with commercial banks. B) The rate of inflation in the long run is equal to the rate of growth of real GDP minus the rate of growth of money supply. C) The Fed can influence the money supply in the economy by influencing the required amount of reserves. D) The Fed can reduce the growth of money supply by increasing growth in bank reserves.

Which of the following statements is TRUE? A) The minimum unemployment rate in the U.S. economy has always been 0 percent. B) The unemployment rate in the United States was the highest ever during the recession of 2007-2009. C) In the past 30 years, the unemployment rate in the United States has never gone below 3 percent. D) The unemployment rate in the U.S. economy has been increasing since 1900.

Which of the scenarios below describes what regulators would label as a systemic risk? A) Repeals of regulation and insurance requirements B) Insolvency of a small bank C) Failure of a large financial institution D) Large numbers of withdrawals at the same time

Which of these financial intermediaries is most likely to invest in new companies that are just starting up and have no track record? A) Hedge funds B) Private equity funds C) Venture capital funds D) Asset management companies

Which statement about seigniorage is correct? A) Seigniorage is not a major source of revenue for the government in any modern economy. B) Seigniorage is a major source of revenue for the government in most modern economies. C) Seigniorage is not a major source of revenue for the government in most modern economies but is relatively important in the United States. D) Seigniorage is a major source of revenue for the government in most modern economies but is relatively unimportant in the United States.

The impact of an increase in the wage rate on labor demand is represented by a(n) ________ the demand curve for labor, assuming all else equal. A) leftward shift of B) rightward shift of C) downward movement along D) upward movement along

________ are a part of the potential labor force of a country. A) Institutionalized people B) Children aged 15 and younger C) People on active duty in the military D) Civilian non-institutionalized people aged 16 years and over

________ increase workers' productivity and improve the profitability of a firm. A) Wage ceilings B) Wage floors C) Productivity wages D) Efficiency wages

________ keeps the market wage above the level that would clear the labor market. A) Wage discrimination B) Wage fluctuation C) Wage stability D) Wage rigidity

What is collective bargaining? How can it result in higher unemployment in a country?

Collective bargaining refers to contract negotiations between an employer and a labor union representing workers. One of the objectives of collective bargaining is to bargain for better wages for workers. As a result, collective bargaining fixes the wage rate above the market-clearing level. Once the wages are fixed at a higher level, wage rigidity prevents it from falling. At this higher level of wage, the quantity of labor supplied exceeds the quantity of labor demanded, and this causes unemployment.

Why is real GDP a more accurate measure of the level of production in an economy than nominal GDP? Explain with an example

Consider an economy that produces only apples. If the price of apples in 2001 was $1 and the economy produced 10 apples, the nominal GDP of the economy was $10. Suppose the price of apples doubled in 2002 without any change in production. In this case, the nominal GDP of the economy in 2002 was $20. However, real GDP in both years was $10 if the year 2001 is taken as the base year. So, according to real GDP, output has not changed between the two years. Hence, real GDP, which accounts for inflation, is a more accurate measure of the level of production than is nominal GDP.

A bank is said to have enough liquidity if ________. A) it holds deposits amounting to at least $100,000 B) it operates more than 12 hours a day for 7 days a week C) the value of its assets exceeds the value of its liabilities by at least $50,000 D) it has enough funds to conduct its day-to-day businesses and meet regulatory requirements

A bank run occurs when ________. A) a bank's assets exceed its liabilities B) a bank sells its assets to its own stockholders C) the central monetary authority regulates the functioning of banks D) a bank experiences an extraordinarily large volume of withdrawals

A firm takes a 2-year loan at a nominal interest rate of 8 percent. It believes that the inflation rate will be 4 percent this year and 2 percent next year. What annual average real interest rate does the firm expect to pay? A) 2 percent B) 3 percent C) 4 percent D) 5 percent

A worker is said to be unemployed if he ________. A) does not have a job and is not actively looking for a job B) is working from home and drawing a weekly salary C) has been working part-time and has been actively looking for full-time work D) does not have a job, has been actively looking for one in the prior 4 weeks, and is available for work

Areas where whole industries disappear will most likely experience ________. A) decreases in the wage rate B) increases in the wage rate C) no change in the wage rate D) an ambiguous change in wage rates

Areas where whole industries disappear will most likely experience ________. A) increases in the unemployment rate B) decreases in the unemployment rate C) decreases in the number of unemployed people D) decreases in the number of possible workers

As a firm hires more and more workers, ________. A) the marginal product of the additional workers remains the same B) the value of the marginal product of the additional workers remains the same C) the value of the marginal product of the additional workers eventually increases D) the value of the marginal product of the additional workers eventually decreases

As long as a bank's stockholders' equity is greater than zero, ________. A) bank runs are not possible B) the bank bears all the risk involved C) the customers of the bank bear all the risk involved D) the stockholders of the bank bear all the risk involved

Assuming all else equal, the credit supply curve shows the relationship between the quantity of credit supplied and the ________. A) inflation rate B) real wage rate C) income tax rate D) real interest rate

Before he went to college, Jon bought a car from his brother Tony. They agreed that Jon would pay Tony $10,000 when Jon graduated from college. While Jon was at college, inflation was lower than expected. Thinking only about the car transaction, this unexpectedly low inflation was ________. A) good for both Jon and Tony B) bad for both Jon and Tony C) good for Jon but bad for Tony D) bad for Jon but good for Tony

Companies that enable investors to use their savings to buy financial securities are referred to as ________. A) banks B) hedge fund companies C) private equity funds D) asset management companies

Consider an economy where the growth rate of real GDP is 6 percent and the annual rate of inflation is 2 percent. If the quantity theory of money holds, the growth rate of money supply in the economy will be ________. A) 2 percent B) 4 percent C) 6 percent D) 8 percent

Daniel lives in Fiji. He learns that the Fijian dollar is an example of fiat money. This means that the Fijian dollar ________. A) is worth exactly 1 U.S. dollar B) fluctuates in value against other countries' currencies C) can be exchanged at a fixed rate for a physical commodity like gold or silver D) is not backed by a physical commodity like gold or silver

Downward wage rigidity ________. A) helps lower unemployment B) leads to frictionless labor markets C) is common only in industries with strong labor unions D) causes the wage to be above the market-clearing wage

Everything else remaining unchanged, if the demand curve for reserves shifts to the right and the value of borrowed reserves is zero, ________. A) there will be an increase in both the federal funds rate and the quantity of reserves B) there will be a decrease in both the federal funds rate and the quantity of reserves C) there will be a decrease in the federal funds rate but no change in the quantity of reserves D) there will be an increase in the federal funds rate but no change in the quantity of reserves

Firm investment depends most strongly on which of the following? A) The federal funds rate B) The long-term nominal interest rate C) The inflation rate D) The long-term real interest rate

Frictional unemployment exists because ________. A) job markets are heavily regulated by the government B) unemployment benefits are capped in most economies C) firms do not make an attempt to advertise the vacancies they have D) firms and workers have imperfect information about each other and the state of the economy

Germany decided to fund deficit spending in the early 1920s by printing more and more currency. This method of obtaining revenue is called ________ and it resulted in ________ for Germany. A) Hyperinflation; seigniorage B) Hyperinflation; deflation C) Seigniorage; deflation D) Seigniorage; hyperinflation

If a firm hires a worker by paying her a wage lower than the value of the marginal product of the worker, it implies that ________. A) the firm is earning zero economic profit B) the firm is making an optimum decision C) the firm should reduce its employee strength to maximize profits D) the firm should hire more workers to increase profits

If an individual borrows $200 at an annual rate of interest of 10 percent, what is the total amount that she will have to repay after 1 year? A) $20 B) $200 C) $210 D) $220

If the annual inflation rate in an economy is i, then $1 borrowed at the beginning of a year will have the same purchasing power as ________ dollars at the end of the year. A) i B) (1/i) C) (1 − i) D) (1 + i)

If the number of discouraged workers in a country increases, ________. A) the unemployment rate will increase B) the unemployment rate will decrease C) the labor force participation rate will increase D) the labor force participation rate will decrease

If the number of employed people in a country is 21 million and the number of unemployed workers in a country is 10 million, the size of the labor force in the country is equal to ________. A) 10 million B) 11 million C) 21 million D) 31 million

If the real interest rate is lower than the equilibrium real interest rate, ________. A) interest rates tend to fall further B) the quantity of credit demanded equals the quantity of credit supplied C) the quantity of credit demanded falls short of the quantity of credit supplied D) the quantity of credit supplied falls short of the quantity of credit demanded

If the stockholders' equity of a bank is $30,000 and the total liabilities of the bank equal $10,000, the total assets of the bank will equal ________. A) $10,000 B) $20,000 C) $30,000 D) $40,000

In theory, any object ________ could play the role of fiat money. A) that has an unlimited demand B) for which demand is limited C) in unlimited supply D) in limited supply

Inflation refers to the rate of increase of ________. A) the money supply B) the exchange rate C) output D) prices

International trade generally ________. A) leads higher overall GDP B) causes economic dislocation C) leads to lower wage rates for some workers D) leads to all of the above

John is expecting to get a hike in his salary after 3 months. Assuming all else equal, this is likely to cause a(n) ________ his current credit demand curve. A) downward movement along B) upward movement along C) left shift of D) right shift of

Printing money to meet government budget deficits ________. A) helps combat inflation B) increases the demand for money C) will generate deflation D) increases the money supply in the economy

Recessions are periods of ________. A) right shifts in the labor supply curves B) right shifts in the labor demand curves C) right shifts in the labor supply and demand curves D) left shifts in the labor demand curves

Savers are willing to lend out money because ________. A) of altruism B) the rate of inflation in an economy is normally positive C) the rate of inflation in an economy is normally negative D) they prefer to spend money in the future rather than today

Scenario: 100 people live in Country X, and 60 of these people are working full time. Tara and Jen have been able to find only part-time jobs. John, Peter, and Luna just had to close their coffee shop; and John and Peter are looking for a new business venture. Luna has inherited a large sum of money and feels that she does not need to work anymore. Her sister Sara feels the same way. Four people in Country X are living in care facilities. Ten people are full-time students, and two of them currently are hoping to find a job. All other people are retirees or under the age of 16. Refer to the scenario above. How would the Bureau of Labor Statistics classify Luna? A) Unemployed B) In the labor force C) Employed D) Potential worker

Scenario: Alpha Bank has $100,000 in total assets and $45,000 in total liabilities. Beta Bank has $250,000 in total assets and $220,000 in total liabilities. Refer to the scenario above. What is NOT Beta Bank's other option in the case of a bank run to avoid being taken over by the government if it cannot pay out all its deposits? A) Take in more deposits and use those to pay off the ones being withdrawn B) Get a loan from the central bank C) Apply for a bailout from the government D) Make more loans

Scenario: Alpha Bank has $100,000 in total assets and $45,000 in total liabilities. Beta Bank has $250,000 in total assets and $220,000 in total liabilities. Refer to the scenario above. What would happen to each bank if its total assets dropped by 20 percent? A) Both banks would still be solvent. B) Both banks would become insolvent. C) Alpha Bank would be insolvent, and Beta Bank would still be solvent. D) Alpha Bank would still be solvent, and Beta Bank would be insolvent.

Scenario: Alpha Bank has $100,000 in total assets and $45,000 in total liabilities. Beta Bank has $250,000 in total assets and $220,000 in total liabilities. Refer to the scenario above. Which of the two banks is more prone to bank runs and why? A) Alpha Bank because it has less in total assets B) Beta Bank because it has more in total liabilities C) Alpha Bank because it is a smaller bank in general D) Beta Bank because its total liabilities are closer to its total assets so it has lower stockholders' equity

Scenario: Jim, Pam, Michael, and Angela all worked for a paper company until the company went out of business. Jim was a salesman, Pam was a receptionist, Michael was the manager, and Angela was an accountant. Once the company went out of business, they all had to look for and consider other work opportunities. Refer to the scenario above. If the paper company went out of business because the paper industry is struggling and becoming out of date, which two people are going to have the easiest time finding a job in another industry? A) Jim and Michael B) Jim and Pam C) Michael and Angela D) Pam and Angela

Scenario: Jim, Pam, Michael, and Angela all worked for a paper company until the company went out of business. Jim was a salesman, Pam was a receptionist, Michael was the manager, and Angela was an accountant. Once the company went out of business, they all had to look for and consider other work opportunities. Refer to the scenario above. Which situation would result in these individuals no longer being part of the job search? A) They stay together and attempt to find a new company willing to hire all four of them. B) They each split up and start applying for new jobs that are available. C) Another paper company opens a new branch nearby, so they all apply for about the same job they had previously. D) They decide to start their own paper company with just the four of them.

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings. Refer to the scenario above. If the bank calls John back one day later and explains that there has been a mistake and the actual nominal interest rate at which he can borrow is 5.5 percent, John will be ________. A) less likely to want to borrow the remaining amount B) more likely to want to borrow the remaining amount C) unfazed in terms of willingness to borrow the remaining amount D) All of the above could be true.

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings. Refer to the scenario above. John's brothers decide to invest all their money in a new business venture outside Bozeman. As a result, John will likely ________. A) have to pay a higher principal on his house B) take longer to pay off his loan C) have to borrow more money to buy the house D) not be affected

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings. Refer to the scenario above. Just before John purchases the house, the sales tax on big ticket items goes up by 5 percent. How might this affect John? A) John might have to take longer to pay off his house. B) John might be less interested in buying the house. C) John might have to pay higher interest. D) All of the above could be true.

Scenario: The unemployment rate in Country Y is 6 percent, and the labor force is equals about 200 million people. 42) Refer to the scenario above. How would the unemployment rate change if Country Y experienced a large increase in immigration of skilled workers? A) It would likely increase, because some immigrants will be unemployed. B) It would likely decrease, because the labor force would increase. C) It may increase or decrease, depending on the availability of skilled jobs. D) It may increase or decrease, depending on the relative increases in the number of unemployed workers and the size of the labor force.

Suppose that inflation were 2 percent and unemployment were 4 percent. Which of the elements of the Fed's dual mandate would it be failing? A) Price stability B) Maximum (sustainable) employment C) Both D) Neither

Suppose that the money supply increases by 20 percent. What does the quantity theory of money tell us must happen to real GDP? A) It must increase by more than 20 percent. B) It must increase by less than 20 percent. C) It must increase by exactly 20 percent. D) None of the above must be correct.

Suppose that the rate of inflation in a country is 5 percent. Which of the following statements is accurate? A) This means all prices rise by 5 percent. B) This means all prices rise, with an average rise of 5 percent. C) This means all prices rise by at least 5 percent. D) This means prices increase on average by 5 percent.

Suppose that we produce a graph with the annual inflation rate on the y-axis and the growth rate of the money supply minus the growth rate of real GDP on the x-axis. We plot the averages of each of these quantities over the past 50 years on the graph. If the quantity theory of money is approximately correct, then ________. A) each country's point will lie approximately on a horizontal line B) each country's point will lie approximately on a vertical line C) each country's point will lie approximately on some upward-sloping line D) each country's point will lie approximately on the 45° line

The Federal Reserve is relatively independent. Which U.S. institution largely controls the Federal Reserve? A) The U.S. Supreme Court B) The U.S. Congress C) The U.S. Treasury D) None of the above

The credit demand curve is ________. A) vertical B) horizontal C) upward-sloping D) downward-sloping

The demand curve for reserves is ________. A) vertical B) horizontal C) upward-sloping D) downward-sloping

The impact of an increase in the wage rate on labor supply will be represented by ________, assuming all else equal. A) a right shift of the labor supply curve B) a left shift of the labor supply curve C) a downward movement along the labor supply curve D) an upward movement along the labor supply curve

The labor demand curve is ________. A) horizontal B) vertical C) upward-sloping D) downward-sloping

The quantity theory of money ________. A) assumes that the ratio of money supply to nominal GDP increases over time B) assumes that the ratio of money supply to nominal GDP decreases over time C) is an exact representation of how the economy behaves in the long run D) is a representation of how a change in the money supply affects the price level in an economy

The quantity theory of money predicts that the inflation rate will be equal to ________. A) the growth rate of the money supply B) the growth rate of real GDP C) the growth rate of the money supply + the growth rate of real GDP D) the growth rate of the money supply - the growth rate of real GDP

The slope of the labor demand curve can be attributed to the law of ________. A) decreasing opportunity cost B) increasing opportunity cost C) increasing marginal productivity of labor D) diminishing marginal productivity of labor

The two key objectives of the Fed are ________. A) low and predictable levels of inflation and interest rate stabilization B) zero inflation and zero unemployment C) low and predictable levels of inflation and zero unemployment D) low and predictable levels of inflation and maximum levels of employment

What will happen to the demand curve for tea workers if the price of tea increases, assuming all else equal? A) There will be a downward movement along the demand curve for tea workers. B) There will be an upward movement along the demand curve for tea workers. C) There will be a left shift of the demand curve for tea workers. D) There will be a right shift of the demand curve for tea workers.

When Terry retired from Caterpillar, he received a pension: Caterpillar would pay him $50,000 the first year he was retired, with the amount increasing by 5 percent each year thereafter. If inflation turned out to be 8 percent each year, what would happen to the real value of Terry's pension? A) It would increase each year by 5 percent. B) It would increase each year by 3 percent. C) It would decrease each year by 5 percent. D) It would decrease each year by 3 percent.

When an asset is traded for goods and services, it serves the function of a ________. A) store of value B) unit of account C) loanable fund D) medium of exchange

When did the U.S. dollar change most recently from being convertible to non-convertible? A) Before 1850 B) Between 1850 and 1900 C) Between 1900 and 1950 D) Since 1971

When prices rise, ________. A) money demand tends to fall B) money supply tends to rise C) menu costs fall D) consumers' purchasing power falls

When the Fed buys or sells government bonds to private banks in exchange for reserves, it is referred to as ________. A) seigniorage B) reserve targeting C) the Fed's dual mandate D) an open market operation

Which of the following changes will cause a downward movement along the demand curve for reserves? A) An increase in the deposits held by banks B) A decrease in the deposits held by banks C) An increase in the federal funds rate D) A decrease in the federal funds rate

Which of the following constitutes monetary policy as performed by the Federal Reserve? A) Monitoring financial institutions B) Controlling certain key interest rates C) Indirectly controlling the money supply D) All of the above

Which of the following equations best approximates the growth rate of real GDP, the growth rate of nominal GDP, and the inflation rate? A) Growth rate of real GDP = Growth rate of nominal GDP + Inflation rate. B) Growth rate of real GDP + Growth rate of nominal GDP = Inflation rate. C) Growth rate of real GDP - Growth rate of nominal GDP = Inflation rate. D) Growth rate of real GDP = Growth rate of nominal GDP - Inflation rate.

Which of the following equations is TRUE of a profit-maximizing firm? A) Wage = A worker's total product B) Wage = The average product of all workers C) Wage = A worker's marginal product D) Wage = The value of a worker's marginal product

Which of the following equations is correct? A) Adults not in labor force = Unemployed workers B) Adults not in labor force = Unemployed workers − Employed workers C) Adults not in labor force = Unemployed workers + Employed workers D) Adults not in the labor force = Potential adult workers − Employed workers − Unemployed workers

Which of the following equations is correct? A) Adults not in the labor force = Unemployed − Employed B) Adults not in the labor force = Labor force − Unemployed C) Adults not in the labor force = Potential adult workers D) Adults not in the labor force = Potential adult workers − Labor force

Which of the following equations is correct? A) Expected real interest rate = Nominal interest rate + Expected inflation rate. B) Expected real interest rate = Nominal interest rate ÷ Expected inflation rate. C) Expected real interest rate = Expected inflation rate ÷ Nominal interest rate. D) Expected real interest rate = Nominal interest rate ‒ Expected inflation rate.

Which of the following groups of people would be considered unemployed? A) Workers who experienced a wage cut due to recession B) Employees working in public sector undertakings C) Parents raising kids at home and not looking for jobs D) Workers who have been looking for jobs for the past 4 weeks

Which of the following is TRUE of cyclical unemployment? A) Cyclical unemployment is also known as frictional unemployment. B) Cyclical unemployment increases during periods of economic boom. C) Cyclical unemployment decreases during periods of economic boom. D) Cyclical unemployment is the deviation of the actual unemployment rate from the natural rate of unemployment.

Which of the following is TRUE of the natural rate of unemployment? A) The natural rate of unemployment excludes frictional unemployment. B) The natural rate of unemployment excludes long-term structural unemployment. C) The natural rate of unemployment is the socially optimal or desirable rate of unemployment. D) The natural rate of unemployment is lower than the actual rate of unemployment during a recession.

Which of the following is likely to happen to the demand curve for reserves if the federal funds rate increases, everything else remaining constant? A) The demand curve for reserves will shift to the right. B) The demand curve for reserves will shift to the left. C) There will be a downward movement along the demand curve for reserves. D) There will be an upward movement along the demand curve for reserves.

Which of the following is likely to happen when the Fed raises the federal funds rate? A) The long-term interest rate will fall. B) Economic activity will increase. C) The labor demand curve shifts to the right. D) The labor demand curve shifts to the left.

Which of the following is likely to shift the demand curve for coffee workers to the left, assuming all else equal? A) An increase in the wage rate of coffee workers B) A decrease in the wage rate of coffee workers C) An increase in the price of coffee D) A decrease in the price of coffee

Which of the following is likely to shift the demand curve for corn farmers leftward, assuming all else equal? A) A rise in the wage rate of corn farmers B) A fall in the wage rate of corn farmers C) A rise in the productivity of farmers due to the use of better fertilizers D) A fall in the productivity of corn farmers due to increased pest attacks

Which of the following is likely to shift the demand curve for engineers rightward, assuming all else equal? A) An increase in the wage rate paid to engineers B) A decrease in the wage rate paid to engineers C) A decrease in the prices of all products manufactured by engineers D) An increase in the productivity of engineers

Which of the following is likely to shift the labor supply curve to the left, assuming all else equal? A) A fall in the wage rate B) A rise in the wage rate C) A decrease in the maximum amount of unemployment benefits D) A social change that discourages women from participating in the labor force

Which of the following statements is TRUE of minimum wages? A) Minimum wages benefit firms and producers. B) Minimum wages are sometimes referred to as wage ceilings. C) No state in the United States has ever enforced a minimum wage. D) Minimum wages are normally set above the labor market-clearing wage rate.

Which of the following statements is TRUE of the U.S. economy? A) No bank runs have occurred after 1990 in the U.S. economy. B) No bank runs have occurred before 1990 in the U.S. economy. C) Almost one-fourth of all U.S. banks failed during the Great Depression. D) The number of bank runs decreased after the Federal Deposit Insurance Corporation was established

Which of the following statements is TRUE of the unemployment rate in an economy? A) During periods of expansion, the unemployment rate in an economy increases. B) During periods of contraction, the unemployment rate in an economy decreases. C) The unemployment rate in most of the developed nations of the world is 0 percent. D) The rate of unemployment is positive in any well-functioning economy

Which of the following statements is TRUE? A) A higher wage can reduce the quantity of labor supplied. B) A higher wage can increase the quantity of labor demanded. C) A higher wage can raise profits if the productivity of workers is fixed. D) A higher wage can raise profits if productivity is directly proportional to wages.

Which of the following statements is TRUE? A) All workers are willing to work at the equilibrium wage rate. B) At all wages below the equilibrium wage rate, labor supplied exceeds labor demanded. C) At all wages above the equilibrium wage rate, labor demanded equals zero. D) Some workers may be willing to work only at a wage rate above the equilibrium wage rate.

Which of the following statements is TRUE? A) At the equilibrium wage rate, the quantity of labor demanded exceeds the quantity of labor supplied. B) At the equilibrium wage rate, the quantity of labor supplied exceeds the quantity of labor demanded. C) At wages above the equilibrium wage rate, the quantity of labor demanded exceeds the quantity of labor supplied. D) At wages below the equilibrium wage rate, the quantity of labor demanded exceeds the quantity of labor supplied.

Which of the following statements is TRUE? A) Banks are the only financial institutions that lend money and do not accept deposits. B) Banks are the only financial institutions that do not lend money but accept deposits. C) The interest rate is positively related to the quantity of credit demanded. D) The larger the principal invested, the higher will be the interest received at the end of a year.

Which of the following statements is TRUE? A) Money that is lent out is considered to be a liability. B) People who lend money are known as debtors. C) People who borrow money are known as creditors. D) Non-bank institutions are also a part of the credit market.

Which of the following statements is TRUE? A) The discount window in the United States is operated by the government. B) The discount window is accessible only to well-performing banks. C) The discount window operates only in periods of economic expansion. D) Loans obtained from the discount window have a very high interest rate.

Which of the following will NOT cause a shift in the demand curve for reserves? A) Business cycles B) Liquidity shocks C) Changes in the deposit base D) A change in the federal funds rate

Workers who are unemployed but are NOT actively looking for jobs are referred to as ________. A) laid-off workers B) unskilled workers C) abandoned workers D) discouraged workers

Zimbabwe decided to fund deficit spending in the early 2000s by printing more and more currency. This method of obtaining revenue is called ________, and it resulted in ________ for Zimbabwe. A) hyperinflation; seigniorage B) hyperinflation; deflation C) seigniorage; deflation D) seigniorage; hyperinflation

What is downward wage rigidity?

Downward wage rigidity refers to the resistance by workers to take a cut in their wages. When downward wage rigidity exists, last year's wage acts as a wage floor for current wages.

Is there any risk involved in using fiat money? How can it be minimized?

One of the problems of using fiat money is that it is easy to counterfeit, since it is actually worthless. Hence, the risk of counterfeiting fiat money and using it to purchase goods and services is comparatively higher. This problem is partially resolved by having the supply of money controlled by the government. The government can create fiat money that is difficult and illegal to counterfeit.

How do efficiency wages help increase a firm's profits?

Efficiency wages are wages offered above the wages that workers would accept, where the premium is paid to increase worker productivity. They help increase a firm's profits in a number of ways, including the following: i) Efficiency wages reduce worker turnover. ii) The risk of losing a high-paying job motivates employees to work harder than they otherwise would. iii) There is a possibility that employees are grateful for receiving an above-market wage, leading them to work harder.

Explain the differences between frictional unemployment and structural unemployment.

Frictional unemployment refers to unemployment that arises because it takes time for an unemployed worker to find a firm with a well-matched job vacancy. Frictional unemployment arises from the process of job search, which normally takes time. In contrast, structural unemployment arises when there is a persistent gap between the quantity of labor supplied and the quantity of labor demanded.

Everything else remaining unchanged, what is likely to happen to the credit supply curve of an economy if firms tend to hold on to retained earnings instead of paying dividends?

If businesses hold on to retained earnings instead of paying dividends, they generate savings. This shifts the credit supply curve to the right.

What is likely to happen if the growth rate of money supply doubles in the following year while the growth rate of real output remains unchanged?

If the growth rate of money supply doubles in the following year and the growth rate of real output remains unchanged, the inflation rate will also double.

List four reasons people save.

People save for several reasons. These include the following: i) People save for consumption after retirement. ii) People save to cope with possible emergencies or shortages of funds in the future. iii) People save to buy durable goods. iv) People save so that they can invest in a personal business.

In an economy, if the money supply is $100,000, currency in circulation is $50,000, amount in savings accounts is $18,000, amount in travelers' checks is $12,000, and the amount in money market accounts is $9,000, then what is the amount held in checking accounts in the economy?

In an economy, the total money supply is the sum of currency in circulation, amount in savings accounts, amount in checking accounts, amount in travelers' checks, and the amount in money market accounts. Hence, the amount in checking accounts is $100,000 − $50,000 − $18,000 − $12,000 − $9,000 = $11,000.

In banking terminology, what is meant by maturity? What is meant by maturity transformation?

In banking terminology, maturity refers to the time until debt must be repaid. Maturity transformation is a process by which banks take short-maturity liabilities and invest in long-maturity assets.

What is the main difference between the type of money that was used before the invention of the printing press and today?

In the days before the invention of the printing press, most societies used something that was valuable itself as money, for example, gold, silver, chickens, and even goats. Today, in most of the world, money is fiat money. Fiat money refers to something that is used as money but is otherwise worthless and is typically backed by the government or the central bank of a country.

Consider two individuals: John and Jenna. John has an opportunity cost of time of $50 per hour, while Jenna has an opportunity cost of time of $25 per hour. Who has a greater incentive to look for work when unemployed?

In this case, the opportunity cost of time of an individual reflects the amount of income he or she would generate if he or she worked for an hour. Since John has a higher opportunity cost of time than Jenna, he can earn a higher income than Jenna if he finds work. Hence, John will have a greater incentive to look for work when he is unemployed than Jenna.

Several people from a neighboring country migrated to Technoland when a war broke out in their homeland. How will this affect the labor market in Technoland if labor demand remains unchanged? Explain with a labor demand and labor supply diagram.

Increases in the size of the population, corresponding to increases in the number of potential workers in the economy, shift the labor supply curve to the right. Another factor that results in an increased population is immigration. Thus, the labor supply curve of Technoland will shift to the right, as shown in the diagram below. If labor demand remains unchanged, the equilibrium wage rate in Technoland will fall from w to wNew and the equilibrium level of employment will increase from L to LNew, as shown in the diagram below.

The prices of several essential goods in Agraria almost doubled over the past decade. To satisfy voters, the government of Agraria introduced price controls. What is likely to happen after the introduction of these price controls?

Inflation generates voter anger, and politicians sometimes respond by advancing economically destructive schemes, especially price controls. In most of these cases, the policy cure is worse than the disease. Price controls cause problems like long lines and supply disruptions. In addition, price controls are partially undone when some of those consumers who are lucky enough to obtain the good at the official capped price resell it at a higher price in the underground economy. Hence, price controls create an inefficient incentive for consumers who don't want to consume the good to buy it anyway, just so they can resell it to someone else at a higher price. This is what is most likely to happen in Agraria.

What is meant by the term "inflation targeting"? What is the Fed's objective regarding inflation?

Inflation targeting refers to the policy of attempting to maintain a specific low level of inflation over the long run. The Fed aims to keep inflation low and predictable.

How does inflation act as a tax?

Printing a lot of money in a short time leads to an increase in the growth rate of money supply that exceeds the growth rate of real GDP. This results in inflation in the economy. A higher inflation rate further reduces the buying power of currency. Hence, printing currency reduces the buying power of currency by reducing its value among consumers and producers, but it increases the revenue of the government in the form of newly printed notes.

Sheena gets her paycheck on the first day of every month and spends it over the month to purchase various goods and services. What are the functions that money is performing in this case?

Since Sheena is using money as means to purchase goods and services, it is acting as a medium of exchange. Moreover, she receives her salary on the first of every month and spends it over the month, which implies that the money is also acting as a store of value.

Why is the Fed referred to as the "lender of last resort"?

Sometimes the federal funds market can fail. For example, during a financial panic, banks with excess reserves do not know whom they can trust. They don't know which banks are solvent and which are not. Accordingly, banks with excess reserves may be unwilling to lend these reserves out. In such a crisis, the Fed can step in and provide reserves to the banks that need them and is hence referred to as the "lender of the last resort."

Differentiate between the adaptive expectations and the rational expectations models of inflation.

The adaptive expectations model of inflation states that inflationary expectations are determined by the level of inflation in the recent past. In contrast, the rational expectations model assumes that people have highly sophisticated beliefs about inflation that rationally incorporate all the information available to them.

What can the central bank of Autarkia do to lower the rate that banks charge one another for overnight loans? How will this affect the economy if it is facing a downturn?

The central bank of Autarkia can increase the supply of reserves. This can be done by buying government bonds from private banks. Such a transaction is referred to as an open market operation. If the central bank buys government bonds from private banks, the supply curve of reserves will shift to the right. The demand for reserves will equal the supply of reserves at a lower federal funds rate. If the federal funds rate falls, the banks will be able to make more loans. The easy availability of loans will boost economic activity in the economy.

What does the slope of the credit supply curve imply? When do movements along a credit supply curve occur?

The credit supply curve has a positive slope, which implies a positive relationship between the real interest rate and the quantity of credit supplied. This means that as the real interest rate increases, the quantity of credit supplied also increases. Movements along a credit supply curve occur when there are changes in the real interest rate, everything else remaining unchanged.

Suppose the labor market for industrial workers is in equilibrium. What will happen to the equilibrium wage and employment level if: a) the demand for industrial workers increases, everything else remaining unchanged? b) the supply of industrial worker decreases, everything else remaining unchanged?

The equilibrium wage rate and employment level are determined in the labor market by the interaction of the labor demand and labor supply curves.

Is there any difference between borrowing from the federal funds market and borrowing from the discount window? Explain.

The federal funds market refers to the market where banks obtain overnight loans of reserves from one another. In contrast, when banks are not granted funds from the federal funds market, they can borrow from the Fed. This is referred to as borrowing from the discount window.

What is the loanable funds market? What happens if the real interest rate in the market is held above the equilibrium interest rate?

The loanable funds market is the market where borrowers obtain funds from savers. In such a market, if the real interest rate is held above the equilibrium interest rate, the quantity of credit supplied will exceed the quantity of credit demanded. This will create a downward pressure on the real interest rate.

The Bank of Lithasia plans to increase its revenue by using demand deposits held with the bank for long-term investments. What is this process known as? Is there any risk associated with this process? If yes, how can the risk be reduced?

The process that the Bank of Lithasia is planning to apply is known as maturity transformation. Maturity refers to the time until debt must be repaid. Maturity transformation refers to the process by which banks take short-term liabilities and invest in long-term assets. This process allows society to undertake long-term investments. One of the implications of such maturity transformations is that they create a mismatch between the short-term maturities of deposits held with the bank and the long-term maturities of the investment made by the banks. Hence, if a large number of depositors simultaneously want to withdraw money from the bank, it can create a problem for the bank, as they may not have enough funds to allow for the withdrawal. Moreover, it is not possible for banks to recover the money they have used for long-term investments at such a short notice to repay the depositors. Hence, maturity transformations can place banks in a risky position. One possible method for banks to minimize the risks associated with maturity transformations is to maintain some fraction of the deposit pool as reserves or some other form of cash-like security. A small reserve usually suffices, because only a small fraction of depositors are likely to withdraw their deposits on the same day.

What does the quantity theory of money imply? If the growth rate of money supply and growth rate of real GDP in an economy are 8 percent and 6 percent, respectively, then what is the inflation rate in the economy?

The quantity theory of money implies that the inflation rate is equal to the gap between the growth rates of money supply and real GDP. In this case, Inflation rate = Growth rate of money supply ‒ Growth rate of real GDP = 8 percent ‒ 6 percent = 2 percent.

What is meant by the term "rate of interest"? If the nominal rate of interest in an economy is 6 percent and the rate of inflation in the economy is 4 percent, what is the real rate of interest in the economy?

The rate of interest is the additional payment a borrower has to make on a $1 loan. It is typically paid at the end of a year. Real rate of interest = Nominal rate of interest − Inflation rate = 6 percent − 4 percent = 2 percent.

What does the slope of the credit demand curve imply? When do movements along a credit demand curve occur?

The slope of the credit demand curve is negative, and this implies an inverse relationship between the real rate of interest and the quantity of credit demanded. So the quantity of credit demanded decreases as the real interest rate increases. Movements along a credit demand curve occur when, everything else remaining unchanged, there is a change in the real interest rate.

State two social benefits of inflation.

The social benefits of inflation are as follows: i) Inflation caused by money creation acts as an implicit tax. It increases the government's revenue by transferring purchasing power from consumers and producers in an economy to the government. ii) Inflation can temporarily reduce the real interest rate and the real wage rate. This increases an employer's willingness to hire more and produce more.

What are the three functions that banks perform as financial intermediaries?

The three functions that banks perform as financial intermediaries are as follows: i) Identifying good investment options ii) Transforming short-term liabilities, like deposits, into long-term investments iii) Transferring risk from depositors to the bank's stockholders and, in some cases, to the government

Which categories of people are excluded when estimating the number of potential workers in the United States?

Three categories of people are excluded when estimating the number of potential adult workers in the United States: i) Children under 16 years of age ii) People on active duty in the military iii) Institutionalized people

Rising inflation is a pressing concern of the government of Utopia. Suggest a suitable monetary policy that the central bank can adopt to lower the rate of inflation.

To lower the rate of inflation using monetary policy, the central bank of Utopia needs to raise the rate that banks charge one another for overnight loans, which is called the federal funds rate. This can be done using four different tools. First, the central bank can reduce the quantity of bank reserves by using open market operations. Second, it can increase the reserve requirement. Third, it can increase the interest rate that it pays on reserves. Fourth, it can increase the discount rate. All these policies will increase the federal funds rate and have a related effect on the interest rates that households and firms face for borrowing. Consequently, a rise in the federal funds rate reduces the amount of loans given out to households and firms, reducing the rate at which the money supply grows and the rate of inflation.

In an economy, the number of potential workers is 60,000, the size of the labor force is 45,000, and the number of employed workers is 39,000. Calculate the unemployment rate and labor force participation rate in the country.

Unemployment rate in the country = (Labor force ‒ Employed workers)/Labor force = (45,000 ‒ 39,000)/45,000 = 13.33 percent. Labor force participation rate in the country = Labor force/Potential adult workers = 45,000/60,000 = 75 percent.

What are open market operations? If the economy is experiencing a recession, what kind of open market operations should the Fed undertake?

When the Fed buys government bonds from or sells government bonds to private banks in exchange for reserves held by those private banks at the Fed, it is referred to as an open market operation. When an economy is going through a recession, the Fed should buy government bonds from private banks to stimulate the economy.

Everything else remaining unchanged, what is likely to happen to the demand curve for coffee workers if: a) the price of coffee falls? b) the wage rate of coffee workers increases? c) the price of coffee seeds increases? d) a new fertilizer that increases the productivity of coffee farmers is invented?

a) A decrease in the price of coffee reduces the value of the marginal product of coffee workers. Therefore, the demand curve for coffee workers shifts to the left. b) If there is an increase in the wage rate, the quantity demanded of coffee workers will decrease. This will cause a upward movement along the demand curve for coffee workers. c) An increase in the price of coffee seeds is likely to result in a decrease in the marginal product of coffee farmers. This in turn will cause a left shift in the demand curve for coffee workers. d) If a new fertilizer that increases the productivity of coffee farmers is invented, it will increase the value of the marginal product of coffee workers. This will cause a right shift in the demand curve for coffee workers.

Everything else remaining unchanged, what is likely to happen to the credit supply curve of households if: a) there is a decrease in the real interest rate? b) households expect a recession in near future?

a) Everything else remaining unchanged, if there is a decrease in the real interest rate, there will be a downward movement along the credit supply curve of households. b) Everything else remaining unchanged, if households expect a recession in near future, they will tend to save more today. This will cause the credit supply curve of households to shift to the right.

Everything else remaining unchanged, what is likely to happen to the credit demand curve of an economy if: a) businesses in the economy see scope for growth and are planning to expand production in the future? b) households are pessimistic about future incomes? c) the government is planning to borrow money from financial institutions for investment in infrastructures?

a) If businesses in the economy see scope for growth and are planning to expand production in the future, the credit demand curve of the economy is likely to shift to the right. b) If households are pessimistic about future incomes, they are unlikely to borrow more today as they may not be able to repay the loans in the future. This shifts the credit demand curve of the economy to the left. c) If the government is planning to borrow money from financial institutions to invest in infrastructures, the credit demand curve of the economy is likely to shift to the right.

An individual plans to borrow a sum of $10,000 for 1 year. The nominal interest charged on the borrowed sum is 6 percent. a) If he takes the loan, what will be the interest amount and the total amount that he would have to pay at the end of the year? b) If the rate of inflation in the economy is 10 percent, then is it a good idea for him to take the loan? Why or why not?

a) If the individual takes the loan, he will have to pay a rate of interest of 6 percent for the year. Hence, the interest amount = 0.06 × 10,000 = $600. The total amount that he would have to pay back = $10,000 + $600 = $10,600. b) A rational individual should make his borrowing decisions on the basis of the real interest rate and not the nominal interest rate. The annual real interest rate in this case is 6 percent − 10 percent = −4 percent. Hence, for every $100 that he borrows, after adjusting for inflation, he is actually paying back $96 at the end of the year. Hence, borrowing at an annual nominal interest rate of 6 percent when the annual rate of inflation is 10 percent is a good idea, and he should take the loan.

Everything else remaining unchanged, what is likely to happen to the labor supply curve of female workers if: a) the opportunity cost of working outside the home decreases? b) there is an increase in the wage rate of female workers?

a) If the opportunity cost of working outside the home decreases, it implies a reduction in the time consumed on household chores. This reduction encourages workers to shift more time out of home production into paid employment, which will increase the supply of female workers at all wage rates. The change will cause a right shift in the supply curve of women workers. b) If the wage rate increases, there will be an increase in the quantity supplied of women workers. This will cause an upward movement along the supply curve of female workers

Everything else remaining unchanged, what is likely to happen to the credit demand curve of a software producing firm if: a) there is an increase in the real interest rate? b) it plans to expand production in near future?

a) If there is an increase in the real interest rate, there will be an upward movement along the credit demand curve of the software manufacturer. b) If the firm plans to expand production in near future, its credit demand curve is likely to shift to the right.

In an economy, out of 221.6 million potential workers, 180.65 million are employed. If the labor force in the economy is 200.5 million, calculate: a) The number of unemployed workers b) The unemployment rate c) The labor force participation rate d) The number of potential workers who are not a part of the labor force

a) Labor force = Number of employed workers + Number of unemployed workers, or 200.5 million = 180.65 million ‒ Number of unemployed workers. Therefore, the number of unemployed workers is 200.5 million ‒ 180.65 million = 19.85 million. b) Unemployment rate = (Number of unemployed workers/Labor force) × 100 percent. Hence, the unemployment rate is (19.85 million/200.5 million) × 100 percent = 9.9 percent. c) Labor force participation rate = (Labor force/Potential workers) × 100 percent, or (200.5/221.6) × 100 percent = 90.47 percent. d) Number of potential workers not in the labor force = Potential workers ‒ Labor force, or 221.6 million − 200.5 million = 21.1 million.

Susan, Kevin, and Joshua are three individuals who were previously employed but do not have jobs now. Classify these three individuals according to their type of unemployment: a) Susan lost her job a year ago. Although she would like to have a job, she has given up looking for one as she thinks there are no suitable jobs available for her. b) Kevin was working as a finance teacher, but quit his job a few months back to become a stockbroker. Ever since he quit his job, he has been unable to get a new one, although he is actively looking for one. c) Joshua was employed in a steel mill. He lost his job when the labor union in his mill demanded a hike in wages.

a) Since Susan previously had a job but has stopped looking for one now, she can be considered a discouraged worker. Discouraged workers are potential workers who have stopped looking for jobs since they think none are available for them. b) Kevin is unemployed because it is taking time for him to find a suitable job. Hence, Kevin can be said to be frictionally unemployed. Such unemployment arises because workers have imperfect information about available jobs and need to engage in a time-consuming process of job search. c) Joshua is unemployed because the labor union in his workplace demanded higher wages. When wages are above the market-clearing wage, there is a fundamental mismatch between the quantity of labor demanded and quantity of labor supplied in the market. Unemployment caused by this mismatch is referred to as structural unemployment.

What are the equilibrium wage rate and employment level in the market? b) If the government thinks that engineers are underpaid in the country and fixes a minimum wage of $50 per hour, what will be the impact on the level of employment? c) If engineers unionize themselves and negotiate a wage that is $30 higher than the market-clearing wage, what will be the impact on the employment level?

a) The equilibrium wage is determined by the intersection of the labor demand curve, LD1, and labor supply curve, LS1. Hence, the equilibrium wage rate in the market is $40 per hour, and the equilibrium employment level is 30 engineers. b) If the government fixes the minimum wage at $50 per hour, which is higher than the equilibrium wage rate, the quantity of engineers supplied will exceed the quantity of engineers demanded. This will cause unemployment. The extent of unemployment = 40 − 20 = 20 engineers. Thus 20 engineers will be unemployed if the government fixes the minimum wage at $50 per hour. c) If engineers form a union and bargain for wages that are $30 above the equilibrium wage, 60 engineers would be willing to work, but the firms would not hire any engineers. This will result in unemployment. The extent of unemployment = 60 − 0 = 60 engineers. Hence, 60 engineers will be unemployed in the market.

Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. a) What is the long-term expected real interest rate? b) How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?

a) The long-term expected real interest rate can be obtained by subtracting the long-term expected inflation rate from the long-term nominal interest rate. Therefore, the long-term expected real interest rate in this case is 4.5 percent ‒ 3 percent = 1.5 percent. b) If the central bank of Techland starts purchasing government bonds from private banks, the supply of reserves will increase. This will lead to a fall in the cost of borrowing funds for private banks. As a result, they will be able to make more loans, which will lead to a decrease in the long-term nominal interest rate. If the long-term expected inflation rate remains unchanged, then the long-term expected real interest rate will fall.

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