Exam 4 econ

If the annual real interest rate is 20%, what is the present value of an asset that promises two payments spread across two years: a payment of $180 one year from today and a payment of $288 two years from today?

$350.

If the annual real interest rate is 5%, what is the present value of $840 one year in the future?

$800.

In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent. The money multiplier equals ________.

2

According to the quantity theory of money, if the economy's money supply grows at 8% per year and potential GDP grows at 5% per year, then, in the long run, we would expect to see an annual inflation rate of

8-5=3

Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?

A lower real interest rate makes more investment projects profitable and hence undertaken.

Liquidity is the

Ease with which an asset can be converted into money

If the fed sought to increase the quantity of money then fed should

Lower the discount rate and buy securities in the open market

A bank creates money by

Making loans from its excess reserves.

The most direct way in which money eliminates the need for a double coincidence of wants is through

Medium exchange

Which of the following is NOT included in the M1 definition of money

Time deposites

Excess reserves are

actual reserves minus desired reserves.

A firm is considering three investment projects, A, B, and C. The real expected profit rate for project A is 8 percent, for project B is 6 percent and for project C is 10 percent. If the real interest rate is 4 percent, the firm will undertake

all three projects.

In the short run, which of the following actions raise the equilibrium interest rate?

an increase in the demand for money

In the short run, which of the following actions lower the equilibrium interest rate?

an increase in the quantity of money

________ in the desired reserve ratio will ________ the money multiplier.

an increase; decrease

A depository institution is best defined as

as an institution that accepts deposits and makes loans.

When the Fed raises the required reserve ratio,

banks must decrease their lending. banks must hold more reserves.

e monetary base does NOT include

checking accounts at commercial banks.

The practice of borrowing short and lending long

creates liquidity

Households will choose to save more if

current disposable income increases. income is expected to decrease in the future.

If the Fed wants to raise the equilibrium interest rate, it must

decrease the quantity of money

Barter is the:

direct exchange of goods and services

The Ricardo-Barro effect proposes that government budget deficits

do not affect the real interest rate.

Bank managers lend the excess reserves created when new deposits come in because they want to

earn a profit.

in the figure above, which of the following will cause the real money demand curve MD1 to shift to MD0?

financial innovation MD0 is there all ready can't shit it

According to the Ricardo-Barro effect,

households increase their personal saving when governments run budget deficits.

The real demand for money is

independent of the price level

If the government has a budget deficit and the Ricardo-Barro effect does not apply,

investment decreases the real interest rate rises

Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve.

leftward; demand for

If the real interest rate is above the equilibrium real interest rate,

lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall.

If households expect an increase in their future incomes, they will save

less and consume more today

The functions of money are

medium of exchange, unit of account, store of value

An increase in the interest rate creates a ________ the money demand curve, and an increase in real GDP creates a ________ the money demand curve.

movement up along; rightward shift of

The opportunity cost of holding money is the

nominal interest rate.

Credit cards are

not money

If there is a surplus of money in the money market, then

people buy bonds and the interest rate falls.

The opportunity cost of investment is the

real interest rate.

The demand for loanable funds curve shows that as the ________ interest rate increases, there will be a ________ curve.

real; movement up along

A decrease in the real interest rate leads to a ________ the demand for loanable funds curve, and a decrease in the expected profit rate leads to a ________ the demand for loanable funds curve.

saving, the government budget surplus and international borrowing

The amount of ________ by households will be less ________.

saving; the lower is the real interest rate

If the Fed wants to raise the equilibrium interest rate it

sell bonds in order to decrease the quantity of money

In the above figure, new expectations of booming business conditions and a higher expected profit will

shift the demand for loanable funds curve rightward.

The larger the public's currency drain from the banking system, the

smaller is the money multiplier

In the market for loanable funds, an increase in wealth shifts the ________ loanable funds curve

supply of; leftward

The discount rate is the interest rate

that the Fed charges on loans of reserves to commercial banks.

An open market operation involves

the Federal Reserve's purchase or sale of government securities.

For a commercial bank, the term "reserves" refers to

the cash in its vaults and deposits at the Federal Reserve.

The idea that a government budget deficit decreases investment is called

the crowding-out effect

Which of the following is NOT a policy tool of the Federal Reserve System?

the interest rate charged on loans to member banks

The money multiplier determines how much

the quantity of money will be changed given a change in the monetary base

if the Fed sells U.S. government securities,

the quantity of money will decrease

The quantity theory of money asserts that inflation is the result of growth in

the quantity of money.

Changes in all of the following shift the supply curve of loanable funds except

the real interest rate