Final Exam

With a reserve requirement of 5% and an initial deposit of $400, what is the total amount of money that could be in the money supply? A. $420 B. $780 C. $4,000 D. $8,000

Correct answer: D, $8,000 Use the simply money multiplier. mm = (1 / rr). In this case, the money multiplier is mm = 20. 20 * $400 = $8,000.

Why is M2 currently a more monitored measure of the money supply than M1? A. ATMs have allowed easier access to savings deposits. B. M2 doesn't include coins, which may be obsolete in a few years. C. Banks pressured the Fed to include savings in the money supply measure. D. People have increased use of credit cards.

Correct answer: A, ATMs have allowed easier access to savings deposits. Before the ATM, savings were more difficult to access, so M1 was used, as it does not include savings deposits. Now with the ATM, savings are readily available for purchasing goods and services.

How does the Fed engage in expansionary monetary policy? A.It buys bonds from financial institutions. B. It sells bonds to financial institutions. C. It lowers the prices of goods. D. It raises the interest rate.

Correct answer: A, It buys bonds from financial institutions. By buying bonds from banks, money is put directly into the loanable funds market.

Which is true with regard to U.S. trade? A. The United States has run a trade deficit since 1975. B. U.S. exports > U.S. imports. C. The United States does most of its trading for oil from the Mideast. D. The United States only does a small amount of trading with Mexico and Canada.

Correct answer: A, The United States has run a trade deficit since 1975. We have run a trade deficit (imports > exports) for many years. However, this may not necessarily be a bad thing.

When people have rational expectations about inflation, it means that they base their inflation predictions on: A. all available information. B. whether or not they have debt. C. the rate of inflation from last year. D. assuming zero inflation.

Correct answer: A, all available information. People will use yesterday's inflation level as well as other information available (central bank intentions) to predict tomorrow's inflation.

What will cause an increase in demand (rightward shift) for foreign currency? A. an increase in demand for foreign goods B. an increase in the exchange rate C. a decrease in the exchange rate D. a decrease in the demand for U.S. products

Correct answer: A, an increase in demand for foreign goods If we want more foreign goods for some reason (causing us to have a rightward shift in demand for those products), we'll buy more foreign currency at all exchange rates (the shift in the demand for the currency). Answers [b] and [c] consider movements along the demand curve for foreign currency, rather than shifts.

How would you characterize world trade in goods over the past 40 years? A. It has decreased dramatically. B. It has grown dramatically. C. It has decreased steadily. D. It has grown steadily.

Correct answer: B, It has grown dramatically. Our economy is the world's largest, and is interconnected to economies around the world.

If U.S. exports increase: A. the current and capital account will no longer balance. B. current account deficits will shrink. C. current account deficits will increase. D. the demand for loanable funds will decrease.

Correct answer: B, current account deficits will shrink. With exports, funds will come into the country. The current account is goods, services, current income, and gifts. More funds will enter this account than before; the deficit in this account will shrink, and the surplus in the capital account will shrink as well.

Today in the United States, the dollar ($) is: A. intrinsically valued money. B. fiat money. C. commodity money. D. commodity-backed money.

Correct answer: B, fiat money. Dollars are just green pieces of paper. They have no value except as the medium of exchange. There is no intrinsic value.

In the United States, imports and exports: A. are generally equal. B. have both risen in the last 50 years. C. are not greatly affected by recessions. D. don't play a large role in GDP.

Correct answer: B, have both risen in the last 50 years. Our economy is the world's largest, and is interconnected to economies around the world.

According to the models studied in this chapter, monetary policy is: A. more effective in the long run. B. more effective in the short run. C. equally effective in the long and short run.

Correct answer: B, more effective in the short run. In the long run (after prices adjust), monetary policy has no real effects; only the price level (a nominal variable) is affected.

The Phillips curve: A. shows that inflation and unemployment are directly related. B. shows that inflation and unemployment are inversely related. C. can be effectively used in the long run. D. guarantees that the Fed can create jobs by changing the money supply.

Correct answer: B, shows that inflation and unemployment are inversely related. The curve is downward-sloping. However, the relationship isn't necessarily easily "exploitable," especially in the long run.

Which of the following is an example of expansionary fiscal policy? A. increase in taxes B. stimulus package C. increasing the money supply D. lowering interest rates

Correct answer: B, stimulus package Fiscal policy is changing taxes or spending. A stimulus package will increase spending, expanding the economy; [c] and [d] are both monetary policies.

Exchange rates can be thought of as: A. the demand for foreign currency. B. the price of foreign currency. C. the price of imports. D. the quantity of goods exchanged across borders.

Correct answer: B, the price of foreign currency. Exchange rates: The price of foreign currency; in other words, the amount of dollars required to buy units of another currency. For example, Mexican pesos.

Why is "dumping" often seen as unfair? A. People don't like imports. B. Consumers don't like when the prices fall too low. C. It is often the result of foreign government subsidies rather than legitimate comparative advantage. D. It allows domestic and foreign firms to collude and raise prices of goods.

Correct answer: C, It is often the result of foreign government subsidies rather than legitimate comparative advantage. When foreign governments subsidize production of foreign goods, that foreign firm has an advantage. Dumping cheap, subsidized goods will help gain entry into another market. Domestic producers (who don't get government help) cannot compete with the low prices.

Which of the following claims is true? A. The United States has a trade deficit in both goods trade and service trade. B. The United States has a trade surplus in both goods trade and service trade. C. The United States has a trade deficit in goods trade, but a surplus in service trade. D. The United States has a trade surplus in goods trade, but a deficit in service trade.

Correct answer: C, The United States has a trade deficit in goods trade, but a surplus in service trade. While the United States has a trade deficit in goods, it has a trade surplus in services.

Gains from trade come from: A. different exchange rates and currency manipulation across borders. B. larger countries taking advantage of smaller countries that must import most goods. C. countries producing goods in which they have a comparative advantage. D. wealthy countries freely giving goods and services to developing countries.

Correct answer: C, countries producing goods in which they have a comparative advantage. With comparative advantage and specialization, overall production and wealth can increase. Note that gains from trade might not be equal. Some countries may gain a lot from trade, while others may just gain a little.

Banks increase the money supply by: A. printing (minting) money. B. controlling interest rates. C. lending out funds to borrowers. D. storing the money of savers.

Correct answer: C, lending out funds to borrowers. When banks lend, more money is in circulation. I deposit my money, and you take out a loan. You now have money, and I can still get my money from the bank.

Discount loans are: A. loans offered by private banks at a lower interest rate. B. cheap loans to individuals from nonbank businesses. C. loans from the Fed to private banks. D. loans private banks make to each other.

Correct answer: C, loans from the Fed to private banks. From the text: We hold deposits at banks, and banks hold deposits at the Fed; these are the federal funds. Second, we take loans from banks, and banks take loans from the Fed; these are discount loans. Discount loans are loans from the Fed to private banks.

Which of the following is an example of an automatic stabilizer? A. Federal Reserve interest rates B. discretionary outlays C. progressive income taxes D. education subsidies

Correct answer: C, progressive income taxes When people make more income, they are "automatically" taxed more, which slows down growth.

Why would a country devalue its own currency? A. to become more dependent on other countries' imports B. to retaliate against countries with overvalued currency C. to make its exports more attractive to foreign countries D. to decrease the price of imports it purchases from other countries

Correct answer: C, to make its exports more attractive to foreign countries If a country keeps its currency undervalued, goods from that country will be cheaper and more attractive to foreigners. This can help a country get a trading relationship started with other countries, and can boost the country's exports significantly.

*ON THE FINAL!* Suppose the MPC is 0.9. What will the total GDP impact be of a $400 billion increase in government spending [G]? A. $360 billion B. $760 billion C. $1 trillion D. $4 trillion

Correct answer: D, $4 trillion We need to find that the spending multiplier is equal to 1 / (1 - MPC). Here, the multiplier is 10. We take 10 * $400 billion to get $4 trillion. It means that everyone spends 90 percent of the dollars they receive. Iteratively (in billions): 400 + 360 + 324 + 291.6 + 262.44 + ...

Suppose that the U.S. dollar appreciates compared to the Japanese yen. What will happen as a result? A. The exchange rate of yens to dollars will not change. B. It will take less yen to buy a U.S. dollar. C. It will take more U.S. dollars to buy yen. D. Japanese goods will become more attractive to American consumers.

Correct answer: D, Japanese goods will become more attractive to American consumers. If the dollar appreciates compared to the yen, it means that yen are now cheaper to buy. We can get yens cheaper, which makes Japanese goods more attractive since we can effectively use fewer dollars to purchase the Japanese goods (by getting more yens for our dollar).

Suppose the Fed engages in contractionary monetary policy to reduce the money supply. What is the result in the loanable funds market? A. There is a shift in the demand for loanable funds. B. The amount of loanable funds increases. C. Bank competition increases. D. The interest rate rises.

Correct answer: D, The interest rate rises. The leftward shift in the supply of loanable funds causes a decrease in the quantity of loanable funds and an increase in the interest rate.

One result of a tariff on imported goods is: A. increased trade of the good. B. increased economic efficiency. C. lower prices for the imported good. D. deadweight loss.

Correct answer: D, deadweight loss. Refer to the tariff graph. The price goes up, using the government's acquired revenue, but there is also some consumer surplus transferred to nobody. The forgone surplus (deadweight loss, economic inefficiency) is the result of decreased transactions that would have otherwise occurred.

Which of the following is an example of contractionary fiscal policy? A. decreasing the money supply B. increasing the interest rate C. increasing government spending D. increasing taxes

Correct answer: D, increasing taxes Once again, [a] and [b] are monetary policies