Macroeconomics Exam 2

1) Money is not ________. A) income because the former is a stock measure and the latter a flow B) wealth because the latter is generally used to procure the former C) as desirable as barter because the latter is more efficient than the former D) all of the above E) none of the above

A

1) The Fed's narrowest measure of money is ________. A) M1 B) M2 C) M3 D) all of the above E) none of the above

A

1) The real interest rate ________ inflation ________. A) is unaffected in the long run by; because of the classical dichotomy B) moves one for one with expected; in the long run C) always increases with; but because of the Fisher effect lower expected inflation ensues D) all of the above E) none of the above

A

10) A procyclical variable ________. A) moves up during expansions and down during contractions B) moves up during contractions and down during expansions C) moves in the opposite direction of aggregate economic activity D) all of the above E) none of the above

A

11) Current Federal Reserve policy focuses on interest rates, rather than on monetary aggregates, because ________. A) monetary aggregates do not provide clear or consistent signals to guide policymakers B) open market operations affect interest rates more directly than they affect monetary aggregates C) according to the Fisher effect, the interest rate is a key determinant of the inflation rate D) all of the above E) none of the above

A

11) Which of the following is most like money? A) game arcade tokens B) board game "money" C) credit cards D) baseball trading cards E) frequent flyer miles

A

13) A leading variable ________. A) reaches a peak or trough before the turning point of the business cycle B) reaches a peak or trough after the turning point of the business cycle C) reaches a peak or trough at the same time as the turning point of the business cycle D) all of the above E) none of the above

A

13) The principal reason(s) that so much U.S. currency is held outside the U.S is (are) ________. A) many people around the world trust the U.S. dollar more than any other currency B) banks all around the world find it convenient to hold large amounts of U.S. dollars C) U.S. citizens and corporations spend a lot of dollars abroad D) all of the above E) none of the above

A

16) From the equation of exchange, if both real income (Y) and the quantity of money (M) double and the price level (P) remains constant, then velocity (V) ________ and nominal income ________. A) remains constant; doubles B) doubles; remains constant C) doubles; doubles D) decreases by 50 percent; quadruples E) none of the above

A

17) In the quantity theory of money, which of these variables is endogenous? A) the price level B) the velocity of money C) real output D) the money supply E) none of the above

A

18) In the quantity theory of money, the assumption that aggregate output is fixed is based on the view that ________. A) wages and prices are perfectly flexible in the long run B) the velocity of money is constant in the short run C) the demand for real money balances is proportional to income D) changes in the quantity of money lead to proportional changes in the price level E) none of the above

A

2) The real interest rate ________ inflation ________. A) subtracted from the nominal rate yields expected; according to the Fisher equation B) moves one for one, in the long run, with expected; according to the classical dichotomy C) always increases with; but because of the Fisher effect lower expected inflation ensues D) all of the above E) none of the above

A

2) With increases in inflation demand for money that does not earn a return decreases. Carrying less cash in our pockets means higher ________. A) shoe-leather costs B) menu costs C) capital gain tax bills D) all of the above E) none of the above

A

3) The direct cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________. A) printing of too much money by the central bank B) government expenditures greatly above revenues C) outlawing of price increases on many commodities D) allowing the use of foreign currencies E) the issuance of a $100 billion bank note

A

3) The quantity theory of money ________. A) was best explained by Fisher's book "The Purchasing Power of Money" B) links total money supply to a country's demand for money C) is also known as the equation of exchange D) all of the above E) none of the above

A

5) Wealth ________. A) may serve the monetary function of store of value B) means essentially the same as money C) differs from money in that wealth is more liquid D) is the flow that corresponds to the stock of income E) none of the above

A

6) Someone who has just inherited a "goldmine" has received a great deal of ________. A) wealth B) money C) income D) currency E) liquidity

A

6) The velocity of money ________. A) represents the average number of times a dollar is spent in a given year B) indicates the relative importance of cash versus writing checks for purchases C) times the money supply should equal real GDP D) all of the above E) none of the above

A

6) When the Fed sells government securities in the open market, the money supply ________ because ________. A) decreases; banks lose liquidity, they make fewer loans and checking account deposits decrease B) increases; banks gain liquidity, they make more loans and checking account deposits increase C) increases; banks lose liquidity, they make more loans and checking account deposits increase D) decreases; banks gain liquidity, they make fewer loans and checking account deposits decrease E) none of the above

A

7) Interest rates spreads between long-term and short-term Treasury bills ________. A) are procyclical B) are not a good predictor of recessions C) are a lagging indicator D) all of the above E) none of the above

A

7) Typically, when someone borrows money from a bank, M2 ________, because ________. A) increases; the money is held for a while in a liquid form B) decreases; the money is held for a while in a liquid form C) does not change; the loan affects only the subcategories within M2 D) decreases; of the decline in the bank's vault cash E) none of the above

A

8) Open market operations alter the money supply by ________. A) influencing banks' ability to make loans to individuals and corporations B) adding currency to or withdrawing currency from banks' vaults C) adding currency to or withdrawing currency from the checking accounts of individuals and corporations D) influencing banks' ability to make loans to the government E) none of the above

A

2) In a business cycle, a period from peak to trough may be referred to as ________. A) an expansion B) a recurrence C) a contraction D) all of the above E) none of the above

C

20) The Conference Board does a good job predicting recessions for reasons that include ________. A) a focus on fewer than five leading variables B) exclusive use of real-time data C) revisions of the components of its monthly index D) all of the above E) none of the above

C

21) The proposition that changes in the money supply have no long-run effect on real variables is known as the ________. A) classical dichotomy B) quantity theory of money C) neutrality of money D) Fisher effect E) none of the above

C

25) The quantity theory of money ________. A) focuses mainly on the close link between short run fluctuations in velocity and the price level B) works very well for the U.S. but it does not hold empirically for other countries in the long run C) provides a long run theory of inflation because it is based on the assumption that prices and wages are fully flexible D) all of the above E) none of the above

C

3) A characteristic of the inflation rate is that ________. A) it typically goes down in a boom B) it typically goes up in a recession C) it is a lagging indicator D) all of the above E) none of the above

C

3) M1 differs from M2 because ________. A) M1 includes demand deposits and M2 does not B) M1 includes currency held by the nonbank public and M2 includes only currency held by banks C) M2 includes interest bearing time deposit accounts and M1 does not D) all of the above E) none of the above

C

3) With high inflation ________. A) stock market investors are always worse off than consumers and households B) producers are always worse off than consumers C) creditors are always worse off than debtors D) all of the above E) none of the above

C

4) M1 differs from M2 because ________. A) M1 is less liquid than M2 B) M1 includes demand deposits and M2 does not C) M1 includes only the most liquid forms of money and M2 includes all of M1 and some less liquid items D) all of the above E) none of the above

C

4) The FOMC ________. A) meets four times a year to decide on how to conduct open market operations that influence the money supply B) meets six times a year to decide on how to conduct open market operations that influence the money supply and interest rates C) meets eight times a year to decide on how to conduct open market operations that influence the money supply and interest rates D) meets twelve times a year to decide on how to conduct open market operations that influence interest rates E) none of the above

C

7) Inflation leads to ________. A) increased variability of relative prices only when it is anticipated B) increased variability of relative prices only when it is unanticipated C) increased variability of relative prices whether inflation is anticipated or not D) lower variability of the general price level only when it is very high E) none of the above

C

8) Economic activity that is above potential output ________. A) signals that potential output is about to increase B) is not possible C) results from an economic shock to which the economy has yet to adjust fully D) occurs near the trough, rather than the peak, of a business cycle E) none of the above

C

8) The phrase "double coincidence of wants" ________. A) is useful to explain why barter is an efficient practice B) refers to two people who have similar tastes C) suggests a quite improbable circumstance D) clarifies the distinction between income and wealth E) none of the above

C

9) The most liquid asset is ________. A) stocks B) bonds C) cash D) real estate E) none of the above

C

9) Which of these transactions results in an increase in M2? A) certificate of deposit matures, adding $520 to your checking account B) withdrawal of $100 cash from your checking account C) depositing a bank loan of $400 into your savings account D) depositing a $300 paycheck into your savings account E) none of the above

C

3) In a business cycle, a period from peak to trough may be referred to as ________. A) a contraction B) a recession C) a depression D) all of the above E) none of the above

D

3) Money is ________. A) an asset B) a unit of measure C) a tool D) all of the above E) none of the above

D

3) The Federal Reserve System consists of ________. A) eleven district banks and a board of governors B) ten district banks and the FOMC C) eleven district banks D) twelve district banks and a board of governors E) none of the above

D

3) The Fisher effect ________. A) comes from combining the Fisher equation and the classical dichotomy B) predicts that in the long run nominal rates will rise with increases in expected inflation C) shows that in high inflation we typically see high nominal interest rates D) all of the above E) none of the above

D

4) A characteristic of stock prices is that ________. A) they tend to go up on the upswing of the cycle B) they tend to go down on the downswing of the cycle C) they are a leading indicator D) all of the above E) none of the above

D

4) Inflation might lead to ________ because ________. A) lower demand for stocks; of tax distortions B) lower demand for cash; money does not typically yield interest C) uncertain or uneven demand for goods; higher fluctuations in relative prices make it harder for consumers to compare among goods and make rational consumption decisions D) all of the above E) none of the above

D

4) Money serves as ________. A) a unit of account B) a store of value C) a medium of exchange D) all of the above E) none of the above

D

5) A recession can manifest itself with ________. A) a decrease in consumer spending B) a decrease in industrial production C) a lengthy period of falling GDP D) all of the above E) none of the above

D

5) M1 does not include cash that is held in ATMs or bank vaults, because ________. A) no one really owns that money B) that money is included in M2 C) that money earns no interest D) the right to access that money is counted already as bank deposits E) none of the above

D

5) The velocity of money ________. A) represents the average number of times a dollar turns over through the year B) provides the link between the money supply and nominal income C) times the money supply should equal total income, according to the equation of exchange D) all of the above E) none of the above

D

7) Economists use the term "potential output" to refer to ________. A) a level of output that has not yet been achieved B) the maximum level of output of which an economy is capable C) the sum of finished goods plus goods in production that will be finished within the year D) the level of output that occurs when all prices are fully adjusted E) none of the above

D

7) The equation of exchange ________. A) states that the quantity of money multiplied by velocity must equal nominal income in a given year B) describes a relationship that is true by definition C) shows that real GDP must equal real money balances times the number of times a dollar turns over in a year D) all of the above E) none of the above

D

9) According to Irving Fisher, velocity ________. A) is determined by institutions that affect the way individuals transact B) is affected by institutions only gradually C) is assumed constant in the short run D) all of the above E) none of the above

D

9) Which of the following is true for the European Central Bank (ECB)? A) its executive board meets more often than the FOMC B) each member country's central bank has similar functions to the Federal Reserve Banks C) it is housed in Frankfurt, Germany D) all of the above E) none of the above

D

10) According to Irving Fisher, velocity ________. A) is determined by the way banks alone conduct transactions B) equals the number of transactions times the average price per transaction all divided by total money balances C) can change very quickly on short notice D) all of the above E) none of the above

B

12) A leading countercyclical variable ________. A) reaches a peak before the peak of the business cycle B) reaches a trough before the peak of the business cycle C) reaches a trough along with the trough of a business cycle D) all of the above E) none of the above

B

12) A prisoner of war camp seems a likely place for "cigarette money," because ________. A) nearly all prisoners smoke cigarettes B) of the absence of better alternatives C) cigarettes are abundant and easy to count D) the guards can enforce the practice of accepting cigarettes as a medium of exchange E) cigarettes retain their value over time

B

12) As of 2013, the outstanding U.S. currency is more than $1 trillion, which suggests that the typical U.S. citizen holds $3,600 in cash. Is this an accurate inference? Why? A) Yes; because dividing total currency by total U.S. population roughly works out to $3,600 per person. B) No; because criminals and foreigners hold large sums of dollars, so the average citizen holds far less. C) No; because the average citizen probably does not have $3,600 in her checking account. D) Yes; because the Fed rarely makes accounting mistakes when computing M1. E) none of the above

B

13) Characteristics that enable an item to serve well as money include each of the following, except ________. A) durable B) abundant C) divisible D) portable E) verifiable

B

14) A lagging variable ________. A) reaches a peak or trough before the turning point of the business cycle B) reaches a peak or trough after the turning point of the business cycle C) reaches a peak or trough at the same time as the turning point of the business cycle D) all of the above E) none of the above

B

2) Hyperinflation typically ________. A) describes periods of extreme price increases of over 10% per year B) is a result of extreme periods of money growth that tend to come from large fiscal imbalances C) affects low-income economies, but is rare among more-developed economies D) all of the above E) none of the above

B

2) In addition to the chairman of the Board of Governors, the FOMC consists of ________. A) six rotating members of the Board of Governors and five presidents of Federal Reserve banks B) six other members of the Board of Governors, four rotating bank presidents and the president of the New York Federal Reserve C) six other members of the Board of Governors and five presidents of Federal Reserve banks; all twelve rotating members D) twelve Federal Reserve Bank presidents E) none of the above

B

2) The quantity theory of money ________. A) is the product of Keynesian economists B) links total income to a country's supply of money C) is also known as the equation of exchange D) all of the above E) none of the above

B

20) The quantity theory of money ________. A) is used by classical economists to explain how frequent changes in velocity lead to infrequent changes in the price level B) gives mathematical grounding for the view that a country's central bank determines the general price level through control of the money supply C) implies that changes in the money supply never have an impact on real variables D) all of the above E) none of the above

B

22) The proposition that the amount of goods and services produced in an economy in the long run is not affected by the price level is known as the ________. A) neutrality of money B) classical dichotomy C) quantity theory of money D) Fisher effect E) none of the above

B

4) In a business cycle, a period from trough to peak may be referred to as ________. A) a contraction B) an expansion C) a recurrence D) all of the above E) none of the above

B

4) The root cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________. A) printing of too much money by the central bank B) government expenditures greatly above revenues C) outlawing of price increases on many commodities D) allowing the use of foreign currencies E) the issuance of a $100 billion bank note

B

5) Inflation might lead to ________ because ________. A) higher demand for stocks; as the price level increases so do stock prices B) higher production costs; businesses have to advertise more often due to faster price revisions C) lower transaction costs; we would hold less cash D) all of the above E) none of the above

B

5) Open Market operations consist mainly of ________. A) the government buying and selling private securities in the open market B) the Fed buying and selling government securities in the open market C) the government selling its own securities in the open market D) the Fed setting rates for securities traded in the open market E) none of the above

B

6) Inflation ________. A) is more costly when it is anticipated than when it comes as a surprise B) makes it more difficult to plan for the future, whether it is a surprise or not C) induces distortions in the money and goods market but not the labor market D) all of the above E) none of the above

B

6) Interest rates spreads between long-term and short-term Treasury bills ________. A) are countercyclical B) are good predictors of recessions C) are a lagging indicator D) all of the above E) none of the above

B

7) When the Fed buys government securities in the open market, the money supply ________ because ________. A) decreases; banks lose liquidity, they make fewer loans and checking account deposits decrease B) increases; banks gain liquidity, they make more loans and checking account deposits increase C) increases; banks lose liquidity, they make more loans and checking account deposits increase D) decreases; banks gain liquidity, they make fewer loans and checking account deposits decrease E) none of the above

B

8) The equation of exchange ________. A) states that the quantity of money divided by velocity must equal nominal income in a given year B) is only an identity if we do not understand the determinants of velocity C) shows that nominal income must equal real money balances times the number of times a dollar turns over in a year D) all of the above E) none of the above

B

8) Which of these transactions results in an increase in M1? A) withdrawal of $100 cash from your checking account B) certificate of deposit matures, adding $520 to your checking account C) depositing a bank loan of $400 into your savings account D) depositing a $300 paycheck into your savings account E) none of the above

B

9) The difference between aggregate economic activity and potential output is called ________. A) the business cycle B) the output gap C) a recession D) a trough E) a co-movement

B

1) Arthur Burns and Wesley Mitchell first described business cycles as ________. A) fluctuations in consumer preferences B) fluctuations in the price of bicycles C) fluctuations in aggregate economic activity D) all of the above E) none of the above

C

10) Which of the following is true for the European Central Bank (ECB)? A) its executive board meets less often than the FOMC B) the members of its executive board have lifetime appointments C) it is a more decentralized system than the Federal Reserve D) all of the above E) none of the above

C

14) From the equation of exchange, if both nominal income and the quantity of money (M) have tripled, while the price level (P) has increased by 50 percent and velocity (V) remains constant, then real output (Y) ________. A) also triples B) increases by 50 percent C) doubles D) decreases by 50 percent E) none of the above

C

15) From the equation of exchange, if both nominal income and the quantity of money (M) have doubled, while the price level (P) has decreased by 50 percent and velocity (V) remains constant, then real output (Y) ________. A) also doubles B) triples C) quadruples D) decreases by 50 percent E) none of the above

C

1) GDP is a good proxy for the business cycle itself since ________. A) its real consumption spending component is procyclical and coincident B) its real investment spending component is procyclical and coincident C) it typically goes up in a boom and down in a recession D) all of the above E) none of the above

D

1) Hyperinflation typically ________. A) describes periods of extreme price increases of over 50% per month or 1,000% per year B) is a result of extreme periods of money growth that tend to come from large fiscal imbalances C) affects both poor and developed economies D) all of the above E) none of the above

D

1) Inflation ________. A) is costly because the classical dichotomy may not always hold B) that is anticipated (or expected) can be costly C) is costly for many reasons but chief among them is that inflation makes it more difficult to plan for the future D) all of the above E) none of the above

D

1) The quantity theory of money ________. A) is the product of classical economists B) links total income to a country's supply of money C) is derived from the equation of exchange D) all of the above E) none of the above

D

10) Subject to a few legal and practical restrictions, anything may be exchanged for anything else. The distinctive advantage of money is that ________. A) it is likely to retain its value, whether it is kept or exchanged B) it has little, if any, use other than exchange C) it can generate income while it is kept D) it is likely to be accepted by everyone in exchange for anything E) none of the above

D

11) The quantity theory of money ________. A) is formulated in terms of aggregate output because the nominal value of transactions is difficult to measure B) assumes that the nominal value of transactions are a constant portion of aggregate output C) assumes velocity is constant in the short run D) all of the above E) none of the above

D

12) The quantity theory of money ________. A) is formulated in terms of aggregate output because the nominal value of transactions is difficult to measure B) tells us how much money is held for a given amount of nominal spending C) implicitly tells us the quantity of money that people want to hold D) all of the above E) none of the above

D

13) The quantity theory of money tells us that real money balances are proportional to income, since ________. A) velocity is assumed constant in the short run B) the supply and demand of money are equal in equilibrium C) changes in the quantity of money lead to proportional changes in the price level D) all of the above E) none of the above

D

19) The quantity theory of money ________. A) is used by classical economist to explain how changes in the quantity of money lead to proportional changes in the price level B) gives mathematical grounding for the view that a country's central bank determines the general price level through control of the money supply C) implies that changes in the money supply have no long run impact on real variables D) all of the above E) none of the above

D

2) A characteristic of the unemployment rate is that ________. A) it typically goes up in a recession B) it typically goes down in a boom C) it is not clear whether it is a leading or a lagging indicator D) all of the above E) none of the above

D

2) M1 differs from M2 because ________. A) M2 includes components that are less liquid than any component of M1 B) M1 does not include savings deposits and M2 does C) M1 is included in M2 but M2 has more components D) all of the above E) none of the above

D

2) Money is not ________. A) income because the former is a stock measure and the latter a flow B) wealth because the former is generally used to procure the latter C) as inefficient as barter because the latter requires a double coincidence of wants D) all of the above E) none of the above

D

1) In modern economies, the supply of money depends mainly on the economy's ________. A) tax rates B) mining of precious metals C) net exports D) growth of output of goods and services E) none of the above

E

10) If the euro replaces the U.S. dollar as the world's most popular currency, that will likely ________. A) reduce M1, without affecting M2 B) reduce M2, without affecting M1 C) cause a temporary increase in M1 D) affect neither M1 nor M2 E) none of the above

E

11) A countercyclical variable ________. A) moves up during expansions and down during contractions B) is another term for an acyclical variable C) moves in the same direction as aggregate economic activity D) all of the above E) none of the above

E

23) The proposition that the velocity of money is fairly constant in the long run is known as the ________. A) neutrality of money B) classical dichotomy C) quantity theory of money D) Fisher effect E) none of the above

E

24) The quantity theory of money ________. A) implies that inflation equals the ratio of the growth rates of the money supply and of real income B) provides central banks with a tool to prevent the rate of inflation from fluctuating C) implies that, in the long run, changes in the money supply will be matched by changes in real income D) all of the above E) none of the above

E

26) The quantity theory of money ________. A) suggests that inflation is always and everywhere a monetary phenomenon which has been shown to always be supported by the data B) validates the classical assumption that wages and prices are completely flexible in the short run C) provides a better description of short run fluctuations in inflation and money growth than the link between these variables in the long run D) all of the above E) none of the above

E

4) The quantity theory of money explains how ________ depends on ________. A) real GDP; the money supply B) the price level; the demand for money C) the money supply; the velocity of money D) all of the above E) none of the above

E

5) The interest rates paid on Treasury bills ________. A) go down in booms B) go up in recessions C) are a coincident indicator D) all of the above E) none of the above

E

5) The main reason that hyperinflation renders a currency worthless is that ________. A) the government cannot print money fast enough to keep up with the rising prices B) laws against raising prices are easily evaded C) reducing government expenditures is politically unpopular D) the government's "official" inflation rate is always a gross understatement E) as soon as inflation seems out of control, everyone knows that the currency will soon lose whatever value it has today

E

6) Examining U.S. business cycles over time reveals that they ________. A) occur at regular intervals B) are of uniform duration C) are of similar magnitude D) all of the above E) none of the above

E

6) Financial innovations such as direct deposit of paychecks, electronic payment of bills, and automated teller machines (ATMs) have likely ________. A) had minimal effect on M1 and M2 B) reduced the size of M2 relative to M1 C) increased both M1 and M2 relative to GDP D) caused the growth rates of M1 and M2 to become more stable E) reduced the size of M1 relative to M2

E

7) Fred has always been known as "the rich kid." Strictly speaking, this must mean that ________. A) Fred has a lot of cash B) Fred's income is quite high C) Fred won the lottery before he was legally eligible D) Fred has a flashy wardrobe E) Fred has a lot of wealth

E

8) Inflation may impose little, if any, cost on the economy, if ________. A) laws against excessive price increases are enforced effectively B) the government subsidizes menu costs C) price increases are fully anticipated D) the Fisher effect holds true E) the rate of price increase is so slow that people do not feel compelled to alter their behavior

E