Macroeconomics Exam 3

Deposit creation occurs when

A bank lends money.

Excess Reserves

Deposits -- Required Reserves

Total Reserves

Excess Reserves + Required Reserves

How would each of these events affect the supply or demand for Japanese yen? (c) Higher inflation in the United States.

US imports of Japanese goods (with relatively lower prices) would increase, causing more demand for Japanese yen. Also Japanese demand for US goods would fall, reducing the supply of Japanese yen

How would each of these events affect the supply or demand for Japanese yen? (a) Stronger U.S. economic growth.

US imports of Japanese goods would increase, causing greater demand for Japanese yen

When a bank makes a loan, it

b. Creates a transactions account balance for the borrower.

According to Bernanke's policy guide, a half percentage point increase in long-term interest rates will

b. Decrease AD by $100 billion. --------1/4% change = $50billion gdp ----------------------------------------------50billion = 2 = decrease $100

Suppose Oscar withdraws $100 from his checking account and deposits it into his savings account. This transaction causes M1 to

b. Decrease by $100 and M2 to remain the same. (If you deposit $100, M1 increases by $100, and M2 is unchanged.)

Which of the following is a series of events that accurately describes the steps by which restrictive monetary policy is effective

b. Decrease in M1, increase in interest rate, and decrease in investment

When a country imposes tariffs, it is likely to cause

b. Higher prices for the import-competing goods.

The quantities of money people are willing and able to hold

b. Increase as interest rates fall.

Which of the following is true about an increase in the discount rate?

b. It signals the Federal Reserve's desire to restrain money growth.

. When money serves as a mechanism for transforming current income into future purchases, it is functioning as

b. Store of value.

Currency in circulation is included in

both M1 and M2

Which of the following represents the lending capacity of an entire banking system?

c. (Total reserves - required reserves) ×money multiplier.

If the United States raises tariffs on foreign goods, it may achieve

c. Greater profitability of import-competing firms. (Tariffs keep out foreign goods)

The terms of trade between two countries refer to

c. The amount of good A given up for good B. (opportunity cost)

When cash or coins are initially deposited into a bank,

c. The composition of the money supply changes, but the size of the money supply does not change.

In which of the following situations is expansionary monetary policy most effective?

d. Banks are willing to lend excess reserves.

When the Fed raises the discount rate, all of the following result except

d. It expands the lending capacity of the banking system.

What is true about M1

it includes the most liquid form of money it is the narrowest definition of the money supply Currency in circulation makes up approximately half of it.

Identify what money is

medium of exchange store of value standard of value

The following exchange rates were taken from ExchangeRate.com. On August 1, 2014, by how much did the dollar appreciate or depreciate against the

percent change old - new / new

Money is functioning as a store of value when you

save your cash to pay for tuition next semester

Suppose a bank has $160,000 in deposits and a required reserve ratio of 10 percent. Then required reserves are

$16,000 = $160,000 x .10

If excess reserves are $10,000, demand deposits are $100,000, and the required reserve ratio is 10 percent, then total reserves are

$20,000

Required Reserves

(bank deposits) x (required reserve ratio)

Which of the following appears in M2 but not in M1?

Savings accounts

If a PlayStation 3 costs 20,000 yen in Japan, how much will it cost in U.S. dollars if the exchange rate is

110 yen = $1? ----20,000/110 = $181.82 (b) 1 yen = $0.009? 20,000 x .009 = $180 (c) 100 yen = $1?------ 20,000/ 100 = $200

If a euro is worth $1.20, what is the euro price of a dollar

1euro/ $1.20 = 0.83 euro

How would each of these events affect the supply or demand for Japanese yen? (b) A decline in Japanese interest rates.

Foreign capital flows to Japan would decrease, reducing demand for Japanese yen. Also, capital flows from Japan would increase, causing an increased supply of Japanese yen

How would rapid inflation in Canada affect U.S. tourism travel to Canada? Does it make any difference whether the exchange rate between Canadian and U.S. dollars is fixed or flexible

Our demand for Canadian imports (including tourism) changes with rapid inflation in Canada. The magnitude of change is determined by the exchange rate mechanism that prevails. If the exchange rate were fixed, the impact of inflation would be to reduce our consumption of Canadian products due to their increasing prices. With flexible exchange rates, our demand would likely remain constant depending on how quickly the exchange rate adjusted to the price changes.

When cash or coins are initially deposited into a bank,

The composition of the money supply changes, but the size of the money supply does not change.

How would each of these events affect the supply or demand for Japanese yen? (d) A Japanese tsunami.

The tsunami restricted Japanese output, increased unemployment, and reduced incomes. This constricted Japan's ability to purchase imports, reducing the supply of yen. The demand for Japanese goods was impacted by safety concerns as well as availability, reducing the demand for yen

. If excess reserves are $30,000, demand deposits are $100,000, and the required reserve ratio is 15 percent, then total reserves are

a. $45,000.

Suppose Canada can produce either 300 tons of paper or 200 HDTVs, and India can produce either 200 tons of paper or 100 HDTVs. The terms of trade between the two countries will lie between

a. 1/2 and 2/3 of an HDTV per ton of paper.

The banking system can lend the sum of its excess reserves because

a. Banks are required to keep only a fraction of deposits on reserve.

If the Fed wishes to increase the money supply, it could

a. Lower the discount rate.

When money is used to acquire goods and services, it is functioning as a

a. Medium of exchange.

. The Fed can increase the federal funds rate by

a. Selling government bonds, which causes market interest rates to rise.

what happens when the fed raises the discount rate

a. The cost of borrowing reserves for member banks increases. b. It sends a signal that it is moving toward a slower growth rate for the money supply. c. It sends a signal that it is reluctant to lend reserves.

Two countries with differing comparative advantages may engage in trade because

a. They will be able to consume more goods in total due to specialization and trade

. If a country is completely self-reliant in producing goods for its own consumption needs, then

b. Its consumption possibilities equal its production possibilities

To reduce the level of unanticipated inflation, monetarists advocate

b. Steady and predictable changes in the money supply.

. First National Bank has zero excess reserves. Ceteris paribus, if the required reserve ratio increases, which of the following will happen immediately?

b. The bank will not have enough required reserves.

A country will not trade unless

b. The terms of trade are superior to domestic opportunities

Transaction account balances are included in

both M1 and M2

Carolina holds $2,000 in her savings account in case of a medical emergency. This represents the

c. Precautionary demand for money.

Which of the following is not true about M1?

c. Savings accounts makes up approximately one-third of it. (Not in M1)

The expansion of world output as a result of trade is mainly due to the effects of

c. Specialization according to comparative advantage.

How much do total deposits change when someone deposits $1000 into checking account

change in deposits = (initial change in deposits) x (money multiplier) ($1000) x (1/0.1) = 10,000

Money Multiplier

1 / required reserve ratio

For each of the following possible events, indicate whether the global value of the U.S. dollar will

American cars become suddenly more popular abroad. RISE (b) Inflation in the United States accelerates. FALL (c) The United States falls into a recession. RISE (d) Interest rates in the United States drop. FALL (e) The United States experiences rapid increases in productivity. RISE (f) Anticipating a return to the gold standard, Americans suddenly rush to buy gold from the two big producers, South Africa and the Soviet Union. FALL (g) War is declared in the Middle East. RISE (h) The stock markets in the United States collapse. FALL

How do changes in the value of the U.S. dollar affect foreign enrollments at U.S. colleges?

As the US dollar appreciates, it takes more of the foreign currency to purchase US dollars. This effectively increases the price of a US education, and quantity demanded of education at US colleges by foreign students declines. Should the US Dollar depreciate, the effective price of a US education declines, and potentially more foreign students enroll at US colleges

Why would a decline in the value of the dollar prompt foreign manufacturers such as BMW to build production plants in the United States?

BMW can produce cars at a lower cost in the US when the dollar falls in value. From BMW's point of view,it can purchase materials at lower dollar costs and sell the cars in Germany at the higher euro value. The gap between euro-dominated revenues and dollar-dominated costs widens, which means profit grows

Transactions account balances are included in

Both M1 and M2.

Traveler's checks are included in which of the following?

Both M1 and M2.

Change in money supply

Change in money supply = (change in deposits) - (initial deposit) initial deposit--NOT new money, but if there is new money, then we do not subtract it because the new money was not counted in the money supply initially

One of the main functions of banks is

Creating money