Money & Financial Markets (After Exam 2)

If nominal GDP is $10 trillion, and velocity is 10, the money supply is A) $1 trillion. B) $5 trillion. C) $10 trillion. D) $100 trillion.

A) $1 trillion.

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 49.0 Indian rupees. Thus, one Indian rupee would have purchased about ________ U.S. dollars. A) 0.02 B) 1.20 C) 7.00 D) 49.0

A) 0.02

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ U.S. dollars. A) 0.30 B) 1.86 C) 2.86 D) 3.33

A) 0.30

f the U.S. dollar appreciates from 1.25 franc per U.S. dollar to 1.5 francs per dollar, then the franc depreciates from ________ U.S. dollars per franc to ________ U.S. dollars per franc. A) 0.80; 0.67 B) 0.67; 0.80 C) 0.50; 0.33 D) 0.33; 0.50

A) 0.80; 0.67

His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports. A) John Maynard Keynes B) Sir John Hicks C) Milton Friedman D) Paul A. Samuelson

A) John Maynard Keynes

When the effects of the subprime crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________. A) appreciated; increased B) depreciated; increased C) appreciated; decreased D) depreciated; decreased

A) appreciated; increased

Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of A) bank deposits denominated in different currencies. B) SDRs. C) gold. D) ECUs

A) bank deposits denominated in different currencies.

The classical economists' contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is ________ and real GDP is ________. A) constant; constant B) constant; variable C) variable; variable D) variable; constant

A) constant; constant

The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A) depreciate in the long run. B) appreciate in the long run. C) depreciate in the short run. D) appreciate in the short run.

A) depreciate in the long run

Fisher's quantity theory of money suggests that the demand for money is purely a function of ________, and ________ no effect on the demand for money. A) income; interest rates have B) interest rates; income has C) government spending; interest rates have D) expectations; income has

A) income; interest rates have

In an IS-LM framework, expansionary monetary policy will A) increase both income and the interest rate B) increase saving and decrease consumption C) increase both consumption and investment D) increase the size of the budget deficit

A) increase both income and the interest rate

Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

A) increase; appreciate

Keynes hypothesized that the speculative component of money demand was primarily determined by the level of A) interest rates. B) velocity. C) income. D) stock market prices.

A) interest rates.

Expansionary monetary policy affects the goods market because: A) it lowers interest rates and raises investment spending B) it raises interest rates and leads to lower investment spending C) it lowers both interest rates and investment spending D) it leads to an expansionary fiscal policy

A) it lowers interest rates and raises investment spending

Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending A) merely causes a movement along the IS curve and not a shift. B) is crowded out by higher taxes. C) is crowded out by higher government spending. D) is crowded out by lower consumer expenditures.

A) merely causes a movement along the IS curve and not a shift.

Everything else held constant, when a countrys currency appreciates, the countrys goods abroad become ________ expensive and foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more

A) more; less

For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Movements in the price level result A) solely from changes in the quantity of money. B) primarily from changes in the quantity of money. C) only partially from changes in the quantity of money. D) from changes in factors other than the quantity of money.

A) solely from changes in the quantity of money.

Today 1 euro can be purchased for $1.10. This is the A) spot exchange rate. B) forward exchange rate. C) fixed exchange rate. D) financial exchange rate.

A) spot exchange rate.

Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise

A) supply; fall

The velocity of money is A) the average number of times that a dollar is spent in buying the total amount of final goods and services. B) the ratio of the money stock to high-powered money. C) the ratio of the money stock to interest rates. D) the average number of times a dollar is spent in buying financial assets.

A) the average number of times that a dollar is spent in buying the total amount of final goods and services.

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money

A) theory of purchasing power parity

Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. A) transactions; income B) transactions; age C) incomes; wealth D) incomes; age

A) transactions; income

Assume that autonomous consumption equals $200 and disposable income equals $1000. If total consumption equal $800, then the mpc equals A) 0.2. B) 0.6. C) 0.8. D) 1.0.

B) 0.6.

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased about ________ U.S. dollars. A) 0.30 B) 0.87 C) 1.15 D) 3.10

B) 0.87

The ________ describes points for which the goods market is in equilibrium. A) LM curve B) IS curve C) consumption function D) investment schedule

B) IS curve

The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded. A) LM curve B) IS curve C) consumption function D) investment schedule

B) IS curve

When the IS and LM curves are combined in the same diagram, the intersection of the two curves determines the equilibrium level of ________ as well as the ________. A) aggregate output; price level B) aggregate output; interest rate C) money supply; price level D) consumer expenditures; interest rate

B) aggregate output; interest rate

The money market is in equilibrium ________. A) at any point on the IS curve B) at any point on the LM curve C) at only one point on the LM curve D) only at the intersection of the IS and LM curves

B) at any point on the LM curve

An autonomous depreciation of the U.S. dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S. net exports, everything else held constant. A) cheaper; decline B) cheaper; rise C) more expensive; decline D) more expensive; rise

B) cheaper; rise

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant. A) appreciate; lower B) depreciate; lower C) depreciate; higher D) appreciate; higher

B) depreciate; lower

When the exchange rate for the Mexican peso changes from 9 pesos to the U.S. dollar to 10 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

B) depreciated; appreciated

When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

B) depreciated; appreciated

When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

B) depreciated; appreciated

Refer to the graph below. Which point(s) represent equilibrium in the financial market? A) point a only B) points a, e, and b only C) points d, a, and c only D) points e and b only

B) points a, e, and b only

The demand for money as a cushion against unexpected contingencies is called the A) transactions motive. B) precautionary motive. C) insurance motive. D) speculative motive.

B) precautionary motive.

The immediate (two-day) exchange of one currency for another is a A) forward transaction. B) spot transaction. C) money transaction. D) exchange transaction.

B) spot transaction.

Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of A) interest-rate determination. B) the demand for money. C) exchange-rate determination. D) the demand for assets.

B) the demand for money.

In the foreign exchange market, if the exchange rate is expected to increase in the future, holding everything else constant, A) the dollar depreciates. B) the dollar appreciates. C) the foreign currency appreciates D) both (a) and (c) of the above.

B) the dollar appreciates.

In the foreign exchange market, if the interest rate on foreign deposits decreases, holding everything else constant, A) the expected return on foreign deposits increases. B) the expected return schedule for foreign deposits shifts to the left. C) the expected return schedule for foreign deposits shifts to the right. D) both (a) and (b) of the above occur.

B) the expected return schedule for foreign deposits shifts to the left.

Exchange rates are determined in A) the money market. B) the foreign exchange market. C) the stock market. D) the capital market.

B) the foreign exchange market.

If the consumption function is expressed as C = a + mpc × YD, then "mpc" represents A) autonomous consumer expenditure. B) the marginal propensity to consume. C) the expenditure multiplier. D) disposable income.

B) the marginal propensity to consume.

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant A. appreciate; lower B. depreciate; lower C. depreciate; higher D. appreciate; higher

B. depreciate; lower

If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by A) $25. B) $70. C) $50. D) $100.

C) $50.

Everything else held constant, if total consumption increases from $600 to $800 because of an increase of disposable income of $400, then the mpc is equal to A) 0.2. B) 0.4. C) 0.5. D) 0.6.

C) 0.5.

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have purchased about ________ U.S. dollars. A) 0.75 B) 1.00 C) 1.33 D) 1.75

C) 1.33

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have purchased about ________ U.S. dollars. A) 0.75 B) 1.00 C) 1.33 D) 1.75

C) 1.33

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is: A) 40 pesos per real. B) 100 pesos per real. C) 25 pesos per real. D) 0.4 pesos per real.

C) 25 pesos per real.

If the money supply is $500 and nominal income is $3,000, the velocity of money is A) 1/60. B) 1/6. C) 6. D) 60.

C) 6.

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A) depreciate. B) float. C) appreciate. D) do none of the above.

C) appreciate.

When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

C) appreciated; depreciated

When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

C) appreciated; depreciated

When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

C) appreciated; depreciated

Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

C) depreciate; long

Keynes reasoned that consumer expenditure is most closely related to A) the level of interest rates. B) the price level. C) disposable income. D) the marginal tax rate.

C) disposable income.

Macroeconomic equilibrium requires ________. A) equilibrium in the goods market B) equilibrium in the money market C) equilibrium in both the goods and money markets D) equilibrium in neither the goods nor the money market

C) equilibrium in both the goods and money markets

Any position that is to the left of (and above) the LM-curve indicates that there is A) excess demand for goods and services B) excess supply of goods and services C) excess demand for money D) excess supply of money

C) excess supply of money

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the A) spot exchange rate. B) money exchange rate. C) forward exchange rate. D) fixed exchange rate.

C) forward exchange rate.

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a A) spot transaction. B) future transaction. C) forward transaction. D) deposit transaction.

C) forward transaction.

If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real GDP is $5 trillion, an increase in the money supply to $2 trillion A) increases real GDP to $10 trillion. B) causes velocity to fall to 2.5. C) increases the price level to 2. D) increases the price level to 2 and velocity to 10.

C) increases the price level to 2.

The goods market and the money market are linked together by A) monetary policy B) fiscal policy C) interest rates D) the labor market

C) interest rates

According to the quantity theory of money demand, A) an increase in interest rates will cause the demand for money to fall. B) a decrease in interest rates will cause the demand for money to increase. C) interest rates have no effect on the demand for money. D) an increase in money will cause the demand for money to fall.

C) interest rates have no effect on the demand for money.

The Keynesian theory of money demand emphasizes the importance of A) a constant velocity. B) irrational behavior on the part of some economic agents. C) interest rates on the demand for money. D) expectations.

C) interest rates on the demand for money.

In the foreign exchange market, if the exchange rate is expected to increase in the future, holding everything else constant, A) the expected return on foreign deposits increases. B) the expected return schedule for foreign deposits shifts to the right. C) the expected return schedule for foreign deposits shifts to the left. D) both (a) and (b) of the above occur. E) both (a) and (c) of the above occur.

C) the expected return schedule for foreign deposits shifts to the left.

Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates? A) the transactions motive B) the precautionary motive C) the speculative motive D) the altruistic motive

C) the speculative motive

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. A) incomes; wealth B) incomes; age C) transactions; income D) transactions; age

C) transactions; income

Velocity is defined as A) P + M + Y. B) (P × M)/Y. C) (Y × M)/P. D) (P × Y)/M.

D) (P × Y)/M.

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen? A) The Mexican peso will depreciate against the Brazilian real. B) The U.S. dollar will depreciate against the Canadian dollar. C) The Canadian dollar will depreciate against the Mexican peso. D) The Brazilian real will depreciate against the U.S. dollar

D) The Brazilian real will depreciate against the U.S. dollar

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen? A) The Mexican peso will depreciate against the Brazilian real. B) The U.S. dollar will depreciate against the Canadian dollar. C) The Canadian dollar will depreciate against the Mexican peso. D) The Brazilian real will depreciate against the U.S. dollar.

D) The Brazilian real will depreciate against the U.S. dollar.

In the foreign exchange market, factors that shift the expected return schedule for domestic deposits include A) a change in the foreign interest rate. B) a change in the expected future exchange rate. C) a change in the current exchange rate. D) a change in the domestic interest rate.

D) a change in the domestic interest rate.

In the foreign exchange market, if the interest rate on domestic deposits declines, holding everything else constant, A) the expected return on domestic deposits decreases. B) the expected return schedule for foreign deposits shifts to the left. C) the dollar depreciates. D) all of the above.

D) all of the above.

In the foreign exchange market, if the interest rate on domestic deposits increases, holding everything else constant, A) the expected return on domestic deposits increases. B) the expected return schedule for domestic deposits shifts to the right. C) the dollar appreciates. D) all of the above.

D) all of the above.

In the foreign exchange market, if the interest rate on foreign deposits increases, holding everything else constant, A) the expected return on foreign deposits increases. B) the expected return schedule for foreign deposits shifts to the right. C) the dollar depreciates. D) all of the above. E) both (a) and (c) of the above.

D) all of the above.

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant. A) depreciate; higher B) appreciate; higher C) depreciate; lower D)appreciate; lower

D) appreciate; lower

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant. A) depreciate; higher B) appreciate; higher C) depreciate; lower D) appreciate; lower

D) appreciate; lower

In the foreign exchange market, factors that shift the expected return schedule for foreign deposits include A) a change in the foreign interest rate. B) a change in the expected future exchange rate. C) a change in the current exchange rate. D) both (a) and (b) of the above.

D) both (a) and (b) of the above.

In the foreign exchange market, if the interest rate on foreign deposits increases, holding everything else constant, A) the expected return schedule for foreign deposits shifts to the right. B) the dollar depreciates. C) the foreign currency depreciates. D) both (a) and (b) of the above. E) both (a) and (c) of the above.

D) both (a) and (b) of the above.

In the foreign exchange market, if the interest rate on domestic deposits increases, holding everything else constant, A) the dollar depreciates. B) the dollar appreciates. C) the foreign currency depreciates. D) both (b) and (c) of the above.

D) both (b) and (c) of the above.

During the beginning on the subprime crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________. A) appreciated; increased B) depreciated; increased C) appreciated; decreased D) depreciated; decreased

D) depreciated; decreased

In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall

D) down; fall

According to Keynes's theory of liquidity preference, velocity increases when A) income increases. B) wealth increases. C) brokerage commissions increase. D) interest rates increase.

D) interest rates increase.

Everything else held constant, when a countrys currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more

D) less; more

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles A) velocity falls by 50 percent. B) velocity doubles. C) nominal incomes falls by 50 percent. D) nominal income doubles

D) nominal income doubles

Evidence from the United States during the period 1973-1999 indicates the correspondence between nominal interest rates and exchange rate movements is A) much closer than that between real interest rates and exchange rate movements. B) not nearly as close as that between government spending and exchange rate movements. C) not nearly as close as that between government deficits and exchange rate movements. D) not nearly as close as that between real interest rates and exchange rate movements.

D) not nearly as close as that between real interest rates and exchange rate movements.

The exchange rate is A) the price of one currency relative to gold. B) the value of a currency relative to inflation. C) the change in the value of money over time. D) the price of one currency relative to another.

D) the price of one currency relative to another.

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GO OVER THOSE QUESTIONS/ANSWERS

If the dollar depreciates relative to the Swiss franc A) Swiss chocolate will become cheaper in the United States. B) American computers will become more expensive in Switzerland. C) Swiss chocolate will become more expensive in the United States. D) Swiss computers will become cheaper in the United States

Swiss chocolate will become more expensive in the United States.

If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will a) fall by 2 percent b) fall by 6 percent c) rise by 6 percent d) rise by 2 percent

a) fall by 2 percent

Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of a. SDRs b. Bank deposits denominated in different currencies c. ECUs d. Gold

b. Bank deposits denominated in different currencies

The theory of PPP suggests that if one country's price level falls relative to another's, its currency will a. depreciate b. float c. appreciate d. none of the above

c. appreciate

According to the Purchasing Power Parity Theory, a rise in the US price level of 5 percent, and a rise in the Mexican price level of 6 percent cause: a. the dollar to depreciate 5 percent relative to the peso b. the dollar to depreciate 1 percent relative to the peso c. the dollar to appreciate 1 percent relative to the peso d. the dollar to appreciate 5 percent relative to the peso

c. the dollar to appreciate 1 percent relative to the peso

When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive. A) appreciated; British cars sold in the United States become more B) appreciated; British cars sold in the United States become less C) depreciated; American wheat sold in Britain becomes more D) depreciated; American wheat sold in Britain becomes less

depreciated; American wheat sold in Britain becomes more