Principle of Macroeconomics Final Exam: Chapters 14, 15, & 16

Tamar can buy an asset this year for $1,000. She is expecting to sell it next year for $1,050. What is the asset's anticipated percentage rate of return? a. 15 percent b. 0 percent c. 5 percent d. 10 percent

c. 5 percent

The Board of Governors of the Federal Reserve System ______________. a. is replaced every 2 years. b. is made up of five members c. coordinates policies for the 12 Federal Reserve Banks. d. is the largest bank in the United States.

c. coordinates policies for the 12 Federal Reserve Banks.

What determines the value (domestic purchasing power) of money? a. The cache of gold owned by the Treasury. b. The Federal Reserve System. c. People's willingness to accept it in exchange for goods and services. d. The foreign exchange rate.

c. People's willingness to accept it in exchange for goods and services.

A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve ratio is 20%. The excess reserves of the bank are: a. $10,000 b. $20,000 c. $40,000 d. $50,000

a. $10,000 How to solve: 1a) Required Reserves = Checkable deposits * req reserve ratio 1b) Req Reserves = $200,000 * 20% = $40,000 2) Actual Reserves = $50,000 3a) Excess Reserves = Actual Reserves - Req Reserves 3b) $50,000 - $40,000 = $10,000

What is the compound interest formula? Assume "i" is the interest rate, "t" is the amount of years (time), and "X" is the investment amount. a. (1-i)^t(X) b. X / (1 + i)^t c. (1 + i)^t + X d. (1 + i)^t (X)

a. (1-i)^t(X)

What component of aggregate demand is most influenced by technological change? a. Investment expenditures b. Net export expenditures c. Consumption expenditures d. Government spending

a. Investment expenditures

Assume that Mei wins a lottery that will pay out $1 million a year for 20 years. However, Mei is already 78 years old and may not live another 20 years, so she would prefer to receive a lump sum now. How can the lottery officials figure out the present value of the prize money? a. Reverse the compound interest formula. b. Reverse the simple interest formula. c. Use the simple interest formula. Use the compound interest formula.

a. Reverse the compound interest formula.

What near-monies are included in the M2 money supply? a. Small-denominated time deposits and retail money market mutual fund balances. b. Checkable savings deposits, money management accounts, small time deposits, and stock market balances. c. Noncheckable savings deposits, large-denominated time deposits, and both retail and commercial money market mutual fund balances. d. Noncheckable savings deposits, small-denominated time deposits, and commercial money market mutual fund balances.

a. Small-denominated time deposits and retail money market mutual fund balances.

The equilibrium interest rate in the money market is determined ______________. a. at the intersection of the total demand for money curve and the supply of money curve. b. at the intersection of the aggregate demand and aggregate supply curves. c. by how much the interest rate fluctuates over time. d. by the Fed.

a. at the intersection of the total demand for money curve and the supply of money curve.

The Federal Reserve may use open-market operations to influence interest rates and the money supply. Open-market operations involve the Federal Reserve ____________. a. either buying or selling bonds. b. changing the interest rate it charges to banks to borrow from the Fed. c. buying bonds. d. selling bonds.

a. either buying or selling bonds.

Other than its main role of controlling the supply of money, functions of the Federal Reserve include _____________. a. issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks. b. issuing Federal Reserve Notes, overseeing government transactions, and performing economic projections. c. overseeing government transactions, providing for check collection, and supervising the operation of banks. d. performing economic projections, providing for check collection, and supervising the operation of banks.

a. issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.

The Fed was designed to be insulated from political pressure so that it might take a ____________ perspective and be immune from lobbying and special interest groups. Without protection from political pressure, the Fed may be influenced to take an overly ____________ monetary policy to keep politicians and special interest groups happy. a. long-term; expansionary b. short-term; expansionary c. long-term; contractionary d. short-term; contractionary

a. long-term; expansionary

The three basic functions of money are ___________. a. medium of exchange, unit of account, and store of value. b. account of exchange, medium of account, and store of value. c. medium of exchange, store of account, and unite of value. d. medium of exchange, record of account, and assessment of value.

a. medium of exchange, unit of account, and store of value.

Interest rate below zero percent would likely cause ____________. a. reduced economic activity. b. excessive government spending. c. increased economic activity. d. a decrease in the money supply.

a. reduced economic activity.

The difference between stocks and bonds in terms of the future payments that they are expected to make is ____________. a. stocks pay dividends out of profits, whereas bonds pay a predetermined amount of interest at regular intervals. b. stocks pay fixed dividends, whereas bonds pay a variable amount of interest at regular intervals. c. bonds pay fixed dividends out of revenues, whereas stocks pay a variable amount of interest at regular intervals. d. bonds pay dividends out of profits, whereas stocks pay a predetermined amount of interest at regular intervals

a. stocks pay dividends out of profits, whereas bonds pay a predetermined amount of interest at regular intervals.

Bonds issued by the U.S. government have lower rates of return than bonds issued by corporations because ______. a. the risk of default is lower with the federal government. b. the U.S. government issues fewer bonds than corporations. c. the U.S. government issues fewer bonds than corporations. d. the risk default is higher with the federal government.

a. the risk of default is lower with the federal government.

Assume that the legally required reserve is 15% and commercial banks choose to hold additional excess reserves equal to 5% of any newly acquired deposits. Under these circumstances the monetary multiplier for the commercial banking system is: a. 6.67 b. 5.0 c. 4.0 d. 3.0

b. 5.0 How to solve: Technically Money Multiplier (MM)= 1/R; where R is the required reserve ratio- why is determined by the Fed. The money multiplier is determined by the capacity of lending of a commercial bank. In this case, the commercial bank chooses to hold reserves beyond what is required (5% more). Then, the MM is estimated considering that R= 15% + 5% = 20%. So, MM = 1/.20 = 5

What are the components of the M1 money supply? a. ATM deposits and checkable deposits. b. Currency in circulation, checkable deposits, and other liquid deposits. c. Currency in circulation and checkable deposits only d. Savings deposits and checkable deposits only.

b. Currency in circulation, checkable deposits, and other liquid deposits.

Which of the Federal Reserve's three administered rates is the most important rate in terms of helping to mitigate or avoid bank runs? a. ON RRP rate b. Discount rate c. Prime rate d. IORB rate e. Federal funds rate

b. Discount rate

Which combination would give the FOMC conflicting signals about the stance of monetary policy? a. Inflation above target and unemployment below target. b. Inflation and unemployment both below target. c. Inflation and unemployment both on target. d. Inflation below target and unemployment above target.

b. Inflation and unemployment both below target.

What "backs" the money supply in the United States? a. Half the money supply is backed by gold. b. There is no concrete backing to the money supply in the United States. c. The money supply is back by U.S. Treasury notes. d. The gold standard applies to a small fraction of the money supply.

b. There is no concrete backing to the money supply in the United States.

Which statement about mutual funds is correct? a. They have an international agenda. b. They pool investors' money and buy a collection of stocks or bonds. c. They require a fee to join. d. They restrict the frequent buying and selling of assets in the fund.

b. They pool investors' money and buy a collection of stocks or bonds.

When a check is cleared against a bank, it will lose: a. cash and securities. b. checkable deposits and reserves. c. reserves and capital stock. d. loans and demand deposits.

b. checkable deposits and reserves.

If there is an increase in the nation's money supply, the interest rate will ____________. a. rise, investment spending will fall, aggregate demand will shift right, real GDP will rise, and the price level will fall. b. fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise. c. rise, investment spending will fall, aggregate demand will shift right, real GDP will fall, and the price level will rise. d. fall, investment spending will rise, aggregate demand will shift right, real GDP will rise, and the price level will fall.

b. fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

If we compare the betas of various investment opportunities, the assets with the _____________. a. lowest betas are the most risky and have the lowest rates of return. b. highest betas are the most risky and have the highest rates of return. c. lowest betas are the least risky and have the highest rates of return. d. highest betas are the least risky and have the lowest rates of return.

b. highest betas are the most risky and have the highest rates of return.

Assume that Johnson deposits $350 of currency in his account in the XYZ bank. Later the same day Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amounts has the supply of money changed? a. increased by $2,350 b. increased by $2,000 c. decreased by $350 d. decreased by $1,650

b. increased by $2,000

Cyclical asymmetry is important to policymakers because ______________. a. recessions are shorter than inflations. b. monetary policy is more effective in fighting inflation than a recession. c. fiscal policy is more effective in fighting inflation than a recession. d. monetary policy is more effecting in fighting a recession than inflation.

b. monetary policy is more effective in fighting inflation than a recession.

Compound interest is ____________. a. equal to the annual interest rate minus the inflation rate. b. the interest an investment earns when interest is paid on the original amount invested plus all interest payments that have previously been made. c. the interest an investment earns when interest is paid on the original amount invested minus all interest payments that have been previously made. d. equal to the annual interest rate plus the inflation rate.

b. the interest an investment earns when interest is paid on the original amount invested plus all interest payments that have previously been made.

Other things equal, if the required reserve ratio was lowered: a. banks would have to reduce their lending. b. the size of the monetary multiplier would increase. c. the actual reserves of banks would increase. d. the Federal funds interest rate would rise.

b. the size of the monetary multiplier would increase.

The idea that there are limits to the range of interest rates over which a decline in the interest rate will lead to more economic activity is called ____________. a. quantitative easing. b. the zero lower bound. c. quantitative tightening. d. the zero sum game.

b. the zero lower bound.

A commercial banks has checkable deposit liabilities of $400,000, reserves of $150,000, and a required reserve ratio of 25%. The amount by which a single commercial bank and the amount by which the baking system can increase loans are, respectively: a. $50,000 and $100,000 b. $50,000 and $150,000 c. $50,000 and $200,000 d. $150,000 and $200,000 Hint: First estimate how much excess reserves the commercial bank is holding and then estimate what would be the total effect in the economy- apply the money multiplier if those excess reserves are given as a credit to the public.

c. $50,000 and $200,000 How to solve: A bank will be able to extend credit- create money until its excess reserves allow it to. 1) Required Reserves = $400,000 *25% = $100,000 2) Excess Reserves =

What economists say that the Federal Reserve Banks are central banks, it means that ____________. a. Federal Reserve Banks are centrally located in their districts. b. the banks' policies are determined by the policymakers at the center of the government. c. the banks' policies are coordinated by the Federal Reserve Board of Governors. d. Federal Reserve Banks are central to the operation of monetary policy.

c. the banks' policies are coordinated by the Federal Reserve Board of Governors.

The vertical intercept of the Security Market Line (SML) is ______________. a. the market interest rate determined by Federal Reserve monetary policy. b. the risk-free interest rate determined by congressional monetary policy. c. the risk-free interest rate determined by Federal Reserve monetary policy. d. the market interest rate determined by congressional monetary policy.

c. the risk-free interest rate determined by Federal Reserve monetary policy.

Economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress because __________. a. the desires of special-interest groups change too frequently. b. economists don't trust the president or Congress. c. this independence allows the Fed to more effectively control the money supply and maintain price stability. d. this independence will ensure lower interest rates.

c. this independence allows the Fed to more effectively control the money supply and maintain price stability.

How would productivity improvements likely affect investment spending? a. It would either increase or decrease depending on the interest rate. b. Productivity improvements would have minimal impact on investment spending. c. They would cause it to decrease. d. They would cause it to increase.

d. They would cause it to increase.

In which situation does the Fed have to worry most about downward price stickiness? a. When continuing a neutral monetary policy. b. When applying expansionary monetary policy. c. All the answer choices are correct. d. When applying restrictive monetary policy.

d. When applying restrictive monetary policy.

When investors try to profit from situations where two identical or nearly identical assets have different rates of return, this is called ____________. a. capital gain. b. passive management. c. active management. d. arbitrage.

d. arbitrage.

What is one significant characteristic of fractional reserve banking? a. banks are not subject to "panics" or "runs". b. banks use deposits insurance for loans to customers. c. bank loans will be equal to the amount of gold on deposit. d. banks can create money through lending their reserves.

d. banks can create money through lending their reserves.

Suppose that the city of New York issues bonds to raise money to pay for a new tunnel linking New Jersey and Manhattan. An investor named Susan buys one of the bonds on the same day that the city of New York pays a contractor for completing the first stage of construction. Susan is making a(n) ______ investment, while New York is making a(n) ______ investment. a. economic; financial b. economic; economic c. financial; financial d. financial; economic

d. financial; economic

In a fractional reserve system, deposit insurance ____________. a. is absolutely necessary or the banking system would collapse. b. provides additional funds that can be lent out. c. raises the fraction of deposits that banks must keep available. d. guarantees that depositors will always get their money, thus avoiding most bank runs.

d. guarantees that depositors will always get their money, thus avoiding most bank runs.

Diversifiable risk can be reduced or eliminated by ______________. a. investing all your money into a single risky stock. b. taking on more systemic risk. c. investing in Treasury funds. d. investing in different types of assets.

d. investing in different types of assets.

The Fed's two-percent inflation target helps with downward wage felxibility because ____________. a. it allows employers to increase nominal wages without causing inflation. b. it allows employers to cut nominal wages without angering workers. c. it allows employers to increase real wages without causing inflation. d. it allows employers to cut real wages without angering workers.

d. it allows employers to cut real wages without angering workers.

Rapid inflation can undermine money's ability to perform its functions. During periods of runaway inflation, _____________. a. the future value of money cannot be predicted, so money cannot act as a predictor of value. b. the value of money falls so money cannot serve as a measure of price. c. money cannot hold sufficient value to act as a medium of value. d. people often revert to barter because money fails as a medium of exchange.

d. people often revert to barter because money fails as a medium of exchange.