2
If the economy's actual capital-labor ratio is less than the steady-state capital-labor ratio, growth from convergence
adds to the overall growth of the economy until the new steady-state is attained
The risk structure of interest rates refers to the relationship
among interest rates on bonds that have different characteristics but the same maturities
A decrease in the real wage would result in a
movement along the labor demand curve, causing an increase in the number of workers hired by the firm
An example of a financial intermediary is
mutual funds, insurance companies, commercial banks
If Jennifer withdraws $750 from her checking account and holds it as currency, then M1 will ______ and M2 will _______
not change; not change
Adverse selection occurs when
one party to a transaction takes advantage of knowing more than the other party
The price of a financial asset should equal the
present value of the payments to be received from owning the asset
If individuals save less because inflation lowers returns on savings, this should ________ real interest rates and _______ investment expenditures
raise; reduce
An increase in interest rates
reduces the prices of existing financial assets
Seigniorage is also known as the inflation tax because it
reduces the purchasing power of money
The demand for loanable funds is determined by
the willingness of firms to borrow money to engage in new investment projects
Both moral hazard and adverse selection problems occur when
there is asymmetric information
What is not a cost of expected inflation?
velocity costs
If the money supply grows at 6% and the inflation rate is 2%, the quantity theory predicts that the change in real GDP will be
4%
What is the difference between a stock variable and a flow variable?
A stock variable is measured at a point in time, while a flow variable is measured per time period.
What three actions by households and firms, banks, or the Federal Reserve will cause the value of the money multiplier to decrease?
An increase by households and firms in their holdings of currency relative to their holdings of checking account deposits; a increase in banks' ratio of excess reserves-to-deposits; and an increase in the Fed-mandated required reserve ratio
What benefits does securitization of mortgage loans provide for banks? What benefits does securitization provide for people who want to buy a home?
Banks can expand the number of loans they make and to earn larger profits; therefore it makes more funds available for individuals who want to buy a home.
Why does the Fed have greater control over the monetary base than over the money supply?
Because the money supply is influenced by the money multiplier which is in part affected by the nonbank public
Which of the following statements are TRUE, according to the Brookings Paper Low inflation or no inflation
Firms prefer some inflation, because real wages can be decreased by increasing the nominal wage by less than the inflation rate
Yield curves generally slope upward. A downward-sloping, or "inverted" yield curve is often thought to signal a future recession. Why might this be true?
If there is a recession, income will fall and thus money demand will fall, which will cause interest rates to fall. Thus an inverted yield curve may indicate that market participants expect a recession
Are only commercial banks subject to runs?
No, any financial institution that accepts short-term deposits and uses the funds to make long-term loans is subject to runs
What is deprication?
It is the reduction in the capital stock that occurs because capital goods (machinery equipment, etc.) become obsolete due to technological progress or break down or become worn out.
Explain under what circumstances lenders lose and borrowers gain if the actual inflation rate differs from the expected inflation rate
Lenders lose and borrowers gain when actual inflation exceeds expected inflation
The Federal Reserve publishes data on the M2 money supply even though currency, checking account deposits, and traveler's checks, which are the most liquid of assets, are already measured in M1. The Fed does this because
M2 is a broader measure of the money supply and therefore may convey additional information about economic activity that is not embodied in M1
Which of the following is one of the most important benefits of money in an economy
Money makes exchange easier, leading to more specialization and higher productivity
Other than pooling deposits and making loans, which of the following are the three key services that financial intermediaries perform for savers and borrowers?
Risk sharing, liquidity, and information
All else equal an increase in net exports accompanies by a decrease in expected future profits would cause which of the following shifts?
Supply of savings shifts left and demand investment shifts left
Which of the following actions is not performed by a central bank?
Taking deposits from the public
Which of the following statements is FALSE regarding information from Planet Money Podcast Anatomy of a Bank Takeover
The FDIC makes a public announcement that it will be taking over the Bank of Clark County
According to the Planet Money Podcast, "The Week America's Economy Almost Died," how did the economy freeze?
The commercial paper market froze, so that even low-risk businesses could not borrow
What is the difference between the quantity equation and the quantity theory of money?
The quantity theory of money assumes that velocity is constant, whereas the quantity equation does not require the same assumption
What is a bank run?
The simultaneous decision of many depositors to withdraw their money from a bank
What do economists mean by the time value of money?
The way that the value of a payment changes depending on when the payment is received
Moral hazard occurs when
actions people take after they have entered into a transaction make the other party worse off
Of the three actions that can decrease the money multiplier, the one most responsible for the drop in value of the money multiplier during the financial crisis of 2007-2009 was the increase in
banks' ratio of excess reserves-to-deposits
A financial intermediary:
borrows funds from savers and lends them to borrowers
The level of investment necessary to keep the capital-labor ratio constant is called
break-even investment
The break-even investment line becomes flatter when the depreciation growth rate ______ or the labor force growth rate _______.
decreases, decreases
The money demand curve will shift to the left if real GDP ________ or if the price level ________
decreases; decreases
In dealing with runs, a central bank's role as a lender of last resort
enables it to restore the confidence of depositors and makes it an ultimate source of credit to which banks can turn for loans
According to the Fisher effect, the nominal interest rate will increase by 8% if the
expected inflation rate increases by 8%
The supply of loanable funds is determined by the
extent of foreign saving that is invested in US financial markets, willingness of households to save, extent of government saving
The primary function of the financial system is to
facilitate the flow of funds from lenders to borrowers
If a government chooses to finance a budge deficit by borrowing and the expected inflation rate does not change, this will cause the real interest rate to ________ and the nominal interest rate to _________
increase, increase
When the growth rate of the labor force increases, the break-even level of investment
increases
As the capital-labor ratio increases, investment per worker
increases at a decreasing rate
Break even investment is the
investment rate that keeps the capital-labor ratio constant by offsetting the effects of both depreciation and labor force growth
A government may risk experiencing hyperinflation by printing money rather than issuing bonds to finance a large budge deficit because
investors refuse to buy the government's bonds on the belief that they will never be paid back
Why does the marginal product of capital decrease as more capital is added? As more capital is added to a fixed labor force, each new unit of capital has relatively
less labor to work with, so output increases at a decreasing rate
Securitization occurs when
loans are bundled together into securities that are resold to investors
The often made statement that inflation "greases the wheels of the labor market" means simply that
low inflation allows for real wage adjustments when nominal wages are sticky, thereby permitting labor market adjustments that improve the market's efficiency
The costs of inflation to firms due to reprinting price lists are known as
menu costs
All else equal, a decrease in the government's budget deficit will cause
supply of savings to shift left
In the article "Three Hurdles to 3 percent growth" the authors state that
sustainable growth is driven by changes in capital, labor, and total factor productivity
Seigniorage
the government's profit from issuing fiat money
In the loanable funds model, the supply curve is upward sloping because
the higher the real interest rate, the greater the reward to saving and hence the larger the quantity of funds household will save and a higher real interest rate increases the foreign exchange value of the dollar, which reduces net exports and, as a consequence, increases the quantity of foreign saving available to the domestic loanable funds market
In the loanable funds model, an explanation as to why the demand curve is downward sloping is that
the lower the real interest rate, the more investment projects firms can profitably undertake, and the greater the quantity of loanable funds they will demand
The demand for money is downward sloping because at lower interest rates,
the opportunity cost of holding money is lower
A major shortcoming of a barter economy is
the requirement of a double coincidence of wants