ECON Exam 2

30. If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate? a. 2 gallons of Argentinean milk/1 gallon of U.S. milk b. 3 gallons of Argentinean milk/2 gallon of U.S. milk c. 2 gallons of Argentinean milk/3 gallon of U.S. milk d. 1 gallons of Argentinean milk/2 gallon of U.S. milk

a. 2 gallons of Argentinean milk/1 gallon of U.S. milk

. If real GDP doubles and the price level doubles, then nominal GDP

quadruples

4. Rosa deposits $100 in a bank account that pays an annual interest rate of 20 percent. A year later, after Rosa has accumulated $20 in interest, she withdraws her $120. Rosa's purchasing power

a. did not change if the inflation rate was 20 percent.

8. According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money

a. gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.

13. A company in Panama pays a U.S. architect to design a factory building. By itself this transaction a. increases Panama's imports and so decreases the Panama's trade balance. b. increases Panama's exports and so decreases the Panama's trade balance. c. decreases Panama's imports and so increases the Panama's trade balance. d. decreases Panama's exports and so increases the Panama's trade balance.

a. increases Panama's imports and so decreases the Panama's trade balance.

19. An increase in the economy's trade surplus means net capital outflow is a. positive and increasing. b. positive and decreasing. c. negative and increasing. d. negative and decreasing.

a. positive and increasing.

29. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases a. the inflation rate and the nominal interest rate by the same number of percentage points. b. nominal interest rates but by less than the percentage point increase in the inflation rate. c. the inflation rate but not the nominal interest. d. neither the inflation rate nor the nominal interest rate.

a. the inflation rate and the nominal interest rate by the same number of percentage points.

38. An associate professor of physics gets a $200 a month raise. With her new monthly salary she can buy fewer goods and services than she could buy last year. a. Her real salary has fallen and her nominal salary has risen. b. Her real and nominal salary have risen. c. Her real and nominal salary have fallen. d. Her real salary has risen and her nominal salary has fallen.

a. Her real salary has fallen and her nominal salary has risen.

2. The price level rises by 5% over a year. The nominal interest rate during this period was 4.5 percent. What was the real interest rate during this period?

-0.5 percent

21. When the Fed decreases the discount rate, banks will a. borrow more from the Fed and lend more to the public. The money supply increases. b. borrow more from the Fed and lend less to the public. The money supply decreases. c. borrow less from the Fed and lend more to the public. The money supply increases. d. borrow less from the Fed and lend less to the public. The money supply decreases.

a. borrow more from the Fed and lend more to the public. The money supply increases.

31. Which of the following accurately describes of the effect of the government budget deficit on the open economy? a. Real interest rates fall, which encourages domestic investment; the currency appreciates pushing the trade balance toward deficit. b. Real interest rates rise, which causes crowding out of domestic investment; the currency appreciates pushing the trade balance toward deficit. c. Real interest rates fall, which encourages domestic investment; the currency depreciates pushing the trade balance toward surplus. d. Real interest rates rise, which causes crowding out of domestic investment; the currency depreciates pushing the trade balance toward surplus.

b. Real interest rates rise, which causes crowding out of domestic investment; the currency appreciates pushing the trade balance toward deficit.

9. Suppose a country's net capital outflow does not change, but its investment declines by $420 billion. Its saving must have

b. fallen by $420 billion, but its net exports are unchanged.

25. Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run a. inflation rises, but by less than the amount by which money supply growth changed. b. inflation falls by the same amount by which money supply growth changed. c. inflation rises by the same amount by which money supply growth changed. d. inflation fall by more than the amount by which money supply growth changed.

b. inflation falls by the same amount by which money supply growth changed.

1. Other things the same, if the U.S. price level falls, then U.S. residents want to buy

b. more foreign bonds. The real exchange rate falls.

28. The economy of Umrica uses gold as its money. If the government discovers a large reserve of gold on their land the a. supply of money decreases, the value of money rises, and prices fall. b. supply of money increases, the value of money falls, and prices rise. c. demand for money increases, the value of money rises, and prices rise. d. demand for money decreases, the value of money falls, and prices fall.

b. supply of money increases, the value of money falls, and prices rise.

17. You are planning a graduation trip to Mexico. Other things the same, if the dollar appreciates relative to the peso, then the dollar buys a. fewer pesos. Your hotel room in Mexico will require fewer dollars. b. fewer pesos. Your hotel room in Mexico will require more dollars. c. more pesos. Your hotel room in Mexico will require fewer dollars. d. more pesos. Your hotel room in Mexico will require more dollars.

c. more pesos. your hotel room in Mexico will require fewer dollars.

32. In 1998, the Russian government defaulted on its bonds. According to the open-economy macroeconomic model, this should have a. increased Russian interest rates and net exports. b. reduced Russian interest rates and net exports. c. increased Russian interest rates and reduced Russian net exports. d. reduced Russian interest rates and increased Russian net exports.

d. reduced Russian interest rates and increased Russian net exports

26. A problem that the Fed faces when it attempts to control the money supply is that a. the 100-percent-reserve banking system in the United States makes it difficult for the Fed to carry out its monetary policy. b. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools. c. the Fed does not have a tool that it can use to change the money supply by either a small amount or a large amount. d. the Fed does not control the amount of money that households choose to hold as deposits in banks.

d. the Fed does not control the amount of money that households choose to hold as deposits in banks.

12. Refer to Table 29-4. Assume the Fed's reserve requirement is 5 percent and all banks besides the Bank of Cheerton are exactly in compliance with the 5 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Cheerton decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase? a. $17,142.86 b. $24,926.97 c. $26,871.29 d. $24,000.00

d. $24,000.00

Net exports equal

exports minus imports

15. Which of the following can a country increase in the long run by increasing its money growth rate?

a. The nominal wage

18. A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can, given the reserve requirement. It follows that the reserve requirement is a. 2.5 percent. b. 33.3 percent. c. 25 percent. d. 75 percent.

c. 25 percent.

27. Which of the following will increase the price level in the long run? a. an increase in government purchases financed by taxes. b. an increase in oil prices c. an increase in the money supply d. technological progress

c. an increase in the money supply

11. A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a U.S. company. As a result of these transactions, Chinese net exports a. increase, and U.S. net capital outflow increases. b. increase, and U.S. net capital outflow decreases. c. decrease, and U.S. net capital outflow increases. d. decrease, and U.S. net capital outflow decreases.

c. decrease, and U.S. net capital outflow increases.

35. You hold currency from a foreign country. If that country has a lower rate of inflation than the United States, then over time the foreign currency will buy a. fewer goods in that country and buy fewer dollars. b. fewer goods in that country but buy more dollars. c. more goods in that country but buy fewer dollars. d. more goods in that country and buy more dollars.

c. more goods in that country but buy fewer dollars

20. The principle of monetary neutrality implies that an increase in the money supply will increase a. real GDP and the price level. b. real GDP, but not the price level. c. the price level, but not real GDP. d. neither the price level nor real GDP.

c. the price level, but not real GDP.

39. In a system of fractional-reserve banking, a. loans are the only asset item for banks. b. banks do not influence the supply of money. c. banks can increase the money supply. d. banks do not accept deposits.

c. banks can increase the money supply.

36. One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports. a. Its trade surplus fell. b. Its trade surplus rose. c. Its trade deficit fell. d. Its trade deficit rose.

d. Its trade deficit rose.

14. Which of the following is not an example of monetary policy? a. The Federal Open Market Committee decides to sell bonds. b. The Federal Open Market Committee decides to buy bonds. c. The Federal Reserve reduces the reserve requirement. d. The Federal Reserve facilitates bank transactions by clearing checks.

d. The Federal Reserve facilitates bank transactions by clearing checks.

33. If the US experiences capital flight, which of the following curves shift right? a. Only the demand for loanable funds. b. Only the supply of dollars in the market for foreign-currency exchange. c. Only the net capital outflow curve and the supply of dollars in the market for foreign currency exchange. d. The demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.

d. The demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.

37. If you are vacationing in Spain and the dollar depreciates relative to the euro, then the dollar buys a. more euros. It will take fewer dollars to buy a good that costs 50 euros. b. more euros. It will take more dollars to buy a good that costs 50 euros. c. fewer euros. It will take fewer dollars to buy a good that costs 50 euros. d. fewer euros. It will take more dollars to buy a good that costs 50 euros.

d. fewer euros. It will take more dollars to buy a good that costs 50 euros.

34. If U.S. net exports are negative, then net capital outflow is a. positive, so foreign assets bought by Americans are greater than American assets bought by foreigners. b. positive, so American assets bought by foreigners are greater than foreign assets bought by Americans. c. negative, so foreign assets bought by Americans are greater than American assets bought by foreigners. d. negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

d. negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

16. Which of the following best represents fiat money?

the euro

23. According to the quantity theory of money, which variable adjusts to balance the supply and demand for money?

the price level