ECON Exam 2

Fiat money... a. has no intrinsic value. b. may be used as a medium of exchange but is not legal tender. c. refers to highly liquid assets that do not serve as a medium of exchange. d. is worthless.

A *By definition! The opposite is commodity money.

What is the opposite of commodity money?

Fiat money

Shoeleather cost refers to...

Resources used to maintain lower money holdings when inflation is high.

Menu cost refers to...

The cost of more frequent price changes induced by higher inflation.

T/F Prices change more frequently during periods of higher inflation.

True

If a bank posts a nominal interest rate of 4%, and the inflation is expected to be 3%, then... a.) the expected real interest rate is 1% b.) the expected real interest rate is 1.33% c.) the expected real interest rate is 1% d.) the expected real interest rate is 2%

c.) the expected real interest rate is 1%

Suppose that some country had an adult population of about 25 million, a labor-force participation rate of 60 percent, and an unemployment rate of 6 percent. How many people were unemployed?

0.9 million *60% of 25m is the size of labor force; that's 15m. 6% of 15m are unemployed individuals. That's 0.06*15m = 0.9 million.

A country has 50 people of which 10 are children. Fifteen (15) people are working, 2 would like to work but are discouraged and have stopped looking, 4 are homemakers, 7 are full-time students, 3 are fresh college graduates searching for their first job, 4 cannot find a job because wages are kept too high by the labor unions' collective bargaining, and 5 are unemployed because of the ongoing recession. In this country, what is the number of unemployed persons?

12 *Actual unemployment = natural + cyclical = structural + frictional + cyclical (4+5+3=12)

A country has 50 people of which 10 are children. Fifteen (15) people are working, 2 would like to work but are discouraged and have stopped looking, 4 are homemakers, 7 are full-time students, 3 are fresh college graduates searching for their first job, 4 cannot find a job because wages are kept too high by the labor unions' collective bargaining, and 5 are unemployed because of the ongoing recession. In this country, what is the unemployment rate?

12/27 *UR = unemployed/labor force LF= employed (15) + unemployed (12)

A country has 50 people of which 10 are children. Fifteen (15) people are working, 2 would like to work but are discouraged and have stopped looking, 4 are homemakers, 7 are full-time students, 3 are fresh college graduates searching for their first job, 4 cannot find a job because wages are kept too high by the labor unions' collective bargaining, and 5 are unemployed because of the ongoing recession. In this country, what is the number of people NOT in the labor force?

13 * Homemakers, full-time students, and people who have stopped looking are not counted.

A country has 50 people of which 10 are children. Fifteen (15) people are working, 2 would like to work but are discouraged and have stopped looking, 4 are homemakers, 7 are full-time students, 3 are fresh college graduates searching for their first job, 4 cannot find a job because wages are kept too high by the labor unions' collective bargaining, and 5 are unemployed because of the ongoing recession. In this country, what is the number of frictionally unemployed persons?

3 *Frictional unemployment is due to job searching

A country has 50 people of which 10 are children. Fifteen (15) people are working, 2 would like to work but are discouraged and have stopped looking, 4 are homemakers, 7 are full-time students, 3 are fresh college graduates searching for their first job, 4 cannot find a job because wages are kept too high by the labor unions' collective bargaining, and 5 are unemployed because of the ongoing recession. In this country, what is the number of structurally unemployed persons?

4 *The reason for structural unemployment is surplus of labor due to wages held above the equilibrium level of wage.

Blast from the past! If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate? (Use the Fisher equation.) a. 4 percent b. 6 percent c. 8 percent d. 10 percent

A *Real int = nominal int - inflation 6% = X - (-2%) 6% = X + 2% X = 6% - 2% = 4%

In 2016 the Bureau of Labor statistics reported that there were 23.5 million people over age 25 who had no high school degree or its equivalent. Of these 9.7 million were employed and .75 million were unemployed. What were the labor-force participation rate and the unemployment rate for just this group?

44.5% and 7.2% Unemployment rate (UR) = unemployed / labor force Labor force = employed + unemployed = 9.7m + 0.75m = 10.45m UR = 0.75m / 10.45m = 0.0717 = 7.2% LFPR = labor force / population = 10.45m / 23.5m = 0.4446 = 44.5%

A country has 50 people of which 10 are children. Fifteen (15) people are working, 2 would like to work but are discouraged and have stopped looking, 4 are homemakers, 7 are full-time students, 3 are fresh college graduates searching for their first job, 4 cannot find a job because wages are kept too high by the labor unions' collective bargaining, and 5 are unemployed because of the ongoing recession. In this country, what is the number of cyclically unemployed persons?

5 *Cyclical unemployment due to "economy gone bad", such as recession. This is the type of unemployment that happens when times are actually bad. Think mass layoffs.

A country has 50 people of which 10 are children. Fifteen (15) people are working, 2 would like to work but are discouraged and have stopped looking, 4 are homemakers, 7 are full-time students, 3 are fresh college graduates searching for their first job, 4 cannot find a job because wages are kept too high by the labor unions' collective bargaining, and 5 are unemployed because of the ongoing recession. In this country, what is the number of naturally unemployed persons?

7 *Natural unemployment = structural unemployment + frictional unemployment (4+3=7)

Suppose that the adult population is 4 million, the number of unemployed is 0.25 million, and the labor-force participation rate is 75%. What is the unemployment rate?

8.3% *Find number of people in labor force (0.75 x 4,000,000), then find unemployment rate

The adult population in the town of Shelbyville is 150 thousand. If 100 thousand people are employed and 20 thousand are unemployed, then the labor force participation rate is approximately...

80% LFPR= LF/adult population LF=employed+ unemployed LFPR= 120,000/150,000= 80%

If the growth rate of money supply is 5%, growth rate in velocity of money is -3%, and growth rate of real GDP is 1%, what is inflation rate? a. 1% b. 7% c. 3% d. -3%

A

What is the primary cause of inflation? a- growth in the quantity of money b- variability in relative prices c- inter-bank lending d- reduced velocity of money

A *By definition! Remember that %∆M + %∆V = %∆P + %∆Y . In other words, growth in money stock + growth in velocity = growth in prices (a.k.a. inflation) + growth in output (a.k.a. real GDP).

According to the quantity theory of money, a 3 percent increase in the money supply... a. causes the price level to rise by 3 percent. b. causes the price level to rise by less than 3 percent. c. leaves the price level unchanged. d. causes the price level to fall by 3 percent.

A *If money supply increases, the left side will be greater than the right side of the equation. Because this is an equation, the two sides must be in balance! So either %∆V should fall, or %∆P would increase or %∆Y would increase to make it so. But, Quantity Theory of Money tells us exactly what will happen: P will increase by the same amount that quantity of money did: by 3%.

If the bank faces a reserve requirement of 8 percent, then the bank... Assets: Reserves = $30,000 Loans = $170,000 Liabilities: Deposits = $200,000 a. is in a position to make a new loan of $14,000. b. has fewer reserves than are required. c. has excess reserves of $16,400. d. None of the above is correct.

A *If the bank has reserve requirement of 8%, then we can calculate that the minimum amount of deposits it must keep in vault is 8%*$200,000 = $16,000. But the bank currently has $30,000 in vault as reserves. This means that the bank kept excess reserves of $14,000 beyond the $16,000 minimum. The bank can lend out those excess reserves if it wishes.

If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, it could... a. buy $300,000 worth of bonds. b. buy $225,000 worth of bonds. c. sell $225,000 worth of bonds. d. sell $300,000 worth of bonds.

A *Increasing money supply would have to be caused by bond PURCHASES. What is the value of those purchases? Use the formula: (value of purchases) *(money issued) = (new money supply) X*3 = $900,000X = $300,000 worth of bonds must be purchased from the public.

Assume there is a reserve requirement and the Bank of Pleasantville is exactly in compliance with that requirement. Assume the same is true for all other banks. What is the money multiplier? Assets: Reserves = $3000 Loans = $47,000 Liabilities: Deposits = $50,000 a. 16.7 b. 6.4 c. 15.6 d. 6

A *Money multiplier is 1 / reserve requirement. We can deduce the reserve requirement using the fact that the bank is exactly in compliance with it, and that it has $3,000 in the vault as required reserves. $3,000 in reserve of $50,000 total deposits represents $3,000 / $50,000 = 0.06 = 6% required reserve ratio. This means the multiplier is 1/0.06 = 16.67.

As the reserve ratio decreases, the money multiplier... a. increases. b. does not change. c. decreases. d. could do any of the above.

A *Reserve ratio (R) represents the percentage of deposits that banks must legally keep in the vaults as reserves. The money multiplier is calculated as 1/R. So if R = 20% = 0.20, multiplier is 1/0.2 = 5. But if R drops to 15% = 0.15, notice the multiplier increases to 1/0.15 = 6.67. This is because with less stringent requirements that deposits must be kept in the banks' vaults, banks will loan that money out, increasing the quantity of money in the economy.

A country's saving is greater than its domestic investment. This difference means that its... a. net capital outflow and net exports are positive. b. net capital outflow and net exports are negative. c. net capital outflow is positive and net exports are negative. d. net capital outflow is negative and net exports are positive.

A *S > I, or S - I > 0. Since S - I = NCO = NX, we conclude that NCO > 0 and that NX > 0.

When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then... a. the money supply and the price level decrease. b. the money supply increases and the price level increases. c. the money supply increases and the price level decreases. d. the money supply and the price level increase.

A Higher value of money means higher 1/P ratio, because value of money = 1/P. If 1/P ratio increases, this must be because of price level P decreasing! For example, like going from 1/3 (0.33) to 1/5 (0.20).

Other things the same, a decrease in velocity means that... a. the rate at which money changes hands falls, so the price level rises. b. the rate at which money changes hands falls, so the price level falls. c. the rate at which money changes hands rises, so the price level rises. d. the rate at which money changes hands rises, so the price level falls.

B

Based on the quantity equation, if Y = 3,000, P = 3, and V = 4, then M =... a. $4,000. b. $2,250. c. $250. d. $36,000.

B *Start with M*V = P*Y M*4 = 3*3000 M = 9000 / 4 = 2250

If the reserve ratio is 100-percent, then a new deposit of $1000 into a bank account... a. eventually increases the money supply by $1000. b. leaves the size of the money supply unchanged. c. eventually decreases the size of the money supply by $1000. d. eventually increases the money supply by $2000.

B *If literally all new money that the bank receives must be kept in the vault, then no new loans can be issued, and no new money can be created.

If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier... a. increases from 8 to 20. b. decreases from 20 to 8. c. increases from 5 to 12.5. d. decreases from 12.5 to 5.

B *If reserve ratio = 5%, then money multiplier is 1 / 5% = 1 / 0.05 = 20 If reserve ratio = 12.5%, then money multiplier is 1 / 12.5% = 1 / 0.125 = 8

If the reserve ratio is 10 percent, $1,400 of additional reserves can create up to... a. $140 of new money. b. $14,000 of new money. c. $140,000 of new money. d. None of the above is correct.

B *If the reserve ratio is 10% by law, then the money multiplier is 1 / 10% = 1/0.1 = 10. So, $1,400 in new reserves will generate $1,400*10 = $14,000 of new money in the economy.

When there is inflation, the number of dollars needed to buy a representative basket of goods... a. increases, and so the value of money rises. b. increases, and so the value of money falls. c. decreases, and so the value of money rises. d. decreases, and so the value of money falls

B *Inflation refers to the increase in the average price of goods and services. When prices are higher, goods are more expensive, and it takes more dollars (more money) to buy the same product. This means that each dollar becomes less valuable.

Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures... a. increase U.S. and Israeli net capital outflow. b. increase U.S. net capital outflow but decrease Israeli net capital outflow. c. decrease U.S. net capital outflow but increase Israeli net capital outflow. d. None of the above is correct.

B *Paul takes his dollars to Israel: USA's capital outflow (NCO goes up). Israel gets a money injection from abroad, so capital inflow there (NCO goes down)

Suppose over some period of time the money supply tripled, velocity doubled, and real GDP doubled. According to the quantity equation the price level is now... a. 6 times its old value. b. 3 times its old value. c. 1.5 times its old value. d. 0.75 times its old value.

B *Start with M*V = P*Y money supply triples: M --> 3M Velocity doubles: V --> 2V real GDP doubles: Y --> 2Y Plug new values into the old formula: (3M)*(2V) = (?*P)*(2Y) Solve for question mark (?) By how much will you have to multiply price level to preserve the sign of equality? Clean up: 6*M*V = 2*?*P*Y From here we can see that "?" should be 3 because 6 = 2*3

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve requirement. a. It has $80 in reserves and $9,920 in loans. b. It has $800 in reserves and $9,200 in loans. c. It has $1,250 in reserves and $8,750 in loans. d. None of the above is correct.

B *Total deposits are $10,000, 8% of which is required reserves: that's 0.08*$10,000 = $800 in required reserves. This means that the rest of the deposit amount, $10,000 - $800 = $9,200, represents loans.

Other things the same, if a country has a trade deficit and saving rises... a. net capital outflow rises, so the trade deficit increases. b. net capital outflow rises, so the trade deficit decreases. c. net capital outflow falls, so the trade deficit increases. d. net capital outflow falls, so the trade deficit decreases.

B *Trade deficit means NX < 0 This means NCO < 0 because NCO = NX NCO = S - I So, S - I = NCO = NX If S increases, so too does S - I, so too does NCO, so too does NX.

If U.S. exports are $150 billion and U.S. imports are $100 billion, which of the following is correct? a. $50 billion flow into the USA, on net. b. $50 billion flow out of the USA, on net. c. $250 billion flow into the USA, on net. d. $250 billion flow out of the USA, on net.

B *What is the relationship between NX and NCO? Start there. NCO = NX. NX = exports - imports = 150 - 100 = 50 billion = NCO. If NCO is a POSITIVE number, then capital, on net, flows out of the country. If it's negative, if flows into the country.

An open-market purchase... a. decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public. b. increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public. c. decreases the number of dollars and the number of bonds in the hands of the public. d. increases the number of dollars and the number of bonds in the hands of the public.

B *When we speak of open-market purchases by the Fed, we mean that the Fed buys financial assets, typically bonds, from the public (private individuals and private firms). This means that the Fed gets the bonds from the public, but the public gets cash in return. This increases the quantity of money in the economy.

If P = 4 and Y = 200, then which of the following pairs of values are possible? a. M = 800, V = 16 b. M = 150, V = 3 c. M = 400, V = 2 d. M = 200, V = 2

C

The nominal exchange rate is the... a. nominal interest rate in one country divided by the nominal interest rate in the other country. b. the ratio of a foreign country's interest rate to the domestic interest rate. c. rate at which a person can trade the currency of one country for another. d. the real exchange rate minus the inflation rate.

C

Suppose that M is fixed but that P falls. According to the quantity equation which of the following could both by themselves explain the decrease in P? a- y rose, v rose b- y fell, v fell c- y rose, v fell d- y fell, v rose

C *Remember the equation M*V = P*Y. If M increases, the left side of the equation will also increase. If P falls, the right side of the equation will also fall. So, when M increases and P falls, the left side of equality will be much greater than the right side of equality!

Blast from the past! If the price level (measured either by GDP deflator or CPI) increased from 120 to 144, then what was the inflation rate? a- 24% b- 25% c- 20% d- 17%

C *In our case, CPI increased from 120 to 144. What is this percentage increase? To find out: (1) take the difference, (2) divide by starting value, (3) multiply by 100%:

Based on the quantity equation, if M = 8,000, P = 3, and Y = 12,000, then V =... a. 0.33. b. 2.0. c. 4.5. d. 0.5.

C *MV = PY. Plug in what is given, solve for the remaining variable

Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate falls, then... a. both the nominal and the real interest rate fall. b. neither the nominal nor the real interest rate fall. c. the nominal interest rate falls, but the real interest rate does not. d. the real interest rate falls, but the nominal interest rate does not.

C *Real interest = nominal interest - inflation rate (the famous Fisher equation) Nominal interest and inflation rate will decrease, leaving real interest rate constant. It's like going from 3% = 7% - 4% to 3% = 5% - 2%

If the reserve ratio is 4 percent, then $81,250 of new money can be generated by... a. $325 of new reserves. b. $20,312.50 of new reserves. c. $3,250 of new reserves. d. $2,031,250 of new reserves.

C *Reserve ratio is 4% = 0.04, so money multiplier is 1 / 0.04 = 25. We need the money multiplier because it explains to us the relationship between reserves and new money creation: (new reserves)*(money multiplier) = (new money supply) (new reserves)*25 = $81,250 new reserves = $3,250

If saving is greater than domestic investment, then... a. there is a trade deficit and Y > C + I + G. b. there is a trade deficit and Y < C + I + G. c. there is a trade surplus and Y > C + I + G. d. there is a trade surplus and Y < C + I + G.

C *S > I means S - I > 0. S - I = NCO = NX. NX > 0 Y = C + I + G + NX For example, 10 = 1 + 2 + 3 + 4 Which side of the equation is larger when you take 4 away?

If a country had a trade deficit of $20 billion and then its exports rose by $7 billion and its imports fell by $10 billion, its net exports would now be... a. $37 billion b. $3 billion c. -$3 billion d. -$37 billion

C *Starting from NX = exports - imports = -20, exports go up by 7 and imports go down by 10. NX will change, of course. By how much? If NX = exports - imports, then change in NX = change in exports - change in imports = +7b - 10b = -3b. That is, NX will decrease by 3 billion.

Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be... Assets: Reserves = $1000 Loans = $7000 Liabilities: Deposits = $8000 a. $40. b. $428.57. c. $437.50. d. $71.42.

C *The reserve ratio is reserves / deposits = $1,000 / $8,000 = 0.125 = 12.5%. $500 more dollars in deposits means that total deposits now = $8,500. If the reserve ratio is left unchanged after this, then the bank should have 12.5%*$8,500 = 0.125*$8,500 = $1,062.50 in reserves, or an increase of $62.50 in reserves. The rest of that new $500 deposits, or $500 - $62.50 = $437.50, must have then been loaned out.

If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is... a. 12.5 percent. b. 40 percent. c. 37.5 percent. d. 2.7 percent.

C *Use the fact that (new reserves)*(money multiplier) = (new money supply). $300*mm=$800 Money multiplier = $800/$300 = 2.67. Money multiplier = 1 / reserve ratio 2.67 = 1 / reserve ratio Reserve ratio = 1 / 2.67 = 0.375 = 37.5%

In an open economy, gross domestic product equals $1,970 billion, government expenditure equals $300 billion, investment equals $500 billion, and net capital outflow equals $280 billion. What is consumption expenditure? a. $280 billion b. $780 billion c. $890 billion d. $1,170 billion

C *Y = 1970 G = 300 I = 500 NCO = 280 C =? Use NCO to find NX: NCO = NX = 280. Then use Y = C + I + G + NX to find C: 1970 = C + 500 + 300 + 280. C = 1970 - 500 - 300 - 280 = 890

Higher Inflation...

Causes firms to change prices more frequently and makes relative prices more variable.

If domestic residents of other countries purchase $600 billion of U.S. assets and U.S residents purchase $500 billion of foreign assets, then U.S. net capital outflow is... a. $100 billion and the U.S. has a trade surplus. b. $100 billion and the U.S has a trade deficit. c. -$100 billion and the U.S. has a trade surplus. d. -$100 billion and the U.S. has a trade deficit.

D

If money is neutral and velocity is stable (unchanging), an increase in the money supply creates a proportional increase in... a- the real GDP only b- output only c- the price level only d- both the price level and nominal output

D

A bank's reserve ratio is 10%, and the bank has $5,000 in deposits. Its required reserves amount to... a. $4,500. b. $50. c. $4,950. d. $500.

D *10% of $5,000 is $500.

If a bank has a reserve ratio of 8 percent, then... a. the bank's ratio of loans to deposits is 8 percent. b. the bank charges an interest rate of 8 percent on all loans. c. government regulation requires the bank to use at least 8 percent of its deposits to make loans. d. the bank keeps 8 percent of its deposits as reserves and loans out the rest.

D *By definition! BE SURE TO KNOW THIS FOR TEST.

When conducting an open-market sale, the Fed... a. buys government bonds, and in so doing increases the money supply. b. buys government bonds, and in so doing decreases the money supply. c. sells government bonds, and in so doing increases the money supply. d. sells government bonds, and in so doing decreases the money supply.

D *Fed selling bonds = the public gets bonds but give up money = money supply decreases.

A country has $3 billion of domestic investment and net exports of $2 billion. What is its saving? a. $1 billion b. $2billion c. $3 billion d. $5 billion

D *I = 3 NX = 2 Use the formula for NCO. Connect it with NX. S = I + NX S = 2 +3 = 5

The reserve ratio for this bank is... Assets: Reserves = $1000 Loans = $7000 Liabilities: Deposits = $8000 a. 87.5 percent. b. 25 percent. c. 8 percent. d. 12.5 percent.

D *Reserve ratio = reserves / deposits = $1,000 / $8,000 = 0.125

A bank has a 10 percent reserve requirement, $36,000 in loans, and has loaned out all it can, given the reserve requirement. a. It has $3,600 in deposits. b. It has $32,400 in deposits. c. It has $39,600 in deposits. d. It has $40,000 in deposits.

D *The bank must keep 10% in the vault as required reserves, so this must mean it has lent out the remaining 90% of deposits. This means that $36,000 represents those 90% of total deposits. In other words, 90%*(deposits) = $36,000. So total deposits are $36,000 / 90% = $36,000 / 0.9 = $40,000.

Wealth is redistributed from creditors (lenders) to debtors (borrowers) when inflation was expected to be...

Low and turns out to be high.

When inflation rises, people...

Make more frequent trips to the bank and firms make more frequent price changes.

Higher inflation makes relative prices...

More variable, making it less likely that resources will be allocated to their best use.

At an equilibrium wage, how many workers are employed?

Zero, by definition. At equilibrium, supply for workers and demand for workers are in balance. Whoever is looking for a job, gets it.

When the Fed purchases $1000 worth of government bonds from the public, the U.S. money supply eventually increases by... a. more than $1000. b. exactly $1000. c. less than $1000. d. None of the above are correct.

a *More, because the money multiplier is at work.

If $800 is deposited into the First Bank of Fairfield, and if the bank has loaned out as much as it could... Assets: Reserves = $1000 Loans = $7000 Liabilities: Deposits = $8000 a.) reserves will increase by $100 b.) liabilities will increase by $100 c.) assets will decrease by $800 d.) loans will increase by $800

a.) reserves will increase by $100 *Find R. If bank lends out as much as it can, it keeps as reserves the mandatory minimum, which is $1,000/$8,000 = 0.125 = 12.5%. So, R = 12.5%. New deposit of $800 will add $800 to liabilities, 12.5%*$800 = $100 to reserves, and 87.5%*$800 = $700 to loans by this bank.

If the reserve ratio is 4 percent, then $81,250 of new money can be generated by... a. $325 of new reserves. b. $3,250 of new reserves. c. $20,312.50 of new reserves. d. $2,031,250 of new reserves

b *R = 4% = 0.04. Money multiplier = 1/0.04 = 25. We know that (original amount of money)*money multiplier = new amount of money, or X*25 = $81,250. Solve for X.

The Fed injected $1 million into the economy through buying commercial bank bonds. If this action generated $7,000,000 of new money in the economy, what was the banks' reserve requirement? a. 7% b. 14.3% c. 33.3% d. none of the above

b. 14.3% *$1m*multiplier=$7m multiplier = 7 = 1 / R R = 1/7 = 0.143

If the Bank of Springfield has lent out all the money it can, given its level of deposits, then what is the money multiplier? Assets: Reserves = $19,800 Loans = $160,200 Liabilities: $180,000 a. 12.34 b. 9.09 c. 8.06 d. 1.12

b. 9.09 *Find R as reserves/deposit = $19,800 / $180,000. Use R to find multiplier = 1 / R

Who is not included in the labor force by the Bureau of Labor Statistics? a. Anita, who is on temporary layoff b. Lauren, who has retired and is not looking for work c. Raymond, who does not have a job but has applied for several in the last week d. None of the above is correct.

b. Lauren, who is retired and is not looking for work *Retired individuals are not counted in the labor force.

In a fractional-reserve banking system, an increase in reserve requirement rr... a. increases both the money multiplier and the money supply. b. decreases both the money multiplier and the money supply. c. increases the money multiplier but decreases the money supply. d. decreases the money multiplier but increases the money supply.

b. when decreases both the money multiplier and the money supply. *When rr goes up, multiplier 1/rr goes down, and so the power to generate new money is weaker since each new dollar injected into the economy multiplies itself less.

If the reserve ratio is 5 percent, then $600 of additional reserves can create up to... a. $30 of new money. b. $3,000 of new money. c. $12,000 of new money. d. None of the above is correct.

c. $12,000 of new money *R = 5% = 0.05. Multiplier = 1/R = 20. 600 gets multiplied 20 times!

Which of the following categories of individuals could be categorized as unemployed? a. full-time students studying at a university b. stay-at-home parents (homemakers) c. a fresh college graduate d. a soldier stationed in barracks

c. a fresh college graduate Note: all others are not a part of the labor force, so they can't be counted as unemployed.

If the reserve ratio is 15 percent and the Fed sells $25.5 million worth of bonds to the public... a. the money supply eventually increases by $382.5 million. b. the money supply eventually increases by $170 million. c. the money supply eventually decreases by $382.5 million. d. the money supply eventually decreases by $170 million.

d *Fed sells bonds to public, public give money to Fed. Money supply in the economy eventually decreases by the original amount ($25.5 million) times the money multiplier, which is 1/15% = 1/0.15 = 6.67

A bank has $500,000 in deposits and $475,000 in loans. It has loaned out all it can. It has a reserve ratio of... a. 2.5% b. 9.5% c. 25 % d. 5%

d. 5% *If the bank has lent out all it can, then it means it must have kept in reserves the remainder of $25,000. This is $25,000 / $500,000 = 0.05 = 5% of deposits that must remain in the vault as required reserves.

If actual unemployment is 10% and natural unemployment is 12%, which of the following is true? a. cyclical unemployment is -2% and we live in bad economic times (bust) b. cyclical unemployment is 2% and we live in good economic times (boom) c. cyclical unemployment is 2% and we live in bad economic times. d. cyclical unemployment is -2% and we live in good economic times.

d. cyclical unemployment is -2% and we live in good economic times.

A bank has a 10 percent reserve requirement, $36,000 in loans, and has loaned out all it can, given the reserve requirement. a. It has $3,600 in deposits. b. It has $32,400 in deposits. c. It has $39,600 in deposits. d. It has $40,000 in deposits

d. it has $40,000 in deposits. *If 10% of deposits must remain in bank vault as reserves, then 90% can be loaned out. 90% of original reposit is $36,000, or 90%*X = $36,000, or 0.90*X = 36000. Solve for X!