Econ Exam 2

What is the maximum amount of money created from a $3 million deposit in the banking system if the required reserve ratio is 5%?

$57 million Multiplier = 1/.05 = 20 Excess Reserves = $3 - (.05*3) = $2.85 m Total Change in Money Supply = $2.85m * 20 = $57 million

A commercial bank has $300 million in checkable-deposit liabilities and $36 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?

$6 million

Assume that Hadley has $10,00 in her checking account at Grand B Bank and uses her debit card to withdraw $500 of cash from the bank's ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?

0, This transaction does not impact M1 as the money in either form is included in M1.

The monetary multiplier is defined as

1/R, where R is the required reserve ratio.

When $100 is deposited in the banking system, it leads to maximum expansion in bank deposits of $1,000. What is the required reserve ratio assuming that the excess reserves are 0

10% (100/1000) x100=10%

5 Baseball Tickets $500, $560 Jersey $120, $150 Food $150, $160 Transport $60, $70 Assuming that year 1 is the base year, calculate the price index for year 1 and for year 2.

100, 113

How much money is created by a bank with $20 million in assets if it lends out half of its assets with a required reserve ratio of 10%.

100,000,000

Suppose that a country has 10 million people working full-time. It also has 2 million people who are actively seeking work but are currently unemployed, along with 1 million discouraged workers who have given up looking for work and are currently unemployed.

17 percent

Henrique is a baseball fan and attends several games per season. His expenses per season are listed in the table below: 5 Baseball Tickets $500, $600 Jersey $100, $120 Food $150, $150 Transport $50, $80 Calculate the inflation rate for Henrique's baseball season between year 1 and 2.

18.5%

Stealth Bank is holding $4 million in reserves, $9 million in government bonds and $9.6 million in low risk mortgage loans. Out of the $20 million in customers' deposits, Stealth holds $13.1 million in the form of certificates of deposit. What is Stealth Bank's net worth in millions of dollars?

2.6 ($4mil + $8mil + $9.6) - $20 = $2.6 million net worth

If the price index moves from 112 to 115, the rate of inflation is:

2.7%

Suppose that initially Goldstar Bank has no excess reserves. A customer then deposits $75,000 into the bank. The reserve requirement is 20 percent.

300,000 Excess Reserves = 75,000-15000 = $60,000 Total change in money supply = $60,000 * 1/.2 = $300,000

Based on the information in the table below, calculate the unemployment rate: Total adult population over the age of 16 83 million Total in the labor force 63 million Total Employed 60 million Total Unemployed 3 million Total out of the labor force 20 million

4.76%

If the Consumer Price Index was 155 in one year and 165 in the next year, then the rate of inflation from one year to the next was approximately:

6.5%

Suppose that initially Goldstar Bank has no excess reserves. A customer then deposits $75,000 into the bank. The reserve requirement is 20 percent. What amount of excess reserves will Goldstar Bank now have as a result of this deposit?

60,000 Required Reserves = .2*75,000 = $15,000 Excess Reserves = $75,000-15,000 = 60,000.

What is the amount that a bank can lend out if the required reserve ratio is 15%?

85% of its deposits

List the tools used by a central bank to affect the money supply and identify which is the most powerful and commonly used method and which is the weakest method.

A central bank has three traditional tools to affect the quantity of money in the economy: open market operations, reserve requirements, and the discount rate. The most powerful and commonly used of the three traditional tools of monetary policy is open market operations, while altering the discount rate is a relatively weak tool of monetary policy.

Which of the following would cause the Aggregate Supply curve to move from AS to AS2 in the graph below? (a shift to the left)

A general increase in energy and labor cost for businesses.

A positive unemployment rate—more than zero percent—is fully compatible with full employment because at full employment, A. unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs B.the economy is producing at capacity. C.unemployment includes seasonal unemployment, which is usually positive because people are transitioning to new jobs. D. there is usually some unemployment due to the business cycle.

A. unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs

Consider the AD and AS model. What happens to the average price level and real output as a result of the following? a. interest rates on consumer loans increases. Average Price Level ___[A]___ Real Output ___[B]___ b. business investment increases. Average Price Level ___[C]___ Real Output ___[D]___ c. congress significantly increases corporate taxes. Average Price Level ___[E]___ Real Output ___[F]___

A.Decreases, B. decreases C. Increase, D. Increase E. Increase, Decrease

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Amy got frustrated with her principal and quit. She spent some time finding a new teaching job at a different school district. [A] b. A recession causes the auto industry to lay off 9000 workers. [B] c. Thousands of truck drivers permanently lose their jobs to self-driving vehicles. [C] d. Florida experiences a higher unemployment rate when thousands of people move from New York during the COVID pandemic. [D]

A.Frictional unemployment B cyclical unemployment C Structural unemployment D structural unemployment

The Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks by $500 billion. It plans to use open-market operations to accomplish this goal. The current reserve requirement for commercial banks is 10 percent. Will the Fed want to buy or sell government securities if sales or purchases of government securities are the only instrument used in the open-market operations? [A] The amount of the open mrket operation to increase the money supply by $500 billion is $[B] billion.

A.buy Specified Answer for: B 50

Briefly explain the role played by banks between savers and borrowers and the economic benefit, if any, derived from their taking on this role.

Banks are financial intermediaries that operate between a saver who deposits money in a bank and a borrower who receives a loan from that bank. As intermediaries, banks make it far easier for a complex economy to carry out the extraordinary range of transactions that occur in goods, labor, and financial capital markets.

Identify and briefly explain the circumstances that could lead to a bank developing a negative net worth, and the various methods that banks may employ to protect themselves from this type of outcome.

Banks run a risk of negative net worth if the value of their assets declines. The value of assets can decline because of an unexpectedly high number of defaults on loans, or if interest rates rise and the bank suffers an asset-liability time mismatch in which the bank is receiving a low rate of interest on its long-term loans but must pay the currently higher market rate of interest to attract depositors. Banks can protect themselves against these risks by choosing to diversify their loans or to hold a greater proportion of their assets in bonds and reserves.

Aggregate demand curves slope downwards for each of the following reasons EXCEPT a. The foreign price effect: As the price level falls, the U.S. becomes more attractive to foreigners and domestic residents, increasing net export spending. b. The interest rate effect: As prices for outputs rise, it costs more to make the same purchases, driving up the demand for money, raising interest rates and reducing investment spending. c. The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods. d. The wealth effect: As the price level falls, the buying power of people's savings increases and induces them to spend more.

C. The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods.

What is the major component of the money supply M1?

Checkable deposits

What are the components of the M1 money supply?

Currency in circulation, checkable deposits, and travelers checks

What will be the effect of sales of government bonds?

Decrease aggregate demand

When we want to measure wage inflation in the labor market, we use the: Employment Price Index Product Price Index Employment Cost Index Consumer Price Index

Employment Cost Index

Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.

False

One set of reasons why wages may be "sticky downward," as economists put it, involves economic laws and institutions. Describe these two "cut-and-dried" labor market realities.

For low-skilled workers being paid the minimum wage, it is illegal to reduce their wages. For union workers operating under a multiyear contract with a company, wage cuts might violate the contract and create a labor dispute or a strike.

What would be the impact of a decrease in money supply?

Higher interest rates and lower GDP

Russia experienced inflation of 2500% per year in the early 1990s. Identify the term used to describe this extreme level of inflation rate and briefly discuss the contributing economic factors that caused this situation to arise.

Historically, Russia had a controlled economy with very low rates of measured inflation because prices were forbidden to rise by law. During those times, the Russian population also had perpetual shortages of goods, because forbidding prices to rise acted like a price ceiling and created a situation where the quantity of goods demanded often exceeded the quantity supplied. As Russia made a transition toward a more market-oriented economy in the 1990s, the price ceilings were eliminated and as a consequence the economy experienced an outburst of extreme inflation, known as hyperinflation before settling in time to a more reasonable rate of inflation at less than 10%.

Identify the most important factor shifting the AS curve in the long term. Briefly explain both how and why this factor shifts the aggregate supply curve.

In the long term, the most important factor shifting the AS curve is productivity growth. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can now produce a greater quantity at every given price level for output.

What is a likely direct result in bank behavior after the Fed lowers required reserve rate?

Issue more loans

The rate of inflation in Zimbabwe rose in 2018 from 10.6% to 577.21% in 2020. What was the positive effect of this unexpected inflation on the residents of the country?

It helped debtors

What happens to the money supply if the Fed decreases the reserve requirement?

It increases

If $2,000 is withdrawn from the bank by a customer, the bank's

Liabilities decrease and assets rise

The Consumer Price Index...

Measures the change in the cost of living for a typical US household

List the three specific functions of money that economists have identified.

Medium of Exchange Unit of account store of value

When you purchase a T-shirt for $25, money is serving which function?

Medium of exchange

The main responsibility of a Central bank is:

Monetary but not fiscal policy

Assuming that the Consumer Price Index increases from 100 to 120...

More money would be needed to buy the same amount of goods, implying that the value of money drops

How do economists define unemployed workers?

Not currently working but actively searching for work

What is the most effective monetary policy tool that the Federal Reserve uses?

Open market operations

Based on the information in the table below, calculate the labor force participation rate, and the percentage or workers out of the labor force: Total adult population over the age of 16 83 million Total in the labor force 63 million Total Employed 60 million Total Unemployed 3 million Total out of the labor force 20 million

Participation rate: 75.9%; Out of the labor force: 24.1%

The Fed can put more reserves into the banking system by:

Purchasing government securities

Suppose that a small country currently has $8 million of currency in circulation, $10 million of checkable deposits, $190 million of savings deposits, $50 million of time deposits, and $90 million of money market mutual fund deposits. From these numbers we see that this small country's M1 money supply is $[A] million, while its M2 money supply is $[B] million.

Specified Answer for: A 18 $8 + $10 = $18 Specified Answer for: B348 $18 + $190 + $50 + $90 = $348

Assume the following data for a country: Total population 500 Population under 16 years of age or institutionalized 120 Not in the labor force 150 Unemployed 23 Part-time workers looking for full-time jobs 10 a. What is the size of the labor force? [A] million b. What is the official unemployment rate? [B] percent

Specified Answer for: A 230 500-120-150=230 Specified Answer for: B 10 23/230 *100 = 10%

When you take a vacation and keep cash with you in case you might need it, money is serving as a:

Store of value

What is aggregate demand comprised of?

The AD curve includes all five parts of demand: consumption, investment, government spending, exports, and imports. (C + I + G + X - M)

Compare the different measures of inflation known as GDP deflator, the Producer Price Index (PPI), and the Consumer Price Index (CPI).

The GDP deflator is based on everything in GDP. The PPI is based on a basket of goods representing supplies and inputs bought by producers of goods and services. And the CPI is based on a basket of goods that a typical consumer would buy.

Who measures the labor force, and how is it defined?

The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are employed and those who are actively seeking work.

Who appoints the Governor of the Federal Reserve System?

The president

Identify the three government policies for assuring safe and stable banking systems.

The three government policies for assuring safe and stable banking systems are: (1) the provision of deposit insurance to reassure households that their bank deposits are safe; (2) examining the financial records of banks to ensure that they have positive net worth; and (3) making emergency short-term loans to banks in times of financial chaos.

The foreign price effect points out that if prices rise in the United States while remaining fixed in other countries, then goods in the United States will be relatively more expensive compared to goods in the rest of the world. U.S. exports will be relatively more expensive, and the quantity of exports sold will fall. Imports from abroad will be relatively cheaper, so the quantity of imports will rise. Thus, a higher domestic price level, relative to price levels in other countries, will be associated with a lower GDP. True or false

True

The interest rate effect is that as prices for outputs rise, it will be necessary for people making purchases to have more money or credit. This additional demand for money and credit will push interest rates higher. In turn, higher interest rates mean less borrowing by businesses for investment purposes and less borrowing by households for homes and cars—and thus a reduction in consumption and investment. True or false

True

The wealth effect holds that as the price level increases, the buying power of wealth that people have stored up in bank accounts and cash will diminish, eaten away to some extent by inflation. Because a rise in the price level reduces people's wealth, consumption will fall as the price level rises. True or false

True

When most workers are classified as not being in the labor force, when in reality they are actively searching for work, then the unemployment rate will be a. Overstated b. Understated c. Neither understated nor overstated d. Either understated or overstated

Understated

The long run aggregate supply curve is...

Vertical at the potential GDP level

Which set of events would most likely decrease real GDP and increase the average price level? a decrease in oil production an increase in personal tax rates an increase in investment spending a decrease in personal income tax rates

a decrease in oil production

expansionary monetary policy

a policy that increases the supply of money and the quantity of loans

contractionary monetary policy

a policy that reduces the supply of money and loans

If you work part-time when you would like to work full time, or have a full-time job that doesn't utilize all your skills and talents, then you are counted as: a. Underemployed b. A discouraged worker c. Structurally unemployed d. Frictionally unemployed

a. Underemployed

The model of aggregate demand/aggregate supply... a. Identifies the equilibrium GDP the economy will reach in the long run b. Identifies the equilibrium GDP and price level as well as the gap between the equilibrium GDP and the potential GDP c. Identifies the equilibrium quantity and price for consumer goods d. Identifies the potential GDP and price level as well as the gap between the price level and the inflation

b. Identifies the equilibrium GDP and price level as well as the gap between the equilibrium GDP and the potential GDP

Based on Say's Law... a. In the short run, the production and sales of a $10 product generates $10 income for someone and $10 of demand. b. In the long run, the production and sales of a $10 product generates $10 of income for someone and $10 of demand. c. In the long run, the demand for a $10 product generates the supply of a $10 product. d. In the short run, the demand for a $10 product generates the supply of a $10 product.

b. In the long run, the production and sales of a $10 product generates $10 of income for someone and $10 of demand.

Which of the following is not considered a characteristic of money? a. It is a means of payment b. It must have intrinsic value c. It can be used to make future payments d. It is a unit of account

b. It must have intrinsic value

An auto company decided to relocate its offices from Huntsville, Alabama to Orlando, Florida. The human resources manager of the auto company refuses to relocate to Orlando due to family obligations. While she is searching for a new job, the manager will be considered: a. Not fit for consideration for any human resource job b. Structurally unemployed c. Frictionally unemployed d. Cyclically unemployed

b. Structurally unemployed

Employees at a toy-manufacturing factory are let go because robots have been installed to replace humans. What type of unemployment faces the laid-off workers? a. Seasonal b. Structurally unemployed c. Frictionally unemployed d. Cyclically unemployed

b. Structurally unemployed

According to Keynes' Law... a. The total demand tends to rise above the total supply capacity in the short run which leads to recessions b. The total demand for products determine the level of gross domestic product and may not equal the supply capacity of the economy in the short run. c. The total supply of products determines the level of gross domestic product and the level of demand in the economy in the long run. d. The total demand always equals the total supply capacity in the short run.

b. The total demand for products determine the level of gross domestic product and may not equal the supply capacity of the economy in the short run.

Miriam is actively searching for a new job after she voluntarily quit her job. Miriam is now considered: a. Seasonal b. Structurally unemployed c. Frictionally unemployed d. Cyclically unemployed

c. Frictionally unemployed

If discouraged workers are included in the determination of the unemployment rate, what effect will it have on the computed rate? a. There will be no impact. b. There is no relationship between discouraged workers and the unemployment rate determination. c. It will raise it because there are always discouraged workers. d. It will lower it because it will reduce the number of unemployed.

c. It will raise it because there are always discouraged workers.

Which of the following was a way for the Bureau of Labor Statistics to reduce the quality/new good bias in its calculation of the CPI? a. Automatically reduce the inflation by 0.5% to account for quality/new good bias. b. Allow for some substitution amongst products. c. Update the list of products included in the CPI more often and rapidly. d. Remove energy and food prices.

c. Update the list of products included in the CPI more often and rapidly.

Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?

canada

If there is an increase in the unemployment rate, the size of the labor force could increase or decrease. must increase. will not change. must decrease

could increase or decrease.

Which of the following scenarios would result in a decrease in Aggregate Demand? a. Technology improvements lead to productivity gains b. The congress passes a new income tax cut. c. A rise in imports from Europe d. A decline in investors confidence causes investment to fall.

d. A decline in investors confidence causes investment to fall.

Workers at a car-manufacturing plant in Detroit, Michigan are laid off because of a recession in the economy. The workers' resulting unemployment can be described as: a. Seasonal b. Structurally unemployed c. Frictionally unemployed d. Cyclically unemployed

d. Cyclically unemployed

Which of the following statements best describes the aggregate supply curve? a. The aggregate supply curve represents the relationship between the inflation rate and the total output or real GDP in the macroeconomy. b. The aggregate supply curve represents the relationship between the inflation rate and the total demand or real GDP in the macroeconomy. c. The aggregate supply curve represents the relationship between the price level and the potential output or GDP in the macroeconomy. d. The aggregate supply curve represents the relationship between the price level and the total output or real GDP in the macroeconomy.

d. The aggregate supply curve represents the relationship between the price level and the total output or real GDP in the macroeconomy.

Which of the following would cause the aggregate supply curve to increase... a. Energy prices such as gas and electricity have increased rapidly throughout the country. b. Consumers are more confident and spending more than before. c. The government has reduced its spending by more than 10% over the last 2 years d. Throughout the economy, workers are using better equipment and output per hour is rising.

d. Throughout the economy, workers are using better equipment and output per hour is rising.

If you are hired by an organization, you would be least hurt by inflation if a. If your employer provides fixed annual increases in salaries and benefits in the employment contract b. You increase savings in your bank account in anticipation of expected rise in inflation c. The government increases social security retirement payments in anticipation of expected inflation d. Your employer has a cost-of-living adjustment clause in the employment contract

d. Your employer has a cost-of-living adjustment clause in the employment contract

An increase in the reserve requirement causes the size of the monetary multiplier to

decrease, the amount of excess reserves in the banking system to decrease, and the money supply to decrease.

The Federal Reserve sells a Treasury bond to a commercial bank for $100,000. The potential money supply:

decreases

Hyperinflation might lead to a severe decline in total output if everyone starts speculating and searching for ways to avoid inflation. taxes go up so that income falls. everyone starts spending more to avoid inflation. people save more because interest rates are falling.

everyone starts speculating and searching for ways to avoid inflation.

If there is an increase in the nation's money supply, the interest rate will

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

In a fractional reserve system, deposit insurance

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

Unanticipated inflation hurts people whose sole source of income is from Social Security benefits. hurts both borrowers and lenders. helps lenders and hurts borrowers. helps borrowers and hurts lenders.

helps borrowers and hurts lenders.

Inflation implies that the level of all prices... decrease increase stay the same none of the above

increase

The effect of substitution bias is that the rise in the price of a fixed basket of goods over time tends to ___________________ the rise in a consumer's true cost of living, because it doesn't take into account that the person can substitute between goods according to changes in their relative prices. stabilize overstate understate reduce

overstate

The __________________ is the nominal interest rate minus the rate of inflation. nominally adjusted real interest rate annualized interest rate real GDP

real interest rate

Which of the following is an example of one of the major categories in the overall CPI? transportation and insurance recreation apparel and accessories entertainment

recreation

Which of the following is the most inclusive and accurate list of what is included in the M2 money supply? savings deposits, money market funds, currency and money market mutual fund balances Checkable deposits, interest deposit accounts, large time deposits, and money market mutual fund balances Checkable deposits, money management funds, time deposits, and stock market balances savings deposits, money market funds, time deposits, and M1

savings deposits, money market funds, time deposits, and M1

Two factors that complicate the calculation of the inflation rate are: complimentary product bias preferential bias consumer behavior bias substitution and quality/new product bias

substitution and quality/new product bias

The long-run aggregate supply curve is vertical because the economy's potential output (full employment GDP) is determined by

the availability and productivity of real resources, not by the price level.

discount rate

the interest rate charged to commercial banks and other financial institutions for short-term loans they take from the Federal Reserve

federal funds rate

the interest rate that banks pay other banks for overnight loans.

The unemployment rate that is consistent with full employment is __________.

the natural rate of unemployment

The unemployment rate is defined as

the number of unemployed persons divided by the labor force.

quantitative easing (QE)

the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand

Which of the following is true about the Federal Reserve System?

there are 12 regional Federal Reserve Banks

Consider a situation where the central bank increases the money supply. All other things being equal, if nominal GDP increased by $800 billion during a time when velocity was 4, by how much did the central bank increase the money supply?

$200 billion