econ exam 3 review

Which of the following is included in both M1 and M2?

demand deposits currency other checkable deposits

Most economists believe the principle of monetary neutrality is

mostly relevant to the long run

Which list ranks assets from most to least liquid?

currency, stocks, fine art

According to purchasing-power parity, inflation in the United States causes the dollar to

depreciate relative to currencies of countries that have lower inflation rates.

The federal funds rate is the

interest rate at which banks lend reserves to each other overnight

If a country's net exports fall, then its net capital outflow falls by the same amount

true

Wealth is redistributed from creditors to debtors when inflation is

unexpectedly high.

Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits?

$4,937.5 billion We have Reserves = $400 billion and Excess Reserves = $5 billion so Required Reserves = $395billion. We also know that Required Reserves = RRRDeposits so $395 billion = 0.08Deposits.Solving for Deposits = $395 billion/0.08 = $4937.5 billion

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve requirement.

It has $800 in reserves and $9,200 in loans.

Which of the following policies can the Fed follow to increase the money supply?

Reduce the interest rate on reserves

Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have available to lend out if it decides to hold only required reserves?

$27,000

If the real exchange rate for coal is 1.5, the price of coal in the United States is $50 per ton, and the price of coal in Britain is 20 British pounds per ton, what is the nominal exchange rate?

1.5 = (50e/20) solve for e 3/5

Which of the following is an example of U.S. foreign direct investment?

A U.S. citizen builds and operates a coffee shop in the Netherlands.

The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?

It falls by $12 billion.

If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million worth of government bonds, bank reserves

decrease by $20 million and the money supply eventually decreases by $400 million.

The existence of money leads to

greater specialization and to a higher standard of living.

A U.S. company uses U.K. pounds it already owned to purchase bonds issued by a company in the U.K. Which of these countries has an increase in net capital outflow?

Neither the U.S. nor the U.K.

The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is explained by the

classical dichotomy

Refer to Figure 30-1. If the money supply is MS2 and the value of money is 5, then the quantity of money

demanded is greater than the quantity supplied; the price level will rise.

If the nominal exchange rate is expressed as foreign currency per dollar , which of the following would both make Americans more willing to buy Italian goods? The nominal exchange rate

rises, the price of goods in Italy falls.

If over the next year the inflation rate in the euro area is higher than the inflation rate in Japan, then the euro should depreciate relative to the Japanese yen

true

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Tazian dollar. Aggregate banking statistics show that collectively the banks of Tazi hold $300 million of required reserves, $75 million of excess reserves, have issued $7,500 million of deposits, and hold $225 million of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank. Refer to Scenario 29-1. Suppose the Bank of Tazi loaned the banks of Tazi $10 million. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply change?

6,900 million Tazes

During the 2008 financial crisis velocity decreased. This means that the rate at which money changed hands

decreased. Other things the same, a decrease in velocity decreases the price level.

Net exports of a country are the value of

goods and services exported minus the value of goods and services imported.

Suppose the bank faces a reserve requirement of 10 percent. Starting from the situation as depicted by the T-account, a customer deposits an additional $60,000 into his account at the bank. If the bank takes no other action it will

have $64,000 in excess reserves.

Refer to Table 29-3. If the bank faces a reserve requirement of 6 percent, then the bank

is in a position to make new loans equal to a maximum of $18,000.

If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?

it increases by $150,000

Purchasing-power parity theory does not hold at all times because

many goods are not easily transported.

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

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

In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold

raised the price level, but decreased the value of gold in Cairo

A country's trade balance will fall if either

saving falls or investment rises.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

selling bonds. This selling would reduce reserves

A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank, what is the value of the money supply?

$150

Which of the following will help to prevent bank runs?

Federal deposit insurance

An associate professor of physics gets a $200 a month raise. With her new monthly salary she can buy more goods and services than she could buy last year.

Her real and nominal salary have risen.

Bill, a U.S. citizen, pays a Spanish architect to design a metal casting factory. Which country's exports increase?

Spains

Visitors to a country hosting a world soccer tournament purchase food, souvenirs, and accommodations while attending the tournament. Which of the following should these expenditures raise?

The host country's net exports and its net capital outflow.

The inflation tax falls mostly heavily on those who hold

a lot of currency but accounts for a small share of US government revenue

In a system of 100-percent-reserve banking,

banks do not influence the supply of money

David and Asher buy the same pair of sneakers, but each in the wrong size. David proposes a size swap with Asher. This is an example of

barter, since the sneakers in the correct size, have intrinsic value to both David and Asher

Gabrielle, an Italian citizen, uses some previously obtained dollars to purchase a bond issued by a U.S. company. This transaction

does not change U.S. net capital outflow.

In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.

false

Other things the same, an increase in the real exchange rate raises U.S. net exports

false

The purchase of U.S. government bonds by Egyptians is an example of

foreign portfolio investment by Egyptians.

Which of the following groups meets to discuss changes in the economy and determine monetary policy?

the FOMC

The discount rate is

the interest rate the Fed charges of bank for a loan.

The principle of monetary neutrality implies that an increase in the money supply will increase

the price level but not the real GDP.

Which of the following is consistent with the idea that high money supply growth leads to high inflation?

the quantity theory and evidence from 4 hyperinflations in the 1920s