Econ Final Practice

Suppose an MP3 player sells for $75 in the United States and for 50 pounds in Britain. Which exchange rate is consistent with purchasing power parity?

1 pound for $1.50

If 1 dinar will buy 25 cents, how many dinar will one US dollar buy?

4

The concept of purchasing power parity implies that the:

Big Mac should cost about the same in all countries

The graph that shows the tradeoff between inflation and money wages is called the:

Phillips curve

In the equation of exchange, if M=$1.5 trillion, V=7, and P=1.05, then:

Q=$10 trillion

Collateralized debt obligations:

are financial instruments backed by a collection of mortgages

In counteracting demand shocks, the Federal Reserve can achieve:

both full employment and price stability

If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely:

buy bonds

The (blank) summarizes the flow of money into and out of domestic and foreign assets.

capital account

To counteract a positive demand shock, the Federal Reserve (blank) monetary policy, which (blank)

contractionary; reduces both output and the price level

(Blank) occurs when the value of a currency falls relative to other currencies

currency depreciation

Foreign aid transfers are part of the (blank) account

current

If American farmers sell corn to a Russian grain dealer, then the (blank)a account is:

current; credited

The twin goals of monetary policy are:

economic growth with low unemployment and stable prices with moderate long-term interest rates

The balance of trade is(are):

exports of goods and services minus imports of goods and services

A country decides to depreciate its currency. In the short run (blank), but in the long run (blank)

exports will increase A/D; rising costs of imported inputs will decrease A/S

The rational expectations theory describes the assumption that people (blank), and the adaptive expectations theory describes the assumption that people are (blank)

forward-looking; backward-looking

If the dollar depreciates relative to the yuan, then American exports to China will:

increase

One of the problems with deflation is that it:

increases the real value of existing debt

The short-run Phillips curve holds (blank) constant

inflationary expectations

A credit default swap:

is essentially the same as insurance against a default

The money illusion:

is the misperception that one is wealthier; it occurs when the money supply grows

A nominal exchange rate:

is the price of one country's currency for another's

When the interest rate falls, American bonds become (blank) attractive to foreign investors often leading to a(n) (blank) in the value of the US dollar in foreign exchange markets

less; decrease

A leveraged account:

magnifies both gains and losses

In a liquidity trap:

monetary policy is ineffective in changing income and output

The Phillips curve tradeoff worsened in the 1970s because of:

oil shocks

What occurs during a negative demand shock?

output and price level decrease

In a jobless recovery:

output begins to rise but employment growth does not

Both (blank) on credit by households and (blank) interest rates set in motion the events that led to the 2007-2009 financial crisis:

overspending; low

Adaptive expectations theory describes the use of (blank) to form expectations of inflation

past rates of inflation only

If the economy is facing inflationary pressures, the Federal Reserve will:

raise interest rates

If the economy has high levels of unemployment, the Federal Reserve will:

reduce interest rates

Tightening monetary policy causes interest rates to (blank) and aggregate (blank) to (blank)

rise; demand; decrease

If the unemployment rate is 4.5% and the inflation rate is 6%, the federal reserve will most likely:

sell bonds

The simultaneous occurrence of rising inflation and rising unemployment is called:

stagflation

The stagflation of the 1960s and 1970s showed policymakers that:

the Phillips curve could shift over time

The Taylor rule targets:

the federal funds rate

The Taylor rule suggests that:

the federal funds target rate should be equal to 2% plus the inflation rate plus one-half the inflation gap plus one-half the output gap

The phenomenon that interest rates may be so low that increases in the money supply will have no impact on A/D is called:

the liquidity trap

monetary policy deals with how:

the money supply is controlled to target interest rates

The difference between the nominal and real exchange rates is that:

the real exchange rate takes relative purchasing power into account, while the nominal rate does not

The long-run Phillips curve shows:

the relationship between inflation and unemployment when the actual inflation rate and the expected inflation rate are equal

In the equation of exchange, if M=$2 trillion, P=1.5, and Q=$8 trillion:

the velocity of money (V)=6

Monetary policy is LEAST effective in maintaining low inflation and high GDP when:

there has been a supply shock

The short-run aggregate supply curve is (blank) and the long-run aggregate supply curve is (blank)

upward sloping; vertical

If 1 euro will buy $1.30

$1 will purchase .77 euro