Economics Final
Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10%. The maximum loan your bank can make as a direct result of your deposit is
$1,800
If the nominal exchange rate between the American dollar and the Canadian dollar is 0.89 Canadian dollars per American dollar, how many American dollars are required to buy a product that costs 2.5 Canadian dollars?
$2.81
If the government purchase multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP
$250 billion
A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil?
$4.50
What is the Fed doing to increase the credibility of its policies?
- Announcing the federal funds target rate -Whenever a change in policy is announced, the change actually takes place
What are examples monetary policy tools used by the Federal Reserve Bank?
- Buying $500 million worth of government securities, such as Treasury bills. - Decreasing the rate at which banks can borrow money from the Federal Reserve - Increasing the reserve requirements from 10% to 12.5%
Indicate the two main objections to the idea that the short-run Phillips curve is vertical
- Contracts with workers keep wages sticky -Workers and firms might not have rational expectations
How do investment banks differ from commercial banks?
- Investment banks generally do not lend to households -Investment banks do not take deposits
How does a budget deficit act as an automatic stabilizer and reduce the severity of a recession?
- Transfer payments to household increase - During recession, tax obligations fall due to falling wages and profits -Consumers spend more than they would in the absence of social insurance programs, like unemployment
The use of money
- allows for greater specialization - reduces the transaction costs of exchange -eliminates the double coincidence of wants
You're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the exchange rate is 0.85 euros per dollar, what's the highest price in euros you'd be willing to pay for a camera?
106.25 euros
The United States is divided into ______ Federal Reserve Districts. The Federal Reserve's Bank Board of Governors consist of ____ members appointed by the president of the United States to 14-year, nonrenewable terms. One of the board members is appointed to a ___ year, renewable term as the chairman
12; 7; 4
Which is not a function of money?
Acceptability
Refer to Figure 17-2. Suppose the economy is at point A in the figure above. Which of the following is true?
Actual inflation and expected inflation are the same
If the dollar appreciates, how will aggregate demand in the United States be affected?
Aggregate demand will shift to the left as imports increase
How does an increase in a country's exchange rate affect its balance of trade?
An increase in the exchange rate raises imports, reduce exports, and reduces the balance of trade
Refer to Figure 15-10. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
An open market sale of Treasury bills
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation
Fiscal policy is determined by
Congress and the president
How does expansionary monetary policy affect net exports?
Expansionary monetary policy increases exports and reduce imports
Monetary policy refers to the actions the
Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomics policy objecctives
Expansionary monetary policy refers to the ____________ to increase real GDP
Federal Reserve's increasing the money supply and decreasing interest rates
As of 1993, the Fed set targets for which of the following in order to achieve price stability and high employment?
Federal funds rate
What is the difference between federal government purchases (spending) and federal government expenditures?
Government purchase are included in government expenditures
If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?
If the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar
Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?
In the long run, aggregate supply is vertical
Refer to Figure 17-2. Suppose the economy is at point A. The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur?
Inflation will accelerate in the long run
The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The curve, indicates what type of relationship between two variables?
Inverse relationship
The most liquid measure of money supply is
M1
The M2 measure of the money supply equals
M1 plus savings account balances plus small-denomination time deposits plus non-institutional money market fund shares
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets
Which of the following is one of the most important benefits of money in an economy?
Money makes exchange easier, leading to more specialization and higher productivity
The 3 main monetary policy tools used by the Federal Reserve to manage the money supply are
Open market operations, discount policy, and reserve requirements
Refer to Figure 17-2. Suppose the economy is at point A in the figure above. Which of the following is true?
The current unemployment rate is equal to the natural rate of unemployment
Refer to Figure 17-2. Suppose the economy is at point B in the figure above. Which of the following is true?
The expected rate of inflation is 3%
Which of the following would be classified as fiscal policy?
The federal government cuts taxes to stimulate the economy
Assuming no change in the nominal exchange rate, how will a higher rate of inflation in the United State relative to France affect the real exchange rate between the two countries?
The real exchange rate will rise.
Refer to Figure 17-2. Suppose the economy is at point C in the figure above. If workers adjust their expectations of inflation, which of the following will be true?
The short-run Phillips curve will shift to the left
Open market operations refer to the purchase or sale of ______ to control the money supply
U.S. Treasury securities by the Federal Reserve
If the dollar appreciates against the Mexican peso,
U.S. exports to Mexico become more expensive
If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant?
a $300 billion decrease in GDP
How might a budget deficit affect the balance of trade?
a budget deficit raises interest rates, which raises exchange rates and reduces the balance of trade
Which of the following would cause the money demand curve to shift to the left?
a decrease in real GDP
Contractionary monetary policy on the part of the Fed results in
a decrease in the money supply; an increase in interest rates, and a decrease in GDP.
When a central bank intervenes into the foreign exchange market to set a country's exchange rate over long periods of time, it is called
a fixed exchange rate
An increase in the interest rate causes
a movement up along the money demand curve
Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented
a permanent trade-off between unemployment and inflation
If actual inflation is higher than expected inflation, the
actual real wage is less than the expected real wage; unemployment falls
Refer to Figure 16-4. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?
an increase in the marginal income tax rate
Refer to Figure 15-2. In the figure above, the movement from point A to point B in the money market would be caused by
an open market sale of Treasury securities by the Federal Reserve
In economics, money is defined as
any asset people generally accept in exchange for goods and services
The increase in government spending on unemployment insurance payments to workers who lose
automatic stabilizers
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ______ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it _____ U.S. Treasury securities
buys; sells
An initial decrease in a bank's reserves will decrease checkable deposits
by an amount greater than the decrease in reserves
To decrease the money supply, the Federal Reserve could
conduct an open market sale of Treasury securities
The M1 measure of the money supply equals
currency plus checking account balances plus traveler's checks
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
current income
Decreasing government spending ________ the price level and _______ equilibrium real GDP.
decrease; decreases
An increase in interest rates
decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports
The required reserves of a bank equal its ______ the required reserve ratio
deposits multiplied by
Net exports _______ net foreign investment
equals
Fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives
The U.S. dollar can best be described as
fiat money
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle
If actual inflation is less than expected inflation, actual wages will be ________ expected real wages and unemployment will _________.
greater than ; rise
Commodity money
has value independent of its use as money
Which of the following is an objective of fiscal policy?
high rates of economic growth
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition
Refer to Figure 16-2. In the graph, if the economy is at point A, and appropriate fiscal policy by Congress and the president would be to
increase government transfer payments
A decrease in the discount rate _______ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate
increases; increases
A decrease in the reserve requirement ________ bank reserves and _________ the money supply
increases; increases
Expansionary fiscal policy involves
increasing government purchases or decreasing taxes
The balance of payments
is always zero
The federal funds rate
is the rate that bank charge each other for short-term loans of excess reserves
Banks can make additional loans when required reserves are
less than total reserves
Fiat money has
little to no intrinsic value and is authorized by the central bank or government body
Refer to Figure 15-6. In this figure, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to
lower interest rates
The quantity theory of money predicts that, in the long run, inflation results from the
money supply growing at a faster rate than real GDP
The quantity equation states that the
money supply times the velocity of money equals the price level times real output
The money demand curve has a
negative slope because an increase in the interest rate decreases the quantity of money demanded
The Federal Reserve System's four monetary policy goals are
price stability, high employment, economic growth, and stability of financial markets and institutions
The ____________________________ is considered the most relevant interest rate when conducting monetary policy
short-term nominal interest rate
The Federal Reserve was established in 1913 to
stop bank panics by acting as a lender of last resort
Which of the following functions of money would be violated if inflation were high?
store of value
Monetary policy has a _______ effect on aggregate demand in a(n) ___________ economy, and fiscal policy has a __________ effect on aggregate demand in a(n) ________ economy
stronger; open; weaker; open
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called
supply-side economics
The Federal Reserve can directly affect its monetary policy _________, which then affect its monetary policy __________.
targets; goals
If, in the long run, real GDP returns to its potential level, then in the long run,
the Phillips curve is vertical
The part of the balance of payments that records migrants' transfers and sales of nonproduced, nonfinancial assets is called
the capital account
The part of the balance payments that record a country's net exports, net investment income, and net transfers is called
the current account
The balance of payments include which three accounts?
the current account, the financial account, and the capital account
How does an increase in the budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?
the demand for dollars rises, and the supply of dollars falls
The part of the balance of payments that record purchases of assets a country has made abroad and foreign purchases of assets in the country is called
the financial account
An increase in the price level causes
the money demand curve to shift to the right
According to the quantity theory of money, inflation results from what?
the money supply grows faster than real GDP
When the Fed uses contractionary policy?
the price level rises less than it would if the Fed did not pursue policy
Refer to Figure 17-2. Suppose the Fed used contractionary policy to push short-run equilibrium to point C. If the short-run equilibrium remained at point C long enough,
the short-run Phillips curve would shift down
Refer to Figure 17-2. Suppose the Fed used expansionary policy to push short-run equilibrium to point B. If the short-run equilibrium remained at point B long enough,
the short-run Phillips curve would shift up
The quantity theory of money was derived from the quantity equation by asserting that
the velocity of money was fixed
The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms.
unexpected