Macro Economics Final Review

How does a country maintain a fixed exchange rate?

By intervening in the foreign exchange markets and buying or selling currency as needed to achieve the desired exchange rate.

Currency Drain

money held outside the banks

M2 includes

M1 and Savings deposits time deposits and others (more broad)

Autonomous consumption is that portion of consumption expenditure that is not influenced by 1) income. 2)preferences. 3)prices. 4)the legal authorities.

1) income.

Consider a market that sells some of its goods as exports. Who does NOT benefit? 1) domestic consumers 2)domestic producers 3)workers in the industry 4) foreign consumers

1) domestic consumers

Consider a market that sells some of its goods as exports. Who does NOT benefit? 1) domestic consumers 2)domestic producers 3)workers in the industry 4)foreign consumers

1) domestic consumers

Which of the following are part of a commercial bank's reserves? 1. cash in the bank's vaults 2.loans 3. cash in checking accounts 1) 1 Only 2) 1 and 2 3)1 and 3 4) All

1) 1 Only Cash in the bank's vaults are the BANKS. Loans are given out to people and cash in checking accounts is not theirs. Cash in the vaults and the required reserve in the Federal bank is what they own.

If prices are fixed, when aggregate planned expenditure exceeds real GDP, then 1) inventories decrease, signaling firms to increase production and increase real GDP. 2)inventories increase, signaling firms to decrease production and decrease real GDP. 3) profits fall, signaling firms to decrease production and decrease real GDP. 4)None of the above answers are correct

1) inventories decrease, signaling firms to increase production and increase real GDP.

In the very short run, the components of aggregate planned expenditure that depend on the level of real GDP are 1) planned consumption expenditure and planned imports. 2) planned investment and planned imports. 3)planned investment and planned exports. 4)planned government expenditure on goods and services and planned imports.

1) planned consumption expenditure and planned imports.

Which of the following is an asset of the Fed? 1)Mortgage-backed securities 2)currency 3)reserves of depository institutions 4)Both answers B and C are correct.

1)Mortgage-backed securities Other assets include holdings of Treasury, agency, and mortgage-backed securities; discount window lending; lending to other institutions; assets of limited liability companies (LLCs). A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes, or packages, the loans together into a security that investors can buy.

If the consumption function lies below the 45-degree line, then saving at these levels of disposable income will 1)be positive. 2)be negative. 3)equal zero. 4)be some amount that cannot be determined without additional information.

1)be positive.

An open market sale of securities by the Fed 1)decreases banks' reserves and increases banks' securities. 2)increases banks' reserves and decreases banks' securities. 3)increases banks' total assets. 4)involves a bank selling government securities to the Fed.

1)decreases banks' reserves and increases banks' securities. To increase the money supply in the market, the FOMC will purchase securities from banks. The funds that the banks acquire from the sale can be used as loans to individuals and businesses. The more money that is available in the market for lending, the lower the rates on these loans become, which causes more borrowers to access cheaper capital. This easier access to capital leads to greater investment and will often stimulate the overall economy. To decrease the money supply, the FOMC will sell securities to banks, which leads to money being taken out of the banks and kept in FOMC reserves. The decrease in money available in the economy leads to a decrease in investment and spending as the availability of capital decreases and it becomes more expensive to obtain. This limiting of access to capital slows down economic growth as investment decreases.

When people who are holding the money of some other country want to exchange it for U.S. dollars, they ________ U.S. dollars and ________ that other country's money. 1)demand; supply 2)supply; supply 3)supply; demand 4)demand; demand

1)demand; supply

As the expected profit from holding dollars ________, the quantity of ________. 1)increases; dollars demanded increases 2) increases; dollars demanded decreases 3)decrease; foreign currency demanded decreases 4)None of the above answers is correct.

1)increases; dollars demanded increases Law of Demand

The sum of the components of aggregate expenditure that vary with real GDP is called 1)induced expenditures. 2)the MPC. 3)autonomous expenditures. 4)autonomous consumption.

1)induced expenditures.

A bank creates money by 1)lending its excess reserves. 2)purchasing currency from the Federal Reserve. 3)buying bonds from the Federal Reserve. 4)printing more checks.

1)lending its excess reserves. Interest rates on loans.

The slope of the consumption function is 1)less than 1. 2)1. 3) greater than 1. 4)negative.

1)less than 1.

The slope of the saving function is equal to the 1)marginal propensity to save. 2) marginal propensity to consume. 3)marginal propensity to consume divided by the marginal propensity to save. 4)marginal propensity to save divided by the marginal propensity to consume.

1)marginal propensity to save.

The Most Direct Way in which money replaces barter is through its use as a 1) medium of exchange 2) recording device 3)store of value 4)unit of account

1)medium of exchange The most inconvenience of bartering is carrying around whatever you are bartering. Ex. Food, Water, etc.

A country specializes in the production of goods for which it has a comparative advantage. We find that 1)some producers and consumers win, some lose, but overall the gains exceed the losses. 2)all producers win. 3)all consumers win. 4)producers win, consumers lose, but overall the gains exceed the losses.

1)some producers and consumers win, some lose, but overall the gains exceed the losses.

A factor that helps to determine the demand for the dollar in the foreign exchange market is 1)the expected future exchange rate. 2) the amount of U.S. imports. 3)the expected future interest rate. 4)the supply of U.S. dollars

1)the expected future exchange rate. Change of Demand: -World Demand for US Exports -US interest rate differential (US Interest Rate - Foreign Interest Rate) -Expected Future Exchange Rate

In the aggregate expenditure model, when real GDP is greater than aggregate planned expenditure 1)unplanned inventories are being accumulated. 2)inventories are being depleted. 3)this cannot happen, because the two variables are always equal. 4)inventories are not being changed.

1)unplanned inventories are being accumulated.

Which of the following does NOT describe a function of money? 1) Unit of Account 2) Hedge against inflation 3)Medium of Exchange 4)Store of Value

2) Hedge Against inflation The Four Types are: Medium of Exchange, Unit of Account, Store of Value, and Means of Deffered Payments.

The commercial banks on Sunny Island have checking deposits of $4 million, reserves of $600,000, and loans of $2.4 million. The desired reserve ratio is 10 percent. The banks have ________ of desired reserves and ________ of excess reserves. 1)$600,000; $0 2)$400,000; $200,000 3)$400,000; $600,000 4)$600,000; $200,000

2)$400,000; $200,000 Reserve Ration = Reserves/Total Deposits

If the pound-dollar exchange rate changes from £0.60 per dollar to £0.65 per dollar, then the pound has ________ against the dollar and the dollar has ________ against the pound. 1)depreciated; depreciated 2)appreciated; depreciated 3)appreciated; appreciated 4)depreciated; appreciated

2)appreciated; depreciated Appreciated .05 and dollar rose .05

A tariff ________ the quantity of the good imported and ________ the domestic price of the imported good. 1)decreases; decreases 2)decreases; increases 3)increases; lowers 4)does not change; increases

2)decreases; increases

The consumption function relates consumption expenditure to 1) the interest rate. 2)disposable income. 3) saving. 4)the price level.

2)disposable income.

Disposable income is 1)income minus saving. 2)income minus taxes 3) income plus transfer payments minus consumption expenditure. 4) total income divided by the price level.

2)income minus taxes

Compared to the situation before international trade, after the United States imports a good, then production in the United States ________ and consumption in the United States ________. 1)increases; increases 2)increases; decreases 3)decreases; increases 4) decreases; decreases

2)increases; decreases

The United States has a comparative advantage in producing cotton if the U.S. price of cotton before international trade is ________ the world price. 1)equal to 2)less than 3)greater than 4)not comparable to

2)less than

A decrease in the quantity of reserves held by commercial banks could be the result of 1)a decision by U.S. households to hold less currency. 2)the sale of government securities by the Federal Reserve. 3)a decrease in the government's budget deficit. 4) an increase in the exchange rate.

2)the sale of government securities by the Federal Reserve An open market sale of securities by the Fed decreases banks' reserves and increases banks' securities.

If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with 1)dollars 2)yuan, the Chinese currency. 3)international monetary credits. 4)euros, or any other third currency.

2)yuan, the Chinese currency. Whoever receives the money is paid in their currency.

The nation is divided into ________ Federal Reserve districts, each having a Federal Reserve Bank. 1)10 2)50 3)12 4)7

3) 12

An increase in real GDP leads to 1) a decrease aggregate planned expenditure. 2)no change in aggregate planned expenditure. 3) an increase in aggregate planned expenditure. 4)a change in aggregate planned expenditure but whether the change is an increase or a decrease depends on whether nominal GDP increases or decreases.

3) an increase in aggregate planned expenditure.

The Federal Reserve can influence the exchange rate by 1) changing interest rates 2)buying or selling dollars. 3)Both answers 1 and 2 are correct. 4)None of the above answers is correct

3)Both answers 1 and 2 are correct.

The Federal Reserve System 1)Regulates the nation's financial institutions 2)conducts the nation's monetary policy. 3)Both answers 1 and 2 are correct. 4)Neither answer 1 nor 2 are correct.

3)Both answers 1 and 2 are correct. The Fed regulates the commercial banks. Ex would be reserve ration. They also conduct the nations monetary policy. Ex. by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy.

If aggregate planned expenditure exceeds real GDP 1)firms are not maximizing their profits. 2)planned investment is greater than planned saving. 3)actual inventories decrease below their target. 4)planned consumption expenditure is less than actual consumption expenditure.

3)actual inventories decrease below their target.

Increasing a tariff will ________ the domestic quantity consumed of the good, while ________ the domestic production of the good. 1)increase; increasing 2)increase; decreasing 3)decrease; increasing 4)decrease; decreasing

3)decrease; increasing

In the very short term, planned investment ________ when GDP changes and planned consumption expenditure ________ when GDP changes. 1)changes; changes. 2)changes; does not change 3)does not change; changes 4)does not change; does not change

3)does not change; changes

The larger the value of U.S. imports, the greater the quantity of ________ causing the quantity supplied of dollars to ________. 1) U.S. dollars demanded; increase 2)U.S. dollars demanded; decrease 3)foreign currency demanded; increase 4)foreign currency demanded; decrease

3)foreign currency demanded; increase

M2_____. 1) does not include currency 2)does not include traveler's checks 3)is a broader measure of money than M1 4)does not include checking deposits held at banks

3)is a broader measure of money than M1 M2 includes M1 so 1), 2), and 4) are all wrong. M2 includes many other types of money that isn't directly usable: saving accounts, time deposits, and etc.

By definition, currency depreciation occurs when the value of 1)all currencies fall relative to gold. 2)one currency rises relative to another currency. 3)one currency falls relative to another currency. 4)gold falls relative to the value of currencies.

3)one currency falls relative to another currency.

The major role of a commercial bank is to 1) make mortgage loans. 2)sell shares and use the proceeds to buy stocks. 3)receive deposits and make loans. 4)restrain the growth of the quantity of money.

3)receive deposits and make loans. 3) Just makes the most sense, due to the fact that they are the two most used roles in commercial banks.

The difference between planned and unplanned spending is ________. 1)always negative 2)inventories 3)unplanned changes in inventories 4) always positive

3)unplanned changes in inventories

There is a movement along the consumption function if there is ________. 1)an increase in autonomous consumption 2)a decrease in the real interest rate 3)an increase in the expected future income 4) an increase in disposable income

4) an increase in disposable income

If aggregate planned expenditure is less than real GDP 1)real GDP will increase 2)real GDP remain unchanged. 3)real GDP will either decrease or increase, depending on the MPC. 4) inventories will increase above their target level and real GDP will decrease.

4) inventories will increase above their target level and real GDP will decrease.

Real GDP 1) is always greater then aggregate income. 2) is always less than aggregate income. 3)might be less than or more than aggregate income depending on consumption 4) is equal to aggregate income.

4) is equal to aggregate income.

If the desired reserve ratio is 3 percent and deposits totaled $575 billion, banks would hold 1)$534.75 in reserves. 2)$17.25 billion in excess reserves. 3)$1,725 billion in currency. 4)$17.25 billion in reserves

4)$17.25 billion in reserves 3% * 575 Just three percent of 575

In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent. The money multiplier equals ________. 1)2.18 2)5.0 3)3.33 4)3.0

4)3.0 MM = 1+current drain (c/d)/desired reserved ratio+currency drain Currency Drain = money in hands of people

The law of demand for dollars in the foreign exchange market means that the 1)lower the exchange rate, the greater the quantity of dollars demanded. 2)higher the exchange rate, the smaller the quantity of dollars demanded. 3)lower the exchange rate, the smaller the quantity of U.S. exports demanded. 4)Both answers 1 and 2 are correct.

4)Both answers 1 and 2 are correct. Inversely related; makes sense

The demand for dollars in the foreign exchange market will increase (so that the demand curve shifts rightward) if 1)the U.S. interest rate differential falls. 2)the expected future exchange rate falls. 3)the exchange rate for the dollar falls. 4)None of the above answers is correct.

4)None of the above answers is correct.

A tax that is imposed by the importing country when an imported good crosses its international boundary is called 1)an import quota. 2)dumping 3) a voluntary export restraint. 4)a tariff.

4)a tariff.

You withdraw $2,000 from your account. Your bank has a desired reserve ratio of 20 percent. This transaction, by itself, will directly reduce 1)the quantity of money by $1,600. 2)deposits by $1,600. 3)the quantity of money by $2,000. 4)deposits by $2,000.

4)deposits by $2,000.

In poorer countries, free trade ________ the demand for labor in these countries and ________ the wages paid in these countries. 1)decreases; lowers 2)decreases; raises 3) increases; lowers 4)increases; raises

4)increases; raises

The vertical distance between the 45-degree line and the consumption line represents 1) investment. 2) total consumption expenditure. 3) the difference between consumption expenditure and investment. 4)saving or dissaving.

4)saving or dissaving.

The marginal propensity to consume measures 1)how much of a given level of disposable income is consumed. 2)how much consumption expenditure occurs at the equilibrium level of income. 3)what percentage of disposable income goes to saving. 4)the fraction of a change in disposable income that is spent on consumption expenditure.

4)the fraction of a change in disposable income that is spent on consumption expenditure.

Inflation Rate

CPI this year - CPI previous year/CPI Previous year x100

Store of Value:

Cost of storing is low

M1 includes

Currency, Coins, Checking account, and travelers checks

Medium of Exchange:

Easy to Carry, hard to replicate

MV=PQ

M = Quantity of Money, V = Velocity of Exchange, P = Price Level, Q = Real GPD PQ = Nominal GDP

Unit of Account (standard of value)

Money servers as a measure of all goods and services

Real Exchante Rate Equation

RER = ER × (P/P*). Where P = price level and P+ = foreign price level

Means of deffered payments

Value of money is stable, relative supply,