Macro test 3
When Mexico decreases the quantity of money, Mexico's aggregate demand ______.
decreases and its AD curve shifts leftward
Japan's current exchange rate policy is ______.
flexible
A government budget surplus _______ the real interest rate, decreases ______.
lowers; private saving, and increases investment
Some events that could have changed aggregate demand from AD0 to AD1 are
..increase ..increase
Why are checks, debit cards, and credit cards not money?
Checks and debit cards are not money. They are instructions to the bank to transfer money from one account to another. A credit card is not money. It is an ID card that allows you to take out a loan.
explain the flows of funds that finance business investment.
Funds from household saving, the government budget surplus, and the rest of the world flow through financial markets and institutions to firms who borrow the funds for investment.
What makes an exchange rate hard to predict?
Influences of expectations and the constant arrival of news about the influences on supply and demand, make day-to-day and week-to-week changes in the exchange rate difficult to predict.
Based on this news clip, Paul Krugman most likely follows the ______ school of thought and Ben Bernanke most likely follows the ______ school of thought.
Keynesian or new Keynesian; Keynesian or new Keynesian
Based on this news clip, Barack Obama most likely follows the ______ school of thought and John McCain most likely follows the ______ school of thought.
Keynesian or new Keynesian; classical or new classical
Treasury Secretary Timothy Geithner most likely follows the _______.
Keynesian school of thought if he is recommending an active policy of tax cuts to combat the recession
Choose the correct statements. 1. Gum does not serve as money because it is not a good store of value. 2. Most people know the price of gum comma so it could serve as money because it is a unit of account. 3. Because most people buy gum comma it can be used as money because it is a useful tool in barter. 4. Gum does not serve as money because it is not generally accepted in exchange for goods and services.
Statements 1 and 4 are correct.
Choose the correct statement about interest rate parity.
adjusted for risk...
Mexican goods might become more expensive to U.S. consumers because ______.
an appreciation of the Mexican peso against the U.S. dollar means that the U.S. dollar depreciates against the Mexican peso
The effect of China's choice of exchange rate regime is _______.
an increase in U.S. dollar reserves when China's target rate is above the equilibrium exchange rate and a decrease in U.S. dollar reserves when China's target rate is below the equilibrium exchange rate
The politician wants a ______ in the short run. This policy would have no effect on the exchange rate in the long run because in the long run ______.
crawling peg; the price level and the nominal exchange rate are determined together
The functions of depository institutions include _______.
creating liquidity
The main components of money in the United States today are ______.
currency and deposits at banks and other depository institutions
The ______ account records receipts from exports of goods and services sold abroad, payments for imports of goods and services from abroad, and ______.
current; net interest income paid abroad and net transfers
First Call, Inc., a smartphone company, plans to build a factorylong dashone that costs $8 million if the real interest rate is 6 percent a year; a larger factory that costs $10 million if the real interest rate is 5 percent a year; or a smaller one that costs $6 million if the real interest rate is 7 percent a year.
decreases, a leftward shift of
Aggregate demand _______ when an increase in interest rates occurs. Aggregate demand _______ when an increase in expected profits occurs.
decreases; increases
A rise in wages in China _______ .
decreases China's short-run aggregate supply and the quantity of real GDP supplied does not change This is the correct answer.B.
The "average overall increase across the board" wage increase _______.
decreases short-run aggregate supply because it increases firms' costs
In the long run, the real exchange rate is determined by ______ and the nominal exchange rate is determined by ______.
demand and supply in the markets for goods and services; the quantities of money in two countries
In the long run, an increase in the quantity of money _______ the interest rate.
does not change
If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long-run
interest rate parity is __________. When this condition does not hold _______.
equal rates of return across currencies; traders take actions within seconds that drive the exchange rate back to its interest rate parity level
Purchasing power parity is _______.
equal value of money
The bank manager is wrong because ______.
every new loan creates a new deposit, and a new deposit is new money
The Fed is the lender of last resort, which means _______.
f depository institutions are short of reserves, they can borrow from the Fed
If the interest rate is less than 4 percent a year, the price of a bond ______, and the interest rate ______.
falls, rises
The price of a bond ______ and the interest rate in the short run ______.
falls, rises
The loanable funds market is the aggregate of all the individual _____ markets.
financial
A depository institution is a _______.
financial firm that takes deposits from households and firms
In the 1950s and 1960s, the United States operated a ______. Now the United States operates a ______.
fixed exchange rate; flexible exchange rate
A crawling peg exchange rate policy is one that _______. A crawling peg exchange rate is achieved _______.
follows a path determined by a decision of the government or the central bank; by central bank intervention in the foreign exchange market
The official settlements account records the change in U.S. official reserves, which are the government's holdings of ______.
foreign currency; negative
The _______, the greater is the amount that a household decides to save.
greater a household's disposable income and the smaller a household's expected future income
The loanable funds market is ______.
he aggregate of all the individual financial markets
The interest rate moves inversely to price because _______.
if the price of a Treasury bond rises, other things remaining the same, the interest rate falls because the interest payment is a smaller percentage of the Treasury bond price
When Canada sets new environmental standards that require power utilities to upgrade their production facilities, Canada's aggregate demand _______.
increases
In the short run, aggregate demand _______.
increases because interest rates fall and it is it easier to get a loan to buy homes and large consumer goods
Starting from a full-employment equilibrium, an increase in aggregate demand ______, and creates ______ gap.
increases real GDP above potential GDP; an inflationary This is the correct answer.
A government budget deficit _______ loanable funds.
increases the demand for
A government budget surplus _______ loanable funds.
increases the supply of
Lowering the required reserve ratio ______, which ______ the quantity of loans that China's banks can make and the quantity of money created. A. decreases the currency drain ratio; increases
increases unplanned reserves; increases
The increase in investment ______ aggregate demand. The decrease in government spending _______ aggregate demand.
increases; decreases
A rise in labor productivity _______.
increases long-run aggregate supply and short-run aggregate supply.
The Fed's three policy tools are _______
open market operations, last resort loans, and the required reserve ratio
The U.S. dollar exchange rate fluctuates in part because a change in the U.S. interest rate differential changes the demand for U.S. dollars and the supply of U.S. dollars in ______ and a change in the expected future exchange rate changes the demand for U.S. dollars and the supply of U.S. dollars in ______.
opposite directions; opposite directions
Examples of physical capital are ______. Examples of financial capital are ______.
ovens used by Pizza Hut and lawn mowers used by Larry's Mowing; bonds issued by Wal-Mart and stocks issued by Boeing
The "capital" that is referred to in the news clip is _________.
owners' investment in the bank
Starting from a short-run equilibrium, when the Fed decreases the quantity of money, _______
people enter the loanable funds market and sell bonds
Monetarist macroeconomists recommend ______.
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
A recessionary gap eventually emerges even if aggregate demand remains constant because over time ______.
potential GDP increases
Net present value is the _______.
present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision
The Fed "counters disorderly conditions in exchange markets" by _______.
purchasing foreign reserves, which lowers the U.S. exchange rate when the demand for dollars dramatically increases
If a shortage of U.S. dollars occurs in the foreign exchange market, the _______ and the exchange rate _______.
quantity of U.S. dollars demanded decreases and the quantity of U.S. dollars supplied increases; rises
If a surplus of U.S. dollars occurs in the foreign exchange market, the _______ and the exchange rate _______.
quantity of U.S. dollars demanded increases and the quantity of U.S. dollars supplied decreases; falls
What happened to the price of a bond between 2005 and 2009? How do you know? The price of a bond _____ between 2005 and 2009 because the _____.
remained unchanged; nominal interest rate remained unchanged This is the correct answer.
The main functions of the Federal Open Market Committee are to _______.
review the state of the economy and determine the monetary policy actions to be taken by the N.Y. Fed
It is expected that in the future the exchange rate will ______. The interest rate differential is ______.
rise, negitive
If the interest rate is greater than 4 percent a year, the price of a bond ______, and the interest rate ______.
rises, falls
To preserve purchasing power parity, the exchange rate ______. If investment from foreigners increases due to the rapid economic growth, the current account balance is becoming more ______.
rises, negitive
The demand for loanable funds increases and the supply of loanable funds decreases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______.
rises; increases, decreases, or remains the same
The supply of loanable funds is determined by the _________. The supply of loanable funds changes when _______.
saving decisions of households, which are influenced by the real interest rate, disposable income, expected future income, wealth, and default risk; disposable income, expected future income, wealth, or default risk change
According to the Ricardo-Barro effect, when a government budget deficit occurs today, ______.
saving increases, the supply of loanable funds increases, and the real interest rate does not change
When fuel prices rise _______. When the price level in India increases _______.
short-run aggregate supply decreases; the quantity of real GDP supplied increases
The long-run historical evidence and international evidence show us that the relationship between money growth and the inflation rate ______.
supports the quantity theory, but the correlation is not perfect
State the financial decision rule: If the net present value is positive _______ and if the net present value is negative _______.
take the action; do not take the action
if a U.K. bank deposit earns 4 percent a year and a U.S. bank deposit earns 5 percent a year, then people expect that ______.
the U.S. dollar will depreciate by 1 percent a year
A lower required reserve ratio increases bank profits because ______.
the banks hold fewer reserves
A currency can experience short-run fluctuations because ______. The Fed counters the short-run fluctuations by _________.
the currency can fluctuate based on beliefs about the future exchange rate; buying and selling U.S. dollars and foreign exchange
In the short run, the nominal exchange rate is determined by ______. And in the short run ______.
the demand for U.S. dollars and the supply of U.S. dollars in the foreign exchange market; a change in the nominal exchange rate brings an equivalent change in the real exchange rate.
Aggregate demand will increase if ______.
the effect of the tax rebates and the change in the foreign exchange rate outweigh the effect of the housing, credit, and financial crises
The main influences on the supply of U.S. dollars in the foreign exchange market include ______.
the exchange rate, U.S. demand for imports, interest rates in the United States and other countries, and the expected future exchange rate
The main influences on the demand for U.S. dollars in the foreign exchange market include ______.
the exchange rate, world demand for U.S. exports, interest rates in the United States and other countries, and the expected future exchange rate
The velocity of circulation is the average number of times a dollar of money is used annually to buy ______. The formula used to measure the velocity of circulation, V, is ______, where P is the price level, Y is real GDP, and M is the quantity of money.
the goods and services that make up GDP; V = (P times Y) divided by M
Arbitrage in the foreign exchange market achieves _______.
the law of one price, no round-trip profit, interest rate parity, and purchasing power parity
The quantity of money that the banking system can create is limited by _______.
the monetary base, desired reserves, and desired currency holdings
Arbitrage is _______.
the practice of seeking to profit by buying in one market and selling for a higher price in another related market
The aggregate demand curve shows the relationship between the quantity of real GDP demanded and ______ when everything else remains the same.
the price level
A movement along the aggregate demand curve occurs if _______.
the price level changes and all other factors remain unchanged
The equilibrium exchange rate is the exchange rate at which _______.
the quantity of dollars demanded equals the quantity of dollars supplied
The demand for loanable funds is the relationship between _____ demanded and the _____ when all other influences on borrowing plans remain the same.
the quantity of loanable funds; real interest rate
The supply of loanable funds is the relationship between _____ supplied and the _____ when all other influences on lending plans remain the same.
the quantity of loanable funds; real interest rate
When the price level in Mexico falls, _______.
the quantity of real GDP demanded in Mexico increases
The real interest rate is the opportunity cost of loanable funds because ______.
the real interest paid on borrowed funds is the opportunity cost of borrowing and the real interest rate forgone is the opportunity cost of not saving or not lending those funds
The demand for loanable funds is determined by ______. The demand for loanable funds changes when ______ changes.
the real interest rate and expected profit; expected profit
Requirements to hold more capital make banks safer because _______.
the requirement to hold more capital makes the possibility of failure less likely
Gross investment is ______. Net investment is ______.
the total amount spent on new capital; the change in the value of capital
Depository institutions minimize the cost of monitoring borrowers by ______.
using specialized resources that have a much lower cost than what households would incur if they had to undertake the activity individually
When the U.S. economy goes into a recession, ______.
Mexico's exports to the United States decrease, Mexico's aggregate demand decreases, and Mexico's AD curve shifts leftward
Suppose that purchasing power parity does not hold. If all (or most) prices have increased in the United States and not increased in Japan, then people will generally expect that the foreign exchange value of the dollar will ______. The demand for dollars ______.
fall; decreases and the supply of dollars increases
Between 1997 and 2005, China operated a _______ exchange rate. Since 2005, China has operated a _________ exchange rate.
fixed; crawling peg
The news clip states that huge trade deficits "seem like a pretty good indication that the dollar was overvalued in global currency markets and needed to come down". Is this statement accurate? Explain.
inaccurate; the current account balance is determined by the private sector balance and the government sector balance
The fall in the average weekly wage rate ______ short-run aggregate supply and ______ long-run aggregate supply.
increases; does not change
The fall in the minimum wage ______ short-run aggregate supply and ______ long-run aggregate supply.
increases; increases
The increase in the personal consumption expenditures ______ aggregate demand. The increase in exports ______ aggregate demand.
increases; increases
When the government of Canada cuts income taxes, Canada's aggregate demand _______. When the United States experiences strong economic growth, Canada's aggregate demand _______.
increases; increases
If the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
increases; short-run
If potential GDP increases, what happens to aggregate supply? When potential GDP increases, ______.
long-run aggregate supply and short-run aggregate supply increase. The LAS and the SAS curve shift rightward
A government budget deficit _______ the real interest rate, increases ______.
raises; private saving, and decreases investment
A government budget deficit ______ the real interest rate because ______.
raises; the demand for loanable funds increases
The demand for loanable funds increases and the supply of loanable funds increases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______.
rises, falls, or remains the same; increases
In the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to a full-employment equilibrium.
rises; decreases
The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full employment
The defining feature of the monetarist view of macroeconomics is that the economy is______.
. self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
Choose the statement that is correct.
A classical macroeconomist and a monetarist recommend that taxes be kept low to avoid disincentive effects for all of the events and a Keynesian recommends active fiscal policy and monetary policy to offset all events.
The central bank of the United States is the ______.
Federal Reserve System
The monetary base is the sum of _______. The monetary base is equal to _______.
Federal Reserve notes, coins, and depository institution deposits at the Fed; the liabilities of the Fed plus coins issued by the Treasur
Explain the flows of funds that finance business investment.
Funds from household saving, the government budget surplus, and the rest of the world flow through financial markets and institutions to firms who borrow the funds for investment.
The two main official measures of money in the United States today are ______. The two main official measures of money in the United States ______ really money.
M1 and M2; are
The equation of exchange is ______ and it is true ______.
MV = PY; by definition
Net exports equals ______.
T minus G) + (S minus I)
Describe the relationship between the price of a treasury bond and its interest rate.
The interest rate is a percentage of the price of the Treasury bond.
Define and distinguish between future value and present value.
The present value of a future dollar is the amount that will grow to be as large as that future value when the interest that it will earn is considered.
The ______ account records ______ U.S. investment abroad.
capital and financial; foreign investment in the United States minus
Depository institutions have made innovations that have resulted in _______.
checking deposits at thrift institutions becoming an increasing percentage of M1
Firms make investment decisions by _______.
comparing the expected profit with the real interest rate and making the investment if the project has a positive net present value
The debtor nation status of the United States would be a concern if the borrowed funds were used to finance ______.
consumption
China makes its choice of exchange rate regimes to _______.
control its inflation
Households preferred to buy corporate equities rather than bonds because ______.
corporate equities deliver capital gains, which increases wealth
If the government sector deficit increases, with no change in the private sector surplus, net exports ______.
decrease
A fall in the expected future exchange rate ______ the demand for U.S. dollars. An increase in the U.S. demand for imports _______ the demand for U.S. dollars.
decrease, does not change
A rise in the expected future exchange rate ______ the supply of U.S. dollars. An increase in the world demand for U.S. exports ______ the supply of U.S. dollars.
decrease, does not change
What makes the supply of U.S. dollars change? A decrease in U.S. demand for imports ______ the supply of U.S. dollars. A fall in the U.S. interest rate differential ______ the supply of U.S. dollars
decrease, increase
a decrease in world demand for U.S. exports ______ the demand for U.S. dollars. A rise in the U.S. interest rate differential ______ the demand for U.S. dollars
decrease, increase
U.S. household income has grown considerably since 1984. U.S. saving has ______ because wealth has ______.
decreased; increased due to capital gains
Event 3 ______.
decreases aggregate demand
Event 1 ______. Event 2 ______.
decreases aggregate demand; decreases short-run aggregate supply
The requirement to hold more capital can make financial institutions safer because by holding more capital, a financial institution ______.
decreases its risk of insolvency
A rise in the wage rate _______.
decreases short-run aggregate supply and does not change long-run aggregate supply
The central bank of the United States performs many functions, one of which is that it _______.
is a public authority that regulates a nation's depository institutions
A flexible exchange rate is one that _______. It works _______.
is determined by demand and supply in the foreign exchange market; with no direct intervention by the central bank
A fixed exchange rate is one that _______. A fixed exchange rate is achieved _______.
is set by the government or the central bank; by central bank intervention in the foreign exchange market
During times of uncertainty, it might be necessary for a bank to hold large cash reserves and to have a large percentage of its assets purchased by its own capital because ______.
its depositors may decide to make large withdrawals
To increase its assets to $2.3 trillion in 2008, the Fed used ______.
last resort loans
The three main types of markets for financial capital are _______.
loan markets, bond markets, and stock markets
The quantity theory of money is that in the _______, an increase in the quantity of money brings an equal percentage increase in the _______.
long run; increase in the price level
The exports effect is the result that the lower the exchange rate, other things remaining the same, the ______.
lower are the prices of U.S.-produced goods and services to foreigners and the greater is the volume of U.S. exports
The imports effect is the result that the higher the exchange rate, other things remaining the same, the ______.
lower are the prices of foreign-produced goods and services to Americans and the greater is the volume of U.S. imports
The Federal Open Market Committee is the _______.
main policy-making organ of the Federal Reserve System
How do banks create money?
making loans
Depository institutions pool risk by using funds obtained from ______ depositors to make loans to ______ borrowers.
many, many
Something is money if it is a commodity or token that is generally acceptable as a ______.
means of payment
The required reserve ratio is the ______
minimum percentage of deposits that depository institutions are required to hold as reserves
The main influences on the quantity of real money that people and businesses plan to hold include the _______.
nominal interest rate, real GDP, and financial innovation but the quantity of real money demanded is independent of the price level
Your loan to pay your college tuition is _______. U.S. dollar bills in your wallet are _______
not money, money
Your Visa card is _______. The check you have just written to pay for your rent is _______
not money, not money
The aggregate demand curve slopes downward because _______.
of the wealth effect and the substitution effect
The Fed's policy tools include _______.
open market operations, last resort loans, and required reserve ratio
Depository institutions balance risk and return by _______.
placing some funds into safe low interest-earning assets and other funds into high-interest risky assets
Following the change in aggregate demand, the new equilibrium is at ______.
point C This is the correct answer.
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
The crowding-out effect is the tendency for a government budget deficit to ______ the real interest rate and decrease ______.
raise; investment
The defining feature of the Keynesian view of macroeconomics is that the economy is ______
rarely at full employment
In the short run, ______ and ______ adjusts to achieve equilibrium.
real GDP determines the demand for money curve and the Fed determines the quantity of real money supplied; the nominal interest rate
The risk that a borrower, also known as a creditor, might not _____ is called credit risk or default risk.
repay a loan
Physical capital is ______. Financial capital is ______.
the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services; the funds that firms use to buy physical capital
Explain why a current account deficit "must be financed by capital inflows." Under what circumstances should the debtor nation status of the United States be a concern? A current account deficit "must be financed by capital inflows" because _______.
to pay for the U.S. current account deficit, the United States must either borrow more from abroad than we lend abroad or use U.S. official reserves
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ potential GDP.
increases; decreases real GDP below
An open market purchase ______ the monetary base. An open market sale ______ the monetary base.
increases, decreases
Choose the correct statement.
The "Mexican peso is gaining on the greenback" because currency investors expect the future Mexican exchange rate to rise.
Explain the relationship between asset prices and the interest rate.
When the price of an asset rises, the interest rate falls, everything else remaining the same.
Using a commodity as money creates problems because ______.
a commodity is bulky and its value changes over time
A macroeconomic equilibrium in which real GDP equals potential GDP is _____ equilibrium. And one in which real GDP exceeds potential GDP is _____ equilibrium.
a full-employment; an above full-employment
Economic growth results from ______.
a growing supply of labor and increasing labor productivity, which increase long-run aggregate supply
A rise in the money wage rate with no change in potential GDP creates ______.
a leftward shift of the SAS curve and no change in the LAS curve
Money serves the functions of _______.
a medium of exchange, a unit of account, and a store of value
Inflation results from ______.
a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate sup
If potential GDP is $1 trillion, the economy has moved to _______ equilibrium.
an above full-employment
The financial institutions that the G-20 might require to hold more capital are ______. The "capital" referred to in the news clip is ______.
banks and insurance companies; the institutions' own funds
A depository institution creates liquidity by ______.
borrowing short and lending long
