Ch 3 and 4 Econ 325

4. All of the following are considered major functions of money except as a

b. way to display wealth

In equilibrium, total investment equals:

c. National Saving

17. Checking account balances that are linked to debit cards are included in:

c. both M1 and M2.

An example of increasing returns to scale is when capital and labor inputs:

c. both increase 5 percent and output increases 10 percent

8. Demand deposits are funds held in:

c. checking accounts.

The demand for loanable funds is equivalent to:

d. Investment

14. Excess reserves are reserves that banks keep:

d. above the legally required amount.

7. Credit card balances are included in:

d. neither M1 nor M2.

The neoclassical theory of distribution explains the allocation of:

*c. Income among factors of production

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving:

**b. rises by $60b Private Saving (Y-T)-C: ^ T = disposable income (Y-T) decreases by $100b; C decreases by $60b; -C 0.6 (Y-T decreases 100b) = C decr by 0.6*100b which is $60b. Public saving (T-G): T^ by $100b= public saving ^ by $100b National Saving (Pr+Pub): $60b ^ in Nat Saving S= Y no Δ - C decr by $60b - G no Δ= $60b RISE T^= S^= r decr= I ^

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. In addition, assume G=0. In this case, equilibrium investment is:

a. 1500 I=S S=Y-C-G =5000- (5000+0.6(5000))=1500

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + 0.2Y, and Y = 50K0.5L0.5, where K = 100. If L increases from 100 to 144, then consumption increases by: a. 560.

a. 560

31. As the U.S. economy approached the millennium, January 1, 2000, many people cautiously began to hold larger than normal quantities of currency as protection against a possible disruption of banking services that could result from computer glitches. a. How did this greater preference for currency affect the money supply? b. How could the Federal Reserve offset such an increase in currency preferences?

a. More people held currency (↑cr), which reduced m and money supply b. To offset this increase in cr, the FED can increase the B to offset the fall in m (which increases/evens out M).

In the classical model with fixed income, if the interest rate is too low, then investment is too ______, and the demand for output ______ the supply.

a. high; exceeds

According to the model developed in Chapter 3, when government spending increases but taxes stay the same, interest rates:

a. increase G ^ T stay the same = r ^

Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005.

a. increased

25. Money market mutual fund shares are included in:

b. M2 only.

13. Based on historical observations, if many banks fail, this is likely to:

b. cause surviving banks to raise their ratios of reserves to deposits.

5. Payment is deferred by using _______, but immediate access to funds occurs when using ______.

b. credit cards; debit cards

If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then saving

b. decreases by 0.15 units

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a ______ interest rate and ______ in the quantity of investment.

b. higher; an increase

The production function feature called "constant returns to scale" means that if we:

b. increase capital and labor by 10 percent each, we increase output by 10 percent.

18. In 1932, the U.S. government imposed a 2-cent tax on checks written on deposits in bank accounts. This action would be expected to ______ the currency-deposit ratio and ______ the money supply.

b. increase; decrease

16. In a system with 100-percent-reserve banking:

b. no banks can make loans using deposits made at their institutions.

Since 1960, the U.S. ratio of labor income to total income has:

b. remained relatively steady

In the classical model with fixed income, if households want to save more than firms want to invest, then:

b. the interest rate falls

The real rental price of capital is the price per unit of capital measured in:

b. units of output

2. People use money as a unit of account when they:

b. use money as a measure of economic transactions.

15. In the United States, bank reserves consist of:

b. vault cash and deposits at the Federal Reserve.

26. If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals:

c. $600 billion.

When the demand for loanable funds exceeds the supply of loanable funds, households want to save ______ than firms want to invest, and the interest rate ______.

c. less; rises

The supply and demand for loanable funds determine the:

c. real interest rate

In a neoclassical economy, assume that the government lowers both government spending and taxes by $100b. If the marginal propensity to consume is 0.6, investment will:

c. rise by $40b

12. In the United States, monetary policy is conducted by:

c. the Federal Reserve

20. If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals:

d. 2.5

According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal:

d. Total output

29. A trade in a barter economy requires:

d. a double coincidence of wants.

3. In a system with fractional-reserve banking:

d. all banks must hold reserves equal to a fraction of their deposits.

11. Bank reserves equal:

d. deposits that banks have received but have not lent out.

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases.

d. downward; more

What determines the ratio of the wage to rental rate of capital in a competitive, profit-maximizing economy with constant returns to scale?

d. the marginal productivity of labor relative to the marginal productivity of capital

24. The ratio of the money supply to the monetary base is called:

d. the money multiplier.

19. Currency equals:

d. the sum of coins and paper money.

23. When the Fed increases the interest rate paid on reserves, it:

**a. increases the reserve-deposit ratio (rr). r on reserves↑ = ↑ rr (bc Fed incentivizes banks to keep more money in reserves rather than lending it out to try and generate more $)

27. The reserve-deposit ratio is determined by:

**b. business policies of banks and the laws regulating banks.

6. When the Fed decreases the interest rate paid on reserves, it:

**b. decreases the reserve-deposit ratio (rr). int rate↓ = rr↓ (less $ held in reserves bc less of an incentive to hold it rather than make more $ off lending it out)

21. The use of borrowed funds to supplement existing funds for purposes of investment is called:

**b. leverage

28. The amount of capital that banks are required to hold depends on the:

**b. riskiness of the bank's assets.

30. The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the _____ the monetary base and the _____ the money supply.

**c. greater; greater

In a Cobb-Douglas production function, the marginal product of capital will increase if:

a. MPK will increase if the quantity of labor increases (because **Watch video

10. A country that is on a gold standard uses:

a. commodity money

22. Banks create money in:

b. a fractional-reserve banking system but not in a 100-percent-reserve banking system.

9. Open-market operations change the ______; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the ______.

**c. monetary base; money multiplier; monetary base Open Market Operations: B (B=C+R) Interest Rate on Reserves: m (m = cr+1 / cr+rr) Discount Rate: B (B=C+R)

When there is a fixed supply of loanable funds, an increase in investment demand results in:

a. a higher interest rate

1. To increase the monetary base, the Fed can:

a. conduct open-market purchases.

Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed. In addition, the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: Y = AKα L(1 - α) Y = C + I + G C = C (Y - T) I = I(r) S=Y-C-G Suggest at least two policies that a government could use to increase the equilibrium quantity of investment in the economy and carefully explain how these policies produce this result.

1. Lowering government spending would increase National Saving (because S=Y-C-G), which would increase q of Investment 2. Increasing taxes would reduce consumption (ppl won't be willing to spend as much if they're taxed more) and therefore increase National Saving, which would increase q of investment