EC 309- Test 2 Study Guide

A bank balance sheet consists of: Deposits: 1,000 Reserves: 100 Securities: 400 Debt: 500 Loans: 2,000 What is the value of bank capital?

+1,000

All of the following are costs of fully expected inflation except that expected inflation: -causes lower real wages -leads to shoeleather costs -increases menu costs -leads to taxing of nominal capital gains that are not real

-causes lower real wages (nominal)

If the quantity of real money balances if kY, where k is constant, then velocity is:

1/k

If the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is:

10%

If the rate of job separation is 0.02 per month and the rate of job finding is 0.10 per month, what is the natural rate of unemployment?

16.7%

Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and the currency-deposit ratio (cr) is 0.1. a. what is the money supply? b. if rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply? c. if rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?

a. $550 billion b. $367 billion c. $400 billion

The Federal Reserve's tools to control the money supply include: open-market operations, the discount rate, and interest payments on reserves. a. how should each instrument be changed if the Fed wishes to decrease the money supply? b. will the change affect the monetary base and/or the money multiplier?

a. open market sales, increase discount rate, increase interest payments on reserves b. both

Unions contribute to structural unemployment when collective bargaining results in wages:

above the equilibrium level

In a country in a gold standard, the quantity of money is determined by the

amount of gold

Economists use the term money to refer to

assets used for transactions

A country that is on a gold standard primarily uses

commodity money

The money supply will decrease if the:

currency-deposit ratio increases

If the Federal Reserve wishes to increase the money supply, it should

decrease the discount rate

When the Fed makes an open-market sale, it

decreases the monetary base (B)

When the Fed decreases the interest rate paid on reserves, it

decreases the reserve deposit ratio (rr)

Liabilities of banks include

demand deposits

The earned income tax credit:

does not raise labor costs

When the aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price (P) along the vertical axis, if the money supply is decreased, the the aggregate demand curve will shift:

downward and to the left

A spell of unemployment begins when a person leaves their job or:

enters the labor force

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier.

fewer; decrease

Unemployment caused by the time it takes workers to search for a job is called

frictional unemployment

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.

greater; greater

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have ____ inflation.

high

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have _____ rates of inflation and decades of low money growth tended to have ______ rates of inflation.

high; low

According to the classical theory of money, inflation does not make workers poorer because wages increase

in proportion to the increase in the overall price level

If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of labor will _____ the number unemployed

increase

If many banks fail, this is likely to:

increase the ratio of currency to deposits

During the past 50 years the natural rate of unemployment in the US _______ during the 1970s and 1980s, compared to the 1950s and 1960s, and then ______ during the 1990s, compared to the previous two decades.

increased; decreased

When the Fed increases the interest rate paid on reserves, it

increases the reserve deposit ratio (rr)

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

increases the reserve deposit ratio (rr)

Inflation _____ the variability of relative prices and ______ allocative efficiency

increases; decreases

According to the quantity theory of money, if money is growing at a 10% rate and real output is growing at a 3% rate, but velocity is growing at increasingly faster rates over time as a result of financial innovations, the rate of inflation must be:

increasing

The unemployment insurance system may be desirable because unemployment insurance:

induces workers to reject unattractive job offers

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1% increase in money growth will lead to rises in:

inflation of 1% and the nominal interest rate of 1%

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the

inflation rate expected inflation rate

The income velocity of money

is defined by the identity MV=PY

When the Fed increases the discount rate, it

is likely to decrease the monetary base (B)

In the United States, the money supply is determined:

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

In 1974 in the US, most spells of unemployment lasted:

less than one month, yet most of the weeks of unemployment occurred in spells lasting two or more months

The banking system creates

liquidity

To increase the money multiplier, the Fed can:

lower the interest rate paid on reserves

Sectoral shifts:

make frictional unemployment inevitable

The money supply will increase if the :

monetary base increases

Open-market operations change the ________; changes in interest rates paid on reserves change the _______; and changes in the discount rate change the ________.

monetary base; money multiplier; monetary bade

When insiders have a much greater impact on the wage bargaining process than do outsiders, the negotiated wage is likely to be ______ the equilibrium wage.

much greater than

The real interest rate is equal to the

nominal interest rate minus the inflation rate

Firms currently have incentives to temporarily lay off workers because firms typically are charged for ______ of workers' unemployment benefits

only a part

The rate of inflation is the

percentage change in the level of prices

Wage rigidity:

prevents labor demand and labor supply from reaching the equilibrium level

Which would most likely be called hyperinflation? -Price increases averaged 300% per year -The inflation rate was 10% per year -Real GDP grew at a rate of 12% over a year -A stock market index rose by 1,000 points over a year

price increases averaged 300% per year

The definition of the transactions velocity of money is:

prices multiplied by transactions divided by money

In the short run, a favorable supply shock causes

prices to fall and output to rise

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumers that the:

real interest rate is constant

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the

real interest rate is constant

When there is structural unemployment, the real wage is:

rigid at a level above the market-clearing level

Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be ________ securities.

riskier and longer-term

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market _____ and ______ the interest rate paid on bank reserves.

sales; raise

Centralized union wage bargaining with government intervention in Sweden gives relatively more influence to ______, while firm-level union wage bargaining in the US gives relatively more influence to _________.

sectoral shirts; efficiency wages

The inconvenience associated with reducing money holdings to avoid the inflation tax is called

shoeleather costs

A variable rate of inflation is undesirable because:

shoeleather costs are greater under variable inflation than under constant inflation

The unemployment resulting from wage rigidity and job rationing is called:

structural unemployment

The cost of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors

The quantity of money in the US is essentially controlled by

the federal reserve

High-powered money is another name for

the monetary base

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then:

the money supply decreases

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases

If the monetary base fell and the currency deposit ratio rose but the reserve deposit ratio remained the same, then:

the money supply would fall, but not by as much as it would have fallen if the reserve deposit ratio would have risen

If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then:

the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen

In a steady state:

the number of people finding jobs equals the number of people losing jobs

When the real wage is above the level that equilibrates supply and demand:

the quantity of labor supplied exceeds the quantity of labor demanded

Frictional unemployment is unemployment caused by

the time it takes workers to search for a job

The macroeconomic problem that affects individuals most directly and severely is:

unemployment

The recent reduced demand for unskilled workers relative to skilled workers has led to ______ for unskilled workers in Europe compared to _____ for unskilled workers in the US.

unemployment; lower wages

All of the following are considered major functions of money except as a: -medium of exchange -way to display wealth -unit of account -store of value

way to display wealth

According to studies of individual unemployed workers, these workers are most likely to find a job:

within a few weeks of their unemployment insurance running out

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is _______ percent.

7

Which is an example of frictional unemployment?

Dave searches for a new job after voluntarily moving to San Diego

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect _______ to increase.

The money supply

If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current unemployment rate is 0.10, then the current unemployment rate is _______ the equilibrium rate, and in the next period it will move _____ the equilibrium rate.

below; toward