ECON 202 Quiz 3

Kaitlyn purchased one share of Northwest Energy stock for $200; one year later she sold that share for $400. The inflation rate over the year was 50 percent. The tax rate on nominal capital gains is 50 percent. What was the tax on Kaitlyn's capital gain?

$100

if the reserve ratio is 10%, $1,400 of additional reserves can create up to

$14,000 of new money

Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves?

$27,000

If real output in an economy is 1000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, the according to the quantity equation, the average price level is

1.20

Based on the quantity equation, if M=150, V=4, and Y=300, then P=

2

During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits.

Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease.

people hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?

They fall $200 million

During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1.5 percent, but people had been expecting 1 percent . This difference between actual and expected inflation

Transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected.

Suppose that M is fixed. According to the quantity equation, which of the following would make the price level higher?

Y falls or V rises

fractional-reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

capital requirement

a government regulation specifying a minimum amount of bank capital

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

Central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

store of value

an item that people can use to transfer purchasing power from the present to the future

demand deposits

balances in bank accounts that depositors can access on demand by writing a check

if the fed sells bonds, which of the following lists has only actions that would each counter the effect on the money supply

decrease reserve requirements, decrease the discount rate

In a fractional-reserve banking system, an increase in reserve requirements

decreases both the money multiplier and the money supply

reserves

deposits that banks have received but have not loaned out

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

falls, bc one unit of currency buys fewer ice cream cones

All fed purchases and sales of

government bonds are conducted at the New York fed's trading desk

According to monetary neutrality and the fisher effect, an increase in the money supply growth rate eventually increases

inflation and nominal interest rates, but does not change real interest rates

Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory,

inflation averaged 5% per year and the real rate of return was 4%

A bank has a 20 percent reserve requirement, $8,000 in loans, and has loaned out all it can given the reserve requirement.

it has $10,000 in deposits

If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $1,000,

it will be able to make new loans up to a maximum of $880

A reduction in the inflation rate would make relative prices

less variable, making it more likely that resources will be allocated to their best use

which of the following is an asset of a bank and a liability for its customers

loans to its customers but not the deposits of its customers

the costs of changing price tags and price listings are known as

menu costs

A central bank's setting (or altering) of the money supply is known as

monetary policy

commodity money

money that takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value that is used as money because of government decree

Most economists believe the principle of monetary neutrality is

mostly relevant to the long run

Credit card limits are included in

neither m1 or m2

fiat money has

no intrinsic value

In the US, taxes on capital gains are computed using

nominal gains. This is one way by which higher inflation discourages saving

reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits

a decrease in the money supply might indicate that the fed had

sold bonds to decrease bank reserves

money multiplier

the amount of money the banking system generates with each dollar of reserves

which of the following is not a central bank

the bank of america

Federal Reserve (Fed)

the central bank of the United States

menu costs

the costs of changing prices

liquidity

the ease with which an asset can be converted into the economy's medium of exchange

quantity equation

the equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services

If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then

the expected real interest rate is 1%

reserve ratio

the fraction of deposits that banks hold as reserves

federal funds rate

the interest rate at which banks make overnight loans to one another

discount rate

the interest rate on the loans that the Fed makes to banks

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

Currency

the paper bills and coins in the hands of the public

In 2010 the U.S. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then

the price level would rise so the value of money would fall

monetary neutrality

the proposition that changes in the money supply do not affect real variables

open-market operations

the purchase and sale of U.S. government bonds by the Fed

money supply

the quantity of money available in the economy

leverage ratio

the ratio of assets to bank capital

shoe-leather cost

the resources wasted when inflation encourages people to reduce their money holdings

velocity of money

the resources wasted when inflation encourages people to reduce their money holdings

inflation tax

the revenue the government raises by creating money

money

the set of assets in an economy that people regularly use to buy goods and services from other people

monetary policy

the setting of the money supply by policymakers in the central bank

classical dichotomy

the theoretical separation of nominal and real variables

leverage

the use of borrowed money to supplement existing funds for purposes of investment

Imagine an economy in which: (1) pieces of paper called yollars are the only thing that buyers give to sellers when they buy goods and services, so it would be common to use, say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so you might walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3) yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. In this economy,

the yardstick is a unit of account but it cannot serve as a store of value

unit of account

the yardstick people use to post prices and record debts

According to the principle of monetary neutrality, a decrease in the money supply will not change

unemployment

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

real variables

variables measured in physical units