Econ Final
If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in Canada over the next year is 5 percent while it is 2 percent in the U.S., we should expect a U.S. dollar to purchase
1.339 Canadian dollars
Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) if the current rate of inflation is 5%, the natural rate of interest is 2%, and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be
10%
If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is 100 U.S. dollars what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S. dollar?
136
The theory of purchasing power parity says
a dollar should buy the same number of goods no matter where in the world you go
If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country
cannot have a discretionary monetary policy
Real business cycle theory explains fluctuations in output through
changes in productivity
A liability of the central bank in functioning as the bankers' bank is
commercial banks
A speculative attack on a country with a fixed exchange rate occurs when
financial market participants believe the government will have to devalue its currency
Decreases in the real interest rate will result in a(n)
increase in net exports because it will lead to a depreciation of the dollar
If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would
increase the IOER
A country that frequently uses capital controls
increases the risk for foreign investors
An open market purchase of securities by the central bank from banks usually will
induce the banks to make more loans since their revenue will decrease if they do nothing
If a recession were the result of monetary policy, we should observe
inflation slowing as output falls
Monetary policymakers could keep equity and property price bubbles from developing by
raising their interest rate target when they suspect a bubble
A review of economic data suggests that
recessions are shorter in duration than expansions
Globalization and trade
reduce inflation in the short run but not in the long run
If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate demand curve is likely to have a
relatively steep slope
Unconventional monetary policy tools include all but
reserve requirement
One reason most central bankers do not set an inflation target of zero is
the central bank could hit the lower bound
If inflation in country A exceeds inflation in country B, purchasing power parity implies that
the currency of country A will depreciate relative to the currency of country B
An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market
the demand for dollars will increase
Assume that the Fed performs a foreign exchange intervention in which it does nothing except buy German government bonds. One result of this will be that
the dollar depreciates
If the Federal Reserve in the United States begins to purchase foreign currency and pay for these purchases with dollars, this should cause
the dollar to depreciate
If inflation in the United States averages more than inflation in the euro area over a long period of time, we should expect
the dollar to depreciate relative to the euro
The Lucas critique focuses specifically on
the role that economic policymaking has on people's economic behavior
Each of the following is a transmission channel of monetary policy, except
the tax-impact channel
All other factors equal, if the costs of converting bonds and other financial securities to a means of payment increase
the transactions demand for money should increase
The interest on excess reserves is
the upper bound of the federal funds target rate range
If monetary policymakers are more concerned about output fluctuations than inflation fluctuations
they will choose a relatively flat monetary policy reaction curve in which movements in the real interest rates are small
If you were going to write a function for money demand, you would say that the demand for money holdings
varies inversely with the nominal interest rate and directly with nominal income
One cost that potentially could result from central banks targeting money growth is
volatile interest rates
Consider the following: an investor in the U.S. is pondering a one
year investment. She can purchase a domestic bond for $1,000 that has an interest rate of i or she can purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of if. The current exchange rate is
$ U.S., then the dollar price of the Japanese automobile is
$22,727
Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum amount Bank A could lend?
$5 million
If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following equals the velocity of money?
(P × Y)/M
Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation?
+1.0%
Based on interest rate parity theory what would be the yield on a German government bond purchased by a U.S. portfolio manager if the German nominal interest was 10% and the dollar appreciated by 6%? Would the portfolio manager invest in a German bond or a U.S. bond offering a 10% yield?
4%; U.S. bond
Firm A has assets that are mainly in financial securities and whose liabilities carry variable interest rates; Firm B has the same assets as Firm A and the same amount of liabilities but its liabilities are all at fixed interest rates. If the central bank lowers interest rates, everything else constant
Firm A's net worth will increase more than Firm B's
In theory, lower real interest rates will tend to cause all but which of the following to increase?
Government spending
The quantity theory of money can explain which of the following?
If the %ΔY > 0 and the %ΔV = 0; the %ΔP < %ΔM
The Fed purchases German bonds from commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?
The Fed's assets increase and its liabilities increase, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes
$1.50/£ . She considers the bonds to be of equal risk. If i = if, the expected returns are not equal. What do you know
The exchange rate must be flexible
If the Federal Reserve is to be independent, then the quantity of securities it purchases is determined by
The federal reserve itself
For central bankers to alter the real interest rate by changing the nominal interest rate, which of the following must be true?
The rate of inflation has to remain constant
Which of the following statements is most correct?
The velocity of M2 is more volatile in the short run than the long run
Which of the following features would characterize a good monetary policy instrument?
Tightly linked to monetary policy objectives
Which of the following would be classified as precautionary demand for money?
You put $1,000 in a savings account at your bank for emergencies
An inflation rate above the target rate will result in
a movement up along the monetary policy reaction curve and a movement up the dynamic aggregate demand curve
A rightward shift in the dynamic aggregate demand curve could result from
a rightward shift of the monetary policy reaction curve
If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury securities in the open market, this would be an example of
a sterilized foreign exchange intervention
When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect
an increase in assets and liabilities
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will show
an increase in the asset category of securities and the liability category of reserves by $2 billion
The economy is in both a short
and long-run equilibrium if -the aggregate demand curve intersects the short-run aggregate supply curve
The monetary policy reaction curve
approximates the behavior of central bankers
Secondary credit provided by the Fed is designed for
banks that are in trouble and cannot obtain a loan from anyone else
Most economists attribute the great moderation experienced in the U.S. during the 1990s mainly to
better understanding and use of monetary policy
Monetary union, in comparison to dollarization, means that
countries share in monetary policy decisions
Each of the following items would appear as assets on the central bank's balance sheet, except
currency
The conventional policy tools available to the Fed include each of the following, except the
currency-to-deposit ratio
If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods, and e = the nominal exchange rate of foreign currency /U.S.$ the real exchange rate is best expressed as
e ×( P / Pf )
If the slope of the monetary policy reaction curve is relatively flat, it means that central bankers are
less concerned about keeping inflation close to its short-run target
With regard to exchange rate determination, the law of one price is a useful theory only when applied to
long-run periods of time
Unconventional policy tools are useful when
lowering the target interest rate to zero is not sufficient to stimulate the economy
Appreciation of the real exchange rate
makes U.S. exports more expensive to foreigners
Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be
no change in total assets or total liabilities, but an increase in the liability of currency and a decrease in the liability of reserves by $300 respectively
The fact that central bankers tend to respond to higher rates of inflation by increasing the real interest rate is
one reason the dynamic aggregate demand curve slopes downward
Vault cash is not included in the central bank's liability category of currency because
only non-bank currency is in the liability category of currency
Bonds must have yields above the effective lower bound because
people can always hold cash
If an individual thinks long term interest rates are likely to rise, she would
sell her bonds and speculative/portfolio demand for money would rise
If monetary policymakers fear a recession resulting from increased pessimism on the part of business people, and they want to avoid the recession, they would
shift the monetary policy reaction curve to the right
If monetary policymakers do not want an increase in government purchases, which increases aggregate demand, to cause an increase in inflation, they would
shift the monetary policy reaction function left, increasing the real interest rate at every rate of inflation
Real business cycle theory seeks to explain business cycle fluctuations by focusing on
shifts in potential output
If U.S. assets are seen as having greater risk relative to foreign assets in the market for foreign exchange, this should cause the
supply of dollars to increase
For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the
target refinancing rate
Policymakers can stabilize the economy by shifting
the dynamic aggregate demand curve
The effect on the monetary policy reaction curve resulting from policymakers decreasing their inflation target would be
the monetary policy reaction curve shifting to the left
Stock prices may rise from a reduction in interest rates because
the present value of future earnings will increase
Disinflation occurs when
the rate of inflation declines
