Economics Exam 3

greater

A country runs a capital surplus when the inflow of foreign capital is _____ than the outflow of domestic capital.

illiquid

A liquidity crisis occurs when banks are _____.

disinflation

A reduction in the inflation rate is called:

banks begin to have liabilities in excess of the value of their assets.

A solvency crisis occurs when:

deficit

A trade _____ occurs when the value of a country's imports is greater than the value of its exports.

increase

A(n) _____ in the growth rate of the U.S. money supply would cause the value of the U.S. dollar to fall, which would cause U.S. exports to rise, which would cause aggregate demand to rise.

depreciation

A(n) _____ is a decrease in the price of a currency in terms of another currency.

Inflation

According to Milton Friedman, "_____ is always and everywhere a monetary phenomenon."

increase

An appreciation is a(n) _____ in the price of one currency in terms of another currency.

appreciation

An increase in the federal government's budget deficit causes interest rates to rise. This increases the demand for dollars, which causes a(n) _____ of the dollar, which causes U.S. exports to fall, which causes aggregate demand to fall.

rise

An increase in the growth rate of the U.S. money supply would cause the value of the U.S. dollar to fall, which would cause U.S. exports to _____, which would cause aggregate demand to rise.

demand

An increase in the growth rate of the U.S. money supply would cause the value of the U.S. dollar to fall, which would cause U.S. exports to rise, which would cause aggregate _____ to rise.

198.48 Canadian dollars. → According to the table, 1 U.S. dollar can be exchanged for 0.9924 Canadian dollars, so 200 U.S. dollars can be exchanged for 200 × 0.9924 = 198.48 Canadian dollars.

At these exchange rates, 200 U.S. dollars can be exchanged for about:

M1, M2, and MB.

Currency is part of:

current account deficits and capital account surpluses.

For most of the past 30 years, the United States has run:

0.8 → This is because 4.8 + 0.8 = 3.2 + 2.4.

If for a certain economy the growth rate of the money supply is 4.8 percent, the growth rate of the velocity of money is _____ percent, the rate of inflation is 3.2 percent, and the real growth rate is 2.4 percent, then the quantity theory of money holds.

4% → This is because 4 + 0.5 = 2.5 + 2.

If for a certain economy the growth rate of the money supply is _____ percent, the growth rate of the velocity of money is 0.5 percent, the rate of inflation is 2.5 percent, and the real growth rate is 2 percent, then the quantity theory of money holds.

increase

If the growth rate of the U.S. money supply were to increase, aggregate demand would _____.

there is a direct relationship of money and nominal GDP.

If we assume that the velocity of money is stable:

technology

In the long run, real GDP is determined by capital, labor, and _____, none of which is affected by the money supply.

many banks; just one bank

In the past _____ issued notes that are used as money. Today _____ issue(s) notes that are used as money.

have the most significant effects on aggregate demand.

M1 and M2:

pays off its debts by printing money.

Monetizing the debt occurs when the government:

people mistake changes in nominal prices for changes in real prices.

Money illusion occurs when:

ii, v, iv, vi, i, iii

Put the following events in proper chronological order: (i) U.S. exports fall and U.S. imports rise; (ii) The government increases its budget deficit; (iii) Aggregate demand falls; (iv) The demand for U.S. dollars rises; (v) Interest rates rise; (vi) The dollar appreciates.

easing

Quantitative _____ occurs when the Fed buys longer-term government bonds or other securities.

equal to $10 billion. → $2 billion × 5 = $10 billion.

Suppose that for an imaginary economy, the velocity of money is equal to 5 and the money supply is $2 billion. The nominal GDP of this economy is:

less than $9.6 billion if the price level is greater than 1. → Nominal GDP is $1.2 billion × 8 = $9.6 billion. Real GDP is nominal GDP divided by the price level.

Suppose that for an imaginary economy, the velocity of money is equal to 8 and the money supply is $1.2 billion. The real GDP of this economy is:

$250,000

The FDIC guarantees bank deposits up to _____ for each depositor in an effort to avoid bank runs.

the monetary base only.

The Fed has direct control over:

short-term

The Fed has the most influence over _____ rates, while most investment spending will depend on longer-term rates.

long-term

The Fed has the most influence over short-term rates, while most investment spending will depend on _____ rates.

exactly how much the change in interest rates will change investment spending.

The Fed's actions do not change aggregate demand by any guaranteed amount, because it is not known:

the Open Market Committee.

The MOST important and influential part of the Fed system is:

capital

The _____ account measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds as well as physical assets.

reserve

The _____ ratio is the ratio of bank-held cash to deposits.

velocity of money.

The average number of times a dollar is spent on final goods and services in a year is called the:

increase

The money multiplier is the amount the money supply expands with each dollar _____ in reserves.

one

The purchasing power parity theorem is an application of the law of _____ price.

price

The quantity theory of money is based on the identity that the product of the money supply and the velocity of money is equal to the product of the average _____ level and real GDP.

real exchange rate.

The rate at which you can exchange the goods and services of one country for the goods and services of another is the:

minus

The real rate of return is the nominal rate of return _____ the inflation rate.

not fixed, but depends on how much of their assets banks want to hold as reserves.

The size of the money multiplier is:

the U.S. Treasury.

The world's largest bank customer is:

current account

To calculate the _____, one takes the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

managed

Under a dirty, or _____, float, a currency will vary in value daily, although the central bank or treasury will intervene if that currency moves too far outside of a band of intended or previously announced values.

A decrease in reserves decreases both M1 and M2.

What effect does a decrease in reserves have on the money supply?

Inflation was too high for the rest of the 1970s.

What was the long-run impact of the Federal Reserve policies that stimulated the economy and helped Nixon win reelection?

whether banks will lend out all the new reserves or only a portion

What will the Fed try to predict and monitor in order to estimate the effect of its actions on aggregate demand?

Hungary

Which country's episode of hyperinflation is the largest on record?

i and ii

Which help(s) to reduce the probability of a liquidity crisis? i. the existence of the FDIC ii. the Fed's role as lender of last resort iii. the existence of the Federal Open Market Committee.

Changes in debt + Changes in ownership of assets + Changes in cash reserves → The international balance of payments presents a comparable expression: = (-) Current account = (-)Capital account+ Change in official reserves.

Which is equal to earning minus spending for an individual?

savings deposits

Which is typically the largest means of payment in the United States?

foreign direct investment → The capital account measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds as well as physical assets.

Which item is part of the capital account?

movements of bank deposits to the United States → The capital account measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds as well as physical assets.

Which item is part of the capital account?

Inflation can change tax burdens in ways that do not make economic sense.

Which situation is one of the costs of inflation covered in the textbook?

Buying; aggregate demand

_____ bonds in an open market operation would increase _____.

illiquid bank

a bank whose short-term liabilities are greater than its short-term assets but overall has assets that are greater than its liabilities

insolvent bank/firm

a bank/firm whose liabilities are greater in value than its assets

dollarization

a foreign country's use of the U.S. dollar as its currency

lender of last resort

a lender that loans money to banks and other financial institutions when no one else will, often a central bank or a country's Treasury or Finance department

solvency crisis

a situation that exists when many banks are insolvent; i.e., have liabilities greater in value than assets

liquidity crisis

a situation that occurs when banks do not have enough liquid assets to meet their liability demands

fractional reserve banking

a system in which banks hold only a portion of deposits in reserve, lending the rest

liquid asset

an asset that can be used for payments or, quickly and without loss of value, be converted into an asset that can be used for payments

Money market mutual funds and time deposits

are less liquid since sometimes it takes time and a little bit of trouble to turn these assets into currency or checkable deposits.

money market mutual fund

is a mutual fund invested in relatively safe short-term debt and government securities.

money multiplier, MM.

the amount the money supply expands with each dollar increase in reserves; MM = 1/RR where RR is the reserve ratio

open market operations

the buying and selling of government bonds by the Fed

moral hazard

the idea that people who are insulated from risk will tend to take on more risk; in macroeconomics, occurs when banks and other financial institutions take on too much risk, expecting that the Fed and regulators will later bail them out

discount rate

the interest rate banks pay when they borrow directly from the Fed at the discount window

Federal Funds rate

the overnight lending rate from one major bank to another

exchange rate

the price of one currency in terms of another currency

reserve ratio (RR)

the ratio of reserves to deposits

systemic risk

the risk that the failure of one financial institution can bring down other institutions as well

the change in the money supply.

ΔReserves × MM equals: