Economics Final Exam

FOMC (Federal Open Market Committee)

12 members the branch of the Federal Reserve Board that determines the direction of monetary policy

quantity equation

M x V = P x Y

Measures of Money Stock

M1 Demand deposits, Traveler's checks Other checkable deposits, Currency M2 Everything in M1 Savings deposits, Small time deposits Money market mutual funds A few minor categories

reserve requirement

Minimum amount of reserves that banks must hold; set by the Fed

Deflation

a decrease in the general level of prices

Inflation

a general increase in prices and fall in the purchasing value of money.

Depression

a severe recession

The First Bank of Fairfield Assets Liabilities Reserves $1,000Deposits $8,000Loans 7,000 Refer to Table 29-4. Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans that it makes will be a. $437.50. b. $40. c. $428.57. d. $71.42.

a. $437.50.

If the reserve ratio is 10 percent, the money multiplier is a. 10. b. 9/10. c. 1/10. d. 100.

a. 10

Assume the MPC is 0.72. The multiplier is a. 3.57. b. 1.39. c. 4.53. d. 2.57.

a. 3.57.

Which of the following is correct? a. The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms. b. The Federal Reserve has 14 regional banks. The Board of Governors has 12 members who serve 7-year terms. c. The Federal Reserve has 14 regional banks. The Board of Governors has 7 members who serve 14-year terms. d. The Federal Reserve has 12 regional banks. The Board of Governors has 12 members who serve 7-year terms.

a. The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms.

Your nominal wage increases from $12 per hour to $13 per hour. At the same time, the price level increases from 140 to 147. As a result, a. The number of dollars you receive increases and the purchasing power of the dollars you receive increases. b. The number of dollars you receive increases and the purchasing power of the dollars you receive decreases. c. The number of dollars you receive decreases and the purchasing power of the dollars you receive decreases. d. The number of dollars you receive decreases and the purchasing power of the dollars you receive increases.

a. The number of dollars you receive increases and the purchasing power of the dollars you receive increases.

An increase in the MPC a. increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand. b. decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand. c. decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand. d. increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.

a. increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

According to the classical dichotomy, which of the following is influenced by monetary factors? a. nominal wages b. unemployment c. real GDP d. All of the above are correct.

a. nominal wages

Other things the same, if technology increases, then in the long run a. output is higher and prices are lower. b. both output and prices are lower. c. both output and prices are higher. d. output is lower and prices are higher.

a. output is higher and prices are lower.

According to liquidity preference theory, if the price level decreases, then a. the interest rate falls because money demand shifts left. b. the interest rate rises because money supply shifts right. c. the interest rate rises because money supply shifts left. d. the interest rate falls because money demand shifts right.

a. the interest rate falls because money demand shifts left.

According to liquidity preference theory, the opportunity cost of holding money is a. the interest rate on bonds. b. the inflation rate. c. the cost of converting bonds to a medium of exchange. d. the difference between the inflation rate and the interest rate on bonds.

a. the interest rate on bonds.

Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp rise in the stock market, an increase in government purchases, an increase in the money supply and a decline in the value of the dollar. In the short run a. the price level and real GDP will both rise. b. the price level and real GDP will both fall. c. neither the price leave nor real GDP will change. d. All of the above are possible.

a. the price level and real GDP will both rise.

The Federal Open Market Committee is a. ​the group at the Federal Reserve that sets monetary policy. b. ​the group that sets the amount of government spending. c. ​in charge of tax collection. d. ​the group that reviews income assistance programs.

a. ​the group at the Federal Reserve that sets monetary policy.

100% reserve banking

all deposits are held as reserves

Table 29-6. Bank of Pleasantville Assets Liabilities Reserves$3,000Deposits$50,000Loans47,000 Refer to Table 29-6. The Bank of Pleasantville's reserve ratio is a. 16.7 percent. b. 6.0 percent. c. 15.7 percent. d. 6.4 percent.

b. 6.0 percent.

Which of the following reduces the interest rate? a. a decrease in government expenditures and a decrease in the money supply b. a decrease in government expenditures and an increase in the money supply c. an increase in government expenditures and a decrease in the money supply d. an increase in government expenditures and an increase in the money supply

b. a decrease in government expenditures and an increase in the money supply

When prices are falling, economists say that there is a. a contraction. b. deflation. c. an inverted inflation. d. disinflation.

b. deflation.

Which of the following is included in both M1 and M2? a. savings deposits b. demand deposits c. small time deposits d. money market mutual funds

b. demand deposits

Most economists believe that money neutrality a. does not hold in either the short run or long run. b. does not hold in the short run. c. holds in the short run and the long run. d. does not hold in the long run.

b. does not hold in the short run.

You put money in the bank. The increase in the dollar value of your savings a. and the change in the number of goods you can buy with your savings are both real variables. b. is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable. c. and the change in the number of goods you can buy with your savings are both nominal variables. d. is a real variable, but the change in the number of goods you buy with your savings is a nominal variable.

b. is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable.

When production costs rise, a. the aggregate demand curve shifts to the right. b. the short-run aggregate supply curve shifts to the left. c. the short-run aggregate supply curve shifts to the right. d. the aggregate demand curve shifts to the left.

b. the short-run aggregate supply curve shifts to the left.

The long-run aggregate supply curve shifts left if a. the capital stock increases. b. there is a natural disaster. c. the government removes some environmental regulations that limit production methods. d. None of the above is correct.

b. there is a natural disaster.

The costs of inflation are a. ​increased variability of relative prices. b. ​All of the above. c. ​shoeleather costs and menu costs. d. ​arbitrary redistributions of wealth.

b. ​All of the above.

fractional reserve banking

banks hold only a fraction of deposits as reserves

excess reserve

banks may hold reserves above the legal minimum

Which of the following events would shift money demand to the right? a. neither an increase in the interest rate nor an increase in the price level b. an increase in the interest rate, but not an increase in the price level c. an increase in the price level, but not an increase in the interest rate d. an increase in the interest rate or an increase in the price level

c. an increase in the price level, but not an increase in the interest rate

To increase the money supply, the Fed could a. sell government bonds. b. increase the discount rate. c. decrease the reserve requirement. d. None of the above is correct.

c. decrease the reserve requirement.

High and unexpected inflation has a greater cost a. for those who hold a little money than for those who hold a lot of money. b. All of the above are correct. c. for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation. d. for those who borrow than for those who save.

c. for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation.

According to liquidity preference theory, a decrease in the price level shifts the a. money demand curve rightward, so the interest rate decreases. b. money demand curve rightward, so the interest rate increases. c. money demand curve leftward, so the interest rate decreases. d. money demand curve leftward, so the interest rate increases.

c. money demand curve leftward, so the interest rate decreases.

Higher inflation makes relative prices a. more variable, making it more likely that resources will be allocated to their best use. b. less variable, making it less likely that resources will be allocated to their best use. c. more variable, making it less likely that resources will be allocated to their best use. d. less variable, making it more likely that resources will be allocated to their best use.

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

When the dollar appreciates, U.S. a. net exports rise, which increases the aggregate quantity of goods and services demanded. b. net exports fall, which increases the aggregate quantity of goods and services demanded. c. net exports fall, which decreases the aggregate quantity of goods and services demanded. d. net exports rise, which decreases the aggregate quantity of goods and services demanded.

c. net exports fall, which decreases the aggregate quantity of goods and services demanded.

As the price level falls a. people will want to hold less money, so the interest rate rises. b. people will want to hold more money, so the interest rate rises. c. people will want to hold less money, so the interest rate falls. d. people will want to hold more money, so the interest rate falls

c. people will want to hold less money, so the interest rate falls.

Reserves decrease if the Federal Reserve a. lowers the discount rate but not if it auctions more credit. b. raises the discount rate or auctions more credit. c. raises the discount rate but not if it auctions more credit. d. lowers the discount rate or auctions more credit.

c. raises the discount rate but not if it auctions more credit.

During a recession, unemployment a. ​is equal to the natural rate of unemployment. b. ​is frictional unemployment minus structural unemployment. c. ​increases. d. ​decreases.

c. ​increases.

Kinds of Money

commodity money and fiat money

If the price level increased from 120 to 130, then what was the inflation rate? a. 1.1 percent. b. 7.7 percent. c. 10.0 percent. d. 8.3 percent.

d. 8.3 percent.

Money a. is more efficient than barter. b. makes trades easier. c. allows greater specialization. d. All of the above are correct.

d. All of the above are correct.

The Federal Reserve a. was created in 1913. b. is the U.S.'s central bank. c. has other duties in addition to controlling the money supply. d. All of the above are correct.

d. All of the above are correct.

Which of the following is correct? a. Economic fluctuations are easily predicted by competent economists. b. Recessions have never occurred very close together. c. Spending, income, and production do not fluctuate closely with real GDP. d. None of the above is correct.

d. None of the above is correct.

A goal of monetary policy and fiscal policy is to a. enhance the shifts in aggregate demand and thereby increase economic growth b. offset the shifts in aggregate demand and thereby eliminate unemployment. c. enhance the shifts in aggregate demand and thereby create fluctuations in output and employment. d. offset shifts in aggregate demand and thereby stabilize the economy.

d. offset shifts in aggregate demand and thereby stabilize the economy.

Banks are able to create money only when a. interest rates are above 2%. b. the reserve ratio is 100%. c. the Fed sells U.S. government bonds. d. only a fraction of deposits are held in reserve.

d. only a fraction of deposits are held in reserve.

In the long run, money demand and money supply determine a. neither the value of money nor the real interest rate. b. the real interest rate but not the value of money. c. the value of money and the real interest rate. d. the value of money but not the real interest rate.

d. the value of money but not the real interest rate.

reserves

deposits that banks have received but have not loaned out

Functions of Money

medium of exchange, unit of account, store of value

central bank

oversees banking system and regulates money supply

Recession

periods of falling real incomes and rising unemployment

the money multiplier

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

open market operations

the buying and selling of government securities to alter the supply of money

the federal reserve system

the central bank of the United States created in 1913

reserve ratio

the fraction of deposits that banks hold as reserves

the fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

money neutrality

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

leverage ratio

the ratio of assets to bank capital

bank capital

the resources a bank's owners have put into the institution

classical dichotomy

the theoretical separation of nominal and real variables

leverage

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

Meanings of Money

to buy goods and services from others