Economics Test 2

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

More; decrease

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ____ multiplied by B?

(cr + 1) / (cr + rr)

Consider the money demand function that takes the form (M/P)d = Y/(4i), where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

4i

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals?

C = $100 Billion R = $50 Billion D = $500 Billion Base = C + R = 100 + 50 Answer: $150 Billion

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals?

C = $100 Billion R = $50 Billion D = $500 Billion Money Supply = C + D Answer: $600 Billion

A bank balance sheet consists of only these items: Deposits $1000 Reserves $100 Securities $400 Bonds Issued $500 Loans $2000 What is the value of the bank capital?

Capital = Assets - Liabilities Assets = Reserves + Securities + Loans Liabilities = Deposits + Bonds Issued Answer: $1000

Which of these is the BEST example of structural unemployment?

Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.

Assets: Reserves $500 Loans $1000 Securities $500 Liabilities/OE: Deposits $1400 Debt $400 Owner's Equity $200 This table represents the balance sheet of a bank. What is the leverage ratio of the bank, and what does it mean?

Leverage Ratio = Total Assets / Owner's Equity 2000/200 = 10 This means that for the contribution of every 1 dollar by the bank owner, 9 dollars are contributed through deposits and debts.

According to the quantity equation, the percentage change in P is approximately equal to percentage change in?

M minus the percentage change in Y plus the percentage change in velocity

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals?

MS = MB * MM MS = $400 billion * 2 $800 billion

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals?

m = (1 + c) / (rr + c) m = (1 + 0.5) / (0.1 + 0.5) m = 2.5

By paying efficiency wages, firms contribute to higher unemployment because they?

Keep the wage above equilibrium level.

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. What is the money supply?

m = (cr + 1/cr + rr) * B m = (0.1 + 1/0.1 + 0.1) * 100 Billion m = 5.5 * 100 Billion Answer: $550 Billion

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage?

Inflation rate - nominal wage Decreased 2 percent

A policy that increases the job-finding rate _____ the natural rate of unemployment

Will decrease

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. If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply?

m = (cr + 1/cr + rr) * B (0.1 + 1/0.1 + 0.2) * 100 Billion m = 3.67 * 100 Billion Answer: $366.67 Billion

"Inflation tax" means that?

In a hyperinflation, the chief source of tax revenue is the ability of the government to create money

If many banks fail, this is likely to?

Increase the ratio of currency to deposits

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by _____ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by _____ percent.

5; 5

Assets Reserves $10000 Loans $100000 Securities $40000 Liabilities and Net Worth Deposits $100000 Debt $20000 Equity $30000 Owner's equity will fall to zero if loan defaults reduce the value of total assets by?

Assets = Reserves + Loans + Securities 10000+100000+40000=150000 150000 - Equity = 150000 - 30000 = 120000, find percentage decrease. Answer: 20 Percent

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

Which of these is an example of frictional employment?

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

When the Fed makes an open-market sale, it?

Decreases the monetary base (B)

Open-market operations are?

Federal Reserve purchases and sales of government bonds

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

Nominal return = real return + inflation Cost = Nominal return 3% + 4% = 7% 7%

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?

Percent Change of Money Supply - Percent Change of Real Output Answer: 7 Percent

Wage Rigidity?

Prevents labor demand and labor supply from reaching the equilibrium level

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

The quantity of labor supplied exceeds the quantity demanded

Frictional unemployment is unemployment caused by?

The time it takes workers to search for a job

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent)

Unemployment = unemployed / labor force Unemployment = 20/220 = 9 Percent

All of these are causes of structural unemployment except?

Unemployment insurance

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a?

Unit of account

The quantity theory of money assumes that?

Velocity is constant

Workers unemployed as a result of wage rigidity are?

Waiting for a job to become available

If the fraction of employed workers who lose their jobs each month (the rate of job separation) 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?

Natural Rate of Unemployment = Rate of Job Separation / Rate of Job Separation + Rate of Job Findings = ( 0.01 / 0.01 + 0.09 ) x 100 10 percent

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal?

Real Balance = M / P 200,000 / 10 = $20000

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank then the money supply?

Remains the same

The major source of government revenue in most countries that are experiencing hyperinflation is?

Seigniorage

Given that M/P = kY, when the demand for money parameter, k, is large, the velocity of money is _____, and money is changing hands _______

Small; infrequently

The natural rate of unemployment is?

The average rate of unemployment around which the economy fluctuates

Frictional unemployment is inevitable because?

The demand for different goods always fluctuates.

In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases?

The nominal interest rate

When the unemployment rate is at a steady state?

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

Assume an economy where only burgers are traded. In a year, 100 burgers are traded at the rate of $5 per burger. Calculate the velocity. If the economy has - $100 in the form of 20 $5 Bills - $100 in the form of 100 $1 Bills

Velocity of money does not depend on the currency denominations. It is a measure for each unit of money and not the unit of the currency. In this example, the velocity of money V = (PT)/M = (5(100))/100 = 5 in both cases.

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. If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?

m = (cr + 1/cr + rr) * B m = (0.2 +1 1/0.2 + 0.1) * 100 Billion m = 4 * 100 Billion Answer: $400 Billion