Macro Exam 3

A country has $100 million of net exports and $170 million of saving. Net capital outflow is

$100 million and domestic investment is $70 million

If the reserve ratio is 10 percent, $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 the reserve ratio is 5 percent, then $500 of additional reserves can create up to

$45,600.

Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5 percent, and excess reserves are $30 billion. What is the level of loans?

$5,100 billion

If domestic residents of France purchase 1.2 trillion euros of foreign assets and foreigners purchase 1.5 trillion euros of French assets, then France's net capital outflow is

-0.3 trillion euros, so it must have a trade deficit

Which of the following equations is correct?

-Y=C+I+G+NCO -NX=NCO -NCO=S-I

The increase in international trade in the United States is partly due to

-improvements i ntransportation -advances in telecommunication -increased trade of goods with a high value per pound

If P denotes the price of goods and services measured in terms of money, then

1/P represents the value of money measured in terms of goods and services.

At any meeting of the Federal Open Market Committee, that committee's voting members consist of

5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors.

Most financial assets other than money function as

A store of value, but not a unit of account nor a medium of exchange

A country purchases more goods and services from residents of foreign countries than residents of foreign countries purchase from it. This country has

A trade deficit and negative net exports

Credit cards

Are a method of deferring payment, and people who have credit cards hold less money on average

A Portuguese company exchanges euros for $60,000 from a U.S. bank. The Portuguese firm then uses the dollars to purchase $60,000 of canning equipment from a U.S. company. As a result of these two transactions alone

Both US net capital outflow and US net exports rise

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

Foreign-produced goods and services that are purchased domestically are called

Imports

Bob traps lobsters in Maine and sells them to a restaurant in Mexico. Other things the same, these sales

Increase US net exports and decrease Mexican net exports

The Federal Reserve

Is responsible for conducting the nations monetary policy, and it plays a role in regulating banks

The banking system currently has $50 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time sells $10 billion worth of bonds, then by how much does the money supply change?

It falls by $180 billion.

Jen and Alica are both U.S. citizens. Jen opens a cafe in France. Alicia buys equipment from a company in Canada to use in her factory. Whose action is an example of U.S. foreign direct investment?

Jen's but not Alicia's

Suppose that U.S. citizens purchase more cars made in Korea, and Koreans purchase more bonds issued by U.S. corporations. Other things the same, these actions

Lower both US net exports and US net capital outflows

Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners

More willing to purchase US bonds, so US net capital outflow would fall

A country has net capital outflow of $40 billion. Which of the following is consistent with this net capital outflow?

Purchases of foreign assets by domestic residents exceed purchases of domestic assets by foreign residents by $40 billion

Net capital outflow equals

The value of foreigh assets purchased by domestic residents-the value of domestic assets purchased by foreigners

Economists use the term "money" to refer to

Those types of wealth that are regularly accepted by sellers in exchange for goods and services

If U.S. residents purchase $600 billion worth of foreign assets and foreigners purchase $300 billion worth of U.S. assets,

US net capital outflow is $300 billion, capital is flowing out of the US

If M = 9,000, P = 6, and Y = 1,500, what is velocity?

V=1 MV=PY

Which of the following best illustrates the medium of exchange function of money?

You pay for your oil change using currency

Prisoners sometime determine a single good to be used as money. This good becomes

a medium of exchange and a unit of account

Carl and Carly are American residents. Carl buys stock of a corporation in Austria. Carly opens a coffee shop in Austria. Whose purchase, by itself, decreases Austria's net capital outflow?

both Carl's and Carly's

You bought some shares of stock and sell them one year later. At the end of the year, the price per share was 5 percent higher and the price level was 3 percent higher. Before taxes, you experienced

both a nominal gain and a real gain, and you paid taxes on the nominal gain.

To increase the money supply, the Fed can

buy government bonds or decrease the discount rate.

The ease with which an asset can be

converted into the economy's medium of exchange determines the liquidity of that asset

If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve

creates dollars and uses them to purchase government bonds from the public

If inflation is higher than what was expected,

creditors receive a lower real interest rate than they had anticipated.

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank reserves

decrease by $25.5 million and the money supply eventually decreases by $170 million

Deflation

decreases incomes and reduces the ability of debtors to pay off their debts.

An open-market sale

decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public

As the price level rises, the value of money

decreases, so people must hold more money to purchase goods and services

A decrease in the money supply creates an excess

demand for money that is eliminated by falling prices

The classical dichotomy refers to the idea that the supply of money

determines nominal variables, but not real variables

When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes

downward, because at higher prices people want to hold more money

The value of money rises as the price level

falls, because the number of dollars needed to buy a representative basket of goods falls

If the Fed increases the money supply, then 1/P

falls, so the value of money falls

The Soviet government in the 1980's never abandoned the ruble as the official currency. However, the people of Moscow preferred to accept

goods such as cigarettes or American dollars in exchange for goods and services, reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money.

Wealth is redistributed from debtors to creditors when inflation was expected to be

high and it turns out to be low

In a fractional-reserve banking system, a decrease in reserve requirements

increase both the money multiplier and the money supply

The principle of monetary neutrality implies that an increase in the money supply will

increase the price level, but not real GDP.

An open-market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

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 interest rate was 4%

Which of the following statements concerning the history of U.S. inflation is not correct?

inflation in the 1970s was below the average over the last 80 years True: prices rose at an average annual rate of about 3.6 percent over the last 80 years -there was about a 17-fold increase in the price level over the last 80 years -the US has experienced periods of deflation

The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?

it falls by $12 billion

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can given the reserve requirement.

it has $800 in reserves and $9200 in loans

If there is inflation, then a firm that has kept its price fixed for some time will have a

low relative price. Relative-price variability rises as the inflation rate rises.

After 1980 in the United States,

national saving fell below investment and net capital outflow was a large negative number

The value of the goods and services Australia purchases from the U.S. are less than the value of goods and services the U.S. purchases from Australia. The U.S. has

negative net exports with Australia and a trade deficit with Australia

In the U.S., taxes on capital gains are computed using

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

Banks are able to create money only when

only a fraction of deposits are held in reserves

The Fisher effect

says there is a one for one adjustment of the nominal interest rate to the inflation rate.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

selling bonds. This selling would reduce reserves

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

selling bonds. This selling would reduce the money supply.

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve

shifts left, causing the price level to fall

You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______.

store of value, unit of account, medium of exchange

The supply of money increases when

the Fed makes open-market purchases

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 percent.

Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases

the inflation rate and nominal interest rates

The 2008 credit crunch occurred when banks reduced lending in response to

the loss of asset value for mortgage backed securities and mortgage loans

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

the price level would rise by 5 percent and real GDP would be unchanged

The money stock in the economy is

the quantity of money circulating in the economy, such as currency and demand deposits.

When deflation exists,

the real interest rate is greater than the nominal interest rate

If saving is less than domestic investment, then

there is a trade deficit and Y<C+I+G

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

In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by the public

would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.