macro exam 3 homework

a bank's attempt to pursue profit can sometimes lead to bank failure because

-the bank will minimize its reserves because reserves pay low or zero interest -depositors can become concerned that the banks will not be able to repay the funds deposited in the bank -a large number of depositors may request the return of their funds

if the dollar price of a euro os $1.25, then the euro price of a dollar is _____

0.80 euros

the central bank of the US is the

Federal Reserve System

the monetary base is the sum of______ , it is equal to _____

Federal Reserve notes, coins, and depository institution deposits at the Fed; the liabilities of the Fed plus coins issued by the Treasury

_____ advocates active government intervention via fiscal policy when the economy is in recession

Keynesian theory

the equation of exchange is

M x V = P x Q; the money supply times its velocity equals the price level times output

the sum of all currency in the hands of the public, checkable deposits and traveler's checks is the official definition of

M1

the economist that is considered the founder of monetarism is

Milton Friedman

according to this graph, in this economy there will be a tendency for (AD and SAS intersect to the right of LAS)

both wages and prices to rise over time

aggregate demand _____ when an increase in interest rate occurs. aggregate demand _____ when a decrease in taxes occur

decreases; increases

assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that

each additional dollar of reserves creates $5 of deposits

long-run macroeconomic equilibrium occurs when the real GDP ____ potential GDP- equivalently, when the economy is on its _____ curve

equals; LAS

the _____ links the quantity of money, velocity of circulation, price level, and real GDP

equation of exchange

which of the following is a determinant of exchange rates?

expected future exchange rate

if consumers in the United States decrease their demand for imports, the result will be to

increase the exchange rate of the US dollar

is barter a means of payment? is it just as efficient as money when trading e-Bay?

is; is not as efficient as money because barer requires a double coincidence of wants

during times of uncertainty, it might be necessary for a bank to hold large cash reserves and to have a large percentage of its assets purchased by its own capital because

its depositors may decide to make large withdrawals

when we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed

lends to banks that are short of reserves and cannot find any other source of funds

FDIC insurance helps to minimize the cost of bank failure by

limiting the loss of each deposit to amounts over $250,000

the quantity theory of money is that in the ____ , an increase in the quantity of money brings an equal percentage increase in the _____

long run; increase in the price level

when potential GDP increases

long-run aggregate supply and short-run aggregate supply increase. the LAS and the SAS curve shift rightward

which factor could have caused the increase in supply shown in the graph?

lower US interest rates

the Federal Open Market is the

main policy making organ of the Federal Reserve System

banks create money by

making loans

something is money if its a commodity or token that is generally acceptable as a

means of payment

the required reserve rations is the

minmum percentage of deposits that depository institutions are required to hold as reserves

the actions of the Fed takes to manage the money supply and interest rates in order to pursue economic objective are called _____

monetary policy

the classical view assumes

money wage rates adjust quickly.

as we move along the long-run aggregate supply curve

the real wage rate remains constant

new classical theorists believe that

the uneven pace of technological change is the most significant cause of business cycle

when the interest rate decreases

there is a movement down a stationary money demand curve

according to the graph, an increase in government spending, all else equal, will shift the AD curve

to an increase AD (right)

when is the opportunity cost of holding money higher?

when interest rates are high

the wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption

the central bank of the US performs many functions, one of which is that it

provides banking services to commercial banks

the defining feature of the Keynesian view of macroeconomics is that the economy is

rarely at full employment

the name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is

required reserves

the quantity of desired reserves demand on the level of deposits and is determined by the desired reserve ration- the ratio of ____ to ____ that the ____ plan to hold

reserves; deposits; banks

the main functions of the Federal Open Market Committee are to

review the state of the economy and determine the monetary policy actions to be taken by the NY Fed

when the real exchange are decreases, a country's net exports will _____

rise

the definite feature of the classical view of macroeconomics is that the economy is

self-regulating and always at full employment

a recession in the US will

shift the supply curve of dollars to the left

the long-run aggregate supply curve

shifts to the right as technological change occurs

an unexpected change in the price of oil would causes a shift of the _____ curve

short-run aggregate supply

the aggregate demand and aggregate supply model explains

short-run fluctuations in real GDP and the price level

according to the graph, the situation of this economy after the supply shock can be called (AS moves left)

stagflation

the monetary base is equal to

the Fed's liabilities together with coins issued by the Treasury

the Federal Reserve System is

the central bank of the United States

the foreign exchange market is the market in which ____ of one country is exchanged for _____ of another

the currency; the currency

the part of the balance of payments that records a country's exports and imports of goods and services is

the current account

If firms reduce investment spending and the economy enters a recession, which of these contributes to the adjustment that causes the economy to return to its long-run equilibrium?

the eventual agreement by workers to accept lower wages

the main influences on the supply of US dollars in the foreign exchange market include

the exchange rate, US demand for imports, interest rates in the US and other countries and the expected future exchange rate

the main influences on the demand for US dollars in the foreign exchange market include

the exchange rate, world demand for US exports, interest rates in the US and other countries and the expected future exchange rate

when there is a shortage of dollars in the foreign exchange market

the forces of supply and demand pull the foreign exchange market into equilibrium

in the long-run, the level of output is

the full-employment level of output

if real GDP increases

the money demand curve shifts to the right

the aggregate demand curve shows the relationship between the quantity of real GDP demanded and _____ when everything else remains the same.

the price level

the aggregate demand curve shows the relationship between

the price level and the quantity of real GDP demanded

a movement along the aggregate demand curve occurs if

the price level changes and other factors remain unchanged

the equilibrium exchange rate is the exchange rate at which

the quantity of dollars demanded equals the quantity of dollars supplied

when the price level in Mexico falls

the quantity of real GDP demanded in Mexico increases

which of these policies affects the economy through intended changes in the quantity of money and interest rates?

monetary policy

the money multiplier is the ratio of the change in the quantify of____ to the change in the quantity of _____

money; monetary base

the exports effect is the result that the lower the exchange rate, other things remaining the same, the

lower are the prices of US produced goods and services to foreginers and the greater is the volume of US exports

the imports effect is the result that the higher the exchange rate, other thins remaining the same, the

lower are the prices of foreign produced goods and services to Americans and the greater is the volume of US imports

which of these shifts the aggregate demand curve to the right?

lower interest rates

FDIC insurance brings _____ stability to the banking system because _____

more; depositors know that money they have deposited with a bank will be repaid making bank runs less likely

the demand for money is the relationship between the quantity of money demanded and the _____, when all other influences on the amount of money that people wish to _____ remain the same

nominal interest rate; hold

an exchange rate is the ____ at which one currency exchanges for another in the foreign exchange market

price

when we say that money serves as a unit of account we mean that

prices are quoted in terms of money

the theory concerning the link between the money supply and the price level that assumes the velocity of money is constant is called the

quantity theory of money

short-run macroeconomic equilibrium occurs when the quantity of _____ demanded equals the quantity of _____ supplied at the point of intersection of the ____ curve and the _____ curve

real GDP; real GDP; AD; SAS

in the long run, the money wage rate _____ , short-run aggregate supply _____ , and the economy returns to a full-employment equilibrium

rises; decreases

suppose that velocity of circulation is 3 and the quantity of money is $500 million. According to the quantity theory of money, GDP equals

$1.5 billion

how many Federal Reserve Districts are there?

12

if the monetary base increases by $1 million and the quantity of money increases by $2.5 million, then the money multiplier is

2.5

if the exchange rate between the US dollar and the Japanese yen is $1 = 100 yen, the price level in the United States is 90 and the price level in Japan is 100, what is the real exchange rate?

90

the Fed has two main assets, which are

US government securities, which are Treasury bonds, and mortgage-backed securities

velocity of circulation is defined as _____

V = (P x Y) / M

after the fall in consumer confidence, the economy moves to _____ equilibrium and _____ gap emerges

a below full-employment; a recessionary

which of these factors will cause the aggregate demand curve to shift?

a change in the expectations of households and firms

using a commodity as money creates problems because

a commodity is bulky and its value changes over time

a higher exchange are will result in

a decrease in net exports and a decrease in aggregate demand

money serves the functions of

a medium of exchange, a unit of account, and a store of value

monetarism is a school of economic thought that favors

a monetary growth rule

inflation results from

a persistent increase in aggregate demand at a faster pace than that of the increased in long-run aggregate supply

the output gap in the graph is _____ because _____

a recessionary gap; potential GDP exceeds real GDP

excess reserves are a bank's ____ reserves minus its ____ reserves

actual; desired

examples of fiscal policy that increases aggregate demand include

an increase in government expenditure, a decrease in taxes, and an increase in transfer payments

which of these will shift the money demand curve to the right?

an increase in real GDP

the output gap gap in the graph is ____ because _____ .

an inflationary gap; potential GDP is less than real GDP

the theory of purchasing power parity states that

arbitrage equalizes the value of monies

reserves consist of the currency in the _____ plus the balance on its _____ account at _____

bank's vaults; reserve; a Federal Reserve bank

to increase the money supply, the Fed _____

buys securities from the public

how can government policies shift the aggregate demand curve to the right?

by increasing government purchases

why are checks, debit cards, and credit cards not money?

checks and debit cards are not money. they are instructions to the bank to transfer money from one account to another. a credit card is not money. it is an ID card that allows you to take out a loan

stagflation is a

combination of inflation and recession

depository institutions provide four benefits, which are

creating liquidity, lowering the cost of borrowing, lowering the cost of monitoring borrowers, and pooling risk

the Fed has two liabilities, which are

currency, which is the dollar bills that we use in our daily transactions, and the reserves of depository institutions

we call the leakage of bank reserves in to currency the currency drain, and we call the ration of ____ to ____ the currency drain ratio

currency; deposits

in the balance of payment accounts the same of exports minus imports, net interest income, and net transfers is called

current account balance

if the sum of net exports, net interest income received from abroad, and net transfer payments from abroad yields a negative number, we say that a country's

current account is in deficit

in the short run, an unexpected decrease in oil prices will

decrease the price level but increase real GDP

a rise in the expected future exchange rate _____ the supply of US dollars. an increase in the world demand for US exports _____ the supply of US dollars

decrease; does not change

when aggregate demand increases, unemployment will usually _____ and inflation will _____

fall; rise

the price of a bond ____ and the interest rate in the short run ____

falls; rises

a _____ is one where the government or central bank determines their exchange rate by intervening in the foreign exchange market

fixed exchange rate

a _____ is where a government or central bank intervene in currency exchange markets and buy or sell currency in order to keep an exchange rate fixed or on a determined path

fixed exchange rate or a crawling peg

a country that allows demand and supply to determine the value of its currency is said to have a

flexible exchange rate

a crawling peg exchange rate policy is one that _____. a crawling peg exchange rate is achieved _____.

follows a path determined by a decision of the government or central bank; by central bank intervention in the foreign exchange market

a monetary growth rule that might be supported by a monetarist would be a. plan

for the Federal Reserve to increase the quantity of money at a fixed rate and not respond to economic fluctuations

in the long run, the rate of inflation is determined by the _____

growth of money supply

the law of demand for foreign exchange states that other things remaining the same, the ____ the exchange rate, the smaller is the ____ in the foreign exchange market

higher; quantity of US dollars demanded

a depository institution is a financial firm that takes deposits from

households and firms

the Fed is the lender of last resort, which means

if depository institutions are short of reserves, they can borrow from the Fed

which of these predictions can be made using the growth rates associated with the equation of exchange?

if the money supply grows at a faster rate than real GDP, there will be inflation

from 1991 to 2006, the US current amount deficit

increased dramatically

starting from a full-employment equilibrium, an increase in aggregate demand ____ , and creates _____ gap

increases real GDP above potential GDP; an inflationary

lowering the required reserve ratio ____ , which _____ the quantity of loans that China's banks can make and the quantity of money created

increases unplanned reserves; increases

an open market purchase _____ the monetary base. an open market sale _____ the monetary base

increases; decreases

starting from a full-employment equilibrium, a decrease in short-run aggregate supply _____ and the price level and ____ potential GDP

increases; decreases real GDP below

if the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ____ and there is a movement up along the ____ aggregate supply curve

increases; short-run

according to Keynesian theory, fiscal policymakers can combat the impact of recessions by

increasing government spending

credit cards are

not part of the money supply

foreign currency is the money _____ regardless of whether that money is in the form of notes, coins, or bank deposits

of other countries

the aggregated demand curve slopes downward because

of the wealth effect and the substitution effect

the economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point

on the long-run aggregate supply curve

when the dollar appreciates against the yen

one dollar will buy more yen

the Fed conducts monetary policy primarily through

open market operations

the Fed's three policy tools are

open market operations, last resort loans, and the required reserve ration

starting from a short-run equilibrium, when the Fed decrease the quantity of money,

people enter the loanable funds and sell bonds

depository institutions balance risk and return by

placing some funds into safe low interest earning assets and other funds into high interest risky assets

Keynesian macroeconomists recommend

policies that actively offset changes in aggregate demand that bring recession

monetarist macroeconomists recommend

policies that keep taxes low to avoid disincentive effects that decrease potential GDP

classical macroeconomists recommend

policies that minimize the disincentive effects of taxes on employment, investment, and technological change

examples of monetary policy that decrease aggregate demand include

a decrease in the quantity of money and an increase in interest rates

which of these factors will shift the short-run aggregate supply to the left?

a decrease in the size of the labor force

if a country has a deficit in its net exports, it means that this country imports

a greater value of goods and services that in exports

economic growth results from

a growing supply of labor and increasing labor productivity, which increase long-run aggregate supply

the 1974-1975 recession was a result of

a leftward shift of the short-run aggregate supply curve

when interest rates on treasury bills and other financial assets are low, the opportunity cost of holding money is _____ , so the quantity of money demanded will be _____.

low, high

a rise in wages in China

decreases China's short-run aggregate supply and the quantity of real GDP supplied does not change

when Mexico decreases the quantity of money, Mexico's aggregate demand _____

decreases and the AD curve shifts leftward

a decrease in US demand for imports ____ the supply for US dollars. a rise in the US interest rate differential _____ the supply for US dollars

decreases; decreases

a fall the expected future exchange rate ____ the demand for US dollars. an increase in the US demand for imports _____ the demand for US dollars

decreases; does not change

a decrease in world demand for US exports ____ the demand for US dollars. a rise in the US interest rate differential _____ the demand for US dollars

decreases; increases

the ratio of reserves to deposits that an bank pans to hold is its _____. if a bank has $10 million in actual reserves and $8 million in desired reserves, then it has _____

desired reserve ratio; unplanned reserves

in the long run, an increase in the quantity of money _____ the interest rate

does not change

if the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied _____ and there is a movement up along the _____ aggregate supply curve

does not change; long-run

the federal funds rate is the _____ rate on _____ loans

interest; interbank

a central bank ______. a commercial bank ______

is a bank's bank; is a firm that takes deposits from household and firms

a flexible exchange rate is one that _____. it works _____

is determined by demand and supply in the foreign exchange market; with no direct intervention by the central bank

a fixed exchange rate is one that ____. a fixed exchange rate is achieved ____

is set by the government or the central bank; by central bank intervention in the foreign exchange market

If the economy moves into a recession, monetarists argue that the Fed should

keep the money supply growing at a constant rate

in the long run, supply and demand in the ___ market determines the real interest rate. the ____ adjusts to make the quantity of real money supplied equal to the quantity demanded

loanable funds; price level

on the balance sheet of commercials banks

loans are the largest asset

the defining feature of the monetarist view of macroeconomists is that the economy is

self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and the pace of money growth is kept steady

to shrink the balance sheet, the Fed would ______. As a result, the monetary base and bank reserves _____

sell Treasury bonds or mortgage-backed securities; decrease

the Board of Governors of the Federal Reserve has _____ members that are appointed for staggered _____ by the _____ and confirmed by the Senate

seven, 14 year terms, President

if the Federal Reserve increases the money supply at 5% a year, in the long run there will be _____.

something less than 5% annual inflation

Keynes maintained that the economy could remain long-term at levels of output below the full-employment level of output due to

sticky wages

the long-run historical evidence and international evidence show us that the relations hip between money growth and the inflation rate _____

supports the quantity theory, but the correlation is not perfect

which of the following statements illustrate monetary policy?

the Fed has raised the federal funds rate by 0.3 percent

which body of the Federal Reserve System sets the majority of US monetary policy?

the Federal Open Market Committee

when the price level, the money wage rate, and other factor prices rise by the same percentage, there is a movement along _____. Potential GDP ______

the LAS curve; does not change

when the price level rises but the money wage rate and the other factor prices remain the same, there is a movement along ____. the quantity of real GDP supplied _____

the SAS curve; increases

which of the following statements illustrate fiscal policy?

the US government has proposed a hike in the corporate tax rate

the US interest rate differential rises when

the US interest rate rises and the foreign interest rate falls

which of these factors will cause the long-run aggregate supply curve to shift to the right?

the accumulation of more machinery and equipment

true statement

the relationship between the quantity of real GDP supplied and the price level is different in the long run than in the short run

according to the graph, an increase in the quantity of money is best described by

the shift in the AD curve