Macroeconomics Exam 4

The liquidity trap refers to the situation where

the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.

Disinflation occurs when

the inflation rate is declining

Interest paid on excess reserves held at the Fed

incentivizes financial institutions to hold more reserves and reduce risky lending

In the curve, a decline in the tax rate from c to b would

increase tax revenue

If the Fed wants to discourage commercial bank lending, it will

increase the interest paid on excess reserves held at the Fed

Refer to the diagram. If the tax rate is currently c and the government wants to maximize tax revenue, it should Question 22 options:

reduce the tax rate to b

The basic problem portrayed by the traditional Phillips Curve is

that a level of aggregate demand sufficiently high to result in full employment may also cause inflation.

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?

$255.26

The beta for an asset considered to be risk-free

zero

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?

$540

Refer to the diagram for a specific economy. An increase in aggregate demand will

move this economy up and to the left along the curve

Alyssa is saving money for a vacation she wants to take five years from now. If the trip will cost $1,000 and she puts her money into a savings account paying 4 percent interest, compounded annually, how much would Alyssa need to deposit today to reach her goal without making further deposits?

$821.93

What are the limits of the terms of trade between Gamma and Sigma?

1 tea = 1 pot to 1 tea = 3 pots

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000. Thea's per-year rate of return is

14.8%

Assume that before specialization and trade, Gamma and Sigma both chose production possibility "C." Now if each specializes according to comparative advantage, the gains from specialization and trade will be

40 tons of tea

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can conclude that X has

5 times the nondiversifiable risk of Y

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent. In about how many years will her investment be worth $150?

8.3%

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years. What annually compounded rate of interest would she have to earn to reach her goal?

8.4%

According to the Taylor rule, if inflation has risen by 6 percentage points above its target of 2 percent, the Fed should

raise the real federal funds rate by 3 percentage points.

The discount rate is the interest

rate at which the Federal Reserve Banks lend to commercial banks

The risk premium of a financial asset is the

rate that compensates for risk

The terms of trade reflect the

ratio at which nations will exchange two goods

What is the difference between economic and financial investments?

Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods

each nation must be able to produce at least one good relatively cheaper than the other

Gamma should export tea to Sigma, and Sigma should export pots to Gamma

Refer to the diagram, which pertains to two nations and a specific product. The equilibrium world price occurs at

I

How do actively managed funds differ from passively managed funds?

Managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns

"NAFTA" stands for

North American Free Trade Agreement

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Open-market operations are focused exclusively on U.S. government bonds; quantitative easing also includes the buying and selling of debt issued by government agencies and government-sponsored entities

Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With a per-unit tariff of PcPt, the total amount of tariff revenue collected on this product will be

PcPt ×wy

Refer to the diagram for a specific economy. Which of the following best describes a decision by policymakers that moves this economy from point b to point a?

Policymakers have instituted an expansionary monetary policy and/or a budgetary deficit, thereby accepting a higher rate of inflation to reduce unemployment.

The production possibilities curves suggest that

West Mudville should specialize in, and export, baseball bats

Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With a per-unit tariff in the amount PcPt, price and total quantity sold will be

Pt and y

Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the short run, cost-push inflation could best be shown as

a leftward shift of aggregate supply from AS2 to AS3

Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the short run, demand-pull inflation could best be shown as

a move from b to c on AS2.

Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the long run, demand-pull inflation could best be shown as

a move from b to d

An adverse aggregate supply shock could result from

a rapid rise in oil prices

lower interest rates and increase the equilibrium GDP

a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply

The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1. In the long run, demand-pull inflation is best shown as

a shift of aggregate demand from AD1 to AD2, followed by a shift of aggregate supply from AS1 to AS2

The idea that money has "time value" refers to the fact that

a specific amount of money is more valuable to a person the sooner it is received

Reserves must be deposited in the Federal Reserve Banks by

all depository institutions, that is, all commercial banks and thrift institutions

Stagflation refers to

an increase in inflation accompanied by decreases in real output and employment

An asset's price and rate of return

are inversely related

Arbitrage is the process by which investors simultaneously sell

assets with lower rates of return and buy otherwise identical assets with higher rates of return

The Security Market Line depicts the relationship between the

average expected rate of return and risk level of a financial asset

The federal funds market is the market in which

banks borrow reserves from one another on an overnight basis

The long-run aggregate supply curve is vertical

because resource prices eventually rise and fall with product prices

Refer to the graphs. Growth of production capacity is shown by

both the shift from AB to CD and the shift from X to Y

Which is an example of a nontariff barrier (NTB)?

box-by-box inspection requirements for imported fruit

Countries engaged in international trade specialize in production based on

comparative advantage

Critics of supply-side economics

contend that the relationship between tax rates and economic incentives is small and of uncertain direction

The short-run aggregate supply curve is upsloping because higher price levels

create incentives to expand output when resource prices are unresponsive to price-level changes

Refer to the diagram, which pertains to two nations and a specific product. Point G is the

domestic price for the nation represented by lines GB and GD

In order for mutually beneficial trade to occur between two otherwise isolated nations,

each nation must be able to produce at least one good relatively cheaper than the other

Limited liability rules

encourage stock investing by limiting shareholder risk of loss

Refer to the graph. A movement of the Security Market Line from SML2 to SML1 and of the highlighted asset from A2 to A1 would be caused by

expansionary monetary policy and arbitrage, respectively

The current share price of a corporation's stock is determined by the

expected capital gains and dividends prospective buyers will earn

Refer to the diagram pertaining to two nations and a specific product. Lines FA and GB are

export supply curves for two countries

In recent years, the United States has

exported more services abroad than it has imported

The market for immediately available reserve balances at the Federal Reserve is known as the

federal funds market

A stockholder owning 5 percent of a company's stock

gets 5 percent of the votes at the shareholders' meetings

Another name for diversifiable risk is

idiosyncratic risk

According to the Taylor rule (1)

if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point

According to the Taylor rule (2)

if real GDP rises by 2 percent above potential GDP, the Fed should raise the real federal funds rate by 1 percentage point

Refer to the diagram, which pertains to two nations and a specific product. In equilibrium, the nation represented by lines FA and FC will

import H from the country represented by lines GB and GD

Refer to the diagram, which pertains to two nations and a specific product. Lines FC and GD are

import demand curves for two countries

When the Fed lends money to a commercial bank, the bank

increases its reserves and enhances its ability to extend credit to bank customers

A senator states, "We need to cut taxes in order to increase incentives to work and produce, so that we can pull the nation out of this economic slump." A mainstream economist who is a critic of this policy would likely reply that

increasing government spending is a surer way to increase production and pull the nation out of this economic slump

If the Federal Reserve System buys government securities from commercial banks and the public

it will be easier to obtain loans at commercial banks

Supply-side economist Arthur Laffer has argued that

large reductions in personal and corporate income taxes will increase aggregate supply much more than aggregate demand

Bonds represent

loans to governments and corporations

In a repo transaction, the Fed _______ money; in a reverse repo transaction, the Fed _______ money

loans; borrows

An increase in the money supply will

lower interest rates and increase the equilibrium GDP

Tariffs

may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs)

The primary gain from international trade is

more goods than would be attainable through domestic production alone

If country A can produce both goods X and Y more efficiently, that is, with smaller absolute amounts of resources, than can country B,

mutually advantageous specialization and trade between A and B may still be possible

In a two-nation model, the equilibrium world price will occur where

one nation's export supply curve intersects the other nation's import demand curve

Inflation in the U.S. economy tends to be

ongoing, as increases in aggregate demand generally exceed the increases in aggregate supply

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

open-market operations

Beginning in 2008, the Fed was allowed to

pay interest on excess reserves deposited at Fed banks

Portfolio diversification

reduces the likelihood that the entire amount invested will be lost

When the Fed loans money in exchange for government bonds being posted as collateral, this is known as a

repo

Which of the following Fed actions will decrease the money supply?

reverse repos

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to

sell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banks

Refer to the diagram, which shows the domestic demand and supply curves for a specific standardized product in a particular nation. If the world price for this product is $0.50, this nation will experience a domestic

shortage of 160 units, which it will meet with 160 units of imports

The last transaction in the federal funds market occurred in 2008 because

since the financial crisis, nearly every bank has significant excess reserves

Other things equal, a tariff is

superior to an import quota for Americans because a tariff generates revenue for the U.S. Treasury

Refer to the diagram, which shows the domestic demand and supply curves for a specific standardized product in a particular nation. If the world price for this product is $1.60, this nation will experience a domestic

surplus of 160 units, which it will export

Another name for nondiversifiable risk is

systemic risk.

The four main tools of monetary policy are

the discount rate, the reserve ratio, interest on excess reserves, and open-market operations

In the extended aggregate demand-aggregate supply model,

the level of real output is the same in the long run regardless of the location of the aggregate demand curve

The traditional Phillips Curve suggests a trade-off between

the level of unemployment and inflation.

The purchase of government securities from the public by the Fed will cause

the money supply to increase

The steeper the Security Market Line,

the more investors dislike risk

The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD1 to AD2,

the price level will rise from P2 to P3

Open-market operations refer to

the purchase or sale of government securities, as well as collateralized money loans, by the Fed

A rightward shift of the traditional Phillips Curve would suggest that

the rate of inflation is now higher at each rate of unemployment

One policy dilemma posed by cost-push inflation is that

the reduction of aggregate demand to restrain inflation will cause a further reduction in the real GDP

In the long run,

there is no inflation-unemployment trade-off

Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With free trade, that is, assuming no tariff, the outputs produced by domestic and foreign producers, respectively, would be

v and vz.

For heavily traded assets like stocks and bonds, arbitrage

will often equalize rates of return among similar assets within minutes