Macroeconomics final

Suppose that an SML indicates that assets with beta = 1.15 should have an average expected rate of return of 12 percent per year. If a particular stock with a beta = 1.15 currently has an average expected rate of return of 15 percent, what should we expect to happen to its price.

rise

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. c. Output prices are flexible, but input prices are fixed

short-run

Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those Changes were caused by only one curve shifting, then those changes are best explained as the result of:

the AD curve shifting left

The actual reason banks must hold required reserves is:

to give the Fed control over the lending ability of commercial banks

A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. the discount rate that applies to the loan is 4 percent and the Fed is currently mandating a reserve ratio of 10 percent. How much of the $100,000 borrowed by the bank must it keep as required reserves?

$0

An American Company wants to buy a television from a Chinese company. the Chineses company sells its TV's for 1,200 yuan each. The current exchange rate between the US dollar and the Chinese yuan is $1 = 6 yuan. How many dollars will the American company have to convert into yuan to pay for the television?

$200

A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has _________ in money-creating potential. If the reserve ratio is 14 percent, the bank has _____________ in money-creating potential.

-$5,000; $1,000

Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion, and a balance on the current account of -$200 billion. The balance on the capital and financial account will be:

200 billion

If prices are sticky and the number of dollars of gross investment unexpectedly increases, the ___________ curve will shift _______________.

AD; right

Suppose that the banking system is Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?

Canada

True or False: If a country if open to international trade, the domestic price can differ from the international trade price.

False

True or False: If spending exceeds output, real GDP will decline as firms cut back on production.

False

True or False: The aggregate expenditures model assumes flexible prices.

False

Which of the following will shift the aggregate demand curve to the left? a. The government reduces personal income taxes b. Interest rates rise c. The government raises corporate profit taxes d. There is an economic boom overseas that raises the incomes of foreign households

Interest rates rise

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? c. Equal increases in aggregate demand and aggregate supply

Price level does not change, but real output increases.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? e. an increase in aggregate demand that exceeds an increase in aggregate supply

Price level increases somewhat, as does real output.

The two conflicting goals facing commercial banks are:

Profit and Liquidity

Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, b. Distracted by a war that is going badly, inflation reaches 8 percent before politicians take notice.

Recognition lag

A depression abroad will tend to ____________ our exports, which in turn will ____________ net exports, which in turn will ____________ equilibrium real GDP.

Reduce, Reduce, Reduce

Which of the following actions will increase bank lending? a. The Fed raises the discount rate from 5 percent to 6 percent b. The Fed raises the reserve ratio from 10 percent to 11 percent c. The Fed initiates reserve repos involving $10 billion worth of Treasury bonds with nonbank financial firms d. The Fed lowers the discount rate from 4 percent to 2 percent.

The Fed initiates reserve repos involving $10 billion worth of Treasury bonds with nonbank financial firms & The Fed lowers the discount rate from 4 percent to 2 percent.

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:

above equilibrium

When bond prices go up, interest rates go _______

down

A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan _________________.

excess reserves

If the money supply fell by 10 percent, a monetarist would expect nominal GDP to ________________.

fall

If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

false

Identify each of the following investments as either an economic investment or a financial investment. b. A pension plan buys some Google stock

financial

Identify each of the following investments as either an economic investment or a financial investment. d. a woman buys a 100-year old farmhouse in the countryside

financial

Identify each of the following investments as either an economic investment or a financial investment. f. a company buys an old factory

financial

Aggregate supply shocks can cause ________ rates of inflation that are accompanied by __________ rates of unemployment.

higher, higher

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. e. An upscoping curve

short-run

if an investment has a 35 percent more non-diversifiable risk than the market portfolio, its beta will be...

1.35

suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small denominated time deposits, and $30 million of money market mutual fund deposits. From these numbers we see that this small country's M1 money supply is ______, while its M2 money supply is _____.

10 million, 280 million

The interest rate on on short term U.S. government bonds is 4 percent. The risk premium for any asset with beta = 1.0 is 6 percent. What is the expected rate of return on the market portfolio?

10 percent

It is a fact that (1 + 0.12)^3 = 1.40. Knowing that to be true, what is the present value of $140 received in 3 years if the annual interest rate is 12 percent?

100

an investment has a 50 percent chance of generating a 10 percent return and a 50 percent chance of generating a 16 percent return. What is the investments average expected rate of return?

13 percent

If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by:

15 billion

Suppose that the opportunity cost ratio for watches and cheese is 1C = 1W in Switzerland but 1C = 4W in Japan. At which of the following international exchange ratios (terms of trade) will Switzerland and Japan be willing to specialize and engage in trade with each other a. 1C = 3W b. 1C = 1/2W c. 1C = 5W d. 1/2C = 1W e. 2C = 1W

1C = 3W and 1/2C = 1W

The exchange rate at a McDonald's restaurant in New York costs $8. The identical meal at a McDonald's restaurant in London costs $4. According to the purchasing-power-parity theory of exchange rates, the exchange rate between U.S. dollars and British pounds should tend to move toward:

2 dollars = I pound

A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the banks excess reserves?

2 million

A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?

2/5

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

20 billion

suppose that the money supply is $1 trillion and money velocity is 4. Then the equation of exchange would predict nominal GDP to be:

4 trillion

Tammy can buy as asset this year for $1,000. She is expecting to sell it next year for $1,050. What is the assets anticipated percentage rate of return.

5 percent

Suppose that firms are expecting 6 percent inflation while workers are expecting 9 percent inflation. How much of a pay raise will workers demand if their goal is to maintain the purchasing power of their incomes?

9 percent

Sammy buys a stock in suntan-lotion maker and also a stock in umbrella maker. One stock does well when the weather is good; the other does well when the weather is bad. Sammy's portfolio indicates that 'weather risk' is a ___________ risk.

Diversifiable

Suppose that the opportunity cost ratio for fish and lumber is 1F = 1L in Canada but 2F = 1L in Iceland. Then ____________ should specialize in producing fish while _____________ should specialize in producing lumber.

Iceland, Canada

City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company's chances for success are dubious, but City Bank makes the loan anyway because it believes that the government will bail it out if SheetOil goes bankrupt and cannot repay the loan. City Bank's decision to make the loan has been affected by:

Moral Hazard

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? b. A decrease in aggregate supply, with no change in aggregate demand

Price level rises and real output decreases.

Suppose that last year, the economy was in a recession, government spending was $595 billion and government revenue was $505 billion. Economists estimate that if the economy had been at its full-employment level of GDP last year, government spending would have been $555 billion and government revenue would have been $550 billion. Which of the following statements about this government's fiscal situation are true? a. The government has a non-cyclically adjusted budget deficit of $595 billion b. The government has a non-cyclically adjusted budget deficit of $90 billion c. The government has a non-cyclically adjusted budget surplus of $90 billion d. The government has a cyclically adjusted budget deficit of $555 billion e. The government has a cyclically adjusted budget deficit of $5 billion f. The government has a cyclically adjusted budget surplus of $5 billion

The government has a non-cyclically adjusted budget surplus of $90 billion & The government has a cyclically adjusted budget deficit of $5 billion

In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the Federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?

There is a crowding-out effect of $20 billion.

True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending

True

True or False: If country B has an absolute advantage over country A in producing bicycles, it will also have a comparative advantage over country A in producing bicycles.

True

True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation form political pressure and (2) speed and flexibility,

True

If the Fed increases interest rate, the SML will shift _________ and asset prices will __________

Up; fall

Which of the following help to explain why the aggregate demand curve slopes downward? a. When the domestic price level rises, our goods and services become more expensive to foreigners b. When government spending rises, the price level falls c. there is an inverse relationship between consumer expectations and personal taxes d. When the price level rises, the real value of financial assets declines.

When the domestic price level rises, our goods and services become more expensive to foreigners & When the price level rises, the real value of financial assets declines.

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

a mediocre and contradictory combination of tax and expenditure changes.

Which of the following will shift the aggregate supply curve to the right? a. a new networking technology increases productivity all over the economy b. The price of oil rises substantially c. Business taxes fall d. The government passes a law doubling all manufacturing wages

a new networking technology increases productivity all over the economy & Business taxes fall

Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, c. A sudden recession is recognized by politicians, but it takes many months of political deal making before a stimulus bill is finally approved.

administrative lag

Suppose that the opportunity-cost ratio for sugar and almonds is 4S ≡ 1A in Hawaii but 1S ≡ 2A in California. Which state has the comparative advantage in producing almonds?

california

identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation. b. Real GDP is above the full-employment level and prices have risen recently

demand pull inflation

Identify each of the following investments as either an economic investment or a financial investment. a. A company builds a new factory

economic

Identify each of the following investments as either an economic investment or a financial investment. c. A mining company sets up a new gold mine

economic

Identify each of the following investments as either an economic investment or a financial investment. e. a man buys a newly built home in the city

economic

Suppose that AD and AS intersect at an output level that is higher than the full employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be _________.

higher than it is now

A commercial bank sells a treasury bond to the federal reserve for $100,000. The money supply:

increases by $100,000

Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, d. To fight a recession, the president issues an executive order requiring Federal agencies to get rid of petty regulations that burden private businesses—but the Federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

operational lag

American apparel makers complain to congress about competition from China. Congress decides to impose either a tariff or a quota on apparel imports from China. Which policy would Chinese apparel manufactures prefer?

quota

Which of the following would help a government reduce an inflationary output gap? a. rasining taxes b. Lowering taxes c. Increasing government spending d. decreasing government spending

rasining taxes & decreasing government spending

suppose that if Iceland and Japan were both closed economies, the domestic price of fish would be $100 per ton in Iceland and $90 per ton in Japan. If the two countries decided to open up to international trade with each other, which of the following could be the equilibrium international price of fish once they begin trading?

$95

James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a state pension plan, which at the same time purchases an insurance policy from AIG that will pay off if James and the other people whose mortgages are in the security can't pay off their mortgage loans. Suppose that James and all the other people can't pay off their mortgages. Which financial entity is legally obligated to suffer the loss?

AIG

Which of the following is not a function of the FED? a. Setting reserve requirements for banks b. Advising Congress on fiscal policy c. regulating the money supply d. serving as a lender of last resort

Advising Congress on fiscal policy

Asset X is expected to deliver 3 future payments. They have present values of, respectively, $1,000, $2,000, and $7,000. Asset Y is expected to deliver 10 future payments, each having a present value of $1,000. Which of the following statements correctly describes the relationship between the current price of Asset X and the current price of Asset Y? a. Asset X and Asset Y should have the same current price b. Asset X should have a higher current price than Asset Y c. Asset X should have a lower current price than Asset Y

Asset X and Asset Y should have the same current price

In Country A, the production of 1 bicycle requires using resources that could otherwise be used to produce 11 lamps. In Country B, the production of 1 bicycle requires using resources that could otherwise be used to produce 15 lamps. Which country has a comparative advantage in making bicycles?

Country A

If inventories unexpectedly rise, then production _______ sales and firms will respond by _______ output.

Exceeds; reducing

True or False. Decreases in AD normally lead to decreases in both output and the price level.

False

True or False: The Financial crisis hastened the ongoing process in which the financial services industry was transforming from having a few large firms to may small firms.

False

If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by _________ taxes or __________ government expenditures.

Increasing; decreasing

Suppose that firms were expecting inflation to be 3 percent, but then it actually turned out to be 7 percent. Other things equal, firm profits will be:

Larger than expected

Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, a. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.

Operational Lag

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? d. a decrease in aggregate demand

Price level does not change, but real output declines.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? a. An increase in aggregate demand

Price level rises rapidly and little change in real output.

Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates?

The Federal Reserve System

During the recession of 2007−2009, the U.S. Federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

Yes

The economy's current level of equilibrium GDP is $780 billion. The full-employment level of GDP is $800 billion. The multiplier is 4. Given those facts, we know that the economy faces ___________ expenditure gap of ________.

a recessionary; $5 billion

Which of the following are benefits from international trade? a. a more efficient allocation of resources b. a higher level of material well-being c. Gains from specialization d. Promoting competition e. Deterring monopoly f. Reducing the threat of war

all options are correct

identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation. a. Real GDP is below the full-employment Level and prices have risen recently

cost push inflation

In Country A, a worker can make 5 bicycles per hour. In country B, a worker can make 7 bicycles per hour. Which country has an absolute advantage in making bicycles?

country B

An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusted back to producing at full employment, the price level would _____________.

decrease

Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers. What happened to the money supply?

decreased

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. b. The price level is fixed

immediate-short-run

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. d. a horizontal line

immediate-short-run

If total spending is just sufficient to purchase an economy's output, then the economy is:

in equilibrium

We see quite a bit of international trade in the real world. And trade is driven by specialization. So why don't we see full specialization—for instance, all cars in the world being made in South Korea, or all the mobile phones in the world being made in China? Choose the best answer from among the following choices. a. High Tariffs b. Extensive c. Increasing Opportunity costs d. Increasing returns

increasing opportunity costs

If the Federal Reserve wants to increase the federal funds rate using open-market operations, it should ___________ bonds to nonbank financial firms.

initiate reverse repos of

An important reason why members of the Federal Reserve's Board of governors are each given extremely long, 14-year terms is to:

insulate members from political pressures that could result in inflation.

Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar?

it will rise by a third (33.3%)

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. a. A Vertical Line

long-run

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. f. Output is fixed

long-run

Suppose that the current international price of wheat is $6 per bushel and the United States is currently exporting 30 million bushels per year. If the United States suddenly became a closed economy with respect to wheat, would the domestic price of wheat in the United States end up higher or lower than $6?

lower

The three functions of money are?

medium of exchange, unit of account, store of value