Midterm 3 Macro
If the reserve ratio is 8 percent, then an additional $1,000 of reserves can increase the money supply by as much as
$12,500.
If a country has net exports of $8 billion and sold $40 billion of goods and services abroad, then it has
$40 billion of exports and $32 billion of imports.
A bank's reserve ratio is 5 percent and the bank has $1,000 in deposits. Its reserves amount to
$50.
In an open economy, gross domestic product equals $1,950 billion, government expenditure equals $280 billion, investment equals $500, and net capital outflow equals $280 billion. What is consumption expenditure?
$890 billion
The nominal interest rate is 4%, the inflation rate is 1% and the tax rate is 20%. Given U.S. tax laws, how is after-tax real return computed?
.04(1 - .20) - .01
If the exchange rate is .70 euro per dollar, the price of an MP3 player in Paris is 150 euros and the price of an MP3 player in the U.S. is $150, then what is the real exchange rate?
.70 French MP3 players per U.S. MP3 player.
If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?
2.25
If the reserve ratio is 5 percent, then the money multiplier is
20.
The manager of the bank where you work tells you that your bank has $10 million in excess reserves. She also tells you that the bank has $400 million in deposits and $355 million dollars in loans. Given this information you find that the reserve requirement must be
35/400.
Over the last 70 years, the average annual U.S. inflation rate was about
4 percent, implying that prices increased about 16-fold.
The nominal interest rate is 6 percent and the real interest rate is 2 percent. What is the inflation rate?
4 percent.
If the reserve ratio is 2.5 percent, then the money multiplier is
40
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.
If the price level increased from 120 to 126, then what was the inflation rate?
5 percent
If M = 5,000, P = 3, and Y = 10,000, what is velocity?
6
If M = 3,000, P = 2, and Y = 12,000, what is velocity?
8
Suppose each good costs $5 per unit and Megan holds $40. What is the real value of the money she holds?
8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.
Which of the following is an example of U.S. foreign direct investment?
A U.S. based restaurant chain opens new restaurants in India.
A double coincidence of wants
All of the above are correct.
Money
All of the above are correct.
The New York Federal Reserve Bank
All of the above are correct.
To decrease the money supply, the Fed could
All of the above are correct.
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.
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 20 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?
It falls by $45 billion.
A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800 euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has purchasing-power parity with the U.S.?
Japan but not Belgium
Given the following information, what are the values of M1 and M2? Small time deposits $650 billion Demand deposits and other checkable deposits $300 billion Savings deposits $750 billion Money market mutual funds $600 billion Traveler's checks $25 billion Large time deposits $600 billion Currency $100 billion Miscellaneous categories in M2 $25 billion
M1 = $425 billion, M2 = $2, 450 billion.
If a country has a trade deficit then
S < I and Y < C + I + G.
On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.
The $80 is a nominal vairable. The quantity of shoes is a real variable.
An open economy's GDP is always given by
Y = C + I + G + NX
The law of one price states that
a good must sell at the same price at all locations.
You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced
a nominal gain, but no real gain, and you paid taxes on the nominal gain.
You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced
a nominal loss and a real gain.
The term hyperinflation refers to
a period of very high inflation.
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 sells more to foreign countries than it buys from them. It has
a trade surplus and positive net exports.
The classical dichotomy argues that changes in the money supply
affect nominal variables, but not real variables.
When deciding how much to save, people care most about
after-tax real interest rates.
Evidence concerning hyperinflation indicates a clear link between the money supply and the price level for
all of the above are correct
Bank runs
are a problem because banks only hold a fraction of deposits as reserves.
The members of the Federal Reserve's Board of Governors
are appointed by the president of the U.S. and confirmed by the U.S. Senate.
Interest rates adjusted for the effects of inflation
are real variables; inflation is a nominal variable.
If purchasing-power parity holds, a dollar will buy
as many goods in foreign countries as it does in the United States.
During the Great Depression in the early 1930s,
bank runs closed many banks.
The federal funds rate is the interest rate
banks charge each other for short-term loans of reserves.
Treasury Bonds are
both liquid and a store of value.
The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?
buy bonds to increase reserves
When the Federal Reserve conducts open-market operations to increase the money supply, it
buys government bonds from the public.
If the U.S. has exports of $1.5 trillion and imports of $2.2 trillion, then the U.S.
buys more from overseas then it sells overseas; it has a trade deficit.
Which of the following is a store of value?
cash and stocks
Higher inflation
causes firms to change prices more frequently and makes relative prices more variable.
Demand deposits are a type of
checking account.
When prisoners use cigarettes or some other good as money, cigarettes become
commodity money and function as a unit of account.
If an economy used gold as money, its money would be
commodity money, but not fiat money.
When inflation causes relative-price variability,
consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired.
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 economy unexpectedly went from inflation to deflation,
creditors would gain at the expense of debtors.
If the reserve ratio is 10 percent, banks do not hold excess reserves, people hold only deposits and no currency, then when the Fed sells $10 million worth of bonds to the public, bank reserves
decrease by $10 million and the money supply eventually decreases by $100 million.
To increase the money supply, the Fed could
decrease the discount rate.
For a given real interest rate, an increase in inflation makes the after-tax real interest rate
decrease, which discourages savings.
When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money
decreases, so the quantity of money demanded increases
As the reserve ratio increases, the money multiplier
decreases.
Credit cards
defer payments.
When prices are falling, economists say that there is
deflation.
Which of the following is included in both M1 and M2?
demand deposits
Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation
does not change the real interest rate but reduces the after-tax real rate of interest.
During a hyperinflation the real domestic value of a country's currency
falls and its nominal exchange rate depreciates.
The value of money rises as the price level
falls, because the number of dollars needed to buy a representative basket of goods falls.
Relative-price variability is "automatic" when
firms change prices only once in a while.
High and unexpected inflation has a greater cost
for savers rather than borrowers.
is greater than zero only if exports are greater than imports.
foreign direct investment that increases Italian net capital outflow
Net exports of a country are the value of
goods and services exported minus the value of goods and services imported.
The existence of money leads to
greater specialization and to a higher standard of living.
Fiat money
has no intrinsic value.
You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency
has no intrinsic value. The exchange is not an example of barter.
Wealth is redistributed from debtors to creditors when inflation was expected to be
high and it turns out to be low.
If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves
increase by $20 million and the money supply eventually increases by $250 million.
For a given real interest rate, a decrease in the inflation rate would
increase the after-tax real interest rate and so increase saving.
U.S. international trade has
increased because of an increase in trade of goods with a high value per pound.
In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have
increased both the money multiplier and the money supply.
At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply
increased. The central bank could have reduced the size of this increase by selling bonds.
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.
If an economy uses silver as money, then that economy's money
is commodity money.
Governments may prefer an inflation tax to some other type of tax because the inflation tax
is easier to impose.
A country's trade balance
is greater than zero only if exports are greater than imports.
The Federal Reserve
is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks.
The reserve requirement is 4%, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 of bonds what happens to the money supply?
it decreases by $250,000
According to purchasing power parity which of the following would happen if a country raised its money supply growth rate?
its nominal exchange rate would fall
The Fed can directly protect a bank during a bank run by
lending reserves to the bank.
Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be. The real interest rate she pays is
lower then she had expected, and the real value of the loan is lower than she had expected.
The money supply increases when the Fed
lowers the discount rate. The increase will be larger the smaller the reserve ratio is.
You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate?
medium of exchange
The price level rises if either
money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money.
Which of the following items is included in M2?
money market mutual funds
When inflation rises, people tend to go to the bank
more often, giving rise to shoeleather costs.
U.S. tax laws allow taxpayers, in computing the amount of tax they owe, to use the real value, as opposed to the nominal value, of
neither interest income nor capital gains.
Which of the following are U.S. taxpayers allowed to adjust for inflation for the purpose of income taxes?
neither interest income nor capital gains.
Other things the same, if a country saves less, then
net capital outflow falls, so net exports fall.
Other things the same, if a country saves more, then
net capital outflow rises, so net exports rise.
If the real exchange rate is greater than 1, then the
nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in the U.S. would buy more then enough foreign currency to buy the same good overseas.
In the U.S., taxes on capital gains are computed using
nominal gains. This is one way by which higher inflation discourages saving.
Which of the following does the U.S. president appoint and the U.S. Senate confirm?
not A.
If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by
not C.
Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then
not a
Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2,
not a, not b
High and unexpected inflation has a greater cost
not all of the above , for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation.
According to the classical dichotomy, when the money supply doubles, which of the following also doubles?
not b. maybe a
The supply of money increases when
not b. the Fed makes open-market purchases.
The nominal interest rate is 3.5 percent and the inflation rate is 2 percent. What is the real interest rate?
not c
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 $65 million worth of bonds to the public, bank reserves
not c maybe d
If the money supply is MS2 and the value of money is 2, then there is an excess
not c.
Nominal exchange rates
not c.
When the price level falls, the number of dollars needed to buy a representative basket of goods
not d.
Which tool of monetary policy does the Federal Reserve use most often?
open-market operations
If a country has Y > C + I + G, then it has
positive net capital outflow and positive net exports
To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the
quantity theory of money.
Economic variables whose values are measured in goods are called
real variables.
In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds,
reserves increase by $100 million and the money supply increases by more than $100 million.
The money supply decreases if the Fed
sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
A decrease in the money supply might indicate that the Fed had
sold bonds in an attempt to increase the federal funds rate.
Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?
store of value.
Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess
supply of money that is represented by the distance between points A and B.
Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?
the FOMC
A problem that the Fed faces when it attempts to control the money supply is that
the Fed does not control the amount of money that households choose to hold as deposits in banks.
If the money multiplier decreased from 20 to 12.5, then
the Fed increased the reserve ratio from 5 percent to 8 percent.
The agency responsible for regulating the money supply in the United States is
the Federal Reserve.
The velocity of money is
the average number of times per year a dollar is spent.
The president of each regional Federal Reserve Bank is appointed by
the board of directors of that regional Federal Reserve Bank.
Menu costs refers to
the cost of more frequent price changes induced by higher inflation.
In recent years the Federal Open Market Committee has focused on a target for
the federal funds rate.
Today, bank runs are not a major problem for the U.S. banking system because
the federal government now guarantees the safety of deposits at most banks.
Net capital outflow measures
the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.
The discount rate is
the interest rate the Fed charges banks.
According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?
the nominal exchange rate, but not the real exchange rate
Money demand depends on
the price level and the interest rate.
When the money market is drawn with the value of money on the vertical axis, as the price level increases which of the following increases?
the quantity of money demanded but not the quantity of money supplied
If a dollar buys more potatoes in the U.S. than in France, then
the real exchange rate is less than 1; a profit might be made by buying potatoes in the U.S. and selling them in France.
Figure 30-1 If the current money supply is MS1, then
there is no excess supply or excess demand if the value of money is 2.
In an economy that relies upon barter,
there is no item in the economy that is widely accepted in exchange for goods and services.
One surprising thing about the U.S. money stock is that
there is so much currency per person.
Economists use the term "money" to refer to
those types of wealth that are regularly accepted by sellers in exchange for goods and services.
In order to maintain stable prices, a central bank must
tightly control the money supply.
During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1.5 percent, but people had been expecting 1 percent . This difference between actual and expected inflation
transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you have expected.
When we measure and record economic value, we use money as the
unit of account.
The measure of the money stock called M1 includes
wealth held by people in their checking accounts.