Quiz 2 ch 4-7

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?

7 percent

If the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is:

A. 10 percent.

The inflation tax is paid:

by all holders of money

Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r3, then the economy has: A. balanced trade. B. a trade surplus. C. positive capital outflows. D. a trade deficit.

D. a trade deficit.

According to Blanchard, Europeans are more likely to use increases in real wages resulting from technological progress to increase ______, and Americans are more likely to use these increases in real wages to increase ______.

D. hours of leisure; consumption of goods and services

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

D. increase; increase

Money's liquidity refers to the ease with which: Answers: A. illegally obtained money can be laundered. B. coins can be melted down. C. loans can be floated. D. money can be converted into goods and services.

D. money can be converted into goods and services.

When insiders have a much greater impact on the wage-bargaining process than do outsiders, the negotiated wage is likely to be ______ the equilibrium wage.

D. much greater than

In a large open economy, the real interest rate is determined by: A. national saving, the domestic investment function, the net capital outflow function, and the net exports function. B. the domestic investment function, the net capital outflow function, and the net exports function. C. national saving, the domestic investment function, and the net exports function. D. national saving, the domestic investment function, and the net capital outflow function.

D. national saving, the domestic investment function, and the net capital outflow function.

The nominal exchange rate between the U.S. dollar and the Japanese yen is the: A. price of U.S. goods divided by the price of Japanese goods. B. price of Japanese goods divided by the price of U.S. goods. C. number of yen you can get for lending one dollar in Japan for one year. D. number of yen you can get for one dollar.

D. number of yen you can get for one dollar.

Wage rigidity:

D. prevents labor demand and labor supply from reaching the equilibrium level.

Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to:

D. reduce the firm's wage bill.

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply: Answers: A. increases by $100. B. increases by more than $100. C. decreases by $100. D. remains the same.

D. remains the same.

Economists call the changes in the composition of demand among industries and regions:

D. sectoral shifts.

The natural rate of unemployment is:

D. the average rate of unemployment around which the economy fluctuates.

All of the following are causes of structural unemployment except:

D. unemployment insurance.

All of the following policies were adopted by the government in an attempt to reduce the natural rate of unemployment except:

D. unemployment insurance.

Exhibit: Saving and Investment in a Small Open Economy Reference: Ref 6-1 (Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r1, then the economy has: A. a trade deficit. B. a trade surplus. C. balanced trade. D. negative capital outflows.

B. a trade surplus.

If inflation is 6 percent and a worker receives a 4 percent nominal wage increase, then the worker's real wage:

decreased 2 percent

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

increase by 1 percent

The opportunity cost of holding money is the:

nominal interest rate

The real interest rate is equal to the:

nominal interest rate minus the inflation rate.

The transactions velocity of money indicates the _____ in a given period, while the income velocity of money indicates the _____ in a given period.

number of times a dollar bill changes hands; number of times a dollar bill enters someone's income

The rate of inflation is the

percentage change in the level of prices.

A policy that decreases the job separation rate _____ the natural rate of unemployment.

D. will decrease

If the quantity of real money balances is kY, where k is a constant, then velocity is:

1/k

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent.

3

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year

5

The real exchange rate: A. is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level. B. is the price of a domestic car divided by the price of a foreign car. C. is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level. D. measures how many Japanese yen one really gets for a U.S. dollar.

A. is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.

In a system with 100-percent-reserve banking: Answers: A. no banks can make loans. B. all banks must hold reserves equal to 100 percent of their loans. C. no banks can accept deposits. D. the banking system completely controls the size of the money supply.

A. no banks can make loans.

If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the unemployment rate is approximately:

A. s/(s + f).

A bank balance sheet consists of only the following items: Deposits $1,000 Reserves $100 Securities $400 Debt $500 Loans $2,000 What is the value of bank capital? Answers: A. -$1,000 B. +$1,000 C. +$500 D. +$1,500

B. +$1,000

If the steady-state rate of unemployment equals 0.125 and the fraction of unemployed workers who find jobs each month (the rate of job findings) is 0.56, then the fraction of employed workers who lose their jobs each month (the rate of job separations) must be:

B. 0.08.

Bank Balance Sheet Assets Liabilities & Net Worth Reserves $ 10,000 Deposits $100,000 Loans 100,000 Debt 20,000 Securities 40,000 Equity 30,000 Reference: Ref 4-1 (Table: Bank Balance Sheet) Based on the table, what is the reserve-deposit ratio at the bank? A. 3 percent B. 10 percent C. 5 percent D. 15 percent

B. 10 percent

Bank Balance Sheet Assets Liabilities & Net Worth Reserves $ 10,000 Deposits $100,000 Loans 100,000 Debt 20,000 Securities 40,000 Equity 30,000 Reference: Ref 4-1 (Table: Bank Balance Sheet) Based on the table, owners' equity will fall to zero if loan defaults reduce the value of total assets by _____ percent. Answers: A. 10 B. 20 C. 30 D. 40

B. 20

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow. A. decreases; increases B. decreases; decreases C. increases; decreases D. increases; increases

B. decreases; decreases

If domestic spending exceeds output, we ______ the difference—net exports are ______. A. export; positive B. import; negative C. export; negative D. import; positive

B. import; negative

The banking system creates: A. currency. B. liquidity. C. wealth. D. reserves.

B. liquidity.

Credit card balances are included in: A. M2 only. B. neither M1 nor M2. C. M1 only. D. both M1 and M2.

B. neither M1 nor M2.

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: A. flow of value. B. unit of account. C. store of value. D. medium of exchange.

B. unit of account.

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the: A. yen will appreciate by 6 percent against the dollar. B. yen will appreciate by 3 percent against the dollar. C. yen will appreciate by 9 percent against the dollar. D. dollar will appreciate by 3 percent against the yen.

B. yen will appreciate by 3 percent against the dollar.

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: A. -$25 billion. B. $10 billion. C. -$10 billion. D. $25 billion.

C. -$10 billion.

Bank Balance Sheet Assets Liabilities & Net Worth Reserves $ 10,000 Deposits $100,000 Loans 100,000 Debt 20,000 Securities 40,000 Equity 30,000 Reference: Ref 4-1 (Table: Bank Balance Sheet) Based on the table, what is the leverage ratio at the bank? Answers: A. 4.67 B. 3 C. 5 D. 10

C. 5

Unions contribute to structural unemployment when collective bargaining results in wages: Selected Answer: C. above the equilibrium level.

C. above the equilibrium level.

In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is ______ and net capital outflow equals ______. A. a trade surplus; $100 billion B. a trade deficit; $100 billion C. balanced trade; $0 D. balanced trade; $100 billion

C. balanced trade; $0

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which: A. labor is relatively scarce. B. capital is relatively abundant. C. capital is relatively scarce. D. technological production capabilities are inferior.

C. capital is relatively scarce.

In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in bank accounts. This action would be expected to ______ the currency-deposit ratio and ______ the money supply. Answers: A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

C. increase; decrease

If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______. A. negative; positive B. negative; negative C. positive; positive D. positive; negative

C. positive; positive

In a steady state:

C. the number of people finding jobs equals the number of people losing jobs

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss good(s) per U.S. good. A. 0.5 B. 10 C. 5 D. 2.5

D. 2.5

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: Answers: A. 0.6. B. 2.0. C. 1.67. D. 2.5.

D. 2.5.

The definition of the transactions velocity of money is:

prices multiplied by transactions divided by money.