Chapter 14-21 Homework
According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?
about 14 years
From 2001 to 2005 there was a dramatic rise in the price of houses. If this rise made people feel wealthier, then it would have shifted
aggregate demand right.
Which of the following is an example of an efficiency wage?
an above-equilibrium wage paid by a firm to reduce turnover costs
Which of the following shifts long-run aggregate supply right?
an increase in either technology or the human capital stock.
Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is
an insurance company
On its web site, your bank posts the interest rates it is paying on savings accounts. Those posted rates
and a price index are both nominal variables.
If you go to the bank and notice that a dollar buys more Japanese yen than it used to, then the dollar has
appreciated. Other things the same, the appreciation would make Americans more likely to travel to Japan.
If the reserve ratio is 10 percent, $1,400 of additional reserves can create up to
$14,000 of new money.
Last year a country had exports of $50 billion, imports of $60 billion, and domestic investment of $40 billion. What was its saving last year?
$30 billion
Refer to Table 29-1. What is the value of M2 in billions of dollars?
$8,315 billion
If a country had a trade deficit of $20 billion and then its exports rose by $7 billion and its imports fell by $10 billion, its net exports would now be
-$3 billion
Refer to Figure 28-3. At the equilibrium wage, how many workers are unemployed?
0
Refer to Scenario 34-1. The marginal propensity to consume for this economy is
0.750.
In the United States, a cup of hot chocolate costs $5. In a foreign country, the same hot chocolate costs 6.5 units of that country's currency. If the exchange rate were 1.3 units of foreign currency per U.S. dollar, what is the real exchange rate?
1 cup of that country's hot chocolate per cup of U.S. hot chocolate
The nominal exchange rate is 2 Barbados dollars per U.S. dollar. If the price of a good in Barbados is 3 Barbados dollars and the price in the U.S. is 2 U.S. dollars, what is the real exchange rate to the nearest 100th?
1.33 Barbados goods per U.S. good
Refer to Table 28-2. The unemployment rate in Aridia in 2010 was
12.5%
If the exchange rate is 5 Egyptian pounds per U.S. dollar, a watch that costs $25 US dollars costs
125 Egyptian pounds
If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate?
4 percent
If the MPC changed from 0.8 to 0.6, then the spending multiplier would change from
5 to 2.5.
Refer to Table 28-3. What was Baltivia's labor-force participation rate in 2009?
63%
Refer to Table 28-4. What is the adult male labor-force participation rate in Meditor?
66.7%
At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?
8 percent
Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is
8 percent
A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?
9 percent
Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?
9.6 percent
Which of the following functions of money is also a common function of most other financial assets?
A store of value
Which of the following best illustrates moral hazard?
After a person obtains life insurance, she takes up skydiving.
Which famous person referred to compounding as "the greatest mathematical discovery of all time?"
Albert Einstein
Other things the same, which of the following happens if the price level rises?
All of the above are correct.
Refer to Figure 34-7. Which of the following is correct?
All of the above are correct.
Refer to Figure 33-4. If the economy is in long-run equilibrium, then an adverse shift in aggregate supply would move the economy from
C to D.
Refer to Figure 33-10. If the economy starts at point C, stagflation would be consistent with point
D.
Which famous company executive introduced an innovative pay system that is consistent with the theory of efficiency wages?
Henry Ford
An assistant manager at a restaurant gets a $100 a month raise. He figures that with his new monthly salary he cannot buy as many goods and services as he could buy last year.
His real salary has fallen and his nominal salary has risen.
Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest?
Inflation is 2 percent; the tax rate is 30 percent.
A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can given the reserve requirement.
It has $800 in reserves and $9,200 in loans.
Which of the following is correct concerning diversification?
It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30.
The banking system currently has $100 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 lowers the reserve requirement to 5 percent and at the same time buys $10 billion worth of bonds, then by how much does the money supply change?
It rises by $1,200 billion.
Who would be included in the labor force?
Lisa, who is unhappy with her current job.
Which of the following is always correct?
NCO = NX
You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.
Option 2; Option 3; Option 1
Steve purchases some land for $30,000. He maintains it, but makes no improvements to it. One year later he sells it for $32,000. Stephanie puts $30,000 in a savings account that pays 6% interest. Steve has to pay the 50% capital gains tax, Stephanie is in the 35% tax bracket. The inflation rate was 2%. Who had the higher before-tax real gain and who had the higher after-tax real gain?
Steve had the higher before-tax real gain but Stephanie had the higher after-tax real gain.
Which of the following is most likely to increase U.S. exports?
The United States unilaterally reduces its restrictions on foreign imports.
Figure 27-6. On the graph, x represents risk and y represents return. Refer to Figure 27-6. Which of the following statements is correct?
The figure shows that the greater the risk, the greater the return.
Which of the following statements best describes the economist's view of finance and the financial system?
The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.
Which of the following is not correct?
The process by which unions and firms agree on the terms of employment is called a strike.
Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.
These are both examples of adverse selection.
Which of the following is not included in either M1 or M2?
U.S. Treasury bills
In the open-economy macroeconomic model, a higher U.S. real exchange rate makes
U.S. goods more expensive relative to foreign goods and reduces the quantity of dollars demanded.
In the open-economy macroeconomic model, equilibrium in the market for foreign-currency exchange is determined by the equality between the supply of dollars which comes from
U.S. net capital outflow and the demand for dollars for U.S. net exports.
If a country has saving of $2 trillion and investment of $1.5 trillion, then it has
a trade surplus and its net capital outflow = $.5 trillion.
The classical dichotomy and monetary neutrality are represented graphically by
a vertical long-run aggregate-supply curve.
Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then
bond issuers and banks will respond by lowering the interest rates they offer.
Adam is looking for a job in marketing. He has had some offers and his prospects are promising, but he has not yet accepted a job. Amanda lost her job working for Mercury Bicycles because many customers decided they prefer bicycles manufactured by Ultimate Bicycles instead. Who is frictionally unemployed?
both Adam and Amanda
Matt and Melinda are American residents. Matt buys stock issued by a German corporation. Melinda opens a shoe factory in Panama. Whose purchase, by itself, increases the U.S.'s net capital outflow?
both Matt's and Melinda's
Which of the following fall during a recession?
both retail sales and employment
Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
both the multiplier effect and the crowding-out effect
If the interest rate is above the Fed's target, the Fed should
buy bonds to increase the money supply.
Public policy
can reduce both frictional unemployment and the natural rate of unemployment.
In which case(s) does(do) a country's demand for loanable funds shift right?
capital flight, but not an increase in the budget deficit
Which of the following can the Fed do to change the money supply?
change reserves or change the reserve ratio
If an economy used gold as money, its money would be
commodity money, but not fiat money.
The change in aggregate demand that results from fiscal expansion changing the interest rate is called the
crowding-out effect.
A government budget deficit
decreases both net capital outflow and net exports.
During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action
decreases the money multiplier and decreases the money supply.
Other things the same if reserve requirements are decreased, the reserve ratio
decreases, the money multiplier increases, and the money supply increases.
Which of the following is a liability of a bank and an asset of its customers?
deposits of its customers but not loans to its customers
If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?
e = P*/P
If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as
e(P/P*),
When the dollar appreciates, U.S.
exports decrease, while imports increase.
Other things the same, as the price level rises, the real value of money
falls and the exchange rate rises.
If there is a surplus in the market for loanable funds, then the interest rate
falls, so national saving falls.
If the Fed increases the money supply, then 1/P
falls, so the value of money falls.
In recent years, the Federal Reserve has conducted policy by setting a target for the
federal funds rate.
An increase in the number of corporations in a portfolio from 1 to 10 reduces
firm-specific risk by more than an increase from 110 to 120.
The idea of menu costs suggests that
firms alter prices more frequently as inflation increases.
High and unexpected inflation has a greater cost
for savers in high income tax brackets than for savers in low income tax brackets.
Net capital outflow is defined as the purchase of
foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
If Spain has a trade deficit, then
foreign countries purchase more Spanish assets than Spain purchases from them. This makes Spanish saving smaller then Spanish domestic investment.
A Finnish corporation builds a factory the produces ceiling fans in the United States. This is an example of Finish
foreign direct investment that increases Finnish net capital outflow.
Suppose that the Bureau of Labor Statistics predicts that the number of jobs for dental hygienists will grow faster than most occupations while the number of jobs for bookbinders will decline. This change in the labor market could lead to
frictional unemployment created by sectoral shifts.
Over the past several decades, the difference between the labor-force participation rates of men and women in the U.S. has
gradually decreased
In the aggregate demand and aggregate supply model, sticky wages, sticky prices, and misperceptions about relative prices
have temporary effects.
Foreign-produced goods and services that are purchased domestically are called
imports.
In the short run, a decrease in the money supply causes interest rates to
increase, and aggregate demand to shift left.
When the Fed buys government bonds, the reserves of the banking system
increase, so the money supply increases.
U.S. international trade has
increased because of an increase in trade of goods with a high value per pound.
Refer to Table 28-2. The unemployment rate of Aridia
increased from 2010 to 2011 but decreased from 2011 to 2012.
When Mexico suffered from capital flight in 1994, Mexico's net exports
increased.
When the money market is drawn with the value of money on the vertical axis, an increase in the money supply
increases the price level and decreases the value of money.
If the minimum wage is currently above the equilibrium wage, then a decrease in the minimum wage
increases the quantity of labor demanded but decreases the quantity of labor supplied.
The most important reason for the slope of the aggregate-demand curve is that as the price level
increases, interest rates increase, and investment decreases.
When the interest rate increases, the opportunity cost of holding money
increases, so the quantity of money demanded decreases.
If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by
increasing the money supply, which lowers interest rates.
According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increases
inflation and nominal interest rates, but does not change real interest rates.
If the supply of loanable funds shifts right, then the equilibrium
interest rate falls, so domestic residents will want to purchase more foreign assets.
In an open economy, the source for the demand for loanable funds is
investment + net capital outflow
The concept of present value helps explain why
investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
Refer to Table 29-5. If the bank faces a reserve requirement of 6 percent, then the bank
is in a position to make a new loan of $18,000.
The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?
it decreases by $250,000
Money is the most liquid asset available because
it is a medium of exchange.
A reduction in U.S net exports would shift U.S. aggregate demand
leftward. In an attempt to stabilize the economy, the government could increase expenditures.
When inflation rises, people will desire to hold
less money and will go to the bank more frequently.
When the price level rises more than expected, a firm with a sticky price will sell its output at a price that is
less than it desires and increase its production.
Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's
marginal utility diminishes as wealth rises, so he must be risk averse.
Which of the following are costs incurred by people trying to protect themselves from the effects of inflation?
menu costs and shoeleather costs
The price level rises if either
money demand shifts leftward or money supply shifts rightward.
Unemployment numbers reported by the Bureau of Labor Statistics are reported based on a
monthly survey of about 60,000 households.
Other things the same, if the real interest rate in a country falls, domestic residents will desire to purchase
more capital goods and more foreign bonds.
When the real exchange rate for the dollar appreciates, U.S. goods become
more expensive relative to foreign goods, which makes exports fall and imports rise.
Higher inflation makes relative prices
more variable, making it less likely that resources will be allocated to their best use.
Real GDP
moves in the opposite direction as unemployment.
Anna recently graduated from college with a degree in electrical engineering, but she has not yet started working. To be counted as "unemployed" she
must have looked for work no more than four weeks ago.
The value of net exports equals the value of
national saving - domestic investment.
When a government raises its budget deficit, then that country's
national saving falls, so its supply of loanable funds shifts left.
After 1980 in the United States,
national saving fell below investment and net capital outflow was a large negative number.
A decrease in the expected price level shifts
only the short-run aggregate supply curve right.
According to classical macroeconomic theory,
output is determined by the supplies of capital and labor and the available production technology.
Currency includes
paper bills and coins.
Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?
present value
If purchasing-power parity holds, when a country's central bank increases the money supply, its
price level rises and its currency depreciates relative to other currencies in the world.
An increase in the money supply might indicate that the Fed had
purchased bonds in an attempt to reduce the federal funds rate.
If the real exchange rate between the U.S. and Argentina is 1, then
purchasing-power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.
The aggregate-demand curve shows the
quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level.
Other things the same, a fall in an economy's overall level of prices tends to
raise the quantity demanded of goods and services, but lower the quantity supplied.
Diversification
reduces the likely fluctuation in a portfolio's return and reduces firm-specific risk.
On a bank's T-account, which are part of the bank's assets?
reserves but not deposits made by its customers
When a country imposes an import quota, its exchange rate
rises because the demand for dollars in the market for foreign-currency exchange rises.
If the Mexican nominal exchange rate does not change, but prices rise faster in Mexico than in all other countries, then the Mexican real exchange rate
rises.
The Fed decreases reserves if it conducts open market
sales but not if it auctions term credit
If, at some interest rate, the quantity of money supplied is less than the quantity of money demanded, people will desire to
sell interest-bearing assets, causing the interest rate to increase.
The money supply decreases if the Fed
sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
Changes in the interest rate
shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.
Financial Crisis: Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts
short-run aggregate supply right.
Refer to Figure 32-1. If the real interest rate is 2 percent, there will be a
shortage of $40 billion.
If France had positive net exports last year, then it
sold more abroad than it purchased abroad and had a trade surplus.
The efficient markets hypothesis says that
stock prices follow a random walk.
Efficiency wages contribute to
structural unemployment and the natural rate of unemployment.
If there were no factors keeping wages from reaching equilibrium then there would be no
structural unemployment.
In order to understand how the economy works in the short run, we need to
study a model in which real and nominal variables interact.
Refer to Figure 32-3. National saving is represented by the
supply curve in panel a.
Other things the same, an increase in the U.S. interest rate causes
supply in the market for foreign-currency exchange to increase so the exchange rate decreases. (wrong)
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 of the following would both shift aggregate demand right?
taxes decrease and government expenditures increase.
Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is
temporarily low and so supply a smaller quantity of labor.
Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?
the crowding-out effect
Which of the following happens in the market for loanable funds when there is capital flight?
the demand curve shifts right.
If speculators lost confidence in foreign economies and so wanted to buy more U.S. bonds
the dollar would appreciate which would cause aggregate demand to shift left.
Using the liquidity-preference model, when the Federal Reserve decreases the money supply,
the equilibrium interest rate increases.
Other things the same, if foreign residents desired to purchase more U.S. wheat
the exchange rate would rise and net exports would be unchanged.
Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?
the exchange-rate effect
Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
the inflation rate and the nominal interest rate by the same number of percentage points.
According to the classical dichotomy, when the money supply doubles which of the following doubles?
the price level and nominal GDP
According to the classical dichotomy, when the money supply doubles, which of the following also doubles?
the price level and nominal wages
In the open-economy macroeconomic model, the key determinant of net capital outflow is
the real interest rate. When the real interest rate rises, net capital outflow falls.
In the market for foreign-currency exchange, capital flight shifts
the supply curve right.
When the Consumer Price Index falls from 110 to 100
there is deflation of 9.1% and the value of money increases.
During periods of expansion, automatic stabilizers cause government expenditures
to fall and taxes to rise.
Which of the following is included in M1 and M2?
traveler's checks
M1 equals currency plus demand deposits plus
traveler's checks plus other checkable deposits.
There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that
velocity rose. If monetary neutrality holds the rise in velocity decreased the ratio M/P.
Which of the following is an example of the menu costs of inflation?
Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy
If the reserve ratio is 7.5 percent, the money multiplier is
13.3.
Over the past two centuries, the average annual rates of return were about
8 percent for stocks and about 3 percent for short-term government bonds.
Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?
A stock-market boom increases households' wealth by $575, and there is an operative crowding-out effect.
Suppose the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen?
All of the above are correct. (People who had lent money at a fixed interest rate would feel poorer, Prices would rise, People who held money would feel poorer)
Who of the following are included in the Bureau of Labor Statistics' "employed" category?
All of the above are correct. (certain unpaid workers, part-time workers, workers on vacation)
Which of the following would increase output in the short run?
All of the above are correct. (firms chose to purchase more investment goods, government spending increases, an increase in stock prices makes people feel wealthier)
The inflation tax
All of the above are correct. (is the revenue created when the government prints money, taxes most those who hold the most money, is an alternative to income taxes and government borrowing)
According to the classical dichotomy, which of the following is not influenced by monetary factors?
All of the above are correct. (real GDP, real wages, real interest rates)
Frictional unemployment can be the consequence of
All of the above are correct. (workers leaving existing jobs to find ones they like better, one industry declining while another is growing, changes in the working conditions offered by competing firms)
Octavia does not currently have a job, but she has applied for several jobs in the previous week. Eve is an unpaid stay-at-home mom who has not searched for work in recent years. Who does the Bureau of Labor Statistics count as "out of the labor force"?
Eve but not Octavia
Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?
It would have to have shifted left by less than aggregate supply shifted
Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.
This stock is overvalued; you shouldn't consider adding it to your portfolio.
Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.
This stock is undervalued; you should consider adding it to your portfolio.
Which of the following is correct?
Unemployment Rate = number of unemployed / (number of employed + number of unemployed) x 100.
Which of the following shifts short-run aggregate supply right?
a decrease in the price of oil
In the open-economy macroeconomic model, which of the following increases net capital outflow?
a fall in the real interest rate, but not a fall in the real exchange rate
A U.S. grocery chain borrows money to buy a warehouse in Ohio and another in Italy. Borrowing for which warehouse(s) is included in the demand for loanable funds in the U.S.?
both the one in Ohio and the one in Italy
Suppose that some people are counted as unemployed when, to maintain unemployment compensation, they search for work only at places where they are unlikely to be hired. If these individuals were counted as out of the labor force instead of as unemployed, then
both the unemployment rate and labor-force participation rate would be lower.
If, at some interest rate, the quantity of money demanded is less than the quantity of money supplied, people will desire to
buy interest-bearing assets, causing the interest rate to decrease.
Reserves are
deposits that banks have received but have not yet loaned out.
Other things the same, a higher real interest rate raises the quantity of
loanable funds supplied.
Wealth is redistributed from creditors to debtors when inflation was expected to be
low and it turns out to be high.
Lucy quit her job because she was unhappy at work. Genevieve was fired because she frequently surfed the Internet rather than working on her assigned tasks. Who is eligible for unemployment insurance benefits?
neither Lucy nor Genevieve
If sales of Saudi Arabian oil to the rest of the world increase and Saudis use the proceeds to buy foreign goods, which of the following increases?
neither Saudi Arabian net exports nor net capital outflow
If the inflation rate is zero, then
neither the nominal interest rate nor the real interest rate can fall below zero.
When fear of default on bonds issued by U.S. corporations decline, then
net capital outflow falls and the exchange rate rises.
Other things the same, if a country has a trade deficit and saving rises,
net capital outflow rises, so the trade deficit decreases.
The ability to profit by purchasing wheat in the U.S. and selling it in China implies that the
real exchange rate is less than 1.
The aggregate quantity of goods and services demanded changes as the price level falls because
real wealth rises, interest rates fall, and the dollar depreciates.
After much anticipation a company releases a new smartphone. The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would
reduce the present value and the price of the corporation's stock.
A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should
reduce the price of the company's stock.
Goods that cost 1/5 of one dollar in the U.S. cost one kroner in Denmark, the real exchange rate would be computed as how many Danish goods per U.S. goods?
the amount of kroner that can be bought with twenty U.S. cents
Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that
the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.
The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning
the long run, but not the short run.
According to 2014 data on the U.S. population, which of the following groups of adults of prime working age (ages 25-54) had the lowest unemployment rate?
white males
Suppose a bank is operating with a leverage ratio of 10. A 6 percent increase in the value of assets
will result in a 60 percent increase in owner's equity.
Which of the following is NOT required for paper dollars to work as a medium of exchange?
Intrinsic value backed by gold
The aggregate demand is described graphically as
sloping downward.