EC 309 Test 2
The rate of inflation is the: A) median level of prices. B) average level of prices. C) percentage change in the level of prices. D) measure of the overall level of prices.
C
A variable rate of inflation is undesirable because: A) debtors and creditors cannot protect themselves by indexing contracts. B) shoeleather costs are greater under variable inflation than under constant inflation. C) menu costs are greater under variable inflation than under constant inflation. D) variable inflation leads to greater uncertainty and risk than under constant inflation.
D
If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent. A) 1 B) 3 C) 4 D) 7
D
Suppose that a country experiences a reduction in productivity - that is, an adverse shock to the production function. c. How would this change in productivity affect the labor market if unions prevented real wages from falling?
No change in wages, due to Unions
In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:
the nominal interest rate.
Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have ______ rates of inflation and decades of low money growth tended to have ______ rates of inflation. A) high; high B) high; low C) low; low D) low; high
B
When the Fed decreases the interest rate paid on reserves, it: A) increases the reserve-deposit ratio (rr). B) decreases the reserve-deposit ratio (rr). C) increases the monetary base (B). D) decreases the monetary base (B).
B
If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of labor will ______ the number unemployed.
increase
Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be _____ securities. A) safer and shorter-term B) tax-favored and foreign C) smaller-denomination and higher-grade D) riskier and longer-term
D
Liabilities of banks include: A) reserves. B) currency in the hands of the public. C) loans to customers. D) demand deposits.
D
Sectoral shifts: A) lead to wage rigidity. B) explain the payment of efficiency wages. C) depend on the level of the minimum wage. D) make frictional employment inevitable.
D
The definition of the transactions velocity of money is: A) money multiplied by prices divided by transactions. B) transactions divided by prices multiplied by money. C) money divided by prices multiplied by transactions. D) prices multiplied by transactions divided by money.
D
The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: A) money supply is constant. B) velocity is constant. C) inflation rate is constant. D) real interest rate is constant.
D
When the Fed increases the discount rate, it: A) increases the reserve to deposit ratio (rr). B) decreases the reserve to deposit ratio (rr). C) is likely to increase the monetary base (B) D) is likely to decrease the monetary base (B).
D
When the Fed makes an open-market sale, it: A) increases the money multiplier (m). B) increases the currency-deposit ratio (cr). C) increases the monetary base (B). D) decreases the monetary base (B).
D
Suppose that a country experiences a reduction in productivity - that is, an adverse shock to the production function. b. How would this change in productivity affect the labor market - that is, employment, unemployment, and real wages - if the labor market were always in equilibrium?
L,U = No change
To increase the money multiplier, the Fed can:
Lower the interest rate paid on reserves.
Sectoral Shifts:
Make frictional employment inevitable.
If the demand for money depends positively on real income and depends inversely on the nominal interest rate, what will happen to the price level today, if the central bank announces (and people believe) that it will decrease the money growth rate in the future, but it does not change the money supply today?
Money supply increases in future so price goes up now.
When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:
downward and to the left.
According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:
increasing
Econoland finances government expenditures with an inflation tax. Explain who pays the tax and how it is paid.
people holding the money
The unemployment resulting from wage rigidity and job rationing is called ________ unemployment.
structural unemployment.
Econoland finances government expenditures with an inflation tax. What are costs of the tax, assuming the tax rate is expected?
the inflation rate
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:
10 percent
A country that is on a gold standard primarily uses: A) commodity money. B) fiat money. C) credit money. D) the barter system.
A
All of the following are costs of fully expected inflation except that expected inflation: A) causes lower real wages. B) leads to shoeleather costs. C) increases menu costs. D) leads to taxing of nominal capital gains that are not real.
A
If many banks fail, this is likely to: A) increase the ratio of currency to deposits. B) decrease the ratio of currency to deposits. C) have no effect on the ratio of currency to deposits. D) decrease the amount of currency in circulation, if the Fed takes no action.
A
If the Federal Reserve wishes to increase the money supply, it should: A) decrease the discount rate. B) increase interest paid on reserves. C) sell government bonds. D) decrease the monetary base.
A
If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then: A) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen. B) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had fallen. C) the money supply would fall more than it would have fallen if the reserve-deposit ratio had risen. D) it is impossible to be certain whether the money supply would fall or rise in this case.
A
In 1974 in the United States, most spells of unemployment lasted: A) less than one month, yet most of the weeks of unemployment occurred in spells lasting two or more months. B) more than one month, and most weeks of unemployment occurred in spells of two or more months. C) less than one month, and most weeks of unemployment occurred in spells of one month or less. D) more than one month, but most weeks of unemployment occurred in spells of one month or less.
A
The banking system creates: A) liquidity. B) wealth. C) reserves. D) currency.
A
The income velocity of money: A) is defined in the identity MV = PY. B) is defined in the identity MV = PT. C) is the same thing as the transactions velocity of money. D) is the same as the number of times a dollar bill changes hands.
A
The recent reduced demand for unskilled workers relative to skilled workers has led to ______ for unskilled workers in Europe compared to ______ for unskilled workers in the United States. A) unemployment; lower wages B) lower wages; unemployment C) more unionization; efficiency wages D) efficiency wages; more unionization
A
Unemployment caused by the time it takes workers to search for a job is called ______ unemployment. A) frictional B) structural C) efficiency D) insider
A
Unions contribute to structural unemployment when collective bargaining results in wages: A) above the equilibrium level. B) below the minimum wage. C) below the equilibrium level. D) above the level of unemployment compensation.
A
Using decade-long data across countries from 2000-2010, countries with high money growth tend to have _____ inflation. A) high B) low C) constant D) decreasing
A
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. A) much greater than B) much less than C) almost equal to D) about one-half of
A
When the Fed increases the interest rate paid on reserves, it: A) increases the reserve-deposit ratio (rr). B) decreases the reserve-deposit ratio (rr). C) increases the monetary base (B). D) decreases the monetary base (B).
A
When the real wage is above the level that equilibrates supply and demand: A) the quantity of labor supplied exceeds the quantity demanded. B) the quantity of labor demanded exceeds the quantity supplied. C) there is no unemployment. D) the labor market clears.
A
Which of the following is an example of frictional unemployment? A) Dave searches for a new job after voluntarily moving to San Diego. B) Elaine is willing to work for less than the minimum wage, but employers cannot hire her. C) Bill is qualified and would like to be an airline pilot, but airlines do not find it profitable to hire him at the wage established by the airline pilot's union. D) Joan is willing to work at the going wage, but there are no jobs available.
A
Which of the following would most likely be called a hyperinflation? A) Price increases averaged 300 percent per year. B) The inflation rate was 10 percent per year. C) Real GDP grew at a rate of 12 percent over a year. D) A stock market index rose by 1,000 points over a year.
A
. The unemployment insurance system may be desirable because unemployment insurance: A) raises the natural rate of unemployment. B) reduces the rate of job finding. C) increases workers' uncertainty about their incomes. D) induces workers to reject unattractive job offers.
B
1. During the past 50 years the natural rate of unemployment in the United States ______ during the 1970s and 1980s, compared to the 1950s and 1960s, and then ______ during the 1990s, compared to the previous two decades. A) increased; increased B) increased; decreased C) decreased; decreased D) decreased; increased
B
A spell of unemployment begins when a person leaves their job or: A) withdraws from the labor force. B) enters the labor force. C) takes a vacation. D) has been without a job for at least four weeks.
B
According to studies of individual unemployed workers, these workers are most likely to find a job: A) about three months before their unemployment insurance runs out. B) within a few weeks of their unemployment insurance running out. C) about three months after their unemployment insurance runs out. D) at a time not influenced by the remaining number of weeks of unemployment insurance.
B
According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the: A) inflation rate. B) expected inflation rate. C) ex ante real interest rate. D) ex post real interest rate.
B
All of the following are considered major functions of money except as a: A) medium of exchange. B) way to display wealth. C) unit of account. D) store of value.
B
Centralized union wage bargaining with government intervention in Sweden gives relatively more influence to ______, while firm-level union wage bargaining in the United States gives relatively more influence to ______. A) efficiency wages; sectoral shifts B) sectoral shifts; efficiency wages C) insiders; outsiders D) outsiders; insiders
B
Firms currently have incentives to temporarily lay off workers because firms typically are charged for ______ of workers' unemployment benefits. A) all B) only a part C) none D) twice the cost
B
If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease
B
If the quantity of real money balances is kY, where k is a constant, then velocity is: A) k. B) 1/k. C) kP. D) P/k.
B
If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in: A) inflation of 1 percent and the nominal interest rate of less than 1 percent. B) inflation of 1 percent and the nominal interest rate of 1 percent. C) inflation of 1 percent and the nominal interest rate of more than 1 percent. D) both inflation and the nominal interest rate of less than 1 percent.
B
In a steady state: A) no hiring or firings are occurring. B) the number of people finding jobs equals the number of people losing jobs. C) the number of people finding jobs exceeds the number of people losing jobs. D) the number of people losing jobs exceeds the number of people finding jobs.
B
Inflation ______ the variability of relative prices and ______ allocative efficiency. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases
B
The costs of unexpected inflation, but not of expected inflation, are: A) menu costs. B) the arbitrary redistribution of wealth between debtors and creditors. C) unintended distortions of individual tax liabilities D) the costs of relative price variability.
B
The inconvenience associated with reducing money holdings to avoid the inflation tax is called: A) menu costs. B) shoeleather costs. C) variable yardstick costs. D) fixed costs.
B
The macroeconomic problem that affects individuals most directly and severely is: A) inflation. B) unemployment. C) low savings. D) low investment.
B
The money supply will decrease if the: A) monetary base increases. B) currency-deposit ratio increases. C) discount rate decreases. D) reserve-deposit ratio decreases.
B
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? A) -$1,000 B) +$500 C) +$1,000 D) +$1,500
C
According to the classical theory of money, inflation does not make workers poorer because wages increase: A) faster than the overall price level. B) more slowly than the overall price level. C) in proportion to the increase in the overall price level. D) in real terms during periods of inflation.
C
Economists use the term money to refer to: A) income. B) profits. C) assets used for transactions. D) earnings from labor.
C
Frictional unemployment is unemployment caused by: A) wage rigidity. B) minimum-wage legislation. C) the time it takes workers to search for a job. D) clashes between the motives of insiders and outsiders.
C
High-powered money is another name for: A) currency. B) demand deposits. C) the monetary base. D) M2
C
If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current unemployment rate is 0.10, then the current unemployment rate is ______ the equilibrium rate, and in the next period it will move ______ the equilibrium rate. A) above; toward B) above; away from C) below; toward D) below; away from
C
If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.
C
If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.
C
If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase. A) reserve requirements B) the discount rate C) the money supply D) the reserve-deposit ratio
C
In a country on a gold standard, the quantity of money is determined by the: A) government. B) central bank. C) amount of gold. D) buying and selling of government securities.
C
In the United States, the money supply is determined: A) only by the Fed. B) only by the behavior of individuals who hold money and of banks in which money is held. C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. D) according to a constant-growth-rate rule.
C
Open-market operations change the ______; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the ______. A) monetary base; monetary base; monetary base B) money multiplier; money multiplier; money multiplier C) monetary base; money multiplier; monetary base D) money multiplier; monetary base; money multiplier
C
The earned income tax credit: A) increases the government's tax revenue. B) reduces the incomes of poor working families. C) does not raise labor costs. D) is not an alternative to raising the minimum wage.
C
The money supply will increase if the: A) currency-deposit ratio increases. B) reserve-deposit ratio increases. C) monetary base increases. D) discount rate increases.
C
The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the _____ the monetary base and the _____ the money supply. A) smaller; smaller B) smaller; greater C) greater; greater D) greater; smaller
C
The quantity of money in the United States is essentially controlled by the: a. President of the United States. b. Department of the Treasury. c. Federal Reserve. d. system of commercial banks.
C
The real interest rate is equal to the: A) amount of interest that a lender actually receives when making a loan. B) nominal interest rate plus the inflation rate. C) nominal interest rate minus the inflation rate. D) nominal interest rate.
C
To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ______ and _____ the interest rate paid on bank reserves. A) purchases; raise B) purchases; lower C) sales; raise D) sales; lower
C
Wage rigidity: A) forces labor demand to equal labor supply. B) is caused by sectoral shifts. C) prevents labor demand and labor supply from reaching the equilibrium level. D) increases the rate of job finding.
C
When there is structural unemployment, the real wage is: A) rigid at a level below the market-clearing level. B) rigid at the market-clearing level. C) rigid at a level above the market-clearing level. D) flexible.
C
Suppose that Congress passes legislation making it more difficult for firms to fire workers. (An example is a law requiring severance pay for fired workers.) If this legislation reduces the rate of job separation without affecting the rate of job finding, how would the natural rate of unemployment change? Do you think that it is plausible that the legislation would not affect the rate of job finding? Why or why not?
No, because if separation rate is low, then job finding rate is low.
In the short run, a favorable supply shock causes:
Prices to fall and output to rise.
Suppose that a country experiences a reduction in productivity - that is, an adverse shock to the production function. a. What happens to the labor demand curve?
Shifts Down, due to supply reducing
In classical macroeconomic theory, the concept of monetary neutrality means that changes in the money supply do not influence real variables. Explain why changes in money growth affect the nominal interest rate, but not the real interest rate
The real interest rate will adjust to S&I without a reference to inflation or money growth rate
The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by:
a significant increase in the reserve-deposit ratio.
