Eco 231
The following are hypothetical exchange rates: 2 euros = 1 pound; $1 = 2 pounds. We can conclude that
$1 = 4 euros
Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years. How much will be required to pay off the loan at the end of 10 years?
$1,079.46
If a U.S. importer can purchase 10,000 British pounds for $20,000, the rate of exchange is
$2 = 1 British pound in the United States
Under a gold standard, a balance of payments disequilibrium would be corrected automatically by
an outflow or inflow of gold.
Arbitrage is the process by which investors simultaneously sell
assets with lower rates of return and buy otherwise identical assets with higher rates of return
If an asset has a risk-return combination that is above the Security Market Line (SML), then arbitrage will make that asset's
average expected return decrease.
The Security Market Line (SML) is upward-sloping, indicating that the
average expected return on investments decreases as their risk level decreases
According to the equation of exchange, changes in the money supply can affect
both the price level and real output
A mutual fund company uses the funds of its investors to
buy stocks and bonds.
With inflation targeting, the Federal Reserve would be required to announce its targeted band for
changes in the price level.
In the United States, the money supply (M1) includes
coins, paper currency, and checkable deposits.
Commercial banks create money when they
create checkable deposits in exchange for IOUs.
According to real-business-cycle theory, recessions are caused by
deviations of aggregate supply from long-term growth trends
In the rational expectations view
discretionary policy tends to be ineffective.
A stock investor may expect returns in the form of
dividends and capital gains
A nation will neither export nor import a specific product when its
domestic price equals the world price.
Which of the following is not a DVC policy likely to increase DVC economic growth?
encouraging emigration of highly skilled workers
Nondiversifiable risk refers to potential losses from
events that move all investments in the same direction.
The main tools that the Fed can use to alter the reserves of commercial banks are the required-reserve ratio and the following, except
exchange rate.
The term trade deficit refers to a situation where
exports are less than imports
A stockholder owning 5 percent of a company's stock
gets 5 percent of the votes at the shareholders' meetings
Trade barriers that restrict imports from developing countries tend to be
highest for those products in which DVCs have a comparative advantage
One criticism against supply-side cuts in marginal tax rates is that they fail to
increase aggregate supply more rapidly than aggregate demand.
Checkable deposits are
included in M1.
If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will
increase the interest rate and reduce the price level, assuming it is flexible downward
Other things equal, a restrictive monetary policy during a period of demand-pull inflation will
increase the interest rate, reduce investment, and reduce aggregate demand.
The American Recovery and Reinvestment Act of 2009 included mostly
increases in government spending and decreases in taxes.
The automatic adjustment mechanism that makes the economy move toward the long-run Phillips Curve is
inflation expectations and wage adjustments.
The government of a DVC may purposely cause inflation because
inflation works like taxation in that it may release resources from consumption so that they can be invested.
International transactions fall into what two broad categories?
international trade and international asset transactions
The traditional Phillips Curve shows the
inverse correlation between the rate of inflation and the rate of unemployment
A coordination failure
is a self-fulfilling prophesy.
Contractionary fiscal policy is so named because it
is aimed at reducing aggregate demand and thus achieving price stability.
Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending
is financed by borrowing
Time value of money refers to the idea that a specific amount of money
is more valuable the sooner it is received
In new classical economics, the change in output caused by a "price-level surprise"
is soon reversed through a shift of the short-run aggregate supply curve.
Rational expectations theory implies that the
long-run aggregate supply curve is vertical
In the extended aggregate demand-aggregate supply model
long-run equilibrium occurs at the intersection of the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve
If the Fed were to reduce the legal reserve ratio, we would expect
lower interest rates, an expanded GDP, and a higher rate of inflation
The present value of a future amount of money will be greater the
lower the interest rate.
In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed
lowered the federal funds target rate
The law of increasing opportunity costs
may limit the extent to which a nation specializes in producing a particular product
An efficiency wage is one that
minimizes the firm's labor cost per unit of output.
In a two-nation, two-good world, if country A has the comparative advantage in producing good X over country B, then country A
must have the comparative disadvantage in producing the other good, Y
Currency held within banks is part of
neither the M1 nor the M2 definition of the money supply.
Comparing what the United States owes to other nations against what other nations owe to the United States, the United States is currently a(n)
net debtor.
In the strict monetarist view, a large increase in the money supply will have
no effect on the velocity of money and a large impact on nominal output.
A deficit on the current account
normally causes a surplus on the capital and financial account.
The theory of rational expectations calls for monetary policy rules because
of the reaction of the public to the expected effects of policy
The "brain drain" problem in the DVCs refers to the fact the best-educated workers
often immigrate to industrialized countries.
The Fed can regularly influence and change the risk-free rate of financial investments through its
open-market operations
Development economists suggest that a key strategy for the poorest DVCs to break out of their poverty is to implement policies that boost their
output and slow down their population growth.
Rational expectations theory assumes that
people behave rationally and that all product and resource prices are flexible both upward and downward
In the short run, if the actual rate of inflation falls lower than the expected rate, then
profits will temporarily fall and unemployment will temporarily rise.
Financial investment refers to
purchasing or building an asset for monetary gain
The view that anticipated changes in the money supply will have no effect on the economy's output would most likely be a proposition of
rational expectations theory.
The Financial Crisis of 2007-2008 started in which sector of the economy?
real estate and housing sector
In the short-run, demand-pull inflation increases
real output and the price level, but in the long-run only the price level.
If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetary multiplier for the banking system will be
4.
A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are
50,000 and $250,000, respectively
Suppose that the Consumer Price Index for a particular economy rose from 110 to 120 in year 1, 120 to 130 in year 2, and 130 to 140 in year 3. We could conclude that this economy is experiencing
Disinflation.
All else equal, when the Federal Reserve Banks engage in an expansionary monetary policy, the interest rates received on government bonds usually
Fall.
The Bureau of Consumer Financial Protection was created in 2010 to become part of the
Federal Reserve System.
The conduct of monetary policy in the United States is the main responsibility of the
Federal Reserve System.
One central idea in supply-side economics concerning budget deficits is illustrated by the
Laffer Curve
A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be part of
Liabilities.
Capital flight is a problem to DVCs because it
reduces the volume of DVC investment.
The most likely way the public debt burdens future generations, if at all, is by
reducing the current level of investment
The equilibrium rate of interest in the market for money is determined by the intersection of the
supply-of-money curve and the total-demand-for-money curve.
The liquidity trap refers to the situation where
the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand
Which of the following is not a reason why government may play a key role in the early stage of economic development in developing nations?
the abundance of entrepreneurs who need to be regulated
The four main tools of monetary policy are
the discount rate, the reserve ratio, interest on excess reserves, and open-market operations.
The public debt is the amount of money that
the federal government owes to holders of U.S. securities.
Assume that a tariff is imposed on an imported product. The difference between the domestic price and the world price is captured by
the government.
Monetary policy is expected to have its greatest impact on
Lg
Suppose that the Mexican government decides to fix or peg the dollar-peso exchange rate at P20 = $1. If foreign-exchange traders on one day want to exchange P40 million for dollars, to enforce the peg the Mexican government will need to come up with
$2 million
If an American can purchase 40,000 British pounds for $90,000, the dollar rate of exchange for the pound is
$2.25
What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?
$338.42
Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of new money that the banking system could create is about
$660 million.
The beta for the market portfolio's level of nondiversifiable risk is
1.
Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40. Jacob's average expected rate of return on this investment is
10.4 percent
If a Japanese importer could buy $1,000 U.S. for 122,000 yen, the rate of exchange for one dollar would be
122 yen
Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000. Thea's per-year rate of return is
14.8 percent.
Consider the following national data: tax revenues as a percentage of GDP: 25 percent; government spending as a percentage of GDP: 31 percent; unemployment rate: 9 percent; inflation rate: 6 percent. What is the misery index for this nation?
15 percent
Which of the following transactions represents a credit on the financial account of the U.S. balance of payments?
A Canadian firm increases its direct investment in its U.S. branch.
The Federal Reserve System consists of which of the following?
Board of Governors and the 12 Federal Reserve Banks
Why wouldn't the Fed want to drive nominal interest rates below zero in response to a financial crisis and recession?
Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses
A "Buy American" policy strictly enforced is equivalent to a(n
Quota
Fractional reserve banking refers to a system where banks
hold only a fraction of their deposits in their reserves.
Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit?
The economy is operating at less than full employment
If the government uses expansionary monetary or fiscal policies to counter the output effects of cost-push inflation, then the economy is likely to experience
an inflationary spiral.
Suppose that Clint wins a lottery jackpot of $300 million. He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately. Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?
Yes, if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments
When it is reported that a nation is experiencing a "balance of payments deficit," this is best interpreted to mean that the nation is experiencing
a decrease in foreign exchange reserves.
A rightward shift of the Phillips Curve suggests that
a higher rate of unemployment is associated with each level of inflation rate.
According to monetarists, a change in the money supply changes
aggregate demand, which in turn changes the nominal GDP.
The role of government in fostering economic growth in DVCs has been criticized because
there is often poor administration and corruption in government
Monetarists believe that
velocity is relatively stable
If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the
velocity of money is 5
The insider-outsider theory implies that
wages may be inflexible downward.
If a nation exports a product, then the price of that product in the nation
will rise above the domestic (no-trade) equilibrium price
