ECON 202 Quiz 3
Kaitlyn purchased one share of Northwest Energy stock for $200; one year later she sold that share for $400. The inflation rate over the year was 50 percent. The tax rate on nominal capital gains is 50 percent. What was the tax on Kaitlyn's capital gain?
$100
if the reserve ratio is 10%, $1,400 of additional reserves can create up to
$14,000 of new money
Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves?
$27,000
If real output in an economy is 1000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, the according to the quantity equation, the average price level is
1.20
Based on the quantity equation, if M=150, V=4, and Y=300, then P=
2
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.
people hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?
They fall $200 million
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 had expected.
Suppose that M is fixed. According to the quantity equation, which of the following would make the price level higher?
Y falls or V rises
fractional-reserve banking
a banking system in which banks hold only a fraction of deposits as reserves
capital requirement
a government regulation specifying a minimum amount of bank capital
quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
Central bank
an institution designed to oversee the banking system and regulate the quantity of money in the economy
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
store of value
an item that people can use to transfer purchasing power from the present to the future
demand deposits
balances in bank accounts that depositors can access on demand by writing a check
if the fed sells bonds, which of the following lists has only actions that would each counter the effect on the money supply
decrease reserve requirements, decrease the discount rate
In a fractional-reserve banking system, an increase in reserve requirements
decreases both the money multiplier and the money supply
reserves
deposits that banks have received but have not loaned out
Suppose an economy produces only ice cream cones. If the price level rises, the value of currency
falls, bc one unit of currency buys fewer ice cream cones
All fed purchases and sales of
government bonds are conducted at the New York fed's trading desk
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
Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory,
inflation averaged 5% per year and the real rate of return was 4%
A bank has a 20 percent reserve requirement, $8,000 in loans, and has loaned out all it can given the reserve requirement.
it has $10,000 in deposits
If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $1,000,
it will be able to make new loans up to a maximum of $880
A reduction in the inflation rate would make relative prices
less variable, making it more likely that resources will be allocated to their best use
which of the following is an asset of a bank and a liability for its customers
loans to its customers but not the deposits of its customers
the costs of changing price tags and price listings are known as
menu costs
A central bank's setting (or altering) of the money supply is known as
monetary policy
commodity money
money that takes the form of a commodity with intrinsic value
fiat money
money without intrinsic value that is used as money because of government decree
Most economists believe the principle of monetary neutrality is
mostly relevant to the long run
Credit card limits are included in
neither m1 or m2
fiat money has
no intrinsic value
In the US, taxes on capital gains are computed using
nominal gains. This is one way by which higher inflation discourages saving
reserve requirements
regulations on the minimum amount of reserves that banks must hold against deposits
a decrease in the money supply might indicate that the fed had
sold bonds to decrease bank reserves
money multiplier
the amount of money the banking system generates with each dollar of reserves
which of the following is not a central bank
the bank of america
Federal Reserve (Fed)
the central bank of the United States
menu costs
the costs of changing prices
liquidity
the ease with which an asset can be converted into the economy's medium of exchange
quantity equation
the equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then
the expected real interest rate is 1%
reserve ratio
the fraction of deposits that banks hold as reserves
federal funds rate
the interest rate at which banks make overnight loans to one another
discount rate
the interest rate on the loans that the Fed makes to banks
natural rate of unemployment
the normal rate of unemployment around which the unemployment rate fluctuates
Currency
the paper bills and coins in the hands of the public
In 2010 the U.S. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then
the price level would rise so the value of money would fall
monetary neutrality
the proposition that changes in the money supply do not affect real variables
open-market operations
the purchase and sale of U.S. government bonds by the Fed
money supply
the quantity of money available in the economy
leverage ratio
the ratio of assets to bank capital
shoe-leather cost
the resources wasted when inflation encourages people to reduce their money holdings
velocity of money
the resources wasted when inflation encourages people to reduce their money holdings
inflation tax
the revenue the government raises by creating money
money
the set of assets in an economy that people regularly use to buy goods and services from other people
monetary policy
the setting of the money supply by policymakers in the central bank
classical dichotomy
the theoretical separation of nominal and real variables
leverage
the use of borrowed money to supplement existing funds for purposes of investment
Imagine an economy in which: (1) pieces of paper called yollars are the only thing that buyers give to sellers when they buy goods and services, so it would be common to use, say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so you might walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3) yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. In this economy,
the yardstick is a unit of account but it cannot serve as a store of value
unit of account
the yardstick people use to post prices and record debts
According to the principle of monetary neutrality, a decrease in the money supply will not change
unemployment
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
real variables
variables measured in physical units
