Econ Final PART 1 (11-15)
If domestic residents of other countries purchase $600 billion of U.S. assets and U.S residents purchase $500 billion of foreign assets, then U.S. net capital outflow is
-$100 billion and the U.S. has a trade deficit.
The Fisher effect
-is consistent with monetary neutrality in the long run. -says that when the inflation rate changes, nominal interest rates increase by the same amount. NOT -implies that the difference between the nominal interest rate and the inflation rate is constant over time.
Other things equal, which of the following would be expected to shift aggregate demand to the left?
An increase in real interest rates.
Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?
As discussed, hyperinflation results from rapid money supply growth, which comes with government "printing money" rather than taxing the public to finance its spending. We did not discuss the inflation tax, but by creating inflation the government is reducing the value of money, in effect taxing everyone holding money. The country has high money supply growth. The government is printing money to finance its expenditures. Inflation is acting like a tax on everyone who holds money.
Other things the same, which of the following would cause the real exchange rate to rise?
Both an increase in the real interest rate and an increase in foreign demand for U.S. goods and services. An increase in the real interest rate shifts the supply curve in the market for foreign currency exchange to the left. An increase in the demand for U.S. goods and services shifts the demand curve in the market for foreign currency exchange to the right. Either of these shifts would increase the real exchange rate.
If imports = 500 billion euros, exports = 700 billion euros, purchases of domestic assets by foreign residents = 600 billion euros, and purchases of foreign assets by domestic residents = 800 billion euros, what is the (net) quantity of euros demanded in the market for foreign-currency exchange?
Foreigners need 700 billion euros to buy European exports, which is 200 billion more than Europeans are offering so that they can buy goods and services from outside of Europe. This net demand for euros is matched by the net supply coming from the net capital outflow.
quantity equation
M x V = P x Y
First National Bank receives a deposit of $1,000, money that was previously held outside the banking system as currency. First National has a policy of keeping 25% of new deposits as reserves and loaning out the rest. When it makes these loans, how is the money supply affected, as compared to when the $1,000 was held as currency?
The loans increase the money supply by $750.
Since 1950 what has happened to U.S. imports/exports?
They have both increased significantly
Last year, you earned a nominal wage of $10 per hour and the price level was 120. This year your nominal wage is $11 per hour, but you are unable to purchase the same amount of goods as last year. Of the following, which is a possible value for the price level this year?
Your nominal wage increased by 10 percent. If you are not able to purchase the same market basket, prices must have increased by more than 10 percent. 135 is the only value that represents more than a 10 percent increase in the price level.
unit of account
a means for comparing the values of goods and services.
A bank loans Greg's Burritos $250,000 to remodel a building near campus to open a new restaurant. On their respective balance sheets, this loan is
an asset for the bank and a liability for Greg's Burritos. The loan increases the money supply.
Which of the following would shift short-run aggregate supply to the left?
an increase in the expected price level.
Prior to 2008, if the Fed wanted to expand the money supply, its primary tool was to
buy government bonds through open market operations
commodity v fiat money
commodity- used as money but as a different value fiat - money we use today. gov says it is money but no other value
What is the money supply
currency held by public outside of banks + deposits in accounts
During the 2008 financial crisis velocity decreased. This means that the rate at which money is spent
decreased. Other things the same, a decrease in velocity decreases the price level.
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
owners equity
difference between banks total asset and liabilities (net worth)
Other things the same, if the interest rate falls, then
domestic firms will want to borrow more, which increases the quantity of loanable funds demanded. One part of the demand for loanable funds comes from domestic firms wanting to borrow to finance investment in capital. They will want to borrow more when the real interest rate is lower.
If expected prices raise less than they are supposed to, according to sticky wage theory
employment and production fall.
buget deficit
gov't spends more than it takes in
A professor of physics gets a $200 a month raise. With her new monthly salary, she can buy more goods and services than she could buy last year. Based on this information we can say that
her real and nominal salaries have both risen, The first sentence states an increase in her nominal salary. The statement that she can buy more says that it is also a real increase in salary.
Fed buying bonds
increases amount of reserves(amount) in the banking system expands money supply(more reserves, can make more loans)
Which of the following explains why long-run aggregate supply shifts to the right in most years?
increases in the labor force, increases in the capital stock, advances in technological knowledge
medium of exchange
money is used to make transactions
insolvent
negative owners equity
Trade deficit
net capital outflow must be negative and saving is smaller than investment.
Trade Surplus
net capital outflow must be positive and saving is bigger than investment.
pre 2008
open market operations, fed buy/sell gov bonds
Cash, fine art, and silver are all
stores of value
Today, bank runs are not a major problem for the U.S. banking system because
the federal government now guarantees the safety of deposits at most banks.
If velocity and output were constant, then
the inflation rate would be the same as the money supply growth rate If V and Y are constant, then according to the quantity equation, P must grow at the same rate as M.
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
real interest rate
the interest rate corrected for the effects of inflation
real exchange rate
the rate at which a person can trade the goods and services of one country for the goods and services of another
Wealth is redistributed from creditors to debtors when inflation is
unexpectedly high.
Suppose the world had only two countries and domestic residents of country A purchased $30 billion of assets from country B and country B purchased $10 billion of assets from country A. What would the net exports of both countries be?
$20 billion for country A and -$20 billion for country B. NCO is 30 - 10 for country A and 10 - 30 for country B. With only two countries, one's NCO has to be the negative of the other's. NCO must be equal to NX, which is what the question asks about.
If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?
2. You would do 3 x 4 = 12/6 = 2. 2 gal Argentinean milk/1 gallon of US milk. dollar amount x cost in US / cost in country
Suppose the wholesale price of rice is $500 per ton in the U.S. and 40,000 yen per ton in Japan. What does the PPP theory predict will be the nominal exchange rate, yen per dollar? If the nominal exchange rate is 100 yen per dollar, where should Ben's Original buy its rice?
80 yen per dollar; Japan According to PPP, the nominal exchange rate should be the price in yen divided by the price in dollars = 80 yen per dollar. If the nominal exchange rate is 100 yen per dollar, the dollar buys more yen than PPP predicts. Rather than buy rice in the U.S., it is cheaper to convert dollars to yen and buy rice in Japan.
Which of the following is one of the explanations for why the aggregate demand curve slopes downward?
A lower price level reduces the interest rate, which encourages greater spending on investment goods.
Which of the following would help explain why the aggregate demand curve slopes downward?
A lower price level reduces the interest rate, which encourages greater spending on investment goods.
Purchasing Power Parity
A monetary measurement of development that takes into account what money buys in different countries.
A country that has a trade deficit must also have
A trade deficit means that imports are greater than exports, or in other words that net exports are negative. Net capital outflow equals net exports, so it must also be negative. Investment will be greater than national saving.
If the value of First National's short-term securities fall by $100 (from $800 to $700)
Assets fall by 1% and owner's equity falls by 25 % Total Assets = Reserves + Loans + Short-Term Securities = $1,200 + $8,000 + $800 = $10,000 Percent fall in the value of assets when short term securities decreases by $100 = ($100/$10,000) * 100 = 1% To balance the T-account total assets always has to equal the total liabilities + owners' equity. Therefore, if assets fall by $100 the right side of the account must fall by $100. A change in the value of short-term securities does not change how much either depositors or other owners of the bank's debt is owed. Therefore, owner's equity must fall by $100, which is 25%. This is as expected because the bank has a leverage ratio of 25. Percent change in owners' equity = ($100 / $400) * 100 = 25%
When Henry, a Romanian citizen, sells wool jackets he produces to Germany, the sale is
Germany's import and Romania's export.
Suppose that the government goes from a budget surplus to a budget deficit. The effects of the change could be illustrated by shifting the
If the government goes from budget surplus to budget deficit, this is a reduction in public saving. It shifts the supply curve in the market for loanable funds to the left.
A Canadian business owner sells maple syrup to Americans and uses all of the revenues to pay for his daughter's tuition at MSU. Together these transactions
Increase both U.S. exports and imports and leave the trade balance unchanged.
Suppose real GDP increases by 3 percent while the money supply to grows by 5 percent. If velocity is constant, what happens to the price level?
It grows by 2 percent. MV = PY
When the U.S. real exchange rate appreciates, U.S. goods become
Less attractive to U.S. customers and those abroad.' When the real exchange rate appreciates, a U.S. market basket becomes relatively more expensive compared to foreign market baskets, when both are evaluated in the same currency. It becomes relatively less attractive to by U.S.-made goods and services for both American consumers and foreigners.
Mary writes a $200 check when buying groceries at Meijer (a local store). Meijer deposits the check in its bank. The transaction is processed by the Federal Reserve. What are the consequences for the two banks involved?
Mary's bank's account balance at the Fed is reduced by $200 and Meijer's bank's account balance is increased by $200.
Suppose the wholesale price of rice is $300 per ton or 30,000 yen per ton, and the nominal exchange rate is 90 yen per dollar. Then
Measured in dollars, rice is cheaper in the U.S. than in Japan. BECAUSE Measured in dollars, rice is $333.33 (30,000/90) in Japan. Thus, rice is cheaper in the U.S. The real exchange rate is (90*300)/30000=0.9, which is not equal to 1 and implies PPP does not hold.
Classify the following three scenarios by the role which money plays. The answers will either be medium of exchange, unit of account, or store of value. (1) Anna buys a new pair of shoes for $200. (2) James keeps $500 in cash hidden in a drawer in case of emergency. (3) Cherisse compares the price of the latest iPad to that of the latest Microsoft Surface and determines that the iPad is more expensive.
Medium of exchange, store of value, unit of account She is using her money to make a purchase. He is keeping his money to spend at a later time. She is comparing the prices of two items.
Which of the following would tend to increase net exports for the U.S.? (Assume that if necessary the net capital outflow also adjusts.)
Mexico experiences a higher inflation rate than the U.S., while the nominal exchange rate is unchanged. real exchange rate down = us less expensive, other more expensive If price is going up compared to U.S. Mexican goods will increase but same pesos per dollar so these will become more expensive for us.
Net capitol outflow
NCO = (Purchase of foreign assets by domestic residents) - (Purchase of domestic assets by foreigners). If NCO < 0, then there must be a trade deficit.
Suppose Andrea spends all of her money on canned tuna and hand sanitizer. In 2015, Andrea made $60,000, tuna cost $2.00 per can, and hand sanitizer cost $4 per bottle. The economy goes through some difficult times, and in 2022, Andrea is making $40,000 while tuna costs $1.50 per can, and hand sanitizer costs $3 per bottle. What can be said about the changes in her nominal and real income, respectively?
Nominal: decrease. (her income decreased) by 1/3 Real: decrease. (the prices of products are falling) only by 1/4 so real is decreasing because nominal is declining by larger.
interest rate
Percentage of amount borrowed to be added to the amount loaned and paid back The shift in the supply of loanable funds leads to a fall in the real interest rate, which increases net capital outflow, increasing the supply of dollars in the market for foreign-currency exchange.
Sparty Bank receives a deposit of $5,000, money that was previously held outside the banking system as currency. Sparty has a policy of keeping 20% of new deposits as reserves and loaning out the rest. When it makes these loans, how is the money supply affected, as compared to when the $5,000 was held as currency?
Previously, the $5,000 in currency counted as part of the money supply. Now the $5,000 in deposits counts plus the $4,000 in new loans. The borrowers now have $4,000 in money (either as cash or as checking account balances that they can spend) that did not exist before.
Which of these groups is most disadvantaged if there is an unexpected increase in inflation that then continues for a number of years?
Retirees who depend on monthly pension benefits that are fixed in nominal terms. The homeowners are not hurt by the inflation because they have fixed nominal rate mortgages, so the real interest rate they pay falls, and their nominal incomes will probably rise along with the price level. The workers can renegotiate future salaries based on the increased price level and new expectations about future inflation. Indexing of social security benefits means that they are automatically increased when prices increase. The retirees are hurt because their pensions are unexpectedly declining in real value.
If S stands for national saving, which of the following equations is correct in an open economy?.
S = I + NCO
National Saving and Domestic Investment
Saving = Investment + Net capital outflow (NCO). If investment is fixed and saving decreases, NCO needs to fall for the equation to hold. Since NX=NCO, both net capital outflow and net exports go down.
Which of the following functions of money is also a common function of most other financial assets?
Since the values of other financial or physical assets can also be saved for future use, STORE OF A VALUE is a function shared both by money and other financial or physical assets.
Start at Z what will stagflation do
Stagflation is stagnation and inflation at the same time, or high unemployment and rising prices at the same time. P3 and Y1 is the only combination that works. It results from a shift to the left in short-run aggregate supply. (QUIZ 15)up cross line to left
The following table represents the balance sheet for Friendly Bank. If a depositor writes a check for $300 to buy groceries, and the check is cashed, what are the consequences for the balance sheet?
The depositor's checking account balance falls by $300, so deposits fall. The bank must give up reserves when the check is cashed so reserves fall. Since the reductions in assets and liabilities are equal, owners' equity is not affected.
If the net capital outflow is unchanged, which of the following will decrease if the U.S. imposes an import quota on imported automobiles?
U.S. exports and U.S. imports. Imports fall but if net capital outflow does not change, exports must fall by an equal amount. An increased net demand for dollars to exchange for foreign currency causes the real exchange rate to rise which reduces exports
Purchasing Power Parity theory (P and E relationship)
When P goes up, E goes down
Which of the following would shift both the short-run and long-run aggregate supply left?
a natural disaster that destroys a significant part of the capital stock Creates a movement along short term aggregate supply. Long run aggregate supply is a vertical line; a decrease in the price level does not affect quantity supplied on the long run aggregate supply curve.
The recession of 2008-2009 was preceded by
a sharp decline in housing prices, rises in mortgage defaults and home foreclosures, large losses among financial institutions that owned mortgage-backed securities
When you list prices for necklaces sold on your website, www.sparklingjewels.com, in dollars, this best illustrates money's function as
a unit of account.
money multiplier
if banks keep a ratio of reserves to deposits of R, the money supply can get as large as 1/R times the amount of reserves
store of value
if you earn income you do not have to spend immediately, will hold value
Suppose that even after the pandemic subsides fewer Americans travel abroad and fewer foreigners travel to the U.S. than before. By themselves, those changes
imply that both U.S. imports and U.S. exports will fall, with an unclear effect on net exports. as both the U.S. travel in/out will decrease
The Fed purchases $200 worth of government bonds previously held by banks. Suppose that banks always keep a 10 percent reserve ratio, and the public holds no currency (all money is held as bank deposits). The U.S. money supply eventually
increases by $2,000. The purchase adds $200 of reserves to the banking system. Under the conditions described, the money multiplier is (1/reserve ratio)1/.1 = 10, so this increase in reserves leads to an increase in the money supply of $2,000. 200x10
The expression Y - C - G (production - consumption - goods/services of gov)
is an expression for national saving, in either an open or a closed economy. Y measures total production in an economy, C is consumption by domestic consumers and G is consumption by government. The difference is by definition national saving, whether the economy is open or closed. It is also equal to I + NX, not NX alone.
According to Purchasing Power Parity what is the real exchange rate?
it is always one
In the open-economy macroeconomic model, if a country's supply of loanable funds shifts right, then
net capitol outflow rises so the exchange rate falls. The increase in supply of savings reduces the real interest rate, making it more attractive to invest one's savings abroad, increasing net capital outflow. The increased supply in the market for foreign-currency exchange reduces the real exchange rate.
If over the next six months inflation is higher in the U.S. than in foreign countries, then according to purchasing-power parity
only nominal rates deprecate
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.
leverage ratio
ratio of total assets to owners equity
n the open-economy macroeconomic model, the price that balances supply and demand in the market for foreign-currency exchange is the
real exchange rate
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. When the real interest rises, it is more attractive to savers to invest their funds in the U.S. rather than abroad, so net capital outflow falls
Workers and management agreed on a three-year contract that gave a 5% wage increase each year. Everyone expected 3% inflation but inflation turned out to be 2% per year. Then at the end of the three years
real wages were higher than was expected. The nominal wage increase remained at 5% per year. A lower than expected inflation rate meant that real wages increased more than was expected.
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. The wealth effect says that wealth rises as the price level falls; the interest rate effect says that the real interest rate falls as the price level falls, and the exchange rate effect is a further consequence of the falling interest rate. The falling interest rate leads to more capital outflow, which leads to a lower real exchange rate.
Fed sell bonds
reduces the amount of reserves in the banking system reduces money supply(takes reserves, less loans)
According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also either a
rise in output or a fall in velocity. If velocity is constant, inflation is the money supply growth rate minus the growth of real GDP. If real GDP is constant, inflation is the money supply growth rate plus the growth rate of velocity. A fall in output would increase the inflation rate relative to the money supply increase.
Other things the same, if the price level rises, then domestic interest rates
rise, so domestic residents will want to hold fewer bonds. This is the interest rate effect. As domestic interest rates rise, domestic residents will substitute toward putting their savings in domestic investments and away from foreign ones.
The "Sticky Wage" theory
says that if firms experience a drop in demand, they are more likely to lay off workers and reduce output than to attempt to cut wages.
Which of the following would both shift aggregate demand right?
taxes decrease and government expenditures increase. A tax decrease is likely to increase consumption and/or investment. A government expenditure increase increases aggregate demand directly.
On January 1, 2020 one U.S. dollar could buy 1.3 Canadian dollars. On April 1, 2020 it bought 1.42 Canadian dollars. Suppose that the price levels within the two countries were constant over this time. Then we can say that regarding nominal (Canadian dollars per U.S. dollar) and real (Canadian goods for U.S. goods) exchange rates over this time
the dollar appreciated and the real exchange rate increased. If the dollar can buy more foreign currency we say it has appreciated. If the nominal exchange rate rises while price levels are unchanged, then the real exchange rate, which is the nominal exchange rate times price of a market basket in U.S dollars over the price of the basket in Canadian dollars (in symbols, e x P/P*), also rises.
supply of loanable funds
the positive relationship between the dollars saved and the real interest rate
monetary neutrality
the proposition that changes in the money supply affect nominal but not real values
nominal exchange rate
the rate at which a person can trade the currency of one country for the currency of another
In the open-economy macroeconomic model, if the supply of loanable funds shifts right, then
the supply of dollars in the market for foreign-currency exchange shifts right.
In the open-economy macroeconomic model of Chapter 14, if real interest rates fall in the U.S., then
the supply of dollars to exchange for foreign currency increases, so the real exchange rate will fall.
If we measure the money supply by M2, and over a period of time M2 grew faster than nominal GDP, then according to the quantity equation
velocity must have fallen. By the quantity equation, the increase in nominal GDP is (approximately) the percentage increase in the money supply plus the percentage increase in velocity. If M2 is growing faster than nominal GDP, the increase in velocity must be negative.
