macro econ exam 2
Inflation implies that the level of all prices...
increase
What is the maximum amount of money created from a $3 million deposit in the banking system if the required reserve ratio is 5%?
$57 million
A commercial bank has $300 million in checkable-deposit liabilities and $36 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?
$6 million
Assume that Hadley has $10,00 in her checking account at Grand B Bank and uses her debit card to withdraw $500 of cash from the bank's ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?
0
The monetary multiplier is defined as
1/R, where R is the required reserve ratio.
When $100 is deposited in the banking system, it leads to maximum expansion in bank deposits of $1,000. What is the required reserve ratio assuming that the excess reserves are 0
10%
In a fractional reserve system, deposit insurance
guarantees that depositors will always get their money, thus avoiding most bank runs.
unanticipated inflation
helps borrowers and hurts lenders.
The Consumer Price Index...
Measures the change in the cost of living for a typical US household
When you purchase a T-shirt for $25, money is serving which function?
Medium of exchange
The main responsibility of a Central bank is:
Monetary but not fiscal policy
Assuming that the Consumer Price Index increases from 100 to 120...
More money would be needed to buy the same amount of goods, implying that the value of money drops
How do economists define unemployed workers?
Not currently working but actively searching for work
Which of the following is true about the Federal Reserve System?
There are 12 regional Federal Reserve Banks
Which of the following would cause the aggregate supply curve to increase...
Throughout the economy, workers are using better equipment and output per hour is rising.
Which of the following was a way for the Bureau of Labor Statistics to reduce the quality/new good bias in its calculation of the CPI?
Update the list of products included in the CPI more often and rapidly.
The long run aggregate supply curve is...
Vertical at the potential GDP level
Russia experienced inflation of 2500% per year in the early 1990s. Identify the term used to describe this extreme level of inflation rate and briefly discuss the contributing economic factors that caused this situation to arise.
When extreme inflation occurs, it is called hyperinflation. The reason Russia was faced with high inflation was beacause their economy shifted from controlled to market-oriented.
What is aggregate demand comprised of?
The AD curve includes all five parts of demand: consumption, investment, government spending, exports, and imports. (C + I + G + X - M)
Workers at a car-manufacturing plant in Detroit, Michigan are laid off because of a recession in the economy. The workers' resulting unemployment can be described as:
cyclical
interest rates on consumer loans increases. Average Price Level ______ Real Output ______
decreases, decreases
When you take a vacation and keep cash with you in case you might need it, money is serving as a:
Store of value
If you are hired by an organization, you would be least hurt by inflation if
Your employer has a cost-of-living adjustment clause in the employment contract
Which set of events would most likely decrease real GDP and increase the average price level?
a decrease in oil production
What is the most effective monetary policy tool that the Federal Reserve uses?
open market operations
The effect of substitution bias is that the rise in the price of a fixed basket of goods over time tends to ___________________ the rise in a consumer's true cost of living, because it doesn't take into account that the person can substitute between goods according to changes in their relative prices.
overstate
The __________________ is the nominal interest rate minus the rate of inflation.
real interest rate
Which of the following is an example of one of the major categories in the overall CPI?
recreation
Which of the following is the most inclusive and accurate list of what is included in the M2 money supply?
savings deposits, money market funds, time deposits, and M1
Employees at a toy-manufacturing factory are let go because robots have been installed to replace humans. What type of unemployment faces the laid-off workers?
structural
An auto company decided to relocate its offices from Huntsville, Alabama to Orlando, Florida. The human resources manager of the auto company refuses to relocate to Orlando due to family obligations. While she is searching for a new job, the manager will be considered:
structurally unemployed
Two factors that complicate the calculation of the inflation rate are:
substitution and quality/new product bias
The interest rate effect is that as prices for outputs rise, it will be necessary for people making purchases to have more money or credit. This additional demand for money and credit will push interest rates higher. In turn, higher interest rates mean less borrowing by businesses for investment purposes and less borrowing by households for homes and cars—and thus a reduction in consumption and investment.
true
What would be the impact of a decrease in money supply?
Higher interest rates and lower GDP
Stealth Bank is holding $4 million in reserves, $9 million in government bonds and $9.6 million in low risk mortgage loans. Out of the $20 million in customers' deposits, Stealth holds $13.1 million in the form of certificates of deposit. What is Stealth Bank's net worth in millions of dollars?
2.6
If the price index moves from 112 to 115, the rate of inflation is:
2.7%
How much money is created by a bank with $20 million in assets if it lends out half of its assets with a required reserve ratio of 10%.
$100,000,000
Consider a situation where the central bank increases the money supply. All other things being equal, if nominal GDP increased by $800 billion during a time when velocity was 4, by how much did the central bank increase the money supply?
$200 billion
The long-run aggregate supply curve is vertical because the economy's potential output (full employment GDP) is determined by
the availability and productivity of real resources, not by the price level.
The unemployment rate that is consistent with full employment is __________.
the natural rate of unemployment
The unemployment rate is defined as
the number of unemployed persons divided by the labor force.
Who appoints the Governor of the Federal Reserve System?
the president
The foreign price effect points out that if prices rise in the United States while remaining fixed in other countries, then goods in the United States will be relatively more expensive compared to goods in the rest of the world. U.S. exports will be relatively more expensive, and the quantity of exports sold will fall. Imports from abroad will be relatively cheaper, so the quantity of imports will rise. Thus, a higher domestic price level, relative to price levels in other countries, will be associated with a lower GDP.
true
Suppose that a country has 10 million people working full-time. It also has 2 million people who are actively seeking work but are currently unemployed, along with 1 million discouraged workers who have given up looking for work and are currently unemployed.
17 percent
Suppose that a small country currently has $8 million of currency in circulation, $10 million of checkable deposits, $190 million of savings deposits, $50 million of time deposits, and $90 million of money market mutual fund deposits. From these numbers we see that this small country's M1 money supply is $[A] million, while its M2 money supply is $[B] million.
18, 348
Suppose that initially Goldstar Bank has no excess reserves. A customer then deposits $75,000 into the bank. The reserve requirement is 20 percent. What is the maximum amount in new deposits and loans that the banking system can generate as a result of the $75,000 deposit into Goldstar Bank?
300,000
If the Consumer Price Index was 155 in one year and 165 in the next year, then the rate of inflation from one year to the next was approximately:
6.5%
Suppose that initially Goldstar Bank has no excess reserves. A customer then deposits $75,000 into the bank. The reserve requirement is 20 percent. What amount of excess reserves will Goldstar Bank now have as a result of this deposit?
60,000
What is the amount that a bank can lend out if the required reserve ratio is 15%?
85% of its deposits
List the tools used by a central bank to affect the money supply and identify which is the most powerful and commonly used method and which is the weakest method.
A central bank has three traditional tools to affect the quantity of money in the economy: open market operations, reserve requirements, and the discount rate. The most powerful and commonly used of the three traditional tools of monetary policy is open market operations, while altering the discount rate is a relatively weak tool of monetary policy.
Which of the following scenarios would result in a decrease in Aggregate Demand?
A decline in investors confidence causes investment to fall.
If $2,000 is withdrawn from the bank by a customer, the bank's
Assets and liabilities decrease
Briefly explain the role played by banks between savers and borrowers and the economic benefit, if any, derived from their taking on this role.
Banks are financial intermediaries that operate between a saver who deposits money in a bank and a borrower who receives a loan from that bank. As intermediaries, banks make it far easier for a complex economy to carry out the extraordinary range of transactions that occur in goods, labor, and financial capital markets.
Identify and briefly explain the circumstances that could lead to a bank developing a negative net worth, and the various methods that banks may employ to protect themselves from this type of outcome.
Banks run a risk of negative net worth if the value of their assets declines. The value of assets can decline because of an unexpectedly high number of defaults on loans, or if interest rates rise and the bank suffers an asset-liability time mismatch in which the bank is receiving a low rate of interest on its long-term loans but must pay the currently higher market rate of interest to attract depositors. Banks can protect themselves against these risks by choosing to diversify their loans or to hold a greater proportion of their assets in bonds and reserves.
What is the major component of the money supply M1?
Checkable deposits
What are the components of the M1 money supply?
Currency in circulation, checkable deposits, and travelers checks
What will be the effect of sales of government bonds?
Decrease aggregate demand
One set of reasons why wages may be "sticky downward," as economists put it, involves economic laws and institutions. Describe these two "cut-and-dried" labor market realities.
For low-skilled workers being paid the minimum wage, it is illegal to reduce their wages. For union workers operating under a multiyear contract with a company, wage cuts might violate the contract and create a labor dispute or a strike.
Miriam is actively searching for a new job after she voluntarily quit her job. Miriam is now considered:
Frictionally unemployed
The model of aggregate demand/aggregate supply...
Identifies the equilibrium GDP and price level as well as the gap between the equilibrium GDP and the potential GDP
Based on Say's Law...
In the long run, the production and sales of a $10 product generates $10 of income for someone and $10 of demand.
Identify the most important factor shifting the AS curve in the long term. Briefly explain both how and why this factor shifts the aggregate supply curve.
In the long term, the most important factor shifting the AS curve is productivity growth. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can now produce a greater quantity at every given price level for output.
What is a likely direct result in bank behavior after the Fed lowers required reserve rate?
Issue more loans
What happens to the money supply if the Fed decreases the reserve requirement?
It increases
Which of the following is not considered a characteristic of money?
It must have intrinsic value
If discouraged workers are included in the determination of the unemployment rate, what effect will it have on the computed rate?
It will raise it because there are always discouraged workers.
The Fed can put more reserves into the banking system by:
Purchasing government securities
Compare the different measures of inflation known as GDP deflator, the Producer Price Index (PPI), and the Consumer Price Index (CPI).
The GDP deflator measures inflation based on the prices of all the GDP components. Unlike the CPI it re-calculates what the GDP would have been using the base-year's prices. The Producer Price Index measures inflation based on prices paid for supplies and inputs by producers of goods and services. It can be broken down into different industries, commodities, and stages of processing. The Consumer Price Index is a measure of inflation that US government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases. In recent years they have considered the problem that the change in cost of a fixed number of goods and services is not equivalent to the change in the cost of living.
Who measures the labor force, and how is it defined?
The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are employed and those who are actively seeking work.
Which of the following statements best describes the aggregate supply curve?
The aggregate supply curve represents the relationship between the price level and the total output or real GDP in the macroeconomy.
Aggregate demand curves slope downwards for each of the following reasons EXCEPT
The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods
Identify the three government policies for assuring safe and stable banking systems.
The three government policies for assuring safe and stable banking systems are: (1) the provision of deposit insurance to reassure households that their bank deposits are safe; (2) examining the financial records of banks to ensure that they have positive net worth; and (3) making emergency short-term loans to banks in times of financial chaos.
According to Keynes' Law...
The total demand for products determine the level of gross domestic product and may not equal the supply capacity of the economy in the short run.
The Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks by $500 billion. It plans to use open-market operations to accomplish this goal. The current reserve requirement for commercial banks is 10 percent. Will the Fed want to buy or sell government securities if sales or purchases of government securities are the only instrument used in the open-market operations? [A] The amount of the open market operation to increase the money supply by $500 billion is $[B] billion.
buy, 50
Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?
canada
If there is an increase in the unemployment rate, the size of the labor force
could increase or decrease
An increase in the reserve requirement causes the size of the monetary multiplier to
decrease, the amount of excess reserves in the banking system to decrease, and the money supply to decrease.
The Federal Reserve sells a Treasury bond to a commercial bank for $100,000. The potential money supply:
decreases.
When we want to measure wage inflation in the labor market, we use the:
employment cost index
Hyperinflation might lead to a severe decline in total output if
everyone starts speculating and searching for ways to avoid inflation.
If there is an increase in the nation's money supply, the interest rate will
fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.
Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.
false
congress significantly increases corporate taxes. Average Price Level ______ Real Output ______
increases, decreases
business investment increases. Average Price Level ______ Real Output ______
increases, increases
The rate of inflation in Zimbabwe rose in 2018 from 10.6% to 577.21% in 2020. What was the positive effect of this unexpected inflation on the residents of the country?
it helped debtors
List the three specific functions of money that economists have identified.
medium of exchange, store of value, unit of account
The wealth effect holds that as the price level increases, the buying power of wealth that people have stored up in bank accounts and cash will diminish, eaten away to some extent by inflation. Because a rise in the price level reduces people's wealth, consumption will fall as the price level rises.
true
if you work part-time when you would like to work full time, or have a full-time job that doesn't utilize all your skills and talents, then you are counted as:
underemployed
When most workers are classified as not being in the labor force, when in reality they are actively searching for work, then the unemployment rate will be
understated
A positive unemployment rate—more than zero percent—is fully compatible with full employment because at full employment,
unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs
