Macro Final
suppose you deposit $2000 in currency into your checking account at a branch of Bank of America, which we will assume has no reserves at the time you make your deposit. Also assume that Bank of America wants to keep 20 percent of the value of its deposits as reserves. What is the maximum increase in the money supply, respectively?
$10,000 and $8,000, respectively
in 2013, the population of Great Britain was around 64 million. According to the World bank, the country's GDP (expressed in US dollars) in 2013 was about $2.5 trillion. This implies that Britain's per capita GDP was about...
$39,000
Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has
$50 in required reserves
Suppose the economy's consumer price index (CPI) in 2008 was 187 and the CPI in 2009 was 196. The inflation rate over the period from 2008-2009 was equal to...
-4.8% - current year - year prior/ year prior
fractional reserve banking system
-banks keep less than 100 percent of deposits as reserves
The Functions of Money
1. medium of exchange 2. unit of account 3. store of value 4. standard of deferred payment
Five criteria that make an asset suitable for use as a medium of exchange
1. the asset must be acceptable to (that is, usable by) most people 2. It should be of standardized quality so that any two units are identical 3. it should be durable so that value is not lost by its quickly wearing out 4. it should be valuable relatibe to its weight so that amounts large to be useful in trade can be easily transported 5. it should be divisible so that it can be used in purchases of both low-priced and high-priced goods
two key points about the money supply
1. the narrowest definition of the money supply consists of both currency and checking account and savings account deposits 2. because balances in checking account and savings account deposits are included in the money supply, banks play an important role in the way the Federal Reserve control the money supply.
two important conclusions
1. when banks gain reserves, they make new loans, and the money supply expands 2. when banks lose reserves, they reduce their loans, and the money supply contracts
suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100
M1 remains unchanged
what equation sums up the components of Gross Domestic Product (GDP)
Y= C + I + G + NX
which equation represents the relationship between GDP and the four major expenditure components?
Y= C + I + G + NX
in a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic"
a bank run involves one bank; a bank panic involves many banks
capital
a bank's stockholders' equity or net worth
suppose that the inflation rate turns out to be much lower than most people expected. in that case,
a borrower will lose from the situation while a lender will gain
net worth
a corporation's stockholders' equity
commodity money
a good used as money that also has value independent of its use as money
excess reserves
any reserves that banks hold above the legal requirement
why do we need money?
by making exchange easier, money allows people to specialize, become more productive, and earn higher incomes
change in checking account deposits
change in bank reserves x 1/RR
money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money
consider the following simple economy that produces only three goods... real GDP in 2017 equals:
price in base year x quantity in current year
simple deposit multiplier
the ratio of the amount of deposits created by banks to the amount of new reserves - 1/RR -the larger the required reserve ratio, the smaller the simple deposit multiplier
the natural rate of unemployment is...
the sum of structural unemployment and frictional unemployment
GM purchases door handles for the Silverado from an auto parts manufacturer in Indiana which affects...
this is not included in GDP calculation
when the economy is at full employment....
-all remaining unemployment is either frictional or structural -the natural rate of unemployment prevails -the unemployment rate is greater than zero
suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation?
-borrowers gain from a lower real interest rate -lenders lose from a lower real interest rate
the M1 measure of the money supply includes which of the following components
-currency in circulation -savings account deposits in bank -checking account deposits in bank
M1
-includes currency, which is all the paper money and coins held by households and firms (not including currency held by banks) - the value of all checking account and savings account deposits in banks
efficiency wage
-increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied -an above-market wage paid by a firm to maximize worker productivity
Federal Open Market Committee (FOMC)
-meets in Washington DC to discuss monetary policy and has 12 voting members -the 7 members of the Federal Reserve's Board of Governors -the president of the Federal Reserve Bank of New York - the
what is fiat money?
-money that is authorized by a central bank and that does not have to be exchanged for hold or some other commodity money
money serves as a unit of account when....
-prices of goods and services are stated in terms of money
how does real GDP deal with the problem inflation causes with nominal GDP
-real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years -by keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced -real GDP separates price changes from quantity changes
menu costs
-the costs to firms of changing prices
what conditions make a good suitable for use as a medium of exchange?
-the good should be durable, valuable relative to its weight, and divisible -the good should be of standardized quality, so that any two units are identical; -the good must be acceptable to (that is, usable by) most buyers and sellers
required reserve ratio
-the minimum fraction of deposits that banks are required to keep as reserves
suppose an economy has an inflation rate of 3.6% and a bank makes a loan with an interest rate of 6.7% in this case, the real interest rate is...
3.1%
your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is 104?
34,000 x (215/104) = $70,288
if a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline
agree. if both output and prices are falling, then both real GDP and nominal GDP will fall
if real GDP stayed the same while nominal GDP declined between 2019 and 2020, then the GDP deflator must also have declined
agree. if nominal GDP declined between 1019 and 2020, then the GDP deflator must also have declined
consumer price index (CPI)
an average of the prices of the goods and services purchased by a typical family
Money
any asset that people are generally willing to accept in exchange for goods and services or for payments of debts
asset
anything of value owned by a person or a firm
required reserves
as authorized by Congress, the Fed can mandate that banks hold a percentage of checking account deposits
double coincidence of wants
condition needed for a barter trade to take place between two people, each person must want what the other one has
you purchase a new Chevrolet Silverado pickup from a GM dealer which affects...
consumption expenditure
a breakdown of the four components of GDP shows that
consumption is by far the largest expenditure category, and that consumer spending on services far exceeds consumer spending on goods
what are the four major components of expenditures in GDP?
consumption, investment, government purchases, and net exports
in the definition of the money supply, where do credit cards belong?
credit cards are not included in the definition of the money supply
an increase in the amount of excess reserves that banks keep [] the value of the real-world deposit multiplier
decreases
what is not a Federal Reserve district?
denver
what is the largest liability of a typical bank?
deposits
reserves
deposits that a bank has retained rather than loaned out or invested
an article in the Wall Street Journal referred to "gross domestic product- the value of all goods and services produced in the US"
disagree, because GDP measures the value of all final goods and services produced in an economy, not all the goods and services produced
agree or disagree: whenever real GDP declines, nominal GDP must also decline
disagree, real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise
agree or disagree: if nominal GDP is less than real GDP, then the price level must have fallen during the year
disagree. nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP
barter economics
economies in which goods and services are traded directly for other goods and services
whenever banks gain reserves and make new loans, the money supply []; and whenever banks lose reserves, and reduce their loans, the money supply []
expands; contracts
a new home purchased by a family...
final good
a new pick up truck purchased by a consumer...
final good
the state of Michigan builds a new highway to help improve access to GM's Flint plant which affects...
government expenditure
the minimum wage law...
has only a small effect on the unemployment rate since only a small part of the labor force earns the minimum wage
bank panice
if many banks experience runs at the same time
what is an example of cyclical unemployment
in an economic downturn, a manufacturing plant reduces production and temporarily lays off workers
small denomination time deposits and non institutional money market fund shares are
included only in M2
what is included in the economist's definition of investment? what is not included?
included: the purchase of new machines, factories or houses not included: the purchase of a rare coin or a deposit in a savings account; the purchase of a share of stock
coffee beans purchased by a coffee shop...
intermediate good
GM purchases new machine tools to use in its Flint factory which affects...
investment expenditure
the real interest rate...
is equal to the nominal interest rate minus the inflation rate
the purchase of cotton fabric from a textile mill by a clothing company...
is not the purchase of a final good
the purchase of a new plane by American Airlines...
is the purchase of a final good
the purchase of an aircraft carrier by the federal government....
is the purchase of a final good
the purchase of domestic wine by a French consumer...
is the purchase of a final good
if prices rise over time, then real GDP will be...
larger than nominal GDP in years before the base year
if the US Bureau of Economic Analysis (CEA) added up the value of every good and service sold during the year, would the total be larger or smaller than measured GDP
larger: the value of all goods and services sold would include intermediate goods
what are the largest asset and the largest liability of a typical bank
loans are the largest asset and deposits are the largest liability of a typical bank
one share of Google stock...
neither
GM produces 1,000 Silverados in a factory in Flint, Michigan, and ships them to a car dealer in Shanghai, China which affects...
net export expenditure
suppose a house is built and sold in the year 2010. If the house is resold in the year 2022, is the value of the house included in GDP for 2022?
no, GDP for 2022 includes only the market value of final goods. A house resold in 2022 is an intermediate good
the following appeared in a newspaper article: "inflation in the Lehigh Valley during the first quarter of [the year] was less than half the national rate... So, unlike much of the nation, the fear here is deflation- when prices sink so low that the CPI drops below zero." Do you agree with the reporter's definition of deflation?
no, deflation is defined as a negative inflation rate
according to Ray Fishman of Boston University and Michael Luca of the Harvard Business School, Amazon's voluntary decision to raise its minimum hourly wage to $15 per hour when the federal minimum wage was 7.25% may be good for "both Amazon's employees and its bottom line" Wouldn't paying higher wages to its employees reduce Amazon's profits? Why would they have adopted such a policy?
no, the higher wage would not decrease profits if it motivates workers to work harder and be more productive
the internet has [] the size of menu costs
reduced
the effect of labor unions on overall unemployment is [] since only a [] percentage of the labor force outside the government is unionized
small; small
in calculating GDP, which levels of government spending are included in government purchases?
spending by federal, state, and local governments
if someone lost his or her job because of machine learning, that person would be considered...
structurally unemployed
the Federal Reserve is divided into two bodies
the Board of Governors and 12 regional districts
A double coincidence of wants refers to:
the fact that for a barter trade to take place between two people, each person must want what the other one has
Discount rate
the interest rate the Fed charges on their discount loans
potential GDP is..
the level of GDP produced when all factors of production are utilized at "normal" rates -grows over time
discount loans
the loans the Fed makes to banks
when the economy is at full employment, unemployment is equal to...
the natural rate of unemployment
if the economy is experiencing deflation...
the nominal interest rate will be lower than the real interest rate
if inflation is expected to increase...
the nominal interest rate will increase
currently, the Bureau of Labor Statistics does not include homemakers in its employment and labor force totals. What would happen to the unemployment rate and the labor force participation rate if homemakers were included in these numbers?
the unemployment rate would decrease and the labor force participation rate would increase
you purchase a 1019 (preowned) Chevrolet Silverado from a friend which affects...
this is not included in GDP calculation (GDP is just from the current year)
bank run
when many depositors simultaneously decide to withdraw their money from a bank
why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
when nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities
would the services of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2022?
yes, GDP for 2022 includes the market value of final goods and services. This includes real estate services
what advice for finding a job would you give someone who lost his or her job because of machine learning?
you should tell the worker that he or she needs to learn new skills or move to another city to find a job
