Macroeconomics final 3

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 10 percent, then how much money should Jan's hold?

$4,000

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 7 percent, then how much money should Jan's hold?

$6,000

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ________ Jordanian dinars per U.S. dollar.

0.712

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ________ in the long run.

1

Based on these data, the nominal exchange rate equals approximately ________ reals per Swiss franc or, equivalently, ________ Swiss francs per real.

1.053; 0.950

The price of gold is $300 per ounce in New York and 435 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar.

1.45

Suppose the price of gold is initially $300 per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ________ Canadian dollars per U.S. dollar.

1.50; 1.70

According to the Taylor rule, if inflation equals 3 percent and there is a recessionary gap equal to 3 percent of potential output, the Fed will set a real interest rate of ________ percent and a nominal interest rate of ________ percent.

1; 4

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is $25 per barrel in the United States, the price of oil is ________ pesos per barrel in Mexico.

200

Based on these data, the nominal exchange rate equals approximately ________ pesos per Canadian dollar or, equivalently, ________ Canadian dollars per peso.

6.222; 0.161

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be used to purchase government bonds earning 5 percent, then how much money should Jan's hold?

8,000

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

Appreciated

In the given figure, the economy is initially in long-run equilibrium at point A. If there is an adverse supply shock that reduces potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

C

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.

Decreases

Based on the theory of purchasing power parity, in the long run, currencies of countries with significant inflation will tend to:

Depreciate

________ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ________ to long-run equilibrium at point ________.

Falling; A; C

Which of the following would be expected to increase the demand for money in the U.S.?

Financial investors become concerned about increasing riskiness of stocks.

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ________ the real exchange rate.

Increases

Which of the following actions would increase Jim's money demand by $200?

Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account.

Which of the following actions would decrease Jim's money demand by $200?

Jim writes a check for $200 to pay down his credit card balance

Which of the following actions would decrease Joan's money demand by $200?

Joan writes a check for $200 to purchase additional shares of stock.

An exchange rate that has an officially fixed value greater than its fundamental or market equilibrium value is called a(n) ________ exchange rate.

Overvalued

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.

Real

The impact of monetary policy through exchange rates tends to ________ the impact of monetary policy through real interest rates.

Reinforce

________ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ________ to long-run equilibrium at point ________.

Rising; A; C

Which of the following will shift the aggregate demand curve to the right?

The government increases spending on education

The principal demanders of U.S. dollars in the foreign exchange market are:

U.S. households or firms wishing to purchase foreign goods or assets.

Given the information about the economy above, which expression also states planned aggregate expenditure (PAE)?

[790 − 700r ] + 0.8Y

Each of the following would decrease the demand for U.S. dollars, shifting the demand curve for dollars to the left, EXCEPT:

a depreciation of foreign currencies relative to the U.S. dollar.

Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT:

a depreciation of the U.S. dollar relative to other currencies.

A speculative attack is:

a massive selling of domestic currency assets by domestic and foreign financial investors.

Based on the diagram, if potential output equals 5,000 and the real interest rate is 5 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.

a recessionary; reduce

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the ________ shifts ________.

aggregate demand curve; left

For a given level of inflation, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ________ shifts ________.

aggregate demand curve; left

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

appreciated

When the nominal exchange changes from 110 yen per dollar to 120 yen per dollar, the dollar has:

appreciated.

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:

appreciated.

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

appreciated; depreciated

An increase in the value of a currency relative to other currencies is called a(n):

appreciation.

In an open economy with flexible exchange rates, monetary policy affects ________ through changes in the real interest rate and affects ________ through changes in the exchange rate.

consumption and investment; net exports

When there is a recessionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.

decline; lower; expand

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e,where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

decrease by 3,000 dollars per period

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

decrease by 9,000 dollars per period

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the required reserve/deposit ratio is 10 percent. If the Central Bank raises the required reserve/deposit ratio making the new desired ratio equal to 15 percent, then the money supply in Macroland will ________ to ________ econs, assuming that the public does not wish to change the amount of currency it holds.

decrease; 5,000

A speculative attack on an overvalued currency leads to a(n) ________ in international reserves and a(n) ________ in the fundamental value of the currency.

decrease; decrease

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ________ their loans based on current deposits, and the money supply will ________.

decrease; decrease

When a currency is overvalued, international reserves ________ and the country has a balance-of-payments ________.

decrease; deficit

An alternative to maintaining an undervalued currency is to ________ the fundamental value of the exchange rate by ________ monetary policy.

decrease; easing

Higher nominal interest rates ________ the amount of money demanded and higher real income ________ the amount of money demanded.

decrease; increases

Tight monetary policy will ________ net exports as a result of a ________ currency.

decrease; stronger

Developments in the United States, such as credit cards, debit cards, ATMs, and online banking have:

decreased the demand for money.

Easy monetary policy ________ interest rates which ________ the demand for a currency and ________ the market equilibrium value of the exchange rate.

decreases; decreases; decreases

A lower real interest rate ________ saving and ________ consumption spending.

decreases; increases

Easy monetary policy reduces the real interest rate, which ________ the demand for dollars, ________ the supply of dollars, and ________ the equilibrium value of the dollar.

decreases; increases; decreases

When Argentines increase their savings in U.S. dollars, the U.S. money:

demand curve shifts right.

European firms wishing to purchase American goods and services are ________ the foreign exchange market.

demanders of U.S. dollars in

European households wishing to purchase shares of stock in an American company are ________ the foreign exchange market.

demanders of U.S. dollars in

If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has:

depreciated.

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

depreciated.

A decrease in the value of a currency relative to other currencies is called a(n):

depreciation

The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ________ rate.

discount

A bank is able to make new loans equal to:

excess reserves of the bank.

The aggregate demand curve shifts when there are changes in:

exogenous spending and the Fed's reaction function.

All else being equal, if European firms switch from U.S. produced software to software produced in India, the equilibrium value of the U.S. dollar will:

fall

When the Fed eases U.S. monetary policy, domestic interest rates ________, making U.S. assets relatively less attractive to foreign investors, and ________ the equilibrium exchange rate.

fall; decreasing

International reserves are:

foreign currency assets held by a government for the purpose of purchasing domestic currency in the foreign exchange market.

Starting from long-run equilibrium, the long-run impact(s) of an increase in autonomous consumption, compared to the original equilibrium, is:

higher inflation and the same output.

According to the AD-AS diagram, short-term, an anti-inflation policy creates:

higher unemployment.

Starting from long-run equilibrium, a sharp drop in oil prices results in ________ output in the short run and ________ output in the long run.

higher; potential

Starting from long-run equilibrium, an increase in autonomous consumption results in ________ output in the short run and ________ output in the long run.

higher; potential

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

in the long run.

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

increase by 2,000 francs per period.

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

increase by 4,000 dollars per period.

A currency appreciation is a(n):

increase in the value of a currency relative to other currencies.

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the required reserve/deposit ratio is 15 percent. If the Central Bank lowers the required reserve/deposit ratio making the new desired ratio equal to 10 percent, then the money supply in Macroland will ________ to ________ econs, assuming that the public does not wish to change the amount of currency it holds.

increase; 5,000

Holding all else constant, an increase in U.S. real GDP will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

increase; decrease

Holding all else constant, an increase in the real interest rate on Mexican assets will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

increase; decrease

If commercial banks are maintaining a 5 percent reserve/deposit ratio and the Fed lowers the required reserve ratio to 3 percent, then banks may ________ their loans and deposits, and the money supply may ________.

increase; increase

When a currency is undervalued, international reserves ________ and the country has a balance-of-payments ________.

increase; surplus

An alternative to maintaining an overvalued currency is to ________ the fundamental value of the exchange rate by ________ monetary policy.

increase; tightening

Proponents of fixed exchange rates argue that the predictability of the fixed exchange rate:

increases trade and economic integration.

According to the Taylor rule, the Federal Reserve lowers the real interest rate as the output gap ________ or the inflation rate ________.

increases; decreases

When the Fed engages in an open market purchase, the money supply ________ and the nominal interest rate ________.

increases; decreases

According to the AD-AS diagram, policy makers face a short-term trade-off between ________ when implementing anti-inflation policies.

inflation and unemployment

Forward guidance refers to:

information that a central bank provides to the financial markets regarding its expected future monetary policy path.

Net exports will tend to be low when the real exchange rate:

is high

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

is less expensive in the United States.

A vertical line showing an economy's potential output is called the ________, while a horizontal line showing the current rate of inflation is called the ________.

long-run aggregate supply; short-run aggregate supply

Suppose the government of New Country has fixed the value of its currency, the New Peso, at $1 per New Peso, but the market equilibrium value of the New Peso is $2 per New Peso. In order to maintain the official value of the New Peso the Central Bank of New Country must either ________ domestic interest rates, or ________ the supply of New Pesos by purchasing or increasing their holding of international reserves.

lower; increase

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.75 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or supply Islandia, which causes the supply of international reserves to ________.

lower; increase

According to the Taylor rule, the Federal Reserve ________ the real interest rate as the output gap increases and ________ the real interest rate as the inflation rate increases.

lowers; raises

The exchange rate that equates the quantities of currency supplied and demanded in the foreign exchange market is called the ________ exchange rate.

market equilibrium value of the

One reason why banks might increase their reserve-deposit ratio above the minimum level in times of economic uncertainty is that banks:

may find only limited lending opportunities that seem sufficiently safe.

A reserve requirement set by the Federal Reserve is the:

minimum ratio of reserves to bank deposits that commercial banks are allowed to maintain.

All else equal, compared to the case of a closed economy, monetary policy is ________ effective in an open economy with a ________ exchange rate.

more; flexible

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

movement down; shift left of

Because many European nations have adopted the euro as their common currency, they are ________ able to conduct independent ________ policy.

no longer; monetary

The Federal Reserve can:

only set a money supply target that is consistent with a nominal interest rate target, and vice versa.

An overvalued currency can be maintained:

only until international reserves are exhausted.

If a country's international reserves are decreasing, then its exchange rate is ________ and there is a balance-of-payments ________.

overvalued; deficit

The demand for the Franconian franc in the foreign exchange market equals 11,000 - 25,000e and the supply of francs in the foreign exchange market equals 9,000 + 25,000 e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 0.25 U.S. dollars per franc, then the franc is ________ and Franconia has a balance-of-payments ________.

overvalued; deficit of 10,500 francs

In reality, the Fed's information is fairly imprecise in regards to:

potential GDP.

The real exchange rate is the:

price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.

The theory that nominal exchange rates are determined so that the law of one price holds is called:

purchasing power parity.

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.25 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or purchase Islandia, which causes the supply of international reserves to ________.

raise; decrease

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 2 percent (0.02). If potential output equals 8,000, the central bank must ________ the interest rate to close the ________ gap.

raise; expansionary

To close an expansionary gap, the Fed ________ interest rates which ________ planned aggregate spending and ________ short-run equilibrium output.

raises; decreases; decreases

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

real GDP in the U.S. decreases

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

real GDP in the U.S. decreases.

Stock prices tend to ________ when the Federal Reserve raises interest rates because higher interest rates ________ dividends.

rise; increase

When the Fed tightens U.S. monetary policy, domestic interest rates ________, making U.S. assets relatively more attractive to foreign investors, and ________ the equilibrium exchange rate.

rise; increasing

If the Fed wishes to increase nominal interest rates, it must engage in an open market ________ of bonds that ________ the money supply.

sale; decreases

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. When the inflation rate is zero, then the real interest rate will be:

set to equal 2 percent.

A downward shift in the Fed's corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

shift right of; shift left of

Changes in the expected rate of inflation will:

shift the SRAS curve downward or upward.

A horizontal line showing the current rate of inflation, as determined by past expectations and pricing decisions is called the:

short-run aggregate supply line.

Graphically short-run equilibrium occurs at the intersection of the aggregate demand curve and the:

short-run aggregate supply line.

Graphically the intersection of the aggregate demand curve and the short-run aggregate supply line determines:

short-run equilibrium.

Because a decrease in the nominal interest rate reduces the opportunity costs of holding money, the money demand curve:

slopes downward.

A massive selling of domestic currency assets by domestic and foreign financial investors is called

speculative attack.

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it is no longer available to:

stabilize the domestic economy

A combination of inflation and recession is called:

stagflation

U.S. firms wishing to purchase European goods and services are ________ the foreign exchange market.

suppliers of U.S. dollars in

Because decreases in inflation increase planned spending and short-run equilibrium output:

the aggregate demand curve is downward sloping.

Higher rates of inflation reduce planned spending because:

the reduction in wealth, resulting from the reduced real value of money, restricts spending.

If the fundamental value of the nominal exchange rate equals 0.20 U.S. dollars per franc, but the franc is officially fixed at 0.15 U.S. dollars per franc, then the franc exchange rate is ________ and to maintain this exchange rate there will be ________ in the government's stock of international reserves.

undervalued; a net increase

A flexible exchange rate is an exchange rate whose value:

varies according to supply and demand for the currency in the foreign exchange market.

The long-run aggregate supply line is:

vertical at the economy's potential output

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

will be unable to stabilize the market equilibrium value of the exchange rate.