Macroeconomics Final
30
(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy. C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of saving will be
households and businesses, but not government or international trade.
A private closed economy includes
$5,000.
A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are
smaller is the economy's MPS.
A specific reduction in government spending will dampen demand-pull inflation by a greater amount the
both M1 and M2.
Currency in circulation is part of
$2 = 1 British pound in the United States.
If a U.S. importer can purchase 10,000 British pounds for $20,000, the rate of exchange is
planned investment will exceed saving.
If aggregate expenditures exceed GDP in a private closed economy:
domestic output will increase.
If at some level of GDP the economy is experiencing an unintended decrease in inventories:
leftward by $40 billion at each price level.
If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift
increasing taxes by $20 billion.
If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by
decreasing taxes by $25 billion.
If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by
they are not directly or immediately a medium of exchange.
In defining money as M1, economists exclude time deposits because
money outflow.
In the U.S. balance of payments, U.S. purchases of assets abroad are a(n)
coins, paper currency, and checkable deposits.
In the United States, the money supply (M1) includes
does not change when real GDP changes.
In the aggregate expenditures model, it is assumed that investment
current account entry.
In the balance of payments of the United States, U.S. goods imports are recorded as a
a decrease in the prices of domestic resources.
In the diagram, a shift from AS1 to AS2 might be caused by
increase in business taxes and costly government regulation.
In the diagram, a shift from AS2 to AS3 might be caused by a(n)
3; 2; 1
In the diagram, the economy's immediate-short-run AS curve is line ______, its short-run AS curve is _____, and its long-run AS curve is line ______.
3 (straight horizontal line)
In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line
nominal GDP decreases and the interest rate increases
In which of the following situations is it certain that the quantity of money demanded by the public will decrease?
less liquid than the M1 components of M2.
The near-money components of M2 are
varies directly with the interest rate.
The opportunity cost of holding money
lower the interest rate.
The present value of a future amount of money will be greater the
why the aggregate demand curve is down-sloping.
The real-balances, interest-rate, and foreign purchases effects all help explain
its goods exports and imports and its services exports and imports.
The current account section in a nation's balance of payments includes
receipts of income and expenditures are not perfectly synchronized.
The desire to hold money for transactions purposes arises because
the latter includes small-denominated time deposits, savings accounts, money market deposit accounts, and money market mutual fund balances.
The difference between M1 and M2 is that
rightward shift in the economy's aggregate demand curve.
The effect of expansionary fiscal policy is shown as a
no unintended changes in inventories.
The equilibrium level of GDP is associated with:
bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
When a check is drawn and cleared, the
a means of payment
When economists say that money serves as a medium of exchange, they mean that it is
a way to keep wealth in a readily spendable form for future use.
When economists say that money serves as a store of value, they mean that it is
vault cash, property, and reserves
Which of the following are all assets to a commercial bank?
determinants of aggregate demand
The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the
sale of real and financial assets to people living abroad minus its purchases of real and financial assets from foreigners.
The financial account balance is a nation's
moves the economy along a fixed aggregate demand curve.
The foreign purchases effect
increase U.S. imports and decrease U.S. exports.
The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will
convert a given number of dollars in the future into its present equivalent.
The formula for present value allows investors to
paper money in the form of gold receipts was rarely redeemed for gold.
The goldsmith's ability to create money was based on the fact that
Council of Economic Advisers (CEA)
The group of three economists who provide fiscal policy recommendations to the president is the
a specific amount of money is more valuable to a person the sooner it is received.
The idea that money has "time value" refers to the fact that
both input and output prices are fixed.
The immediate-short-run aggregate supply curve represents circumstances where
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
The interest-rate effect suggests that
Checkable deposits
The largest component of the money supply (M1) is
expenditures of consumers and businesses.
The level of aggregate expenditures in the private closed economy is determined by the
Current account = −$50 billion; capital account = +$20 billion; financial account = +$30 billion.
Which of the following combinations is plausible, as it relates to a nation's balance of payments?
Assets equal liabilities plus net worth.
Which of the following describes the identity embodied in a balance sheet?
(1 + i)tX
Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?
The investment pays a positive rate of interest.
Which of the following is not common to all investments?
a $30 billion decrease in government spending
Which of the following represents the most contractionary fiscal policy?
Interest rates and bond prices vary inversely.
Which of the following statements is correct?
deflation will shift both the transactions demand curve for money and the total money demand curve to the left.
Which of the following statements is correct? Other things equal,
It is a financial investment but not an economic investment.
Which of the following statements is true about buying an old factory?
U.S. firms sell insurance to Brazilian shippers.
Which of the following would call for inflows of money to the United States?
an increase in stock prices that increases consumer wealth
Which of the following would most likely shift the aggregate demand curve to the right?
deposit insurance
Which one of the following is presently a major deterrent to bank panics in the United States?
an increase in U.S. purchases of assets abroad
Which one of the following will not directly affect the U.S. balance on the current account?
$255.26
$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?
assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.
A commercial bank's reserves are
$1,433
$800 invested at an annually compounded interest rate of 6 percent will be worth how much at the end of 10 years?
6 and 8.
(1) Goods Exports +$200 (2) Balance on Capital Account 0 (3) Net Transfers 0 (4) Imports of Services −100 (5) Net Investment Income 0 (6) US Purchases of Assets Abroad −50 (7) Goods Imports −250 (8) Foreign Purchases of Assets in the US +150 (9) Exports of Services +50 The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. The financial account items for Zippo are
current account deficit.
(1) Goods Exports +$200 (2) Balance on Capital Account 0 (3) Net Transfers 0 (4) Imports of Services −100 (5) Net Investment Income 0 (6) US Purchases of Assets Abroad −50 (7) Goods Imports −250 (8) Foreign Purchases of Assets in the US +150 (9) Exports of Services +50 The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a
4.8 percent
(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years. If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?
15.7
(Advanced analysis) Indy has $2,000 invested in a financial asset earning an annually compounded interest rate of 6 percent. Approximately how many years will it take before Indy's investment is worth $5,000?
8.3
(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent. In about how many years will her investment be worth $150?
225
(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy. C = 60 + 0.6Y I = I0 = 30 In this economy, the equilibrium level of income (Y) is
normally causes a surplus on the capital and financial account.
A deficit on the current account
is susceptible to bank "panics" or "runs."
A fractional reserve banking system
Federal Reserve note.
A $20 bill is a
liabilities of $75 billion.
A bank that has assets of $85 billion and a net worth of $10 billion must have
a. $10 Billion Surplus b. $15 Billion Surplus c. $20 Billion Surplus d. $20 Billion Deficit e. Deficit
Alpha's balance-of-payments data for 2020 are shown below. All figures are in billions of dollars. Goods exports $+40 Goods imports -30 Service exports +15 Service imports -10 Net investment income -5 Net transfers +10 Balance on capital account 0 Foreign purchases of Alpha assets +20 Alpha purchases of assets abroad -40 a. What is the balance on goods? b. What is the balance on goods and services? c. What is the balance on the current account? d. What is the balance on the capital and financial account? Suppose Alpha sold $10 billion of official reserves abroad to balance the capital and financial account with the current account. e. Does Alpha have a balance-of-payments deficit or does it have a surplus?
a decrease in tax rates
An appropriate fiscal policy for a severe recession is
right by a multiple of the change in net exports.
An increase in net exports will shift the AD curve to the
more money is needed to finance a larger volume of transactions.
An increase in nominal GDP increases the demand for money because
rise by 2.5 percentage points.
Answer the question based on the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent. If the price of this bond falls by $200, the interest rate will
$3,760 billion.
As of March 2019, the supply of money (M1) in the United States was about
$6,000
Assets Liabilities and Net Worth Reserves $40,000 Checkable Deposits $130,000 Loans 25,000 Stock Shares 45,000 Securities 110,000 Assume the Continental National Bank's balance statement is as shown in the accompanying table. Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000 was drawn and cleared against it?
$80,000.
Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of
$0
Assume that Jimmy Cash has $2,000 in his checking account at Folsom Bank and uses his checking account debit card to withdraw $200 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?
unplanned decreases in inventories of $10 billion will occur.
Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus:
the supply of money is increased by $5,000.
Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,
an excess of government expenditures over tax receipts.
Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward
M1 and M2 money supplies will not change.
Assuming no other changes, if balances in money market deposit accounts increase by $50 billion and small-denominated time deposits decrease by $50 billion, the
M1 money supply will decline and the M2 money supply will remain unchanged.
Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the
$40 billion $24 billion
By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80? If the MPC is 0.67?
are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently.
Bank panics
they can be readily used in purchasing goods and paying debts.
Checkable deposits are classified as money because
included in M1
Checkable deposits are:
-$49.1
China had a $49.1 billion overall current account surplus in 2018. Assuming that China's net debt forgiveness was zero in 2018 (its capital account balance was zero), by how much did Chinese purchases of financial and real assets abroad exceed foreign purchases of Chinese financial and real assets?
not part of the nation's money supply.
Coins held in commercial bank vaults are
make loans to the public.
Commercial banks monetize claims when they
describes how quickly an interest-bearing asset increases in value.
Compound interest
a. 3.13$ b. -4.81% c. Decrease d. $123.75
Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chance that it will be worth $140 in a year. a. What is its average expected rate of return? b. Next, figure out what the investment's average expected rate of return would be if its current price were $130 today. c. Does the increase in the current price increase or decrease the asset's average expected rate of return? d. At what price would the asset have a zero average expected rate of return?
is aimed at reducing aggregate demand and thus achieving price stability.
Contractionary fiscal policy is so named because it
$5 billion surplus.
Current Account (1) Goods Exports +$80 (2) Goods Imports −70 (3) Exports of Services +20 (4) Imports of Services −25 (5) Net Investment Income +5 (6) Net Transfers −5 Financial Account (7) Foreign Purchases of Assets in the United States +13 (8) US Purchases of Foreign Assets Abroad -23 Capital Account (9) Balance on Capital Account +5 The table contains balance of payments data (+ and −) for the hypothetical nation of Zabella. All figures are in billions of dollars. Zabella's balance on goods and services shows a
deficit of $5 billion.
Current Account (1) Goods Exports +$80 (2) Goods Imports −70 (3) Exports of Services +20 (4) Imports of Services −25 (5) Net Investment Income +5 (6) Net Transfers −5 Financial Account (7) Foreign Purchases of Assets in the United States +13 (8) US Purchases of Foreign Assets Abroad -23 Capital Account (9) Balance on Capital Account +5 The table contains balance of payments data (+ and −) for the hypothetical nation of Zabella. All figures are in billions of dollars. Zabella's balance on the capital and financial account shows a
involves specific changes in taxes and government spending undertaken expressly for stabilization at the option of Congress.
Discretionary fiscal policy is so named because it
deficits during recessions and surpluses during periods of demand-pull inflation.
Discretionary fiscal policy will likely cause budget
difference between actual reserves and required reserves.
Excess reserves refer to the
quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.
If the demand for money and the supply of money both decrease, the equilibrium
the interest rate will rise.
If the quantity of money demanded exceeds the quantity supplied,
a unit of account.
If you are estimating your total expenses for school next semester, you are using money primarily as
a medium of exchange.
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as
fall, causing households and businesses to hold more money.
If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will
18.95%
In 1980, the U.S. inflation rate was 13.5 percent and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full-employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed's target interest rate?
balance, with no deficit or surplus.
In 2018, the capital account in the U.S. balance of payments was in
increase tax rates and/or reduce government spending.
In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should
business inventories will fall.
In a private closed economy, when aggregate expenditures exceed GDP:
shift the AD curve to the left.
In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will
international trade and international asset transactions
International transactions fall into what two broad categories?
a nation's consumers benefit from a trade deficit during the period it occurs.
It may be misleading to label a trade deficit as unfavorable or adverse, because
Great Depression
John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?
$1,079.46
Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years. How much will be required to pay off the loan at the end of 10 years?
horizontally adding the transactions and the asset demand for money.
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by
a vertical line
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by
expand investment and shift the AD curve to the right.
Other things equal, a decrease in the real interest rate will
aggregate demand curve would shift to the right.
Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.
worth or value today of future expected returns or costs.
Present value is best defined as the
deferred payouts are adjusted upward to compensate for forgone interest.
Professional athletes attempting only to maximize income will defer larger salaries if
do nothing since the economy appears to be achieving full-employment real output.
Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to
a negative GDP gap.
Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing
$50.
Refer to the diagram for a private closed economy. At the equilibrium level of GDP, investment and saving are both
increase by $2 for every $3 increase in GDP.
Refer to the diagram for a private closed economy. In this economy, aggregate expenditures
$180 billion
Refer to the diagram for a private closed economy. The equilibrium GDP is
only at the $300 level of GDP.
Refer to the diagram for a private closed economy. Unplanned changes in inventories will be zero
demand for bonds in the bond market will rise and the interest rate will fall.
Refer to the diagram of the market for money. Given Dm and Sm, an interest rate of I3 is not sustainable because the
the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
Refer to the diagram of the market for money. The vertical money supply curve Sm reflects the fact that
AD0.
Refer to the diagram, in which Qf is the full-employment output. Expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at
reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.
Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to
the opportunity cost of holding money increases as the interest rate rises.
The asset demand for money is downsloping because
increase government expenditures or reduce taxes.
Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to
expansionary fiscal policy
Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with
H and HF, respectively.
Refer to the diagram, which applies to a private closed economy. If gross investment is Ig1, the equilibrium GDP and the level of consumption will be:
is an investment demand curve, and curve B is an investment schedule.
Refer to the diagrams. Curve A
leave curve A in place but shift curve B upward.
Refer to the diagrams. Other things equal, an interest rate decrease will
shift curve B upward.
Refer to the diagrams. Other things equal, an interest rate reduction coupled with a rightward shift in curve A will
transactions demand for money.
Refer to the given market-for-money diagrams. Curve D1 represents the
nominal GDP is $800.
Refer to the given market-for-money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that
buy bonds, which would cause bond prices to rise and the interest rate to fall.
Refer to the given market-for-money diagrams. If the interest rate was at 8 percent, people would
10.
Reserve Requirement (%) Checkable Deposits Actual Reserves Excess Reserves (1) W $100,000 $10,000 $0 (2) 8 X 20,000 12,000 (3) 12 200,000 Y 8,000 (4) 20 300,000 70,000 Z The accompanying table gives data for a commercial bank or thrift. In row 1, the number appropriate for space W is
$32,000.
Reserve Requirement (%) Checkable Deposits Actual Reserves Excess Reserves (1) W $100,000 $10,000 $0 (2) 8 X 20,000 12,000 (3) 12 200,000 Y 8,000 (4) 20 300,000 70,000 Z The accompanying table gives data for a commercial bank or thrift. In row 3, the number appropriate for space Y is
unit of account
Stock market price quotations best exemplify money serving as a
Yes, if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments.
Suppose that Clint wins a lottery jackpot of $300 million. He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately. Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?
38,000
Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, how much does the bank hold in actual reserves?
5,000
Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return. What amount of excess reserves does the bank now have?
$360 billion
Suppose that a certain country has an MPC of 0.9 and a real GDP of $400 billion. If its investment spending decreases by $4 billion, what will be its new level of real GDP?
a.$257.70 b.$248.68
Suppose that a risk-free investment will make three future payments of $100 in 1 year, $100 in 2 years, and $100 in 3 years. a. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investment? b. What is the price of this investment if the Federal Reserve raises the risk-free interest rate to 10 percent?
$50 billion
Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand?
$82,645
Suppose that you desire to get a lump-sum payment of $100,000 two years from now. How many current dollars will you have to invest today at 10 percent interest to accomplish your goal?
117
Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound. What will be the value of your investment 4 years from now?
Liabilities increased by $ 80,000
Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?
not accurately predict what will happen to interest rates or bond prices.
Suppose the demand for money and the supply of money increase simultaneously. We can
a. $0.80 b. $2.00
Suppose the price level and value of the U.S. dollar in year 1 are 1 and $1, respectively. a. If the price level rises to 1.25 in year 2, what is the new value of the dollar? b. If, instead, the price level falls to 0.50, what is the value of the dollar?
reduce taxes by $80 billion.
Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should
$200,000.
Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out
$90,000 in checkable deposit liabilities and $32,000 in reserves.
The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is consistent with the bank having
individual shares in money market mutual funds.
The M2 money supply includes
shows the amount of real output that will be purchased at each possible price level.
The aggregate demand curve
per-unit production costs rise as the economy moves toward and beyond its full-employment real output.
The aggregate supply curve (short run) is upsloping because
slopes upward and to the right.
The aggregate supply curve (short-run):
excess reserves.
The amount that a commercial bank can lend is determined by its
the net amount Americans received as interest and dividends on existing U.S. investments abroad.
The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. Item 5 indicates
$25 billion deficit.
The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. The U.S. balance on current account is a
surplus of $20 billion.
The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. The United States has a balance of goods
surplus of $25.
The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. The United States' balance of capital and financial account is a
$360
The table gives data for a private closed economy. If gross investment is $12 billion, the equilibrium level of GDP will be
medium of exchange
The transactions demand for money is most closely related to money functioning as a
4,000
Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5,000 in currency into the bank, and the bank adds that currency to its reserves. What amount of excess reserves does the bank now have?
whatever performs the functions of money extremely well is considered to be money.
To say "money is what money does" means that
the desire for high rates of return and dislike of risk and uncertainty
What are the two most important factors influencing investor preferences?
Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods.
What is the difference between economic and financial investments?
$1,927.72
What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?
$338.42
What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?
75%
What percentage of the average U.S. firm's costs is accounted for by wages and salaries?
