Unit 3: Principles of Macroeconomics
You take $150 you had kept under your mattress and deposit it in your bank account. Suppose this $150 stays in the banking system as reserves and banks hold reserves equal to 12.5 percent of deposits. The total amount of deposits in the banking system increases by ______, and the money supply increases by _________.
$1200 $1050
In an open-market operation, the Fed buys $20 million of government bonds from individual investors. if the required reserve ratio is 12.5%, the largest possible increase in the money supply that could result is _____ million, and the smallest possible increase is ______ million.
160 20
Refer to Figure 30-3. Suppose the relevant money-supply curve is the one labeled MS 1; also suppose the economy's real GDP is 30,000 for the year. If the market for money is in equilibrium, then the velocity of money is approximately points of graph: (10,000,0.5) and (15,000,0.33)
6.0
Suppose that a country's inflation rate increases sharply. As a result, the inflation tax on holders of money _________. True or False: Holders of savings accounts are hurt by the increase in the inflation rate because they are taxed on their nominal interest income.
Increase true
A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve requirement. a. It has $800 in reserves and $9,200 in loans. b. It has $8,000 in reserves and $2,000 in loans. c. It has $80 in reserves and $9,920 in loans. d. It has $1,250 in reserves and $8,750 in loans.
a
The purchase of U.S. government bonds by Egyptians is an example of a. foreign portfolio investment by Egyptians. b. U.S. imports. c. U.S. exports. d. foreign direct investment by Egyptians.
a
When the price level falls, the number of dollars needed to buy a representative basket of goods a. increases, so the value of money rises. b. decreases, so the value of money falls. c. decreases, so the value of money rises. d. increases, so the value of money falls.
c
When the Fed decreases the interest rate it pays on reserves, the money supply will _______.
increase
If the Fed wanted to decrease the money supply, it can ______ the reserve requirements
raise
Your uncle repays a $350 loan from Tenth National Bank (TNB) by writing a $350 check from his TNB checking account. Assume these funds are the only loans and deposits available for your uncle and the bank. Complete T-account for your uncle and TBN before your uncle pays what is it after he repays the loan?
your uncle assets- 350 liabilities- 350 tenth national bank loans-350 deposits- 350 all accounts are 0
Assume that the reserve requirement is 20 percent. If the Federal Reserve buys $5,000 worth of bonds, the largest possible increase in the money supply is _______. If someone deposits in a bank $5,000 that she had been hiding in her cookie jar, the largest possible increase in the money supply is ________. All other things equal, if the Federal Reserve buys $5,000 worth of bonds, the money supply will expand ______ than if someone deposits in a bank $5,000 that she had been hiding in her cookie jar.
25,000 20,000 more
It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. Assume that velocity is constant. True or False: In order to achieve this zero-inflation goal, the rate of money growth must equal zero.
False
True or False: If the Fed wants to keep the price level stable instead, it should keep the money supply unchanged next year.
False
True or False: If the Fed wants to keep the price level stable, it should reduce the money supply.
False
Which of the following is included in M2? a. Money market mutual funds b. Corporate bonds c. Credit cards d. Large time deposits
a
Happy Bank starts with $200 in bank capital. It then takes in $1,000 in deposits. It keeps 15 percent of deposits in reserve. It uses the rest of its assets to make bank loans. complete the balance sheet happy bank's leverage ratio is ____
assets: reserves- 150 loans- 1050 liabilities: deposits- 1000 capital-200 6
A country's trade balance a. must be greater than zero. b. is greater than zero only if exports are greater than imports. c. is greater than zero only if imports are greater than exports. d. must be zero.
b
A depreciation of the U.S. real exchange rate induces U.S. consumers to buy a. fewer domestic goods and more foreign goods. b. fewer domestic goods and fewer foreign goods. c. more domestic goods and fewer foreign goods. d. more domestic goods and more foreign goods.
c
Which of the following functions as both a store of value and a medium of exchange? a. Stocks but not cash b. Cash and stocks c. Cash but not stocks d. Neither cash nor stocks
c
If saving is greater than domestic investment, then there is a trade a. surplus and Y < C + I + G. b. deficit and Y > C + I + G. c. deficit and Y < C + I + G. d. surplus and Y > C + I + G.
d
If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate? a. 10 percent b. 8 percent c. 6 percent d. 4 percent
d
When colonists in Virginia used tobacco as money, their money a. had no store of value. b. had no intrinsic value. c. was fiat money. d. was commodity money
d
If the Fed does not respond to this event, the price level will _________
decrease
A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank, what is the value of the money supply? a. $150 b. $100 c. $200 d. $50
a
If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by a. selling bonds. This selling would reduce reserves. b. buying bonds. This buying would reduce reserves. c. buying bonds. This buying would increase reserves. d. selling bonds. This selling would increase reserves.
a
In an open economy, gross domestic product equals $2,450 billion, consumption expenditure equals $1,390 billion, government expenditure equals $325 billion, investment equals $510 billion, and net capital outflow equals $225 billion. What is national saving? a. $735 billion b. $510 billion c. $1,390 billion d. $225 billion
a
Which of the following is not included in either M1 or M2? a. U.S. Treasury bills b. Small time deposits c. Money market mutual funds d. Demand deposits
a
Suppose that this year's money supply is $600 billion, nominal GDP is $15 trillion, and real GDP is $3 trillion. The price level is ___, the velocity of money is _____.
5 25
A company in Panama pays for a U.S. architect to design a factory building. By itself this transaction a. increases U.S. exports and so increases the U.S. trade balance. b. increases U.S. imports and so decreases the U.S. trade balance. c. increases U.S. imports and so increases the U.S. trade balance. d. increases U.S. exports and so decreases the U.S. trade balance.
a
According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then a. nominal GDP would rise by 5 percent; real GDP would be unchanged. b. nominal and real GDP would rise by 5 percent. c. neither nominal GDP nor real GDP would change. d. nominal GDP would be unchanged; real GDP would rise by 5 percent.
a
First National Bank Assets. Liabilities and Owners' Equity Reserves: $1,200 Deposits: $9,000 Loans: 8,000 Debt: 800 Short-term securities: 800 Capital (owners' equity): 200 Refer to Table 29-5. This bank's leverage ratio is a. 50. b. 7.5. c. 2. d. 13.3.
a
If purchasing-power parity holds, then the value of the a. real exchange rate is equal to one. b. nominal exchange rate is equal to one. c. real exchange rate is equal to the difference in inflation rates between the two countries. d. real exchange rate is equal to the nominal exchange rate.
a
Suppose that some of the borrowers from Happy Bank default, making 8 percent of its bank loans worthless. complete the new balance sheet the bank's assets decline by ______, and the bank's capital declines by ______
assets: reserves- 150 loans- 966 liabilities: deposits- 1000 bank capital- 116 7% and 42%
A country's trade balance will fall if either a. investment or saving fall. b. saving falls or investment rises. c. investment falls or saving rises. d. investment or saving rise.
b
Changes in nominal variables are determined mostly by the quantity of money and the monetary system according to a. neither the classical dichotomy nor the quantity theory of money. b. both the classical dichotomy and the quantity theory of money. c. the classical dichotomy, but not the quantity theory of money. d. the quantity theory of money, but not the classical dichotomy.
b
Dollar bills, rare paintings, and emerald necklaces are all a. units of account. b. media of exchange. c. stores of value. d. extremely liquid assets.
c
If velocity = 4, the quantity of money = 20,000, and the price level = 2.5, then the real value of output is a. 200,000. b. 12,500. c. 32,000. d. 2,000
c
The shoeleather cost of inflation refers to the a. increased cost to the government of printing more money. b. redistributional effects of unexpected inflation. c. waste of resources used to maintain lower money holdings. d. time spent searching for low prices when inflation rises.
c
When Microsoft establishes a distribution center in France, U.S. net capital outflow a. decreases because Microsoft makes a foreign portfolio investment in France. b. increases because Microsoft makes a foreign portfolio investment in France. c. increases because Microsoft makes a foreign direct investment in France. d. decreases because Microsoft makes a foreign direct investment in France.
c
When inflation causes relative-price variability consumer decisions, a. are not distorted and markets are still able to efficiently allocate factors of production. b. are distorted, but markets are still able to efficiently allocate factors of production. c. are distorted and the ability of markets to efficiently allocate factors of production is impaired. d. are not distorted, but the ability of markets to efficiently allocate factors of production is impaired.
c
Which of the following is an example of U.S. foreign direct investment? a. A Chinese company opens a restaurant in the U.S. b. A U.S. bank buys bonds issued by an Australian corporation. c. A U.S. company opens an auto parts factory in Canada. d. An Australian bank buys stocks issued by a U.S. corporation.
c
Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow? a. For a given amount of saving, an increase in net capital outflow must decrease domestic investment. b. Saving is the sum of investment and net capital outflow. c. For a given amount of saving, a decrease in net capital outflow must decrease domestic investment. d. An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged.
c
Bank capital is a. the reserves of the bank. b. the bank's total assets. c. the machinery, structures, and equipment of the bank. d. the resources that owners have put into the bank.
d
If the real exchange rate for coal is 1.5, the price of coal in the United States is $50 per ton, and the price of coal in Britain is 20 British pounds per ton, what is the nominal exchange rate? a. 5/3 or 1.67 pounds per dollar b. 4/15 or 2.67 pounds per dollar c. 15/4 or 3.75 pounds per dollar d. 3/5 or 0.6 pounds per dollar
d
If the reserve ratio is 5 percent, then $500 of additional reserves would ultimately generate a. $2,500 of money. b. $10,500 of money. c. $9,500 of money. d. $10,000 of money.
d
Which of the following equations is correct? a. S = I + C b. S = I − NX c. S = NX − NCO . d. S = I + NCO
d
Which of the following is correct? Since 1950 a. U.S. exports and U.S. imports each have increased slightly. b. U.S. exports have decreased and U.S. imports have increased. c. U.S. exports increased only slightly and U.S. imports have increased significantly. d. U.S. exports and U.S. imports each have increased significantly.
d
Which of the following policies can the Fed follow to increase the money supply? a. Reduce the quantity of funds available through the Term Auction Facility b. Increase reserve requirements for banks c. Sell government bonds d. Reduce the interest rate on reserves
d
if bankers decide to hold more excess reserves because they are fearful of bank runs, the money supply ______
decrease
When the Fed sells bonds in open-market operations, it _______ the money supply
decreases
Indicate which of the functions of money (a medium of exchange, a unit of account, and a store of value) each of the following performs in the U.S. economy. Check all that apply. Medium of Exchange, Unit of Account, or Store of Value Plastic Credit Card Diamond British pound US penny
Plastic Credit Card- none (not money) Diamond- Store Value (not money) British Pound- Store Value (not money) US penny- Medium exchange, Unite of account, and store of value (money)
If the exchange rate is expressed as euros/dollar, t he dollar is said to depreciate against the euro if the exchange rate a. falls. Other things the same, it will cost fewer euros to buy U.S. goods. b. falls. Other things the same, it will cost more euros to buy U.S. goods. c. rises. Other things the same, it will cost more euros to buy U.S. goods. d. rises. Other things the same, it will cost fewer euros to buy U.S. goods.
a
In the last part of the 1800s a. deflation made it harder for farmers to pay off their debt. b. deflation made it easier for farmers to pay off their debt. c. inflation made it harder for farmers to pay off their debt. d. inflation made it easier for farmers to pay off their debt
a
In the nation of Wiknam, the money supply is $80,000 and reserves are $18,000. Assuming that people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve requirement is a. 22.5 percent. b. 16.4 percent. c. 29.1 percent. d. 18.0 percent.
a
Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits? a. $4,937.5 billion b. $5,000 billion c. $5,062.5 billion d. $4,995 billion
a
The "law of one price" states that a. a good must sell at the same price at all locations. b. nominal exchange rates will not vary. c. a good cannot sell for a price greater than the legal price ceiling. d. a good must sell at the price fixed by law.
a
To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the a. quantity theory of money. b. theory of hyperinflation. c. disequilibrium theory of money and inflation. d. price-index theory of money.
a
When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis , the money demand curve slopes a. downward, because at higher prices people want to hold more money. b. downward, because at higher price people want to hold less money. c. upward, because at higher prices people want to hold less money. d. upward, because at higher prices people want to hold more money.
a
If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as a. e + P*/P. b. (eP)/P* . c. (eP *)/P. d. e − P/P*.
b
In a system of 100-percent-reserve banking, a. banks can increase the money supply. b. banks do not influence the supply of money. c. loans are the only asset item for banks. d. banks do not accept deposits.
b
Jen and Alicia are both U.S. citizens. Jen opens a cafe in France. Alicia buys equipment from a company in Canada to use in a U.S.-based factory. Whose action is an example of U.S. foreign direct investment? a. Alicia ' s but not Jen ' s b. Jen ' s but not Alicia ' s c. Neither Alicia ' s nor Jen ' s d. Jen's and Alicia ' s
b
Suppose ice cream cones costs $3. Molly holds $60. What is the real value of the money she holds? a. $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold fewer dollars. b. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold more dollars. c. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold fewer dollars. d. $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold more dollars.
b
In the graph, MS represents the money supply and MD represents money demand. The vertical axis is the value of money measured as 1/P and the horizontal axis is the quantity of money. Refer to Figure 30-2. If the relevant money-demand curve is the one labeled MD, then the equilibrium value of money is a. 2 and the equilibrium price level cannot be determined from the graph. b. 2 and the equilibrium price level is 0.5. c. 0.5 and the equilibrium price level is 2. d. 0.5 and the equilibrium price level cannot be determined from the graph.
c
In the long run, money demand and money supply determine a. neither the value of money nor the real interest rate. b. the real interest rate but not the value of money. c. the value of money but not the real interest rate. d. the value of money and the real interest rate.
c
Purchasing-power parity theory does not hold at all times because a. the same goods produced in different countries are perfect substitutes for each other. b. consumer preferences are different across countries. c. prices are different across countries. d. many goods are not easily transported and the same goods produced in different countries may be imperfect substitutes.
d
If the Fed wants an inflation rate of 12 percent instead, it should ___ the money supply by _____.
increase 16%
John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks. As a result of these changes, a. M1 and M2 stay the same. b. M1 increases by $2,500 and M2 stays the same. c. M1 decreases by $2,500 and M2 increases by $2,500. d. M1 increases by $2,500 and M2 decreases by $2,500.
b
Purchasing-power parity describes the forces that determine a. exchange rates in the short run. b. exchange rates in the long run. c. prices in the long run. d. prices in the short run.
b
Refer to Figure 30-3. At the end of 2009 the relevant money-supply curve was the one labeled MS . At the end of 2010, the relevant money-supply curve was the one labeled MS . Assuming the economy is always in equilibrium, what was the economy's approximate inflation for 2010? points: (10,000, 0.5) and (15,000, 0.33) a. 67 percent b. 50 percent c. −33 percent d. 17 percent
b
Suppose the market for money, drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis , is in equilibrium. If the money supply increases, then at the old value of money there is an a. excess supply of money that will result in a decrease in spending. b. excess supply of money that will result in an increase in spending. c. excess demand for money that will result in a decrease in spending. d. excess demand for money that will result in an increase in spending.
b
The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold? a. 60 florin b. 80 florin c. 20 florin d. 40 florin
b
When conducting an open-market sale, the Fed a. buys government bonds, and in so doing increases the money supply. b. sells government bonds, and in so doing decreases the money supply. c. buys government bonds, and in so doing decreases the money supply. d. sells government bonds, and in so doing increases the money supply.
b
When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis , the price level increases if money demand shifts a. left and decreases if money supply shifts right. b. left and decreases if money supply shifts left. c. right and decreases if money supply shifts right. d. right and decreases if money supply shifts left.
b
Which of the following both increase the money supply? a. An increase in the discount rate and a decrease in the interest rate on reserves b. A decrease in the discount rate and a decrease in the interest rate on reserves c. A decrease in the discount rate and an increase in the interest rate on reserves d. An increase in the discount rate and an increase in the interest rate on reserves
b
Which of the following can a country increase in the long run by increasing its money growth rate? a. Real output b. The nominal wage c. Real interest rates d. The real wage
b
Which of the following is not included in M1? a. Currency b. Savings deposits c. Demand deposits d. Traveler's checks
b
If the value of goods and services that Australia purchases from the United States are less than the value of goods and services that the United States purchases from Australia, then the United States has a. positive net exports with Australia and a trade surplus with Australia. b. positive net exports with Australia and a trade deficit with Australia. c. negative net exports with Australia and a trade deficit with Australia. d. negative net exports with Australia and a trade surplus with Australia.
c
Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2, a. the supply of money has decreased. b. the equilibrium price level decreases. c. the equilibrium value of money decreases. d. the demand for goods and services will decrease.
c
The First Bank of Roswell Assets Liabilities Reserves $30,000 Deposits $200,000 Loans 170,000 Refer to Table 29-5. Suppose the bank faces a reserve requirement of 10 percent. Starting from the situation as depicted by the T-account, a customer deposits an additional $60,000 into his account at the bank. If the bank takes no other action it will a. be in a position to make new loans equal to a maximum of $6,000. b. have $4,000 in excess reserves. c. have $64,000 in excess reserves. d. be unable to make any new loans.
c
The inflation tax refers to a. taxes being indexed for inflation. b. the idea that, other things the same, an increase in the tax rate raises the inflation rate. c. the revenue a government creates by printing money. d. higher inflation which requires more frequent price changes.
c
Suppose a Starbucks tall latte costs $4.00 in the United States and 2.50 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.50 in theUnited States and 3.60 euros in the Euro area. If the nominal exchange rate is 0.80 euros per dollar, which goods have prices that are consistent with purchasing-power parity? a. Both the tall latte and the Big Mac b. The tall latte but not the Big Mac c. Neither the Big Mac nor the tall latte d. The Big Mac but not the tall latte
d
Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners a. less willing to purchase U.S. bonds, so U.S. net capital outflow would rise. b. more willing to purchase U.S. bonds, so U.S. net capital outflow would rise. c. less willing to purchase U.S. bonds, so U.S. net capital outflow would fall. d. more willing to purchase U.S. bonds, so U.S. net capital outflow would fall.
d
The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the a. Friedman Effect. b. inflation tax. c. Hume Effect. d. Fisher Effect.
d
When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as a. purchasing-power parity. b. currency appreciation. c. net exports. d. arbitrage. e. net capital outflow.
d
Which of the following does the Federal Reserve not do? a. Conduct monetary policy b. Serve as a bank regulator c. Act as a lender of last resort d. Conduct fiscal policy
d
Which of the following groups meets to discuss changes in the economy and determine monetary policy? a. The Board of Directors from each of the 12 regional Federal Reserve Banks b. Congress c. The President of the United States d. The Federal Open Market Committee
d
Which of the following helps to explain why the "inflation fallacy" is a fallacy? a. As the price level rises, the value of a dollar falls. b. Increases in the price level can be created by increases in money demand. c. Inflation only changes real variables. d. Nominal incomes tend to rise at the same time that the price level is rising, leaving real income unchanged .
d
You hold currency from a foreign country. If that country has a higher rate of inflation than the United States, then over time the foreign currency will buy a. more goods in that country and buy more dollars. b. more goods in that country but buy fewer dollars. c. fewer goods in that country but buy more dollars. d. fewer goods in that country and buy fewer dollars.
d
Suppose that velocity is constant and the economy's output of goods and services rises by 4 percent each year. Use this information to answer the questions that follow. If the Fed keeps the money supply constant, the price level will go _______ and nominal GDP will _______.
down by 4% stay the same
When the FOMC (federal open market committee) decreases its target for the federal funds rate, the money supply will ______
increase
Suppose that changes in bank regulations reduce the availability of credit cards so that people need to hold more cash. Show how this event affects the demand for money.
shifts right
