ECN 102 Exam 1 Questions With Complete Solutions

1. What is the primary difference between the M2 and M1 measures of the money supply? - ANSWER assets in m1 are more liquid than m2 2. Suppose the reserve requirement in a fractional reserve banking system is 20%. If you took $100 of currency and deposited it in the bank, how much additional money could be created? - ANSWER $400 3. The purchase and sale of government bonds by the central bank refers to - ANSWER open market operations 4. If the Fed purchases government bonds, which of the following has only actions that would each counter the effect of government bond purchases on the money supply? - ANSWER increase reserve requirements, increase the discount rate 5. An investment bank before the financial crisis had $100 billion in assets and $90 billion in debt. What would be the value of bank capital if the value of assets falls to $95 billion? - ANSWER $5 billion 6. As the Fed increases the money supply, - ANSWER value of money decrease and the price level increase 7. Most economists believe that the classical dichotomy and money neutrality holds - ANSWER in the long run but not the short run 8. Using the quantity theory of money, if the rate of real GDP growth is greater than the rate of money growth, then there would be - ANSWER deflation 9. Assume the economy produces only oranges. There is a money supply of $6000. The economy produces 6000 oranges that sell for $3 each. What is nominal GDP and money velocity? - ANSWER nominal GDP=#18,000, velocity=3 10. The inflation tax refers to - ANSWER the revenue the government creates by printing money 11. . Inflation causes tax distortions because - ANSWER taxes are set in nominal terms, leading to different real returns based on tax rates. 12. If the exchange rate is 8 Moroccan dirhams per US $, a crate of oranges costs 400 dirhams in Morocco, and a crate of oranges costs $45 in Florida, then - ANSWER the real exchange rate is less than one and there is an arbitrage opportunity to buy oranges in Florida and sell in Morocco 13. When more American students choose to go on spring break in Mexico instead of Florida - ANSWER US net exports fall and the US trade deficit becomes further from balanced trade 14. Which of the following is true about a country with a trade surplus? - ANSWER capital outflows are greater than capital inflows 15. In 2012, for each $1 you could get 2 Brazilian Reais. Today, for each $1 you can get 4 Brazilian Reais. Everything else constant, the Brazilian Reais has - ANSWER depreciated and can buy fewer US goods and services. 16. For which reason(s) might purchasing-power parity not hold? - ANSWER both of the above 17. What item from McDonald's does the weekly magazine, The Economist, use to test purchasing-power parity? - ANSWER Big mac 18. All else constant, as more international students from China choose to go to universities in Europe instead of the United States, what would happen - ANSWER the Chinese currency would appreciate against the dollar and depreciate against the euro 19. There is currently political unrest in Chile, we would expect - ANSWER Chilean net capital outflow to rise so Chilean interest rates rise. 20. Holding all else constant, an increase in US real interest rates will - ANSWER increase the real exchange rate. 21. A US mutual fund sells Canadian stocks and buys American stocks. Holding all else constant, in the market for foreign-currency exchange - ANSWER supply of dollars falls 22. In open economy, what is the effect of a government budget deficit? - ANSWER all of the above 23. Which of the following would cause both the equilibrium interest rate and quantity of loanable funds increase? - ANSWER Net capital outflows increase 24. Trade policies, like import tariffs and export quotas, affect - ANSWER specific firms and industries. 25. Which of the following policy combinations would consistently work to increase the money supply? - ANSWER buy government bonds, decrease reserve requirements, decrease the discount rate 26. Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent? - ANSWER $5,000 27. Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank, - ANSWER the money supply is unaffected 28. If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements, - ANSWER we cannot be certain what will happen to the money supply. 29. Which of the following statements about a bank's balance sheet is true? - ANSWER Assets minus liabilities equals owner's equity or capital. 30. The Fed's tools of monetary control are - ANSWER open-market operations, lending to banks, reserve requirements, and paying interest on reserves. 31. If banks increase their holdings of excess reserves - ANSWER the money multiplier and the money supply decrease. 32. medium of exchange - ANSWER an item that buyers give to sellers when they purchase goods and services. 33. unit of account - ANSWER yardstick people use to post prices and record debts. 34. store of value - ANSWER item that people can use to transfer purchasing power from the present to the future. 35. Liquidity - ANSWER ease with which an asset can be converted into the economy's medium of exchange 36. commodity money - ANSWER When money takes the form of a commodity with intrinsic value, it is called 37. intrinsic value - ANSWER means that the item would have value even if it were not used as money. 38. fiat money - ANSWER Money without intrinsic value is called 39. currency - ANSWER the paper bills and coins in the hands of the public 40. demand deposit - ANSWER balances in bank accounts that depositors can access on demand simply by writing a check or swiping a debit card at a store. 41. federal reserve - ANSWER the central bank of the United States 42. central bank - ANSWER an institution designed to oversee the banking system and regulate the quantity of money. 43. money supply - ANSWER The Fed's second job is to control the quantity of money that is made available in the economy 44. monetary policy - ANSWER Decisions by policymakers concerning the money supply constitute 45. true or false: Cryptocurrencies serve none of the functions of money - ANSWER false 46. true or false. the leverage ratio describes how many dollars of bank capital for each dollar of assets - ANSWER false 47. If the Fed increases reserve requirements, the money supply will increase. True or false - ANSWER false 48. True or false. Money velocity has been stable with the introduction of new forms of electronic payment. - ANSWER true 49. true or false. Inflation makes it harder for people to pay off their debts. - ANSWER false 50. true or false As banks create money with new loans, they do create wealth. - ANSWER false 51. true or false According to the Fisher effect, a decrease in the inflation rate would decrease nominal interest rates. - ANSWER true 52. true or false. When there is a trade surplus, there are capital inflows. - ANSWER false 53. true or false. For a closed economy, national savings always equals domestic investment. - ANSWER true 54. true or false. Over the long run, there is a weak relationship between a country's inflation rate and nominal exchange rate to the dollar. - ANSWER false 55. true or false. If the government budget deficit decreases, then the foreign-exchange price of the dollar will rise. - ANSWER false 56. true or false. For a country with a trade deficit, domestic saving is greater than domestic investment - ANSWER false 57. true or false. The "twin" deficits that the US economy has experienced in recent history are the federal budget deficit and trade deficit - ANSWER true 58. true or false. An example of capital outflow for the US would be a US bank buying a German government bond. - ANSWER true 59. true or false. Abhijit Banerjee, Esther Duflo, and Michael Kremer won the 2019 Sveriges Riksbank in Economic Sciences in Memory of Alfred Nobel. - ANSWER true Sometimes economists label "medium of deferred payment" as a fourth function of money, but it is really just a combination of which two functions: - ANSWER medium of exchange, store of value Which of the following is not a function of money? - ANSWER Protection against inflation The M1 money supply is composed of - ANSWER currency, demand deposits, traveler's checks, and other checkable accounts.