ECO-231 Practice Exam #3 Flashcards

Flashcards based on the practice exam for ECO-231, covering topics like the monetary system, inflation, and open-economy macroeconomics.

What does the "law of one price" state?

A good must sell at the same price at all locations.

Under what condition is a country said to have a trade deficit and negative net exports?

When it sells fewer goods and services abroad than it buys from other countries.

Which component is included in the M2 money supply but not in M1?

Small time deposits

What action can the Federal Reserve take to increase the money supply?

Reduce the interest rate on reserves.

Based on the Florencial economy data in Table 30-2, what is the M1 money supply?

$500\,billion$ (Currency $150$ + Demand deposits $300$ + Other checkable deposits $50$).

Based on the Florencial economy data in Table 30-2, what is the M2 money supply?

$875\,billion$ (M1 $500$ + Small time deposits $80$ + Savings deposits $65$ + Money market mutual funds $200$ + Miscellaneous categories $30$).

If a foreign country has a lower rate of inflation than the United States, what happens to the value of that foreign currency over time?

It will buy more goods in that country and buy more dollars.

How does inflation-induced relative-price variability affect markets?

Consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired.

In terms of national saving and domestic investment, what is the value of net exports?

$$\text{National saving} - \text{Domestic investment}$$

Based on Table 30-4 for the Bank of Cheerton, what is the reserve ratio?

$9.0\%$ ($8,100$ in reserves / $90,000$ in deposits).

Based on Table 30-4, if the Bank of Cheerton is in exact compliance with reserve requirements and people hold only deposits, what is the money multiplier?

$11.1$ ($1 / 0.09$).

How can the Fed move the federal funds rate back towards its target if the rate is currently too high?

By buying bonds, which increases the money supply.

Which three functions of money are illustrated by saving currency to buy a laptop, observing a posted price, and completing the purchase?

Store of value, unit of account, and medium of exchange.

What characterizes commodity money?

It has intrinsic value, such as an economy using silver as money.

Why does the purchasing-power parity theory not always hold?

Many goods are not easily transported and goods produced in different countries may be imperfect substitutes.

What is the source of the supply of loanable funds in the open-economy macroeconomic model?

Public saving + personal saving.

If a country has exports of $85\,billion$, imports of $30\,billion$, and domestic investment of $115\,billion$, what is its saving?

$170\,billion$ ($S = I + NX$, where $NX = 85 - 30 = 55$, so $115 + 55 = 170$).

What effect do both monetary neutrality and the Fisher effect imply regarding an increase in the money supply growth rate?

It increases the inflation rate and the nominal interest rate by the same number of percentage points.

What are menu costs?

The costs of changing price tags and price listings.

Which organization meets to determine U.S. monetary policy?

The Federal Open Market Committee.

According to the quantity equation, if $Y$ and $V$ are constant and $M$ doubles, what happens to the price level?

The price level doubles.

What happens to the federal funds rate if the Fed raises the reserve requirement?

The demand for reserves increases, so the federal funds rate rises.

How is the bank leverage ratio calculated?

Assets divided by bank capital.

What is the shoeleather cost of inflation?

The waste of resources used to maintain lower money holdings.

If the price level increases from $120$ to $142$, what is the inflation rate?

$18.3\%$ ($(142 - 120) / 120 = 0.183$).