Macro Exam 2

Macroeconomists refer to investment as saving, such as investing in stocks or bonds. (T/F)

False

Because of differences in tax treatment, municipal bonds pay a lower interest rate than corporate bonds. (T/F)

True

Index funds are usually outperformed by mutual funds due to the lack of professional money managers. (T/F)

False

All financial intermediaries are financial institutions, but not all financial institutions are financial intermediaries. (T/F)

True

By definition, both exports and imports are zero for a closed economy. (T/F)

True

In a closed economy, investment must equal private saving. (T/F)

False

If, for an imaginary closed economy, investment amounts to $10,000 and the government is running a $2,500 deficit, then private saving must amount to $12,500. (T/F)

True

Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left. (T/F)

True

An increase in the budget deficit shifts the demand for loanable funds to the left. (T/F)

False

When the government budget deficit rises, national saving is reduced, interest rates fall, and investment falls. (T/F)

False

Fiat money cannot be used as a store of value because it does not have intrinsic value. (T/F)

False

When the Soviet Union began breaking up in the late 1980s, cigarettes began replacing the ruble as the medium of exchange even though the ruble was legal tender. The cigarettes provide an example of commodity money. (T/F)

True

Demand deposits are considered as money, but credit card balances are not. (T/F)

True

M1 includes more but less liquid assets than M2. (T/F)

False

The Federal Reserve was created in 1972 after President Richard Nixon refused France’s request to withdraw gold. (T/F)

False

Members of the Federal Reserve Board of Governors, including the chair, are appointed by the president of the U.S. and confirmed by the U.S. Senate. (T/F)

True

Fractional-reserve banking is a system where banks must hold a certain fraction of loans as cash reserves. (T/F)

False

Banks cannot influence the total money supply if they are required to hold all deposits in reserve. (T/F)

True

Assuming that banks hold no excess reserves, an increase in the reserve requirement increases reserves and decreases the money supply. (T/F)

True

Just after the terrorist attack on September 11, 2001, the Fed stood ready to lend financial institutions funds. When the Fed did this, it was acting in its role as a lender of last resort. (T/F)

True

The inflation rate is measured as the percentage change in a price index. (T/F)

True

The quantity theory of money can explain hyperinflations but not moderate inflation. (T/F)

False

As the price level rises, the value of money rises. (T/F)

False

When the value of money is on the vertical axis, an increase in the price level shifts money demand to the right. (T/F)

False

If money demand shifts right, the price level falls. (T/F)

True

If there is a surplus of money, it is eliminated by a decrease in the value of money. (T/F)

True

If the Fed conducts open market sales, the equilibrium value of money decreases, and the equilibrium price level increases. (T/F)

False

The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept monetary neutrality as a good description of the economy in the long run but not in the short run. (T/F)

True

The quantity equation is M × V = P × Y. (T/F)

True

If the money supply increased by 10% and velocity decreased by 10% at the same time, then according to the quantity equation, the nominal GDP would not change. (T/F)

True

At the broadest level, the financial system moves the economy's scarce resources from

those holding excess money to those in need of money

Which of the following statements about the term of a bond is correct?

Term refers to the length of time until the bond matures, and long-term bonds usually have higher interest rates than short-term bonds.

Consider two bonds that have the same term to maturity. The first was issued by a state government, and the probability of default is believed to be low. The other was issued by a corporation, and the default probability is believed to be high. Which of the following is correct?

Because of the differences in tax treatment and credit risk, the corporate bond should have a higher interest rate.

Financial intermediaries are

financial institutions through which savers can indirectly provide funds to borrowers.

Consider a closed economy. What remains after paying for consumption and government purchases is

national saving.

In a closed economy, private saving is

the amount of household income that remains after paying for consumption and taxes.

The slope of the demand for loanable funds curve represents the

negative relation between the interest rate and investment.

If there is a shortage of loanable funds, then the quantity of loanable funds demanded is

greater than the quantity of loanable funds supplied, and the interest rate will rise.

If the government instituted an investment tax credit, which of the following would be higher in equilibrium?

Saving and the interest rate

Which of the following is an example of barter?

A barber gives a plumber a haircut in exchange for the plumber fixing the barber's leaky faucet.

Which list ranks assets from most to least liquid?

Currency, stocks, houses

Which of the following best represents fiat money?

Canadian dollars

Which of the following is most likely included in M1?

Checking account balances

Which of the following groups meets to discuss changes in the economy and determine monetary policy?

The Federal Open Market Committee

Which of the following statements regarding the Federal Open Market Committee is correct?

All regional Fed presidents attend the meetings, but only five get to vote.

Suppose that a 100-percent-reserve bank opens in an economy where $150 of currency was initially circulated. If customers deposit $100 into the bank, what would be the value of the money supply?

$150

When the Fed conducts open-market purchases,

it buys U.S. Treasury bills or bonds, which increases the money supply.

When the Fed decreases the discount rate, banks could

borrow more from the Fed and lend more to the public. The money supply could increase.

Which of the following policies can the Fed follow to increase the money supply?

Reduce the interest rate on reserves

A problem that the Fed faces when it attempts to control the money supply is that

the Fed does not control the amount of money that households choose to hold as deposits in banks.

If the price level increased from 120 to 142, then what was the inflation rate?

18.3 %

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

quantity theory of money.

The principle of monetary neutrality implies that an increase in the money supply will increase

the price level, but not real GDP.

The market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis. If the Fed buys bonds, then the

money supply and the price level increase.

In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by

purchasing bonds on the open market, which would have lowered the value of money.

The velocity of money is

the average number of times per year a dollar is spent.

If velocity = 6, the quantity of money = 2,400, and the price level = 2.25, then the real value of output is approximately

$6,400

If Y and V are constant and M doubles, the quantity equation implies that the price level

Doubles

According to the assumptions of the quantity theory of money, if the money supply increases by 2 percent, then

nominal GDP would rise by 2 percent; real GDP would be unchanged

The inflation tax refers to

the revenue a government creates by printing money

If the real interest rate is 11 percent and the price level is falling at a rate of 5 percent, what is the nominal interest rate?

6%

Under the assumptions of the Fisher effect and monetary neutrality, if the growth rate of the money supply rises, then

the nominal interest rate rises, but the real interest rate does not.