Review

Question 1

What is not included in M1 or M2?

Answer 1

credit cards

Question 2

Real GDP =

Answer 2

C+I+G+(X-M)
consumption, investment, government spending

Question 3

X-M is

Answer 3

exports minus imports

Question 4

The discount rate is

Answer 4

the interest rate the Fed charges the bank

Question 5

Money multiplier =

Answer 5

1/reserve ratio

Question 6

If the reserve ratio is 5%, the money multiplier is

Answer 6

1/.05 or 20

Question 7

What is not a function of money?

Answer 7

protection against inflation

Question 8

If the money multiplier is 3, and the Fed wants to increase the money supply by $900,000 it could

Answer 8

buy $300,000 worth of bonds

Question 9

If the Federal Open Market Committee decides to decrease the money supply, it will

Answer 9

sell government bonds

Question 10

Calculate the money stock M1 if the entire economy has
$200 dollars kept in coffee cans and wallets
$400 in saving accounts
$300 in credit card limits
$250 in checking accounts
$500 in gold
$175 in time deposits
$375 in restricted retirement accounts
$800 in money market funds

Answer 10

M1 = 850
coffee cans and wallets, saving accounts, checking accounts (liquid)

Question 11

Calculate the money stock M2 if the entire economy has
$200 dollars kept in coffee cans and wallets
$400 in saving accounts
$300 in credit card limits
$250 in checking accounts
$500 in gold
$175 in time deposits
$375 in restricted retirement accounts
$800 in money market funds

Answer 11

M1+175+800 = 1825

Question 12

While cleaning his apartment, Hakeem finds a $50 bill under the
couch. He deposits the bill in his checking account at Wells Fargo
Bank. The reserve ratio is 10% of deposits. What is the maximum
amount that the money supply could increase?

Answer 12

If banks hold 10% in reserve, then money multiplier = 1/R = 1/0.1 = 10
* Maximum possible increase in deposits is 10 × $50 = $500
* But money supply also includes currency, which falls by $50
* Hence, maximum increase in money supply = $450

Question 13

Maximum Possible Expansion of Deposits

Answer 13

1/% * initial deposit

Question 14

U4 underutilized labor

Answer 14

(U+discouraged/LF+discouraged)*100

Question 15

U5 underutilized labor

Answer 15

U+MAW/LF+MAW

Question 16

Unemployment rate =

Answer 16

unemployed/labor force

Question 17

The natural rate of unemployment includes:

Answer 17

both frictional and structural unemployment

Question 18

In recent decades, Americans have increased their purchase of stocks
of foreign-based companies. The Americans who have bought these
stocks were engaged in:

Answer 18

foreign portfolio investment

Question 19

Over the past century in the United States, real GDP per person has
grown, on average, by about:

Answer 19

2% per year

Question 20

CPI =

Answer 20

(current basket cost/base basket cost)100

Question 21

Inflation rate =

Answer 21

(current CPI-initial CPI/current CPI)100

Question 22

If the marginal propensity to consume (MPC) is 0.5, then the
multiplier is:

Answer 22

1/(1-MPC) so 1/1-.5 = 2

Question 23

An example of an automatic stabilizer is:

Answer 23

unemployment benefits

Question 24

Which of the following properly describes the interest-rate effect that
helps explain the slope of the aggregate-demand curve?

Answer 24

As the price level increases, the interest rate rises, so spending falls

Question 25

When the Fed sells government bonds, the reserves of the banking
system:

Answer 25

decrease, so the money supply decreases

Question 26

Opponents of active stabilization policy:

Answer 26

believe that the political process creates lags in the implementation
of fiscal policy

Question 27

Fiscal policy

Answer 27

Taxes and government spending

Question 28

Monetary policy

Answer 28

interest rates and money supply

Question 29

The classical dichotomy and monetary neutrality are represented
graphically by:

Answer 29

a vertical long-run aggregate-supply curve

Question 30

Quantity Equation:

Answer 30

MV=PY

Question 31

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

Answer 31

doubles

Question 32

Shoeleather costs arise when higher inflation rates induce people to:

Answer 32

hold less money

Question 33

In the U.S., taxes are paid on one’s __________ gains/returns.
Therefore, a __________ inflation rate encourages more saving.

Answer 33

nominal, low