Econ Final chapters 12-13 Flashcards

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M1 includes

currency, demand deposits, and travelers checks.


What is not included in M1?

savings deposit.


When conducting an open market sale, the Fed

sells government bonds, and in so doing decreases the money supply


An open market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.


When the federal reserve sells assets from its portfolio to the public with the intent of changing the money supply,

those assets are government bonds and the Feds reason for selling them is to decrease the money supply.


A banks reserve ratio is 8 percent and the bank has $1000 in deposits. Its reserves amount to



When the bank loans out $1000, the money supply



If the Fed sells government bonds to the public, then reserves

decrease, and the money supply decreases.


The tool most often used by the Fed to control money supply is

open market operations


The fed can increase the money supply by conduction open market

purchases, or by lowering the discount rate.


To decrease the money supply, the fed can

sell government bonds or increase the discount rate.


Which of the following both increases the money supply?

A decrease in the discount rate and a decrease on the interest rates on reserves.


Inflation can be measured by

the percentage change in the consumer price index


If the price level increased from 120 to 130, then what was the inflation rate?

8.3 percent.


When prices are falling, economists say there is




decreases income and reduces the ability of debtors to pay off their debts.


The term hyperinflation refers to

a period of very high inflation


When the price level falls, the number of dollars needed to buy a representative basket of goods

decreases, so the value of money rises.


If the CPI rises, the number of dollars needed to buy a representative basket of goods

increases, so the value of money falls.


The value of money rises as the price level

falls, because the number of dollars needed to buy a representative basket of goods fall.


If P denotes the price of goods and services measured in terms of money, then

All of the above are correct.


As the price level decreases, the value of money

increases, so people must hold less money to purchase goods and services.


When the CPI increases from 100 to 120,

more money is needed to buy the same amount of goods, so the value of money falls.


If the value of a dollar falls, then the quantity of money demanded

rises, meaning people want to hold more of their wealth in a liquid form.


With the value of money on the vertical axis, the money supply curve is

Vertical, because we assume the central bank controls the money supply.


The price level is a

nominal variable.


The payments you make on your automobile loan are given in terms of dollars. As prices rise you notice you give up fewer goods to make your payments

The dollar amount you pay is the nominal value. The number of goods you give up is the real value.


An associate professor of physics gets a $200 month raise. She figures that with her new monthly salary she can buy more goods and services than she could last year

Her real and nominal salary has risen.


Last year, you earned a nominal wage of $10 per hour, and the price level was 120. This year your nominal wage is $11 per hour, but you are unable to purchase the same amount of goods as last year. The price level this year must be



Suppose ice cream cones cost $3. Molly holds $60. What is the real value of money she holds?

20 ice cream cones. If the price of cones rises, to maintain the real value of her money holdings she needs to hold more dollars.


The classical dichotomy argues that changes in money supply

affect nominal variables, but not real variables.


Monetary neutrality means that a change in the money supply

does not change the real GDP. Most economists think this is a good description of the economy in the long run, but not in the short run.


The velocity of money is

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


If M=3000, P=2, and Y=6000, what is velocity?



Based on the quantity equation, if M=8000, P=3, and Y= 12,000, then V=?



Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?

All of the above


The inflation tax falls most heavily on

those who hold alot of currency, but account for a small share of US government revenue.


If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then

the expected real interest rate is 1 percent.


The Fisher effect says that

The nominal interest rate adjusts one for one with the inflation rate.


People can reduce the inflation tax by

reducing cash holdings


When inflation rises, people will desire to hold

less money, and go to the bank more frequently.


Net exports of a country are the value of

goods and services exported, minus the value of goods and services imported.


A country purchases more goods and services from residents of foreign countries than residents of foreign countries purchase from it. This country has

A trade deficit, and negative net exports.


If Germany purchases more goods and services abroad than it sold abroad last year, then it had

negative net exports which is a trade deficit.


If a country has net exports of $8 billion and sold $40 billion of goods and services abroad, then it has

$40 billion of net exports, and $32 billion of imports.


A firm in China sells toys to a US department store chain. Other things the same, these sales

Decrease US net exports and increase Chinese net exports


If a country had a trade deficit of $10 billion and then its exports rose by $20 billion and its imports rose by $10 billion, then its net exports would now be



Net capital outflow measures the imbalance between the amount of

foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.


If US residents purchase $600 billion worth of foreign assets and foreigners purchase $300 billion worth of US assets,

US net capital outflow is $300 billion; capital is flowing out of the US.


Alfonso, a citizen of Italy, decides to purchase bonds issued by Ireland instead of ones issued by the US even though Irish bonds have a higher risk of default. An economic reason for his decision might be that

Irish bonds pay a higher rate of interest.


Paul, a US citizen, builds a telescope factory in Israel. his expenditures

Increase US net capital outflow, but decrease Israeli net capital outflow


A japanese bank buys US government bonds, this purchase

Decreases US net capital outflow, but increases Japan net capital outflow.


If a country has a trade surplus

it has positive net exports and positive net capital outflow.


If a country has a trade deficit

It has negative net exports and negative net capital outflow.


Which of the following statements is correct for an open economy with a trade surplus?

The trade surplus implies that the country's national savings is greater than domestic investment.


US based John Deere sells machinery to residents of South Africa who pay with South African money (the rand).

This increases US net capital outflow because US acquires foreign assets.


The dollar is said to appreciate against the Euro if

the exchange rate rises. Other things the same, it will cost more Euros to buy US goods.


If the exchange rate rises from .65 British pounds per dollar to .70 pounds per dollar, than compared to British goods, US goods become

relatively more expensive for both British and US goods.


A depreciation of the US real exchange rate induces US consumers to buy

more domestic goods, and fewer foreign goods.


If the US real exchange rate appreciates, US exports

decrease, and US imports increase.


If the US real exchange rate appreciates, US exports to Europe

fall, and European exports to US rise.


Purchasing-power parity describes the forces that determine

exchange rates in the long run


If the dollar buys less cotton in Egypt than in the US, then traders could make a profit by

buying cotton in the US and selling it in Egypt, which would tend to raise the price of cotton in the US.


If the Canadian nominal exchange rate does not change, but prices rise faster abroad than in Canada, then the Canadian real exchange rate