Chapter 25: Loanable Funds Mkt
Chapter 28: Money Growth & Inflation
Chapter 26: Unemployment
Chapter 27: Monetary System
Test 2 Review
1
When government reduces national saving by running a budget deficit, the interest rate rises and quantity of _________ __________ falls.
What is "loanable funds"
1
T/F: The Quantity Theory of Money predicts that a change in the money supply, M affects price level, but not real GDP Y.
True: money does not affect real variables in the long-run. Y = F(K,L, H, N , Tech)
1
____________ unemployment: unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.
structural
1
If the Fed sells $1 million of government bonds. If the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves what is the money supply?
With a required reserve ratio of 10% and no excess reserves, the money multiplier is 1/0.10 = 10. If the Fed sells $1 million of government bonds, reserves will decline by $1 million and the money supply will contract by 10 × $1 million = $10 million.
1
A ___ is promise to pay or a loan
bond
1
How much is the public saving in the this Figure
public saving = T - G = 0 - 100,000 = - 100,000
1
______costs: the resources wasted when inflation encourages people to reduce their money holdings
What is "shoe leather"
1
What is the unemployment rate?
The country X has collected the following information:
Population 240,000
Employed 180,000
Unemployed 30,000
Unemployment rate
= (30,000/210,000) × 100 = 14.3%
1
T/F: Banks hold only a fraction of deposits as reserves
What is "true"
1
____________ is the ease with which an asset can be converted into the economy’s medium of exchange
liqudity
1
National Saving
What is Sprivate = Y - C - G
1
When the nominal interest rate adjusts one-for-one with changes in the inflation rate this is know as the
Fisher Effect
1
What is the labor force participation rate in Country x?
Labor market data for Country X
Employed: 100,000
Frictionally unemployed: 5000
Structurally unemployed: 10,500
Cyclically unemployed: 5000
Not in labor force: 100,000
What is: {120,500/220,500} x 100% = 54.64%
1
What function of money does this figure represent?
What is " a unit of account"
1
When a firm sells stock (to households, the public) to raise money for investment spending this is called____________ finance
equity
1
T/F: The source of the demand for loanable funds (in a closed economy) is Investment
True
1
The revenue governments from printing money is
What is an inflation tax
1
What is the efficiency wage in this table?
The Efficiency wage ($16) is wage higher than the equilibrium wage ($14)
1
if RRR= 10% what are the minimum reserves in Table 2?
(0.1) x 100,000 = 10,000
1
Labor surplus caused by minimum wage, union wages and efficiency wages creates ______ unemployment
Structural
1
The identity equation for national saving, S = ?
What is: S = Y - C - G
1
One good: corn. The economy has enough labor, capital, and land to produce Y = 800 bushels of corn. V is constant. In 2008, MS = $2000, P = $5/bushel
Compute the 2008 values of nominal
Nominal GDP = P x Y
P x Y = 5 x 800 = 4000
M x V = $2000 x 2 = $4000
1
What is the amount of unemployment cause by the "efficiency wage" in this table?
What is 8000 – 5000 =3000
1
This figure suggests that China's money supply, will increase, decrease or stay the same? Explain.
Increase because a lower RRR will encourage banks to increase lending. New loans are new money when they are deposited or used as currency.
1
__________ unemployment arises when there are more workers willing to work than there are jobs available
Structural
1
T/F: A stock is claim to partial ownership in a firm
True: a stock is a certificate of ownership
1
What is the formula for the Fisher Equation
What is nominal interest rates
= inflation rate + real interest rate
1
What is NRU in Country X
Table 2 Labor market data for Country X
Employed: 100,000
Frictionally unemployed: 5000
Structurally unemployed: 10,500
Cyclically unemployed: 5000
Not in labor force: 100,000
NRU = (15,500/120,500) x 100% = 12.86
labor force: Employed (100,000) + Unemployed (15,500+5000) = 120,500
Structural + Frictional: 15,500
1
Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion.
Assuming this economy is closed, calculate consumption, government purchases, national saving, and investment.
.
public saving = T - G = 0.2
0.2 = 1.5 - G: G = 1.3
S = private saving + public saving = 0.5+0.2 = 0.7
S = Y - C - G = 8 - C - 1.3 = 0.7
therefore: C = 6
Closed Economy: S = I
S = 0.5 + 0.2 = 0.7 = I
Y = C + I + G = 6 + 0.7 + 1.3 = 8 (Check)
1
____ ____ occurs when investment declines because a budget deficit makes the real interest rates rise.
Crowding out
1
Prove the identity S = I for a closed economy
S = Y – C – G;
Y = C + I + G (NX = 0 for closed economy)
I = Y – C – G
S = I
1
What is the velocity of money in an economy with one good: pizza.
In 2008,
Y = real GDP = 3000 pizzas
P = price level = price of pizza = $10
P x Y = nominal GDP = value of pizzas =30,000
M = money supply = $10,000
V = 3
1
Labor surplus caused by minimum wage, union wages and efficiency wages creates _____________ unemployment
What is "structural unemployment"
1
Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. Beleaguered State Bank (BSB) holds $250 million in deposits and maintains a reserve ratio of 10 percent.
Shows a T-account for BSB would show loans of $_______ million
What is $225 million
1
When conducting ___ ___ ____, the U.S. Fed sells government bonds and securities and therefore DECREASES the money supply
Open Market Operations
1
Which does this figure model?
a) hyper inflation b) crowding out c) menu cost 
b) crowding out
1
T/F: unexpected inflation aribitarily re-distributes wealth from lenders to borrowers because borrowers pay back their loans in "cheaper" dollars.
True
1
What is the unemployment rate?
•Unemployment Rate
= (12.5/155.0) × 100 = 8.1%.
1
______________ ____________ sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
Mutual Fund
1
If all loans are held in the form of currency: cash + coins How much is the money supply?
Money Supply = deposits + Currency
90 + 81 = 171
1
According to the Fisher Equation, what impact would diagram below have on the nominal interest rates? Explain.
nominal interest rate
= inflation rate + real interest rate
if the real interest rates rise (5% to 6%) then the nominal interest rates will increase by 1%
1
The formula for the Quantity Equation is
M x V = P x Y
1
T/F Marisa has no job and is not looking for a job. Marisa is counted as unemployed.
FALSE: since she in not looking for a job she in included in the labor force and therefore cannot be unemployed.
Marisa is a "discouraged worker"
1
if the Third National Bank keeps the minimum required reserves then the money multiplier
RRR = 10% or 0.10
Multiplier = 1/0.1 = 10
1
if the First National Bank keeps the minimum reserves then the money multiplier is
RRR = 10% or 0.1
The money multiplier is 1/0.01 = 10
1
_______ ________: an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
Mutual Fund
1
The is a financial institution designed to oversee the banking system and regulate the quantity of money in the economy
Central Bank
1
the equation for the labor force participation rate is:
the percentage of the adult population that is in the labor force
1
ANS: higher or lower
A (___________) discount rate encourages banks to lend their reserves (and borrow from the Fed). This will increase the money supply.
lower
1
If the Fed buys $2,000 worth of bonds from the public what is the money supply if the reserve ratio is 5%?
The money supply will expand more if the Fed buys $2,000 worth of bonds. Both deposits will lead to monetary expansion, but the Fed’s deposit is new money. With a 5% reserve requirement, the multiplier is 20 (1/0.05). The $2,000 from the Fed will increase the money supply by $40,000 ($2,000 x 20).
1
S = (Y - C - T) + (T - G). The second term of this equation is
Private Saving or the governments budget deficit (surplus).
1
Real interest rate = 5% Inflation rate = 2% then the nominal interest rate is:
nominal interest rate= 5% + 2% = 7%.
1
The labor force participation in country X is
The country X has collected the following information:
Population 240,000
Employed 180,000
Unemployed 30,000
Labor-force participation rate = (210,000/240,000) × 100 = 87.5%
1
Which of the following are money in the U.S. economy? Explain using the 3 functions of money"
a. a U.S. penny
b. a Mexican peso
c. a Picasso painting
d. a plastic credit card
a. A U.S. penny is considered money in the U.S. economy because it is used as a medium of exchange as a store of value and unit of account.
b. A Mexican peso is not considered money in the U.S. economy, because it is not used as a medium of exchange
c. A Picasso painting is not considered money, because you cannot exchange it for goods or services, and prices are not given in terms of Picasso paintings.
d. A plastic credit cards do not fully represent the medium of exchange function of money, nor are they stores of value, because they represent short-term loans rather than being an asset like currency.
1
If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does First National now hold?
require reserves = 0.05 x 500,000 = 25,000
excess reserves = 75,000 (100,000 - 25,000)
1
Which of the following situations represent investment? Saving? Explain.
a. Your family takes out a mortgage and buys a new house.
b. You use your $200 paycheck to buy stock in AT&T.
c. Your roommate earns $100 and deposits it in her account at a bank.
d. You borrow $1,000 fr om a bank to buy a car to use in your pizza delivery business
a. When your family takes out a mortgage and buys a new house, that is investment because it is a purchase of new capital.
b. When you use your $200 paycheck to buy stock in AT&T, that is saving because your income of $200 is not being spent on consumption goods.
c. When your roommate earns $100 and deposits it in his account at a bank, that is saving because the money is not spent on consumption goods.
d. When you borrow $1,000 from a bank to buy a car to use in your pizza-delivery business, that is investment because the car is a capital good.