HW 3 - Macro MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. The equilibrium interest rate is percent and the equilibrium quantity of loanable funds is. A) 4; $1.4 trillion B) 6; $2.0 trillion C) 4; $1.8 trillion D) 6; $1.6 trillion E) 4; $2.0 trillion 2) If saving supply decreases, the equilibrium real interest rate and the equilibrium quantity of investment. A) rises; increases B) rises; decreases C) falls; decreases D) does not change; does not change E) falls; increases 1) 2) 3) If there is no Ricardo-Barro effect, an increase in the government budget surplus will 3) A) increase the real interest rate. B) decrease the supply of loanable funds. C) decrease the demand for loanable funds. D) decrease the real interest rate. E) not change the demand for loanable funds, the supply of loanable funds, or the real interest rate. 4) Economists use the term wealth to mean 4) A) the same thing as income. B) the amount of income that is spent and not saved. C) what a person earns. D) a person's investment. E) what a person owns. 1
5) Ford Motor Corporation is considering purchasing new technology that will increase productivity by twenty percent. If Ford Motor Corporation decides to make this investment at the going real interest rate, then A) the quantity of loanable funds demanded increases. B) saving increases. C) the demand for loanable funds increases. D) the supply of loanable funds increases. E) Ford's profits will decline. 5) 6) When disposable income increases, saving will 6) A) decrease and there is a movement downward along the supply of loanable funds curve. B) decrease and the supply of loanable funds curve shifts leftward. C) increase and there is a movement upward along the supply of loanable funds curve. D) increase and the supply of loanable funds curve shifts rightward. E) not change. 7) A prediction of the Ricardo-Barro effect is 7) A) no effect on the real interest rate when the government runs a budget deficit. B) a larger decrease in investment when the government runs a budget deficit. C) a larger decrease in investment when the government runs a budget surplus. D) a larger decrease in the real interest rate when the government runs a budget surplus. E) a larger increase in the real interest rate when the government runs a budget deficit. 8) The crowding-out effect is the tendency for 8) A) higher government budget deficits to increase total savings. B) lower private saving to increase the budget deficit. C) higher private savings to decrease government budget surpluses. D) lower private saving to decrease investment. E) higher government budget deficits to decrease investment. 9) Which of the following is an example of investment demand? 9) A) Brian, owner of Bryan Games, purchasing computers to enhance the production of games B) Scott purchasing a rookie-year baseball card for last year's World Series MVP C) George purchasing United States savings bonds for his son's college fund D) Mary buying stocks for her retirement portfolio E) Mark buying rare gold coins 10) Which of the following is correct? 10) A) Net investment is the total spent on capital. B) Gross investment equals net investment minus depreciation. C) Net investment is the same as capital consumption. D) Gross investment is the total spent on capital. E) The change in the nation's capital stock over a year equals the amount of gross investment. 11) Which of the following decreases the demand for loanable funds and shifts the demand for loanable funds curve leftward? A) the economy experiences a recession B) the real interest rate rises C) an economy experiences a rapid increase in population D) technology that increases productivity is introduced E) wealth decreases 11) 2
12) A bank reports reserves of $200,000, equipment of $200,000, loans of $1,000,000, deposits of $1,000,000, and owners' equity of $400,000. If the required reserve ratio is 10 percent, the bank's required reserves are A) $14,000. B) $140,000. C) $10,000. D) $280,000. E) $100,000. 12) 13) When the Fed purchases government securities, 13) A) excess reserves in the banking system decrease, leading to fewer loans being made. B) required reserves in the banking system decrease, leading to fewer loans being made. C) required reserves in the banking system increase, leading to more loans being made. D) excess reserves in the banking system increase, leading to more loans being made. E) the monetary base does not change. 14) The Board of Governors has 14) A) 14 members appointed to four-year terms. B) seven members appointed to 14-year terms. C) seven members appointed for life. D) 14 members appointed to 10-year terms. E) four members appointed to seven-year terms. 15) The quantity of money decreases if 15) A) the required reserve ratio decreases. B) the Fed buys U.S. government securities. C) the Treasury Department issues fewer government securities. D) banks loan all excess reserves. E) the currency drain increases. 16) Open market operations are used 16) A) infrequently because they do not have a strong effect. B) to change the quantity of reserves in the banking system. C) infrequently because their effect is too drastic. D) once a year to change the growth of the quantity of money. E) whenever the U.S. Congress passes a law allowing the Fed to use them for a stated period of time. 17) Assume the First Bank of Townsville makes a loan of $2,500. This loan will 17) A) increase the First Bank of Townville's liabilities at the Fed. B) increase the quantity of money initially by $2,500. C) decrease the quantity of money initially by $2,500. D) have no change on the quantity of money, just its composition. E) increase the First Bank of Townville's reserves. 18) If the Fed buys a $100,000 government security from a bank when the required reserve ratio is 10 percent and the currency drain is 50 percent, the bank can loan a maximum of A) $60,000. B) $40,000. C) $100,000. D) $90,000. E) $50,000. 19) The Fed buys $20,000 of government securities. The required reserve ratio is 5 percent and the currency drain is zero. What will be the change in the quantity of money? A) $5,000 B) $399,980 C) $19,000 D) $400,000 E) $20,000 18) 19) 3
20) The Federal Open Market Committee consists of 20) A) 12 members, seven of whom are the members of the Board of Governors and five of whom are presidents of Federal Reserve banks. B) 12 members, split evenly so that six of whom are members of the Board of Governors and six of whom are presidents of Federal Reserve banks. C) 12 members, seven of whom are the members of the Board of Governors, four of whom are presidents of Federal Reserve banks, and the president of the United States. D) 12 members, all of whom are the presidents of Federal Reserve banks. E) 12 committees, all serving on the Board of Governors. 21) Hyperinflation 21) A) happens in all countries at some time during their business cycle. B) is a period of time when inflation exceeds 20 percent per year. C) occurs in the United States during each business cycle. D) occurs only in theory, never in reality. E) has never occurred in the United States. 22) If the Fed wants to lower the nominal interest rate in the short run, the Fed the growth rate of the money supply. A) lowers B) raises C) first lowers and then raises D) does not change E) None of the above answers are correct because the premise of the question is wrong since the Fed cannot affect the nominal interest rate, only the real interest rate. 23) The proposition that in the long run when real GDP equals potential GDP, an increase in the quantity of money leads to an equal percentage increase in the price level is the called the quantity theory of A) equal change. B) money. C) the long run. D) constant velocity. E) inflation. 24) Suppose the nominal interest rate on a savings bond is 5 percent a year and the inflation rate is 3 percent a year. How much is the real interest rate? A) 3 percent B) 2 percent C) 15 percent D) 7 percent E) 8 percent 22) 23) 24) 25) Hyperinflation is defined as periods of 25) A) inflation over 50 percent per month. B) inflation under 10 percent per year. C) low inflation. D) negative price changes. E) inflation over 25 percent per year 4
26) The supply of money curve is 26) A) horizontal because interest rates are fixed at any one point. B) horizontal because the Fed controls the quantity of money supplied. C) upward sloping, showing the influence of interest rates. D) vertical because the quantity of money is fixed at any one point. E) downward sloping, showing the negative influence of interest rates. 27) Government saving is equal to 27) A) net taxes minus government expenditures. B) net taxes plus government expenditures. C) net taxes. D) private savings minus government expenditures. E) the quantity of investment demanded. 28) The local Allied Moving Company begins 2008 with capital equal to $250,000. During 2008 the firm depreciates $150,000 worth of its capital and ends 2008 with capital equal to $250,000. Which statement correctly summarizes Allied Moving Company's investment? A) Allied Moving Company made no capital investment during the year. B) Allied Moving Company made net investment of $150,000 during the year. C) Allied Moving Company made no net investment during the year. D) Allied Moving Company made no gross investment during the year. E) Allied Moving Company made gross investment of $250,000 during the year. 28) 29) The demand for loanable funds 29) A) decreases in an expansion and increases in a recession. B) increases if wealth increases. C) increases if the expected rate of profit decreases. D) increases if population growth declines. E) increases in an expansion and decreases in a recession. 30) The discount rate is the 30) A) long-term interest rate. B) price of borrowing funds from another bank. C) interest rate the Fed pays banks for the reserves the banks keep at the Fed. D) price of borrowing funds from the Fed. E) reduction in the interest rate given to the bank's best customers. 31) The monetary base is equal to 31) A) the sum of coins, Federal Reserve notes, and bank reserves at the Fed. B) the sum of coins, Federal Reserve notes, and gold at the Fed. C) M2. D) M1. E) currency and coins in circulation plus checkable deposits. 32) The Fed buys $25,000 of government securities. The required reserve ratio is 20 percent and the currency drain is zero. What will be the change in the quantity of money? A) $20,000 B) $125,000 C) $5,000 D) $50,000 E) $25,000 32) 5
33) Using the quantity theory of money, in the long run a 3 percent increase in the quantity of money leads to a 3 percent A) increase in the price level. B) increase in real GDP. C) decrease in the price level. D) decrease in the real interest rate. E) increase in the real interest rate. 33) 6