#### Macro Practice Test 3 + Study Guide

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

the price level would rise by 5 percent and real GDP would be unchanged.

You put money in the bank. The increase in the dollar value of your savings

is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable.

The claim that increases in the growth rate of the money supply increase nominal interest rates but
not real interest rates is known as the

Fisher Effect.

The shoeleather cost of inflation refers to

the waste of resources used to maintain lower money holdings.

Wealth is redistributed from creditors to debtors when inflation was expected to be

low and it turns out to be high.

Net exports of a country are the value of

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

Net capital outflow equals

the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreign residents

Suppose that the real return from operating factories in Ghana rises relative to the real rate of return
in the United States. Other things the same,

this will increases U.S. net capital outflow and decrease Ghanan net capital outflow.

Net capital outflow is always equal to...

is always equal to net exports.

If saving is greater than domestic investment, then

there is a trade surplus and Y > C + I + G.

If a country has a trade surplus

it has positive net exports and positive net capital outflow.

If a country has positive net capital outflows, then its net exports are

positive, and its saving is larger than its domestic investment.

The nominal exchange rate is the

rate at which a person can trade the currency of one country for another.

If the exchange rate is 5 units of Peruvian currency per dollar and a hotel room in Lima costs 300
units of Peruvian currency, then how many dollars do yo
u need to get a room?

60 and your purchase will increase Peru's net exports.

The exchange rate is 1.5 Bosnian markas per U.S. dollar. The price of a refrigerator in Bosnia is
1,200 markas while in the U.S. it is $1,000. The real exchange rate is 5/4 If the real exchange rate between the U.S. and Argentina is 1, then purchasing power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina. In the open-economy macroeconomic model, the market for loanable funds identity can be written as S = I + NCO An increase in real interest rates in the United States encourages both U.S. and foreign residents to buy U.S. assets. If net exports are positive, then net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners. Population number/number of employed/labor force participation rate are all given to you. Calculate the unemployment rate. 100 x (# of unemployed/labor force=u-rate 100 x (labor force/adult population)=labor force participation rate frictional unemployment occurs when workers spend time searching for the jobs that best suit their skills and tastes, short-term for most workers structural unemployment occurs when there are fewer jobs than workers, usually longer-term (minimum wage laws, unions, efficiency wages) Fiat money Money without intrinsic value, used as money because of govt decree Commodity money takes the form of a commodity with intrinsic value Reserve ratio, R fraction of deposits that banks hold as reserves, total reserves as a percentage of total deposits Money multiplier the amount of money the banking system generates with each dollar of reserves (1/R) Reserve requirements regulations on the minimum amount of reserves banks must hold against deposits. Money supply money multiplier x bank reserves Capital requirement a govt regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts. Value of money 1/P (P=price level) Classical dichotomy the theoretical separation of nominal and real variables Monetary neutrality the proposition that changes in the money supply do not affect real variables Velocity of money the rate at which money changes hands P x Y = nominal GDP = (price level) x (real GDP) M = money supply V = velocity Velocity formula: V= (P x Y)/M inflation tax printing money causes inflation, which is like a tax on everyone who holds money. Nominal interest rate inflation rate + real interest rate Fisher effect: nominal interest rate adjusts one-for-one with the inflation rate Shoeleather costs the resources wasted when inflation encourages people to reduce their money holdings, Includes the time and transactions costs of more frequent bank withdrawals Menu costs the costs of changing prices, Printing new menus, mailing new catalogs, etc. Net capital outflow (NCO) domestic residents' purchases of foreign assets minus foreigners' purchases of domestic assets =net exports Nominal exchange rate the rate at which one country's currency trades for another Real exchange rate P = domestic price P^ = foreign price (in foreign currency) e = nominal exchange rate, i.e., foreign currency per unit of domestic currency (e x P)/P ^ Purchasing Power Parity (PPP) e x P = P^ e= P^/P When the government uses bonds.. buy bonds from the public to increase money supply, sell bonds to public to decrease money supply Cyclical unemployment... has a different explanation than does the natural rate of unemployment, refers to the year to year fluctuation in unemployment around an economy's natural rate of unemployment, and is closely associated with short-run ups and downs of economic activity. Suppose some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were employed? 28.5 million Which of the following is not an explanation for the existence of unemployment in the long run? the business cycle Which of the following is not an explanation for the existence of structural unemployment? job search John is a stockbroker. He has had several job offers, but he has turned them down because he thinks he can find a firm that better matches his tastes and skills. Curtis has looked for work as an accountant for some time. While the demand for accountants d John is frictionally unemployed, and Curtis is structurally unemployed. From time to time, the demand for workers has risen in one region of the United States and fallen in another. This illustrates... frictional unemployment created by sectoral shifts. Currently, U.S. currency is... fiat money with no intrinsic value. The Federal Reserve was created in 1913, has more than one specific job to perform, is an example of a central bank. If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve creates dollars and uses them to purchase government bonds from the public. In a system of 100-percent-reserve banking, banks do not influence the supply of money. Suppose that banks desire to hold no excess reserves, the reserve requirement is 5 percent, and a bank receives a new deposit of$1,000. This bank

will increase its required
reserves by $50, will initially see its total reserves increase by$1,000, will be able to make a new loan of \$950.

The discount rate is the interest rate that

the Fed charges banks for loans.

Which of the following lists two things that both increase the money supply?

the Fed buys bonds and lowers the discount rate.

Other things the same if reserve requirements are decreased, the reserve ratio

decreases, the money multiplier increases, and the money supply increases.

In December 1999 people feared that there might be computer problems at banks as the century
changed. Consequently, people wanted to hold relatively more in currency and relatively less in
deposits. In anticipation banks raised their reserve ratios to hav

would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.

Today, bank runs are

uncommon because of FDIC deposit insurance.

If M = 10,000, P = 2, and Y= 20,000, then velocity =

4. Velocity will rise if money changes hands more frequently.

According to the classical dichotomy, which of the following is affected by monetary factors?

nominal wages
the price level
nominal GDP

According to the quantity theory of money, a 2 percent increase in the money supply...

causes the price level to rise by 2 percent.

The inflation tax refers to

the revenue a government creates by printing money.

The supply curve of money is vertical because the quantity of money supplied increases

only if the central bank increases the money supply.