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dynamic macroeconomics

Macroeconomics For Today 6th Edition Irvin B. Tucker - Solutions

Free trade theory suggests that when trade takes placea. both nations will be worse off.b. one nation must gain at the other nation’s expense.c. both nations will be better off.d. one nation will gain and the other nation will be neither better nor worse off.
With trade, the production possibilities for two nations liea. outside their consumption possibilities.b. inside their consumption possibilities.c. at a point equal to the world production possibilities curve.d. none of the above.
The countries of Alpha and Beta produce diamonds and pearls. The production possibilities schedule below describes their potential output in tons per year:Using the data in the table, answer the following questions:a. What is the opportunity cost of diamonds for each country?b. What is the
Assume a fixed demand for money curve, and the Fed increases the money supply. In response, people willa. sell bonds, thus driving up the interest rate.b. sell bonds, thus driving down the interest rate.c. buy bonds, thus driving up the interest rate.d. buy bonds, thus driving down the interest
Key Concept: Equilibrium Interest Rate
Assume the Fed decreases the money supply, and the demand for money curve is fixed. In response, people willa. sell bonds, thus driving up the interest rate.b. buy bonds, thus driving down the interest rate.c. buy bonds, thus driving up the interest rate.d. sell bonds, thus driving down the
In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected toa. decrease as real GDP increases.b. increase as the interest rate decreases.c. increase as the interest rate increases.d. all of the above.
When the Fed buys government securities, ita. lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.b. raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public.c. increases the amount of excess reserves that
When the Fed sells government securities, ita. lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.b. raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public.
The Monetary Control Act of 1980a. allowed savings and loan associations to offer checking accounts.b. allowed more institutions to offer checking account services.c. created greater competition among various financial institutions.d. all of the above.e. none of the above.
Which of the following groups oversees and administers the Federal Reserve System?a. The House of Representatives.b. The President’s Council of Economic Advisors.c. The U.S. Treasury Department.d. None of the above; the Fed is an independent agency.
Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies?a. M1 and M2 are both unchanged.b. M1 falls by $1,000, and M2 rises by $1,000.c. M1 is unchanged, and M2 rises by $1,000.d. M1 falls by $1,000, and M2 is
As shown in Exhibit 11, if people behave according to rational expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will causea. labor to adjust nominal wages sluggishly.b. the aggregate supply curve to remain at SRAS1.c. the price level to eventually rise from 100 to
As shown in Exhibit 11, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the price level to movea. directly from 100 to 110 and then remain at 110.b. directly from 100 to 105 and then remain at 105.c. from 100 to 105
Which of the following government policies is an incomes policy?a. A reduction in welfare expendituresb. The publication of a list of guidelines suggesting maximum wage and price increasesc. An increase in the money supplyd. All of the above
Adaptive expectations theorya. argues that the best indicator of the future is recent information.b. underestimates inflation when it is accelerating.c. overestimates inflation when it is slowing down.d. does none of the above.e. does all of the above.
According to the natural rate hypothesis,a. the Phillips curve is quite flat, so a large reduction in employment can be achieved without inflation.b. workers adapt their wage demands to inflation only after a considerable time lag.c. the Phillips curve is vertical in the long run at full
A difficulty in using the Phillips curve as a policy menu isa. that the natural rate of unemployment does not exist.b. that the curve does not remain in one position.c. deciding between monetary and fiscal policies.d. that Democrats choose one point on the curve and Republicans choose another point.
Use Exhibit 8 to answer the questions below.a. Which points represent the natural unemployment rate?b. Which points represent an unemployment rate below the natural unemployment rate?c. Which points represent an unemployment rate above the natural unemployment rate?d. Explain points A and D on the
Suppose you flipped an honest coin 10 times and heads came up 8 times. You are about to toss the coin another 10 times. Using adaptive expectations, how many heads do you expect? Based on rational expectations, how many heads do you expect?
Assume the economy is experiencing an inflationary gap. Keynesian economists would believe thata. wages will remain inflexible.b. the federal government should decrease spending to shift the aggregate demand curve leftward.c. the Federal Reserve should lower the interest rate.d. the federal
Assume the economy is operating at a real GDP below full-employment real GDP. Keynesian economists would prescribe which of the following policies?a. Noninterventionistb. Fixed rulec. Contractionaryd. Expansionary5. Assume the economy is in short-run equilibrium at a real GDP above its potential
Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP.According to classical self-correction theory, which of the following policies should be followed?a. The Federal Reserve should increase the money supply.b. The federal government should increase spending.c.
The monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on thea. indirect impact of changes on the interest rate.b. indirect impact of changes on profit expectations.c. direct impact of changes in fiscal policy on aggregate
In Exhibit 13, if the Fed believes the economy is at AD3, how might it engineer a decline in the price level?a. By decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall.b. By decreasing the money supply, the interest rate
In Exhibit 13, a move from M1 to M2a. increases the money supply, causing the interest rate to rise from i2 to i1.b. increases the money supply, causing the interest rate to fall from i1 to i2.c. decreases the money supply, causing the interest rate to rise from i2 to i1.d. decreases the money
Which of the following is not an issue in the Keynesian-monetarist debate?a. The importance of monetary versus fiscal policyb. The importance of a change in the money supplyc. The importance of the crowding-out effectd. All of the above
Using the aggregate supply and demand model, assume the economy is in equilibrium on the intermediate portion of the aggregate supply curve. A decrease in the money supply will decrease the price level anda. lower both the interest rate and real GDP.b. raise both the interest rate and real GDP.c.
Assume the demand for money curve is fixed and the Fed increases the money supply. The result is that the price of bondsa. rises.b. remains unchanged.c. falls.d. None of the above occurs.
Keynes gave which of the following as a motive for people holding money?a. Transactions demandb. Speculative demandc. Precautionary demandd. All of the above
Assume you are the chair of the Federal Reserve Board of Governors and the condition of the economy is as shown in Exhibit
Using the demand and supply schedule for money shown in Exhibit 10, do the following:a. Graph the demand for and the supply of money curves.b. Determine the equilibrium interest rate.c. Suppose the Fed increases the money supply by $100 billion. Show the effect in your graph, and describe the money
How much money do you keep in cash or checkable deposits on a typical day? Under the following conditions, would you increase or decrease your demand for money? Also identify whether the condition affects your transactions demand, precautionary demand, or speculative demand.a. Your salary
The monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on thea. indirect impact of changes on the interest rate.b. indirect impact of changes on profit expectations.c. direct impact of changes in fiscal policy on aggregate
Which of the following is not an issue in the Keynesian-monetarist debate?a. The importance of monetary versus fiscal policyb. The importance of a change in the money supplyc. The importance of the crowding-out effectd. All of the above
Assume the demand for money curve is fixed and the Fed increases the money supply. The result is that the price of bondsa. rises.b. remains unchanged.c. falls.d. None of the above occurs.
Keynes gave which of the following as a motive for people holding money?a. Transactions demandb. Speculative demandc. Precautionary demandd. All of the above
If all banks in the system shown in Exhibit 6 were identical to Tucker National Bank, the money multiplier for the system would bea. 4.b. 5.c. 10.d. 25.
In Exhibit 6, the bank coulda. extend new loans by $5,000.b. extend new loans by $20,000.c. call in $5,000 existing loans.d. call in $20,000 existing loans.
The required reserve ratio in Exhibit 6 isa. 10 percent.b. 15 percent.c. 20 percent.d. 25 percent.
A $1,000 open market sale by the Fed woulda. expand the money supply by $1,000.b. expand the money supply by $15,000.c. contract the money supply by $1,000.d. contract the money supply by $5,000.
Assume all banks in the system are identical to Best National Bank in Exhibit
If all banks in the system were identical to Best National Bank in Exhibit 5, the money multiplier would bea. 5.b. 10.c. 15.d. 20.
The result would bea. a $200 increase in excess reserves.b. a $200 increase in required reserves.c. a $1,200 increase in required reserves.d. zero change in required reserves.
Suppose Brad Jones deposits $1,000 in the bank shown in Exhibit
If the bank in Exhibit 5 received $100,000 in new deposits, its addition to required reserves would bea. $10,000.b. $20,000.c. $30,000.d. $40,000.
The required reserve ratio in Exhibit 5 isa. 10 percent.b. 15 percent.c. 20 percent.d. 25 percent.
The cost to a member bank of borrowing from the Federal Reserve is measured by thea. reserve requirement.b. price of securities in the open market.c. discount rate.d. yield on government bonds.
In a simplified banking system in which all banks are subject to a 20 percent required reserve ratio, a $1,000 open market purchase by the Fed would cause the money supply toa. increase by $100.b. decrease by $200.c. decrease by $5,000.d. increase by $5,000.
In a simplified banking system in which all banks are subject to a 25 percent required reserve ratio, a $1,000 open market sale by the Fed would cause the money supply toa. increase by $1,000.b. decrease by $1,000.c. decrease by $4,000.d. increase by $4,000.
If an increase of $100 in excess reserves in a simplified banking system can lead to a total expansion in bank deposits of $400, the required reserve ratio must bea. 40 percent.b. 400 percent.c. 25 percent.d. 4 percent.e. 2.5 percent.
The Best National Bank operates with a 10 percent required reserve ratio. One day a depositor withdraws $400 from his or her checking account at the bank. As a result, the bank’s excess reservesa. fall by $400.b. fall by $360.c. rise by $40.d. rise by $400.
Assume a simplified banking system in which all banks are subject to a uniform required reserve ratio of 30 percent and checkable deposits are the only form of money. A bank that receives a new deposit of $10,000 is able to extend new loans up to a maximum ofa. $3,000.b. $7,000.c. $10,000.d.
If a bank has total deposits of $100,000 with$10,000 set aside to meet reserve requirements of the Fed, its required reserve ratio isa. $10,000.b. 10 percent.c. 0.1 percent.d. 1 percent.
What are some problems faced by the Fed in controlling the money supply?
Briefly describe the effect on the money supply of the following monetary policies:a. The Fed purchases $20 million worth of U.S. Treasury bonds.b. The Fed increases the discount rate.c. The Fed decreases the discount rate.d. The Fed sells $40 million worth of U.S.T-bills.e. The Fed decreases the
Assume the required reserve ratio is 10 percent and a bank’s excess reserves are $50 million.Explain why checkable deposits resulting from new loans based on excess reserves are not likely to generate the maximum of $500 million.
Suppose the Federal Reserve’s trading desk buys$500,000 in T-bills from a securities dealer who then deposits the Fed’s check in Best National Bank. Use a balance sheet to show the impact on the bank’s loans. Consider the money multiplier and assume the required reserve ratio is 10
Suppose it is the holiday season and you withdraw $1,000 from your account at First National Bank to purchase presents. Using a balance sheet, show the impact on this bank’s assets and liabilities. If the required reserve ratio is 20 percent, what is the impact on the bank’s loans?
Suppose you remove $1,000 from under your mattress and deposit it in First National Bank.Using a balance sheet, show the impact of your deposit on the bank’s assets and liabilities. If the required reserve ratio is 10 percent, what is the maximum amount the bank can loan from this deposit?
Suppose you deposit your paycheck drawn on another bank. Explain the impact on the money supply.
In what form does a bank hold its required reserves? Assume the Fed has a 20 percent required reserve ratio. What amount of checkable deposits can be supported by $10 million in required reserves?
Consider this statement: “Banks do not create money because this is the Fed’s responsibility.”Do you agree or disagree? Explain.
If you deposit a $20 bill into a checking account and your bank has a 10 percent reserve requirement, by how much will the bank’s excess reserves rise?
Relate Shakespeare’s admonition “Neither a borrower nor a lender be” to the goldsmiths’evolutionary use of fractional reserve banking.
Which of the following is not part of the Federal Reserve System?a. Council of Economic Advisorsb. Board of Governorsc. Federal Open Market Committeed. 12 Federal Reserve District Bankse. Federal Advisory Council
The major protection against sudden mass attempts to withdraw cash from banks is thea. Federal Reserve.b. Consumer Protection Act.c. deposit insurance provided by the FDIC.d. gold and silver backing the dollar.
Which of the following is in charge of the buying and selling of government securities by the Fed?a. The presidentb. Federal Open Market Committee (FOMC)c. Congressd. None of the above
Which of the following is not one of the functions of the Federal Reserve?a. Clearing checksb. Printing currencyc. Supervising and regulating banksd. Controlling the money supply
Which of these institutions has the responsibility to control the money supply?a. Commercial banksb. Congressc. U.S. Treasury Departmentd. Federal Reserve System
Which definition of the money supply includes credit cards, or “plastic money”?a. M1b. M2c. All of the aboved. None of the above
Which of the following is not part of M1?a. Checking accountsb. Coinsc. Credit cardsd. Paper currency
Which of the following is part of the M2 definition of the money supply, but not part of M1?a. Checkable Depositsb. Currency held in banksc. Currency in circulationd. Money market mutual fund shares
Which of the following items is not included when computing M1?a. Coins in circulationb. Currency in circulationc. Savings accountsd. Checking account entries
The M1 definition of the money supply consists ofa. coins and currency in circulation.b. coins and currency in circulation, checkable deposits, and traveler’s checks.c. Federal Reserve notes, gold certificates, and checkable deposits.d. Federal Reserve notes and bank loans.
M1 refers toa. the most narrowly defined money supply.b. currency held by the public plus checking account balances and traveler’s checks.c. the smallest dollar amount of the money supply definitions.d. all of the above.
The easier it is to convert an asset directly into goods and services without loss, thea. less secure it is.b. more secure it is.c. more liquid it is.d. less liquid it is.
Which of the following is not a store of value?a. Dollarb. Money market mutual fund sharec. Checking account balanced. Credit card
Which of the following is not a characteristic of money?a. It provides a way to measure the relative value of goods and services.b. It is always backed by something of high intrinsic value, such as gold or silver.c. It is generally acceptable as a medium of exchange.d. It allows for saving and
Which of the following is a problem with barter?a. Individuals will not exchange goods.b. Individuals’ wants must coincide in order for there to be exchange.c. Goods can be exchanged, but services cannot.d. None of the above is a problem.
Briefly discuss the importance of the Depository Institutions Deregulation and Monetary Control Act of 1980.
Which banks must be insured by the FDIC?Which banks can choose not to be insured by the FDIC?
Should the Fed be independent or a government agency subordinate to Congress and the president?
What is the major purpose of the Federal Reserve System? What is the major responsibility of the Board of Governors and the Federal Open Market Committee?
Distinguish between M1 and M2. What are near monies?
What are the components of the most narrowly defined money supply in the United States?
What backs the U.S. dollar? Include the distinction between commodity money and fiat money in your answer.
Consider each of the items in question 2 in terms of scarcity, portability, divisibility, and uniformity.
Could each of the following items potentially serve as money? Consider each as (1) a medium of exchange, (2) a unit of account, and (3) a store of value.a. Visa credit cardb. Federal Reserve notec. Dogd. Beer mug
Discuss this statement: “A man with a million dollars who is lost in the desert learns the meaning of money.”
Supply-side economists argue that less government spendinga. will contract the productive side of the economy.b. will result in more crowding out.c. causes higher rates of unemployment and inflation.d. would cause interest rates to increase dramatically.e. would make more investment capital
The national debt is unlikely to cause national bankruptcy because thea. national debt can be refinanced by issuing new bonds.b. interest on the public debt equals GDP.c. national debt cannot be shifted to future generations for repayment.d. federal government cannot repudiate the outstanding
When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result ofa. World War II.b. The Vietnam War.c. The Reagan defense buildup and tax cuts.d. The Bush economic recovery program.
“Crowding in” refers to federal government deficitsa. used for public infrastructure, which will offset any decline in business investment.b. which reduce private business and consumption spending.c. which reduce future rates of economic growth.d. all of the above.
Which of the following statements about crowding out is true?a. It can completely offset the multiplier.b. It is caused by a budget deficit.c. It is not caused by a budget surplus.d. All of the above are true.
Which of the following statements about crowding out is true?a. It is caused by a budget surplus.b. It is not caused by a budget deficit.c. It cannot completely offset the multiplier effect of deficit government spending.d. It affects interest rates and, in turn, consumption and investment spending.
The portion of the U.S. national debt held by foreignersa. represents a burden because it transfers purchasing power from U.S. taxpayers to other countries.b. is an accounting entry that represents no real burden.c. decreased as a proportion of the total debt during the 2000s.d. has been constant
Which of the following own a portion of the national debt?a. Federal, state, and local governmentsb. Private U.S. citizensc. Banksd. Foreignerse. All of the above
In 2007, approximately what percentage of the U.S. national debt was owed to foreigners?a. 2.5 percentb. 25 percentc. 30 percentd. 60 percent 346 PART 4 MACROECONOMIC THEORY AND POLICY
Which of the following is false?a. The national debt decreased steadily after World War II until 1980 and then increased sharply each year.b. The national debt increases whenever the federal government has a budget surplus.c. The national debt is currently about the same size as it was during World

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