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Krugmans Macroeconomics For Ap 1st Edition Margaret Ray, David A Anderson - Solutions
Assume that there is an increase in the demand for money at every interest rate. Using a diagram, show what effect this will have on the equilibrium interest rate for a given money supply.
In Module 29 you learned about the market for loanable funds, which is intimately related to our current topic of budget deficits. Use a correctly labeled graph of the market for loanable funds to illustrate the effect of a persistent budget deficit.Identify and explain the effect persistent budget
Consider the information provided below for the hypothetical country of Zeta.Tax revenues = 2,000 Government purchases of goods and services = 1,500 Government transfers = 1,000 Real GDP = 20,000 Potential output = 18,000a. Is the budget balance in Zeta positive or negative? What is the amount of
Which of the following is a reason to be concerned about persistent budget deficits?a. crowding outb. government defaultc. the opportunity cost of future interest paymentsd. higher interest rates leading to decreased long-run growthe. all of the above
During a recession in the United States, what happens automatically to tax revenues and government spending?Tax revenues Government spendinga. increase increasesb. decrease decreasesc. increase decreasesd. decrease increasese. decrease does not change
The cyclically adjusted budget deficit is an estimate of what the budget balance would be if real GDP werea. greater than potential output.b. equal to nominal GDP.c. equal to potential output.d. falling.e. calculated during a recession.
Which of the following fiscal policies is expansionary?Taxes Government spendinga. increase by $100 million increases by $100 millionb. decrease by $100 million decreases by $100 millionc. increase by $100 million decreases by $100 milliond. decrease by $100 million increases by $100 millione. both
If government spending exceeds tax revenues, which of the following is necessarily true? There is a I. positive budget balance.II. budget deficit.III. recession.a. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Suppose the economy is in a slump and the current public debt is quite large. Explain the trade - off of short - run versus long - run objectives that policy makers face when deciding whether or not to engage in deficit spending.
Explain how each of the following events would affect the public debt or implicit liabilities of the U.S. government, other things equal. Would the public debt or implicit liabilities be greater or smaller?a. The growth rate of real GDP increases.b. Retirees live longer.c. Tax revenue decreases.d.
Explain why states required by their constitutions to balance their budgets are likely to experience more severe economic fluctuations than states not held to that requirement.
Why is the cyclically adjusted budget balance a better measure of the long-run sustainability of government policies than the actual budget balance?
Contrast the short-run effects of an increase in the money supply on the interest rate to the long-run effects of an increase in the money supply on the interest rate. Which market determines the interest rate in the short run? Which market does so in the long run? What are the implications of your
Using a figure similar to Figure 29.7, explain how the money market and the loanable funds market react to a reduction in the money supply in the short run.
Using the accompanying diagram, explain what will happen to the market for loanable funds when there is a fall of 2 percentage points in the expected future inflation rate.How will the change in the expected future inflation rate affect the equilibrium quantity of loanable funds?
Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%, reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next
How would you respond to a friend who claims that the government should eliminate all purchases that are financed by borrowing because such borrowing crowds out private investment spending?
In 2006, Congress estimated that the cost of the Iraq War was approximately $100 billion a year. Since the U.S. government was running a budget deficit at the time, assume that the war was financed by government borrowing, which increases the demand for loanable funds without affecting supply. This
The government is running a budget balance of zero when it decides to increase education spending by $200 billion and finance the spending by selling bonds. The accompanying diagram shows the market for loanable funds before the government sells the bonds. Assume that there are no capital inflows
Use the market for loanable funds shown in the accompanying diagram to explain what happens to private savings, private investment spending, and the rate of interest if the following events occur. Assume that there are no capital inflows or outflows.a. The government reduces the size of its deficit
The accompanying figure shows new U.S. housing starts, in thousands of units per month, between January 1980 and September 2008. The graph shows a large drop in new housing starts in 1984–1991 and 2006–2008. New housing starts are related to the availability of mortgages.
The Congressional Research Service estimates that at least $45 million of counterfeit U.S. $100 notes produced by the North Korean government are in circulation.a. Why do U.S. taxpayers lose because of North Korea’s counterfeiting?b.As of September 2008, the interest rate earned on oneyear U.S.
Using Figure 26.1 find the Federal Reserve district in which you live. Go to http://www.federalreserve.gov/bios/pres.htm, and click on your district to identify the president of the Federal Reserve Bank in your district. Go to http://www.federalreserve.gov/fomc/ and determine if the president of
Although the U.S. Federal Reserve doesn’t use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $100 million in reserves and $1,000 million in checkable deposits; the initial required reserve ratio is 10%. The
What will happen to the money supply under the following circumstances in a checkable-deposits-only system?a. The required reserve ratio is 25%, and a depositor withdraws$700 from his checkable bank deposit.b.The required reserve ratio is 5%, and a depositor withdraws$700 from his checkable bank
In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table. (Hint:The first row shows that the bank must hold $100 in
Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps it in his wallet.a. How will the withdrawal change the T-account of the local bank and the money supply?b.If the bank maintains a reserve ratio of 10%, how will the bank respond to the withdrawal? Assume that the bank
Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank.a. How does the deposit initially change the T-account of the local bank? How does it change the money supply?b.If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit?c.
The drug company Pfizer is considering whether to invest in the development of a new cancer drug. Development will require an initial investment of $10 million now; beginning one year from now, the drug will generate annual profits of $4 million for three years.a. If the interest rate is 12%,
You have won the state lottery. There are two ways in which you can receive your prize. You can either have $1 million in cash now, or you can have $1.2 million that is paid out as follows: $300,000 now, $300,000 in one year’s time, $300,000 in two years’ time, and $300,000 in three years’
Indicate whether each of the following is part of M1, M2, or neither:a. $95 on your campus meal cardb. $0.55 in the change cup of your carc. $1,663 in your savings accountd. $459 in your checking accounte. 100 shares of stock worth $4,000f. a $1,000 line of credit on your Sears credit card
There are three types of money: commodity money, commodity -backed money, and fiat money. Which type of money is used in each of the following situations?a. Bottles of rum were used to pay for goods in colonial Australia.b. Salt was used in many European countries as a medium of exchange.c. For a
For each of the following transactions, what is the initial effect(increase or decrease) on M1? or M2?a. You sell a few shares of stock and put the proceeds into your savings account.b. You sell a few shares of stock and put the proceeds into your checking account.c. You transfer money from your
What are the important types of financial intermediaries in the U.S. economy? What are the primary assets of these intermediaries, and how do they facilitate investment spending and saving?
Explain how a well-functioning financial system increases savings and investment spending, holding the budget balance and any capital flows fixed.
Which of the following are examples of investment spending, investing in financial assets, or investing in physical assets?a. Rupert Moneybucks buys 100 shares of existing Coca -Cola stock.b.Rhonda Moviestar spends $10 million to buy a mansion built in the 1970s.c. Ronald Basketballstar spends $10
Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is the budget balance? What is the relationship among investment spending, private savings, and the budget balance? Is national savings equal to investment
Does each of the following affect either the supply or the demand for loanable funds, and if so, does the affected curve increase (shift to the right) or decrease (shift to the left)?a. There is an increase in capital inflows into the economy.b. Businesses are pessimistic about future business
Draw a correctly labeled graph showing equilibrium in the loanable funds market.
Both lenders and borrowers base their decisions ona. expected real interest rates.b. expected nominal interest rates.c. real interest rates.d. nominal interest rates.e. Nominal interest rates minus real interest rates.
Which of the following will increase the supply of loanable funds?a. an increase in perceived business opportunitiesb. decreased government borrowingc. an increased private saving rated. an increase in the expected inflation ratee. a decrease in capital inflows
Which of the following will increase the demand for loanable funds?a. a federal government budget surplusb. an increase in perceived business opportunitiesc. a decrease in the interest rated. positive capital inflowse. decreased private saving rates
The real interest rate equals thea. nominal interest rate plus the inflation rate.b. nominal interest rate minus the inflation rate.c. nominal interest rate divided by the inflation rate.d. nominal interest rate times the inflation rate.e. federal funds rate.
A business will decide whether or not to borrow money to finance a project based on a comparison of the interest rate with the from its project.a. expected revenueb. profitc. rate of returnd. cost generatede. demand generated
Suppose that expected inflation rises from 3% to 6%.a. How will the real interest rate be affected by this change?b. How will the nominal interest rate be affected by this change?c. What will happen to the equilibrium quantity of loanable funds?
Explain what is wrong with the following statement: “Savings and investment spending may not be equal in the economy as a whole in equilibrium because when the interest rate rises, households will want to save more money than businesses will want to invest.”
Use a diagram of the loanable funds market to illustrate the effect of the following events on the equilibrium interest rate and quantity of loanable funds.a. An economy is opened to international movements of capital, and a capital inflow occurs.b. Retired people generally save less than working
Draw a correctly labeled graph showing equilibrium in the money market. Select an interest rate below the equilibrium interest rate and explain what occurs in the market at that interest rate and how the market will eventually return to equilibrium.
Draw three correctly labeled graphs of the money market.Show the effect of each of the following three changes on a separate graph.a. The aggregate price level increases.b. Real GDP falls.c. There is a dramatic increase in online banking.
The quantity of money demanded rises (that is, there is a movement along the money demand curve) whena. the aggregate price level increases.b. the aggregate price level falls.c. real GDP increases.d. new technology makes banking easier.e. short-term interest rates fall.
Which of the following is true regarding short-term and long-term interest rates?a. Short-term interest rates are always above long-term interest rates.b. Short-term interest rates are always below long-term interest rates.c. Short-term interest rates are always equal to long-term interest rates.d.
What will happen to the money supply and the equilibrium interest rate if the Federal Reserve sells Treasury securities?Money supply Equilibrium interest ratea. increase increaseb. decrease increasec. increase decreased. decrease decreasee. decrease no change
Which of the following will decrease the demand for money?a. an increase in the interest rateb. inflationc. an increase in real GDPd. an increase in the availability of ATMse. the adoption of Regulation
A change in which of the following will shift the money demand curve?I. the aggregate price level II. real GDP III. the interest ratea. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
How will each of the following affect the opportunity cost or benefit of holding cash? Explain.a. Merchants charge a 1% fee on debit/credit card transactions for purchases of less than $50.b. To attract more deposits, banks raise the interest paid on six-month CDs.c. Real estate prices fall
Explain how each of the following would affect the quantity of money demanded, and indicate whether each change would cause a movement along the money demand curve or a shift of the money demand curve.a. Short -term interest rates rise from 5% to 30%.b. All prices fall by 10%.c. New wireless
What are the four basic functions of the Federal Reserve System and what part of the system is responsible for each?
a. What are the three major tools of the Federal Reserve System?b. What would the Fed do with each tool to increase the money supply? Explain for each.
When banks make loans to each other, they charge thea. prime rate.b. discount rate.c. federal funds rate.d. CD rate.e. mortgage rate.
If the Fed purchases U.S. Treasury bills from a commercial bank, what happens to bank reserves and the money supply?Bank reserves Money supplya. increase decreaseb. increase increasec. decrease decreased. decrease increasee. increase no change
When the Fed makes a loan to a commercial bank, it chargesa. no interest.b. the prime rate.c. the federal funds rate.d. the discount rate.e. the market interest rate.
Which of the following financial services does the Federal Reserve provide for commercial banks?I. clearing checks II. holding reserves III. making loansa. I onlyb. II onlyc. III onlyd. I and IIe. I, II, and III
Which of the following is a function of the Federal Reserve System?I. examine commercial banks II. print Federal Reserve notes III. conduct monetary policya. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and III
a. What does the Board of Governors of the Federal Reserve System do?b. How many members serve on the group?c. Who appoints members?d. How long do members serve?e. Why do they serve a term of this length?f. How long does the chair serve?
a. What group determines monetary policy?b. How many members serve in this group?c. Who always serves in this group?d. Who sometimes serves in this group? Explain.
Which of the following contributed to the financial crisis of 2008?a. subprime lendingb. securitizationc. deleveragingd. low interest rates leading to a housing boome. all of the above
Who oversees the Federal Reserve System?a. the presidents of the Regional Federal Reserve Banksb. the president of the United Statesc. the Federal Open Market Committeed. the Board of Governors of the Federal Reserve Systeme. the Reconstruction Finance Corporation
Which of the following is NOT a role of the Federal Reserve System?a. controlling bank reservesb. printing currency (Federal Reserve notes)c. carrying out monetary policyd. supervising and regulating bankse. holding reserves for commercial banks
Which of the following is a part of both the Federal Reserve System and the federal government?a. the Federal Reserve Board of Governorsb. the 12 regional Federal Reserve Banksc. the Reconstruction Finance Corporationd. commercial bankse. the Treasury Department
Which of the following contributed to the creation of the Federal Reserve System?I. the bank panic of 1907 II. the Great Depression III. the savings and loan crisis of the 1980sa. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Describe the balance sheet effect. Describe the vicious cycle of de leveraging. Why is it necessary for the government to step in to halt a vicious cycle of de leveraging?
Why did the creation of the Federal Reserve fail to prevent the bank runs of the Great Depression? What measures did stop the bank runs?
What are the similarities between the Panic of 1907, the S&L crisis, and the crisis of 2008?
The required reserve ratio is 5%.a. If a bank has deposits of $100,000 and holds $10,000 as reserves, how much are its excess reserves? Explain.b. If a bank holds no excess reserves and it receives a new deposit of $1,000, how much of that $1,000 can the bank lend out and how much is the bank
How will each of the following affect the money supply through the money multiplier process? Explain.a. People hold more cash.b. Banks hold more excess reserves.c. The Fed increases the required reserve ratio.
The monetary base equalsa. currency in circulation.b. reserves held by banks.c. currency in circulation − reserves held by banks.d. currency in circulation + reserves held by banks.e. currency in circulation/reserves held by banks.
Which of the following changes would be the most likely to reduce the size of the money multiplier?a. a decrease in the required reserve ratiob. a decrease in excess reservesc. an increase in cash holding by consumersd. a decrease in bank runse. an increase in deposit insurance
Bank regulation includes which of the following?I. deposit insurance II. capital requirements III. reserve requirementsa. I onlyb. II onlyc. III onlyd. I and IIe. I, II, and III
The fraction of bank deposits actually held as reserves is thea. reserve ratio.b. required reserve ratio.c. excess reserve ratio.d. reserve requirement.e. monetary base.
Bank reserves include which of the following?I. currency in bank vaults II. bank deposits held in accounts at the Federal Reserve III. customer deposits in bank checking accountsa. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Take the example of Silas depositing his $1,000 in cash into First Street Bank and assume that the required reserve ratio is 10%. But now assume that each recipient of a bank loan keeps half the loan in cash and deposits the rest. Trace out the resulting expansion in the money supply through at
Assume that total reserves are equal to $200 and total checkable bank deposits are equal to $1,000. Also assume that the public does not hold any currency and banks hold no excess reserves.Now suppose that the required reserve ratio falls from 20% to 10%. Trace out how this leads to an expansion in
A con artist has a great idea: he’ll open a bank without investing any capital and lend all the deposits at high interest rates to real estate developers. If the real estate market booms, the loans will be repaid and he’ll make high profits. If the real estate market goes bust, the loans
Suppose you are a depositor at First Street Bank. You hear a rumor that the bank has suffered serious losses on its loans.Every depositor knows that the rumor isn’t true, but each thinks that most other depositors believe the rumor. Why, in the absence of deposit insurance, could this lead to a
a. What is the amount you will receive in three years if you loan$1,000 at 5% interest?b. What is the present value of $1,000 received in three years if the interest rate is 5%?
What is the present value of $100 realized two years from now if the interest rate is 10%?a. $80b. $83c. $90d. $100e. $110
If the interest rate is 5%, the amount received one year from now as a result of lending $100 today isa. $90.b. $95.c. $100.d. $105.e. $110.
If the interest rate is 10%, the present value of $1 paid to you one year from now isa. $0.b. $0.89.c. $0.91.d. $1.e. more than $1.
If the interest rate is zero, then the present value of a dollar received at the end of the year isa. more than $1.b. equal to $1.c. less than $1.d. zero.e. infinite.
Suppose, for simplicity, that a bank uses a single interest rate for loans and deposits, there is no inflation, and all unspent money is deposited in the bank. The interest rate measures which of the following?I. the cost of using a dollar today rather than a year from now II. the benefit of
Consider the three hypothetical projects shown in Table 24.1.This time, however, suppose that the interest rate is only 2%.a. Calculate the net present values of the three projects. Which one is now preferred?b. Explain why the preferred choice is different with a 2%interest rate from with a 10%
a. The U.S. dollar derives its value from what? That is, what“backs” U.S. currency?b. What is the term used to describe the type of money used in the United States today?c. What other two types of money have been used throughout history? Define each.
a. What does it mean for an asset to be “liquid”?b. Which of the assets listed below is the most liquid? Explain.A Federal Reserve note (dollar bill)A savings account deposit A housec. Which of the assets listed above is the least liquid? Explain.d. In which monetary aggregate(s) calculated by
Which of the following is the best example of using money as a store of value?a. A customer pays in advance for $10 worth of gasoline at a gas station.b. A babysitter puts her earnings in a dresser drawer while she saves to buy a bicycle.c. Travelers buy meals on board an airline flight.d. Foreign
Which of the following is the most liquid monetary aggregate?a. M1b. M2c. M3d. near-moneyse. dollar bills
In the United States, the dollar isa. backed by silver.b. backed by gold and silver.c. commodity-backed money.d. commodity money.e. fiat money.
When you decide you want “$10 worth” of a product, money is serving which role(s)?I. medium of exchange II. store of value III. unit of accounta. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
When you use money to purchase your lunch, money is serving which role(s)?I. medium of exchange II. store of value III. unit of accounta. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and III
List and describe the four most important types of financial intermediaries.
Identify and describe the three tasks of a well-functioning financial system.
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