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The current money supply

3. If the dollar appreciated in real terms against the euro by 2% in a
year, and in same year, inflation rates in the U.S. and the euro zone were 3% and 1%, what would be the percent change in the value of the dollar relative to the euro in nominal terms?
a. appreciated 6%
b. appreciated 4%
c. appreciated 2%
d. no change
e. depreciated 4%
f. None of the above

8. In the country of Hyrkania, the CPI in 2000 was 120 and the CPI in
2001 was 132. Jake, a resident of Hyrkania, borrowed money in 2000 and repaid
the loan in 2001. If the nominal interest rate on the loan was 12 percent, then
the real interest rate was (approximately)
a. 12 percent.
b. 10 percent.
c. 2 percent.
d. 0 percent.
e. impossible to determine without knowing the base year for the CPI.

11. Suppose that the government were to replace the income tax with a
consumption tax so that interest on savings was not taxed. This would make the
real interest rate
a. and investment increase.
b. and investment decrease.
c. increase and investment decrease.
d. decrease and investment increase
12. The banking system currently has $200 billion of reserves, none of
which are excess. People hold only deposits and no currency, and the reserve
requirement is 4%. If the Fed raises the reserve requirement to 5% and at the
same time buys $50 billion dollars of Treasury securities, then by how much does the money supply change?
a. It rises by $1000 billion.
b. It rises by $1250 billion.
c. It falls by $950 billion.
d. It falls by $500 billion.
e. None of the above is correct.
15. Imagine that the federal funds rate was below the level the Federal
Reserve had targeted. To move the rate back towards its target the Federal
Reserve could
a. buy Treasury securities. This buying would reduce reserves.
b. buy Treasury securities. This buying would increase reserves.
c. sell Treasury securities. This selling would reduce reserves.
d. sell Treasury securities. This selling would increase reserves.
e. do nothing. The market will move the rate back towards the Fed target.

16. Suppose the Mexican nominal exchange rate does not change, but
prices rise faster abroad than in Mexico. Based on this information, the Mexican real exchange rate
a. does not change.
b. appreciates.
c. depreciates.
d. There is not enough information.
e. None of the above is necessarily correct.
17. Which of the following is the most likely result from an increase in the
government's budget surplus?
a. higher interest rates
b. lower imports
c. lower net capital outflows
d. lower domestic investment

19. An economic contraction caused by a shift in aggregate demand causes
prices to
a. rise in the short run, and rise even more in the long run.
b. rise in the short run, and fall back to their original level in the long run.
c. fall in the short run, and fall even more in the long run.
d. fall in the short run, and rise back to their original level in the long run.

21. Suppose the economy is in long-run equilibrium. If there is a sharp
decline in the stock market combined with a significant increase in immigration of skilled workers, then we would expect that in the short run,
a. real GDP will rise and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise and the price level might rise, fall, or stay the same.
b. the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be una ected.
c. the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.
d. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.
22. (2 points) If the Fed conducts open-market sales of U.S. Treasury securities,
which of the following three increase: interest rates, prices, investment spending?
a. interest rates, prices, investment spending
b. interest rates and prices, not investment spending
c. interest rates and investment, not prices
d. interest rates, not investment or prices
23. An increase in the expected price level shifts short-run aggregate sup-
ply to the
a. right, and an increase in the actual price level shifts short-run aggregate
supply to the right.
b. right, and an increase in the actual price level does not shift short-run aggregate supply.
c. left, and an increase in the actual price level shifts short-run aggregate supply to the left.
d. left, and an increase in the actual price level does not shift short-run aggregate supply.

Figure 2: The loanable funds market and the foreign exchange market in Mexico.

24. Refer to Figure 2. Suppose the Mexican economy starts at r0 and E1.
Which of the following new equilibrium is consistent with capital flight?
a. r0 and E0
b. r1 and E0
c. r1 and E1
d. None of the above is correct.

26. Suppose the economy is in long-run equilibrium. If there is a sharp
decline in the stock market combined with a significant increase in immigration of skilled workers, then we would expect that in the short run,
a. real GDP will rise and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise and the price level might rise, fall, or stay the same.
b. the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be unaffected.
c. the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.
d. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.
e. None of the above.
28. Economists at the Fed observe that rapidly rising stock prices are not
matched by marked improvements in corporate earnings. Suppose that they are
worried about the effects of a likely stock market bubble on the economy. What could they recommend that the Fed do?
a. buy Treasury securities to raise the interest rate
b. buy Treasury securities to lower the interest rate
c. sell Treasury securities to lower the interest rate
d. sell Treasury securities to raise the interest rate

Figure 3: Short-run equilibrium.

30. Refer to Figure 3. If the economy is at point b, a policy to restore full
employment would be
a. a decrease in the federal funds rate.
b. a decrease in government purchases.
c. an increase in taxes.
d. All of the above are correct.
e. Only b and c are correct.
f. None of the above is correct.

Solution Summary

The current money supply is depicted.

$2.19