Macroeconomics chapter – Flashcards
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The definition of economics states that it is the study of how? _________.
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agents choose to allocate scarce resources and the impact of those choices on society.
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The ethical implications of a hotly debated government policy would best be considered a? _________.
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normative? question, since it deals with a subjective issue based on personal preferences.
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Economics is divided into two broad fields of? study: microeconomics and macroeconomics. Microeconomics studies? _________, while macroeconomics studies? _________.
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a small piece of the overall? economy; the economy as a whole.
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Policy decisions made by the government are analyzed by? _________.
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both microeconomics and macroeconomics.
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Empiricism .
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describes a situation where economists use data to analyze what is happening in the world .
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Optimization
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describes a situation where people weigh costs and benefits when making a decision
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Equilibrium
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describes a situation where no one would benefit from changing his or her behavior
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?Economics, anthropology,? psychology, sociology, and political science all study human behavior. Economics differs from these other social sciences because it also addresses these three key? concepts: _________.
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Optimization, equilibrium, and empiricism.
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Suppose that you allocate? $20 each week for your entertainment budget. This money is spent on two? items: either renting movies for? $1 each at Redbox or downloading songs from iTunes at? $1 each. Given this? information, which of the following would represent your budget constraint for? entertainment?
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Amount spent on iTunes? + Amount spent at Redbox? = $20.
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The opportunity cost of an activity is a measure of what is given up when you do that activity. ?Let's say that you are trying to decide what to do on Friday at 11 a.m. You rank your possible options from the one you value the most to the one that you value the least in the following? order: going to? class, sleeping in? late, going to work? early, getting? lunch, going to the gym to? exercise, and watching television. If you decide to go to? class, then what do we know about the opportunity cost of your? decision?
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The opportunity cost would be sleeping in? late, since it was your? next-best option.
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Comparing a set of feasible alternatives and picking the best one is an optimization process called? _________.
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?cost-benefit analysis.
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When deciding whether to install visible countdown timers for pedestrians at? crosswalks, which of the following would be considered in the? cost-benefit analysis? ?(Check all that apply.?)
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The cost in terms of dollars of installing these new timers all over the city. The value of the lives lost by drivers who watch the countdown timers and try to make it through a light. The higher maintenance bill associated with fixing these more complex signals when they break down. The value of the? pedestrians' lives saved by having the timers to assist in crossing the street.
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In which of the following areas will taking an economics course help benefit you throughout your? life?
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All of the above.
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Suppose your New Year resolution is to get back in shape. You are considering various ways of doing? this: you can sign up for a gym? membership, walk to? work, take the stairs instead of the? elevator, or watch your diet. How would you evaluate these options and choose an optimal? one?
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Do a? cost-benefit analysis to compare the alternatives.
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Free riding occurs when people's private benefits are out of sync with the public interest . Which of the following is subject to the? free-rider problem?
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All of the above.
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Which of the following is more susceptible to the? free-rider problem:government?funded symphonies or city?wide pest control??
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Use of city?wide pest control is more susceptible since even those who? don't pay taxes still? benefit, while government?funded symphonies can charge for admission?, so that everyone who goes pays their share.
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Which of the following is more susceptible to the? free-rider problem: state parks or city?wide pest control??
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Use of city?wide pest control is more susceptible since even those who? don't pay taxes still? benefit, while state parks can charge for admission?, so that everyone who goes pays their share.
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Which of the following is more susceptible to the? free-rider problem: fishing in public lakes or street lights??
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Use of street lights is more susceptible since even those who? don't pay taxes still? benefit, while fishing in public lakes can charge for a fishing license?, so that everyone who goes pays their share.
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Which of the following is true regarding the concept of? causation?
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It describes how one event can bring about change in another.
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Which of the following is not an example of? causation?
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Washing your car will lead to raining that day. Wearing your lucky socks while watching the football game will lead to your team winning. Driving without car insurance will lead to getting into an accident.
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Economists say the opportunity cost of an activity includes the value of the alternative use of your time . The opportunity cost of an activity takes account not only of required money outlay but also the value of the time you spend on the activity. The opportunity cost of your time can be roughly estimated using your wage . Positive economic? analysis_____________.
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involves objective statements that can be disproven using data.
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Normative economic? analysis______________.
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may include subjective and ethical judgments. makes recommendations on the best decision to achieve a given end.
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Normative economic analysis
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recommends what people and society ought to do and takes the subjective preferences and ethical judgments of those making the decision into account.
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Positive
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1. Families where both parents earn high wages? (high opportunity cost of? time) are more likely to both work at a paid job and hire outside help for household chores than otherwise similar families where parents earn low wages? (low opportunity cost of? time).
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Normative
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2. Parents should carefully weigh all the costs and? benefits, including their preferences and? values, when deciding how to care for children.
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Normative
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3. Some economists recommend granting unpaid leave to parents after the birth of a child because they calculate that the benefits exceed the costs.
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The process of critical thinking is useful in macroeconomics? because:
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Macroeconomics is focused on choosing effective policies.
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Which of the below is not a distinguishing characteristic of critical? thinking?
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Intuitiveness
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What is the critical thinking issue in the story? "What Do You? Mean, Mr.? President?" in Box? 1.3?
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Knowing what the issue is.
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Which of the following statements about the role of communication in the process of critical thinking is? false?
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Communication can play a? role, but more often than not its role is not important.
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The critical thinking step of coming to a? conclusion:
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Should include a consideration of the implications and consequences of your answer to the question at hand.
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The process of critical thinking often involves formal and informal writing. Why do critical thinkers use both types of? writing?
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Formal writing is used to communicate the results of? one's critical thinking and to persuade others that one is right. Informal writing is primarily intended for oneselft or others with whom one is? working, and is used to facilitate the critical thinking process itself.
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Which of the following is not a part of the critical thinking step of gathering relevant? information?
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Deciding which possible answer you gather is the right one.
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Critical thinking about macroeconomic issues requires that you do what before analyzing the particular issue at? hand?
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Take stock of any relevant macroeconomic? information, theories, and conclusions that you already hold or believe.
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Suppose that you are doing a macroeconomic research paper on whether to the Federal government should balance its budget in the coming year. Suppose further that in working on that paper you are frustrated by the inability to find statistics on government spending and economic growth in other countries. This frustration suggests you are having with what step of the critical thinking? process?
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Gathering relevant information to answer the question.
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What role do personal? (or professional) values play in thinking critically about macroeconomic? issues?
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Their role depends on the nature of the macroeconomic issue being investigated. ? However, one should be aware of any values that one holds that might be relevant to the macroeconomic issue.
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The process of thinking critically is best described? as:
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Deciding what the issue? is, becoming aware of your initial frame of? reference, gathering? information, and constructing a conclusion.
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Caveat lector? is:
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A summary of the argument that one should be skeptical when gathering information.
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Suppose you have just been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. During a meeting with your? client, the CEO asks if your economic models include all factors that impact gasoline prices. What is your response to his? question?
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?No, the model is a simplified representation of reality.
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Your client becomes critical of your? "sloppy" technique of using a model that does not include all factors. What is the most appropriate reply to this? criticism?
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Economic models are meant to be approximations that predict what happens in most circumstances.
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Based on this? story, should you conclude that demand will fall to zero if the client raises gas prices by one? cent? No ?, since this is an argument by anecdote ?, which can lead to wrong conclusions . Instead of relying on? Debbie's college story to make a? conclusion, you decide it is smarter to collect and analyze? __________.
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a large amount of empirical data.
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Which of the following people are counted as potential? workers?
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People who are already employed? full-time.
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Which of the following would be classified as? unemployed?
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Someone who is not working and looked for work two weeks ago.
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The labor supply curve shows that the quantity of labor supplied will increase as wages increase . This results in a labor supply curve that is upward-sloping . The labor supply curve is derived from the concept that? ____________.
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as wages? increase, the opportunity cost of leisure? increases, leading people to work more hours.
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Frictional unemployment can result when? ____________. ?(Check all that apply?.)
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firms and workers have imperfect information about each other firms and workers have imperfect information about the state of the economy it takes time for firms to find applicants with the right skills and experience it takes time to find what jobs are available in a specific field.
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Structural unemployment can be caused by? ____________.
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minimum wage laws. labor unions. collective unemployment can be caused by
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Remaining firms in the area may prefer not to lower wages for their workers because it might result in reduced worker morale and productivity. If this is the? case, when local employers go out of? business, we are likely to? see:
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Unemployment equal to the difference between the quantity demanded and supplied of labor at the rigid wage.
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The EBE presents data from the Pittsburgh and? Raleigh-Durham labor markets from 1990dash-2007. Which of the following are likely explanations the change in their local unemployment? rates: ?(Check all that apply.?)
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Labor demand shifted relatively farther left in? Raleigh-Durham. Economic activity in Pittsburgh was concentrated in industries that experienced relatively slow growth of Chinese imports.
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The EBE also reports evidence from an extensive study that included hundreds of U.S. labor market regions from? 1990-2007. The findings tend to confirm the model of labor markets depicted in Exhibit 9.9. Match each finding from the study to the relevant labor market feature. You may need more than? one! Communities with high exposure to Chinese imports experienced sharper declines in manufacturing employment than? low-exposure communities. ?(Check all that apply.?)
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Leftward shift in labor demand.
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The rate of unemployment also rose more in the areas with high exposure than those with low exposure. ?(Check all that apply.?)
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Rigid or not completely flexible wages. Leftward shift in labor demand.
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The study found no decline in manufacturing wages. ?(Check all that apply.?)
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Rigid or not completely flexible wages.
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The study found a significant decline in wages of? non-manufacturing workers in high exposure areas. ?(Check all that apply.?)
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Wage rigidity may not extend to new jobs outside the impacted industry. Leftward shift in labor demand.
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Unemployment statistics are measured and released by the Bureau of Labor Statistics? (BLS), a division of the U.S. Department of Labor. The BLS officially classifies a person as being employed? ____________.
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if that person holds either a? part-time or? full-time paid job.
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Potential workers are classified as being unemployed when? ____________.
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they do not have a paid? job, have looked for work in the previous 4? weeks, and are available for work.
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The value of the marginal product of labor is the? ____________.
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market value of a? worker's additional output for a firm.
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Anthony owns a landscaping business that has 4 employees. His company is able to earn revenue of? $600 per day. He knows that if he hires another? worker, he would have to pay that worker? $50 per day and the company would earn revenue of? $680 per day if the new worker is hired. Determine the value of the marginal product of labor of the employee that Anthony is considering hiring.
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?$80.
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Which of the following is an example of what economists refer to as job? search?
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People that engage in the job hunt by sending out resumes. An individual that engages in the job hunt by determining who is hiring and how much they pay. A person who applies for a? high-paying job but does not? qualify, so she begins searching for an appropriate position.
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What type of unemployment does job search lead? to?
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Frictional unemployment.
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Suppose the equilibrium wage in the market for food service workers is? $11 per hour. The government then establishes a minimum wage at? $9 per hour. What will be the effect of the minimum wage on the market for labor in the food service? industry?
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There will be no? effect, since the market equilibrium wage that equates the amount of labor supplied with the amount of labor demanded is above the minimum wage.
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In response to high? unemployment, the Spanish government enacted a series of labor market reforms in 2012. Among other? measures, the government reduced severance pay and the influence of unions in setting wages and hours of work. What could be the rationale behind using these measures to boost? employment?
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The rationale behind these measures was to lower unemployment by addressing the wage rigidity caused by unions and? firms' unwillingness to hire new employees because of severance pay obligations.
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If this market were frictionless and could adjust? freely, then over time we would expect? ____________.
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a decrease in the wage? rate, since there are more people looking for jobs at that wage than firms want to higher.
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?Real-time data analysis exercise Click the following link to view unemployment data from FRED?*. Then use that data to answer the following questions. LOADING... ?*Real-time data provided by Federal Reserve Economic Data? (FRED), Federal Reserve Bank of Saint Louis. The data in the table below shows employment data for June 01, 2017. Using the link? above, correctly identify the title for each series
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Unemployed ?, Civilian Labour force ?, Employment level-part-time for economic reasons...
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Given your? graph, the total amount of unemployment that would result from the decline in demand for Starbucks products along with having a fixed wage at ?$10 can be found by? ______________.
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subtracting the quantity of labor at point B from the quantity of labor at point A.
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Suppose the wage is flexible. ?Now, the impact from the decline in demand for Starbucks products would lead to? ____________.
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a decrease in employment but not by as much as under the? fixed-wage rate system.
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Why is the unemployment? rate, as measured by the Bureau of Labor? Statistics, an imperfect measure of the extent of joblessness in the? economy?
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All of the above.
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When compared to the Great? Depression, the typical length of unemployment in the modern? (post-Great Depression-era) U.S. economy is
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relatively brief.
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In an? economy, the? working-age population is 200 million. Of this? total, 160 million workers are employed. 6 million workers are unemployed. 28 million workers are not available for work? (homemakers, full-time? students, etc.). 4 million workers are available for work but are discouraged and thus are not seeking work. 2 million workers are available for work but are not currently seeking work due to transportation or childcare problems.
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The unemployment rate in this economy is 3.63.6?%. ? (Round your answer to one decimal place?.)
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The unemployment rate
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shows the percentage of the labor force that is considered unemployed.
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Suppose John Q. Worker is currently unemployed. Each? day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of? skills, abilities, and interests. If someone asks John Q. what he does for? work, he tells them that he is currently? "in-between jobs." Which of the following best classifies John? Q.'s unemployment? status?
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Frictionally unemployed
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When the economy is at full? employment,
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All of the above.
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Suppose that Sally J. Society recently lost her job as an underwater welder. In looking for a new? job, she discovers that the only available jobs are for economists and that there are no openings for underwater welders because the trade is now obsolete. If Sally J. Society decides to return to school to earn an Economics? degree, what is the best classification of her unemployment? status?
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Structurally unemployed
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Why do economists believe that setting a goal of zero percent unemployment is not feasible or? desirable? Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because
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the economy needs some? short-term unemployment in order to allow for better matching of jobs with workers that possess the proper skill sets.
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The economy witnessed the sharpest change in the unemployment rate from? ____________.
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2008 to 2009 as a result of the financial crisis that hit the United States starting in late 2007.
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Which of the following is not one of the general trends that you observed in the? table?
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There has been a steady increase in both the size of the adult population and the labor force participation rate between 2006 and 2016.
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In April? 2012, the Bazanian? Daily, a leading newspaper in the country of? Bazania, carried a report titled? "20,000 jobs added in the last? quarter; unemployment rate shoots up from 5 percent to 6.7? percent." How could the unemployment rate in Bazania increase even when new jobs were? created?
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. The new jobs may have made discouraged workers optimistic enough to start applying for? jobs, thus? re-entering the labor force and being counted as? unemployed, which causes the overall unemployment rate to increase.
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In? macroeconomics, a? "leading indicator" is defined as a measurable economic variable that changes prior to when the economy as a whole starts to follow a given trend.? Conversely, a? "lagging indicator" is a measurable variable that only changes in the latter phaseslong dash—or even afterlong dash—an overall trend is evident in the economy. The following chart shows the evolution of the U.S. unemployment rate from January 1948 to January 2014? (monthly data). Note that the shaded bars are recessions and that the unemployment rate increases during recessions. The U.S. Unemployment Rate from 1948 to 2014
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?Lagging, since in every recession the unemployment rate did not peak until very late into the? recession, or in some? cases, after the recession.
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Unemployment statistics are measured and released by the Bureau of Labor Statistics? (BLS), a division of the U.S. Department of Labor. The BLS officially classifies a person as being employed? ____________.
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if that person holds either a? part-time or? full-time paid job.
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Explain whether each of these individuals will be counted as a part of the labor force. Alex is a full?time stay?at?home parent while his wife works. John is a full?time student that volunteers on the weekends at an animal shelter. We know that Alex is? ____________, and we know that John is? ____________.
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not in the labor force?; not in the labor force.
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What other reasons might explain why unemployment is lower among workers with a relatively higher level of? education?
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All of the above.
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Which of the following best explains why the labor supply curve slopes? upward?
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When wages? increase, the opportunity cost of not working? increases, leading people to seek more work hours.
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Which of the following does not cause the labor supply curve to? shift?
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Changes in the wage rate paid to workers.
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The value of the marginal product of labor is the? ____________.
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market value of a? worker's additional output for a firm.
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The goal of a country with a healthy economy is to have? ____________ equal to zero.
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cyclical unemployment.
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Which of the following is an example of what economists refer to as job? search?
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All of the above.
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Suppose the equilibrium wage in the market for food service workers is? $11 per hour. The government then establishes a minimum wage at? $9 per hour. What will be the effect of the minimum wage on the market for labor in the food service? industry?
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There will be no? effect, since the market equilibrium wage that equates the amount of labor supplied with the amount of labor demanded is above the minimum wage.
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In response to high? unemployment, the Spanish government enacted a series of labor market reforms in 2012. Among other? measures, the government reduced severance pay and the influence of unions in setting wages and hours of work. What could be the rationale behind using these measures to boost? employment?
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The rationale behind these measures was to lower unemployment by addressing the wage rigidity caused by unions and? firms' unwillingness to hire new employees because of severance pay obligations.
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According to? salary.com, the average salary for a software engineer level III? (a higher-level position in software design and? implementation) in the Silicon Valley area of California is? $108,244. However, Google pays its level III software engineers an average salary of? $124,258. Why does Google pay a salary higher than the equilibrium salary for equivalent positions in the same? area?
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Google is paying an efficiency wage in order to minimize worker? turnover, increase worker? productivity, and attract the top talent.
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The period from 2007 to 2009 was a time of economic contraction that came to be known as the? "Great Recession." During periods of? recession, most firms experience a decline in demand for their? product, as well as a decline in the? product's equilibrium price. All other things being? equal, macroeconomic theory predicts that the wage of most workers should decline in recessionary periods.? However, this was not the case in the Great? Recession, or during many other economic downturns throughout recent history. Based on the discussion in the? chapter, explain why this might be? so, and what the implications are for unemployment.
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During downturns workers are resistant to the lowering of wages and firms try to avoid doing so. This downward wage rigidity keeps the quantity of labor supplied greater than? demand, causing unemployment.
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Sometimes new technology in production reduces the time that a worker takes to complete a task. Technological innovations can also completely replace a factory worker. Does this mean that technological progress will lead to? large-scale unemployment?
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No, some sectors may experience unemployment as a result of the innovations but overall productivity and incomes will? increase, leading to more employment opportunities.
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Which of the following is true regarding wage? rigidity?
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It occurs when wages are held fixed above the competitive equilibrium level.
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Which of the following is not one of the factors that can increase wage rigidity in the labor? market?
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An increase in the time needed to search for available jobs.
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The? inflation-adjusted purchasing power of the originally borrowed dollar is subtracted from the amount a borrower repays in a year on a? one-dollar loan. The result is the? ____________.
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all of the above.
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Banks and other financial institutions of an economy are in the business of channeling funds from suppliers of financial capital to users of financial capital. This process is known as? ____________.
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financial intermediation.
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The two basic types of financial capital are? ____________.
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credit and equity.
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As used in? finance, the term maturity refers to the? ____________.
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time until a debt must be repaid.
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For banks and other financial? institutions, the discrepancy between the? short-term maturities of their deposits and the? long-term maturities of their assets is referred to as? ____________.
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a maturity mismatch.
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Banks usually hold a small pool of reserves because? ____________.
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on most days the withdrawals of existing deposits are roughly offset by inflows of new deposits.
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If a bank runs short of? reserves, a reasonable step would be to? ____________.
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B and C only.
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What is the difference between nominal and real interest? rates?
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A and C only.
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What are some factors that explain why people save for the? future? ?(Check all that apply?.)
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People save for retirement. People save for predictable large expenses. People save for a 'rainy day.' People save for their children People save to invest in a personal business
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Which of the following are functions banks perform as financial intermediaries in the? economy? ?(Check all that apply?.)
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Manage risk through diversification strategies. Identify profitable lending opportunities. Transform? short-term liabilities into? long-term assets.
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What is? stockholders' equity?
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The difference between a? bank's total assets and total liabilities.
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Who bears the risk that a bank faces when? stockholders' equity is greater than? zero?
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The? bank's stockholders.
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What is deposit? insurance?
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A program implemented in most countries to protect bank? depositors, in full or in? part, from losses caused by a? bank's inability to pay its withdrawals.
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Excluding cases where banks had accumulated a lot of? non-deposit liabilities that are not covered by FDIC? insurance, would analysts generally agree that deposit insurance has been successful in preventing bank? runs?
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Yes, since bank runs and bank failures have been relatively rare since the advent of deposit insurance.
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Banks fail when they invest in? long-term assets that subsequently fall in price. What are the two views on why asset prices fluctuate so much that they lead to financial crises and bank? failures?
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One view holds that asset prices are rationally based on fluctuating? fundamentals, while the other asserts that psychological factors and biases play a significant role.
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Banks that practice narrow banking match the maturity of their investments with the term of the deposits that they collect from the public. In other? words, narrow banks take? short-maturity deposits and invest in assets that carry a low level of risk and are also of? short-term maturity, like? short-term government debt. Suppose that all? FDIC-insured banks decide to adopt narrow banking. How would narrow banking reduce the level of risk in the banking? system?
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It would reduce risk in the banking system by reducing the likelihood of bank runs and liquidity problems for banks.
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If narrow banking reduces systemic? risk, why do banks still practice maturity? transformation?
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Banks still practice maturity transformation simply because it is generally very profitable to do so.
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Recall from the chapter that banks in the United States hold a fraction of their checking deposits as? reserves, either as vault cash or as deposits with the Federal Reserve? (where they earn very little? interest). Regulations require them to hold a certain percentage? (currently 10? percent) of their checking deposits as reserves.? However, banks are free to hold additional reserves if they choose. The latter are called excess reserves. ?Ordinarily, banks held very few excess reserves.? However, starting in the financial crisis of 2007-?2009, the amount of excess reserves held by banks went from virtually zero to over 1.8 trillion dollars. Explain why banks would be expected to try to minimize the amount of excess reserves that they hold.
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All of the above.
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Based on what you learned about banking in the? chapter, explain why you think that the crisis prompted banks to dramatically expand the amount of excess reserves they held.
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All of the above.
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?Firms, households, and governments use the credit market for borrowing. The credit demand curve shows the relationship between the quantity of credit demanded and the real interest rate. The credit demand curve slopes downward because? ____________.
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a lower real interest rate raises a borrowing? firm's profit and hence its willingness to borrow.
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A shift in the credit demand curve can be caused by? ___________.
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all of the above.
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Households and firms with savings lend money to banks and other financial institutions. The credit supply curve shows the relationship between the quantity of credit supplied and the real interest rate. The credit supply curve slopes upward because a? ____________.
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B and C only.
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A shift in the credit supply curve can be caused by? ____________. ?(Check all that apply?.)
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an aging population that is? ill-prepared for retirement. a heightened desire on the part of firms to internally fund their future activities. an elevated perception on the part of households that the future may hold many? "rainy days."
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The 1970s saw a period of high inflation in many industrialized countries including the United States. Due to the increase in the rate of? inflation, lenders, including credit card? companies, revised their nominal interest rates upward. How is the rate of inflation related to the nominal interest rate that credit card companies? charge, and why would lenders need to increase the nominal interest rate when the inflation rate? increases?
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The nominal rate of interest is the real rate of interest plus the rate of? inflation; lenders need to raise the nominal rate when inflation increases to maintain their desired real return.
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Usury laws place an upper limit on the nominal rate of interest that lenders can charge on their loans. In the? 1970s, some credit card companies moved to states where there were no ceilings on interest rates to avoid usury laws. Why would credit card companies move to states without usury laws during a period of high? inflation, like the? 1970s?
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Because usury law ceilings may limit the real return lenders can earn during inflationary? periods, lenders have an incentive to move to states without such laws.
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In? August, 1979, the annual rate of inflation in the U.S. was nearly? 12%, and the U.S.? short-term nominal interest rate was nearly? 10%. Over the next 35? years, both the rate of inflation and? short-term nominal interest rate tended to fall. By August? 2014, the rate of inflation was about? 2% and the? short-term nominal interest rate was close to? 0%. How has the real? short-term interest rate changed from 1979 to? 2014?
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. The real rate remained stable at ??2%.
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Why do the inflation rate and the nominal interest rate tend to move together over the? long-run?
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A and B only.
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What is the shadow banking? system?
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All of the above describe the shadow banking system.
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Maturity transformation is the process by which banks? ____________.
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transfer? short-term liabilities into? long-term investments.
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A bank run is? ____________.
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an extraordinarily large volume of withdrawals driven by a concern that a bank will run out of liquid assets with which to pay withdrawals.
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Excluding cases where banks had accumulated a lot of? non-deposit liabilities that are not covered by FDIC? insurance, would analysts generally agree that deposit insurance has been successful in preventing bank? runs?
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?Yes, since bank runs and bank failures have been relatively rare since the advent of deposit insurance.
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As the Choice and Consequence box on? "Too Big to? Fail" notes, bank regulators worry about the prospect of the failure of large financial? institutions, dubbed? "systemically important financial? institutions" (SIFIs). How would the failure of a systemically important financial institution? (SIFI) affect the? economy?
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Financial intermediation would likely be? impaired, with negative consequences for the? economy's performance.
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What steps do bank regulators take to prevent SIFIs from failing or to minimize the effect of such? failures?
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All of the above.
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Banks fail when they invest in? long-term assets that subsequently fall in price. What are the two views on why asset prices fluctuate so much that they lead to financial crises and bank? failures?
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One view holds that asset prices are rationally based on fluctuating? fundamentals, while the other asserts that psychological factors and biases play a significant role.
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anks that practice narrow banking match the maturity of their investments with the term of the deposits that they collect from the public. In other? words, narrow banks take? short-maturity deposits and invest in assets that carry a low level of risk and are also of? short-term maturity, like? short-term government debt. Suppose that all? FDIC-insured banks decide to adopt narrow banking. How would narrow banking reduce the level of risk in the banking? system?
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It would reduce risk in the banking system by reducing the likelihood of bank runs and liquidity problems for banks.
question
If narrow banking reduces systemic? risk, why do banks still practice maturity? transformation?
answer
Banks still practice maturity transformation simply because it is generally very profitable to do so.
question
If you have studied? microeconomics, you may recall a concept called? "moral hazard." Moral hazard occurs when an economic agent is incentivized to take risks because some? (or all) of the losses that might result will be borne by other economic agents. How might federal deposit? insurance, as administered by the? FDIC, lead to moral? hazard?
answer
All of the above are plausible.
question
Recall from the chapter that banks in the United States hold a fraction of their checking deposits as? reserves, either as vault cash or as deposits with the Federal Reserve? (where they earn very little? interest). Regulations require them to hold a certain percentage? (currently 10? percent) of their checking deposits as reserves.? However, banks are free to hold additional reserves if they choose. The latter are called excess reserves. ?Ordinarily, banks held very few excess reserves.? However, starting in the financial crisis of 2007-?2009, the amount of excess reserves held by banks went from virtually zero to over 1.8 trillion dollars. Explain why banks would be expected to try to minimize the amount of excess reserves that they hold.
answer
All of the above.
question
Based on what you learned about banking in the? chapter, explain why you think that the crisis prompted banks to dramatically expand the amount of excess reserves they held.
answer
All of the above.
question
The sharpest? one-day percentage decline in the Dow Jones Industrial Average? (DJIA) took place on October? 19, 1987. The DJIA fell 23 percent on this one day. Foreign exchange markets and other asset markets also exhibit large fluctuations on a daily basis. Eugene F.? Fama, Robert J.? Shiller, and Lars Peter Hansen shared the Nobel Prize in Economic Sciences in 2013 for their work on the? "empirical analysis of asset? prices." Based on the information given in this? chapter, which of the following factors could explain why asset prices? fluctuate? ?(Check all that apply?.)
answer
Fluctuations reflect the rational appraisals by investors of new information relevant to asset profitability. There are pychological factors and biases that can produce excessive reactions to booms and busts.
question
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.25?% at a time when inflation is around 1.61.6?%. For the average? saver, the real rate of interest on his or her savings is ?1.35?%. ?(Round your response to two decimal places and use a minus sign if necessary?.) If banks expect that the rate of inflation in the coming year will be 4.6?% and they want a real return of 6?% on a certain category of? loans, then the nominal rate they should charge borrowers on those loans is 10.6?%. ?(Round your response to two decimal places.?) If the economy experiences an unexpectedly low rate of? inflation, the group that would tend to benefit is? ___________.
answer
creditors (people or institutions that are owed money).
question
Everything else remaining? unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit supply curve shifts to the? right?
answer
The equilibrium rate of interest will decrease and the quantity of credit will increase.
question
Which of the following equations is? correct?
answer
Real interest rate? = Nominal interest rate minus? Inflation rate
question
Consider two? banks: Bank A and Bank B. Suppose the value of liabilities of both the banks is equal.? However, Bank A is solvent but Bank B is insolvent. This would imply? that:
answer
the value of Bank A's assets exceeds the value of Bank B's assets.
question
When the value of a? bank's assets is lessless than its? liabilities, the bank is said to be? ____________.
answer
insolvent
question
When a bank experiences withdrawals of deposits and? short-term loans by firms and other? banks, the situation is described as? ____________.
answer
an institutional bank run.
question
When large firms and the general banking community lose confidence in a weak bank, FDIC insurance is ______ the situation
answer
incapable of alleviating
question
Convertibility is the ability to convert? ____________.
answer
fiat money into a physical? commodity, such as gold.
question
According to the quantity theory of? money, ____________.
answer
in the long? run, the growth in the money supply is directly related to the inflation rate.
question
Seignorage is the? ____________.
answer
difference between the cost of printing paper money and the value of the goods and services that the government can purchase with the newly printed money.
question
A central bank is the government institution? ____________.
answer
that runs a? country's monetary system.
question
The functions of a central bank are to? ____________. ?(Check all that apply?.)
answer
control certain key interest rates. monitor financial institutions. indirectly control the money supply.
question
The inflationary expectation model that states inflationary expectations are determined by the level of inflation in the recent past is called ? rational expectations adaptive expectations short-run expectations . The inflationary expectation model that assumes people have highly sophisticated beliefs that incorporate all of the available information is called ? adaptive expectations long-run expectations rational expectations. Adaptive expectations are ? forward-looking irrational backward-looking .
answer
adaptive expectations. rational expectations backward-looking
question
According to this Evidence Based Economics? (EBE) feature, the following factors set the stage for the German hyperinflation after World War? I:
answer
All of the above
question
Economists believe that the German government could have averted the hyperinflation if it had responded to its situation? by: ? Decreasing Increasing ?taxes, ? borrowing from lending to the public and ? paying defaulting on its debt.
answer
increasing borrowing from defaulting on
question
What are the functions of money in a modern? economy? ?(Check all that apply?.)
answer
Unit of account. Medium of exchange. Store of value.
question
Inflation is the? ____________.
answer
growth rate of the overall price level in the economy.
question
Deflation is? ____________.
answer
the rate of decrease of the overall price level in the economy.
question
Hyperinflation is? ____________.
answer
a doubling of the price level within three years.
question
What are the costs associated with? inflation? ?(Check all that apply?.)
answer
Uncertainty about the aggregate price? level, which can distort prices and make planning difficult. Logistical costs related to the need to frequently change prices. Unproductive policies such as price? controls, which may be due to voter dissatisfaction.
question
The federal funds rate is the? ____________.
answer
interest rate in the federal funds market where banks obtain overnight loans of reserves from one another.
question
The funds that are lent in this market are? ____________.
answer
reserves at the Federal Reserve Bank.
question
The factors that would shift the demand curve for reserves include? ____________. ?(Check all that apply.?)
answer
a changing deposit base. anticipated liquidity shocks. an economic expansion or contraction.
question
What are the two models that are used to describe inflationary? expectations? ?(Check only two?.)
answer
Adaptive expectations. Rational expectations.
question
Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to? encounter? ?(Check all that apply?.)
answer
It might be difficult to agree on how many car washes is equivalent to painting a house. It may take a lot of time to negotiate and finally settle on a deal that you both find fair. You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return.
question
Some barter Web sites allow the use of? "barter dollars." The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified? above?
answer
Yes, because you could both pay and be paid in? "barter dollars."
question
Yap is a small island in the Pacific Ocean with a total land area of 39 square miles. In the? 1900s, there were only three commodities that were traded on this isolated island—?fish, ?coconuts, and sea cucumber.? However, the monetary system in Yap was highly sophisticated. The currency that was used on Yap was called? "Fei." Fei were large wheels of stone with a hole in the center. These stone wheels were not quarried in Yap but were brought to the island from elsewhere. The value of each wheel as currency depended on its? size, which ranged from 1 foot in diameter to 12 feet. Each time a transaction had to be settled in? Fei, the ownership of each stone wheel was transferred to the? seller, even if the wheel was not physically moved to the? seller's house. What functions of money do Fei? satisfy? ?(Check all that apply.?)
answer
Medium of exchange. Store of value. Unit of account.
question
Imagine that the chairperson of the Federal Reserve announced? that, as of the following? day, all currency in circulation in the United States would be worth 10 times its face denomination. For? example, a? $10 bill would be worth? $100; a? $100 bill would be worth? $1,000, etc.? Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts.? So, if you have? $500 in your checking? account, as of the following? day, your balance would be? $5,000, etc. Would you actually be 10 times better off on the day the announcement took? effect?
answer
No, because all prices would increase by a factor of 10 as? well, keeping the real value of your money constant.
question
According to the? BBC, inflation in the country of Zimbabwe reached an annualized rate of? 231,000,000 percent in October of 2008. Prices got so high that in January of? 2009, the? country's central banklong dash—the Reserve Bank of Zimbabwelong dash— introduced a? $100 trillion bill. Use the following link to read the summary of? Zimbabwe's experience with hyperinflation in? Wikipedia: ?http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe?). What was the root cause of hyperinflation in? Zimbabwe?
answer
There was an increase in the money supply in excess of the growth rate of real GDP.
question
What were some of the costs of the? hyperinflation? ?(Check all that apply?.)
answer
People spent time exchanging money multiple times per day. Businesses were forced to adjust prices several times per day. Price controls were applied.
question
What were some of the? benefits? ?(Check all that apply?.)
answer
The government gained the seignorage.
question
What were some of the adaptations that the country adopted to cope with the? situation? ?(Check all that apply?.)
answer
Redenominations of the Zimbabwean dollar. The use of foreign currencies for transactions. The use of the black market for many transactions.
question
How does fiat money differ from commodities like gold and silver that were used as? money?
answer
Fiat money is intrinsically? worthless, whereas gold and silver have intrinsic value.
question
If fiat money is intrinsically? worthless, then why is it? valuable?
answer
Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.
question
The M2 money supply is defined to include? ___________.
answer
currency in? circulation, checking? accounts, savings? accounts, travelers'? checks, and money market accounts.
question
Money makes a variety of economic transactions possible. In the following three? situations, determine whether money is involved in the transaction. In prison camps during World War? II, and in some prisons? today, cigarettes circulate among prisoners. For? example, an iPod might cost two cartons of? cigarettes, whereas a magazine might only cost two cigarettes. Which functions of money are cigarettes fulfilling in this? case? ?(Check all that apply?.)
answer
Medium of exchange. Unit of account. Store of value
question
Over the last 50? years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards? money?
answer
?No, because you credit cards are not assets.
question
Almost every? day, many people sign their names to little pieces of paper called? checks, which are then accepted in exchange for goods and services. Do these checks constitute? money?
answer
No, because checks simply represent a means of access to? money, not money itself.
question
Bitcoins are defined as a? "peer-to-peer decentralized digital? currency." The supply of bitcoins is not controlled by the government or any other central agency. The value of each bitcoin is determined on the basis of supply and demand and is defined in terms of dollars. New bitcoins can be generated through a process called? "mining." However, new bitcoins will not be created once there are a total of 21 million bitcoins in existence. Some commentators feel that bitcoins can eventually replace most of the major currencies in the world. What are some of the issues with bitcoins replacing major? currencies? ?(Check all that apply?.)
answer
Fiat money is generally worthless without a government decree that it is legal tender. The value of a bitcoin is highly volatile and so people that hold them may lose money. Bitcoin deposits are not insured by the government.
question
Traditional currencies are controlled by central banks. What is a potential problem of restricting the creation of bitcoins to a total of 21 million? bitcoins?
answer
Monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions.
question
Recall the discussion in the chapter about the? "quantity theory of? money." The quantity theory of money assumes that? ____________.
answer
the ratio of money supply to nominal GDP is exactly constant.
question
This implies that if the money supply grows by 10? percent, then nominal GDP needs to grow by ? .
answer
10 percent
question
It follows that the growth rate of money supply and the growth rate of nominal GDP will be the same. In this? case, inflation is? ____________.
answer
equal to the gap between the growth rate of money supply and the growth rate of real GDP.
question
If the growth rate of money supply is larger than the growth rate of real? GDP, the inflation rate is ? .
answer
positive
question
Are the predictions of the quantity theory of money borne out by historical? data?
answer
Yes, the? long-run data show a? one-for-one growth rate of money supply and inflation.
question
Hyperinflation is most likely caused by? ____________.
answer
large budget deficits financed by printing more money.
question
Which of the following are possible benefits of? inflation? ?(Check all that apply.?)
answer
There may be a reduction in real wages. Revenue is generated to the government when it prints money. There may be a reduction in the real interest rate.
question
The following table shows the cost of producing dollar notes of various denominations. As you can see in the? table, it costs only 12.7 cents to produce a? $100 bill. Suppose the government decided that it will print new notes to fund its fiscal deficit as well as all its ongoing expenditure. What would be the effects of such a? policy?
answer
Printing paper money has a small direct cost and so gives the government money to spend.
question
Identify a possible problem with this policy.
answer
Printing too much money may lead to a high rate of? inflation, reducing the amount of goods and services that the government can purchase with the newly printed notes.
question
An open market operation is? ____________.
answer
an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks.
question
The Federal Reserve conducts open market operations when it wants to? ____________.
answer
influence the federal funds rate.
question
The Federal Reserve is referred to as the? "lender of last? resort" because? ____________.
answer
banks borrow from the? Fed's discount window when other banks? won't lend to them.
question
The Federal Reserve influences the long-run real interest rate LOADING... through? ____________.
answer
the? short-term federal funds rate.
question
The chapter discusses different models of how people form their expectations regarding inflation. Consider the following two? investors, who are trying to forecast what inflation will be for next year. Sean reasons as? follows: ? "Inflation was 2.5 percent last year.? Therefore, I think it is likely to be 2.5 percent this? year." ?Carlos, on the other? hand, thinks this? way: "The economy has recovered from recession sufficiently that inflationary pressures are likely to build.? Likewise, a weaker dollar means that imports are going to be more expensive. I? don't think the Fed will risk slowing the recovery and raising unemployment by raising interest rates to fight inflation. ? So, in light of all these? factors, I expect inflation to increase to 5 percent next? year." How would you best describe how each investor is forming his expectations of? inflation? Sean is forming his forecast based on the adaptive expectations model of inflation and Carlos is forming his forecast based on the rational expectations model of inflation. What are possible criticisms of the way each investor is forming his? expectations? Economists might argue that
answer
Sean is not maximally? rational, and Carlos can not be as good at understanding how the economy works as he thinks he is.
question
Economic fluctuations are? ____________.
answer
short-run changes in the growth of GDP.
question
Recessions are periods in which the economy contracts ?, while economic expansions are defined as the periods between recessions . An economic expansion begins? ____________.
answer
at the end of a recession.
question
In the United? States, recessions are usually defined as? ____________.
answer
two consecutive quarters of negative growth in real GDP.
question
What does it mean to say that an economic fluctuation involves the? co-movement of many aggregate macroeconomic? variables?
answer
These variables grow or contract together during booms and recessions.
question
The duration of an economic fluctuation? ____________.
answer
has limited predictability.
question
Using sophisticated statistical? techniques, economists can usually predict? ____________.
answer
the end of a recession.
question
Which of the following characteristics of economic fluctuations does the Great Depression? illustrate? ?(Check all that apply?.)
answer
Limited predictability. Persistence. ?Co-movement in economic aggregates.
question
Go to FRED?, which shows the U.S. unemployment rate since 1948. Every recession during this period is shown by the gray bars on the graph. ?*Real-time data provided by Federal Reserve Economic Data? (FRED), Federal Reserve Bank of Saint Louis. Does the behavior of the unemployment rate illustrate the principle of? co-movement discussed in the? chapter?
answer
?Yes, because when real GDP? declines, unemployment increases.
question
Economic variables are sometimes divided into? "leading indicators" and? "lagging indicators." Leading indicators are variables that start to change before an economic expansion or contraction. Lagging indicators change only when an expansion or contraction is well? underway, or even about to reverse. Based on the? graph, is unemployment a leading or lagging indicator of? recessions?
answer
Lagging indicator.
question
Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to? encounter? ?(Check all that apply?.)
answer
It might be difficult to agree on how many car washes is equivalent to painting a house. You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return. It may take a lot of time to negotiate and finally settle on a deal that you both find fair.
question
Some barter Web sites allow the use of? "barter dollars." The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified? above?
answer
Yes, because you could both pay and be paid in? "barter dollars."
