Test bank monetary economics and global economy 9th

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Macroeconomics, 9e, Global Edition (Abel/Bernanke/Croushore) Chapter Introduction to Macroeconomics 1.1 What Macroeconomics Is About 1) The two major reasons for the tremendous growth in output in the U.S economy over the last 125 years are A) population growth and low inflation B) population growth and increased productivity C) low unemployment and low inflation D) low inflation and low trade deficits Answer: B Diff: Topic: Section: 1.1 Question Status: Previous Edition 2) The main reason that the United States has such a high standard of living is A) low unemployment B) high average labor productivity C) low inflation D) high government budget deficits Answer: B Diff: Topic: Section: 1.1 Question Status: Previous Edition 3) Which of the following factors are most important for determining the economic growth of a country? A) The country's level of resources B) The independence of the country's central bank C) The country's rates of saving and investment D) The level of sophistication of a country's financial markets Answer: C Diff: Topic: Section: 1.1 Question Status: New 4) Average labor productivity is the A) amount of workers per machine B) amount of machines per worker C) ratio of employed to unemployed workers D) amount of output per worker Answer: D Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 5) In analyzing macroeconomic data during the past year, you have discovered that average labor productivity fell, but total output increased What was most likely to have caused this? A) There is nothing unusual in this outcome because this is what normally occurs B) The capital—output ratio probably rose C) There was an increase in labor input D) Unemployment probably increased Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 6) In which of the following periods did average labor productivity in the United States grow the fastest? A) 1929 to 1935 B) 1949 to 1973 C) 1973 to 1995 D) 1995 to 2008 Answer: B Diff: Topic: Section: 1.1 Question Status: Previous Edition 7) The most direct effect of an increase in the growth rate of average labor productivity would be an increase in A) the inflation rate B) the unemployment rate C) the long-run economic growth rate D) imported goods Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 8) Short-run contractions and expansions in economic activity are called A) recessions B) expansions C) deficits D) the business cycle Answer: D Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 9) When national output rises, the economy is said to be in A) an expansion B) a deflation C) an inflation D) a recession Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 10) When national output declines, the economy is said to be in A) an expansion B) a deflation C) an inflation D) a recession Answer: D Diff: Topic: Section: 1.1 Question Status: New 11) Which of the following best describes a typical business cycle? A) Economic expansions are followed by economic contractions B) Inflation is followed by unemployment C) Trade surpluses are followed by trade deficits D) Stagflation is followed by inflationary economic growth Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 12) During recessions, the unemployment rate and output A) rises; falls B) rises; rises C) falls; rises D) falls; falls Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 13) The number of unemployed divided by the labor force equals A) the inflation rate B) the labor force participation rate C) the unemployment rate D) the misery index Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 14) The unemployment rate is the A) number of unemployed divided by the number of employed B) number of employed divided by the number of unemployed C) number of unemployed divided by the labor force D) labor force divided by the number of unemployed Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 15) The highest and most prolonged period of unemployment in the United States over the last 125 years occurred during A) World War II B) the 1890s Depression C) the 1990-1991 recession D) the Great Depression of the 1930s Answer: D Diff: Topic: Section: 1.1 Question Status: Previous Edition 16) During the Great Depression, the unemployment rate for the United States peaked at approximately A) 10% B) 70% C) 45% D) 25% Answer: D Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 17) If a city has 3293 unemployed people and 73,177 in its labor force, then the city's unemployment rate equals A) 45.0% B) 4.5% C) 4.3% D) 0.45% Answer: B Diff: Topic: Section: 1.1 Question Status: New 18) If a city has 3293 unemployed people and 69,884 employed people, then the city's unemployment rate equals A) 45.0% B) 4.5% C) 4.3% D) 0.45% Answer: B Diff: Topic: Section: 1.1 Question Status: New 19) A country is said to be experiencing inflation when A) prices of most goods and services are rising over time B) prices of most goods and services are falling over time C) total output is rising over time D) total output is falling over time Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 20) From 1800 to 1940, the price level in the United States A) trended neither upward nor downward B) fluctuated wildly C) declined slowly D) increased slowly Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 21) Before World War II, the average level of prices in the United States usually A) fell during wartime and rose during peacetime B) fell during wartime and fell during peacetime C) rose during wartime and fell during peacetime D) rose during wartime and rose during peacetime Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 22) A country is said to be experiencing inflation when A) prices of most goods and services are rising over time B) prices of most goods and services are falling over time C) total output is rising over time D) total output is falling over time Answer: A Diff: Topic: Section: 1.1 Question Status: New 23) A country is said to be experiencing deflation when A) prices of most goods and services are rising over time B) prices of most goods and services are falling over time C) total output is rising over time D) total output is falling over time Answer: B Diff: Topic: Section: 1.1 Question Status: Previous Edition 24) The inflation rate is the A) percent increase in the average level of prices over a year B) percent increase in output over a year C) percent increase in the unemployment rate over a year D) price level divided by the level of output Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 25) If the price level was 100 in 2014 and 102 in 2015, the inflation rate was A) 102% B) 20% C) 2% D) 0.2% Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 26) A closed economy is a national economy that A) doesn't interact economically with the rest of the world B) has a stock market that is not open to traders from outside the country C) has extensive trading and financial relationships with other national economies D) has not established diplomatic relations with other national economies Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 27) An open economy is a national economy that A) doesn't interact economically with the rest of the world B) has a stock market that is open to traders from anywhere in the world C) has extensive trading and financial relationships with other national economies D) has established diplomatic relations with most other national economies Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 28) An economy that doesn't interact economically with the rest of the world is called economy A) a closed B) an open C) a surplus D) an authoritarian Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 29) U.S exports are goods and services A) produced abroad and sold to Americans B) produced in the United States and sold to Americans C) produced abroad and sold to foreigners D) produced in the United States and sold to foreigners Answer: D Diff: Topic: Section: 1.1 Question Status: New 30) U.S imports are goods and services A) produced abroad and sold to Americans B) produced in the United States and sold to Americans C) produced abroad and sold to foreigners D) produced in the United States and sold to foreigners Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 31) Following World War I and World War II, the United States had a A) small trade surplus B) small trade deficit C) large trade deficit D) large trade surplus Answer: D Diff: Topic: Section: 1.1 Question Status: Previous Edition 32) In the 1980s, 1990s, and 2000s, the United States has had a A) small trade surplus B) small trade deficit C) large trade deficit D) large trade surplus Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 33) A country has a trade surplus when A) imports exceed exports B) imports equal exports C) exports exceed imports D) imports equal zero Answer: C Diff: Topic: Section: 1.1 Question Status: Previous Edition 34) A country has a trade deficit when A) imports exceed exports B) imports equal exports C) exports exceed imports D) exports are zero Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 35) Data on exports and imports for the United States over the period from 1890 to 2008 show that A) the United States had large trade deficits throughout this entire period B) the United States had large trade surpluses throughout this entire period C) the percentage of total output exported by U.S firms fell dramatically during World War I and World War II D) a higher percentage of U.S goods was exported in recent years than in earlier years Answer: D Diff: Topic: Section: 1.1 Question Status: Previous Edition 36) A central bank is an institution that A) pays for government expenditures B) controls a nation's monetary policy C) runs a country's stock market D) determines a nation's fiscal policy Answer: B Diff: Topic: Section: 1.1 Question Status: Previous Edition Copyright © 2017 Pearson Education, Ltd 37) In the United States, monetary policy is determined by A) the Federal Reserve B) the president C) private citizens D) the Treasury Department Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 38) The peak in U.S government spending as a percent of GDP occurred during A) World War II B) the 1960s war on poverty C) the Great Depression D) the war against Iraq in the 2000s Answer: A Diff: Topic: Section: 1.1 Question Status: Previous Edition 39) Why were the U.S government budget deficits of the 1980s and early 1990s so unusual from a historical point of view? A) It was the first time the U.S government had ever run deficits B) In the past, deficits were usually that large only in wartime C) It was the first time that deficits were accompanied by very high rates of inflation D) It was the first time that deficits diverted funds from other productive uses, such as investment in modern equipment Answer: B Diff: Topic: Section: 1.1 Question Status: Previous Edition 40) Critics of the government's fiscal policies argued that government deficits A) prevented capital from flowing into the United States B) were linked to the excess of imports over exports that occurred in the 1980s C) caused the level of unemployment in the United States to increase during the 1980s D) had directly contributed to a decline in the level of demand in the American economy Answer: B Diff: Topic: Section: 1.1 Question Status: Previous Edition 10 Copyright © 2017 Pearson Education, Ltd 20) Assume that the lost output due to tax distortions is proportional to the square of the tax rate If the average cost of the distortion created by taxes is currently $1000, and the tax rate is increased from 40% to 50%, the average cost of the distortion created by taxes will increase to A) $383.33 B) $450.00 C) $640 D) $1562.50 Answer: D Diff: Topic: Section: 15.2 Question Status: Previous Edition 21) The average cost of the distortion created by taxes A) increases proportionately with the tax rate B) is lower when the tax rate is constant than when it fluctuates C) is higher when the tax rate is constant than when it fluctuates D) equals the square root of the tax rate Answer: B Diff: Topic: Section: 15.2 Question Status: Previous Edition 22) An example of tax smoothing is provided by evidence of A) temporary changes in defense expenditures by the government B) reductions in tax rates prior to presidential elections C) Keynesian tax cuts designed to help the economy recover from a recession D) reliance on debt financing rather than taxation during World War II Answer: D Diff: Topic: Section: 15.2 Question Status: Previous Edition 23) The idea that all aspects of economic behavior, such as labor supply, saving, and investment, respond to economic incentives, especially tax rates, is known as A) New Keynesian economics B) new classical economics C) tax-structured classical economics D) supply-side economics Answer: D Diff: Topic: Section: 15.2 Question Status: New 13 Copyright © 2017 Pearson Education, Ltd 24) The graph plotting the tax rate on the horizontal axis and tax revenues on the vertical axis, which was used by supply-side economists to suggest that tax rates were too high, in known as the A) Beveridge curve B) Phillips curve C) Taylor rule D) Laffer curve Answer: D Diff: Topic: Section: 15.2 Question Status: New 25) U.S data suggest that the U.S economy is located where on the Laffer curve? A) On the right side, after the peak in tax revenue B) On the left side, before the peak in tax revenue C) At the peak in tax revenue D) The economy was on the right side before the 1980s and on the left side after 1980 Answer: B Diff: Topic: Section: 15.2 Question Status: New 26) Suppose that all workers place a value on their leisure of 75 goods per day The production function relating output per day Y to the number of people working per day N is Y = 500N - 0.4 N2, and the marginal product of labor is MPN = 500 - 0.8 N A 25% tax is levied on wages (a) How much is output per day? (b) In terms of lost output, what is the cost of the distortion introduced by this tax? Answer: (a) 150,000 (b) 2734 Diff: Topic: Section: 15.2 Question Status: Previous Edition 14 Copyright © 2017 Pearson Education, Ltd 27) Suppose that the federal income tax on individuals is set up as follows: Income above Income below Taxes $8000 0.10 × income $8000 $35,000 $800 + [0.15 × (income - $8000)] $35,000 & up $4850 + [0.25 × (income - $35,000)] Calculate the average tax rate and marginal tax rate for workers with the following levels of income: (a) $6500 (b) $27,000 (c) $72,000 (d) $250,000 Answer: (a) MTR = 10 (b) T = 800 + [(27,000 - 8000) × 15] = 3650 ATR = 3650/27,000 = 135 MTR = 15 (c) T = 4850 + [(72,000 - 35,000) × 25] = 14,100 ATR = 14,100/72,000 = 196 MTR = 25 (d) T = 4850 + [(250,000 - 35,000) × 25] = 58,600 ATR = 58,600/250,000 = 2344 MTR = 25 Diff: Topic: Section: 15.2 Question Status: Previous Edition 15.3 Government Deficits and Debt 1) The total value of government bonds outstanding at any particular time is called the A) government debt B) government deficit C) seignorage revenue D) yield curve Answer: A Diff: Topic: Section: 15.3 Question Status: Previous Edition 2) From 1945 to 1995, the debt—GDP ratio in the United States A) steadily fell B) steadily increased C) fell from 1945 until around 1970 and rose thereafter D) fell from 1945 until around 1980 and rose thereafter Answer: D Diff: Topic: Section: 15.3 Question Status: New 15 Copyright © 2017 Pearson Education, Ltd 3) From 1995 to 2001, the debt—GDP ratio in the United States A) steadily fell B) steadily increased C) was about constant D) fell from 1995 to 1998, then rose sharply Answer: A Diff: Topic: Section: 15.3 Question Status: New 4) From 2001 to 2015, the debt—GDP ratio in the United States A) steadily fell B) steadily increased C) was about constant D) fell from 1995 to 1998, then rose sharply Answer: B Diff: Topic: Section: 15.3 Question Status: New 5) Increases in the debt—GDP ratio are primarily caused by A) a high growth rate of GDP B) a high government deficit relative to GDP C) increases in government borrowing through bonds D) increases in interest rates Answer: B Diff: Topic: Section: 15.3 Question Status: Previous Edition 6) If the deficit is 0.02 times GDP, the existing debt—GDP ratio is 0.5, and the growth rate of nominal GDP is 0.03, then the change in the debt—GDP ratio is A) +0.05 B) +0.025 C) D) -0.025 Answer: C Diff: Topic: Section: 15.3 Question Status: Previous Edition 16 Copyright © 2017 Pearson Education, Ltd 7) If the deficit is 0.1 times GDP, the existing debt—GDP ratio is 0.5, and the growth rate of nominal GDP is 0.04, then the change in the debt—GDP ratio is A) +0.08 B) +0.075 C) D) -0.075 Answer: A Diff: Topic: Section: 15.3 Question Status: Previous Edition 8) If the deficit is 0.08 times GDP, the existing debt—GDP ratio is 0.8, and the growth rate of nominal GDP is 0.05, then the change in the debt—GDP ratio is A) +0.08 B) +0.04 C) D) -0.08 Answer: B Diff: Topic: Section: 15.3 Question Status: Previous Edition 9) A Social Security system in which payroll taxes that workers and their employers pay in go directly to retirees and other beneficiaries is known as A) a pay-as-you-go system B) an individual-account system C) a primary-deficit system D) a social-lockbox system Answer: A Diff: Topic: Section: 15.3 Question Status: Previous Edition 10) According to current projections, in about 2034, the Social Security trust fund will A) own all the government bonds that have been issued B) own about half of all the stock issued on the New York Stock Exchange C) run out of assets D) start to run deficits Answer: C Diff: Topic: Section: 15.3 Question Status: Revised 17 Copyright © 2017 Pearson Education, Ltd 11) Which of the following policies would not prevent the Social Security trust fund from running out of assets? A) Reduce promised benefits B) Reduce taxes C) Increase taxes D) Earn a higher rate of return Answer: B Diff: Topic: Section: 15.3 Question Status: Previous Edition 12) Social Security benefits could be reduced in each of the following ways except A) cutting the promised monthly benefit B) increasing the retirement age C) investing the trust fund in the stock market D) reducing the degree to which benefits are adjusted for inflation Answer: C Diff: Topic: Section: 15.3 Question Status: Previous Edition 13) To earn a higher return on the assets in the Social Security trust fund, a suggestion has been made to allow the trust fund to A) buy government bonds B) sell limited partnerships C) sell insurance D) invest in the stock market Answer: D Diff: Topic: Section: 15.3 Question Status: Previous Edition 14) Recent proposals to allow the Social Security trust fund to invest in the stock market (instead of buying government bonds) are based on the premise that A) the returns to stocks are higher than the returns to bonds B) the returns to stocks aren't as risky as the returns to bonds C) the transactions costs for investing in stocks are lower than the transactions costs for investing in bonds D) stocks are more liquid than bonds Answer: A Diff: Topic: Section: 15.3 Question Status: Previous Edition 18 Copyright © 2017 Pearson Education, Ltd 15) A decreased government deficit created by a lump-sum tax increase will increase national saving if A) the value of government bonds outstanding grows slower than the public's wealth B) it causes consumption to fall C) the government runs a primary surplus as a result D) the real interest rate is less than the growth rate of real GNP Answer: B Diff: Topic: Section: 15.3 Question Status: Previous Edition 16) According to the Ricardian equivalence proposition, current deficits A) will not affect consumption or national saving B) will affect consumption but not national saving C) will affect national saving but not consumption D) will affect both consumption and national saving Answer: A Diff: Topic: Section: 15.3 Question Status: Previous Edition 17) According to the Ricardian equivalence proposition, a government budget deficit created by a temporary tax cut A) does not affect desired national saving B) does not affect expected future taxes C) reduces desired investment spending D) increases the real interest rate Answer: A Diff: Topic: Section: 15.3 Question Status: Previous Edition 18) Deficits are a burden on future generations if they A) cause higher rates of inflation to occur B) are not used for government capital formation C) cause national saving to fall D) are always a primary government deficit Answer: C Diff: Topic: Section: 15.3 Question Status: Previous Edition 19 Copyright © 2017 Pearson Education, Ltd 19) The stimulus package of 2009 had the effect of A) causing higher rates of inflation to occur B) giving new foreign aid to help less developed countries C) significantly raising the debt to GDP ratio D) reducing the primary government deficit Answer: C Diff: Topic: Section: 15.3 Question Status: Previous Edition 20) Why is the Social Security system in crisis at a time when it's running large surpluses? What's the source of the problem? What solutions have been proposed? Answer: The Social Security system is in a crisis even though it's running large surpluses because its surpluses will turn to large deficits within the next 20 years The source of the problem is that the baby-boom generation will begin to retire, greatly increasing the Social Security benefits that will be paid out Potential solutions include reducing benefits, increasing taxes, or getting a higher return for the Social Security trust fund by investing in the stock market Diff: Topic: Section: 15.3 Question Status: Previous Edition 21) Who bears the burden of the government debt? Explain why Under what circumstances is there no burden to be borne? Answer: If taxes must be raised in the future to pay off the debt, the distortions from higher tax rates are a burden on future generations Also, if bondholders are on average wealthier than taxpayers, there will be a redistribution of wealth as the debt is repaid Finally, if the debt reduces national saving, then investment will be lower, which reduces the capital stock, which means a lower standard of living for future generations But if taxes are lump-sum and Ricardian equivalence holds, there is no burden, since then private saving rises to prevent the debt from having any effects on national saving Diff: Topic: Section: 15.3 Question Status: Previous Edition 22) What are the main reasons (give at least three) that Ricardian equivalence might not hold? Answer: People may face borrowing constraints, they may be shortsighted, they may fail to leave bequests, or their economic behavior may be affected because taxes aren't lump-sum Diff: Topic: Section: 15.3 Question Status: Previous Edition 20 Copyright © 2017 Pearson Education, Ltd 23) Suppose that real GDP is 10,000 and remains constant, nominal GDP is initially 30,000, inflation is 3%, and the debt—GDP ratio is 0.7 Find the largest nominal deficit that the government can run without raising the debt—GDP ratio Answer: change in debt/GDP = deficit/GDP - (debt/GDP × growth rate) = deficit/30,000 - (0.7 × 03) 021 = deficit/30,000 deficit = 021 × 30,000 = 630 Diff: Topic: Section: 15.3 Question Status: Previous Edition 24) Find the largest nominal deficit that the government can run without raising the debt—GDP ratio, under each of the following sets of assumptions: (a) Suppose that real GDP is 20,000 and remains constant, nominal GDP is initially 30,000, inflation is 4%, and the debt—GDP ratio is 1.2 (b) Suppose that nominal GDP growth is 5% and outstanding nominal debt is 1500 Answer: Use the equation: change in debt/GDP = deficit/GDP - (debt/GDP × g), where g is the growth rate of GDP (a) = deficit/30,000 - (1.2 × 0.04), so 0.048 = deficit/30,000, so deficit = 1440 (b) = deficit/GDP - (1500/GDP) × 0.05); so deficit = 75 Diff: Topic: Section: 15.3 Question Status: Previous Edition 15.4 Deficits and Inflation 1) Seignorage is the revenue a government raises by A) taxation B) printing money C) borrowing money D) charging fees for services Answer: B Diff: Topic: Section: 15.4 Question Status: Previous Edition 2) The revenue that a government raises by printing money is called A) seignorage B) monetary revenue C) currency credit D) currency inflation Answer: A Diff: Topic: Section: 15.4 Question Status: Previous Edition 21 Copyright © 2017 Pearson Education, Ltd 3) State governments in the United States can raise revenue by all the following means except A) increasing income taxes B) increasing taxes on corporate profits C) increasing sales taxes D) increasing the money supply Answer: D Diff: Topic: Section: 15.4 Question Status: Previous Edition 4) The relationship between the government deficit and the change in the monetary base is A) deficit equals change in government debt held by the public minus change in monetary base B) deficit equals change in government debt held by the public plus change in monetary base C) deficit equals change in government debt outstanding plus change in monetary base D) deficit equals change in government debt outstanding minus change in monetary base Answer: B Diff: Topic: Section: 15.4 Question Status: Previous Edition 5) In which case would you be most likely to expect inflation to occur? A) The government runs a sustained government deficit by lowering taxes B) The government runs a sustained government deficit by increasing purchases C) The government runs a sustained primary deficit by increasing purchases D) The government funds its sustained deficit by increasing the money supply Answer: D Diff: Topic: Section: 15.4 Question Status: Previous Edition 6) In an all-currency economy in which real output and the real interest rate are fixed and the rates of money growth and inflation are constant, the inflation rate equals A) the real interest rate B) the nominal interest rate C) the growth rate of the nominal money supply D) the level of real seignorage revenue Answer: C Diff: Topic: Section: 15.4 Question Status: Previous Edition 22 Copyright © 2017 Pearson Education, Ltd 7) The real seignorage collected by the government in an all-currency economy is the product of A) the rate of inflation and the real supply of government bonds B) the rate of inflation and the real money supply C) the debt—GDP ratio and the real money supply D) the debt—GDP ratio and the rate of inflation Answer: B Diff: Topic: Section: 15.4 Question Status: Previous Edition 8) The inflation tax is primarily a tax on A) government bonds B) Social Security recipients C) money D) real income Answer: C Diff: Topic: Section: 15.4 Question Status: Previous Edition 9) Assume that in an all-currency economy the real interest rate is 4%, the expected rate of inflation is 8%, and the nominal interest rate is 12% The monetary base equals $50 billion The real seignorage revenue collected by the government would equal A) $4 billion B) $6 billion C) $8 billion D) $12 billion Answer: A Diff: Topic: Section: 15.4 Question Status: Previous Edition 10) Real money demand in the economy is given by L = 0.5Y - 2500i, where Y is real income and i is the nominal interest rate In equilibrium, real money demand L equals real money supply M/P Suppose that Y equals 1000 and the real interest rate is 0.02 At what rate of inflation is seignorage maximized? A) 0.05 B) 0.075 C) 0.09 D) 0.10 Answer: C Diff: Topic: Section: 15.4 Question Status: Previous Edition 23 Copyright © 2017 Pearson Education, Ltd 11) Real money demand in the economy is given by L = 0.5Y - 2500i, where Y is real income and i is the nominal interest rate In equilibrium, real money demand L equals real money supply M/P Suppose that Y equals 1000 and the real interest rate is 0.02 What is the maximum amount of seignorage revenue? A) 11.11 B) 20.25 C) 22.25 D) 24.75 Answer: B Diff: Topic: Section: 15.4 Question Status: Previous Edition 12) Consider an economy that has the following monetary data The monetary base and the money supply are expected to grow at a constant rate of 20% per year Inflation and expected inflation are 20% per year Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest What is the cost to the public of the inflation tax? A) $60 B) $140 C) $190 D) $200 Answer: D Diff: Topic: Section: 15.4 Question Status: Previous Edition 24 Copyright © 2017 Pearson Education, Ltd 13) Consider an economy that has the following monetary data The monetary base and the money supply are expected to grow at a constant rate of 20% per year Inflation and expected inflation are 20% per year Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest What is the nominal value of seignorage over the year? A) $10 B) $60 C) $70 D) $200 Answer: C Diff: Topic: Section: 15.4 Question Status: Previous Edition 14) Whether real seignorage revenue increases when the rate of money growth increases depends on whether A) the rise in real money holdings outweighs the decline in inflation B) the rise in inflation outweighs the decline in real money holdings C) the rise in inflation ratio outweighs the decline in the real supply of currency D) the rise in the real supply of currency outweighs the decline in inflation Answer: B Diff: Topic: Section: 15.4 Question Status: Previous Edition 15) When did the United States suffer hyperinflation? A) Revolutionary War B) War of 1812 C) World War II D) Korean War Answer: A Diff: Topic: Section: 15.4 Question Status: Previous Edition 25 Copyright © 2017 Pearson Education, Ltd 16) When the United States engaged in quantitative easing from 2008 to 2014, rose sharply A) bank reserves B) inflation C) the unemployment rate D) the money supply Answer: A Diff: Topic: Section: 15.4 Question Status: New 17) When the United States engaged in quantitative easing from 2008 to 2014, why didn't the money supply rise sharply? A) Foreigners wanted all the new dollars created by the Federal Reserve B) Banks held the increased monetary base as excess reserves C) The Fed offset the increased monetary base by raising reserve requirements D) The Fed offset the increased monetary base by buying foreign currency Answer: B Diff: Topic: Section: 15.4 Question Status: New 18) When the economy strengthens, following the period of quantitative easing, the Federal Reserve plans to keep a lid on money growth by A) increasing reserve requirements B) selling dollars in foreign-exchange markets C) increasing the interest rate paid on reserves D) buying dollars in foreign-exchange markets Answer: C Diff: Topic: Section: 15.4 Question Status: New 19) How is real seignorage revenue related to inflation? How does the quantity of real seignorage revenue change as inflation rises from zero to a positive level, to still higher levels? Answer: Real seignorage revenue is the inflation rate times the level of real money balances As inflation rises, real money balances decline Initially, as inflation rises from zero, real seignorage revenue rises, because inflation rises more than real money balances fall Real seignorage revenue continues to rise with higher inflation rates until it hits a point at which it begins to decline, because real money balances begin to fall more than inflation rises Diff: Topic: Section: 15.4 Question Status: Previous Edition 26 Copyright © 2017 Pearson Education, Ltd 20) Real money demand in the economy is given by L = 0.3Y - 600i, where Y is real income and i is the nominal interest rate In equilibrium, real money demand L equals real money supply M/P Suppose that Y equals 2000 and the real interest rate is 5% (a) At what rate of inflation is seignorage maximized? (b) What is the maximum amount of seignorage revenue? Answer: (a) 47.5% (b) 135.375 Diff: Topic: Section: 15.4 Question Status: Previous Edition 21) Consider an economy that has the following monetary data The monetary base and the money supply are expected to grow at a constant rate of 20% per year Inflation and expected inflation are 20% per year Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest (a) What is the cost to the public of the inflation tax? (b) What is the nominal value of seignorage over the year? (c) What is the profit to the banks from the inflation? Answer: (a) $200 (b) $70 (c) $130 Diff: Topic: Section: 15.4 Question Status: Previous Edition 27 Copyright © 2017 Pearson Education, Ltd ... microeconomics and macroeconomics is that A) microeconomics looks at supply and demand for goods, macroeconomics looks at supply and demand for services B) microeconomics looks at prices, macroeconomics looks... supplied and demanded in markets B) wages and prices adjust quickly to balance quantities supplied and demanded in markets C) prices, but not wages, adjust quickly to balance quantities supplied and. .. goods and services A) produced abroad and sold to Americans B) produced in the United States and sold to Americans C) produced abroad and sold to foreigners D) produced in the United States and
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