Boğaziçi University Department of Economics Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS Problem Set 6 Answer Key

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1 Boğziçi University Deprtment of Eonomis Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS Prolem Set 6 Answer Key 1. Any item tht people n use to trnsfer purhsing power from the present to the future is lle. meium of exhnge.. unit of ount.. store of vlue.. None of the ove is orret. 2. Whih of the following est illustrtes the onept of store of vlue?. You re preious-metls eler, n you re lwys wre of how mny ounes of pltinum tre for n oune of gol.. You sell items on eby, n your pries re stte in terms of ollrs.. You keep 6 ounes of gol in your sfe-eposit ox t the nk for emergenies.. None of the ove is orret. 3. When we mesure n reor eonomi vlue, we use money s the. liqui sset.. meium of exhnge.. unit of ount.. store of vlue. 4. Imgine n eonomy in whih: (1) piees of pper lle ollrs re the only thing tht uyers give to sellers when they uy goos n servies, so it woul e ommon to use, sy, 50 ollrs to uy pir of shoes; (2) pries re poste in terms of yrstiks, so you might wlk into groery store n see tht, toy, n pple is worth 2 yrstiks; n (3) yrstiks isintegrte overnight, so no yrstik hs ny vlue for more thn 24 hours. In this eonomy,. the yrstik is meium of exhnge ut it nnot serve s unit of ount.. the yrstik is unit of ount ut it nnot serve s store of vlue.. the yrstik is meium of exhnge ut it nnot serve s store of vlue, n the yollr is unit of ount.. the yollr is unit of ount, ut it is not meium of exhnge n it is not liqui sset. 5. If n eonomy uses silver s money, then tht eonomy s money. serves s store of vlue ut not s meium of exhnge.. serves s meium of exhnge ut not s unit of ount.. is ommoity money.. hs no intrinsi vlue.

2 6. The primry ifferene etween ommoity money n fit money is tht. ommoity money is meium of exhnge ut fit money is not.. fit money is meium of exhnge ut ommoity money is not.. ommoity money hs intrinsi vlue ut fit money oes not.. fit money hs intrinsi vlue ut ommoity money oes not. 7. Whih of the following is not inlue in M1?. urreny. emn eposits. svings eposits. trveler's heks 8. Whih of the following sttements is orret?. All items tht re inlue in M1 re inlue lso in M2.. All items tht re inlue in M2 re inlue lso in M1.. Creit rs re inlue in oth M1 n M2.. Svings eposits re inlue in oth M1 n M2. 9. Money mrket mutul funs re inlue in. M1 ut not M2.. M1 n M2.. M2 ut not M1.. neither M1 nor M An open-mrket purhse. inreses the numer of ollrs n the numer of ons in the hns of the puli.. inreses the numer of ollrs in the hns of the puli n ereses the numer of ons in the hns of the puli.. ereses the numer of ollrs n the numer of ons in the hns of the puli.. ereses the numer of ollrs in the hns of the puli n inreses the numer of ons in the hns of the puli. 11. In system of 100-perent-reserve nking,. nks o not ept eposits.. nks o not influene the supply of money.. lons re the only sset item for nks.. All of the ove re orret.

3 12. Bnks re le to rete money only when. interest rtes re ove 2%.. the Fe sells U.S. government ons.. the reserve rtio is 100%.. only frtion of eposits re hel in reserve. 13. Suppose the nking system urrently hs $400 illion in reserves, the reserve requirement is 8 perent, n exess reserves mount to $5 illion. Wht is the level of eposits?. $5,000 illion. $4,937.5 illion. $5,062.5 illion. $4,995 illion 14. If nk tht esires to hol no exess reserves n hs just enough reserves to meet the require reserve rtio of 15 perent reeives eposit of $600, it hs. $600 inrese in exess reserves n no inrese in require reserves.. $600 inrese in require reserves n no inrese in exess reserves.. $510 inrese in exess reserves n $90 inrese in require reserves.. $90 inrese in exess reserves n $510 inrese in require reserves. 15. A nk hs n 8 perent reserve requirement, $10,000 in eposits, n hs lone out ll it n given the reserve requirement.. It hs $80 in reserves n $9,920 in lons.. It hs $800 in reserves n $9,200 in lons.. It hs $1,250 in reserves n $8,750 in lons.. None of the ove is orret. 16. The mnger of the nk where you work tells you tht your nk hs $6 million in exess reserves. She lso tells you tht the nk hs $400 million in eposits n $362 million ollrs in lons. Given this informtion you fin tht the reserve requirement must e. 44/ / / / Suppose the nking system urrently hs $300 illion in reserves, the reserve requirement is 5 perent, n exess reserves re $30 illion. Wht is the level of lons?. $270 illion. $5,400 illion. $6,000 illion. $5,100 illion

4 18. If the reserve requirement is 12 perent n nks esire to hol no exess reserves, when nk reeives new eposit of $1,000,. it must inrese its require reserves y more thn $150.. its totl reserves initilly inrese y $120.. it will e le to mke new lons up to mximum of $880.. None of the ove is orret. 19. Suppose the Fe requires nks to hol 9 perent of their eposits s reserves. A nk hs $18,000 of exess reserves n then sells the Fe Tresury ill for $9,000. How muh oes this nk now hve to len out if it eies to hol only require reserves?. $27,000. $27,190. $26,190. $9, The money multiplier equls. 1/R, where R represents the quntity of reserves in the eonomy.. 1/R, where R represents the reserve rtio for ll nks in the eonomy.. 1/(1+R), where R represents the quntity of reserves in the eonomy.. 1/(1+R), where R represents the reserve rtio for ll nks in the eonomy. 21. Whih of the following sttements is orret? In the speil se of the 100-perent reserve nking the money multiplier is. 0 n nks rete money.. 0 n nks o not rete money.. 1 n nks rete money. 1 n nks o not rete money. 22. If the reserve rtio is 5 perent, then $500 of itionl reserves n rete up to. $10,500 of new money.. $10,000 of new money.. $9,500 of new money.. $2,500 of new money. 23. If the reserve rtio is 20 perent, then $100 of new reserves n generte. $60 of new money in the eonomy.. $250 of new money in the eonomy.. $500 of new money in the eonomy.. $2,000 of new money in the eonomy.

5 24. If the reserve rtio is 4 perent, then $81,250 of new money n e generte y. $325 of new reserves.. $3,250 of new reserves.. $20, of new reserves.. $2,031,250 of new reserves. 25. In the ntion of Wiknm, the money supply is $80,000 n reserves re $18,000. Assuming tht people hol only eposits n no urreny, n tht nks hol no exess reserves, then the reserve requirement is. 29 perent perent.. 16 perent.. None of the ove is orret. Tle 1. Bnk of Plesntville Assets Liilities Reserves $3,000 Deposits $50,000 Lons 47, Refer to Tle 1. From the tle it follows tht the Bnk of Plesntville opertes in. frtionl-reserve nking system, sine its reserves re less thn its eposits.. frtionl-reserve nking system, sine its reserves re less thn its lons perent-reserve nking system, sine its ssets re equl to its liilities perent reserve nking system if the Fe s reserve requirement is 10 perent; otherwise, it opertes in frtionl-reserve nking system. 27. Refer to Tle 1. The Bnk of Plesntville s reserve rtio is. 6.4 perent perent perent perent. 28. Refer to Tle 1. Assume there is reserve requirement n the Bnk of Plesntville is extly in ompline with tht requirement. Assume the sme is true for ll other nks. Lstly, ssume people hol only eposits n no urreny. Wht is the money multiplier?

6 29. Refer to Tle 1. If the Fe s reserve requirement is 5 perent, then wht quntity of exess reserves oes the Bnk of Plesntville now hol?. $500. $250. $2,000. $3, Refer to Tle 1. Assume the Fe s reserve requirement is 5 perent n ll nks esies the Bnk of Plesntville re extly in ompline with the 5 perent requirement. Further ssume tht people hol only eposits n no urreny. Strting from the sitution s epite y the T-ount, if the Bnk of Plesntville eies to mke new lons so s to en up with no exess reserves, then y how muh oes the money supply eventully inrese?. $10, $13,000.. $8, $10, If the CB sells government ons to the puli, then reserves. inrese n the money supply inreses.. inrese n the money supply ereses.. erese n the money supply inreses.. erese n the money supply ereses. 32. When the Fe purhses $1000 worth of government ons from the puli, the U.S. money supply eventully inreses y. more thn $ extly $ less thn $ None of the ove re orret. 33. If the money multiplier is 3 n the Fe uys $50,000 worth of ons, wht hppens to the money supply?. it inreses y $100,000. it inreses y $150,000. it ereses y $100,000. it ereses y $200, When the Fe ereses the isount rte, nks will. orrow more from the Fe n len more to the puli. The money supply inreses.. orrow more from the Fe n len less to the puli. The money supply ereses.. orrow less from the Fe n len more to the puli. The money supply inreses.. orrow less from the Fe n len less to the puli. The money supply ereses.

7 35. Reserves inrese if the Feerl Reserve. rises the isount rte or utions more reit.. rises the isount rte ut not if it utions more reit.. lowers the isount rte or utions more reit.. lowers the isount rte ut not if it utions more reit. 36. Whih of the following oth inrese the money supply?. n inrese in the isount rte n n inrese in the interest rte on reserves. n inrese in the isount rte n erese in the interest rte on reserves. erese in the isount rte n n inrese in the interest rte on reserves. erese in the isount rte n erese in the interest rte on reserves 37. In frtionl-reserve nking system, n inrese in reserve requirements. inreses oth the money multiplier n the money supply.. ereses oth the money multiplier n the money supply.. inreses the money multiplier, ut ereses the money supply.. ereses the money multiplier, ut inreses the money supply. 38. Other things the sme, if reserve requirements re inrese, the reserve rtio. inreses, the money multiplier inreses, n the money supply inreses.. inreses, the money multiplier ereses, n the money supply ereses.. ereses, the money multiplier inreses, n the money supply inreses.. ereses, the money multiplier ereses, n the money supply inreses. 39. The mnger of the nk where you work tells you tht the nk hs $300 million in eposits n $255 million ollrs in lons. If the reserve requirement is 8.5 perent, how muh is the nk holing in exess reserves?. $15 million. $19.5 million. $25.5 million. $0 million 40. The money supply ereses if the Fe. sells Tresury ons. The lrger the reserve requirement, the lrger the erese will e.. sells Tresury ons. The smller the reserve requirement, the lrger the erese will e.. uys Tresury ons. The lrger the reserve requirement, the lrger the erese will e.. uys Tresury ons. The smller the reserve requirement, the lrger the erese will e. 41. When the prie level rises, the numer of ollrs neee to uy representtive sket of goos

8 . inreses, n so the vlue of money rises.. inreses, n so the vlue of money flls.. ereses, n so the vlue of money rises.. ereses, n so the vlue of money flls 42. When infltion rises people will. emn more money so the prie level rises.. emn more money so the prie level flls.. emn less money so the prie level rises.. emn less money so the prie level flls. 43. If P enotes the prie of goos n servies mesure in terms of money, then. 1/P represents the vlue of money mesure in terms of goos n servies.. P n e regre s the overll prie level.. n inrese in the vlue of money is ssoite with erese in P.. All of the ove re orret. 44. The supply of money inreses when. the prie level flls.. the interest rte inreses.. the CB mkes open-mrket purhses.. money emn inreses. 45. As the prie level ereses, the vlue of money. inreses, so people must hol less money to purhse goos n servies.. inreses, so people must hol more money to purhse goos n servies.. ereses, so people must hol more money to purhse goos n servies.. ereses, so people must hol less money to purhse goos n servies. 46. When the money mrket is rwn with the vlue of money on the vertil xis, s the prie level inreses, the vlue of money. inreses, so the quntity of money emne inreses.. inreses, so the quntity of money emne ereses.. ereses, so the quntity of money emne ereses.. ereses, so the quntity of money emne inreses. 47. When the money mrket is rwn with the vlue of money on the vertil xis, if the prie level is elow the equilirium level, there is n. exess emn for money, so the prie level will rise.

9 . exess emn for money, so the prie level will fll.. exess supply of money, so the prie level will rise.. exess supply of money, so the prie level will fll. 48. A erese in the money supply retes n exess. supply of money tht is eliminte y rising pries.. supply of money tht is eliminte y flling pries.. emn for money tht is eliminte y rising pries.. emn for money tht is eliminte y flling pries. 49. When the money mrket is rwn with the vlue of money on the vertil xis, if the Feerl Reserve uys ons, then the money supply urve. shifts rightwr, using the vlue of money mesure in terms of goos n servies to rise.. shifts rightwr, using the vlue of money mesure in terms of goos n servies to fll.. shifts leftwr, using the vlue of money mesure in terms of goos n servies to rise.. shifts leftwr, using the vlue of money mesure in terms of goos n servies to fll. 50. On given morning, Frno sol 40 pirs of shoes for totl of $80 t his shoe store.. The $80 is rel vrile. The quntity of shoes is nominl vrile.. The $80 is nominl vrile. The quntity of shoes is rel vrile.. Both the $80 n the quntity of shoes re nominl vriles.. Both the $80 n the quntity of shoes re rel vriles. 51. When shopping you notie tht pir of jens osts $20 n tht tee-shirt osts $10. You ompute the prie of jens reltive to tee-shirts.. The ollr prie of jens n the reltive prie of jens re oth nominl vriles.. The ollr prie of jens n the reltive prie of jens re oth rel vriles.. The ollr prie of jens is nominl vrile; the reltive prie of jens is rel vrile.. The ollr prie of jens is rel vrile; the reltive prie of jens is nominl vrile. 52. Your nominl wge inreses from $12 per hour to $13 per hour. At the sme time, the prie level inreses from 140 to 147. As result,. The numer of ollrs you reeive inreses n the purhsing power of the ollrs you reeive inreses.. The numer of ollrs you reeive inreses n the purhsing power of the ollrs you reeive ereses.. The numer of ollrs you reeive ereses n the purhsing power of the ollrs you reeive inreses.. The numer of ollrs you reeive ereses n the purhsing power of the ollrs you reeive ereses.

10 53. Chnges in nominl vriles re etermine mostly y the quntity of money n the monetry system oring to. oth the lssil ihotomy n the quntity theory of money.. the lssil ihotomy, ut not the quntity theory of money.. the quntity theory of money, ut not the lssil ihotomy.. neither the lssil ihotomy nor the quntity theory of money. 54. The veloity of money is. the rte t whih the Fe puts money into the eonomy.. the sme thing s the long-term growth rte of the money supply.. the money supply ivie y nominl GDP.. the verge numer of times per yer ollr is spent. 55. If M = 3,000, P = 2, n Y = 6,000, wht is veloity?. 1/ If M = 12,000, P = 3, n Y = 32,000, then veloity = Veloity will rise if money hnges hns more frequently Veloity will rise if money hnges hns less frequently.. 8. Veloity will rise if money hnges hns more frequently.. 8. Veloity will rise if money hnges hns less frequently. 57. If veloity = 4, the quntity of money = 20,000, n the prie level = 2.5, then the rel vlue of output is. 2, , , , Aoring to the ssumptions of the quntity theory of money, if the money supply inreses y 5 perent, then. nominl n rel GDP woul rise y 5 perent.. nominl GDP woul rise y 5 perent; rel GDP woul e unhnge.. nominl GDP woul e unhnge; rel GDP woul rise y 5 perent.. neither nominl GDP nor rel GDP woul hnge.

11 59. The money supply in Mukln is $100 illion. Nominl GDP is $800 illion n rel GDP is $200 illion. Wht re the prie level n veloity in Mukln?. The prie level n veloity re oth 8.. The prie level is 2 n veloity is 8.. The prie level n veloity re oth 4.. The prie level is 4 n veloity is Other things the sme, erese in veloity mens tht. the rte t whih money hnges hns flls, so the prie level rises.. the rte t whih money hnges hns flls, so the prie level flls.. the rte t whih money hnges hns rises, so the prie level rises.. the rte t whih money hnges hns rises, so the prie level flls. 61. Suppose the money supply triple, ut t the sme time veloity oule n rel GDP ws unhnge. Aoring to the quntity eqution the prie level. is 1.5 times its ol vlue.. is 3 times its ol vlue.. is 6 times its ol vlue.. is the sme s its ol vlue. 62. Whih of the following is not implie y the quntity eqution?. If veloity is stle n money is neutrl, n inrese in the money supply retes proportionl inrese in nominl output.. If veloity is stle n money is neutrl, n inrese in the money supply retes proportionl inrese in the prie level.. With onstnt money supply n output, n inrese in veloity retes n inrese in the prie level.. With onstnt money supply n veloity, n inrese in output retes proportionl inrese in the prie level. 63. The lim tht inreses in the growth rte of the money supply inrese nominl interest rtes ut not rel interest rtes is known s the. Friemn Effet.. Hume Effet.. Fisher Effet.. the infltion tx. 64. The infltion tx. is n lterntive to inome txes n government orrowing.. txes most those who hol the most money.. is the revenue rete when the government prints money.

12 . All of the ove re orret. 65. Uner the ssumptions of the Fisher effet n monetry neutrlity, if the money supply growth rte flls, then. oth the nominl n the rel interest rte fll.. neither the nominl nor the rel interest rte fll.. the nominl interest rte flls, ut the rel interest rte oes not.. the rel interest rte flls, ut the nominl interest rte oes not. 66. Suppose tht monetry neutrlity n the Fisher effet oth hol. An inrese in the money supply growth rte inreses. the infltion rte n growth of rel GDP.. the infltion rte ut not the growth rte of rel GDP.. the growth rte of rel GDP, ut not the infltion rte.. neither the infltion rte nor the growth rte of rel GDP.