chapters 28, 29 & 30 review packet€¦ · web viewefficiency wage theory suggests that it is...

Chapters 28, 29 & 30 Review packet

Multiple ChoiceIdentify the letter of the choice that best completes the statement or answers the question.

____ 1. The natural rate of unemployment is thea. unemployment rate that would prevail with zero inflation.b. rate associated with the highest possible level of GDP.c. difference between the long-run and short-run unemployment rates.d. amount of unemployment that the economy normally experiences.

____ 2. Sam just lost his job, but isn't yet looking for a new one. Sam isa. counted as unemployed and part of the labor force.b. counted as unemployed, but not part of the labor force.c. not counted as unemployed, but counted as part of the labor force.d. not counted as unemployed or counted as part of the labor force.

____ 3. Who would be included in the labor force?a. Karen, who works most of the week in a steel factoryb. Beth, who is waiting for her new job at the bank to startc. Dave, who does not have a job, but is looking for workd. All of the above are included in the labor force.

____ 4. Sally is on a temporary layoff from her factory job. If Sally participates in the BLS survey, she will be classified asa. unemployed and in the labor force.b. unemployed and out of the labor force.c. employed and in the labor force.d. employed and out of the labor force.

____ 5. Which of the following correctly ranks categories from smallest to largest according to recent U.S. statistics?a. unemployed, employed, not in labor forceb. unemployed, not in labor force, employedc. not in labor force, employed, unemployedd. not in labor force, unemployed, employed

____ 6. A college student who is not working or looking for a job is counted asa. neither employed nor part of the labor force.b. unemployed and in the labor force.c. unemployed, but not in the labor force.d. employed and in the labor force.

____ 7. The labor-force participation rate is defined asa. (Employed Adult Population) 100.b. (Employed Labor Force) 100.c. (Labor Force Adult Population) 100.d. (Adult Population Labor Force) 100.

Labor StatsThe Labor MarketThis table shows the 2003 data for males and females ages 16 and over in the imaginary country of Meditor.

1. Not in labor forcea. male: 45 millionb. female: 35 million

2. Unemployeda. male: 5 millionb. female: 5 million

3. Employeda. male: 85 millionb. female: 65 million

____ 8. Refer to Labor Stats. What is the adult population in Meditor?a. 90 millionb. 150 millionc. 160 milliond. 240 million

____ 9. Refer to Labor Stats. What is the adult unemployment rate in Meditor?a. 4.12%b. 6.25%c. 11.11%d. 12.50%

____ 10. Refer to Labor Stats. What is the adult female population in Meditor?a. 35 millionb. 40 millionc. 70 milliond. 105 million

____ 11. Refer to Labor Stats. What is the adult male labor force in Meditor?a. 85 millionb. 90 millionc. 120 milliond. 135 million

____ 12. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Canadian adult non-institutionalized population was 25.022 million, the labor force was 16.956 million, and the number of people employed was 15.864 million. According to these numbers, the Canadian labor-force participation rate and unemployment rate were abouta. 67.8% and 6.4%b. 67.8% and 4.4%c. 63.4% and 6.4%d. 63.4% and 4.4%

____ 13. The BLS reported in 2005 that there were 28.19 million people over age 25 who had no high school degree or its equivalent. In this group 11.73 million were employed and 1.04 million were unemployed. About what were the labor-force participation rate and the unemployment rate for this group?a. 41.6% and 3.7%b. 41.6% and 3.7%c. 45.3% and 8.1%d. 45.3% and 8.1%

____ 14. Suppose that in some state the adult population is 4 million, the labor-force participation rate is 75%, and that .25 million people are unemployed. What is the unemployment rate to the nearest tenth?a. 6.3%b. 7.7%c. 8.3%d. 9.1%

____ 15. Suppose some country had an adult population of about 46.5 million, the labor-force participation rate was 63.5 percent, and the unemployment rate was 5.8 percent. What were the number of people employed and the number of people unemployed?a. about 29.5 million and 2.7 million.b. about 29.5 million and 1.7 million.c. about 27.8 million and 2.7 million.d. about 27.8 million and 1.7 million.

____ 16. Tara just graduated from college. In order to devote all her efforts to college, she didn’t hold a job. She is going to cruise around the country on her motorcycle for awhile before she starts looking for work. As a result, the unemployment ratea. increases, and the labor-force participation rate increases.b. is unaffected, and the labor-force participation rate is unaffected.c. increases, and the labor-force participation rate decreases.d. increases, and the labor-force participation rate is unaffected.

____ 17. Between 2004 and 2005, the country of Aquilonia reported an increase in the number of people who were employed. It also reported an increase in the unemployment rate. Which of the following would best explain the two reports?a. There was an increase in the size of the labor force between 2004 and 2005.b. There was a decrease in the size of the labor force between 2004 and 2005.c. There was an increase in the size of the adult population between 2004 and 2005.d. The two reports are contradictory and can't be reconciled.

____ 18. President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office. You conclude thata. one of them must be lying.b. both of them could be telling the truth if the labor-force participation rate and the labor

force both fell.c. both of them could be telling the truth if the labor force grew slower than employment.d. both of them could be telling the truth if the labor force grew faster than employment.

____ 19. Which of the following is correct for people ages 20 and over?a. Men have lower rates of labor-force participation and similar unemployment rates

compared to women.b. Men have lower rates of labor-force participation and higher rates of unemployment than

do women.c. Women have lower rates of labor-force participation and higher rates of unemployment

compared to those of men.d. Women have lower rates of labor-force participation and similar unemployment rates

compared to those of men.____ 20. Which of the following is correct for people ages 20 and over?

a. Blacks have higher rates of labor-force participation and lower unemployment rates than those of whites.

b. Blacks have higher rates of labor-force participation and higher unemployment rates than those of whites.

c. Blacks have similar rates of labor-force participation and lower unemployment rates than those of whites.

d. Blacks have similar rates of labor-force participation and higher unemployment rates than those of whites.

____ 21. Which of the following is correct?a. Adults have higher labor-force participation rates and higher unemployment rates than do

teenagers.

b. Adults have higher labor-force participation rates and lower unemployment rates than do teenagers.

c. Adults have lower labor-force participation rates and lower unemployment rates than do teenagers.

d. Adults have lower labor-force participation rates and higher unemployment rates than do teenagers.

____ 22. The labor-force participation rate of the U.S. adult population (ages 16 and over) is abouta. 47 percent.b. 55 percent.c. 66 percent.d. 74 percent.

____ 23. In the United States in recent years, for people age 20 and over, the unemployment rate of blacks has beena. less than that of whites.b. about the same as that of whites.c. about 50 percent higher than that of whites.d. about double that of whites.

____ 24. In the United States in recent years, the unemployment rate among teenagers has beena. less than that of people ages 20 and over.b. about the same as that of people ages 20 and over.c. about twice that of people ages 20 and over.d. more than three times that of people ages 20 and over.

____ 25. Since 1950, the labor-force participation rate of women hasa. increased. This can be attributed to longer lives.b. increased. This can be attributed partly to advances in birth control.c. decreased. This can be attributed partly to longer schooling.d. decreased. This can be attributed partly to increases in the minimum wage.

____ 26. Recent entrants into the labor force account for abouta. 1/5 of those who are unemployed.b. 1/4 of those who are unemployed.c. 1/3 of those who are unemployed.d. 1/2 of those who are unemployed.

____ 27. In one year you meet 45 people who are each unemployed for one week, and five people who are each unemployed for the whole year. What percent of the people you meet are short-term unemployed, and about what percent of the unemployment you encounter is long-term?a. 90 percent and 85.2 percentb. 10 percent and 85.2 percentc. 90 percent and 10 percentd. 10 percent and 14.7 percent

____ 28. Consider two people who are currently out of work. Tim is not looking for work because there have been many job cuts where he lives and he doesn't think it likely that he will find work. Bev is not currently looking for work, but she would like a job. While she hasn't looked for work for sometime, she has looked for work in the past. The BLS considersa. both Tim and Bev to be marginally attached workers.b. neither Tim nor Bev to be marginally attached workers.c. only Tim to be a marginally attached worker.d. only Bev to be a marginally attached worker.

Use the following table to answer the following questions.

Table 28-1

CategoryNumber of People (in millions)

Civilian Labor Force 100Persons unemployed 15 weeks or longer 1.6Job losers and persons who have completed temporary jobs (excludes job leavers) 3.1Total unemployed 6.2Total unemployed plus discouraged workers 7.0Total unemployed plus all marginally attached workers 8.1Total unemployed plus all marginally attached workers plus total employed part-time for economic reasons 9.2

____ 29. Refer to Table 28-1. What is the U-1 measure of labor underutilization?a. 1.6 percentb. 3.1 percentc. 4.7 percentd. 6.2 percent



____ 32. Meredith is looking for work as a computer programmer. Although her prospects are good she hasn't yet taken a job. Julie is looking for work in a steel mill. Every time she shows up for an interview there are more people looking for work than their are openings. Someone waiting in line with her tells her its been that way a long time.a. Meredith and Julie are both frictionally unemployed.b. Meredith and Julie are both structurally unemployed.c. Meredith is frictionally unemployed, and Julie is structurally unemployed.d. Meredith is structurally unemployed, and Julie is frictionally unemployed.

____ 33. Job searcha. explains why firms pay less than the competitive equilibrium wage.b. is due simply to the failure of wages to balance labor supply and labor demand.c. is the process of matching workers with appropriate jobs.d. All of the above are correct.

____ 34. Sectoral shifts in demand for outputa. create structural unemployment.b. immediately reduce unemployment.c. increase unemployment due to job search.d. on net leave unemployment unchanged.

____ 35. Consumers decide to buy more computers and fewer typewriters. As a result, computer companies expand production while typewriter companies lay-off workers. This is an example ofa. structural unemployment created by efficiency wages.

b. cyclical unemployment created by a recession.c. frictional unemployment created by a sectoral shift in demand.d. None of the above is correct.

____ 36. Frictional unemployment can be the consequence ofa. workers leaving existing jobs to find ones they like better.b. an industry declining while another is growing.c. changes in the working conditions offered by competing firms.d. All of the above are correct.

____ 37. Which of the following is not correct?a. Frictional unemployment is inevitable in a dynamic economy.b. Although the unemployment created by sectoral shifts is unfortunate, in the long run such

changes lead to higher productivity and higher living standards.c. At least 10 percent of U.S. manufacturing jobs are destroyed every year.d. In a typical month more than 9 percent of workers leave their jobs.

____ 38. Compared to the United States, Germany historically has had higher unemployment rates. One explanation for this difference could bea. a very low minimum wage in German.b. the relatively low expenditures of the German government..c. the relatively high unemployment insurance in Germany.d. the refusal of German firms to set wages according to efficiency wage theory.

____ 39. Unemployment insurancea. reduces search effort and raises unemployment.b. reduces search effort and lowers unemployment.c. increases search effort and raises unemployment.d. increases search effort and decreases unemployment.

____ 40. Wages in excess of their equilibrium level help explaina. frictional but not structural unemployment.b. structural but not frictional unemployment.c. frictional and structural unemployment.d. neither frictional or structural unemployment.

____ 41. An increase in the minimum wage woulda. increase both the quantity demanded and the quantity supplied of labor.b. decrease both the quantity demanded and the quantity supplied of labor.c. increase the quantity of labor demanded while decreasing the quantity supplied.d. decrease the quantity of labor demanded while increasing the quantity supplied.

Use the graph below to answer the following questions.

Figure 28-2

____ 42. Refer to Figure 28-2. If the minimum wage fell from $7 to $5, in this market unemployment woulda. fall by 20.b. fall by 40.c. be unchanged.d. would rise by 20.

____ 43. Refer to Figure 28-2. If the minimum wage rose from $5 to $7, unemployment woulda. rise by 40.b. rise by 20.c. fall by 20.d. fall by 40.

____ 44. Which of the following is not correct?a. A union is a form of cartel.b. Union workers typically earn 25 to 33 percent more than similar nonunionized workers.c. The power of a union comes from its ability to strike if its demands are not met.d. Workers in unions reap the benefits of collective bargaining, while workers not in unions

bear some of the cost.____ 45. Union workers earn what percent more than similar nonunion workers?

a. 0 to 5b. 5 to 10c. 10 to 20d. 20 to 30

____ 46. When a union bargains successfully with employers, in that industrya. both the quantity of labor supplied and the quantity of labor demanded increase.b. both the quantity of labor supplied and the quantity of labor demanded decrease.c. the quantity of labor supplied increases and the quantity of labor demanded decreases.d. the quantity of labor demanded increases and the quantity of labor supplied decreases.

____ 47. Right-to-work lawsa. guarantee workers the right to form unions.b. give workers in a unionized firm the right to choose whether or not to join the union.c. prevent employers from hiring permanent replacements for workers who are on strike.d. say that workers can not be fired because of increases in wages brought about by

collective bargaining.____ 48. Unions

a. do not increase the natural rate of unemployment.

b. do not raise the wages of workers in the union.c. raise the profits of firms they work for.d. cause wages of nonunionized workers to fall.

____ 49. The theory of efficiency wages explains whya. setting wages at the equilibrium level may increase unemployment.b. it may be in the best interest of firms to offer wages that are above the equilibrium level.c. the most efficient way to pay workers is to pay them according to their skills.d. it is efficient for firms to set wages at the equilibrium level.

____ 50. When employers pay efficiency wages, they pay wagesa. below equilibrium to increase profitability.b. above equilibrium to increase productivity.c. set by the government to counter charges of unfair labor practices.d. at a level that would prevail in the absence of unions.

____ 51. Ellen decides to hire some additional workers for her vinyl siding factory. The equilibrium wage is $14 per hour. Efficiency wage theory suggests that it is reasonable for Ellen to offera. $14 per hour.b. less than $14 per hour, since some people would be willing to work for less.c. less than $14 an hour to prevent shirking.d. more than $14 per hour, so as to attract a better pool of applicants.

____ 52. Economists use the word "money" to refer toa. income generated by the production of goods and services.b. those assets regularly used to buy goods and services.c. the value of a person's assets.d. the value of stocks and bonds.

____ 53. Commodity money isa. backed by gold.b. the principal type of money in use today.c. money with intrinsic value.d. receipts created in international trade that are used as a medium of exchange.

____ 54. M1 includesa. currency.b. demand deposits.c. travelers' checks.d. All of the above are correct.

____ 55. Money market mutual funds are included ina. M1 but not M2.b. M1 and M2.c. M2 but not M1.d. neither M1 or M2.

Use the (hypothetical) information in the following table to answer the following Questions.

Table 29-1Type of Money AmountLarge time deposits $80 billionSmall time deposits $75 billionDemand deposits $75 billionOther checkable deposits $40 billionSavings deposits $10 billion

Travelers' checks $1 billionMoney market mutual funds $15 billionCurrency $100 billionSDRs $10 billionMiscellaneous categories of M2 $25 billion

____ 56. Refer to Table 29-1. What is the M2 money supply?a. $125 billionb. $341 billionc. $421 billiond. $431 billion

____ 57. Members of the Board of Governorsa. are appointed by the U.S. president, while presidents of the Federal Reserve regional

banks are appointed by the banks' boards of directors.b. are appointed by the banks' boards of directors while the presidents of the Federal Reserve

regional banks are appointed by the U.S. president.c. and the presidents of the Federal Reserve regional banks are appointed by the U.S.

president.d. and the presidents of the Federal Reserve regional banks are appointed by the banks'

boards of directors.____ 58. Which of the following has a four-year term?

a. the members of the Board of Governorsb. the Chair of the Board of Governorsc. the members of the FOMCd. All of the above are correct.

____ 59. Which of the following does the Federal Reserve not do?a. conduct monetary policyb. act as a lender of last resortc. convert Federal Reserve Notes into goldd. serve as a bank regulator

____ 60. Monetary policy affects employmenta. only in the long run.b. only in the short run.c. in both the long run and the short run.d. in neither the long run nor the short run.

____ 61. Over one time horizon or another Fed policy decisions influencea. inflation and employment.b. inflation but not employment.c. employment but not inflation.d. neither inflation nor employment.

____ 62. In a 100-percent-reserve banking system,a. banks can create money by issuing currency.b. banks can create money by lending out reserves.c. the Fed can increase the money supply with open-market sales.d. banks hold as many reserves as they hold deposits.

____ 63. A bank’sa. reserves and the deposits of its customers are both assets.b. reserves and the deposits of its customers are both liabilities.c. reserves are assets and the deposits of its customers are liabilities.

d. reserves are liabilities and the deposits of its customers are assets.____ 64. A bank’s assets include

a. both its reserves and the deposits of its customers.b. neither its reserves nor the deposits of its customers.c. its reserves, but not the deposits of its customers.d. the deposits of its customers, but not its reserves.

____ 65. Suppose a bank has a 10 percent reserve requirement, $4,000 in deposits, and has loaned out all it can given the reserve requirement.a. It has $40 in reserves and $3,960 in loans.b. It has $400 in reserves and $3,600 in loans.c. It has $444 in reserves and $3,556 in loans.d. None of the above is correct.

____ 66. Suppose the banking system currently has $300 billion in reserves, that the reserve requirement is 10%, and that $3 billion of the reserves are excess reserves that will not be lent out. What is the value of deposits?a. $3,300 billionb. $2,970 billionc. $2,700 billiond. $2,673 billion

____ 67. Suppose banks desire to hold no excess reserves. If the reserve ratio is 10 percent and a bank receives a new deposit of $10. Then this banka. must increase required reserves by $1.b. will initially see its total reserves increase by $1.c. will be able to make new loans up to a maximum of $1.d. All of the above are correct.

____ 68. Suppose that banks desire to hold no excess reserves. If the reserve ratio is 5 percent and a bank receives a new deposit of $400, ita. must increase required reserves by $380.b. will initially see reserves increase by $380.c. will be able to use this deposit to make new loans.d. None of the above is correct.

____ 69. If banks desire to hold no excess reserves, the reserve ratio is 10 percent, and a bank that was previously just meeting its reserve requirement receives a new deposit of $400, then initially the bank has a a. $400 increase in excess reserves and no increase in required reserves.b. $400 increase in required reserves and no increase in excess reserves.c. $360 increase in excess reserves and $40 increase in required reserves.d. $40 increase in excess reserves and $360 increase in required reserves.

Use the balance sheet for the following questions.

Table 29-2First Bank of Mason City

Assets LiabilitiesRequired Reserves $20.00 Deposits $100.00Loans $80.00

____ 70. Refer to Table 29-2. If $1,000 is deposited into the First Bank of Mason City, and the bank takes no other actions, it’sa. total reserves will increase by $200.b. liabilities will decrease by $1,000.

c. assets will increase by $1,000.d. required reserves will increase by $800.

Use the balance sheet for the following questions.

Table 29-3Last Bank of Cedar Bend

Assets LiabilitiesReserves $25,000 Deposits $150,000Loans $125,000

____ 71. Refer to Table 29-3. The reserve requirement is 10 percent and then someone deposits an additional $50,000 into the bank, then if the bank takes no other action it willa. have $65,000 in excess reserves.b. have $55,000 in excess reserves.c. need to raise an additional $5,000 of reserves to meet the reserve requirementd. None of the above is correct.

____ 72. Refer to Table 29-3. If the reserve requirement is 20 percent, this banka. has $10,000 of excess reserves.b. needs $10,000 more reserves to meet its reserve requirements.c. needs $5,000 more reserves to meet its reserve requirements.d. just meets its reserve requirement.

Table 29-5

Bank of SpringfieldAssets LiabilitiesReserves $12,000 Deposits $240,000Loans $228,000

____ 73. Refer to Table 29-5. Assume that the Bank of Springfield is holding the required percent of deposits as reserves. Also, assume all other banks hold only the required percent of deposits as reserves. What is the money multiplier?a. 5b. 10c. 15d. 20

____ 74. Refer to Figure 29-5. If the Fed requires a reserve ratio of 4%, how much in excess reserves does the Bank of Springfield now hold?a. $1,200b. $2,400c. $2,880d. $3,000

____ 75. If the reserve ratio is 20 percent, the money multiplier isa. 2.b. 4.c. 5.d. 8.

____ 76. The multiplier equals

a. 1/Rb. 1/(1+R)c. 1/(1-R)d. None of the above is correct.

____ 77. If the reserve ratio is 10 percent, $1,000 of additional reserves can createa. $11,000 of new money.b. $10,000 of new money.c. $9,000 of new moneyd. None of the above is correct.

Meditorian Banking StatisticsThe monetary policy of Meditor is determined by the Meditorian Central Bank. The local currency is the medit. Meditorian banks collectively hold 100 million medits of required reserves, 25 million medits of excess reserves, 250 million medits of Meditorian Treasury Bonds, and their customers hold 1,000 million medits of deposits. Meditorians prefer to use only demand deposits and so all currency is on deposit at the bank.

____ 78. Refer to Meditorian Central Banking. Suppose that the Central Bank of Meditor loaned the banks of Meditor 5 million medits. Suppose also that both the required reserve ratio and the percentage of deposits held as excess reserves stay the same. By how much would the money supply of Meditor change? a. 60 million meditsb. 50 million meditsc. 40 million meditsd. None of the above is correct.

Tazian Banking StatisticsThe Monetary Policy of Tazi is controlled by the country’s central bank known as the Bank of Tazi. The local unit of currency is the Taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million Tazes of required reserves, 75 million Tazes of excess reserves, have issued 7,500 million Tazes of deposits, and hold 225 million Tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all currency is on deposit at the bank.

____ 79. Refer to Tazian Banking Statistics. Suppose that the Bank of Tazi changes the reserve requirement ratio to 3%. Assuming that the banks still want to hold the same percentage of excess reserves what is the value of the money supply after the change in the reserve requirement ratio?a. 9,375 million Tazesb. 10,000 million Tazesc. 12,500 million Tazesd. None of the above is correct to the nearest million medits.

____ 80. The money supply increases when the Fed a. buys bonds. The increase will be larger the smaller the reserve ratio is.b. buys bonds. The increase will be larger the larger the reserve ratio is.c. sells bonds. The increase will be larger the smaller the reserve ratio is.d. sells bonds. The increase will be larger the larger the reserve ratio is.

____ 81. The money supply increases when the Fed a. lowers the discount rate. The increase will be larger the smaller the reserve ratio is.b. lowers the discount rate. The increase will be larger the larger the reserve ratio is.c. raises the discount rate. The increase will be larger the smaller the reserve ratio is.d. raises the discount rate. The increase will be larger the larger the reserve ratio is.

____ 82. Which of the following is not a tool of monetary policy?

a. open market operationsb. reserve requirementsc. changing the discount rated. increasing the deficit

____ 83. Which of the following lists two things that both decrease the money supply?a. lower the discount rate, raise the reserve requirement ratiob. lower the discount rate, lower the reserve requirement ratioc. raise the discount rate, raise the reserve requirement ratiod. raise the discount rate, lower the reserve requirement ratio

____ 84. Which of the following lists two things that both decrease the money supply?a. make open market purchases, raise the reserve requirement ratiob. make open market purchases, lower the reserve requirement ratioc. make open market sales, raise the reserve requirement ratiod. make open market sales, lower the reserve requirement ratio

____ 85. When the Fed conducts open market purchases, bank reservesa. increase and banks can increase lending.b. increase and banks must decrease lending.c. decrease and banks can increase lending.d. decrease and banks must decrease lending.

____ 86. If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reservesa. increase by $20 million and the money supply eventually increases by $200 million.b. decrease by $20 million and the money supply eventually increases by $200 million.c. increase by $20 million and the money supply eventually decreases by $200 million.d. decrease by $20 million and the money supply eventually decreases by $200 million.

____ 87. If the discount rate is lowered, banks choose to borrowa. less from the Fed so reserves increase.b. less from the Fed so reserves decrease.c. more from the Fed so reserves increase.d. more from the Fed so reserves decrease.

____ 88. When the Fed decreases the discount rate, banks will a. borrow more from the Fed and lend more to the public. The money supply increases.b. borrow more from the Fed and lend less to the public. The money supply decreases.c. borrow less from the Fed and lend more to the public. The money supply increases.d. borrow less from the Fed and lend less to the public. The money supply decreases.

____ 89. The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 4%. If the Fed raises the reserve requirement to 5% and at the same time buys $50 billion dollars of bonds, then by how much does the money supply change?a. It rises by $1000 billion.b. It rises by $1250 billion.c. It falls by $950 billion.d. None of the above is correct.

____ 90. Suppose that in a country people had no access to banks but used currency. The creation of a fractional reserve banking system with a reserve ratio of less than 100% would cause the money supply to a. increase. The central bank could reduce the size of this increase by buying bonds.b. increase. The central bank could reduce the size of this increase by selling bonds.c. decrease. The central bank could reduce the size of this decrease by buying bonds.d. decrease. The central bank could reduce the size of this decrease by selling bonds.

____ 91. Suppose that banks decide to hold fewer excess reserves relative to deposits. Other things the same, this action will cause the a. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.d. money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.

____ 92. If people decide to hold more currency relative to deposits, the money supplya. falls. The larger the reserve ratio is, the more it falls.b. falls. The larger the reserve ratio is, the less it falls.c. rises. The larger the reserve ratio is, the more it rises.d. rises. The larger the reserve ratio is, the less it rises.

____ 93. If people decide to hold less currency relative to deposits, the money supplya. falls. The Fed could lessen the impact of this by buying Treasury bonds.b. falls. The Fed could lessen the impact of this by selling Treasury bonds.c. rises. The Fed could lessen the impact of this by buying Treasury bonds.d. rises. The Fed could lessen the impact of this by selling Treasury bonds.

____ 94. In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by the publica. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of

the money supply, it could have sold bonds.b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of

the money supply, it could have bought bonds.c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the

money supply, it could have sold bonds.d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the

money supply, it could have bought bonds.____ 95. The money supply would fall if

a. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans.

b. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans.

c. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans.

d. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.

____ 96. The Fed can directly protect a bank during a bank run bya. increasing reserve requirements.b. selling government bonds to the bank.c. lending reserves to the bank.d. Doing any of the above.

____ 97. The Federal Funds rate is the a. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities.b. percentage of deposits that banks must hold as reserves.c. interest rate at which the Federal Reserve makes short-term loans to banks.d. interest rate at which banks lend reserves to each other overnight.

____ 98. Imagine that the Federal Funds rate was above the level the Federal Reserve had targeted. To move the rate back towards it’s target the Federal Reserve could

a. buy bonds. This buying would increase the money supply.b. buy bonds. This buying would reduce the money supply.c. sell bonds. This selling would increase the money supply..d. sell bonds. This selling would reduce the money supply..

____ 99. The price level rises from 120 to 126. What is the inflation rate?a. 3%b. 5%c. 6%d. None of the above is correct.

____ 100. There was hyperinflationa. during 1880-1896 in the United States.b. in post-World War I Germany.c. during the 1970s in the United States.d. All of the above are correct.

____ 101. Economists all agree thata. neither high inflation nor moderate inflation is very costly.b. both high and moderate inflation are quite costly.c. high inflation is costly, but disagree about the costs of moderate inflation.d. moderate inflation is as costly as high inflation.

____ 102. An increase in the price level makes the value of moneya. increase, so people want to hold more of it.b. increase, so people want to hold less of it.c. decrease, so people want to hold more of it.d. decrease, so people want to hold less of it.

____ 103. When the money market is drawn with the value of money on the vertical axis, the money demand curve slopesa. upward because at higher prices people want to hold more money.b. downward because at higher prices people want to hold more money.c. downward because at higher price people want to hold less money.d. upward, because at higher prices people want to hold less money.

____ 104. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of moneya. increases, so the quantity of money demanded increases.b. increases, so the quantity of money demanded decreases.c. decreases, so the quantity of money demanded decreases.d. decreases, so the quantity of money demanded increases.

____ 105. When the money market is drawn with the value of money on the vertical axis,a. money demand slopes up and money supply is horizontal.b. money demand slopes down and money supply is vertical.c. money demand slopes up and money supply is horizontal.d. money demand slope down and money supply is vertical.

____ 106. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in thea. the value of money.b. real interest rates.c. nominal interest rates.d. money supply.

____ 107. Which of the following is correct?a. If the Fed purchases bonds in the open market, then the money supply curve shifts right. A

change in the price level does not shift the money supply curve.b. If the Fed sells bonds in the open market, then the money supply curve shifts right. A

change in the price level does not shift the money supply curve.c. If the Fed purchases bonds, then the money supply curve shifts right. An increase in the

price level shifts the money supply curve right.d. If the Fed sells bonds, then the money supply curve shifts right. A decrease in the price

level shifts the money supply curve right.____ 108. In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away

much gold, which was in use as a medium of exchange. We would predict that this increase in golda. raised both the price level and the value of gold in Cairo.b. raised the price level, but decreased the value of gold in Cairo.c. lowered the price level, but increased the value of gold in Cairo.d. lowered both the price level and the value of gold in Cairo.

____ 109. In the 1970s in response to recessions caused by an increase in the price of oil, the central banks in many countries increased the money supply. The central banks might have done this bya. selling bonds on the open market, which would have raised the value of money.b. purchasing bonds on the open market, which would have raised the value of money.c. selling bonds on the open market, which would have raised the value of money.d. purchasing bonds on the open market, which would have lowered the value of money.

Use the figure below for the following questions.

Figure 30-1

____ 110. Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2, the graph shows thata. the demand for goods and services decreases.b. the economy's ability to produce goods and services increases.c. the equilibrium price level increases.d. the equilibrium value of money increases.

____ 111. Sally sells 40 bags of lettuce for a total of $80 at the farmers’ market.a. The $80 is a real variable. The quantity of lettuce is a nominal variable.b. The $80 is a nominal variable. The quantity of lettuce is a real variable.c. Both the $80 and the quantity of lettuce are nominal variables.d. Both the $80 and the quantity of lettuce are real variables.

____ 112. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makesa. your nominal wage increase. If your nominal wage rose by a greater percentage than the

price level, then your real wage also increased.b. your nominal wage increase. If your nominal wage rose by a greater percentage than the

price level, then your real wage decreased.c. your real wage increase. If your real wage rose by a greater percentage than the price

level, then your nominal wage also increased.d. your real wage decrease. If your real wage rose by a greater percentage than the price

level, then your nominal wage decreased.____ 113. You put money in the bank. The increase in the dollar value of your savings

a. and the change in the number of goods you can buy with your savings are both nominal variables.

b. and the change in the number of goods you can buy with your savings are both real variables.

c. is a nominal variable, but the change in the number goods you can buy with your savings is a real variable.

d. is a real variable, but the change in the number of goods you buy with your savings is a nominal variable.

____ 114. According to the classical dichotomy, which of the following increases when the money supply increases?a. the real interest rateb. real GDPc. the real waged. None of the above increases.

____ 115. According to the classical dichotomy, which of the following is not influenced by monetary factors?a. the price levelb. real GDPc. nominal interest ratesd. All of the above are correct.

____ 116. According to the classical dichotomy, which of the following is not influenced by monetary factors?a. nominal GDP and nominal interest ratesb. real wages and real GDPc. the price level and nominal GDPd. None of the above is correct.

____ 117. Most economists believe the principle of monetary neutrality isa. relevant to both the short and long run.b. irrelevant to both the short and long run.c. mostly relevant to the short run.d. mostly relevant to the long run.

____ 118. In order to maintain stable prices, a central bank musta. maintain low interest rates.b. keep unemployment low.c. tightly control the money supply.d. sell indexed bonds.

____ 119. Based on the quantity equation, if M = 100, V = 4, and Y = 200, then P =a. 1/2.b. 2.c. 8.d. None of the above is correct.

____ 120. If Y and V are constant, and M doubles, the quantity equation implies that the price levela. more than doubles.b. changes but less than doubles.c. doubles.d. does not change

____ 121. If V and M are constant, and Y doubles, the quantity equation implies that the price levela. falls to half its original level.b. does not change.c. doubles.d. more than doubles.

____ 122. Suppose that the money supply tripled, but at the same time velocity fell by half and real GDP was unchanged. According to the quantity equation the price levela. is 1.5 times its old value.b. is 3 times its old value.c. is 6 times its old value.d. is the same as its old value.

____ 123. Suppose that over some period the money supply tripled, velocity fell by half, and real GDP doubled. According to the quantity equation the price level is nowa. 6 times its old value.b. 3 times its old value.c. 1.5 times its old value.d. .75 times its old value

____ 124. Suppose that monetary neutrality holds and that velocity is constant. A 5% increase in the money supply a. increases the price level by more than 5%.b. increases the price level by 5%.c. increases the price level by 5%.d. does not change the price level.

____ 125. If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase ina. real output only.b. nominal output only.c. the price level only.d. Both the price level and nominal output.

____ 126. The inflation taxa. is an alternative to income taxes and government borrowing.b. taxes most those who hold the most money.c. is the revenue created when the government prints money.d. All of the above are correct.

____ 127. Governments may prefer an inflation tax to some other kind of tax because the inflation taxa. is easier to impose.b. reduces inflation.c. falls mainly on high-income individuals.d. reduces the real cost of government expenditure.

____ 128. Printing money to finance government expendituresa. causes the value of money to rise.b. imposes a tax on everyone who holds money.c. is the principle method by which the U.S. government finances its expenditures.d. None of the above is correct.

____ 129. Which of the following is correct?a. The Continental Congress used the inflation tax to help finance the American Revolution.b. The inflation tax has been a principle source of revenue for the U.S. government.c. There is no way a person can avoid the inflation tax.d. None of the above is correct.

____ 130. The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real interest rate?a. 6 percent

b. 5 percentc. 1.5 percentd. 1 percent

____ 131. The nominal interest rate is 6 percent and the real interest rate is 2 percent. What is the inflation rate?a. 3 percent.b. 4 percent.c. 8 percent.d. 12 percent.

____ 132. The real interest rate is 8 percent and the nominal interest rate is 12 percent. Is there inflation or deflation? What is the inflation or deflation rate?a. deflation; 1.5 percentb. deflation; 4 percentc. inflation; 1.5 percentd. inflation; 4 percent

____ 133. Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, thena. both the nominal and the real interest rate rise.b. neither the nominal nor the real interest rate rise.c. the nominal interest rate rises, but the real interest rate does not.d. the real interest rate rises, but the nominal interest rate does not.

____ 134. Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate falls, thena. both the nominal and the real interest rate fall.b. neither the nominal nor the real interest rate fall.c. the nominal interest rate falls, but the real interest rate does not.d. the real interest rate falls, but the nominal interest rate does not.

____ 135. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate raises.a. the inflation rate and real interest rates.b. the inflation rate, but not real interest rates.c. real interest rates, but not the inflation rate.d. neither the inflation rate nor real interest rates.

____ 136. According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increasesa. inflation, nominal interest rates, and real interest rates.b. inflation and nominal interest rates, but does not change real interest rates.c. inflation and real interest rates, but does not change nominal interest rates.d. neither inflation, nominal interest rates, or real interest rates.

____ 137. If the inflation rate falls, people are likely toa. change prices more frequently and go to the bank more frequently.b. change prices more frequently and go to the bank less frequently.c. change prices less frequently and go to the bank less frequently.d. change prices less frequently and go the bank more frequently.

____ 138. The shoeleather cost of inflation refers toa. the redistributional effects of unexpected inflation.b. the time spent searching for low prices when inflation rises.c. the waste of resources used to maintain lower money holdings.d. the increased cost to the government of printing more money.

____ 139. Shoeleather costs refer to

a. the cost of more frequent price changes induced by higher inflation.b. the distortion in resource allocation created by distortions in relative prices due to

inflation.c. resources used to maintain lower money holdings when inflation is high.d. the tendency for more effort searching for the lowest price when inflation is high.

____ 140. On income tax forms, people are required to reporta. nominal interest earnings.b. real interest earnings.c. real capital gains.d. All of the above.

____ 141. You buy stock and its price rises just as much as the price level. Before taxes you madea. a nominal and real gain, and you pay taxes on the nominal gain.b. a nominal and real gain, but you pay taxes only on the real gain.c. a nominal gain, but no real gain, yet you pay taxes on the nominal gain.d. a nominal gain, but no real gain, so you pay no taxes on the nominal gain.

____ 142. You buy a stock and its price rises less than the price level. Before taxes you madea. a nominal and real gain, and you pay taxes on the nominal gain.b. a nominal gain and a real loss, and you don't have to pay taxes since you gained less than

the change in the price level.c. a nominal and a real gain, and you pay taxes on the real gain.d. a nominal gain and a real loss, and you pay taxes on the nominal gain.

____ 143. For a given real interest rate, an increase in inflation makes the after-tax real interest ratea. decrease, which encourages savings.b. decrease, which discourages savings.c. increase, which encourages savings.d. increase, which discourages savings.

____ 144. Given a nominal interest rate of 8 percent, in which case below would you earn the highest after-tax real interest rate?a. Inflation is 5 percent; the tax rate is 20 percent.b. Inflation is 4 percent; the tax rate is 30 percent.c. Inflation is 3 percent; the tax rate is 40 percent.d. The after-tax real interest rate is the same for all of the above.

____ 145. You put money in an account that earns a 5 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?a. 3.4 percentb. 1.6 percentc. 1 percentd. None of the above is correct.

____ 146. The country of Veridian has a tax system identical to that of the United States. Suppose someone in Veridian bought a parcel of land for 10,000 deera (the local currency) in 1964 when the price index equaled 100. In 2005, the person sold the land for 100,000 deera, and the price index equaled 500. The tax rate on nominal capital gains was 20%. Compute the taxes the person paid on the nominal gain and the change in the real value of the land in terms of 2005 prices to find the after-tax real capital gain. a. $72,000b. $62,000c. $32,000d. $6,400

____ 147. Which of the following is correct? Inflationa. impedes financial markets in their role of allocating resources.

b. reduces the purchasing power of the average consumer.c. generally increases after-tax real interest rates.d. is most costly when anticipated.

____ 148. If the economy unexpectedly went from inflation to deflation,a. both debtors and creditors would all have reduced real wealth.b. both debtors and creditors would all have increased real wealth.c. debtors would gain at the expense of creditors.d. creditors would gain at the expense of debtors.

____ 149. Marta lends money at a fixed interest rate and then inflation rises more than expected. The real interest rate she earns isa. higher than she’d expected, and the real value of the loan rises.b. higher than she’d expected, and the real value of the loan falls.c. lower than she’d expected, and the real value of the loan rises.d. lower then she’d expected, and the real value of the loan falls.

____ 150. Which of the following is accurate?a. Monetary policy is neutral in both the short run and the long run.b. Though monetary policy is neutral in the long run, it may have effects on real variables in

the short run.c. Monetary policy has profound effects on real variables in both the short run and the long

run.d. Monetary policy has profound effects on real variables in the long run, but is neutral in the

short run.

Short Answer

151. The table below uses data for the year 2003 provided by the BLS and adjusted to be comparable to U.S. data. All values are in thousands. Fill in the blank entries in the table. Show your work!

CountryAdult

PopulationLaborForce Employed Unemployed

UnemploymentRate

Labor-ForceParticipation

Rate

Japan 109,474 62,510 3,500France 26,870 2,577 57.41

Germany 70,159 39,591 9.69

152. Why have labor-force participation rates for women in the United States increased since World War II while labor-force participation rates for men have decreased?

153. What is the theory of efficiency wages? Provide two reasons that employers might pay efficiency wages.

154. Suppose that there is an excess supply of economics professors. Should universities necessarily reduce salaries? What does standard economic theory suggest? What does efficiency-wage theory suggest?

155. Since unemployment rates are consistently higher in Canada and some Western European countries than in the United States, it appears that the natural rate of unemployment is lower in the United States. What might explain this difference?

156. Economists argue that the move from barter to money increased trade and production. How is this possible?

157. What is the difference between money and wealth?

158. Are credit cards and debit cards money? What's the difference between credit and debit cards?

159. What is the difference between commodity money and fiat money? Why do people accept fiat money in trade for goods and services?

160. What does the text mean by the question, "Where Is All the Currency?" How does it answer the question?

161. What is meant by the term "lender of last resort?" In what circumstances might the Fed be a lender of last resort?

162. Compare the Board of Governors and the Federal Open Market Committee.

163. What makes the New York Federal Reserve regional bank so important?

164. Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

165. According to the classical dichotomy, what changes nominal variables? What changes real variables?

166. Wages and prices are many times higher today than they were 30 years ago, yet people do not work a lot more hours or buy fewer goods. How can this be?

167. What is the inflation tax, and how might it explain the creation of inflation by a central bank?

168. In recent years Venezuela and Russia have had much higher nominal interest rates than the United States while Japan has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why?

169. Inflation distorts relative prices. What does this mean and why does it impose a cost on society?

170. The U.S. Treasury Department began issuing inflation-indexed bonds in early 1997. Since these assets are virtually risk free, both in terms of default risk and inflation risk, will they quickly replace all other kinds of assets that still entail risk of one kind or another, such as ordinary government bonds or corporate bonds? Explain.

Chapters 28, 29 & 30 Review packetAnswer Section

MULTIPLE CHOICE

1. ANS: D DIF: 1 REF: 28-1 TOP: Natural rate of unemploymentMSC: Definitional

2. ANS: D DIF: 1 REF: 28-1 TOP: Labor forceMSC: Definitional

3. ANS: D DIF: 1 REF: 28-1 TOP: Labor forceMSC: Interpretive

4. ANS: A DIF: 2 REF: 28-1 TOP: Labor forceMSC: Interpretive

5. ANS: B DIF: 1 REF: 28-1 TOP: Labor forceMSC: Definitional

6. ANS: A DIF: 1 REF: 28-1 TOP: Labor forceMSC: Interpretive

7. ANS: C DIF: 1 REF: 28-1 TOP: Labor-force participation rateMSC: Definitional

8. ANS: D DIF: 1 REF: 28-1 TOP: Labor forceMSC: Applicative

9. ANS: B DIF: 2 REF: 28-1 TOP: Unemployment rateMSC: Applicative

10. ANS: D DIF: 1 REF: 28-1 TOP: Labor forceMSC: Applicative

11. ANS: B DIF: 2 REF: 28-1 TOP: Labor forceMSC: Applicative

12. ANS: A DIF: 2 REF: 28-1TOP: Labor-force participation rate, Unemployment rate MSC: Applicative

13. ANS: C DIF: 2 REF: 28-1TOP: Labor-force participation rate, Unemployment rate MSC: Applicative

14. ANS: C DIF: 2 REF: 28-1TOP: Labor-force participation rate, Unemployment rate MSC: Analytical

15. ANS: D.

DIF: 3 REF: 28-1 TOP: Labor-force participation rate, Unemployment rateMSC: Analytical

16. ANS: B DIF: 1 REF: 28-1TOP: Labor-force participation rate, Unemployment rate MSC: Applicative

17. ANS: A DIF: 3 REF: 28-1TOP: Labor-force participation rate, Unemployment rate MSC: Analytical

18. ANS: D DIF: 3 REF: 28-1TOP: Labor-force participation rate, Unemployment rate MSC: Analytical

19. ANS: D DIF: 1 REF: 28-1 TOP: Labor-force demographicsMSC: Definitional


21. ANS: B DIF: 1 REF: 28-1 TOP: Labor-force demographicsMSC: Definitional

22. ANS: C DIF: 1 REF: 28-1 TOP: Labor-force demographicsMSC: Definitional



25. ANS: B DIF: 1 REF: 28-1 TOP: Labor-force demographicsMSC: Definitional

26. ANS: C DIF: 2 REF: 28-1 TOP: Labor-force demographicsMSC: Definitional

27. ANS: A DIF: 2 REF: 28-1 TOP: Unemployment spellsMSC: Analytical

28. ANS: A DIF: 2 REF: 28-1 TOP: UnemploymentMSC: Interpretive

29. ANS: A DIF: 3 REF: 28-1 TOP: Labor underutilizationMSC: Applicative

30. ANS: B DIF: 3 REF: 28-1 TOP: Labor underutilizationMSC: Applicative

31. ANS: B DIF: 3 REF: 28-1 TOP: Labor underutilizationMSC: Applicative

32. ANS: C DIF: 2 REF: 28-1TOP: Frictional unemployment, Structural unemployment MSC: Interpretive

33. ANS: C DIF: 1 REF: 28-1 TOP: Job searchMSC: Definitional

34. ANS: C DIF: 1 REF: 28-1TOP: Frictional unemployment, Sectoral shifts MSC: Interpretive

35. ANS: C DIF: 2 REF: 28-2 TOP: Sectoral shiftsMSC: Interpretive

36. ANS: D DIF: 1 REF: 28-1 TOP: Frictional unemploymentMSC: Definitional

37. ANS: D DIF: 1 REF: 28-1 TOP: Frictional unemploymentMSC: Definitional

38. ANS: C DIF: 1 REF: 28-2 TOP: Unemployment insuranceMSC: Definitional

39. ANS: A DIF: 2 REF: 28-2 TOP: Unemployment insuranceMSC: Analytical

40. ANS: B DIF: 1 REF: 28-3TOP: Structural unemployment, Frictional unemployment MSC: Interpretive

41. ANS: D DIF: 2 REF: 28-3 TOP: Minimum wageMSC: Analytical

42. ANS: B DIF: 2 REF: 28-3 TOP: Minimum wageMSC: Analytical

43. ANS: A DIF: 2 REF: 28-3 TOP: Minimum wageMSC: Analytical

44. ANS: B DIF: 2 REF: 28-4 TOP: UnionsMSC: Definitional

45. ANS: C DIF: 1 REF: 28-4 TOP: Union wagesMSC: Definitional

46. ANS: C DIF: 2 REF: 28-4 TOP: UnionsMSC: Applicative

47. ANS: B DIF: 1 REF: 28-4 TOP: Right-to-work lawsMSC: Definitional

48. ANS: D DIF: 1 REF: 28-4 TOP: UnionsMSC: Definitional

49. ANS: B DIF: 1 REF: 28-5 TOP: Efficiency wagesMSC: Definitional

50. ANS: B DIF: 1 REF: 28-5 TOP: Efficiency wagesMSC: Definitional

51. ANS: D DIF: 1 REF: 28-5 TOP: Efficiency wagesMSC: Applicative

52. ANS: B DIF: 1 REF: 29-1 TOP: MoneyMSC: Definitional

53. ANS: C DIF: 1 REF: 29-1 TOP: Commodity moneyMSC: Definitional

54. ANS: D DIF: 1 REF: 29-1 TOP: M1MSC: Definitional

55. ANS: C DIF: 1 REF: 29-1 TOP: M1, M2MSC: Definitional

56. ANS: B DIF: 2 REF: 29-1 TOP: M2MSC: Applicative

57. ANS: A DIF: 1 REF: 29-2 TOP: Federal ReserveMSC: Definitional

58. ANS: B DIF: 1 REF: 29-2 TOP: Federal ReserveMSC: Definitional

59. ANS: C DIF: 1 REF: 29-2 TOP: Federal ReserveMSC: Definitional

60. ANS: B DIF: 2 REF: 29-2 TOP: Monetary policyMSC: Applicative

61. ANS: A DIF: 2 REF: 29-2 TOP: Inflation, UnemploymentMSC: Definitional

62. ANS: D DIF: 1 REF: 29-3 TOP: ReservesMSC: Definitional

63. ANS: C DIF: 1 REF: 29-3 TOP: Bank balance sheetMSC: Definitional

64. ANS: C DIF: 1 REF: 29-3 TOP: Bank balance sheetMSC: Definitional

65. ANS: B DIF: 1 REF: 29-3 TOP: ReservesMSC: Applicative


67. ANS: A DIF: 2 REF: 29-2 TOP: ReservesMSC: Applicative

68. ANS: C DIF: 2 REF: 29-2 TOP: ReservesMSC: Applicative





73. ANS: D DIF: 2 REF: 29-2 TOP: Money multiplierMSC: Analytical

74. ANS: B DIF: 2 REF: 29-2 TOP: Excess reservesMSC: Applicative

75. ANS: C DIF: 1 REF: 29-3 TOP: Money multiplierMSC: Applicative

76. ANS: A DIF: 1 REF: 29-3 TOP: Money multiplierMSC: Applicative

77. ANS: B DIF: 1 REF: 29-3 TOP: Money multiplierMSC: Applicative

78. ANS: C DIF: 3 REF: 29-3 TOP: Reserve ratioMSC: Applicative

79. ANS: A DIF: 3 REF: 29-3 TOP: Reserve ratioMSC: Applicative

80. ANS: A DIF: 2 REF: 29-3 TOP: Monetary toolsMSC: Applicative

81. ANS: A DIF: 2 REF: 29-3 TOP: Monetary toolsMSC: Applicative

82. ANS: D DIF: 1 REF: 29-3 TOP: Monetary toolsMSC: Definitional

83. ANS: C DIF: 2 REF: 29-3 TOP: Monetary toolsMSC: Definitional

84. ANS: C DIF: 2 REF: 29-3 TOP: Monetary toolsMSC: Definitional

85. ANS: A DIF: 2 REF: 29-3 TOP: Monetary toolsMSC: Interpretive

86. ANS: A DIF: 3 REF: 29-3TOP: Open-market operations, Money multiplier MSC: Applicative

87. ANS: C DIF: 1 REF: 29-3 TOP: Discount rateMSC: Definitional

88. ANS: A DIF: 2 REF: 29-3 TOP: Discount rateMSC: Interpretive

89. ANS: D DIF: 3 REF: 29-3TOP: Money multiplier, Open-market operations MSC: Analytical

90. ANS: B DIF: 2 REF: 29-3TOP: Money multiplier and currency holdings MSC: Applicative

91. ANS: C DIF: 3 REF: 29-3TOP: Money multiplier and excess reserves MSC: Applicative

92. ANS: B DIF: 3 REF: 29-3TOP: Money multiplier and currency holdings MSC: Applicative

93. ANS: D DIF: 3 REF: 29-3TOP: Money multiplier and currency holdings MSC: Applicative

94. ANS: D DIF: 3 REF: 29-3TOP: Money multiplier, Open-market operations MSC: Analytical

95. ANS: A DIF: 2 REF: 29-3 TOP: Currency holdings, Excess reservesMSC: Analytical

96. ANS: C DIF: 1 REF: 29-3 TOP: Bank runsMSC: Definitional

97. ANS: D DIF: 1 REF: 29-3 TOP: Federal funds rateMSC: Definitional

98. ANS: A DIF: 3 REF: 29-3 TOP: Federal funds rate marketMSC: Analytical

99. ANS: B DIF: 1 REF: 30-1 TOP: InflationMSC: Applicative

100. ANS: B DIF: 1 REF: 30-1 TOP: HyperinflationMSC: Definitional

101. ANS: C DIF: 1 REF: 30-1 TOP: Inflation costsMSC: Definitional

102. ANS: C DIF: 2 REF: 30-1 TOP: Money demandMSC: Definitional

103. ANS: B DIF: 1 REF: 30-1 TOP: Money demandMSC: Definitional

104. ANS: D DIF: 2 REF: 30-1 TOP: Money demandMSC: Definitional

105. ANS: B DIF: 1 REF: 30-1 TOP: Money demand, Money supplyMSC: Definitional

106. ANS: A DIF: 1 REF: 30-1 TOP: Money marketMSC: Definitional

107. ANS: A DIF: 2 REF: 30-1 TOP: Money supplyMSC: Analytical

108. ANS: B DIF: 1 REF: 30-1 TOP: Money marketMSC: Applicative

109. ANS: D DIF: 2 REF: 30-1 TOP: Money marketMSC: Applicative

110. ANS: C DIF: 1 REF: 30-1 TOP: Money marketMSC: Applicative

111. ANS: B DIF: 1 REF: 30-1 TOP: Nominal variables, Real variablesMSC: Definitional

112. ANS: A DIF: 2 REF: 30-1 TOP: Nominal variables, Real variablesMSC: Interpretive

113. ANS: C DIF: 1 REF: 30-1TOP: Nominal interest rate, Real interest rate MSC: Definitional

114. ANS: D DIF: 1 REF: 30-1 TOP: Classical dichotomyMSC: Definitional

115. ANS: B DIF: 1 REF: 30-1 TOP: Classical dichotomyMSC: Definitional

116. ANS: B DIF: 1 REF: 30-1 TOP: Classical dichotomyMSC: Definitional

117. ANS: D DIF: 1 REF: 30-1 TOP: Monetary neutralityMSC: Definitional

118. ANS: C DIF: 1 REF: 30-3 TOP: InflationMSC: Definitional

119. ANS: B DIF: 1 REF: 30-1 TOP: VelocityMSC: Applicative

120. ANS: C DIF: 1 REF: 30-1 TOP: Quantity equationMSC: Analytical

121. ANS: A DIF: 1 REF: 30-1 TOP: Quantity equationMSC: Analytical

122. ANS: A DIF: 2 REF: 30-1 TOP: Quantity equationMSC: Analytical

123. ANS: D DIF: 2 REF: 30-1 TOP: Quantity equationMSC: Analytical

124. ANS: B DIF: 1 REF: 30-1 TOP: Quantity equationMSC: Applicative

125. ANS: D DIF: 2 REF: 30-1 TOP: Velocity, Monetary neutralityMSC: Analytical

126. ANS: D DIF: 1 REF: 30-1 TOP: Inflation taxMSC: Definitional

127. ANS: A DIF: 1 REF: 30-1 TOP: Inflation taxMSC: Definitional

128. ANS: B DIF: 1 REF: 30-1 TOP: Inflation taxMSC: Definitional

129. ANS: A DIF: 1 REF: 30-1 TOP: Inflation taxMSC: Definitional

130. ANS: D DIF: 1 REF: 30-1TOP: Nominal interest rate, Real interest rate MSC: Applicative

131. ANS: B DIF: 1 REF: 30-1TOP: Nominal interest rate, Real interest rate MSC: Applicative

132. ANS: C DIF: 2 REF: 30-1TOP: Nominal interest rate, Real interest rate MSC: Analytical

133. ANS: C DIF: 1 REF: 30-1 TOP: Fisher effectMSC: Definitional

134. ANS: C DIF: 1 REF: 30-1 TOP: Fisher effectMSC: Definitional

135. ANS: B DIF: 1 REF: 30-1 TOP: Quantity equation, Fisher effectMSC: Applicative

136. ANS: B DIF: 2 REF: 30-1 TOP: Quantity equationMSC: Analytical

137. ANS: C DIF: 1 REF: 30-2 TOP: Shoeleather costs, Menu costsMSC: Definitional

138. ANS: C DIF: 1 REF: 30-2 TOP: Shoeleather costsMSC: Definitional

139. ANS: C DIF: 1 REF: 30-2 TOP: Shoeleather costsMSC: Definitional

140. ANS: A DIF: 1 REF: 30-2 TOP: Inflation-induced tax distortionsMSC: Definitional

141. ANS: C DIF: 2 REF: 30-2 TOP: Inflation-induced tax distortionsMSC: Analytical

142. ANS: D DIF: 2 REF: 30-2 TOP: Inflation-induced tax distortionsMSC: Analytical

143. ANS: B DIF: 2 REF: 30-2 TOP: After-tax real interest rateMSC: Analytical

144. ANS: C DIF: 3 REF: 30-2 TOP: After-tax real interest rateMSC: Applicative

145. ANS: C DIF: 2 REF: 30-2 TOP: After-tax real interest rateMSC: Applicative

146. ANS: C DIF: 3 REF: 30-2 TOP: After-tax real capital gainsMSC: Analytical

147. ANS: A DIF: 2 REF: 30-2 TOP: Inflation costsMSC: Interpretive

148. ANS: D DIF: 2 REF: 30-2TOP: Redistributional effects of unexpected inflation MSC: Analytical

149. ANS: D DIF: 1 REF: 30-2TOP: Redistributional effects of unexpected inflation MSC: Analytical

150. ANS: B DIF: 1 REF: 30-3 TOP: Money in the short and long runMSC: Definitional

SHORT ANSWER

151. ANS:

CountryAdult

PopulationLaborForce Employed Unemployed

UnemploymentRate

Labor-ForceParticipation

Rate

Japan 109,474 66,010 62,510 3,500 5.30 60.30France 46,804 26,870 24,293 2,577 9.59 57.41

Germany 70,159 39,591 35,755 3,836 9.69 56.43

DIF: 3 REF: 28-1 TOP: Labor-force participation rate, Unemployment rateMSC: Analytical

152. ANS:Labor-force participation rates for women have increased largely as a result of a change in the attitude of society toward women working outside the home and the concomitant increase in educational and vocational opportunities for women. Advances in birth control have made it possible for women to stay in the labor force longer. Labor-force participation rates for men have decreased because young men now stay in school longer than they used to, older men now retire earlier and live longer, and more fathers now stay at home to raise their children.

DIF: 2 REF: 28-1 TOP: Labor-force demographicsMSC: Definitional

153. ANS:According to the theory of efficiency wages, firms operate more efficiently if wages are above the equilibrium level. Therefore, it may be profitable for firms to keep wages high even in the presence of an excess supply of labor. If so, firms will keep wages above the equilibrium level, creating unemployment.

(1) Worker Health:

Better-paid workers eat a more nutritious diet, and workers who eat a better diet are healthier and more productive. A firm may find it profitable to pay higher wages in order to have healthier, more productive workers.

(2) Worker Turnover:The more a firm pays its workers, the less often its workers choose to leave the firm. Since it is costly to hire and train new workers, it may be profitable for an employer to pay higher than equilibrium wages in order to reduce worker turnover rates.

(3) Worker EffortIn jobs where workers have some discretion over how hard they work, workers may shirk. As a result, firms monitor the effort of their workers, and those caught shirking are fired. However, it is costly to monitor workers, and monitoring is often imperfect. By paying higher wages, firms make it more expensive for workers to shirk, since if they are caught they will not readily find other employment at their current wage. It may be profitable for a firm to pay higher than market wages in order to reduce shirking.

(4) Worker QualityWhen a firm hires new workers, it cannot perfectly gauge the quality of the applicants. By paying a higher wage, the firm attracts a better pool of workers to apply for its jobs. It may be profitable for a firm to pay higher than market wages in order to increase the probability that it will hire good-quality workers.

DIF: 2 REF: 28-5 TOP: Efficiency wagesMSC: Definitional

154. ANS:Standard economic theory suggests that if universities are interested in maximizing profits or minimizing costs, they should reduce salaries until the quantity supplied of workers is equal to the quantity demanded. The reduction in wages would reduce the costs of production and raise profits while still allowing universities to fill faculty positions.

Efficiency-wage theory suggests that it might be profitable for universities to keep wages above the equilibrium level in order to reduce worker turnover, increase worker quality, increase worker effort (reduce shirking), and therefore worker productivity. (Fortunately, salaries of economics professors are usually a bit above what is necessary to eat nutritious diets, so the worker-health variant of the efficiency wage is not likely to be important here.)

DIF: 3 REF: 28-5 TOP: Efficiency wagesMSC: Definitional

155. ANS:The text offers two explanations for the natural rate of unemployment. The first is frictional unemployment, which results from people and employers taking time to search for the best match. Frictional unemployment would be higher in countries that have frequent and large sectoral shifts and generous unemployment compensation. It seems unlikely that Canada and Western European countries would have greater sectoral shifts than the United States. So, some of the difference might be due to more generous unemployment compensation in Canada and Western Europe.

The second explanation for the natural rate of unemployment is that wages in some labor markets are above equilibrium. One rationale for setting wages above equilibrium is to attract and retain productive workers. There is no obvious reason why these efficiency wages should contribute to unemployment more in Canada and Western Europe than in the United States. Wages can also be above equilibrium in some markets because of minimum-wage laws. So, some unemployment in Canada and Western Europe might result from higher minimum wages. Finally, unions may negotiate higher wages for their members causing a rise in unemployment. Possibly, Canada and Western Europe have greater union membership rates or more powerful unions.

DIF: 3 REF: 28-2, 28-3, 28-4, 28-5TOP: Unemployment rate differences across countries MSC: Analytical

156. ANS:The use of money allows people to trade more easily. When it is easier to trade specialization increases. Increased specialization increases production and the standard of living.

DIF: 2 REF: 29-1 TOP: Efficiency of moneyMSC: Interpretive

157. ANS:Money is defined as the set of assets in the economy that people regularly use to buy goods and services from other people. Wealth includes all assets, both monetary and nonmonetary.

DIF: 2 REF: 29-1 TOP: Money, WealthMSC: Definitional

158. ANS:Neither credit cards nor debit cards are money, but credit cards are very different from debit cards. Credit cards are not a medium of exchange, but are a means of deferring payment. Debit cards allow the user immediate access to deposits in a bank account. These deposits are part of the money supply.

DIF: 2 REF: 29-1 TOP: Credit cards, Debit cardsMSC: Interpretive

159. ANS:Commodity money has "intrinsic value," or value in uses other than as money. Fiat money is established as money by the government. It has very little, if any, intrinsic value. Although fiat money has no intrinsic value, people accept it in trade when they are confident that others will also accept it. The government's decree that fiat currency serves as legal tender increases this confidence.

DIF: 2 REF: 29-1 TOP: Commodity money, Fiat moneyMSC: Definitional

160. ANS:The amount of currency per person is over $3,100. Most people carry far less than this. The question is, "where is the rest of the currency?" Foreigners and criminals hold some. In some foreign countries, people have more confidence in the U.S. dollar than in their own currency. Criminals use currency because it makes it harder for the government to trace their activities than if they used bank accounts. So they may hold above average amounts of currency.

DIF: 2 REF: 29-1 TOP: Currency holdingsMSC: Definitional

161. ANS:

A "lender of last resort" is a lender to those who cannot borrow anywhere else. The Fed might loan funds to a solvent bank that is experiencing a bank run and so doesn't currently have enough cash on hand to meet depositors' demands.

DIF: 1 REF: 29-2 TOP: Lender of last resortMSC: Interpretive

162. ANS:The Board of Governors runs the Federal Reserve. It has seven members who are appointed by the U.S. president with the advice and consent of the Senate. The voting members of the Federal Open Market Committee include the 7 members of the Board of Governors and 5 of the 12 regional bank presidents, rotated among the 12 regional presidents, but always including the president of the New York Fed. The chair of the BOG also serves as chair of the FOMC. The FOMC meets about every six weeks in Washington, D.C. to discuss the condition of the economy and to consider changes in monetary policy.

DIF: 1 REF: 29-2 TOP: Federal ReserveMSC: Definitional

163. ANS:The president of the New York Federal Reserve regional bank is the only regional bank president who is always a voting member of the FOMC, the committee that determines monetary policy. New York is the traditional financial center of the U.S. economy and the New York Federal Reserve Bank conducts all open-market transactions.

DIF: 1 REF: 29-2 TOP: Federal ReserveMSC: Definitional

164. ANS:When the money supply increases, there is an excess supply of money at the original value of money. After the money supply increases, people have more money than they want to hold in their purses, wallets and checking accounts. They use this excess money to buy goods and services or lend it out to other people to buy goods and services. The increase in expenditures causes prices to rise and the value of money to fall. As the value of money falls, the quantity of money people want to hold increases so that the excess supply is eliminated. At the end of this process the money market is in equilibrium at a higher price level and a lower value of money.

DIF: 2 REF: 30-1 TOP: Money marketMSC: Analytical

165. ANS:The classical dichotomy argues that nominal variables are determined primarily by developments in the monetary system such as changes in money demand and supply. Real variables are largely independent of the monetary system and are determined by productivity and real changes in the factor and loanable funds markets.

DIF: 1 REF: 30-1 TOP: Classical dichotomyMSC: Definitional

166. ANS:Inflation has raised the general price level. An increase in the general price level has no effect on real variables in the long run. Wages are higher, but so are prices. Prices are higher, but so are wages and incomes. In the long run, people change their behavior in response to changes in real variables, not nominal ones.

DIF: 2 REF: 30-1 TOP: Nominal variables, Real variablesMSC: Interpretive

167. ANS:The inflation tax refers to the fact that inflation is a tax on money. When prices rise, the value of money currently held is reduced. Hence, when a government raises revenue by printing money, it obtains resources from households by taxing their money holdings through inflation rather than by sending them a tax bill. In countries where governments are unable or unwilling to raise revenues by raising taxes explicitly, the inflation tax may be an alternative source of revenue.

DIF: 1 REF: 30-2 TOP: Inflation tax MSC: Interpretive168. ANS:

The Fisher effect says that increases in the inflation rate lead to one-to-one increases in nominal interest rates. The quantity theory says that in the long run, inflation increases one-to-one with money supply growth. It follows that differences in nominal interest rates may be due to differences in money supply growth rates. It is reasonable to guess that much higher nominal interest rates in Venezuela and Russia indicate higher money supply growth while lower interest rates in Japan indicate lower money supply growth.

DIF: 1 REF: 30-1 TOP: Fischer effectMSC: Applicative

169. ANS:Relative prices are the value of one good in terms of other goods. Relative prices ordinarily provide signals concerning the relative scarcity of goods so the goods may be allocated efficiently. Some prices change infrequently, so that when inflation rises, there is greater variation in relative prices. However, changes in relative prices created by inflation do not signal changes in the scarcity of goods and so lead to an inefficient allocation of goods and resources.

DIF: 1 REF: 30-2 TOP: Relative price variabilityMSC: Interpretive

170. ANS:When individuals are choosing between assets of different kinds, they consider both expected return and risk. Because the new inflation-indexed bonds have very low risk, they will also have very low real interest rates. So they will not replace other, more risky assets that promise to pay a much higher real interest rate. They do, however, offer a way of escaping some inflation risk, and have become a popular addition to portfolios.

DIF: 1 REF: 30-2 TOP: Inflation-indexed bondsMSC: Analytical

chapters 28, 29 & 30 review packet€¦ · web viewefficiency wage theory suggests that it is...

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