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Econ 2630
STUDY GUIDE FOR FINAL*
* The study guide is not exhaustive. It is intended to give you direction as to what you should
focus on understanding given your limited study time.
-Money
-Functions of money
-Types of money
-Commodity and Fiat Money
-Bitcoin
-Measures of money
-M1 and M2
-Money supply
-Reserve deposit ratio
-Money multiplier
-Currency and bank deposits
-How the FED buying and selling bonds affects the money supply
-The Federal Reserve and Monetary Policy
-Functions of the FED
-The FED and the Great Depression
-The FED and the Great Recession
-QE1, QE2, and TARP
-How the FED addresses output gaps through interest rates
-The federal funds rate
-How changing interest rates affects consumption, savings and investment
-The demand for money and the money demand curve
-Shifters of the money demand curve
-The supply of money and the money market equilibrium
-How the FED changes interest rates by changing the money supply
-Open market operations
-Discount window lending (the discount rate)
-Reserve requirements
-The Taylor Rule
-The liquidity trap
-The Phillips Curve
-Short term and long-term Phillips curves
Financial Economics
-Stocks
-Dividends and marketcap
-Risk premiums
-Common fallacies of investing
-Diversification
-The importance of starting to save early
-Compounding interest
-Calculating future values of investments
The International Economy
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-Exchange Rates
-Calculating them from an exchange rate table
-Judging appreciation and depreciation
-What happens to exports and imports when a currency appreciates or depreciates
-Supply and Demand for Dollars on foreign exchange markets
-Why supply is upward sloping and why demand is downward sloping
-How a change in supply or demand affects exchange rates
-Fixed exchange rates
-Why a country maintains would maintain fixed exchange rate
-The impact of an over- or under-valued currency and how they’re maintained
-Bretton Woods
-International Trade
-Who benefits and who is hurt by free trade
-The balance of trade
-Why the U.S. trade deficit is so large
-Trade restrictions (quotas and tariffs) and likely impacts
Practice Problems. Remember approximately 1/3 of the final will be based on material discussed
prior to the second midterm, so it is worth spending sometime reviewing old exams/quizzes/study
guides in addition to this material. Happy studying!
1. What are the three principal uses of Money?
2. What is the distinction between fiat and commodity money?
3. Consider the following information:
Item
Currency outstanding
Checking accounts
Savings accounts
Money Market Mutual Funds
Travelers Checks
Stocks and bonds
Credit Card balances
Amount in billions of dollars
5
9
30
20
1
50
30
a. What is M1?
b. What is M2?
4. What does the money supply equal in terms of currency, deposits, reserves, and the
reserve ratio?
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5. If a bank’s reserves increase by $10,000 and the actual reserve-deposit ratio is 0.10,
how much will the money supply change assuming that the public doesn’t hold any
additional cash?
6. Suppose the public holds $200 million in currency, the reserve-deposit ratio is 0.05,
and the bank holds $300 million in reserves, what is the money supply?
7. If the FED conducts an open-market sale of bonds, what will happen to the money
supply?
8. Suppose the Fed purchases $1,000 in bonds. How much will the money supply change
if the reserve-deposit ratio is 0.10 assuming the public holds no extra currency?
9. How will higher interest rates affect savings, consumption, and investment?
10. If the Fed lowers the real interest rate, what will happen to short-run equilibrium output?
11. If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a
______ gap and the Federal Reserve must _____ interest rates in order to close the gap.
12. How does the Fed reduce inflation, and what are the likely consequences of the Fed trying to
reduce inflation to AD, AS, and unemployment?
13. How does the Fed reduce unemployment, what are the likely consequences of the Fed trying
to reduce unemployment to AD, AS, and inflation?
14. Explain the moral hazard problem associated with the Fed protecting large financial
institutions.
15. What is the demand for money?
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16. What is the opportunity cost of holding money?
17. Refer to the figure above. If the Federal Reserve wants to raise the interest rate to 7%, it must
_____ the money supply to _____.
18. Refer to the figure above. If the Federal Reserve wants to set the nominal interest rate at 1%,
it must conduct open market _____ to set the money supply at _____.
19. An increase in the nominal interest rate will __________ the quantity of money demanded,
and is represented with a movement _______ along the money demand curve.
20. How would a decrease in output affect the Money Demand Curve?
21. If there is an expansionary gap in the economy, the FED will _________ money _________,
which will ____________ interest rates, which will ______________ investment and
___________ AD, which will ____________ inflation.
22. If there is an expansionary gap in the economy, the Federal Reserve will likely (circle the
correct answer) to the following:
Interest rates:
Increase
Decrease
Not change
Money Supply:
Increase
Decrease
Not change
Which will cause (circle the correct answer) to:
Savings:
Increase
Decrease
Not change
Investment:
Increase
Decrease
Not change
Aggregate Demand:
Increase
Decrease
Not change
Aggregate Supply:
Increase
Decrease
Not change
Inflation:
Increase
Decrease
Not change
Unemployment:
Increase
Decrease
Not change
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23. Suppose inflation is 2% and there is an expansionary gap of 5%. According to the Taylor
rule, the Federal Funds rate should equal ____.
24. Suppose inflation is 1% and there is a recessionary gap of 4%. According to the Taylor rule,
the Federal Funds rate should equal ____.
25. The Phillips Curve shows that in the short run there is tradeoff between
___________ and ______________. What is this relationship in the long-run and why?
26. If a company’s stock trades for $12, and there are 10 million shares, what is their
market cap?
27. What are the two ways investors in stocks can earn money?
28. Suppose investment A is riskier than investment B. Which is likely to have a higher
rate of return? What does the risk premium between these two investments equal?
29. Suppose you invest $5,000 and earn a 6% rate of return for 45 years. How much will your
investment be worth? How much will it be worth if you start 10 years earlier and withdraw it in
35 years?
30. If 1.00 U.S. dollar is worth 0.75 euro, how much does 1.00 euro worth in terms of dollars?
31. Use the following exchange rate table to answer the following questions
Country
Swedish (Krona)
Australian (Dollar)
Foreign Currency/Dollar
6.00
Dollar/Foreign Currency
1.09
a. What is the number of U.S. dollars per Swedish kronar?
b. What is the number of Australian dollars per U.S. dollars?
c. What is the number of Swedish Krona per Australian dollar?
32. What groups benefit from and what groups are hurt by a depreciating currency?
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33. A new mp3 player costs 200 U.S dollars. If the exchange rate is $1.50 per euro, how much
will the mp3 player cost in Euros?
34. If the exchange rate expressed in euros per dollar increases, what will happen to the price of
U.S. goods and services for Europeans?
35. How will a decrease in the exchange rate for U.S. dollars (expressed in foreign currency per
dollar) affect quantities of dollars demanded?
36. If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per
U.S. dollar, then the Mexican peso has ______ and the U.S. dollar has _____.
37. How would a decrease in U.S. interest rates relative to Japan interest rates affect the supply
for dollars curve, other things constant? How would it affect the value of U.S. dollars?
38. What will happen to a country’s imports and exports if the country maintains an undervalued
exchange rate?
39a. Refer to the figure above. Based on the figure, if the krone exchange rate is fixed at $0.15
dollars per krone, the krone is ______.
b. If the krone exchange rate is fixed at $0.15 dollars per krone, there will be an excess _____
equal to ______ krone?
c. In order to maintain an exchange rate of $0.15 krones/dollar, what will the Polish government
will have to do on foreign exchange markets?
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40. Suppose a country exports $50,000 and imports $75,000. What is the country’s trade
balance?
41. What was the balance of trade in the U.S. in 2013? What is the top deficit nation and what is
the top surplus nation?
42. What are the major determinants of a country’s trade balance?
43. What groups benefit from free trade and what groups are hurt by free trade?
44. What is a tariff and what is a quota?
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