Download Review Questions Chapter 16

Practice Questions – Chapters 16,17,18,19
Chapter 16
1. What are the three functions of money? What is the difference between
commodity money and fiat money? What are demand deposits?
2. What is the Fed? What are reserves? Define fractional-reserve banking and
reserve ratio. Define money multiplier, open market operations, and reserve
requirements. What is the discount rate? What is the central bank? Define money
supply and monetary policy.
3. Suppose the reserve requirement for checking deposits is 10% and that banks so
not hold any excess reserves.
a. If the Fed sells $1 million of government bonds, what is the effect on the
economy’s reserves and money supply?
b. Now suppose the Fed lowers the reserve requirement to 5%, but banks
choose to hold another 5% of deposits as excess reserves. Why might
banks do so? What is the overall change in the money multiplier and the
money supply as a result of these actions?
Chapter 17
1. Explain the classical dichotomy. Define nominal variables and real variables.
What is money neutrality? What is the velocity of money and the quantity
equation? What is the theory of money
2. What is an inflation tax?
3. Explain the Fischer Effect.
4. What are the costs of inflation? Explain each one.
5. Explain how inflation can cause tax distortions on capital gains.
6. Suppose that this year’s money supply is $500 billion, nominal GDP is $10
trillion, and real GDP is $5 trillion.
a. What is the price level? What is the velocity of money?
b. Suppose that velocity is constant and the economy’s output of goods and
services rises by 5% each year. What will happen to nominal GDP and the
price level next year if the Fed keeps the money supply constant?
c. What money supply should the Fed set next year if it wants to keep the
price level stable?
d. What money supply should the Fed set next year if it wants inflation of
10%?
Chapter 18
1. Define exports, imports, net exports, trade balance, trade surplus, trade deficit,
and balanced trade.
2. Define net capital outflow. How does it relate to net exports?
3. Define nominal exchange rates, real exchange rates, appreciation, and
depreciation.
4. What is the purchasing power parity? What are its limitations?
5. A can of soda costs $.75 in the U.S. and 12 pesos in Mexico. What would be the
peso-dollar exchange rate be if the purchasing power parity holds? If a monetary
expansion caused all prices in Mexico to double, so that soda rose to 24 pesos,
what would happen to the peso-dollar exchange rate?
6. What is happening to the U.S. real exchange rate in each of the following
situations? Explain.
a. The U.S. nominal exchange rate is unchanged, but prices rise faster in the
U.S. than abroad.
b. The U.S. nominal exchange rate is unchanged, but prices rise faster abroad
than in the U.S.
c. The U.S. nominal exchange rate declines, and prices are unchanged in the
United States and abroad.
d. The U.S. nominal exchange rate declines, and prices rise faster abroad
than in the U.S.
Chapter 19
1. According to Mankiw, to understand the forces at work in an open economy, we
focus on supply and demand in two markets: the market for loanable funds, and
the market for foreign currency exchange. What does the market for loanable
funds coordinate? What does the market for foreign currency exchange
coordinate? What is the link between the two markets?
2. What policies and events can affect an open economy?
3. The chapter notes that the rise in the U.S. trade deficit during the 1980’s was
largely due to the rise in the U.S. budget deficit. On the other hand, the popular
press sometimes claims that the increased trade deficit resulted from a decline in
the quality of U.S. products relative to foreign products.
a. Assume that U.S. products did decline in relative quality during the
1980’s. How did this affect net exports at any given exchange rate?
b. Use a three panel diagram to show the effect of this shift in net exports on
the U.S. real exchange rate and trade balance.
c. Is the claim in the popular press consistent with the model in this chapter?
Does a decline in the quality of U.S. products have any effects on our
standard of living? (Hint: When we sell our goods to foreigners, what do
we receive in return?)
4. Suppose the French suddenly develop a strong taste for California wines. Answer
the following questions using words and a diagram.
a. What happens to the demand for dollars in the market for foreign –
currency exchange?
b. What happens to the value of dollars in the market for foreign-currency
exchange?
c. What happens to the quantity of net exports?