FNCE 1010 Final Practice Questions Flashcards by William Alexander

Which of the following would NOT be counted as final goods?

a) A family of 4 builds a second house
b) A city gets a new road built by the state government
c) A local business installs technology that improves environmental quality
d) A firm sells rare earth elements that are made into computer chips

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Which of the following would not be counted in American GDP?

a) An American firm builds computers using silver purchased from a foreign country

b) An Indonesian firm develops a soda product based on the patent of an American soda

c) A national government invests in a transportation infrastructure project titled ‘TRANSFER’

d) An American firm produces silicon to be made into iPads, but all iPad production occurs in
Taiwan

B; good is produced in Indonesia

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Which of the following would count in Brazil’s GNP but not their GDP?

a) A Brazilian firm produces rubber and exports it to Vietnam
b) A Brazilian national works abroad but sends money to their family in Brazil every year
c) A Brazilian state government transfers funds to a Brazilian local government
d) A Brazilian family purchases a new car that was produced in the United States

B; Workers abroad count for gnp

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Which of the following can cause prices to change?

a) Rise in nominal costs
b) Household beliefs
c) Technological innovation
d) All answers are correct

D; Consumer Preferences

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If the Consumer Price Index changes by 3% year-over-year and the nominal interest rate available to small businesses and households is 6%, then what is the real interest rate?

a) 2%
b) 3%
c) -1%
d) 9%

B; Real interest rate = nominal interest rate - inflation rate

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Which of the following statements is true about the difference between the GDP deflator and the CPI?

a) CPI accounts for changing prices of exports while the GDP deflator does not
b) GDP deflator measures the change in prices of both investments and government spending
while the CPI does not
c) GDP deflator measures the changes in prices of consumption while the CPI does not
d) Both the CPI and the GDP deflator account for changes in the price of imports

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Loans available to large corporations offer a 3% interest rate. Which of the following
statements is true?

a) If inflation is positive, then the real interest rate will be negative
b) If the real interest rate equals 4%, then the inflation rate is 1%
c) If there is deflation, then the real interest rate will be less than 3%
d) If inflation is at 2%, then the real interest rate is 1%

D; Real Interest Rate = 3% (nominal rate) - 2% (inflation rate) = 1%

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Which of the following are counted in PCE but not in core PCE?

a) Energy and stock market returns
b) Food and volatile consumer goods
c) Food and energy prices
d) The difference stems from differences in measurement, not differences in content

C; PCE Definition

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Which of the following is correct?

a) Nominal GDP reflects only changes in price
b) Real GDP incorporates changes in the interest rate
c) Real GDP reflects only changes in quantities
d) Real GDP reflects changes in both prices and quantities

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The United States is a leading producer of silicon computer chips. Computer chips are crucial components of computers. What type of goods are they?

a) Capital goods
b) Intermediate goods
c) Consumer goods
d) Investment goods

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Which component of GDP makes up the largest share of output in the United States?
a) Consumption
b) Investment
c) Government spending
d) Net Exports

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With a permanent decrease in the real wage, the substitution effect leads to ______, the
income effect leads to ________, and _______.

a) a higher labor supply; a lower labor supply, the income effect is greater than the substitution
effect
b) a higher labor supply; a lower labor supply, income effect is less than the substitution effect
c) a lower labor supply; a higher labor supply, income effect is greater than the substitution
effect
d) a lower labor supply; a higher labor supply, the income effect is less than the substitution effect

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Okun’s Law states that the gap between full employment and actual output is equal to _____
times the ______ .

a) 2; structural unemployment rate
b) 2; cyclical unemployment rate
c) ½; structural unemploymentrate
d) ½; cyclical unemploymentrate

B; full employment - actual employment = 2(cyclical unemployment)

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An increase in the minimum wage leads, according to the classical model, to _____ in the
labor demand curve, ____ in the labor supply curve, and _______ in unemployment.

a) Decrease, increase, increase
b) Decrease, increase, no change
c) Decrease, decrease, increase
d) No change, no change, increase

A; fuck prof. answer

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Suppose the marginal product of labor is MPN = 400 - 0.4N where N is aggregate
employment. The aggregate quantity of labor supplied is 200 + 10w, where w is the real
wage. What is the equilibrium real wage?
a) 40
b) 49
c) 70
d) 64

D; Set equal and solve

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Everyone’s wealth increases in a country. All else equal, in the labor market, which of the
following is INCORRECT?

a) Equilibrium level of marginal productivity of labor will be higher
b) Labor demand curve shifts right
c) Labor supply will decrease
d) Equilibrium real wage increases

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With optimal labor supply, which of the following is true?

a) The increase in output per additional worker is equal to the nominal wage
b) Marginal product of capital equals real wage
c) Marginal product of labor equals nominal wage
d) None of the other answers are correct

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There is a decrease in real wages and labor increases. Which of the following is true?
a) Substitution effect dominates
b) Income effect dominates
c) Neither substitution nor income effect dominates
d) None of the other answers are true

B; labor increases despite a decrease in real wages, it indicates that the income effect is dominating

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A manufacturing company obtains more machines for its factory. How would this affect
the labor demand curve?
a) No change
b) Shifts right
c) Shifts left
d) Not enough information

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Suppose a semiconductor company uses silicon in the production process. If silicon prices increase, how would the price change appear in the production function?

a) An increase in level of capital, K
b) A decrease in level of capital, K
c) An increase in productivity level, A
d) A decrease in productivity level, A

D; The productivity level (A) in a production function typically refers to how effectively inputs are converted into output.

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Which of the following factors affect total factor productivity?
a) Machine learning
b) Discrimination
c) Entrepreneurial ability
d) All other answers are correct

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A firm producing car parts uses capital and labor. If the firm buys more welding
machines, what is the effect on labor supply and labor demand?

a) Labor supply doesn’t change, labor demand increases
b) Labor supply doesn’t change, labor demand decreases
c) Labor supply decreases, labor demand increases
d) Labor supply decreases, labor demand decreases

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An individual receives a holiday bonus pay. What do we expect to happen to the
individual’s consumption and savings?

a) Consumption will go up, saving will go down.
b) Consumption will go up, saving will go up.
c) Consumption will go down, saving will go down.
d) Consumption will go down, saving will go up.

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An individual learns that their job will be terminated in the next year. What do we expect
to happen to current levels of the individual’s consumption and saving?

a) Consumption will go up, saving will go down.
b) Consumption will go up, saving will go up.
c) Consumption will go down, saving will go down.
d) Consumption will go down, saving will go up.

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An individual inherits a large sum of money from a distant relative. What do we expect to happen to the individual’s consumption and saving? a) Consumption will go up, saving will go down. b) Consumption will go up, saving will go up. c) Consumption will go down, saving will go down. d) Consumption will go down, saving will go up.

Which of the following statements is correct? a) Ricardian equivalence is an argument that suggests households should smooth consumption over time. b) The savings rate is decreasing in household income. c) The marginal propensity to consume is larger for low-income households. d) All other answers are true.

Suppose that the real interest rate in the economy is declining, what happens to the aggregate saving curve? a) Shifts right. b) Shifts left. c) No change. d) Not enough information.

The price of capital is $2,000, the rate of depreciation is 3% per year, the annual expected real interest rate is 5%, and expected inflation is 2%. What is the user cost of capital? a) $100 b) $120 c) $160 d) $200

The equation for the marginal productivity of capital in the following period is 500 − 20𝐾. Suppose the price of a unit of capital is $200, the depreciation rate is 10% per year, and the real interest rate is 10% per year. The desired capital stock is: 40 = 500 - 20K K = 23 a) $23 b) $24 c) $25 d) $26

Which of the following statements is correct? a) The difference between gross investment and net investment is corporate taxes. b) Consumption is the most volatile component of GDP. c) Higher price of capital increases the demand for capital. d) All other answers are incorrect.

Suppose current productivity is increasing and is expected to revert back to its original level in the following period. What is the impact on the equilibrium level of real interest rate, consumption, and investment? a) Real interest rate goes up, consumption declines, investment declines. b) Real interest rate goes down, consumption increases, investment increases. c) Real interest rate goes up, consumption increases, investment increases. d) Real interest rate goes down, consumption declines, investment declines.

A firm chooses its level of investment so that a) The average productivity of capital equals the user cost of capital. b) The marginal productivity of capital equals the real interest rate. c) Its revenues are maximized. d) Its profits are maximized.

In February 2020, Abdou earned $9,000 and his consumption was $6,000. In March 2020, Abdou earned $9,000 but received a stimulus check for $1,000, and his consumption went up to $6,500. What is the marginal propensity to consume of Abdou? a) 50% - only count extra income b) 55% c) 60% d) 65%

Suppose the capital depreciation rate is increasing. What happens to investment? a) Net investment surely declines. b) Gross investment surely declines. c) Net investment is ambiguous. d) Gross investment surely increases.

Suppose households move money from their checking accounts to their savings deposits. What is the effect on M1 and M2? a) Both M1 and M2 will increase. b) M1 will decline, and M2 will increase c) M1 will not change, and M2 will not change. d) M1 will increase, and M2 will decline.

Suppose that the annual yield on a 1-year treasury bond is 5% and the annual yield on a 3- year treasury bond is 7%. According to the expectations theory of the term structure, what is the expected annual yield on a 2-year treasury a year from now? a) 6% b) 7% c) 8% d) 9%

C; 21-5 = 16/2 = 8

Which of the following statements is correct? a) An inverted yield curve implies that the market expects future interest rates to decline. b) During recessions, the yield curve is often inverted. c) A few months after a recession, the yield curve is downward sloping. d) The yield curve is usually downward sloping.

Suppose that the real amount of money (M/P) is 10, real GDP (Y) is 1000, and that the price level (P) is 10. What is the velocity of money? a) 10 b) 100 c) 1000 d) 10000

B; V= (P×Y) / M

Suppose that the nominal interest rate increases. What is the expected effect on the demand for money? a) Money demand declines. b) Money demand increases. c) Money demand does not change. d) Money demand increases only if the money supply is constant.

Suppose that the real interest rate in the economy goes up and money supply does not change. What is the expected effect on the price level? a) Price level increases. b) Price level declines. c) The price level doesn’t change. d) The effect is ambiguous.

Suppose that there is $2B currency in circulation, $200M in bank vaults, $5.2B public deposits, and commercial banks hold $800M deposits at the Federal Reserve system. What is the money multiplier (round to 2nd digit)? a) 1.73 b) 2.40 c) 2.50 d) 2.57

B; 1 + cu / cu + res Res = 1000/5200 = 1/26 = .1923 Cu: 2 / 5.2 = 1 / 2.6 = .3846 1.3846 / .5769 = 2.40

What is the Federal Funds interest rate? a) The interest rate in which commercial banks can borrow from the Federal Reserve bank. b) The interest rate the Federal Reserve Bank pays commercial banks on their excess reserves. c) The interest rate the Federal Reserve Bank pays commercial banks on their required reserves. d) The interest rate commercial banks borrow and lend their excess reserves to each other.

What is the primary interest rate that the Fed targets by executing open market Operations? a) The Fed Funds rate. b) The discount window lending rate. c) The interest rate the Federal Reserve bank pays commercial banks on their excess reserves. d) The long-term interest rate.

Suppose the Fed purchases short-term U.S. treasuries from the public. Which statement is correct? a) This is a form of forward guidance. b) This is a form of quantitative easing. c) This is a form of conventional monetary policy. d) None of the other statements are correct.

Suppose that unemployment is at its natural level, and the inflation rate is 2%. According to Taylor rule, what should the central bank set the nominal interest rate to? a) 0% b) 2% c) 4% d) 8.5%

4% (put taylor rule in calculator)

Suppose the natural level of unemployment is 2%, and expected inflation is 2%. If unemployment is 5%, what should be the actual level of inflation according to the expectations-augmented Phillips curve? a) Inflation is equal to 5%. b) Inflation is greater than 2%. c) Inflation is lower than 2%. d) Inflation is equal to 2%.

Suppose that inflation was expected to be 5%, and instead, it ended up being 3%. According to the expectations-augmented Phillips curve, what can you say about the unanticipated inflation rate and the cyclical unemployment rate? a. Both the unanticipated inflation rate and cyclical unemployment are positive. b. The unanticipated inflation rate is negative and cyclical unemployment rate is positive. c. The unanticipated inflation rate is positive and cyclical unemployment is negative. d. Both unanticipated inflation rate and cyclical unemployment rate are negatives.

Hurricane Sandy caused significant damage in the US, including the destruction of 3.5% of the state's infrastructure and equipment used by local businesses. Which of the following statements is correct regarding the economic impact of Hurricane Sandy? a. The marginal productivity of capital declines. b. The marginal productivity of capital increases. c. The marginal productivity of labor declines. d. Both (a) and (c) are correct. e. Both (b) and (c) are correct.

Hurricane Sandy caused significant damage in the US, destroying 3.5% of the state's business infrastructure and equipment. Concurrently, many households faced major damage to their homes, leading to a substantial decrease in household wealth. Considering these combined impacts on capital and household wealth, what is the effect of Hurricane Sandy on the equilibrium levels of the real wage and labor? a. The real wage decreases, while labor increases. b. The real wage decreases, while the effect on labor is ambiguous. c. Both the real wage and the effect on labor are ambiguous. d. The real wage increases, while labor decreases.

Suppose that inflation is 6% and the output gap is -2%. What should the Fed set the nominal interest rate according to Taylor’s rule? a. 10% b. 9% c. 7% d. 6%

B (study taylor rule)

Suppose future real wages are expected to decrease. What is the impact on the equilibrium levels of the real wage and labor? a. Real wage declines and labor increases b. Real wage declines and labor declines c. Real wage increases and labor increases d. Real wage increases and labor declines

When Siemens, a German engineering company, raises the price of its industrial machinery imported by U.S. manufacturers, which of the following price indexes will be directly affected in the U.S.? a. The CPI and PCE increase. b. The GDP deflator increases. c. None of the above. d. All of the above.

In a fictional economy, the nominal GDP for the year 2020 was $12,000, and the real GDP for the same year was $10,000. In 2021, the nominal GDP increased to $18,000, while the real GDP increased to $12,000. Calculate the inflation rate from 2020 to 2021 using the GDP deflator, rounding your answer to the nearest second decimal place. a. -20% b. 25% c. 50% d. 20%

B (relearn gdp deflator)

In 2022, Amazon reported revenues of $300 billion. From this total, they spent $50 billion on employee salaries, $40 million purchasing products from suppliers, and $20 million on purchasing services essential to their production process. Additionally, they paid $90 billion in taxes. Given that both the purchased products and essential services are intermediate inputs, what was Amazon’s value-added? a. $300 billion b. $240 billion c. $250 billion d. $100 billion

Types of Employment

Frictional: short-lived. It occurs when people voluntarily change jobs. Cyclical: variation in the number of unemployed workers over the course of economic upturns and downturns. Unemployment rises during recessionary periods and declines during periods of economic growth. Structural: Technological changes can lead to unemployment among workers displaced from jobs that are no longer needed. Displaced workers often end up either unemployed for extended periods or leaving the labor force entirely. Institutional: Can result from government policies, such as high minimum wage floors, generous social benefits programs, and restrictive occupational licensing laws. Or market factors.

Suppose there is a major decline in the stock market, leading to a significant decrease in household wealth. What is the impact on the equilibrium level of the real interest rate, consumption, and investment? a. Real interest rate falls; consumption declines; investment increases b. Real interest rate falls; consumption increases; investment increases c. Real interest rate rises; consumption declines; investment declines d. Real interest rate falls; consumption is ambiguous; investment is ambiguous

With a permanent increase in the real wage, the substitution effect leads to ____, the income effect leads to _____, and _____. a. A higher labor supply; a lower labor supply; income effect is weaker than the substitution effect. b. A higher labor supply; a lower labor supply; income effect is stronger than the substitution effect. c. A lower labor supply; a higher labor supply; income effect is weaker than the substitution effect. d. A lower labor supply; a higher labor supply; income effect is stronger than the substitution effect.

What would happen to money demand if the real interest rate (𝑟) on alternative assets Increases?

b. Money demand decreases because higher interest rates make holding money more costly in terms of foregone interest on alternative assets.

Suppose that output (Y) goes up and the money supply stays the same. What do we expect to happen to the price level in equilibrium? a. P increases. b. P declines. c. P remains the same. d. None of the answers are correct.

B; P declines

Suppose that the price of capital (𝑝𝑘) decreases due to an excess supply of capital. What is the effect on the investment curve? a. No change b. Shifts right c. Not enough information d. Shifts left

B - Shifts Right

Identify the true statements concerning key interest rates: I. The discount window lending rate is the interest rate at which commercial banks can borrow directly from the Federal Reserve. II. The federal funds rate is the interest rate at which commercial banks borrow and lend their reserves to each other, typically overnight. III. The federal funds rate is the interest rate that the Federal Reserve pays to commercial banks on their excess reserves. IV. The discount window lending rate is the preferential interest rate offered by commercial banks to low-risk households compared to high-risk ones. a. I and II only b. II and III only c. I, II, and III only d. I, III, and IV only

The equation for the marginal productivity of capital is given by 𝑀𝑃𝐾𝑓 = 200 ― 5𝐾. Suppose the price of a unit of capital is $100, the depreciation rate is 1% per year, and the real interest rate is 4% per year. The desired capital stock is a. 45 b. 39 c. 20 d. 25

Given the following economic data: Nominal GDP: $1500 Real GDP: $900 Velocity of money: 5 Expected inflation rate: 10% What is the money supply in this economy? a. 180 b. 300 c. 4500 d. 7500

B; Money Supply = Nominal GDP / Velocity of Money

During an economic slowdown, the Federal Reserve wishes to stimulate economic activity using conventional monetary policy. They decide to conduct open market operations. What action should they take, and what immediate effect would it have on the federal funds rate? a. They should buy treasury securities, which will push the federal funds rate upwards. b. They should sell treasury securities, which will push the federal funds rate downwards. c. They should buy treasury securities, which will push the federal funds rate downwards. d. They should sell treasury securities, which will push the federal funds rate upwards.

During the conflict between Ukraine and Russia, the Federal Reserve observed distinct trends in inflation indicators: the core PCE experienced a minor rise, whereas the overall PCE saw a more pronounced increase. What factors might account for this disparity between overall and core inflation rates? a. The transition to remote work during the pandemic intensified housing demand, driving up prices. b. Chip shortages drove up the costs of capital goods. c. Sanctions imposed on Russia resulted in a significant surge in oil prices. d. All of the above factors.

Tesla produced an electric car in 2020 and sold it in 2021. Which of the following statements is true: A. The car is counted in the U.S. GDP for 2020 B. The car is counted in the U.S. GDP in 2021 C. The car is counted in the U.S. investment in 2020 D. Both (B) and (C) are correct E. Both (A) and (C) are correct

Which of the following statements is correct? A) Nominal GDP reflects only changes in prices. B) Nominal GDP will increase because of a high inflation rate. C) Nominal GDP reflects only changes in quantities D) None of the above statement is correct

If Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory, which of the following price indexes will be affected? A) The CPI increases B) The GDP deflator increases C) The PCE increases D) All of the above

If Armani raises the price of the Italian jeans it sells in the U.S., which of the following price indexes will be affected? A) The CPI increases B) The GDP deflator increases C) The PCE increases D) Both (A) and (C) E) All of the above

D; GDP Deflator not impacted by imported goods

Suppose older workers are more efficient. How would the aging of the workforce during the past decades appear in the production function? A. An increase in the level of labor, N B. A reduction in the level of labor, N C. An increase in the level of capital, K D. An increase in the productivity level, A

An earthquake destroys 10% of the capital in the economy. How does this event affect the labor demand curve? A. No change. B. Shifts right C. Shifts left D. Not enough information.

The real wage in the economy increased by 20%. What is the effect on the labor demand curve? A. No change. B. Shifts right C. Shifts left D.Not enough information.

Due to a war in the Middle East, the price of oil goes up by 20%. What is the effect on the labor demand curve? A. No change. B. Shifts right C. Shifts left D. Not enough information

Future wages are expected to increase as the country is joining a free-trade agreement. What is the effect on the aggregate labor supply curve? A. No change B. Shift to the left C. Shift to the right D. Not enough information

B. Shift to the left

A country finds large oil reserves on its domestic territory. The revenues from oil will be redistributed to households, and the large reserves are expected to reduce oil prices. What is the impact on the equilibrium levels of real wage and labor? A. Real wage declines, and labor declines B. Real wage increases and labor declines C. Real wage increases and labor increases D. Real wage declines and labor increases

B. Real wage increases and labor declines

An individual is furloughed for 3 months without pay during a year. What do we expect to happen to the individual’s consumption and savings? A. Consumption will go up B. Savings will go up C. Savings will go down D. Both (A) and (B) E. Both (A) and (C)

The boss tells the worker that they will get a promotion and a wage increase in the following year. What do we expect to happen to the individual’s consumption and savings? A. Consumption will go up B. Savings will go up C. Savings will go down D. Both (A) and (B) E. Both (A) and (C)

A household inherits a large sum of money. What do we expect to happen to the individual’s consumption and savings? A. Consumption will go up B. Savings will go up C. Savings will go down D. Both (A) and (B) E. Both (A) and (C)

If a household is a net-borrower, the income effect of an increase in the real interest rate tend to increase its savings. A. True B. False

Suppose that the future income of households is expected to decline. What is the effect on the aggregate savings curve? A. No change B. Shifts right C. Shifts left D. Not enough information

B. Shifts right

Suppose that the real interest rate in the economy goes up. What happens to the aggregate savings curve? A. No change B. Shifts right C. Shifts left D. Not enough information

A. No change

Ricardian Equivalence is an argument suggesting

C: Government Spending financing methods don't impact consumption behavior

Suppose that the depreciation rate of capital increases due to climate change. What is the effect on the future level of capital and on investment demand? A. 𝐾𝑓 goes down, but the effect on 𝐼 is uncertain B. The effects on both 𝐾𝑓 𝑎𝑛𝑑 𝐼 are uncertain C. Both 𝐾𝑓 and 𝐼 decrease D. The effects on 𝐾𝑓 is uncertain, but 𝐼 decreases.

A. 𝐾𝑓 goes down, but the effect on 𝐼 is uncertain. explanation:

Suppose that the price of capital increases due to limited supply. What is the effect on the investment curve? A. No change B. Shifts right C. Shifts left D. Not enough information

Current oil prices increase, but they are expected to return to their original level in a year. What is the impact on the equilibrium level of real interest rate, consumption, and investment? A. 𝑟 ↓, 𝐶 ↓, 𝐼 ↑ B. 𝑟 ↑, 𝐶 ↓, 𝐼 ↓ C. 𝑟 ↑, 𝐶 ↑, 𝐼 ↓ D. 𝑟 ↓, 𝐶 ↓, 𝐼 ? E. 𝑟 ↑, 𝐶 ?, 𝐼 ?

B. 𝑟 ↑, 𝐶 ↓, 𝐼 ↓

Future oil prices are expected to rise, what is the impact on the equilibrium level of real interest rate, consumption and investment? A. 𝑟 ↑, 𝐶 ↓, 𝐼 ↑ B. 𝑟 ↑, 𝐶 ↑, 𝐼 ↑ C. 𝑟 ↓, 𝐶 ↑, 𝐼 ? D. 𝑟 ↓, 𝐶 ↓, 𝐼 ↑ E. 𝑟 ↓, 𝐶 ?, 𝐼 ?

The equation for the marginal productivity of capital is given by 𝑀𝑃𝐾𝑓 = 1000 − 10𝐾. Suppose the price of a unit of capital is $1000, the depreciation rate is 5% per year, and the real interest rate is 2% per year. The desired capital stock is A. 70 B. 82 C. 93 D. 100 E. 110

C. 93; ________

We would expect the interest rate of Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that a) The credit risk associated with Bond A is lower than the credit risk associated with Bond B b) Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation c) Bond A has a term of 20 years and Bond B has a term of 2 years. d) All of the above are correct

c) Bond A has a term of 20 years and Bond B has a term of 2 years.

Suppose that the 1-year yield is 5% and the 2-year yield is 10%. According to the expectations theory of the term structure, what is the expected 1-year yield a year from now? a) 0% b) 5% c) 10% d) 15% e) 20%

D) 15%

Suppose that households sell bonds to the Fed and deposit the proceeds to their savings deposits. Which statement is true? a) M1 declines. b) M2 declines. c) M1 increases. d) M2 increases. e) Both (a) and (b) are correct.

Suppose that the 1-year yield is 7% and the 2-year yield is 5%. According to the expectations theory of the term structure, what is the expected 1-year yield a year from now? a) 9% b) 12% c) -2% d) 3% e) 0%

D) 3%

Suppose that the 2-year yield is 2% and the 4-year yield is 0%. According to the expectations theory of the term structure, what is the expected 2-year yield two years from now? a) -4% b) -2% c) 0% d) 2% e) 4%

b) -2%

Suppose that nominal GDP is $1,000, money supply is $100, and the expected inflation rate is 10%. What is the velocity of money? a) 0.1 b) 1 c) 10 d) 100 e) 100,000

c) 10

The coefficient of the Taylor rule on the output gap is 0.5. Ben Bernanke thinks that the coefficient on the output gap should be 1, and not 0.5. Is Ben Bernanke more dovish than John Taylor? a) True b) False

a) True

How does an open-market purchase of U.S. treasuries by the Fed affect its balance sheet? a) Assets increase, and liabilities decline b) Assets decline, and liabilities increase c) Both assets and liabilities increase d) Both assets and liabilities decline

c) Both assets and liabilities increase

Suppose that inflation is 5% and that the unemployment rate is at its natural level. What should the Fed set the nominal interest rate to according to Taylor’s rule? a) 1.5% b) 5% c) 6.5% d) 8.5%

D) 8.5%

Suppose that there is $900M currency in circulation, $100M in bank vaults, $2B public deposits, and commercial banks hold $900M deposits at the Federal Reserve system. What is the money multiplier (round to 2nd digit)? a) 1.50 b) 1.53 c) 1.56 d) 1.65

c) 1.56 Money multiplier= 𝑀/𝐵𝐴𝑆𝐸 = (𝐶𝑈+𝐷𝐸𝑃) / (𝐶𝑈+𝑅𝐸𝑆)

What is the discount window lending rate? a) The interest rate in which commercial banks can borrow from the Federal Reserve bank b) The interest rate the Federal Reserve bank pays commercial banks on their excess reserves c) The interest rate commercial banks borrow and lend their excess reserves to each other d) The favorable interest rate offered to low-risk households relative to high-risk ones

a) The interest rate in which commercial banks can borrow from the Federal Reserve bank

FNCE 1010 Final Practice Questions Flashcards

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