Eco - Macro Exam

The ex ante real interest rate is based on ___ inflation while the ex post real interest rate is based on ___ inflation

expected ; actual

The neoclassical theory of distribution explains the allocation of:

income among factors of production

IN the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then _____ determines real GDP and ______ determines nominal GDP

the productive capability of the economy; the money supply

Over the past century, the productivity of farmers (MPLf) has risen substantially because of technological progress. According to the neoclassical theory, what should have happened to farmers' real wage (W/P)?

Real wages should increase

Over theist century, the productivity of barbers (Mpl) has remained constant. According to the neoclassical theory , what should hav happened to farmers' real wage (W/P)?

Real wages should remain constant

A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. When the engineer eats the bread, what is the value added by each person? What is the breads contribution to GDP?

The farmer's added value is $1. The baker's added value is $3 The miller's added value is $2. The bread's contribution to GDP is $6.

Suppose workers can move freely between being farmers or being barbers (i.e., no additional costs are required to switch between occupations) . What does this imply about the nominal wages of each occupation?

The nominal wages should be equal

The investment function slopes ____ because there are _____ investment projects that are profitable as the interest rate decreases

downward; more

In the long run, the level of national income in an economy is determined by its:

factors of production and production function

If a person quits his job to become at a stay- at - home parent, the labor- force participation rate _____ and the unemployment rate _____

falls, rises

People use money as a store of value when they:

hold money to transfer purchasing power into the future

If the reserve- deposit ratio is less than once, and the monetary base increases buy $1 million, then the money supply will:

increase by more than $1million

According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates:

decrease

If the money supply is held constant, then an increase in the nominal interest rate will____ the demand fir money and ____ the pricer level

decrease; increase

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, than the worker's real wage:

decreed 2 percent

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their:

marginal productivities

The characteristic of the classical model that the money supply does not affect real variables is called

monetary neutrality

in a system of fractional reserve banking, lending by banks increases the

money supply

________ GDP measures the value of the economy's output at current prices and is a ____ variable.

nominal, flow

A fixed - weight price index like the CPI _____ the change in the cost of living because it_____ take into account that people can substitute less expensive goods for ones that have become more expensive.

overestimates; does not

Consumption depends ____ on disposable income, and investment depends____ on the real interest rate

positively; negatively

The currency - deposit ratio is determined by:

preferences of households about the form of money they wish to hold

An increase in the ____ interest rate ____ investment.

real, decreases

Your answers in parts a through d imply that the relative prices of haircuts, P, has _____ relative to the price of food P.

risen

The government raises lump- sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change,. If the marginal propensity to consume is 0.6, national saving:

rises by $60billion

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases

In the classical model, according to the quantity theory of money and he Fisher equation, an increase in money growth increases

the nominal interest rate

If national income is $1,200, consumption is $600, taxes are $200, and government purchases are #300, then the national saving is

300

According to the quantity theory of money and the Fischer equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase

5 percent

An economy with constant velocity has real GDP growth of 3 percent, money growth of 7 percent and a real interest rate of 2 percent. The nominal interest rate

6

If immigration increases the labor 0 force in an economy with Cobb- Douglas production function, the wage _____ and the rental price of capital____.

decreases, increases

In a fractional - reserve banking system, banks create money because:

each dollar of reserved generate many dollars of demand deposits

According to the Fisher effect, an increase in _____ inflation causes an equal increase in the ____ interest rate

expected, nominal

During World War 2, bth Germany and England had plans for a paper weapon; they each printed the other's currency, with the intention of dropping large quantity by airplane, so as to increase the other's money supply

hyperinflation coyly undermine the public's confidence in the economy relative prices would become more variable menu and show leather costs would rise

your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.

inconvenience of a changing price level

The demand for real money balances is generally assumed to:

increase as real income increases

If the Federal Reserve reduces the interest rate it pays on reserves, it will tent to ______ the money multiplier _____ and ____ the money supply

increase, increase

Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. IF the Fed does nothing, the money supply will tend to ____. But the Fed can hold the money supply constant by ____ bonds in open market operations.

increase, selling

When the demand for loanable funds exceeds the supply of loanable funds, households want to save ____ than firms want to invest, and the interest rate____

less; rises

According to the classical theory of money, reuducing inflation will not make workers richer because firms will increase product prices _____ each year and give workers ____ raises

less; smaller

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical, will:

lower investment and raise the interest rate

How are real wages measured in parts a and b?

As units of output per hour

Suppose that a change in transactions technology reduces the amount of currency people want to hold relative to demand deposits. Complete the following statement.

If the Fed does nothing, the money supply will tend to increase, However, the Fed can hold the money supply constant by selling bonds in open- market operations.

Excess reserves are reserves that banks keep:

above the legally required amount

If nominal wages cannot be cut, then the only way to reduce real wages is by:

adjustments via inflation

In a system with fractional - reserve banking:

all banks must hold reserve equal to a fraction of their deposits

Gita lives in a n economy with an inflation rate of 10%. Over the past year, she earned a return of $50,000 on her million - dollar portfolio of stocks and bonds. Because her tax rate is 20%, she paid $10,000 to the government.

altered tax liability

If the demand for real money balances depends on the nominal interest rate, then higher inflation can

arise from the expectation of future money growth

If the demand for real money balanced is proportional to real income, velocity will:

be constant

If a central bank wants to increase the money supply, it can ____ bonds in open- market operations or ____ reserve requirements

buy, decrease

To increase the money supply, the federal reserve

buys government bonds

The inflation tax is paid:

by all holders of money

The demand for loanable funds is equivalent to:

investment

According to the model developed in Chapter 3, when government spending increases without a change in taxes:

investment decreases

When bread is baked but put away for later sale, this is called

investment in inventory

When a firm sells a product out of inventory, GDP:

is not changed

maria lives in an economy with hyperinflation. Eco day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value.

show leather costs

Given that M/P = kY, when the demand for money parameter, k, is large, the velocity of money is ____, and money is changing hands ____.

small; infrequently

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?

the real wage

In Computing GDP

the value of intermediate goods is included in the market price

Two equivalent ways to view GDP are as the:

total income of everyone in the economy or the total expenditure on the economy's output of goods and services

Because most loans are specified in nominal terms, high ____ inflation hurts ____.

unexpected, creditors

The economy begins in equilibrium at point E, representing the real interest rate r1 nat which saving S1 equals desired investment I1. What will be the new equilibrium or real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy?)

Point A

If the productivity of farmers has risen substantially over time because of technological process, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of:

both barbers and farmers should have risen over time

Unlike the real world, the classical model with fixed output assumes that:

capital and labor are fully utilized

Real GDP is a better measure of economic measure of economic well- being than nominal GDP because real GDP:

measures changes in the quantity of goods and services produced by holding prices constant

Because inflation has risen, a clothing company decides to issue a new catalog monthly instead of quarterly

menu costs

Open - market operations change the _____; changes in interest rate paid in reserved change the _____; and changes in the discount rate change the_____

monetary base. money multiplier, monetary base

An increase in the supply of capital will

decrease the real rental price of capital

Based on the table, what is the reserve- deposit ratio at the bank?

10 percent

An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. The velocity of money is

2

Consider the money demand function that takes the form M/P = kY, where M is the quantity of money, P, is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 present rate, and k is constant what is the average inflation rate int he eocnbomy>

7 percent

The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding other factors constant?

Point A

If the government raises taxes by $100 billion when the marginal propensity to consume is 0.6, what happens to each of the following variables?

Puboic saving will increase by $100 billion Private saving will decrease by $40 billion National saving will increase by $60 billion investment will increase by $60 billion

Which of the following events would affect the CPI but not the GDP deflator?

Volvo, the Swedish auto maker, raises the prices of the cars it sells in the UNIted States

Because of the leverage, a 5- percent decline in the value of a bank's assets will cause the value of the bank's ____ to fall by ____ than 5 percent

capital, more

hyperinflation ten to occur when

central banks finance large government budget deficits

The largest component of GDP

consumption

The Ford Motor Company makes a car in 2020 and sells it to eh Jones family in 2021. This event increases

consumption in 2021 and GDp in 2020

Grandpa buys an annuity for $100,000 form an insurance company, which promises to pay $10,000 a year for the rest of his life. After buying it, the is surprised that high inflation ripples the price level over the next few years

cost of unexpected inflation

In the case of an unanticipated increase in inflation:

creditors with an unindexed contract are hurt because they get less than they expected in a real terms

A decrease in government purchases of goods and services, holding taxes constant, will _____ the equilibrium real interest rate and ____ investment

decrease, increase

When a firm sells a product out of inventory, investment expenditures ____ and consumption expenditures _______.

decrease; increase

A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage, The marriage:

decreases GDP by &60,000

inflation ____ the variability of relative prices and ____ the efficiency of the allocation of resources

increase; decrease

A small country might want to use the money of a large country rather than print its own money if the small country

is likely to be unstable, whereas the large country is likely to be stable

The classical dichotomy:

is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money

If nominal GDP real GDP both rise by 10 percent, then the GDP deflator

is unchanged

In the united states, the money supply is determined:

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

In the classical model with fixed income, a reduction in the government budget deficit will lead to a:

lower real interest rate

A manager of a perfectly competitive frm observes that the marginal product of labor is 5 units per hour, the marginal product of capital is 40 units per machine the wage is $20 per hour, the rental price of capital is $120 per machine, and the price of output is $5 per unit. TO maximize profits the manager should hire ______ labor and rent_____ capital.

more, more

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's

need to generate revenue to pay for spending

An economy has the Cobb- Douglas production function Y= 10 K^1/3L^2/3. If the economy's stock of capital doubles, the share of total income paid to the owners of capital will

stay the same

A rembrandt

store of value

What are the functions of money

store of value, a medium of exchange, a unit of account

a subway token used in the subway system

store of value, medium of exchange, unit of account

cigarettes in a POW camp

store of value, medium of exchange, unit of account q

Which of the following is not part of the money supply?

the balances in your retirement ac count

The preferences of household determine

the currency - deposit ratio

If the nominal interest rate increases, then:

the demand for money decreases