Econ Exam 1 (Homework's)

decrease the real rental price of capital

An increase in the supply of capital will: a. increase the marginal product of capital. b. increase the real rental price of capital. c. increase the productivity of capital. d. decrease the real rental price of capital.

downward; more

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases. a. downward; more b. downward; fewer c. upward; fewer d. upward; more

income among factors of production

The neoclassical theory of distribution explains the allocation of: a. income among factors of production. b. output among consumption, investment, and government spending. c. output between goods and services. d. income between saving and investment.

currency-deposit ratio

The preferences of households determine the: a. size of the monetary base. b. reserve-deposit ratio. c. currency-deposit ratio. d. loan-deposit ratio.

marginal productivities

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their: a. marginal productivities. b. relative political power. c. equilibrium growth rates. d. supply.

decrease; increase

When a firm sells a product out of inventory, investment expenditures ______, and consumption expenditures ______. a. increase; decrease b. decrease; remain unchanged c. remain unchanged; increase d. decrease; increase

cost of unexpected inflation

Select the cost of inflation that best describes each scenario. Grandma buys an annuity for $100,000 from an insurance company, which promises to pay $10,000 a year for the rest of her life. After buying it, she is surprised that high inflation triples the price level over the next few years. a. Inconvenience of a changing price level b. Altered tax liability c. Cost of unexpected inflation

the real wage

In the classical model, what adjusts to eliminate any unemployment of labor in the economy? a. the interest rate b. the real rental price of capital c. the real wage d. the average price level

$3

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 bread's contribution to GDP? The baker's added value is:

$6

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 bread's contribution to GDP? The bread's contribution to GDP is:

$1

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 bread's contribution to GDP? The farmer's added value is:

$2

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 bread's contribution to GDP? The miller's added value is:

overestimates; does not

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. a. overestimates; does b. underestimates; does not c. overestimates; does not d. accurately estimates; does

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

A small country might want to use the money of a large country rather than print its own money if the small country: a. needs the revenue for seigniorage. b. is likely to be unstable, whereas the large country is likely to be stable. c. wants to control its own inflation rate. d. is likely to be stable, whereas the large country is likely to be unstable.

decreases GDP by $60,000

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: a. increases GDP by more than $60,000. b. decreases GDP by $60,000. c. increases GDP by $60,000. d. does not change GDP.

less; smaller

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises. a. more; larger b. less; smaller c. more; smaller d. less; larger

investment decreases

According to the model developed in Chapter 3, when government spending increases without a change in taxes: a. consumption decreases. b. investment increases. c. investment decreases. d. consumption increases.

decrease

According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates: a. are unchanged. b. can vary wildly. c. decrease. d. increase.

units of output per hour worked

According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. Let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and MPLf and MPLb be the marginal productivity of farmers and barbers. In parts a and b, real wages are measured as a. units of output per hour worked. b. the ratio of capital to labor. c. output per worker times the price of the output. d. the ratio of output per worker to the price of the output.

remained constant

According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. Let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and MPLf and MPLb be the marginal productivity of farmers and barbers. Over the past century, the productivity of barbers (MPLb) has remained constant. According to the neoclassical theory, barbers' real wage (Wb/Pb) should have a. remained constant. b. decreased. c. increased. d. fluctuated randomly.

increased

According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. Let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and MPLf and MPLb be the marginal productivity of farmers and barbers. Over the past century, the productivity of farmers (MPLf) has risen substantially due to technological progress. According to the neoclassical theory, farmers' real wage (Wf/Pf) should have a. increased. b. decreased. c. remained constant. d. fluctuated randomly

farmers and of barbers will be equal

According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. Let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and MPLf and MPLb be the marginal productivity of farmers and barbers. Suppose workers can move freely between being farmers or being barbers (i.e., no additional costs are required to switch between occupations). This implies that the nominal wages of a. farmers and of barbers will be equal. b. farmers will be higher than those of barbers. c. farmers and of barbers will vary relative to each other over time. d. farmers will be lower than those of barbers.

risen

According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. Let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and MPLf and MPLb be the marginal productivity of farmers and barbers. Your answers in parts a through d imply that the relative price of haircuts, Pb, has ___________ relative to the price of food, Pf. a. fallen b. not changed c. risen

5 percent

According to the quantity theory of money and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase: a. 5 percent. b. 2 percent. c. 3 percent. d. 6 percent.

lower investment and raise the interest rate.

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 economy, will: a. raise investment and lower the interest rate. b. raise both investment and the interest rate. c. lower both investment and the interest rate. d. lower investment and raise the interest rate.

7 percent

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 percent rate, and k is constant, what is the average inflation rate in this economy? a. 13 percent b. 7 percent c. 10 percent d. 3 percent

positively; negatively

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate. a. positively; positively b. negatively; negatively c. negatively; positively d. positively; negatively

Menu and shoeleather costs would rise Hyperinflation could undermine the public's confidence in the economy Relative prices would become more variable

During World War II, both Germany and England had plans for a paper weapon. They each printed the other's currency, with the intention of dropping large quantities by airplane, thereby increasing each other's money supply. Select all of the following reasons that might have made this an effective weapon. Menu and shoeleather costs would rise. Support for the opposing country would rise. Hyperinflation could undermine the public's confidence in the economy. Relative prices would become more variable. A fall in spending would push the economy into recession.

above the legally required amount

Excess reserves are reserves that banks keep: a. above the legally required amount. b. to meet legal reserve requirements. c. in their vaults. d. at the central bank.

small; infrequently

Given that M / P = kY, when the demand for money parameter, k, is large, the velocity of money is ______, and money is changing hands ______. a. large; frequently b. small; infrequently c. large; infrequently d. small; frequently

need to generate revenue to pay for spending

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: a. inability to buy government securities through open-market operations. b. responsibility to increase nominal interest rates by increasing expected inflation. c. desire to increase prices throughout the economy. d. need to generate revenue to pay for spending.

decreased 2 percent

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage: a. increased 2 percent. b. increased 4 percent. c. decreased 6 percent. d. decreased 2 percent.

adjustments via inflation

If nominal wages cannot be cut, then the only way to reduce real wages is by: a. unions. b. legislation. c. productivity increases. d. adjustments via inflation.

be constant

If the demand for real money balances is proportional to real income, velocity will: a. increase as income decreases. b. vary directly with the interest rate. c. increase as income increases. d. be constant.

increase by $60

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? Investment saving will _________________ billion a. decrease by $40 b. increase by $60

increase by $60

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? National saving will _________________ billion a. increase by $60 b. decrease by $40

decrease by $40

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? Private saving will _________________ billion a. increase by $60 b. decrease by $40

increase by $100

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? Public saving will _________________ billion a. increase by $100 b. decrease by $60

decrease; increase

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level. a. increase; increase b. decrease; decrease c. decrease; increase d. increase; decrease

the demand for money decreases

If the nominal interest rate increases, then: a. the demand for money decreases. b. the money supply decreases. c. the demand for money increases. d. the money supply increases.

both barbers and farmers should have risen over time

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of: a. both barbers and farmers should have remained constant over time. b. both barbers and farmers should have risen over time. c. farmers should have risen while the real wage of barbers should have remained constant. d. barbers should have risen while the real wage of farmers should have remained constant.

the money supply decreases

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: a. the money supply decreases. b. the money supply does not change. c. it cannot be determined whether the money supply increases or decreases. d. the money supply increases.

increase by more than $1 million

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will: a. increase by more than $1 million. b. decrease by more than $1 million. c. decrease by $1 million. d. increase by $1 million.

each dollar of reserves generates many dollars of demand deposits

In a fractional-reserve banking system, banks create money because: a. each dollar of reserves generates many dollars of demand deposits. b. banks have the legal authority to issue new currency. c. the wealth of the economy expands when borrowers undertake new debt obligations. d. funds are transferred from households wishing to save to firms wishing to borrow.

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

In a system with fractional-reserve banking: a. all banks must hold reserves equal to a fraction of their loans. b. the banking system completely controls the size of the money supply. c. all banks must hold reserves equal to a fraction of their deposits. d. no banks can make loans.

the value of intermediate goods is included in the market price of the final goods

In computing GDP: a. the amount of production in the underground economy is imputed b. the value of intermediate goods is included in the market price of the final goods c. expenditures on used goods are included d. production added to inventories is excluded

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

In the United States, the money supply is determined: a. according to a constant-growth-rate rule. b. only by the behavior of individuals who hold money and of banks in which money is held. c. jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. d. only by the Fed.

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

In the case of an unanticipated increase in inflation: a. creditors with an unindexed contract are hurt because they get less than they expected in real terms. b. creditors with an indexed contract gain because they get more than they contracted for in nominal terms. c. debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms. d. debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.

lower real interest rate

In the classical model with fixed income, a reduction in the government budget deficit will lead to a: a. higher real interest rate. b. lower real interest rate. c. higher level of output. d. lower level of output.

the nominal interest rate

In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases: a. velocity. b. the real interest rate. c. output. d. the nominal interest rate.

the productive capability of the economy; the money supply

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. a. the money supply; the productive capability of the economy b. the productive capability of the economy; the money supply c. velocity; the money supply d. the money supply; velocity

factors of production and production function

In the long run, the level of national income in an economy is determined by its: a. real and nominal interest rate. b. government budget surplus or deficit. c. rate of economic and accounting profit. d. factors of production and production function.

increases; decreases

Inflation ______ the variability of relative prices and ______ the efficiency of the allocation of resources. a. decreases; decreases b. increases; decreases c. increases; increases d. decreases; increases

monetary base; money multiplier; monetary base

Open-market operations change the ______; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the ______. a. monetary base; monetary base; monetary base b. monetary base; money multiplier; monetary base c. money multiplier; money multiplier; money multiplier d. money multiplier; monetary base; money multiplier

hold money to transfer purchasing power into the future

People use money as a store of value when they: a. hold money to gain power and esteem. b. use money as a measure of economic transactions. c. hold money to transfer purchasing power into the future. d. use money to buy goods and services.

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

Real GDP is a better measure of economic well-being than nominal GDP because real GDP: a. adjusts the value of goods and services produced for changes in the foreign exchange rate. b. includes the value of government transfer payments. c. measures changes in the quantity of goods and services produced by holding prices constant. d. excludes the value of goods and services exported abroad.

menu costs

Select the cost of inflation that best describes each scenario. Because inflation has risen, a clothing company decides to issue a new catalog monthly instead of quarterly. a. Menu costs b. Shoeleather costs c. Inconvenience of a changing price level

altered tax liability

Select the cost of inflation that best describes each scenario. Gita lives in an 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. a. Cost of unexpected inflation b. Altered tax liability c. Shoeleather costs

shoeleather costs

Select the cost of inflation that best describes each scenario. Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value. a. Shoeleather costs b. Cost of unexpected inflation c. Menu costs

Inconvenience of a changing price level

Select the cost of inflation that best describes each scenario. 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. a. Altered tax liability b. Inconvenience of a changing price level c. Menu costs

increase, selling

Suppose that a change in transaction 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 __________. However, the Fed can hold the money supply constant by ____________ bonds in open-market operations.

monetary neutrality

The characteristic of the classical model that the money supply does not affect real variables is called: a. the monetary basis. b. the quantity theory of money. c. monetary neutrality. d. monetary policy.

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

The classical dichotomy: a. is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money. b. fully describes the world in which we live, especially in the short run. c. cannot hold if money is "neutral." d. arises because money depends on the nominal interest rate.

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

The currency-deposit ratio is determined by: a. the Federal Reserve. b. business policies of banks and the laws regulating banks. c. the Federal Deposit Insurance Corporation (FDIC). d. preferences of households about the form of money they wish to hold.

investment

The demand for loanable funds is equivalent to: a. public saving. b. national saving. c. private saving. d. investment.

increase as real income increases

The demand for real money balances is generally assumed to: a. be exogenous. b. increase as real income increases. c. be constant. d. decrease as real income increases.

expected; actual

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation. a. actual; expected b. expected; actual c. expected; core d. core; actual

rises by $60 billion

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: a. falls by $100 billion. b. rises by $100 billion. c. falls by $60 billion. d. rises by $60 billion.

by all holders of money

The inflation tax is paid: a. equally by every household. b. only by government bond holders. c. only by the central bank. d. by all holders of money.

buys government bonds

To increase the money supply, the Federal Reserve: a. sells corporate stocks. b. sells government bonds. c. buys corporate stocks. d. buys government bonds.

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

Two equivalent ways to view GDP are as the: a. total payments made to all workers in the economy or the total profits of all firms and businesses in the economy. b. total expenditures on all goods produced in the economy or the total income earned from producing all services in the economy. c. total income of everyone in the economy or the total expenditure on the economy's output of goods and services. d. total profits of all firms and businesses in the economy or the total consumption of goods and services by all households in the economy.

capital and labor are fully utilized

Unlike the real world, the classical model with fixed output assumes that: a. some capital lies idle, and some labor is unemployed. b. capital and labor are fully utilized. c. all capital is fully utilized, but some labor is unemployed. d. all labor is fully employed, but some capital lies idle.

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

What are the three functions of money? a. A store of value, a medium of exchange, a unit of account b. A medium of exchange, a unit of account, a demand deposit c. A store of value, a bank reserve holding, a medium of exchange d. A medium of exchange, a demand deposit, a bank reserve holding

is not changed

When a firm sells a product out of inventory, GDP: a. increases or decreases, depending on the year the product was changed b. is not changed c. decreases d. increases

investment in inventory

When bread is baked but put away for later sale, this is called: a. investment in inventory. b. saving. c. waste. d. fixed investment.

less; rises

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 ______. a. more; rises b. less; rises c. more; falls d. less; falls