Economics Oral Exam 2

No, because everyone would have the same information and the same goals. Index funds make the most sense in this setting because they track market averages at low cost.

If financial markets are behaving as predicted by the efficient markets hypothesis, does it make sense to try to outperform market averages? Why or why not? What type of stock investment makes the most sense in an efficient markets setting? Explain.

Neutral

If money does not influence real economic variables, then it is said to be ________. Fill in the blank.

The real interest rate would be 1%. Yes, if the inflation rate is higher than the nominal interest rate then the real interest rate would be negative.

If the nominal interest rate is 3% and the inflation rate is 2%, what is the value of the real interest rate? Can the real interest rate be negative? Explain.

Minnesota Department of Employment and Economic Development

If you wanted to see detailed state and regional labor market data for the State of Minnesota, what MN agency would you go to?

8%

If you were told that $10,000 placed in an investment account had doubled to $20,000 in 9 years, approximately what rate must this fund been earning over this nine-year period?

Improvement in productivity. Some determinants are capital per worker, human capital per worker, technology, institutions, and natural resources.

Improvement in what economic measure is the key to achieving long-term growth in real output per capita? In class, we discussed several determinants of this measure. Please identify 3 of these determinants.

Cost of Living Adjustment

In economics, what does the term COLA stand for?

Civilian Labor Force

In the BLS household survey, the number employed plus the number unemployed equals what?

Monetary Velocity

In the Classical Equation of Exchange, what does V stand for?

Increases

In the Quantity Theory of Money, what happens to the level of real output when the money supply is increased?

Price Level

In the long run, a change in aggregate demand can only impact what economic variable?

Price level decreases

In the short run, what happens to the overall price level when short run aggregate supply falls and aggregate demand rises?

Minneapolis

In what city is the Federal Reserve bank for the ninth Federal Reserve district (the one that serves Minnesota) located?

1913

In what year was the Federal Reserve created?

Equal to

Is the interest rate paid on bank deposits at the Fed higher, lower or equal to the discount rate?

Bank Capital

On a bank balance sheet, what is the difference between a bank's assets and their liabilities?

$40,000

Suppose $20,000 is invested at a compound rate of 2% per year. Approximately how much will this be worth after 36 years?

9%

Suppose $5,000 is invested at an 8% compound rate per year. Approximately how many years will it take for this amount to double in size to $10,000?

The Coupon Rate

A coupon payment on a bond is calculated by multiplying its face value by what?

Bonds

A debt instrument that is often sold by governments and companies to finance projects is known as what?

Mutual Fund

A financial investment that pools together investor shares allowing small investors to invest in a diversified set of financial instruments is known as what?

junk bond

A high-yield, high-risk bond is known as a _______ . Fill in the blank.

Dividends

A quarterly payment that is made to stockholders by some companies is known as what?

Diversification

A strategy that is used to reduce risk in which investors avoid "putting all of their eggs in one basket" is known as what?

CD

A time deposit is known by what two letters?

4%

According to the March 2022 Summary of Economic Projections, what do Fed decision-makers think is the value of the longer run unemployment rate?

Real GDP

According to the National Bureau of Economic Research, what is the most important indicator of recession?

6.9%

At a seasonally adjusted annual rate, what was the percentage change in US real GDP in the fourth quarter of 2021?

16 years old

At least how old does one need to be in order to be considered unemployed?

Investment would increase if a country saves more, which would lead to an increased long-term economic growth.

Ceteris paribus, what happens to investment when a country saves more? Does this lead to increased or decreased long-term economic growth?

Increases

Ceteris paribus, when the US dollar depreciates, what happens to aggregate demand?

Food and energy

Core inflation is inflation that excludes what?

Monetary

Fill in the blank: "Inflation is always and everywhere a _________ phenomenon."

4 years

For how long is the term of the chair of the Federal Reserve Board?

Monthly

How frequently is the CPI reported?

14 years

How long is a term of a member of the Federal Reserve Board of Governors?

12

How many voting members serve on the FOMC?

You use the rule of 72 to make the calculation. It would take 12 years. 72/6=12

Suppose you had $100,000 in an investment account that earns a compound rate of 6% per year. Approximately how many years will it take for this amount to double to $200,000? What "rule" do you use in making this calculation?

2%

The Federal Reserve's target for the PCE deflator is for it to be at an annual rate of ___ % . Fill in the blank.

Menu costs

The cost of having to reprint price lists during a period in which the general price level is rising is known as what type of costs?

Shoeleather Costs

The cost of the time and effort that people experience in attempting to overcome the effects of inflation are known as what type of costs?

Net Worth

The difference between assets and liabilities in the consumer balance sheet is known as what?

Convergence

The idea that undercapitalized countries will grow more rapidly than the most advanced countries, which will ultimately lead them to catch up to the leaders is known by what term?

0.5%

The primary credit discount rate is currently set at what rate?

Natural Rate of Unemployment

The term used to identify the "full employment rate of unemployment" is known as what?

12

There are _______ Federal Reserve districts. Fill in the blank.

Fiat money

This kind of monetary standard is one in which money has no value other than in exchange. By what term is this monetary standard known?

Rule of 72

This rule is used to approximate how many years it will take something to double in size when it is growing at a particular compound rate over time. What is this rule known as?

Crowding out applies to when the government runs a budget deficit and causes investments to decrease. This would occur when the government spending is being paid off. This makes fiscal stimulus plans less successful.

To what does the term "crowding out" apply? When would we expect crowding out to occur? What happens to interest rates when crowding out arises? Does this make fiscal stimulus plans more or less successful?

Reserves

Vault cash plus deposits banks maintain in the Federal Reserve System are equal to what?

BLS (Bureau of Labor Statistics)

What US agency collects and reports CPI data?

BLS (Bureau of Labor Statistics)

What US agency is responsible for collecting and reporting data on the employment situation in the US?

Municipal Bonds. The interest earned is exempt from federal income tax. They do have default risk, but investors shouldn't be worried about it.

What do we call a bond that is issued by a state or local government? What special feature does such a bond have? Do investors in these bonds need to be concerned about default risk?

Bartering

What do we call exchange in which there is no money used but and goods and services are traded directly for other goods and services?

Baby Boomers

What do we call the population cohort that was born during the period 1946-1964?

M1 and M2. M1 has currency, checkable deposits, and saving deposits. M2 includes M1, small denomination time deposits, and retail money market mutual funds. Credit cards are not included because they are a way of deferring payment and their balances are a liability.

What do we call the two measures of the money supply in the US? What assets are included in these definitions? Are credit cards included in either of these measures? Explain.

Recession

What economic term is used to describe a situation in which inflation is accelerating, unemployment is rising, and output is falling?

Increases

What happens to real GDP when taxes are reduced and the money supply increased?

Decreases

What happens to the aggregate quantity of goods and services demanded when the price level increases?

Increased. Material living standards has also increased. We have better medical technology, better insurance, better quality of food and healthcare.

What has happened to per capita real GDP in the US over the past 150 years? What does this say about material living standards? Please cite a couple of examples of how indicators of social progress have improved over this time period.

1/100 of a percent of interest

What is a basis point?

$100 today is worth more than $100 ten years from now. I would compare the purchasing power of the $100 dollars today to ten years from now.

What is more valuable: $100 today or $100 ten years from today? How would you go about comparing the value of $100 today vs. $100 ten years from today? Explain.

High employment and price stability. Price stability helps to keep inflation rates low and high employment boosts GDP.

What is the Fed's dual mandate? What does this mean in terms of specific targets for those items that are included in this dual mandate?

The quantity theory of money is a theory of how money impacts the overall economy and explains hyperinflation. It applies to the long run. The quantity theory of money changes changes the classical equation of exchange into a theory by stating that any change in M can only cause a change in P

What is the Quantity Theory of Money? Does it apply to the short run or the long run? How is the Classical Equation of Exchange used in your answer? Explain.

0.25%-0.5%

What is the current target range for the federal funds rate?

Money vs income: Income is how much money you are generating in a certain period of time, money is the currency you use to buy things. Money vs wealth: Wealth combines the values of things that you own, which calculates your net worth.

What is the difference between money and income? What is the difference between money and wealth?

Reserves

What is the largest asset (in percentage terms) on a bank balance sheet?

Savings Deposits

What is the largest component of M1?

Open Market Operations

What is the most important monetary policy tool during normal times?

Jay Powell

What is the name of the current chair of the Federal Reserve Board?

Federal Funds Rate

What is the name of the key interest rate that the Fed targets in conducting monetary policy?

Federal Open Markey Committee (FOMC)

What is the name of the key monetary policymaking committee of the Federal Reserve?

100

What is the numerical value of a price index in a base year?

2%

What is the numerical value of the Fed's inflation target?

Curved downward

What is the shape of the long run aggregate supply curve?

The Federal Reserve Board members are non-renewable. The President appoints members, not the Senate. The Senate confirms them, not the House of Representatives. Each member of the Board has to be from a different district.

What is wrong with the following statement? The US Senate just re-appointed a member of the Federal Reserve Board of Governors to their second 14-year term. The appointment was confirmed by the House of Representatives. This Federal ReserveBoard member is now the third person from the San Francisco Federal Reserve district to currently serve on the Board.

Frictional Unemployment

What kind of unemployment exists when people initially enter the work force and engage in an extended period of job search?

Reserve Requirements

What monetary policy tool was eliminated by the Fed in March 2020?

core price index

What price statistic is most closely watched by the Federal Reserve?

Ricardian Equivalence. This impacts the effectiveness of fiscal policy positively because it influences people to save more in order to cover the higher taxes that the government will implant, which will increase the amount of currency in the banks and in circulation.

What term do we use to explain how forward-looking ultra rational people will save more in anticipation of higher future taxes when the government runs budget deficits. How does this impact the effectiveness of fiscal policy in impacting economic activity? Explain.

Stocks. This is more risky than a bond since they do not pay a fixed income and are based on the companies success. Historically, stocks have had a higher rate of return, but also comes with higher risk.

What type of financial instrument entitles an investor to a share of ownership in a company? Is this type of investment more or less risky than a bond? How does the historical rate of return on this financial instrument compare to other types of investments?

insurance

What type of products are used by people to manage financial risk?

Price Deflator. Real GDP. The shape is a downward curved line. The wealth effect is one thing that explains why it is curved downwards. It says that as the price level rises, real wealth falls.

What variable is measured on the vertical axis of an aggregate demand curve? What variable is found on its horizontal axis? What shape is the aggregate demand curve? What is one thing that explains why the aggregate demand curve is this shape?

3.6%

What was the US unemployment rate in March 2022?

3.6% Last month, unemployment was 3.8%. One year ago, unemployment was 6%. This does make sense, last year we were in the middle of the pandemic and many people had lost their jobs. We are now reaching the same numbers that we had before the pandemic.

What was the US unemployment rate in March 2022? How does this compare to the previous month? How does it compare to one year ago? Does this make sense to you? Explain.

Discount loans

When a bank wishes to borrow from the Federal Reserve, what type of loan does it use?

The face value

When a coupon bond reaches maturity, it makes its final coupon payment and also repays what?

The First Friday

When are national employment situation announcements made each month?

Aggregate demand decreases. This causes real GDP to decrease. Policymakers could decrease taxes which would increase the amount of money people have. They could also increase government spending by funding new buildings that could also create new jobs.

When consumer confidence falls, business pessimism increases, and foreign purchases of US goods decrease, what happens to aggregate demand? How does this affect the level of real GDP? What might monetary and/or fiscal policymakers do, if anything, to restore long-run equilibrium when this occurs? Explain.

4%

When output is at its potential level, what is the actual unemployment rate equal to?

Decreases

When the Fed makes an open market sale, what happens to the money supply?

"The lender of last resort"

When the Fed was founded, it was created to be _____________ , which allows it to provide liquidity to our economic system when other funding sources are not available? Fill in the blank.

7

When the board is fully appointed, how many members of the Federal Reserve Board are there?

Frictional unemployment and structural unemployment. The rate of cyclical unemployment would be 0.

When the unemployment rate is at its natural rate, what two types of unemployment exist? What is the value of cyclical unemployment when we are at the natural rate?

Real GDP increases

When there is both an economy wide technological advance and a decrease in energy costs, what happens to real GDP?

Treasury Bonds

Which of the following has the longest term to maturity when they are originally issued—Treasury bills, Treasury notes, or Treasury bonds?

M1; the national debt

Which of the following is largest in dollar terms? M1; The National Debt; M2; Currency in Circulation?

The Treasury

Which of the following is responsible for issuing US debt? The Bureau of Labor Statistics; The Federal Reserve; The Bureau of Economic Analysis; The Treasury Department?

John Keynes

Who is credited with writing, "in the long run we are all dead"?

John Keynes

Who wrote The General Theory of Employment, Interest, and Money?