Macro final + ch 10

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store, is produced by the production process in the chart below. What is the value added of Citrus Growers Inc.?

$0.75 - inc in revenue

An economy produces only 1,000,000 computers valued at $2,000 each. Of these, 200,000 are sold to consumers, 300,000 are sold to businesses, 300,000 are sold to the government, and 100,000 are sold abroad. No computers are imported. The unsold computers at the end of the year are held in inventory by the computer manufacturers. What is the value of the investment component of GDP?

$0.8 billion

i. Adam (who lives in England) shears wool from his sheep and sells it to Karl (who lives in Germany) for $1400ii. Karl uses the wool purchased from Adam to weave into cloth that he then sells to Leon (who also lives in Germany) for $1600.iii. Leon sells the wool cloth to Alfred (who lives in England) for $2000.iv. Alfred then tailors a suit for John (who lives in England) for $5000.Suppose that transactions i) and ii) occurred in 2016 and transactions iii) and iv) occurred in 2017. Calculate UK GDP for 2016 and 2017.

$1400 and $3000 Use the value added method to figure GDP. Adam, from the UK, exports $1400 worth of wool to Germany in 2016. So $1400 gets added to UK's 2016 GDP. In 2017, Alfred, from the UK sells a suit to John for $5000. However, he purchased inputs worth $2000. So the value added is $3000, which gets added to UK's GDP for 2017.

If Bountiful Orchard grows $100,000 worth of peaches, sells $50,000 worth of peaches to consumers and uses to rest to make jam that is sold to consumers for $100,000, Bountiful Orchard's contribution to GDP is:

$150,000

How much (if any) does each of the following transactions raise GDP? The Jones family sells its old house to the Reynolds family for $130,000. The Jones family then buys a newly constructed house from a builder for $175,000.

$175,000 The $175,000 is counted towards GDP because it is new construction. The $130,000 does not count towards GDP because nothing new has been produced.

109) An economy produces 500,000 tables valued at $100 each. Households purchase 100,000 tables, of which 50,000 are imported. Businesses purchase 200,000 domestically produced tables, the government purchases 100,000 domestically produced tables, and 50,000 domestically produced tables are sold abroad. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is value of the investment component of GDP?

$30 million GDP is 5 million dollars (500,000 x 100). Households buy 50,000 tables. Business buys 200,000 tables. 50,000 tables are exported. So 500,00 - 400,000 = 100,000 tables are produced but not sold. So investment = 200,000 tables purchased by business + 100,000 unsold inventory which is worth 30 million dollars.

If the principal amount of a bond is $10,000,000, the coupon rate is 7 percent, and the inflation rate is 4 percent, then the annual coupon payment made to the holder of the bond is ______.

$300,000

If the desired reserve-deposit ratio is 0.25 and the banking system receives an additional $10 million in reserves, bank deposits will increase by ______.

$40 million

i. Adam (who lives in England) shears wool from his sheep and sells it to Karl (who lives in Germany) for $1400ii. Karl uses the wool purchased from Adam to weave into cloth that he then sells to Leon (who also lives in Germany) for $1600.iii. Leon sells the wool cloth to Alfred (who lives in England) for $2000.iv. Alfred then tailors a suit for John (who lives in England) for $5000.Suppose that these are the only transactions in the two countries, and that they all take place in the year 2017. The GDPs of the United Kingdom and Germany (measured in dollars), respectively, are:

$4400 and $600 Using the Value Added Method to figure GDP.i. $1400 is added to UK Exports.ii. Karl (German) creates value added worth $200 and sells to Leon (also German). This adds $200 to German GDP.iii. Leon creates value added of $400 ($2,000 - 1,600) and exports the wool to the UK. So $400 get added to German exports.iv. Alfred creates value added worth $3,000 (= $5,000 - 2,000). So $3,000 get added to UK GDP.

In Macroland there is $12,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 12.5 percent, deposits in Macroland equal ______ and the money supply equals ______.

$48,000,000; $54,000,000

The chart below gives us data on Econland. All numbers are in billions of dollars. National saving in Econland equals _______.

$63 billion savings + taxes - purchases - transfers

Peg's Manicure Manor did 4,000 sets of nails in 2015 and 4,500 sets of nails in 2016. The price of a set of nails was $20 in 2015 and $22 in 2016. If 2015 is the base year, Peg's contribution to real GDP in 2015 was _______ and in 2016 was _______ .

$80,000; $90,000

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then real GDP must be equal to

$98 trillion

The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and real GDP equals $10 trillion. What is potential GDP in Omega?

10 trillion

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals _____.

1160

In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted them. All but one of these had actively looked for a job in the previous four weeks. What is the unemployment rate in this town?

12.5%

The towns of Jekyll and Hyde each have a labor force of 2,000 people. In Jekyll, 500 people were unemployed for the entire year, while the rest of the labor force was employed continuously. In Hyde, every member of the labor force was unemployed for three months and was employed for nine months. The average duration of unemployment spells over the year was _____ months in Jekyll and _____ months in Hyde.

12; 3 Notes: Jekyll: (500x12)/500 = 12; Hyde: (2000x3)/2000 = 3

Data for an economy shows that the unemployment rate is 6%, the participation rate 60 percent, and 200 million people 16 years or older are not in the labor force. How many people are unemployed this economy?

18 million

If real GDP equals 1,500, and, the price level equals 2.5, then what is velocity of circulation if the money stock equals 1,875?

2

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62 for one share of the stock today, you expect a dividend payment of $2, and your risk premium is 5%, what is the rate of return on safe assets?

3

In the year, 2005 Janice Quinn sells a five-year-old car to Used Car, Inc. for $3,000. In the same year, Used Car, Inc. resells the car to Ima Goner for $3,500. What is the contribution of this transaction to GDP in the year 2005?

500

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10 percent. What is Macroland's Money Supply?

5000 econs

The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $500 billion, actual GDP equals $480 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha?

7

In an economy of 100 people in the labor force, if 10 people are unemployed for 4 weeks during the year, and 30 people are unemployed for 8 weeks during the year, and the rest are employed continuously throughout the year, then the average duration of unemployment in this economy is:

7 weeks Notes: ​[(10x4) + (30x8)]/(10 + 30) = 7

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Planned aggregate expenditure equals:

900 + 0.80Y

Which of the following is an example of a final good?

A new computer sold to a business firm.

Which of the following events will increase the domestic real interest rate in an open economy?

An increase in the domestic government's budget deficit.

A large part of the agricultural sector in developing countries is subsistence farming, in which much of the food that is produced is consumed by the farmer and the farmer's family. Discuss the implication of this fact for the measurement of GDP in poorer countries.

Answer: Food that is consumed by its producers does not pass through markets and thus does not get assigned a market price. Measuring GDP therefore requires estimating the value of food consumed by producers, which is a difficult task. Thus, to the extent that the value of food produced by subsistence farmers is ignored or underestimated by the statisticians, the country's measured GDP will understate the true GDP.

rue or False: A high participation rate in an economy implies a low unemployment rate.

Answer: The statement is false. The participation rate is equal to the labor force (E + U) divided by the working age population (E + U + N). The participation rate therefore measures the fraction of the working age population that is either working or looking for work. It is possible for the participation rate to be high and unemployment rate to be high at the same time if most of the labor force participants are unemployed. Example: Let U = 800, E = 100, and N = 100. Unemployment rate is 89% and labor force participation rate is 90%.

Which of the following is NOT a capital good?

Batteries purchased by a car manufacturer to install in new cars.

In the recent past, the government has attempted to stimulate the economy by sending tax refunds to individual people so that they will buy more products. What component of GDP is the government attempting to increase?

Consumption

Which of the following does not describe a characteristic of short-term economic fluctuations?

Durable-goods industries are less sensitive to short-term fluctuations than service and non-durable industries.

The US government pays $1 billion in salaries for government workers.

GDP increases by $1 billion.

c. The US government pays a US firm $1 billion for newly produces airplane parts.

GDP increases by $1 billion.

Who from among the following would be classified as unemployed?

Jack Little, a 21 year old new college graduate actively looking for his first job.

Joan purchases a beautiful rug for $25,000. After several years of wear and tear, Joan has the rug appraised and finds that it is now worth $20,000. Based on this information we may conclude that

Joan has a $5,000 capital loss.

M1 differs from M2 in that

M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.

Which of the following is an example of the life-cycle motive for saving?

Pat puts $400 per month in his 401(k) retirement account.

Which of the following equations is equivalent to the equation S - NX = I?

S + KI = I

Which of the following would increase the government purchases component of U.S. GDP?

The U.S. federal government pays $3 billion in salaries to soldiers in the military. Pensions are transfer payments and not added to GDP. The interest on national debt is also not added to GDP. Look up the power point slides for detailed explanation.

Which of the following is a stock (as in stocks and flows)?

The amount of US currency in circulation as of 8 AM this morning

If the unemployment rate decreases, which of the following is true?

The number of people looking for work decreased and the number of people with jobs increased by even more. The number of people employed increased but the number of people looking for work stayed the same. The number of people unemployed stayed the same but the labor force increased. Unemployment Rate = U/(U + E)

Why is the purchase of a share of stock not included in GDP?

The purchase of a share of stock does not correspond to the production of a good or service. Stocks represent ownership in an existing company. It is neither a good nor a service.

Maggie is a US citizen and lives in Washington DC. She owns a law firm. State the effect of the following transaction on US GDP and on the four components of Aggregate Expenditure:Maggie buys a new car for her personal use from a dealership in Virginia. The car was made entirely in Sweden.

There is no change in US GDP. US Consumption Expenditures will rise by the value of the Swedish car and US imports will rise by the same amount (as the car is Swedish).

b. The US government pays $1 billion to Social Security recipients.

Transfer payments are not counted in GDP; so this transaction does not affect GDP.

Question 37. Maggie is a US citizen and lives in Washington DC. She owns a law firm. State the effect of the following transaction on US GDP and on the four components of Aggregate Expenditure:Maggie buys a new car for her personal use from a dealership in Maryland. The car was made entirely in the US.

U.S. GDP and Consumption Expenditures will both rise by the value of the new car.

If the United States has a $500 billion net capital inflow, then there must be a

U.S. trade deficit of $500 billion.

Question 37. Maggie is a US citizen and lives in Washington DC. She owns a law firm. State the effect of the following transaction on US GDP and on the four components of Aggregate Expenditure: d. The US government buys a new, US made car for Maggie, who has been appointed as Ambassador to Sweden.

US GDP and Government Expenditures will both increase by the value of the car.

Question 37. Maggie is a US citizen and lives in Washington DC. She owns a law firm. State the effect of the following transaction on US GDP and on the four components of Aggregate Expenditure: Maggie's law firm buys a new car from a dealership in New York. The car was made entirely in the US.

US GDP and Investment Expenditures will both rise by the value of the car since the purchase of a car by a business counts as investment.

Alex is a US lawyer with an office in Chicago. A Japanese business firm (operating in Japan) hires Alex and pays him $1 million for his services. How would this transaction show up in US GDP?

US exports will rise by $1 million.

If people become discouraged looking for work and drop out of the labor force without finding a job, how does it affect unemployment rates?

Unemployment rate decreases. When people leave the labor force because they are discouraged, it decreases both the numerator of the unemployment rate and the denominator by the same amount. This change lowers the unemployment rate overall.

Which one of the following is the largest part of national income?

Wages

Which of the following would increase the consumption component of U.S. GDP?

You purchase a vacation at Disney World in Florida .A business purchasing a vacation is included under investment because it is purchased by a business.

After the Federal Reserve increases reserves in the banking system, banks create new deposits through multiple rounds of lending and accepting deposits until the

actual reserve-deposit ratio is equal to the desired reserve-deposit ratio.

Ex-post (in an accounting sense), Savings __________ equals Investment. However, ex-ante, __________ savings may very well be different from __________ investment. It is the __________ which adjusts to make desired savings equal to desired investment.

always; desired; desired; real interest rate

The additional goods and services produced by women in the United States as their labor force participation increases represent (e.g. Jane produces water filter membranes for a company that produces reverse osmosis products):

an increase in economic activity. The water filter membrane would not be produced without her labor and is a true increase in economic activity.

The impact of declining stock prices in the U.S. during 2000-2006 on U.S. household wealth was at least partially offset by

an increase in housing prices.

A country's actual output _____ its potential output.

can only temporarily exceed

Stockholders receive returns on their financial investment in the form of ______ and ______.

capital gains; dividends

Bank Reserves are

cash and similar assets held by the bank to meet depositor withdrawals and other payments.

Changes in autonomous consumption could be the result of

changes in housing prices.

Menu costs are the costs of

changing prices.

People who would like to work full-time, but are able to find only part-time work are:

counted as employed.

Regular interest payments made to bondholders are called ______

coupon payments.

Saving equals

current income minus spending on current needs

Holding other factors constant, if terrorist attacks increase the desire for precautionary saving, then the real interest rate will ______ and the equilibrium quantity of saving and investment will ______.

decrease; increase

A decrease in the perceived riskiness of Company A stock ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

decreases; increases

Economic activity moves from a trough into a period of ______ until it reaches a ______ and then into a period of ______.

expansion; peak; recession

When actual investment is greater than planned investment,

firms have actually sold less output than they had planned to.

Recessions tend to be _____ by _____ rate of inflation.

followed; a decrease in the

Banks help savers find productive uses for their funds because banks are specialized in

gathering information about and evaluating potential borrowers.

If a bank's desired reserve-deposit ratio is 0.25 and it has deposit liabilities of $75 million and reserves of $20 million, it:

has too many reserves and will increase its lending.

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S._____ and there is a capital _____ the United States.

imports increase; inflow to

National defense services provided by the military are:

included in GDP at cost. All current goods and Services produced by the government are included in the GDP at cost because they do not have market prices.

Taylor has the following assets and liabilities. Suppose that Taylor receives a $10,000 bonus from her employer. If she puts that money toward her mortgage, her wealth would ______; if she puts that money in her checking account, her wealth would ______.

increase to $121,000; increase to $121,000

If business inventories equal $40 billion at the beginning of the year and $55 billion at the end of the year, then, assuming no other changes, GDP must have:

increased by $15 billion. 40 billion dollar's worth of goods were produced last year but not sold. They were added to last year's GDP. At the end of this year, the unsold inventory amount is 55 billion dollars. Therefore, (55 - 40 =) 15 billion dollar's worth of new goods must have been produced this year but are not sold. The economy will carry forward 55 billion dollar's worth of inventory which will be beginning of the year inventory for next year.

If short-run equilibrium output equals 10,000, the mpc equals 0.8, and potential output (Y*) equals 11,000, then government purchases must be _____ to eliminate the output gap.

increased by 200

The introduction of credit cards and debit cards ______.

increased velocity of circulation

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, and potential output (Y*) equals 9,000, then taxes must be _____ by approximately _____ to eliminate the output gap.

increased; 250

As disposable income increases, consumption

increases

According to the quantity equation, if velocity and real GDP are constant, and the Federal Reserve increases the money supply by 5 percent, then the price level ______.

increases by 5 percent.

As the real interest rate increases, the quantity of saving supplied ______ and the quantity of saving demanded _______.

increases; decreases

When real output increases, planned aggregate expenditures increase because

induced expenditures increase.

Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6% coupon rate. One year later, after receiving the first coupon payment, Pat decides to sell the bond. If the savings bank interest rate at the time of sale is 7%, at what price can Pat expect to sell the bond for?

less than $10,000

If the natural rate of unemployment equals 6 percent and the actual rate of unemployment equals 5 percent, then cyclical unemployment equals _____ ; the economy has _____ gap equal to ______ .

minus 1%; expansionary; 2%

In the short run, total spending affects _____, and in the long run total spending affects _____.

output; prices

In the basic Keynesian model all of the following are true EXCEPT:

planned investment always equals actual investment.

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes

production levels (but not prices), to meet the demand.

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $4,000 per year. His other option is to go to work for someone else earning net income of $3,000 per year. He should

purchase the truck if the real interest rate is less than 5 percent.

From the point of view of a particular country, capital inflows are

purchases of domestic assets by foreigners.

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store, is produced by the production process in the chart below. If the oranges were grown and the jam produced in the year 2005, but the marmalade was sold at The Corner Store in the year 2006, what is the contribution of these transactions to GDP in the year 2005?

revenue during that year 2

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store, is produced by the production process in the chart below. What is the sum of the value added of all the firms?

sum of total revenue 2.50

The decline in the natural rate of unemployment between the 1979 and the 2000s might be the result of

the changing age structure of the population and more efficient labor markets.

Empirical evidence for the US indicates that higher real interest rates lead to modest increases in savings. Therefore, we can conclude that

the income effect is less than the substitution effect.

In reference to short-term economic fluctuations, the "trough" refers to

the low point of economic activity prior to a recovery.

Two countries, Alpha and Beta, have the same levels of nominal and real GDP. Each dollar in Alpha is used more frequently than each dollar in Beta. Therefore, it must be the case that _____ in Alpha than in Beta.

the money stock is smaller

Planned investment may differ from actual investment because of

unplanned changes in inventories.

Assume an economy produces only hamburgers and hot dogs and the base year is 2016. Use the date to calculate the value of real GDP in 2017.

use base year prices and current quantities

If two countries are economically identical except that citizens in one country have more leisure time, then the level of GDP:

will be the same in both countries.

When the actual reserve-deposit ratio exceeds the desired reserve-deposit ratio, banks ______.

will find it profitable to make new loans.