Macroeconomics Exam #3

What is the value of $1

1/P

Who developed the Quantity Theory of Money

18th century Philosopher David Hume

If domestic residents of other countries purchase $600 billion of U.S. assets and U.S residents purchase $500 billion of foreign assets, then U.S. net capital outflow is A. -$100 billion and the U.S. has a trade deficit. B. $100 billion and the U.S has a trade deficit. C. $100 billion and the U.S. has a trade surplus. D. -$100 billion and the U.S. has a trade surplus.

A. -$100 billion and the U.S. has a trade deficit.

If the exchange rate is 5 Egyptian pounds per U.S. dollar, a watch that costs $25 US dollars costs A. 125 Egyptian pounds B. 50 Egyptian pounds C. 5 Egyptian pounds D. None of the above is correct.

A. 125 Egyptian pounds

If velocity = 4, the quantity of money = 20,000, and the price level = 2.5, then the real value of output is A. 32,000. B. 2,000. C. 200,000. D. 12,500.

A. 32,000

Suppose that M is fixed. According to the quantity equation, which of the following would make the price level higher? A. Y falls or V rises B. Y rises or V falls C. Y or V rise D. Y or V fall

A. Y rises or V rises

Net exports of a country are the value of A. goods and services exported minus the value of goods and services imported. B. goods and services imported minus the value of goods and services exported. C. goods imported minus the value of goods exported. D. goods exported minus the value of goods imported.

A. goods and services exported minus the value of goods and services imported.

The position of the long-run aggregate supply curve A. is determined by resource usage and technology. B. is at the point where the economy would cease to grow. C. shifts to the right when the money supply increases. D. is at the point where the unemployment rate is zero.

A. is determined by resource usage and technology.

According to the classical dichotomy, which of the following is not influenced by monetary factors? A. price level times real GDP divided by the money supply. B. real GDP times the money supply divided by the rate at which money changes hands. C. real GDP times the money supply divided by the price level. D. price level times the money supply divided by real GDP.

A. price level times real GDP divided by the money supply

Most economists believe that in the short run A. real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend. B. real and nominal variables are determined independently and that money cannot move real GDP away from its long-run trend. C. real and nominal variables are highly intertwined but that money cannot move real GDP away from its long-run trend. D. real and nominal variables are determined independently but that money can temporarily move real GDP away from its long-run trend

A. real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply creates an excess A. supply of money, causing people to spend more. B. demand for money, causing people to spend more. C. supply of money, causing people to spend less. D. demand for money, causing people to spend less.

A. supply of money, causing people to spend more

The long-run aggregate supply curve shifts right if A. technology improves. B. the price level decreases. C. the money supply increases. D. All of the above are correct.

A. technology improves

When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then A. the money supply and the price level decrease. B. the money supply decreases and the price level increases. C. the money supply increases and the price level decreases. D. the money supply and the price level increase.

A. the money supply and price level decrease

Aggregate demand includes A. the quantity of goods and services the government, households, firms, and customers abroad want to buy. B. neither the quantity of goods and services the government, households, nor firms want to buy nor the quantity of goods and services customers abroad want to buy. C. the quantity of goods and services households and firms want to buy, but not the quantity of goods and services the government wants to buy. D. the quantity of goods and service the government wants to buy, but not the quantity of goods and services households, firms, or customers abroad want to buy.

A. the quantity of goods and services the government, households, firms, and customers abroad want to buy.

The inflation tax refers to A. the revenue a government creates by printing money. B. higher inflation which requires more frequent price changes. C. the idea that, other things the same, an increase in the tax rate raises the inflation rate. D. taxes being indexed for inflation.

A. the revenue a government creates by printing money

In the open-economy macroeconomic model, if net capital outflow increases then A. the supply of dollars in the market for foreign-currency exchange shifts right. B. the supply of dollars in the market for foreign-currency exchange shifts left. C. the demand for dollars in the market for foreign-currency exchange shifts right. D. the demand for dollars in the market for foreign-currency exchange shifts left.

A. the supply of dollars in the market for foreign-currency exchange shifts right.

Other things the same, the real exchange rate between U.S. and Belgian goods would be higher if A. ​prices in the U.S. were higher, or the number of euro the dollar purchased were higher. ​B. prices in the U.S. were higher, or the number of euro the dollar purchased were lower. ​C. prices in the U.S. were lower, or the number of euro the dollar purchased were lower. ​D. prices in the U.S. were lower, or the number of euro the dollar purchased were higher.

A. ​prices in the U.S. were higher, or the number of euro the dollar purchased were higher.

Quantity Theory of Money

Asserts that quantity of money determines the value of money

In the United States, a three-pound can of coffee costs about $5. If the exchange rate is 0.8 euros per dollar and a three-pound can of coffee in Belgium costs 7 euros. What is the real exchange rate? A. 5/5.6 cans of Belgian coffee per can of U.S. coffee B. 4/7 cans of Belgian coffee per can of U.S. coffee C. 5.6/5 cans of Belgian coffee per can of U.S. coffee D. 7/4 cans of Belgian coffee per can of U.S. coffee

B. 4/7 cans of Belgian coffee per can of U.S. coffee

Which of the following is included in the supply of U.S. dollars in the market for foreign-currency exchange in the open-economy macroeconomic model? A. a U.S. bank loans dollars to Tom to buy a U.S. made motorcycle B. a U.S. tire maker wants to build a new factory in China C. a U.S. company wants to import goods to sell in its retail stores D. All of the above are correct.

B. a U.S. tire maker wants to build a new factory in China

Which of the following both shift aggregate demand left? A. an increase in taxes and at a given price level consumers feel more wealthy B. an increase in taxes and at a given price level consumers feel less wealthy C. a decrease in taxes and at a given price level consumers feel more wealthy D. a decrease in taxes and at a given price level consumers feel less wealthy

B. an increase in taxes and at a given price level consumers feel less wealthy

Which of the following would cause prices and real GDP to rise in the short run? A. an increase in the expected price level B. an increase in the money supply C. a decrease in the capital stock D. an increase in taxes.

B. an increase in the money supply

An Italian company exchanges euros for dollars from U.S. residents and then uses the dollars to buy U.S. products to sell in its stores in Rome. U.S. residents who exchanged their dollars for euros use the euros to buy bonds issued by French corporations. At this point A. U.S. net exports have risen and U.S. net capital outflow have fallen. B. both U.S. net exports and U.S. net capital outflows have risen. C. U.S. net exports have fallen and U.S. net capital outflow have risen. D. both U.S. net exports and U.S. net capital outflow have fallen.

B. both U.S. net exports and U.S. net capital outflows have risen.

Lydia, a citizen of Italy, produces scarves and purses that she sells to department stores in the United States. Other things the same, these sales A. increase U.S. net exports and have no effect on Italian net exports. B. decrease U.S. net exports and increase Italian net exports. C. increase U.S. net exports and decrease Italian net exports. D. decrease U.S. net exports and have no effect on Italian net exports.

B. decrease U.S. net exports and increase Italian net exports.

If a U.S. shirt maker purchases cotton from Egypt, U.S. net exports A. increase, and U.S. net capital outflow increases. B. decrease, and U.S. net capital outflow decreases. C. decrease, and U.S. net capital outflow increases. D. increase, and U.S. net capital outflow decreases

B. decrease, and U.S. net capital outflow decreases.

When the price level falls, the number of dollars needed to buy a representative basket of goods A. increases, so the value of money rises. B. decreases, so the value of money rises. C. increases, so the value of money falls. D. decreases, so the value of money falls.

B. decreases, so the value of money rises

The classical dichotomy refers to the idea that the supply of money A. is irrelevant for understanding the determinants of nominal and real variables. B. determines nominal variables, but not real variables. C. determines real variables, but not nominal variables. D. is a determinant of both real and nominal variables.A.

B. determines nominal variables, but not real variables

If Y and M are constant and V doubles, the quantity equation implies that the price level A. does not change. B. doubles. C. falls to half its original level. D. more than doubles.

B. doubles

Net capital outflow measures the imbalance between the amount of A. foreign assets held by domestic residents and domestic assets held by foreign residents. B. foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners. C. foreign assets bought by domestic residents and the amount of domestic goods and services sold to foreigners. D. None of the above is correct.

B. foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.

Other things the same, a decrease in the price level makes consumers feel A. more wealthy, so the quantity of goods and services demanded falls. B. more wealthy, so the quantity of goods and services demanded rises. C. less wealthy, so the quantity of goods and services demanded rises. D. less wealthy, so the quantity of goods and services demanded falls.

B. more wealthy, so the quantity of goods and services demanded rises.

If U.S. net exports are negative, then net capital outflow is A. positive, so American assets bought by foreigners are greater than foreign assets bought by Americans. B. negative, so American assets bought by foreigners are greater than foreign assets bought by Americans. C. positive, so foreign assets bought by Americans are greater than American assets bought by foreigners. D. negative, so foreign assets bought by Americans are greater than American assets bought by foreigners.

B. negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

Which of the following can explain the upward slope of the short-run aggregate supply curve? A. an increase in the money supply lowers the interest rate B. nominal wages are slow to adjust to changing economic conditions C. as the price level falls, the exchange rate falls D. an increase in the interest rate increases investment spending

B. nominal wages are slow to adjust to changing economic conditions

If a country has a positive net capital outflow, then A. on net other countries are purchasing assets from it. This adds to its demand for domestically generated loanable funds. B. on net it is purchasing assets from abroad. This adds to its demand for domestically generated loanable funds. C. on net it is purchasing assets from abroad. This subtracts from its demand for domestically generated loanable funds. D. on net other countries are purchasing assets from it. This subtracts from its demand for domestically generated loanable funds.

B. on net it is purchasing assets from abroad. This adds to its demand for domestically generated loanable funds.

If a country has Y > C + I + G, then it has A. positive net capital outflow and negative net exports. B. positive net capital outflow and positive net exports. C. negative net capital outflow and negative net exports. D. negative net capital outflow and positive net exports.

B. positive net capital outflow and positive net exports.

The real exchange rate measures the A. price of domestic currency relative to foreign currency. B. price of domestic goods relative to the price of foreign goods. C. rate of domestic and foreign interest. D. None of the above is correct.

B. price of domestic goods relative to the price of foreign goods.

If a country changes its corporate tax laws so that domestic businesses build and manage more business in other countries, then the net capital outflow of that country A. and the net capital outflow of other countries rise. B. rises and the net capital outflow of other countries fall. C. falls and the net capital outflow of other countries rise. D. None of the above are correct.

B. rises and the net capital outflow of other countries fall.

Investment is a A. large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP. B. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP. C. small part of real GDP, so it accounts for a small share of the fluctuation in real GDP. D. large part of real GDP, so it accounts for a large share of the fluctuation in real GDP.

B. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.

If the exchange rate is .60 British pounds = $1, a bottle of ale that costs 3 pounds costs A. $1.80. B. $4.80. C. $5. D. None of the above is correct.

C. $5.

If the exchange rate is 1.25 New Zealand dollars per U.S dollar, the price of apples is $2 a pound in the U.S. and 1 New Zealand dollar per pound in New Zealand, what is the real exchange rate? A. 1.25 B. .75 C. 2.50 D. 2

C. 2.50

If the price level increased from 120 to 144, then what was the inflation rate? A. 24 percent B. 25 percent C. 20 percent D. 17 percent

C. 20 percent

Based on the quantity equation, if M = 8,000, P = 3, and Y = 12,000, then V = A. 0.33. B. 2.0. C. 4.5. D. 0.5.

C. 4.5

A good in the U.S. costs $20. The same good costs 150 pesos in Mexico. If the nominal exchange rate is 10 pesos per dollar, what is the real exchange rate? A. 3/4 so the good is more expensive in the U.S. B. 4/3 so the good is more expensive in Mexico C. 4/3 so the good is more expensive in the U.S. D. 3/4 so the good is more expensive in Mexico

C. 4/3 so the good is more expensive in the U.S.

Which of the following is an example of U.S. foreign portfolio investment? A. Dustin, a U.S. citizen, opens a country-western tavern in New Zealand. B. Albert, a German citizen, buys stock in a U.S. computer company. C. Nancy, a U.S. citizen, buys bonds issued by a Japanese bank. D. Larry, a citizen of Ireland, opens a fish and chips restaurant in the United States.

C. Nancy, a U.S. citizen, buys bonds issued by a Japanese bank.

Which of the following would make both the equilibrium real interest rate and the equilibrium quantity of loanable funds increase? A. The supply of loanable funds shifts left. B. The demand for loanable funds shifts left. C. The demand for loanable funds shifts right. D. The supply of loanable funds shifts right.

C. The demand for loanable funds shifts right.

When Jamie, a U.S. citizen, purchases a wool jacket made in Ireland, the purchase is A. neither an export nor an import for either country. B. both a U.S. and Irish import. C. a U.S. import and an Irish export. D. a U.S. export and an Irish import.

C. a U.S. import and Irish export

In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right? A. only the increased funding for states B. only the tax cuts C. both the increased funding for states and the tax cuts D. neither the increased funding for states nor the tax cuts

C. both the increased funding for states and the tax cuts

In an open economy, national saving equals A. domestic investment minus net capital outflow. B. domestic investment. C. domestic investment plus net capital outflow. D. net capital outflow.

C. domestic investment plus net capital outflow.

All saving in the U.S. economy shows up as A. investment in the U.S. economy. B. U.S. net capital outflow. C. either investment in the U.S. economy or U.S. net capital outflow. D. None of the above is correct.

C. either investment in the U.S. economy or U.S. net capital outflow.

If when the money supply changes, real output and velocity do not change, then a 2 percent increase in the money supply A. decreases the price level by less than 2 percent. B. decreases the price level by 2 percent. C. increases the price level by 2 percent. D. increases the price level by less than 2 percent.

C. increase the price level by 2 percent

The aggregate-demand curve shows that a decrease in the price level A. decreases the real value of goods and services demanded in the economy. B. increases the dollar value of goods and services demanded in the economy. C. increases the real value of goods and services demanded in the economy. D. decreases the dollar value of goods and services demanded in the economy.

C. increases the real value of goods and services demanded in the economy.

In the open-economy macroeconomic model, the supply of loanable funds comes from A. private saving. B. domestic investment. C. national saving. D. the sum of domestic investment and net capital outflow.

C. national saving.

Which of the following is most commonly used to monitor short-run changes in economic activity? A. value of the U.S. dollar in the foreign exchange market. B. the inflation rate. C. real GDP. D. interest rates.

C. real GDP.

Other things the same, an increase in the U.S. interest rate causes the quantity of loanable funds supplied to A. rise because domestic investment rises. B. fall because domestic investment falls. C. rise because national saving rises. D. fall because national saving falls.

C. rise because national saving rises.

In the open-economy macroeconomic model, the market for loanable funds equates national saving with A. net capital outflow. B. the sum of national consumption and government spending. C. the sum of domestic investment and net capital outflow. D. domestic investment

C. the sum of domestic investment and net capital outflow.

If the price level last year was 180 and this year it is 176, then A. there was inflation of 2.3 percent. B. there was inflation of 4.0 percent. C. there was deflation of 2.2 percent. D. there was deflation of 4.0 percent.

C. there was a deflation of 2.2 percent

If output is above its natural rate, then according to sticky-wage theory A. workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce less at any given price level. B. workers and firms will strike bargains for higher wages. In response to the higher wages firms will produce more at any given price level. C. will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level. D. workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce more at any given price level.

C. will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.

Last year a country had exports of $100 billion, imports of $70 billion, and purchased $60 billion worth of foreign assets. What was the value of domestic assets purchased by foreigners? A. $10 billion B. $40 billion C. $70 billion D. $30 billion

D. $30 billion

If a country has net exports of $8 billion and sold $40 billion of goods and services abroad, then it has A. $48 billion of imports and $40 billion of exports. B. $48 billion of exports and $40 billion of imports. C. $40 billion of imports and $32 billion of exports. D. $40 billion of exports and $32 billion of imports

D. $40 billion of exports and $32 billion of imports

If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what is the real interest rate? S. 3.2 percent B. 20 percent C. 10.5 percent D. 5.5 percent

D. 5.5 percent

The classical theory of inflation A. is also known as the quantity theory of money. B. was developed by some of the earliest economic thinkers. C. is used by most modern economists to explain the long-run determinants of the inflation rate. D. all of the above are correct

D. All of the above are correct

Which of the following is included in the aggregate demand for goods and services? A. consumption demand B. investment demand C. net exports D. All of the above are correct.

D. All of the above are correct.

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency A. rises, because one unit of currency buys fewer ice cream cones. B, rises, because one unit of currency buys more ice cream cones. C. falls, because one unit of currency buys more ice cream cones. D. falls, because one unit of currency buys fewer ice cream cones.

D. Falls, because one unit of currency buys fewer ice cream cones

If P = 4 and Y = 200, then which of the following pairs of values are possible? A. M = 800, V = 16 B. M = 200, V = 2 C. M = 150, V = 3 D. M = 400, V = 2

D. M = 400, V = 2

The term hyperinflation refers to A. inflation accompanied by a recession. B. a decrease in the inflation rate C. the spread of inflation from one country to another D. A period of very high inflation

D. a period of very high inflation

Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to A. increase consumption, shown by shifting the aggregate-demand curve to the right. B. decrease consumption, shown as a movement to the left along a given aggregate-demand curve. C. increase consumption, shown as a movement to the right along a given aggregate-demand curve. D. decrease consumption, shown by shifting the aggregate-demand curve to the left.

D. decrease consumption, shown by shifting the aggregate-demand curve to the left.

Foreign-produced goods and services that are purchased domestically are called A. exports. B. net imports. C. net exports. D. imports.

D. imports

According to classical macroeconomic theory, changes in the money supply affect A. real variables, but not nominal variables. B. neither nominal nor real variables. C. nominal variables and real variables. D. nominal variables, but not real variables.

D. nominal variables, but not real variables.

The aggregate demand and aggregate supply graph has A. the price level on the horizontal axis. The price level can be measured by the GDP deflator. B. the price level on the vertical axis. The price level can be measured by GDP. C. the price level on the horizontal axis. The price level can be measured by real GDP. D. the price level on the vertical axis. The price level can be measured by the GDP deflator.

D. the price level on the vertical axis. The price level can be measured by the GDP deflator.

The aggregate supply curve is A. upward sloping in the long run and vertical in the short run. B. upward sloping in the short run and in the long run. C. vertical in the short run and in the long run. D. vertical in the long run and slopes upward in the short run.

D. vertical in the long run and slopes upward in the short run.

Misperceptions Theory

Firms may confuse changes in prices with changes in relative price of the products they sell

Marginal Propensity to consume is important to what policy?

Fiscal Policy

Prices, Value of money

Inflation drive up ________ and drives down_______

Why is the AD curve downward sloping?

Interest rate effect, wealth effect, exchange rate effect

Exchange Rate Effect

Interest rates are lower, so people send money abroad in search of higher interest rates; makes your home money worth less (bad for businesses abroad)

MPC

Marginal Propensity to Consume

domestic money invested abroad - foreign money invested domestically =

Net Capital Outflow

inflation equation

New - Old / Old

What is the formula for nominal GDP

P x Y

P

Price level (CPI or GDP deflator

Sticky Price Theory

Prices are sticky in the short run, due to menu costs; costs to adjust prices

Interest Rate Effect

Prices fall/low leads to money demand falls (increase in the supply of money)

What are the 3 theories of SRAS being upward sloping

Sticky wage theory, sticky price theory, misperceptions theory

Inflation Tax

Tax revenues is inadequate and they can't borrow, government may print money

retaliative Price

The price of one good retaliative to another good or wage

American buys Canadian maple syrup. What happens to net exports in U.S. & net exports in Canada?

U.S. imports increase therefore net exports decreases Canada exports increase therefore net exports increase

If Y = 3,000 Pizzas, P = $10, M = $10,000 and nominal GDP = 30,000 what is the velocity ?

V = P x Y / M = 10 x 3,000 / 10,000 = 30,000/10,000 = 3

equation for velocity

Velocity = P - Y /M

Supply-demand diagram, & equation

Ways to prove Quantity Theory of Money

Multiplier formula

Y = (1 / -MCP ) x change in G

Keynesain Economists

believe that changing the money supply does impact the economy- particularly in the short-run

Classical Economists

believe that changing the money supply has no effect on the real economy

arbitrage

buy low, sell high

If the fed sells bonds...

decrease money supply (too good economy) decrease aggregate demand

P

domestic Price

formula for real exchange rate

e x P / P*

NX (net exports) =

exports - imports

P*

foreign price

Yf

full employment output (GDP)

What causes shifts in LRAS

immigration, minimum wage, unemployment insurance, increase in capital stock, changes in education, changes in raw materials, advances in technology, removal of barriers to international trade

If the fed buys bonds...

increase money supply (bad economy) increase in aggregate demand

hyperinflation

inflation > 50% per month

M

money supply

e

nominal exchange rate

Sticky wage theory

normal wages are sticky in the short run, due to labor contracts and social norms

real exchange rate

rate at which the goods and services of one country trade for the goods and services of another

Y

real GDP

Sunscreen in Mexico Costs 523 pesos. The nominal exchange rate is 18.78 pesos/ $1. The domestic price is $15. what is the real exchange rate ?

rer= e x P / P* = 18.78 x 15 / 523 = 281.7 / 523 = .54 foreign good per domestic good

the law of once price

the idea that a good should sell for the same in all markets (same currency)

What is the value of money

the price of a basket of goods measured in $

neutrality of Money

the proposition that changes in money supply do not affect real variables

Velocity of Money

the rate at which money changes hands

Classical Dichotoomy

the theoretical separation of normal and real variables

Purchasing-Power Parity (PPP)

theory of exchange rates where by the unit of any currency should be able to buy the same quantity of goods in all countries. This implies that exchange rates should change.

V

velocity

If wage is $10 and a Sub cost $7.50 what is the units of output per hour(retaliative price)

w/p = 10/7.50 = 1.33 units of output per hour (retaliative price)

Wealth effect

when lower prices raise the value of cash; you now feel wealthy, so you spend more