Macroeconomics Final Exam

Which of the following always uses prices and quantities from the same period

nominal GDP but not real GDP

Other things the same, when the interest rate rises,

people would want to lend more, making the quantity of loanable funds supplied increase.

The one variable that stands out as the most significant explanation of large variations in living standards around the world is

productivity

Suppose the economy is in long-run equilibrium. If a major new source of oil is discovered in the country, then in the short-run

real GDP will rise and the price level will fall.

In an open economy, which factor brings the supply and demand of loanable funds into balance?

real exchange rates

If the price level falls, the real value of a dollar

rises, so people will want to buy more. This response shifts aggregate demand to the right.

A bond buyer is a

saver. Long term bonds have more risk than short term bonds.

At the broadest level, the financial system moves the economy's scarce resources from

savers to borrowers

The source of the supply of loanable funds is

saving, and the source of the demand for loanable funds is investment

When a large, well-known corporation wishes to borrow directly from the public, it can

sell bonds

When conducting an open-market sale, the Fed

sells government bonds, and in so doing decreases the money supply. Correct

The CPI is a measure of the overall cost of

the goods and services purchased by a typical customer

In an open economy, savings equals

investment plus net capital outflow

If the reserve ratio is 5 percent, then $2,500 of additional reserves can create up to

$50,000 of new money

Based on the national savings identity, private savings can be described as

(Y-T-C)

Describe the Federal Reserve's dual mandate and put the mandate into context with one example of a recent macroeconomic event in the United States.

+1 high (full) employment; +1 low, steady inflation (price stability); +2 any discussion with details on: Fed focused on employment with Yellen, focused on employment after 2007, Fed massively increased MS to stimulate AD, increasing Y, decreasing U-3, but thus far without large increases in inflation.

Use the interest-rate effect to explain why we believe the Aggregate Demand curve is downward sloping. You do not need to write a lot, but you will be graded on the accuracy and detail of your explanation.

+1 if price level decreases, you are wealthier, you need less $ to buy the same goods, thus likely to increase savings. +1increased savings shifts the supply of loanable funds to the right, decreasing the real interest rate. +1 increased savings shifts the supply of loanable funds to the right, increasing the total amount of loans in the market +1 this increased investment leads to increased output (Y). Thus, when price level decreases, Y increases for AD.

Use the quantity equation ( M x V = P x Y ) to first define the variables and then explain the quantity theory of money. You do not need to write a lot, just make sure you explain the steps that get us to the main finding of the quantity theory of money.

+2 defining the variables - M=money supply; V=velocity of money; P=price level; Y=real output; +2 if velocity is constant, and money neutrality tells us changes in M do not change real variables (Y), then changes in M must result in changes in P. Therefore changes in the money supply leads to inflation.

Last year a country had a population of 2,700 and real GDP of 16,200,000. This year it had a population of 2,500 and real GDP of 14,640,000. What was the growth rate of real GDP per person between last year and this year?

-2.4 percent

If the nominal interest rate is 0.115, and the inflation rate is 0.025, what is the real interest rate?

0.090

If the current exchange rate between the US Dollar and Euro is $0.76/1 EUR, what is the real exchange rate (in terms of USD/EUR) for a McDonalds hamburger that costs 3.79USD in America and 4.62EUR in France (round to two decimal places)? Report the number only.

0.62

Suppose a basket of goods and services has been selected to calculate the CPI and 2004 has been selected as the base year. In 2002, the basket's cost was $50; in 2004, the basket's cost was $52; and in 2006, the basket's cost was $54.60. The value of the CPI in 2006 was

105.0

Suppose the banking system currently has $300 billion in reserves; the reserve requirement is 10 percent; and excess reserves amount to $3 billion. What is the level of deposits?

2,970 billion

Suppose you deposit $4,000 into an index fund that you expect will earn a yearly return of 7%. If you leave the money in the account for 30 years until retirement, what is the future value of your investment? Round your answer to the nearest dollar.

30,449

Suppose a basket of goods and services has been selected to calculate the CPI and 2008 has been selected as the base year. In 2007, the basket's cost was $100; in 2008, the basket's cost was $98; and in 2009, the basket's cost was $102.80. The rate of inflation between 2008 and 2009 was

4.90%

Suppose that the Fed uses open market operations to increase the reserves held by private banks by $420 (million). By how much will the money supply ultimately increase if the required reserve ratio is 8% (assuming that banks keep as reserves only what is required)? Report only the number.

5250

If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation rate is

6.5 percent

Assume GDP at period zero is equal to 100 and GDP at period one is equal to 1550. What is the average annual growth rate of GDP if the number of years between period zero and period one is 40? Report your answer as a percent to one decimal place.

7.1

You take out a small business loan to start a business. At the end of the 7-year loan, you have made total payments of $150,462.10 with an interest rate of 8.5%. What is the present value of your loan rounded to the nearest dollar?

85,000

The following is a chart of price levels and nominal (market) exchange rates for the USA and Japan (which uses the Yen): Month CPI_USA CPI_JPN YEN/USD Jan 100 98 103 Feb 101 96 103 Mar 101 98 100 Apr 103 96 102 In what month has the US dollar (real exchange rate) appreciated the most?

April

When inflation is higher than expected,

borrowers are better off

In periods of unexpectedly high inflation, who benefits?

Borrowers benefit because they pay back the loan using fewer dollars than anticipated

According to the loanable funds model, which of the following events would result in higher interest rates and greater saving?

Congress passes a reform of the tax laws that encourages greater investment.

The current chairperson of the Federal Reserve is

Janet Yellen

Why does comparative advantage matter in trade?

Each country will export more goods of its comparative advantage

Credit cards are included in the definition of M2 but not the definition of M1 when counting the money supply.

False

If the dollar (USD) "depreciates" then you can buy more foreign currency with one dollar.

False

In the components of GDP, new residential home purchases fall under the category of Consumption.

False

One example of a fiscal policy change is the Federal Reserve purchasing bonds on the open market.

False

Positive Net Capital Outflow is associated with a deficit in the trade balance.

False

Real GDP per capita is relatively uniform across various nations

False

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next

False

The Bureau of Economic Analysis reports the U.S. Consumer Price Index each month

False

The only measure of price level change in the economy is CPI

False

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account. As a result of this transfer by itself

M1 increase by $2,500 and M2 stays the same

Matt is waiting to be recalled to a job which he was laid off. David was fired but hasn't been looking for work during the last 2 months. Who does the BLS count as unemployed?

Matt but not David

The Island of Yap once used large boulders as currency. What essential characteristic of money do boulders lack that most makes it ineffective?

Medium of Exchange

Which of the following would cause investment spending to increase and aggregate demand to shift right?

both an increase in the money supply and an investment tax credit

Suppose there are a large number of men who used to work or seek work who now no longer do either. Other things the same, this makes

both the number of people unemployed and the labor force fall

In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes?

The supply of loanable funds shifted rightward.

"Money neutrality" implies that changes in the money supply have no effect in the long run on real variables.

True

GDP is the market value of all final goods and services produced within a country in a give time period

True

Moral hazard is an increase in risky behavior resulting from someone not bearing the full costs of their own actions.

True

One way the Federal Reserve can increase the money supply is by buying bonds through open market activities.

True

You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. You experienced

a nominal gain, but no real gain, and you paid taxes on the nominal gain.

In 2006 and 2007, the US economy saw a dramatic decline in the average price of a house, bringing the housing market to a halt and lowering individuals wealth (on paper). How did this affect the Aggregate Demand/Aggregate Supply curve?

aggregate demand shifted to the left (decreased)

Which of the following shifts the long-run aggregate supply curve to the left?

an increase in the price of imported natural resources, but not opening up international trade

If a new technology that increases worker productivity is discovered, the long-run result will be a(n) __________ in the aggregate price level and a(n) ___________ in real output.

decrease, increase

When the Federal Reserve increases the money supply, what happens to the value of money in the economy?

decreases

Of the component parts of trade, the US currently runs a trade _________ in goods and a trade ________ in services.

deficit, surplus

On the horizontal axis of the production function, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L). The curve becomes flatter as the amount of capital per worker increases because of

diminishing returns to capital

The value of money rises as the price level

falls, because the number of dollars needed to buy a representative basket of goods falls.

Bonds with higher interest rates tend to

have a higher credit risk than bonds with lower interest rates

In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

Assume the US and Canada are the only two countries in the world. If the exchange rates now change such that the US Dollar becomes cheaper for Canadians to buy, we should expect net exports (Nx) in the US to:

increase

Suppose that the US Congress decreases taxes and as a result, increases the deficit. As a result, the real interest rate should ______ and the real exchange rate should _________ in an open economy.

increase, appreciate

Decreasing the reserve ratio will _________ the money multiplier and _____________ the overall money supply.

increase, increase

Which one of these is a historical example of stagflation in the US economy?

increased oil prices in the 1970s shifted the short-run aggregate supply curve to the left (decreased)

Decreasing the reserve ratio will _________ the money multiplier and _____________ the overall money supply.

increases, increase

Since the peak of employment around 10% following the Great Recession in 2007-08, the unemployment rate has mostly been decreasing because

the labor force participation rate among men has decreased

If a domestic economy is viewed by investors as a "safe haven" for investments, we should expect a shift in the Net Capital Outflows that would result in:

the real interest rate for the economy to decrease and the real exchange rate to appreciate

Over time both real GDP and the price level have trended upward. Which of these trends would the classical dichotomy say could be explained by an upward trend in the money supply?

the upward trent in the price level but not upward trent in real GDP

What does a positive value of net exports indicate?

the value of imports is lower than the value of exports