ECN302 Exam 1

In the market for a Toyota Camry, which price is endogenous a. the price at which toyota can sell the camry to the consumer b.the price toyota must pay their workers c.the price toyota must pay for robotic arms d. both b. and c.

the price at which toyota can sell the camry to the consumer

other things equal, an increase in the interest rate leads to

a decrease in the quantity of investment goods demanded

an important factor in the evolution of commodity money to fiat money is

a desire to reduce transaction costs

a trade in a barter economy requires

a double coincidence of wants

all of the following are considered major functions of money except as a: a. medium of exchange b. way to display wealth c. unit of account d. store of value

way to display wealth

prices of items included in the CPI are

weighted according to quantity of the item purchased by the typical household.

"Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonalds sells you a hamburger made from that meat for $2. In this case, GDP increases by

$2

Which of the following would decrease the real exchange rate in a small open economy?

a reduction in government spending

if a technological advancement increases productivity, then

both the real wage and the real rental rate of capital will rise

to increase the money supply, the Federal Reserve

buys government bonds

a competitive, profit-maximizing firm hires labor until the

marginal product of labor equals the real wage

Unlike the real world, the classical model with fixed output assumes that:

capital and labor are fully utilized

the preferences of households determine the

currency deposit ratio

the money supply consists of

currency plus demand deposits

nominal GDP means the value of goods and services is measured in ______ prices

current

If the information technology boom increases investment demand in a small open economy, then net exports _____, and the real exchange rate _____

decrease ; appreciates

an increase in the supply of capital will

decrease the real rental price of capital

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade and _____ and _____ net capital outflow

deficit ; negative

public saving:

depends on the government's tax collections relative to its expenditures

with a Cobb Douglas production function, the share of output going to labor

does not depend on the amount of labor in the economy

in a small, open economy if net exports are negative, then

domestic spending is greater than output

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate

falls, and home country net exports rise

If the reserve deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will

increase by more than $1 million

the production function feature called "constant returns to scale" means that if we:

increase capital and labor by 10% each, we increase output by 10%

An effective policy to reduce a trade deficit in a small open economy would be to:

increase taxes

If many banks fail, this is likely to:

increase the ratio of currency to deposits

Inflation _____ the variability of relative prices and _____ the efficiency of the allocation of resources

increases ; decreases

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

increasing taxes

the measure of how fast the general level of prices is rising is called the

inflation rate

The demand for loanable funds represents

investment

In a small open economy, policies that increase

investment tend to cause a trade deficit

if the production function describing an economy is Y = 100K0.25L0.75, then the share of output going to labor

is 75 percent

disposable personal income

is computed by subtracting personal tax from personal income

The real exchange rate

is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) multiplied by the domestic price level divided by the foreign price level

The world interest rate

is the interest rate prevailing in world financial markets

A small open economy with perfect capital mobility is characterized by all of the following except that a. its domestic interest rate always exceeds the world interest rate b. it engages in international trade c. its net capital outflows always equal the trade balance d. its government does not impede international borrowing or lending

its domestic interest rate always exceeds the world interest rate

the neoclassical production function assumes diminishing returns to

labor as it is sized up, holding the capital stock constant

The lower the real exchange rate, is the _____ expensive domestic goods are relative to foreign goods, and the ____ the demand is for net exports

less ; greater

the money supply will increase if the

monetary base increases

the characteristic of the classical model that the money supply does not affect real variables is called

monetary neutrality

money's liquidity refers to the ease with which

money can be converted into goods and services

the supply of loanable funds represents

national savings

The real exchange rate is determined by the equality of

net capital outflow and the demand for net exports

the opportunity cost of holding money is the

nominal interest rate

Protectionist policies implemented in a small open economy with a trade deficit have the effect of _____ the trade deficit and _____ the quantity of imports and exports

not changing ; decreasing

the labor force equals the

number of employed and unemployed individuals

The nominal exchange rate between the US dollar and the Japanese yen (measured in $ / yen) is the

number of yen you can get for one dollar

Holding other factors constant, legislation to cut taxes in an open economy will

reduce national saving and lead to a trade deficit

in a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply

remains the same

compared to typical open-market operations, when engaging in quantitative easing operations conducted by the Federal Reserve between 2007 and 2011, Federal Reserve purchases tended to be _____ securities

riskier and longer-term

the amount of capital in an economy is a _____ and the amount of investment is a ______

stock ; flow

the assumption that the factor's supply is fixed will imply that the factor's

supply curve is vertical

an increase in the price of goods bought by firms and the government will show up in:

the GDP deflator but not the CPI

in the factor market for labor, which of the following is exogenous

the capital stock

A depreciation of the real exchange rate in a small open economy could be the result of

the expiration of an investment tax-credit provision

In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases

the nominal interest rate

the real wage will increase if

the productivity of labor increases

In a Cobb-Douglas production function, the marginal product of labor will increase if

the quantity of labor decreases

in a Cobb Douglas production function, the marginal product of capital will increase if

the quantity of labor increases

if an earthquake destroys some of the capital stock, then

the real wage rate will fall, and the real rental rate of capital will rise

In a Cobb-Douglas production function, the marginal product of labor will increase it

the stock of capital increases

GDP is all of the following except: a.the total expenditure of every household in the economy b. the income of everyone in the economy c. the overall expenditure on the economy's output of goods and services d. the total output of the economy

the total expenditure of every household in the economy

if net capital outflow is positive, then

the trade balance must be positive

two equivalent ways to view GDP are as the

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

the real wage is the return to labor measured in

units of output

If the real exchange rate between the U.S. and Japan remains unchanged, and the inflation rate in the US is 6% and the inflation rate in Japan is 3%, the

yen will appreciate by 3% against the dollar

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by

0.85 units

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:

50 =(100*101*0.5) - (100*100*0.5)

open-market operations are

Federal Reserve purchases and sales of government bonds.

in a closed economy, private savings equals

Y - T - C

Excess reserves are reserves that banks keep

above the legally required amount

The marginal product of labor is

additional output produced when one additional unit of labor is added

In a system with fraction-reserve banking

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

net exports equal GDP minus domestic spending on

all goods and services

An appreciation of the real exchange rate in a small open economy could be the result of

an increase in government spending

economists use the term money to refer to

assets used for transactions

In the circular flow diagram, firms receive revenue from the _____ market, which is used to purchase inputs in the _____ market

goods ; factor

consumption depends _____ on disposable income, and investment depends _____ on the real interest rate

positively ; negatively

a competitive, profit-maximizing firm hires labor until the

price of output multiplied by the marginal product of labor equals the nominal wage

Deflation occurs when

prices fall

The definition of the transactions velocity of money is

prices multiplied by transactions divided by money

In a small open economy, if the government adopts a policy that lowers imports, then that policy

raises the real exchange rate and does not change net exports

the total income of everyone in the economy adjusted for the level of base year prices is

real GDP

in a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be finance by

borrowing from abroad

the reserve deposit ratio is determined by

business policies of banks and the laws regulating banks

the largest component of national income is

compensation of employees

If output is described by the production function Y = AK0.2L0.8, then the production function has:

constant returns to scale

according to our closed economy model, when taxes decrease without a change in government spending

consumption increases and investment decreases

when the Fed makes an open-market sale, it

decreases the monetary base (B)

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _____ and ____ net capital outflow

deficit ; negative

the unemployment rate

has never been equal to zero in the US

If government purchases exceed taxes minus transfer payments, then the government budget is

in deficit

employing additional units of capital, holding labor constant will _____ total output and ____ marginal output

increase ; decrease

In a small open economy, if the world interest rate falls, then domestic investment will _____ and the real exchange rate will _____, holding all else constant

increase ; increase

crowding out occurs when an increase in government spending _____ the interest rate and investment _____

increases ; decreases

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit _____ net exports, and the real exchange rate _____

increases ; depreciates

in our closed economy model, if there is a decrease in government spending with no change in taxes, then public saving _____ and private saving _____

increases ; doesn't change

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then saving:

increases by 0.15 units

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, investment

rises by $60 billion

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency towards a trade _____ and _____ net capital outflow

surplus ; positive

in a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade _____ and _____ net capital outflow

surplus ; positive

the size of the monetary base is determined by

the Federal reserve

the costs of unexpected inflation, but not of expected inflation, are

the arbitrary redistribution of wealth between debtors and creditors

the value of net exports is also the value of

the difference of national saving and domestic investment

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

the money supply decreases

If velocity is constant and, in addition, the factors of production and the production function determine the real GDP, then

the price level is proportional to the money supply