ECO119 - EXAM 1
When a firm sells a product out of inventory, GDP: a.) is not changed b.) increases, or decreases, depending on the year the product was purchased c.) increases d.) decreases
a.) is not changed
If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will a.) increase by $1 million b.) increase by $1 million c.) decrease by more than $1 million d.) increase by more than $1 million
d.) increase by more than $1 million
To increase the money supply, the Federal Reserve: a.) sells corporate stocks b.) buys corporate stocks c.) buys government bonds d.) sells government bonds
c.) buys government bonds
A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. When the engineer eats the bread, what is the value added by each person? What is the bread's contribution to GDP? The farmer's added value is $ The baker's added value is $ The miller's added value is $ The bread's contribution to GDP is $
The farmer's value added is $1 The miller's value added is $2 The baker's added value is $3 The bread's contribution to GDP is $6
When bread is baked but put away for later sale, this is called: a.) investment in inventory b.) fixed investment c.) saving d.) waste
a.) investment in inventory
In the United States, the money supply is determined: a.) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held b.) only by the behavior of individuals who hold money and of banks in which money is held c.) according to a constant growth-rate rule d.) only by the Fed
a.) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held
When demand for loanable funds exceeds the supply of loanable funds, households want to save ____ than firms want to invest, and the real interest rate _____. a.) less; rises b.) more; falls c.) more; rises d.) less; falls
a.) less; rises
Excess reserves are reserves that banks keep: a.) in their vaults b.) above the legally required amount c.) to meet legal reserve requirements d.) at the central bank
b.) above the legally required amount
If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of: a.) both barbers and farmers should have remained constant over time b.) both barbers and farmer should have risen over time c.) barbers should have risen while the real wage of farmers should have remained constant d.) farmers should have risen while the real wage of barbers should have remained constant.
b.) both barbers and farmers should have risen over time
The demand for loanable funds is equivalent to: a.) national saving b.) investment c.) public saving d.) private saving
b.) investment
Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's a.) inability to buy government securities through open-market operations b.) need to generate revenue to pay for spending c.) desire to increase prices throughout the economy d.) responsibility to increase nominal interest rates by increasing expected inflation
b.) need to generate revenue to pay for spending
A fixed-weight price index like the CPI _____ the change in the cost of living because it ______ take into account that people can substitute less expensive goods for ones that have become more expensive a.) overestimates; does b.) overestimates; does not c.) underestimates; does not d.) accurately estimates; does
b.) overestimates; does not
According to the quantity theory of money and the fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase a.) 6 percent b.) 2 percent c.) 5 percent d.) 3 percent
c.) 5 percent
If nominal wages cannot be cut, then the only way to reduce real wages is by a.) productivity increases b.) legislation c.) adjustments via inflation d.) unions
c.) adjustments via inflation
Open-market operations change the ______: changes in interest rate paid on reserves change the __________: and changes in the discount rate change the ______. a.) monetary base; monetary base; monetary base b.) money multiplier; money multiplier; money multiplier c.) monetary base; money multiplier; monetary base d.) money multiplier; monetary base; money multiplier
c.) monetary base; money multiplier; monetary base
The characteristic of the classical model that the money supply does not affect real variables is called: a.) the monetary basis b.) the quantity theory of money c.) monetary neutrality d.) monetary policy
c.) monetary neutrality
Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. Complete the following statement. If the fed does nothing, the money supply will tend to _____. However, the Fed can hold the money supply constant by ___ bonds in open-market operations.
increase; selling
Based on the table which is the reserve-deposit ratio at the bank? Assets Reserves - $10,000 Loans - 100,000 Securities - $40,000 Liabilities and Net Worth Deposits - $100,000 Debt - 20,000 Equity - 30,000
a.) 10 percent
If the ratio of reserves to deposit (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: a.) the money supply decreases b.) it cannot be determined whether the money supply increases or decreases c.) the money supply increases d.) the money supply does not change
a.) the money supply decreases
An increase in the supply of capital will: a.) increase the marginal product of capital b.) decrease the real rental price of capital c.) increase the real rental price of capital d.) increase the productivity of capital
b.) decrease the real rental price of capital
In a fractional-reserve banking system, banks create money because: a.) the wealth of the economy expands when borrowers undertake new debt obligations b.) each dollar of reserves generates many dollars of demand deposits c.) banks have the legal authority to issue new currency d.) funds are transferred from households wishing to save to firms wishing to borrow
b.) each dollar of reserves generates many dollars of demand deposits
The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____. a.) core; actual b.) expected; actual c.) actual; expected d.) expected; core
b.) expected; actual
According to the model developed in Chapter 3, when government spending increases without a change in taxes: a.) consumption decreases b.) investment decreases c.) consumption increases d.) investment increases
b.) investment decreases
Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will: a.) lower both investment and the interest rate b.) lower investment and raise the interest rate c.) raise investment and lower the interest rate d.) raise both investment and the interest rate
b.) lower investment and raise the interest rate
The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)? a.) point b b.) point A c.) point D d.) point C
b.) point A
In the case of unanticipated increase in inflation: a.) creditors with an indexed contract gain because they get more than they contracted for in nominal terms b.) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms c.) creditors with an unindexed contract are hurt because they get less than they expected in real terms d.) debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms
c.) creditors with an unindexed contract are hurt because they get less than they expected in real terms
If the money supply is held constant, then an increase in the nominal interest rate will ___ the demand for money and ____ the price level. a.) decrease; decrease b.) increase; increase c.) decrease; increase d.) increase; decrease
c.) decrease; increase
If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage a.) increased 2 percent b.) increased 4 percent c.) decreased 2 percent d.) decreased 6 percent
c.) decreased 2 percent
In the classical model, what adjusts to eliminate any unemployment of labor in the economy? a.) the interest rate b.) the average price level c.) the real wage d.) the real rental price of capital
c.) the real wage
The inflation tax is paid a.) equally by every household b.) only by the central bank c.) only by government bond holders d.) by all holders of money
d.) by all holders of money
The preferences of households determine the: a.) size of the monetary base b.) loan-deposit ratio c.) reserve-deposit ratio d.) currency-deposit ratio
d.) currency-deposit ratio
When a firm sells a product out of inventory, investment expenditures _______, and consumption expenditures_______. a.) decrease; increase b.) remain unchanged; increased c.) decrease; remain unchanged d.) increase; decrease
a.) decrease; increase
If nominal interest rate increases, then: a.) the money supply increases b.) the demand for money decreases c.) the money supply decreases d.) the demand for money increases
b.) the demand for money decreases
In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ____ determines real GDP and ______ determines nominal GDP a.) velocity; the money supply b.) the productive capability of the economy; the money supply c.) the money supply; the productive capability of the economy d.) the money supply; velocity
b.) the productive capability of the economy; the money supply
In computing GDP: a.) production added to inventories is excluded b.) the value of intermediate goods is included in the market price of the final goods c.) expenditures on used goods are included d.) the amount of production in the underground economy is imputed
b.) the value of intermediate goods is included in the market price of the final goods
Real GDP is a better measure of economic well-being than nominal GDP because real GDP: a.) adjusts the value of goods and services produced for changes in the foreign exchange rate b.) includes the value of government transfer payments c.) measures changes in the quantity of goods and services produced by holding prices constant d.) excludes the value of goods and services exported abroad
c.) measures changes in the quantity of goods and services produced by holding prices constant
Given that M/P = kY, when the demand for money parameter, k, is large, the velocity of money is ____, and money is changing hands a.) large; infrequently b.) large; frequently c.) small; infrequently d.) small; frequently
c.) small; infrequently
In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases: a.) the real interest rate b.) output c.) the nominal interest rate d.) velocity
c.) the nominal interest rate
During WWII, both Germany and England had plans for a paper weapon; they each printed the other's currency, with the intention of dropping large quantities by airplane, so as to increase the other's money supply Select all of the following reasons that might have made this an effective weapon -relative prices would become variable -support for the opposing country would rise -it would create additional seigniorage revenue for the country -menu and shoeleather costs would rise -the banking system would fail -Hyperinflation could undermine the public's confidence in the economy
-relative prices would become variable -menu and shoeleather costs would rise
If the government raises taxes by $100 billion when the marginal propensity to consume is 0.6, what happens to each of the follow variables 1.) public saving will _____ billion 2.) Private saving will ____ billion 3.) National saving will _____ billion 4.) Investment will ____ billion
1.) increase by $100 2.) Decrease by $40 3.) Increase by $60 4.) Increase by $60
1.) Because inflation has risen, a clothing company decides to issue a new catalog monthly instead of quarterly: 2.) Grandpa buys an annuity for $100,000 from an insurance company, which promises to pay $10,000 a year for the rest of his life. After buying it, he is surprised that high inflation triples the price level over the next few years 3.) Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value 4.) Gita lives in an economy with inflation rate of 10%. Over the past year, she earned a return of $50,000 on her million-dollar portfolio of stocks and bonds. Because her tax rate is $10,000 to the government 5.) Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.
1.) menu costs 2.) costs of unexpected inflation 3.) shoeleather costs 4.) altered tax liability 5.) inconvenience of changing price level
What are the three functions of money a.) a store of value, a medium of exchange, a unit of account b.) a store of value, a bank reserve holding, a medium of exchange c.) A medium of exchange, a unit of account, a demand deposit d.) a medium of exchange, a demand deposit, a bank reserve holding assign the correct functions of money to each example below 1.) A Rembrandt painting 2.)A subway token used in the subway system 3.) Cigarettes in a POW camp
a.) a store of value, a medium of exchange, a unit of account 1.) store of value 2.) store of value, medium of exchange, unit of account 3.) store of value, medium of exchange, unit of account
A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after marriage: The marriage a.) decreases GDP by $60,000 b.) increases GDP by more than $60,000 c.) does not change GDP d.) increases GDP by $60,000
a.) decreases GDP by $60,000
The investment function slopes ____ because there are ___ investment projects that are profitable as the interest rate decreases a.) downward; more b.) upward; fewer c.) upward; more d.) downward; fewer
a.) downward; more
Inflation ____ the variability of relative prices and ____ the efficiency of the allocation of resources a.) increases; decreases b.) increases; increases c.) decreases; increases d.) decreases; decreases
a.) increases; decreases
According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ___ each year and give workers ____ raises a.) less; smaller b.) less; larger c.) more; smaller d.) more; larger
a.) less; smaller
The economy begins in equilibrium at point E, representing the real interest rate r1 at which S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving and investment if the government cut taxes, holding other factors constant? (photo not available on quizlet) a.) point A b.) point D c.) point C d.) point B
a.) point A
The currency-deposit ratio is determined by: a.) preferences of households about the form of money they wish to hold b.) the Federal Deposit Insurance Corporation (FDIC) c.) business policies of banks and laws regulating banks d.) the Federal reserve
a.) preferences of households about the form of money they wish to hold
According to the neoclassical theory of distribution, a worker's real wage reflects her productivity. let's use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers Pf and Pb be the prices of food and haircuts, and MPLf and MPLb be the marginal productivity of farmers and barbers a.) Over the past century, the productivity of farmers (MPLf) has risen substantially because of technological progress. According to the neoclassical theory, what should have happened to farmers' real wage (Wf/Pf) b.) Over the past century, the productivity of barbers (MPLb) has remained constant. According to the neoclassical theory, what should have happened to farmers' real wage (Wb/Pb) c.) How are real wages measured in parts a and b a.) as ratio of output per worker to the price of the output b.) as the ratio of capital to labor c.) As units of output per hour worked d.) As output per worker times the price of the output d.) Suppose workers can move freely between being farmers or being barbers (I.e., no additional costs are required to switch between occupations). What does this imply about the nominal wage of each occupation? e.) Your answers in parts a through d imply that the relative price of haircuts, Pb has ____ relative to the price of food Pf.
a.) real wages should increase b.) Real wages should remain constant c.) c.) As units of output per hour worked d.) nominal wages should be equal e.) risen
Consider the money demand function that takes the form M / P = kY, where M is the quantity of money, P is price level, k is constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy? a.) 13 percent b.) 10 percent c.) 7 percent d.) 3 percent
c.) 7 percent
In a system with fractional-reserve banking: a.) the banking system completely controls the size of the money supply b.) no banks can make loans c.) all banks must hold reserves equal to a fraction of their deposits d.) all banks must hold reserves equal to a fraction of their loans
c.) all banks must hold reserves equal to a fraction of their deposits
If the demand for real money balances is proportional to real income, velocity will: a.) increase as income increases b.) vary directly with the interest rate c.) be constant d.) increase as income decreases
c.) be constant
The neoclassical theory of distribution explains the allocation of: a.) output between goods and services b.) output among consumption, investment, and government spending c.) income among factors of production d.) income between saving and investment
c.) income among factors of production
A small country might want to use the money of a large country rather than print its own money if the small country: a.) needs the revenue for seigniorage b.) wants to control its own inflation rate c.) is likely to be unstable, whereas the large country is likely to be stable c.) is likely to be stable, whereas the large country is likely to be unstable
c.) is likely to be unstable, whereas the large country is likely to be stable
Two equivalent ways to view GDP are as the: a.) total expenditures on all goods produced in the economy or the total income earned from producing all services in the economy b.) total payments made to all workers in the economy or the total profits of all firms and businesses in the economy c.) total income of everyone in the economy or the total expenditure on the economy's output of goods d.) total profits of all firms and businesses in the economy or the total consumption of goods and services in the economy
c.) total income of everyone in the economy or the total expenditure on the economy's output of goods and services
Unlike the real world, the classical model with fixed output assumes that: a.) all labor is fully employed, but some capital lies idle b.) all capital is fully utilized, but some labor is unemployed c.) some capital lies idle, and some labor is unemployed d.) capital and labor are fully utilized
d.) capital and labor are fully utilized
According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates a.) can vary wildly b.) are unchanged c.) increase d.) decrease
d.) decrease
In the long run, the level of national income in an economy is determined by its: a.) government budget surplus or deficit b.) rate of economic and accounting profit c.) real and nominal interest rate d.) factors of production and production function
d.) factors of production and production function
People use money as a store of value when they: a.) use money to buy goods and services b.) hold money to gain power and esteem c.) use money as a measure of economic transactions d.) hold money to transfer purchasing power into the future
d.) hold money to transfer purchasing power into the future
The demand for real money balances is generally assumed to: a.) be constant b.) be exogenous c.) decrease as real income increases d.) increase as real income increases
d.) increase as real income increases
In the classical model with fixed income, a reduction in the government budget deficit will lead to a: a.) higher level of output b.) lower level of output c.) higher real interest rate d.) lower real interest rate
d.) lower real interest rates
According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their a.) equilibrium growth rates b.) relative political power c.) supply d.) marginal productivity
d.) marginal productivities
Consumption depends _____ on disposable income, and investment depends ___ on the real interest rate. a.) negatively; negatively b.) negatively; positively c.) positively; positively d.) positively; negatively
d.) positively; negatively
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, national saving: a.) falls by $100 billion b.) falls by $60 billion c.) rises by $100 billion d.) rises by $60 billion.
d.) rises by $60 billion