Econ 202 - MSU

Capital Goods

A long-lived good, which is itself produced and used to produce other goods and services

Unemployment Spell

A period during which an individual is continuously unemployed

The core inflation rate excludes _____. A. food and energy prices B. the prices of final goods and services C. the prices of intermediate goods and services D. housing prices E. all of the other choices

A. food and energy prices

The Federal Reserve System consists of _____ regional banks. A. 14. B. 7 C. 12 D. 5 E. no (there is just one central bank)

C. 12

Deposit insurance for banks _____. A. wastes taxpayer money to subsidize excessively large banks for no apparent reason B. was established by the Federal Reserve Bank Act of 1913 C. may induce the managers of banks to take excessive risks D. leads to systematic collapse of the banking system E. created the too big to fail problem

C. may induce the managers of banks to take excessive risks

The monetary policy method used most often to expand the money supply is _____. A. reducing reserve requirement ratios B. reducing the discount rate C. open-market purchases D. increasing reserve requirement ratios E. open market sales

C. open-market purchases

M1

Currency in the hands of the public, traveler's checks, checking account balances and other checkable deposits, and balances in credit unions

Net Exports

Exports minus imports

T or F "Junk bonds" are the debt obligations of corporations that have defaulted on that debt.

False

T or F A bond is a certificate of ownership.

False

T or F An increase in interest rates generally causes bond prices to increase.

False

T or F Command economies allocate resources efficiently by using the political process.

False

T or F Fiscal policy would include the U.K. nationalizing its banks.

False

T or F The Board of Governors of the Federal Reserve has 7 governors appointed for 6-year staggered terms.

False

T or F The FOMC has 12 members one from each of the 12 regional banks.

False

T or F The central bank of the U.S. is the U.S. Treasury.

False

T or F The coupon rate of a bond is the yield you will earn if you purchase the bond in the secondary market.

False

T or F The coupon rate on a bond changes when interest rates on newly issued bonds change.

False

T or F The discount rate is the rate that banks charge each other to borrow and lend funds to meet reserve requirements.

False

financial intermediaries

Firms that determine to whom to extend credit using funds raised from savers

Final Goods and Services

Goods or services purchased by the ultimate user

Leakages

Incomes earned by households that do not come back to buy the output of firms

shoe-leather costs

More frequent trips to the bank as a result of inflation

coupon payments

Regular interest payments made to the bondholder

Investment

Spending by firms on machinery, plant and equipment, change in business inventories, and spending on newly manufactured housing

Consumption

Spending by households on goods and services, such as food, clothing, and entertainment

Duration

The length of an unemployment spell

If a country imports more than it exports, it has _____. A. a trade balance B. a trade deficit C. a trade surplus D. a budget deficit E. inflation

B. a trade deficit

bank reserve-deposit ratio

Bank reserves divided by deposits

When banks borrow funds via the Fed's discount window, _____. A. they pay the federal funds rate B. the reserve/deposit ratio falls C. they pay the discount rate D. they pay the prime rate E. bank reserves are decreased and, ultimately, bank deposits and the money supply decrease

C. they pay the discount rate The federal funds rate is the rate one bank pays another for short-term loans from one bank with excess reserves to another bank with deficient reserves. The prime rate is the rate commercial banks charge their best customers for a loan. The discount rate is the rate the Federal Reserve charges banks for a loan (of reserves).

National saving equals _____. A. public saving minus private saving B. private saving minus public saving C. the output of the economy D. the output of the economy left over after consumption and government spending E. total profits generated in the economy

D. the output of the economy left over after consumption and government

high yield "junk" bonds

Debt of higher credit risk firms

Federal Open-Market Committee (or FOMC)

A 12-member committee which sets credit and market interest rate policies for the Federal Reserve System

fractional-reserve banking system

A banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent

stock

A certificate of partial ownership and claim to the profits that a firm makes

mutual fund

A financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets

bond

A legal promise to pay specified amounts of money on specified dates typically including both regular coupon (interest) payments and the maturity value (typically the face amount)

Real GDP

A measure of GDP designed to measure physical output and purchasing power changes in which the quantities produced are valued at base year prices

Nominal GDP

A measure of GDP in which the quantities produced are valued at current-year prices

real measure

A measure that is calculated in base-year prices; that is, in physical terms since all such measures over time use the same prices

nominal (money) value

A quantity that is valued at current prices

Flow Variable

A rate measure of a process that takes place over time needing an interval of time measurement to be meaningful

dividend

A regular payment received by stockholders for each share that they own

100 percent reserves banking

A situation in which banks' reserves equal 100 percent of their deposits

disinflation

A situation in which prices are rising, but not as rapidly as they had been rising

deflation

A situation in which the inflation rate is negative

deposit insurance

A system under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt

A two-year labor contract provides for a first-year money wage of $30 per hour and specifies that the second-year REAL wage will rise by 4 percent. If the CPI is 120 in the first year and 138 in the second year, the money wage per hour that must be paid in the second year is _____ and the real wage is _____. A) $35.88; $26.00 B) $35.88; $34.50 C) $35.70; $34.50 D) $35.70; $26.00 E) $31.20; $35.88

A) $35.88; $26.00 With an inflation rate of 15%, wages would need to increase to $34.50 just to stay even. A real increase of 4% would be 4% higher or 1.04*$34.50 equal to $35.88. The real wage is the nominal wage deflated, or ($35.88/138)*100 or $26. With a different approach, the first-year real wage is ($30/120)*100 or $25. The contracted 4% increase results in a second-year real wage of 1.04*$25 or $26. (See the solution method of question 15 for additional explanation.)

Both lender and borrower agree by contract on a 5% NOMINAL interest rate. If both originally expected a 3% inflation rate, but the inflation rate over the life of the loan turns out to be 8% instead, then _____. A) the real payments received by the lender will be lower than expected B) the real payments received by the lender will be higher than expected C) the nominal payments received by the lender will be higher than expected D) both the real and nominal payments received by the lender will be as expected E) the nominal payments received by the lender will be lower than expected

A) the real payments received by the lender will be lower than expected

Which of the following transactions would be included in the GNP of the United States? A. General Motors produces and sells automobiles in China. B. A U.S. resident purchases in the U.S. new tires made by Michelin in France. C. Sony produces televisions in Michigan. D. Ford buys a factory that was being used by General Motors in Detroit. E. General Motors purchases a new computer made in Japan.

A. General Motors produces and sells automobiles in China.

An example of a financial intermediary is a _____. A. a credit union B. stock market C. bond market D. stock broker E. the U.S. Treasury

A. a credit union

A bond is _____. A. a legal promise to pay back a loan B. a claim to partial ownership of a firm C. a promise to pay returns to the holder including dividends D. always short-term with maturities of one year or less E. always long-term with maturities of more than one year

A. a legal promise to pay back a loan

Banks reserves are _____. A. cash and deposit accounts at the Fed held for the purpose of meeting depositor withdrawals and payments B. cash only held for the purpose of insuring bank deposits C. cash and deposit accounts at the Fed held for the purpose of insuring bank deposits D. cash only held for the purpose of making a loan E. cash and deposit accounts at the Fed to be used for investments as needed

A. cash and deposit accounts at the Fed held for the purpose of meeting depositor withdrawals and payments

The narrow definition of money used for our class calculations includes _____. A. currency in the hands of the public and deposit balances held by commercial banks only B. cash only C. currencies in the hands of the public only D. deposit balances held by commercial banks only E. money market funds and cash only

A. currency in the hands of the public and deposit balances held by commercial banks only

Over the next half-century the population in Japan is projected to decline sharply, while the fraction of the population that is retired is expected to increase sharply. As a consequence, assuming average labor productivity remains constant, output in Japan will ____ and the standard of living in Japan will ____. A. decline; decline B. decline; increase C. increase; decline D. increase; increase E. decrease; remain constant

A. decline; decline

The most used definition of the unemployment rate is the _____. A. fraction of the labor force who would like to be employed but can't find work B. number of people who would like to be employed but can't find work C. fraction of people who are not working D. fraction of the labor force who are not working E. number of unemployed people

A. fraction of the labor force who would like to be employed but can't find work

When a bank makes a loan by crediting the borrower's checking account balance with an amount equal to the loan _____. A. money is created B. the bank gains new reserves C. the Fed has made an open-market sale D. money is destroyed E. the Fed has made an open-market purchase

A. money is created

The most often used method the Federal Reserve uses to increase the money supply is _____. A. open-market purchases B. increasing the discount rate. C. increasing the required reserve-deposit ratio D. increasing interest rates. E. selling bonds in the public market

A. open-market purchases

Fiscal policy _____. A. refers to decisions that determine the government's budget to affect the national economy B. is controlled by the Congressional Budget Office C. is aimed at changing the underlying structure, or institutions, of the nation's economy D. refers to the determination of the nation's money supply and interest rates to affect the rates of economic growth and inflation E. refers to the determination of the nation's money supply to affect the size of the government's budget deficit

A. refers to decisions that determine the government's budget to affect the national economy

The duration of unemployment _____. A. rises during recessions B. falls during recessions C. is a period during which an individual is continuously unemployed D. is shorter for the chronically unemployed than it is for the long-term unemployed E. is of less importance to macroeconomics than the costs of unemployment

A. rises during recessions

A recession ends at a _____. A. trough B. peak C. an inflection point D. low unemployment rate E. high inflation rate

A. trough

M2

All the assets in M1 plus other, harder to transact with, assets including savings deposits and money market deposit accounts, small denomination time deposits, and balances in retail money market funds

banking panic

An episode in which depositors, spurred by news or rumors of the imminent bankruptcy of one or more banks, rush to withdraw their deposits from the banking system; that is, many banks suffer bank runs at the same time

money

Any asset that can be used to purchase most or all goods and services

Suppose a family earned a money income of $40,000 in 2000 when the CPI was 160. By 2010, that family's nominal income increased to $80,000, while the CPI increased to 320. In 2010, the family's REAL income equaled _____. A)$80,000 B) $25,000 C) $160,000 D) $40,000 E) $50,000

B) $25,000 Real income is always measured in base-year prices. The process of changing a nominal value to a real value is called deflating, which involves dividing out the current price and multiplying by the base year price to measure the value in base-year prices. Here, $80,000 is divided by 320 and multiplied by 100 to measure the income in the base-year price thus turning it into a real value.

Peg's Manicure Manor did 3,000 sets of nails in the year 2000 and 4,000 sets of nails in the year 2001. The price of a set of nails was $10 in 2000 and $12 in 2001. If the year 2000 is the base year, Peg's contribution to real GDP in 2001 was _____ . A) $36,000 B) $40,000 C) $35,000 D) $30,000 E) $48,000

B) $40,000

If the CPI is 200 at the end of 2010 and equals 220 at the end of 2011, then the inflation rate for 2011 equals _____. A) 20 percent. B) 10 percent. C) 25 percent D) 220 percent. E) 110 percent.

B) 10 percent. (New - Old) divided by Old values.

Paula purchases for $9400 a two-year government note with a principal amount of $10,000 and a coupon rate of 4% paid annually. One year before the note matures (and after receiving the coupon payment for the first year), Paula sells the note in the open market when the market interest rate on an equivalent one-year note is 6%. The price Paula will receive for her note (after rounding) is equal to $_____ and her simple one-year holding rate of return (after rounding) is _____%. A) 9811;4.37 B) 9811;8.63 C) 9434;4.62 D) 9811;2.11 E) 9434;8.87

B) 9811;8.63 A purchaser of the bond will receive at the end of one year the principal value of $10,000 and one year interest of .04 * $10,000 or a total of $10,400. To earn a 6% rate of return, the buyer would pay the present value or $10,400/1.06 equal to $9811.32. Paula's holding period rate of return is equal to her gain of $9811.32 - $9400 plus the $400 of interest received (new - old) divided by her purchase price (old) equal to $811.32/$9400 or 8.63%

If the Consumer Price Index (CPI) overstates the true rate of inflation, the use of the CPI to adjust social security payments (indexing social security payments to the CPI) results in _____. A) no change in social security true real payments B) increases in social security true real payments C) decreases in social security true nominal payments D) increases in social security true nominal payments E) no change in social security true nominal payments

B) increases in social security true real payments Social security nominal payments will be increased by more than the true rate of inflation resulting in an increase in true real payments. Nominal payments could do anything depending on whether there is inflation or deflation.

If the Consumer Price Index is 135 at the end of 2001 and at the end of 2002 it is 142, then during 2002 the economy experienced A) deflation B) inflation C) hyperinflation D) indexing E) deflating

B) inflation

If real GDP in 2010 is larger in value than nominal GDP in 2010, then in 2010 _____. A) none of the other choices must always be true B) the price level is lower than in the base year C) physical output is lower than in the base year D) the price level is higher than in the base year E) physical output is greater than in the base year

B) the price level is lower than in the base year

Deflating is _____. A) what occurs when prices decline B) the process of adjusting a nominal value to express it in real terms C) the process of adjusting a real value to express it in nominal terms D) the process of adjusting nominal incomes for inflation to maintain real values E) what occurs when prices increase at a decreasing rate

B) the process of adjusting a nominal value to express it in real terms

Suppose the market value of output in a country increased from $500 billion in 2000 to $750 billion in 2005. If prices, as measured by a price index, increased from 200 in 2000 to 250 in 2005, then real GDP for the country in 2005 was _____. A. $600 billion B. $300 billion C. $562.5 billion D. $500 billion E. $750 billion

B. $300 billion Real GDP, a measure of physical output, must hold prices constant, which it does by measuring output at base-year prices that the government sets at 100. Since nominal GDP (measured in current prices) is $750 billion in 2005 and since the price index is 250, the output must be revalued at base-year prices to provide a measure of real GDP. Since the base-year price level is 100, or 40% of the 2005 price level that is 250, real GDP is 40% of nominal GDP, or 40% of $750 billion or $300 billion. The answer is obtained, in a more formal way, by dividing out the current price and multiplying by the base-year price to measure the output in the base-year price, or, [($750 billion)/(250)]*100.

The value of output is $600 in Smallville while the population is 100 people with 60 of them working. In Smallville, the numerical value of average labor productivity equals _____ and the numerical value of the standard of living equals _____ .A. 6; 10 B. 10; 6 C. 6: 6 D. 10; 10 E. 105; 36

B. 10; 6

Which of the following is an intermediate good for this year and, therefore, would not be counted directly in the calculation of GDP this year? A. a new set of tires purchased by Ford this year to install on a new Explorer next year B. a new set of tires purchased by Ford this year to install on a new Explorer this year C. 100 shares of stock in Microsoft purchased this year D. a new home constructed this yearE. a used car sold to a new car owner this year

B. a new set of tires purchased by Ford this year to install on a new Explorer this year

When a government's expenditures are less than its revenues, it has a ____. A. budget deficit B. budget surplus C. trade deficit D. trade surplus E. debt burden

B. budget surplus

Diversification _____. A. increases portfolio return with extra risk B. can reduce risk without reducing portfolio return C. eliminates systematic risk D. cannot reduce specific risk E. has no place in determining a portfolio's composition

B. can reduce risk without reducing portfolio return

The coupon rate on new bond issues typically increases when _____. A. the term to maturity decreases B. credit risk increases C. credit risk decreases. D. interest payments are taxed less E. dividends decrease

B. credit risk increases

If the required reserve/deposit ratio is 1/4 and if a bank has deposits of $100 million and reserves of $50 million, it _____. A. has too few reserves and must reduce its lending B. has excess reserves and may increase its lending C. has exactly the required amount of reserves D. must increase its reserves. E. must decrease its reserves.

B. has excess reserves and may increase its lending

Which of the following is included when using the expenditure method to measure GDP? A. corporate profits B. investment spending C. dividends D. net interest on the government debt E. labor income

B. investment spending

A command economy run by government usually misallocates resources because _____. A. economic reasons only will be used for allocation decisions B. it is costly to obtain the required information and politics interferes with decision-making C. politics is NOT used to make decisions D. the best economists are not hired by the government E. of nothing. Command economies are efficient because government workers have the expertise to know the optimal use of resources for the nation

B. it is costly to obtain the required information and politics interferes with decision-making

The accuracy of the official unemployment rate (U3) is criticized because _____. A. unemployed homemakers and students who are not actively seeking employment are not included in the number of unemployed people B. people who would like to work but have given up trying to find work are not included in the number of unemployed people C. it fails to indicate how many people work at more than one job D. people less than 16 years of age and over 70 years of age are excluded from the data E. the BLS survey does not include all the households in the United States

B. people who would like to work but have given up trying to find work are not included in the number of unemployed people

When the Fed sells government securities in the open market, the banks' _____. A. reserves will increase and lending will expand, causing an increase in the money supply B. reserves will decrease and lending will contract, causing a decrease in the money supply C. reserve requirements will increase and lending will contract, causing a decrease in the money supply D. reserves/deposit ratio will increase and lending will expand, causing an increase in the money supply E. reserves/deposit ratio will decrease and lending will contract, causing an increase in the money supply

B. reserves will decrease and lending will contract, causing a decrease in the money supply

When there is disinflation as measured by the Consumer Price Index, then _____. A) the purchasing power of money increases B) the CPI may be rising or falling C) the CPI is rising D) there is deflation E) the CPI is falling

C) the CPI is rising Disinflation implies prices are rising but at a decreasing rate.

Both lender and borrower agree by contract on a 5% REAL interest rate. If both originally expected a 3% inflation rate, but the inflation rate over the life of the loan turns out to be 8% instead, then _____. A) the real payments received by the lender will be lower than expected B) the real payments received by the lender will be higher than expected C) the nominal payments received by the lender will be higher than expected D) both the real and nominal payments received by the lender will be as expected E) the nominal payments received by the lender will be lower than expected

C) the nominal payments received by the lender will be higher than expected Since the contract guarantees the lender a fixed REAL rate, when the inflation rate rises unexpectedly, the borrower will be required to compensate the lender for the higher than expected prices providing the lender with the guaranteed real rate of return.

The real value of money declines when _____. A) there is deflation B) the economy is in recession C) there is inflation D) the unemployment rate increases E) the unemployment rate decreases

C) there is inflation

If a pizza maker pays $3 for pepperoni produced in 2004, $4 for tomatoes produced in 2005, $5 for cheese produced in 2005, and sells the pizza made with all of these ingredients in 2005 for $16, then these activities contribute _____ to 2005 GDP and the value added of the pizza producer is _____? A. $21; $16 B. $16; $7 C. $13; $4 D. $16; $4 E. $21; $4

C. $13; $4 The valued added by the pizza producer is the value of output minus the value of intermediate goods used up. For the pizza producer, value added equals the value of output minus the value of intermediate good purchases or $16 - $3 - $4 - $5. For GDP, either use the value added method for 2005 ($4 for the tomato producer, $5 for the cheese producer, and $4 for the pizza producer), or use the expenditure method with consumption equal to $16 and investment equal to negative $3 as the change in business inventories (drop for pepperoni producer's inventory).

Paula purchases a newly-issued two-year government note with a principal amount of $70,000 and a coupon rate of 9% paid annually. One year before the note matures (and after receiving the coupon payment for the first year), Paula sells the note in the open market. The price (rounded to the nearest dollar) Paula will receive for her note at a prevailing one-year interest rate of 5% is _____. A. $70,673 B. $73,211 C. $72,667 D. $73,365 E. $73,500

C. $72,667 A purchaser of the bond will receive at the end of one year the principal value of $70,000 and one year interest of .09 * $70,000 or a total of $76,300

Assume the CPI standard basket is 10 pizzas and 20 apples. For each of the years 2002-2005, the costs of the basket are $100, $125, $120, and $135 respectively. If 2003 is the base year, then the CPI for 2005 is _____ and the inflation rate between 2004 and 2005 is _____%. A. 135, 12.5 B. 135, -4.0 C. 108, 12.5 D. 108, -4.0 E. 112.5, 8.0

C. 108, 12.5 The CPI for any year is equal to the cost of the standard basket in that year divided by the cost of the basket in the base year times 100. For 2004 and 2005, the CPI is 96 and 108 respectively with the inflation rate found by new - old all over old.

The FOMC has _____ members. A. 14 B. 7 C. 12 D. 5 E. varying group of

C. 12

If a bank deposit increases from $1200 to $1605 while at the same time (one year) the price of a shmoo increases from $12 to $15, then the SIMPLE ONE-YEAR REAL return from the deposit will be _____%. A. 8.75 B. 33.75 C. 7.00 D. 8.00 E. 7.50

C. 7.00 With nominal value $1200 at a shmoo price level of $12 each, the real value, or purchasing power would be ($1200/$12) or 100 shmoon. With $1605 at a price level of $15 each, the real value would be ($1605/$15) or 107 shmoon or a purchasing power increase of (107 - 100)/100 (or new minus old all over old) equal to 7%.

In a small town of 120 people there are 20 people under 16. Out of the remaining persons, there are 14 retired people, 60 people will full-time jobs, 9 people with part-time jobs, 3 full-time students, 4 full-time homemakers, and 10 people who do not have jobs, but want them. Only 6 of these latter 10 people without jobs had actively looked for a job in the preceding four weeks. In this town, the unemployment rate is _____% and the labor force participation rate is _____%. A. 6; 69 B. 5; 62.5 C. 8; 75 D. 10; 79 E. 8.5; 62.5

C. 8; 75 The unemployment rate is defined as the number of unemployed, U, divided by the labor force (employed, E, plus unemployed). The number of unemployed is 6 (only 6 searching for work and not working). The number of employed is 60 (full-time jobs) plus 9 (part-time jobs) for a total of 69. The unemployment rate is (U/LF) = (U/(E+U)) or 6/(69+6) or 8%. The participation rate is the labor force (employed plus unemployed equal to 75) divided by the working age population (100) so it is equal to 75%.

During a recession, we are most likely to see a _____. A. a higher interest rate B. a higher inflation rate C. a higher unemployment rate D. a lower level of average labor productivity E. a shortage

C. a higher unemployment rate

The adding up of individual economic variables to obtain economy-wide totals is called _____. A. positive analysis B. normative analysis C. aggregation D. microeconomic policy E. macroeconomic policy

C. aggregation

Monetary policy is conducted by the _____. A. Congress B. President C. central bank D. commercial banks E. Supreme Court

C. central bank

The purchase by a U.S. household of a good produced in China is _____. A. counted as part of U.S. GDP B. counted as part of U.S. GNP C. counted as part of U.S. consumption spending D. counted as part of China consumption spending E. not counted as any of the other choices

C. counted as part of U.S. consumption spending While included in U.S. consumption spending, it is subtracted out when imports are subtracted to not affect the calculation of U.S. GDP.

When the Federal Reserve sells Treasury securities in the public market, the quantity of reserves in the banking system _____ and the money supply _____. A. increases; ultimately increases B. does not change; does not change C. decreases; ultimately decreases D. increases; ultimately decreases E. decreases; ultimately increases

C. decreases; ultimately decreases

The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the _____ rate. A. Federal funds B. prime C. discount D. Federal E. fundamental

C. discount

When market interest rates increase, _____. A. the coupons of existing bonds usually increases B. the price of existing bonds usually increases C. newly issued bonds need to have a higher coupon rate D. newly issued bonds need to have a lower coupon rate E. existing bond holders will realize a gain

C. newly issued bonds need to have a higher coupon rate The coupon on most existing bonds is fixed lead to a bond price decline when market interest rates increase. Newly issued bonds, generally, will have a higher coupon rate to provide a return equal to the higher market interest.

"Not restricting the sale of sodas and other sugar sweetened beverages to 16 ounces or less in New York City will lead to a higher level of diabetes there than otherwise," is an example of, primarily, a _____ statement about _____ policy. A. normative; structural. B. negative; fiscal C. positive; structural D. positive; monetary E. normative; fiscal

C. positive; structural

The unit of account function of money allows _____. A. people to hold their wealth in a liquid form B. governments to issue fiat currencies C. relative prices of goods and services to be more easily compared D. goods and services to be exchanged even with a double coincidence of wants E. governments to issue commodity monies

C. relative prices of goods and services to be more easily compared

bank reserves

Cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments

Inflation creates static or "noise" in the price system, making it difficult for _____. A) businesses and households to interact with each other B) lenders and borrowers to determine an appropriate level of nominal interest rate on loans C) employers and workers to determine the appropriate level of money wages to be paid D) businesses to interpret the information being transmitted by price changes E) households and businesses to hold cash

D) businesses to interpret the information being transmitted by price changes

"Shoe leather" costs of inflation refer to the _____. A) difficulty of interpreting the price signals in an inflationary environment B) unintended changes in taxes caused by inflation C) arbitrary redistribution of wealth from one group to another D) costs of economizing on holding cash E) interference of inflation on the long-run planning of households and businesses

D) costs of economizing on holding cash

Econland has a population of 60 people with 40 of them working producing a total output of $600,000. The standard of living of Econland equals _____ while average labor productivity equals _____. A. $6,000; $15,000 B. $6,000; $10,000. C. $10,000; $10,000. D. $10,000; $15,000 E. $15,000; $10,000

D. $10,000; $15,000

The CPI equals 120 in year one and 132 in year two. If the nominal wage is $15 in year one and a contract calls for the real wage to increase by 4%, what will be the nominal wage in year two? A. $16.50 B. $15.00 C. $15.60 D. $17.16 E. $17.10

D. $17.16 Here are two different methods to obtain the answer. The first measures real wages directly by expressing values in base-year prices (assumed always to be 100) through dividing out current prices and multiplying by the base-year price. At a price level of 120, a nominal wage of $15 corresponds to a real wage of $12.50; that is, ($15/120)*100, which measures wages in base-year prices indicating base-year prices are 5/6 of current prices. A 4% increase would equal 1.04*12.50 or a real wage equal to $13. To determine the money wage corresponding to a real wage of $13. the wage must be valued at current prices. That is achieved by dividing out the base-year price and multiplying by the current price. At a price level of 132, the nominal wage corresponding to a real wage of $13 would be ($13/100)*132 or $17.16 to measure wages at current prices for the year, or a value 32% higher than that measured at the base-year price level. At money wage $17.16 purchasing power will have increased by 4% as required (a $13 real wage compared to $12.50).The second method looks at the inflation rate, the percentage change in the price level, new minus old all over old, which is (132 - 120)/120 or 10%. The nominal wage must increase by the inflation rate just to maintain purchasing power, or must increase by 10% to 1.10*$15 or $16.50. But to have a real wage increase of 4%, or a 4% increase in purchasing power, requires the nominal wage to increase by an additional 4%, or 1.04*$16.50 equal to $17.16

Use the information below to calculate the value added by the firm. Rent paid for office space: $40,000 Wages paid to workers: $260,000 Value of produced inputs used up to produce the firm's output that were purchased from other firms: $400,000 Value of firm's output: $900,000 A. $240,000 B. $200,000 C. $300,000 D. $500,000 E. $460,000

D. $500,000

Paula purchases newly-issued two-year government notes with a total principal amount of $50,000 and a coupon rate of 10% paid annually. One year before the note matures (and after receiving the coupon payments for the first year), Paula sells the notes in the open market. The price (rounded to the nearest dollar) Paula will receive for her notes at a prevailing one-year interest rate of 5% for similar notes is _____. A. $47,619 B. $50,000 C. $55,000 D. $52,381 E. $57,619

D. $52,381

Suppose there is $300 million of cash in existence with $200 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 25%, then the money supply will be ______ if banks hold no excess reserves. A. $300 million. B. $500 million. C. $800 million. D. $900 million. E. $1100 million.

D. $900 million. With a reserve-deposit ratio of .25 and with reserves of $200 million, checking deposits will be $800 million ((Res/Dep) = .25, or ($200m/Dep) = .25). Since cash in the hands of the public is $100 million (banks hold $200 million of the $300 million of cash in the economy), the money supply will be $800 million + $100 million, or $900 million.

The value of output was 600 shmoon in Shmooland, which had a population of 120 people and a workforce of 100 people. The numerical value of average labor productivity was ____ and of the standard of living was _____. A. 5; 5 B. 6; 6 C. 5; 6 D. 6; 5 E. unknown; unknown since not enough information is supplied

D. 6; 5

The Board of Governors of the Federal Reserve has _____ members. A. 12. B. 10 C. 14 D. 7 E. 5

D. 7

Which statement is mostly a "positive" statement as defined in the course? A. We should not have high rates of inflation. B. Lower interest rates are inferior to higher interest rates. C. Michigan State University must not raise the level of tuition. D. If the budget deficit is increased, we shall not have lower interest rates. E. it is best to avoid high budget deficits.

D. If the budget deficit is increased, we shall not have lower interest rates.

Average labor productivity equals _____. A. average production per year. B. the standard of living C. average output per person D. average output per worker E. average production per person

D. average output per worker

When a government collects more in taxes than it spends , it runs a(n) A. trade deficit. B. trade surplus. C. budget deficit. D. budget surplus. E. trade imbalance.

D. budget surplus.

Wages are to savings as _____. A. stock is to flow B. flow is to flow C. stock is to stock D. flow is to stock E. stock is to flow change

D. flow is to stock Saving is a flow variable --- a rate needing an interval of time for it to be meaningful. Savings is a stock variable, which is measured at an instant of time.

An unemployment spell begins when a worker _____. A. losses his/her job and ends when he/she finds a new job B. losses his/her job and ends when he/she finds a new job or leaves the labor force C. starts to actively look for employment and ends when he/she finds a new job D. is not working and starts to actively look for employment and ends when he/she finds a new job or leaves the labor force E. becomes discouraged and stops seeking employment and ends when he/she begins to actively look for employment

D. is not working and starts to actively look for employment and ends when he/she finds a new job or leaves the labor force An unemployment spell begins when a person becomes unemployed and ends when he or she either becomes employed or leaves the labor force.

The U3 unemployment rate is the _____ A. number of unemployed divided by the population. B. number of workers divided by the labor force. C. number of unemployed divided by the working age population. D. number of unemployed divided by the labor force E. number employed divided by the population

D. number of unemployed divided by the labor force

Real GDP values output in base-year prices to measure _____. A. changes in the quality of goods and services B. value added during a previous year C. inflation D. purchasing power E. changes in the cost of intermediate goods and services

D. purchasing power By using the same set of prices, any change in value must be due to physical output changes measuring the change in physical output that can be purchased.

The unemployment rate increases during _____. A. expansions and booms B. expansions and recessions C. booms and recessions D. recessions and depressions E. booms and depressions

D. recessions and depressions

Investment spending includes _____. A. household purchases of durable goods B. the level of business inventories C. social security payments D. the change in business inventories E. household purchases of services

D. the change in business inventories

The official unemployment rate is calculated as _____. A. the number of working-age people 16 years of age or older who are employed divided by the number of people in the labor force B. all people 18 years of age or older who are employed, plus all those unemployed who are actively seeking work C. the percentage of the working-age population 16 years of age or older who are not working but are actively seeking work D. the number of people 16 years of age or older who are not employed and are actively seeking work divided by the number of people in the labor force E. all people 16 years of age or older who are employed, plus all those unemployed who are actively seeking work, divided by the number of people in the labor force

D. the number of people 16 years of age or older who are not employed and are actively seeking work divided by the number of people in the labor force

Which of the following transaction values would be included in the calculation of GDP in 1996? A. the price of a home built in 1991 and sold in 1996 B. the value of 100 shares of Exxon stock sold in 1996 C. the price of a classic 1960 Thunderbird purchased in 1996 D. the price of a new punch press built and purchased in 1996 to replace a worn out machine E. the price of a used bicycle purchased at a garage sale in 1996

D. the price of a new punch press built and purchased in 1996 to replace a worn out machine The punch press is counted as investment spending

Suppose there is $500 million of cash in existence with $200 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 50%, then the money supply will be ______ if banks hold no excess reserves. A. $300 million B. $400 million C. $900 million D. $500 million E. $700 million

E. $700 million

The consumer price index basket for Planet Econ consists of only two items: books and pizzas. In 2000, the base year, the typical consumer purchased 100 books for $40 each and 100 pizzas for $10.00 each. In 2010, the typical consumer purchased 80 books for $60 each and 120 pizzas for $10.00 each. The consumer price index for 2010 on Planet Econ equals (rounding to the nearest tenth) ____. A. 88.0 B. 136.4 C. 130.0 D. 120.0 E. 140.0

E. 140.0 The CPI for any year is the cost of the standard (base-year) basket in that year using that year's prices (100*$60 + 100*$10) divided by the cost of the base-year basket in the base-year (100*$40 + 100*$10) multiplied by 100, which in this case is ($7000/$5000)*100. Thus the 2010 price level is 140.

_____ statements involve values, while _____ statements involve testable assertions. A. Fiscal; structural B. Positive; normative C. Structural; monetary D. Monetary; fiscal E. Normative; positive

E. Normative; positive

Which of the following is the best example of money used as a medium of exchange? A. In a prisoner of war camp prices of socks, candy and food are quoted in terms of packs of cigarettes needed to purchase each, even for nonsmokers. B. A plumber unclogs a drain for a carpenter, who repairs broken steps for the plumber. C. A farmer stores $100 dollar bills in a strong box under the barn floor. D. A restaurant marks its menu with the dollar cost of each item. E. Real estate, cars, and other goods on the island of Yap are traded for cases of beer.

E. Real estate, cars, and other goods on the island of Yap are traded for cases of beer. Since the beer can be used to buy many other goods, it is meeting the definition of the medium of exchange function of money.

Perhaps the most comprehensive measure of labor resource unemployment is _____. A. U2 B. U3 C. U4 D. U5 E. U6

E. U6

A trade deficit occurs when _____ A. government spending exceeds taxes B. government spending is less than taxes. C. government spending equals taxes D. exports exceed imports. E. imports exceed exports

E. imports exceed exports

If the rate falls at which prices in general are increasing, but is still positive, then ____. A. the price level is rising at an accelerated rate B. there is deflation C. there is stagflation D. the price level is falling E. none of the other choices is true

E. none of the other choices is true

In the monthly survey conducted by the Bureau of Labor Statistics, a person in the working age population who was not working during the previous week and was not actively seeking work during the previous four weeks is classified as _____. A. employed B. unemployed C. underemployed D. part-time employed E. not a member of the labor force

E. not a member of the labor force

Which of the following is a leakage out of the income-expenditure flow? A. government purchases of goods and services B. exports of goods and services C. consumption expenditures D. gross private domestic investment E. private saving

E. private saving

The inflation rate measures _____. A. unemployment B. the level of output C. the growth rate of output D. the level of overall prices E. the percentage rate of change of prices

E. the percentage rate of change of prices

If, on a deposit to a bank account, the annual NOMINAL interest rate is 8% and the annual REAL interest rate is 5%, then at the end of one year _____. A. the purchasing power of the deposit will be 8% higher B. the bank account will show a dollar balance 5% higher C. the purchasing power of the deposit will be 3% higher D. the bank account will show a dollar balance 3% higher E. the purchasing power of the deposit will be 5% higher

E. the purchasing power of the deposit will be 5% higher The nominal interest rate measures the percentage increase in dollars whereas the real interest rate measures the percentage increase in purchasing power, which takes into account inflation. Since the real interest rate is 5%, the purchasing power of the deposit will be 5% higher at the end of the year. Since the nominal interest rate is 8%, the dollar balance will be 8% higher at the end of the year. The inflation rate must have been about 3% to have purchasing power increase that much less than the increase in money value.

The functions of money include its use as a _____. A. way to hedge against risk B. way to trade one asset with another asset C. mechanism to earn dividends D. measure of risk E. way to trade one asset for multiple other goods, services and assets

E. way to trade one asset for multiple other goods, services and assets

T or F "As a nation, we need reduced tax rates," is primarily a positive statement.

False

T or F The person from whom you would buy 100 shares of IBM is a financial intermediary between you and the stock market.

False

T or F An increase in the inflation rate will cause lenders to have loan losses.

False. An UNEXPECTED increase in the inflation rate will cause lenders with fixed nominal interest rate loans to have loan losses.

T or F An increase in discouraged workers increases the unemployment rate.

False. An increase in discouraged workers REDUCES the unemployment rate.

T or F If you are in the working age population, the BLS counts you as either employed or unemployed.

False. If you are in the working age population, the BLS counts you as either employed or unemployed OR OUT OF THE LABOR FORCE.

T or F Nominal GDP is the value of output adjusted for inflation.

False. REAL GDP is the value of output adjusted for inflation.

T or F Nominal wages decline when prices increase more than real wages increase.

False. REAL wages decline when prices increase more than NOMINAL wages increase.

T or F Real GDP equals nominal GDP in the current year only.

False. Real GDP equals nominal GDP in the BASE year only.

T or F If a family earned a money income of $40,000 in 2000 when the CPI was 200 and a money income of $60,000 in 2004 when the CPI increased to 300, then the family's REAL income remained constant at $40,000 in both years.

False. Real income is always measured in the base-year price of 100 implying real income remained constant at $20,000 equal to ($40,000/200)*100 and equal to ($60,000/300)*100.

T or F The CPI compares the current cost of the current basket with the base-year cost of the current basket.

False. The CPI compares the current cost of the STANDARD basket with the base-year cost of the STANDARD basket.

T or F The CPI is calculated by valuing the current basket at base-year prices.

False. The CPI is calculated by valuing the STANDARD basket at base-year and CURRENT prices.

T or F The consumer price index bundle for Planet Econ consists of only two items: books and hamburgers. In 2001, the base year, the typical consumer purchased 80 books for $25 each and 200 hamburgers for $5 each. In 2005, the typical consumer purchased 40 books for $100 each and 250 hamburgers for $2 each. The consumer price index for 2005 on Planet Econ equals 150.

False. The base-year basket of goods is 80 books and 200 hamburgers. The CPI measures the percentage change in the cost of this standard basket of goods with 100 being the value of the CPI in the base year. This basket costs $3000 in the base year and $8400 in 2005 for a CPI value of ($8400/$3000)*100 or 280.

T or F The inflation rate is negative when there is disinflation.

False. The inflation rate is negative when there is DEFLATION.

T or F The substitution bias of the CPI has to do with the arrival of new goods.

False. The substitution bias of the CPI has to do with consuming less of those goods becoming relatively more expensive while the CPI, by assuming a fixed basket of goods, assumes purchases are unchanged.

T or F To obtain real income, you can multiply nominal income by GDP.

False. To obtain real income, you can DIVIDE nominal income by a PRICE INDEX.

T or F To obtain the GDP deflator you can divide nominal GDP by the CPI.

False. To obtain the GDP deflator you can divide nominal GDP by REAL GDP AND MULTIPLY BY 100.

T or F A real value is indexed if it rises over time at the rate of inflation.

False: A nominal value is indexed if it rises over time at the rate of inflation.

T or F If the simple nominal one-year interest rate paid on a bank deposit is 30% while at the end of one year the price level is 25% higher, then the simple one-year real rate of interest paid over the year is 5%.

False: The real interest rate is a measure of percentage change in purchasing power. Assume an initial bank deposit of, say, $1000. Assume an initial price level, of say, $10 per shmoo. Then the real value of the deposit, its purchasing power, is 100 shmoos. If the nominal interest rate is 30%, then the bank account will read $1000*(1+.30) = $1300 at the end of the year. The price of the shmoo at a 25% rate of increase will be $10*(1+.25) = $12.50 per shmoo at the end of the year. Purchasing power at the end of the year will be $1300/$12.50 shmoos equal to 104 shmoos. The real interest rate is the percentage change in purchasing power, or new minus old all divided by old, equal to 104 shmoos - 100 shmoos all divided by 100 shmoos, equal to 4/100, equal to a real interest rate of 4%, not 5%.

CPI

For any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a base year

Intermediate Goods

Goods or services used up in the production of final goods and services and therefore not counted directly as part of GDP

term of bond

Length of time before the debt is fully repaid

store of value

Money serves as this when it is used as a means of holding wealth

medium of exchange

Money serves as this when it is used to purchase goods and services

unit of account

Money's use as a measure of value including, for example, the measurement of profit, debt, price, revenue, and of the value or cost of goods, services, or assets in general

GDP deflator

Nominal GDP divided by real GDP multiplied by 100The wage paid to workers measured in terms of current dollar values

National Saving

Output of an economy that is not purchased by households and government

Discouraged Workers

People who say they would like to have a job but have not made an effort to find one in the previous 4 weeks

hyperinflation

Prices rise at a rate of 50% per month or more

short-term securities

Promises by large firms and government to pay an agreed sum no longer than one year in the future

open-market operations

Purchases and sales of debt securities in the public market by the Federal Reserve

Government Purchases

Purchases by government of final goods and services

default or credit risk

Risk that borrower will not repay the loan

principal amount

The amount originally lent

Federal Reserve System (or Fed)

The central bank of the United States

financial markets

The collections of households, firms, governments, banks, and other financial institutions that lend and borrow

maturity

The date at which bondholders are scheduled to be paid, typically, the face value and the last interest payment

barter

The direct trade of goods or services for other goods or services

Participation Rate

The fraction of the working-age population in the labor force

discount rate

The interest rate the Fed charges commercial banks to borrow reserves from the Fed

Board of Governors

The leadership of the Fed, consisting of seven governors appointed by the President to staggered 14-year terms

discount window lending

The lending of reserves by the Federal Reserve to commercial banks

GNP

The market value of the final goods and services produced by home residents anywhere in the world

reserve requirements

The minimum permitted values, set by the Fed, of commercial bank reserve-deposit ratios

Unemployment Rate

The number of unemployed people divided by the labor force

nominal interest rate

The percentage increase over a time period in the nominal (money) value of a financial asset

real interest rate

The percentage increase over a time period in the purchasing power of a financial asset

inflation rate

The percentage rate of change in the price level as measured, for example, by using the CPI

indexing

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index over that period

diversification

The practice of spreading of ones wealth over a variety of different financial investments to reduce overall risk

relative price

The price of a specific good or service in comparison to the prices of other goods and services

deflating

The process of dividing a nominal quantity by a price index (such as the CPI) and multiplying by its base-year price (generally 100) to express the quantity in real terms; that is, in base-year prices

risk premium

The rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

Labor Force

The total number of employed and unemployed people in the economy

coupon rate

The typically fixed interest rate legally promised when a bond is issued

nominal (money) wage

The wage paid to workers measured in terms of current dollar values

real wage

The wage paid to workers measured in terms of purchasing power

T or F Exports is a flow variable.

True

T or F No money market instrument (short-term security) has a maturity of more than one year.

True

T or F The Federal Reserve System has 12 regional banks.

True

T or F The Federal Reserve tool used most often to control the money supply is open-market operations.

True

T or F The labor force participation rate is the labor force divided by the working age population.

True

T or F Usually, interest rates will vary directly with the term to maturity (length of time until principal amount borrowed becomes payable) of a debt instrument.

True

T or F Inflation causes "noise" in the price system.

True.

T or F The GDP deflator does not include the prices of imported goods.

True.

T or F Below, using 2000 as the base year, real GDP increased by 15%:2000: Apple: 100 bu. @ $10 Pear: 200 bu. @ $52001: Apple: 80 bu. @ $20 Pear: 300 bu. @ $2

True. As demonstrated below, real GDP increased by 15%.All output must be valued in base year (2000) prices to obtain real GDP.For 2000: $1000 of apples and $1000 of pears for $2000 per year real GDPFor 2001: 80 bu. of apples @ $10 each ($800) and 300 bu. of pears @ $5 each ($1500) for $2300 per year real GDP. The percentage increase is ($2300 - $2000)/$2000 = $300/$2000 = 15/100 = 15%.

T or F If a retired person receives $10,000 in yearly social security benefits and if prices increase by 5%, then to have a 2% real increase the person would need to receive $10,710.

True: Assume the price of a shmoo is, say, $100 each. Then $10,000 in yearly income is equal to 100 shmoos per year. A 2% real increase would mean having an income equal to 102 shmoos per year; that is, 2% more than 100. A price increase of 5% would have each shmoo price equal to $105 each each; that is 5% more than $100 each. To afford 102 shmoo per year at a price of $105 each requires 102*$105 of nominal income each year; that is, $10,710 of income each year.

T or F If, in 1975, NGDP = 963.9 and the GDP deflator is 39.8, then RGDP = 2422.

True: RGDP = (NGDP/P)*100

T or F A possible example of the "quality adjustment bias" of the CPI is the increase in the price index that could result when General Motors produces a higher quality car and sells it at a higher price.

True: The quality adjustment bias of the CPI fails to reflect that price changes need to be adjusted to reflect quality improvements to obtain a true measure of the price being paid.

Value Added

Value of a firm's output minus the value of intermediate goods it purchases from other firms and uses up in the production process