Econ 510 Example Questions

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ___________ divided by _____________ multiplied by B. (cr + rr); (1 + rr) (rr + 1); (rr + cr) (cr + rr); (1 + cr) (cr + 1); (cr + rr)

(cr + 1); (cr + rr)

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: 6 percent. 1 percent. -5 percent. -4 percent.

-4 percent.

Open-market operations are: Treasury Department purchases and sales of U.S. gold stock. Federal Reserve purchases and sales of government bonds. Securities and Exchange Commission rules requiring open disclosure of market trades. Commerce Department efforts to open foreign markets to international trade.

Federal Reserve purchases and sales of government bonds.

Economic models are used to strip away irrelevant details to explain complex behaviors. True False

True

Bob bought $5000 worth of Adobe stock. This transaction was brokered by John, who received $50 for his help. Should the $50 be included in GDP? Yes No

Yes

Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is: $22,000 $12,000 $20,000 $10,000

$12,000

Which of the following is NOT an effect of expected inflation. leads to shoeleather costs. leads to taxing of nominal capital gains that are not real. increases menus costs. causes lower real wages.

causes lower real wages.

The price received by each factor of production for its services is determined by: demand for factors and supply of output. demand and supply factors. demand for output and supply of factors. demand and supply of output.

demand and supply factors.

The interest rate charged on loans by the Federal Reserve to banks is called the: Treasury bill rate. federal funds rate. prime rate. discount rate.

discount rate.

Macroeconomics is the study of... large variations. macroscopic organisms. forces that influence the economy as a whole. microscopic organisms. small changes that effect individuals.

forces that influence the economy as a whole.

In equilibrium, total investment equals: national savings household income private savings public savings

national savings

In the national income accounts, consumption expenditures include all of the following except household purchases of: non-durable goods. services. new residential housing.

new residential housing.

The marginal propensity to consume is: normally assumed to increase as disposable income increase normally expected to be between zero and one. normally assumed to decrease as disposable income increase equal to consumption divided by disposable income.

normally expected to be between zero and one.

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ___________ and _________ the interest rate paid on bank reserves. purchases ; lower sales ; raise sales ; lower purchases ; raise

sales ; raise

If the quantity of real money balances is kY, where k is a constant, then velocity is __________ and money is changing hands __________ . large ; frequently small ; frequently small ; infrequently large ; infrequently

small ; infrequently

Suppose that the production function for the corporate sector is well represented by the Cobb-Douglas production function Y = K0.3L0.7 With this production function we know: MPL(K,L) = 0.7K0.3L-0.3 and MPK(K,L) = 0.3K0.7L-0.7 If the capital stock of the firm is K=10, then what is the demand for labor (WP) 1.4L-0.3 1.4L-0.7 2.4L-0.3 10L-0.3

1.4L-0.3

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: 2.0 1.67 2.5 0.6

2.5

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be _________ percent. 11 9 4 3

3

If the consumption function is given by the equation C = 500 +0.5Y, the production function is Y = 50K0.5L0.5 where K=100 and L=100, then C equals: 5,000 3,000 2,500 1,000

3,000

Consider the money demand function that takes the form (MP)d=Y4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy? 0.25 i 4i 1/4i

4i

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ________ times per year. 5 2 10 0.2

5

Given the following basket of goods: 25 pizzas, 15 salads and the following price per year, what is the inflation rate for 2018? Year Pizza Salad 2017 $12 $8 2018 $13 $8 2019 $15 $8.50 2020 $18 $10 1% 4.25% 5.95% 6.75% 10%

5.95%

Given the following information on population: Number employed = 107.3 millionNumber unemployed = 4.5 millionAdult population = 219 million The Labor Force Participation Rate is: 48% 53% 45% 51%

51%

Assume that the demand for real money balance is (MP)=0.6Y−100iwhere Y is national income and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. a.) If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be? If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be?

A. i=(3+1) i=4% 100/P = .6(1,000) - (100x4) P=0.5% B. i=(3+2) i=5% 100/P = .6(1,000) - (100x5) P=1%

Assume that the consumption function is given by C=200+0.7(Y-T), the tax function is given by T=100+0.2Y and Y= 50K0.5L0.5 where K=100, L=100. a) Find Y, T and C. b) If L increase from 100 to 144, what would be the change in consumption?

A. Y=5,000 T=1,100 C=2,930 B.Change in consumption = 560

Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 1,000 + 0.3(Y-T). Investment (I) is given by the equation I = 1,500 -50r, where r is the real interest rate in percent. Taxes (T) are 1,000 and government spending (G) is 1,500. What is the equilibrium value of I?

Between 1,299 and 1,301

Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 1,000 + 0.3(Y-T). Investment (I) is given by the equation I = 1,500 -50r, where r is the real interest rate in percent. Taxes (T) are 1,000 and government spending (G) is 1,500. What is the value of national savings?

Between 1,299 and 1,301

Given Y=1000, C= 25+0.75(Y-T) and T=10 +0.1Y, find the value of C.

Between 691 and 693

The closed economy of Moneyland has total income of $5,000, consumption function of C = 2,000 -30r, investment function I=1,500-20r, government spending is $2,000, r is the real interest rate. Find the value of the real interest rate.

Between 9 and 11

In the short run prices are flexible, so they adjust to equate quantity demanded and supplied. True False

False

Banks create money in: a fractional-reserve banking system but not in a 100-percent-reserve banking system. both a 100-percent-reserve banking system and a fractional-reserve banking system. neither a 100-percent-reserve banking system nor a fractional-reserve banking system. a 100-percent-reserve banking system but not in a fractional-reserve banking system.

a fractional-reserve banking system but not in a 100-percent-reserve banking system.

Assume that a series of inflation rates is 1 percent, 2 percent and 4 percent, while nominal interest rates in the same three periods are 5 percent, 5 percent and 6 percent, respectively. a.) What are the ex post real interest rates in the same three periods? b.) If the expected inflation rate in each period is the realized inflation rate in the previous period, what are the ex ante real interest rates in periods two and three? c.) If someone lends in period two, based on ex ante inflation expectation in part b, will they be pleasantly or unpleasantly surprised in period three when the loan is repaid?

a. (5-1)=4%, (5-2)=3%, (6-4)=2% 4%,3%,2% b. (5-1)= 4%, (6-2)=4% Period 2 = 4%, Period 3 = 4% c. They will be unplesantly surprised in period three. They will have an expected interest qrate of 4% but actually recieve a 3% rate. Inflation was higher than expected.

The monetary base consists of : all outstanding currency, plus reserves held by banks. all bank reserves. all outstanding currency, plus demand deposits. currency held by the public, plus reserves held by banks.

currency held by the public, plus reserves held by banks.

The money supply consists of: the monetary base plus demand deposits. currency plus demand deposits. currency plus reserves. currency plus the monetary base.

currency plus demand deposits.

The money supply will decrease if the: reserve-deposit ratio decreases. monetary base increases. discount rate decreases. currency-deposit ratio increase.

currency-deposit ratio increase.

The amount of capital that banks are required to hold depends on the: amount of deposits held at the bank. reserve requirements set by the Fed. riskiness of the bank assets. level of deposit insurance coverage.

riskiness of the bank assets.

Which of the following is the best example of a sticky price? the price of a share of stock the price of the U.S. dollar in terms of euros. the price of soda in a vending machine

the price of soda in a vending machine

In the long run, according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then _________ determines real GDP and ___________ determines nominal GDP. the money supply ; velocity the money supply ; the productive capability of the economy velocity ; the money supply the productive capability of the economy ; the money supply

the productive capability of the economy ; the money supply

An economy's __________ equals its __________ . consumption; income consumption; expenditure on goods and services total income; total expenditure on goods and services expenditure on goods; expenditure on services

total income; total expenditure on goods and services

The quantity theory of money assumes that: velocity is constant. income is constant. prices are constant. the money supply is constant.

velocity is constant.