Intermediate Macro Test 1

If 250 workers are unemployed for a period of 1 month, 150 for the period of 6 months and 100 for the period of 12 months in a given year, how many spells and months of unemployment occur during a year?

250 (1) + 150 (6) + 100 (12) = 2350 spells of unemployment

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

400 billion * 2 = $800 billion

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate, in percent. In addition, assume that G = 0. In this case, the equilibrium real interest rate is:

5%

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 = 50(K^0.5 x L^0.50), where K = 100. If L increases from 100 to 144, then consumption increases by:

560

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ___ percent

9%

John withdraws $100 from his checking account and deposits it in his saving account. What will be the effect of this transaction on different measures of money, such as C, M1, and M2?

Currency wouldn't change because it is not in circulation. M1 would decrease because money is leaving the checking deposit. M2 would stay the same. (M1 is included in M2 but not vise versa)

the value of a bank's owners' equity is called bank

capital

The two MOST important factors of production are:

capital and labor

a country that is on a gold standard uses:

commodity money

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

decreased 2 percent

paying efficiency wages helps firms reduce the problem of moral hazard by

encouraging unsupervised workers to maintain a high level of productivity

Open-market operations are

federal reserve purchases and sales of government bonds

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

in deficit

National saving refers to:

income minus consumption minus government purchases Y - C - G

the demand for loanable funds is equivalent to

investment

According to the model developed in Chapter 3, when government spending increases without a change in taxes:

investment decreases

the quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in ___ increases in the monetary base and ___ in money supply

large; smaller

according to the classical theory of money, reducing will not make workers richer because firms will increase product prices ____ each year and give workers ____ raises

less; smaller

Much of the difference in unemployment rates across Europe is attributable to differences in

long-term unemployment

to increase the money multiplier, the Fed can

lower the interest rate paid on reserves

the monetary base of Moneyland is $500 million. The currency-deposit ratio (cr) is .2, and the reserve-deposit ratio (rr) is .2. Calculate the money multiplier and money supply.

m = cr+1 / cr + rr -> .2 + 1 / .2 + .2 -> 1.2 / .4 = 3 M = m * B -> 3 *500 million = $1.5 billion Money Supply

sectoral shifts

make frictional unemployment inevitable

in a fractional-reserve banking system, banks create money when they

make loans

transitions into and out of the labor force

make the interpretation of unemployment statistics complicated.

Money's liquidity refers to the ease with which

money can be converted into goods and services

All of these assets are included in M1 EXCEPT:

money market deposit accounts (currency, demand deposits, and traveler's checks are all in M1)

an example of nominal variable is the

money supply

the supply of loanable funds is equivalent to

national saving

Hyperinflation 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

need to generate revenue to pay for spending

Credit Card balances are included in

neither M1 or M2

in a system with 100-percent-reserve banking

no banks can make loans using deposits made at their institution

the concept of monetary neutrality in the classical means that an increase in the money supply growth rate will increase

nominal interest rates

the rate of inflation is the

percentage change in the overall level of prices

Exhibit: Saving, Investment, and the Interest Rate 1 (Refer to the HW #10)The economy begins in equilibrium at point E, representing the real interest rate r1 at which savings S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts spending, holding other factors constant?

point b

the currency-deposit ratio is determined by

preferences of households about the form of money they wish to hold

According to the quantity equation, if the transactions velocity of money remains constant while the quantity of money doubles, the

price of the average transaction multiplied by the number of transactions must double

Disposable personal income is defined as income after the payment of all:

taxes

the natural rate of unemployment is

the average rate of unemployment around which the economy fluctuates

according to the classical dichotomy, when the money supply decreases, ____ will decrease

the price level

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.

the productive capability of the economy; the money supply

when the real wage is above the level that equilibrates supply and demand

the quantity of labor supplied exceeds the quantity demanded

frictional unemployment is unemployment caused by:

the time it takes workers to search for a job

The macroeconomic problem that affects individuals most directly and severely is

unemployment

discouraged workers are individuals who

want a job but have given up looking for one

A policy that increases the job-finding rate _____ the natural rate of unemployment.

will decrease

Assume that an economy is described by a Cobb-Douglas production function. If average labor productivity is growing rapidly:

workers will experience high rates of real wage growth

If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is

400 - 3500 - 1000 + 800 = 300

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. In addition, assume G = 0. In this case, equilibrium investment is:

C = 500 + .06Y -> C = 500 +.6 (5000) -> C = 3500 Y = C + G + I + NX I = Y - C - G - NX I = 5000 - 3500 - 0 - 0 I = 1500

If the rate of of job separation is .02 per month and the rate of job finding is .1 per month, what is the natural rate of unemployment

U / L -> S / S + f -> .02 / .02 + .1 = 16.67%

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

V = PY/ M -> Y = (P * Y * 4i) -> 4i

which of these characteristics made the 2008-2009 recession differ MOST sharply from previous recessions?

a large spike in the duration of unemployment

If the consumption depends positively on the level of real balances, and real balances depend negatively on the nominal interest rate, then

a rise in money growth leads to a fall in consumption and a rise in investment

Suppose a government moves to reduce a budget deficit. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of reducing a government's budget deficit by reducing government purchases. Be sure to label the axes, the curves, the initial equilibrium values, the direction curves shift, and the terminal equilibrium values.a. Illustrate the impactb. State in words what happens to (i) the real interest rate, (ii) national saving, (iii) investment, (iv) consumption, and (v) output.

a. View the HW document. Shifts to the right b. (i) Real interest rate would decrease (ii) National saving would increase (iii) Investment would increase (iv) Consumption is unchanged (v) Output is unchanged

The average unemployment rate in western Europe is higher than in the U.S. a. explain one difference between the European and U.S. economies that is consistent with more structural unemployment in Europe b. explain one difference between the European and U.S. economies that is consistent with more frictional unemployment in Europe

a. structural unemployment is unemployment resulting from real wage rigidity and job rationing, European labor markets are more rigid with strict labor laws and more lenient welfare programs making it harder for workers to switch jobs or sectors b. Frictional unemployment is unemployment caused by the time it takes workers to search for a job. The European cultures/languages are much more diverse than the U.S. and the more generous social programs can lengthen job searching fostering frictional unemployment

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than the expected rate of inflation

in response to the great shutdown of 2020, the Congress passed legislation to increase the unemployment benefits in a way that the new benefits

added $600 per week to the benefits of every unemployed worker

Inflation tax means that

as the price level rises, the real value of money held by the public decreases

If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current unemployment rate is 0.10, then the current unemployment rate is ______ the equilibrium rate, and in the next period it will move ______ the equilibrium rate.

below; toward

An example of decreasing returns to scale is when capital and labor inputs:

both increase 10% and output increases 5%

the reserve-deposit ratio is determined by

business policies of banks and the laws regulating banks

If an increase of an equal percentage in all factors of production increases output of the same percentage, then a production function has the property called:

constant returns to scale

when the Fed decreases the interest rate paid on reserves it

decreases the reserve-deposit ratio (rr)

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.

delta M + delta V = delta P + delta Y -> delta M + delta V - delta P = delta Y -> 12 - 4 - 5 = Y -> Y = 3

bank reserves equal

deposits that banks have received but have not lent out

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on ______, the amount of investment spending depends on ______, and the amount of government spending is determined ______.

disposable income; the interest rate; exogenously

equilibrium in the market for goods and services determines the ___ interest rate, and the expected rate of inflation determines the ___ interest rate

ex ante real; ex ante nominal

Public policy to increase the job finding rate includes ____, and public policy to decrease the job separation rate includes ____

government employment agencies; 100 percent experience-rated unemployment insurance

Centralized union wage bargaining with government intervention in Sweden gives relatively more influence to ____, while firm-level union wage bargaining in the U.S. gives relatively more influence to ____.

outsiders; insiders

The real wage will increase if the:

productivity of labor increases

permitting a lower minimum wage for teenagers would likely

raise unemployment among unskilled adults

leverage ratio

assets / equity (which is capital) = leverage ratio

real money balances equal the

amount of money expressed in terms of the quantity of goods and services it can purchase.

The price received by each factor of production is determined by demand:

and supply of factors

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 ___ multiplied by B

(cr+1)/(cr+rr)

Assume that the production function is Cobb-Douglas with parameter a = 0.3 (e.g. the exponent for capital). If capital and labor are paid their marginal products, they receive the shares of income:

.3 and .7 capital income = .3 labor income = 1 -.3 = .7

A Gini coefficient of ______ represents perfect income equality, while a Gini coefficient of ______ represents perfect income inequality.

0; 1

If the quantity of real money balances is kY, where k is a constant, then velocity is:

1/k

A country has changed its labor laws and decreased the minimum age of working from 18 to 16 years. What is the effect of this change on the equilibrium wage

Labor supply curve will shift right prompting equilibrium wages rate to fall

Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed. In addition, the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: Y = AK^aL^(1-a) Y = C + I + G C = C(Y-T) I = I(r) Suggest at least two policies that a government could use to increase the equilibrium quantity of investment in the economy, and carefully explain how these policies produce this result.

Policy number 1: Decrease interest rates Policy number 2: Decrease taxes

according to the fisher effect, nominal interest rate and explected inflation are positively related. However, when we look at the data, it appears that nominal interest rate and actual inflation are positively correlated.

The actual inflation is positively correlated with nominal interest rates, because inflation data shows persistence in changes

Assume that GDP (Y) is 6,000. Consumption (C). is given by the equation C = 600 + 0.6(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real rate of interest in percent. Taxes (T) are 500 and government spending (G) is also 500.a. What are the equilibrium values of C, I, and r?b. What are the values of private saving, public saving, and national saving?c. If government spending rises to 1,000, what are the new equilibrium values of C, I, and r?d. What are the new equilibrium values of private saving, public saving, and national saving?

a. C = 600 + 0.6(Y-T)C = 600 + 0.6(6,000 - 500)C = 3,900 Y = C + I + G -> 6,000 = 3,900 + I + 500 6,000 = 4,400 + I I = 1,600 I = 2,000 - 100r 1,600 = 2,000 - 100r 100r = 400r = 4% b. Private Savings = (Y-T-C) = (6,000 - 500 - 3,900) = 1,600 Public Savings = (T-G)= (500 - 500) = 0 National Savings = (Y-G-C) = (6,000 - 500 - 3,900) = 1,600 c. C = 600 + 0.6(Y-T) -> C = 600 + 0.6 + (6,000 - 500) C = 3,900 Y = C + I + G 6,000 = 3,900 + I + 1,000 6,000 = 4,900 + I I = 1,100 I = 2,000 - 100r 1,100 = 2,000 - 100r 100r = 900r r = 9% d. Private Savings = (Y-T-C) = (6,000 - 500 - 3,900) = 1,600 Public Savings = (T-G) = (500 - 1,000) = -500 National Savings = (Y-G-C) = (6,000 - 1,000 - 3,900) = 1,100

Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is .1, and the currency-deposit ratio(cr) is .1 a. what is the money supply? b. If rr changes to .2, but cr is .1 and B is unchanged, what is the money supply? c. If rr is .1 and cr is .2, but B is unchanged, what is the money supply?

a. m = cr + 1 / cr + rr -> .1 + 1 / .1 +1 -> 5.5 M = m * B -> 5.5 * 100 billion -> Money Supply = $550 billion b. .1 + 1 / .1 + .2 -> 1.1 / .3 -> 3.67 * 100 billion -> Money Supply = $366,666,666,66.67 c. .2 + 1 / .2 +.1 = 1.2 /.3 -> 4 * 100 billion -> $400 billion

In a classical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will:

rise by $40 billion

between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base ___, and the currency-deposit and reserve-deposit ratios both ___

rose; rose

The major source of government revenue in most countries that are experiencing hyperinflation is:

seigniorage

to reduce the money supply, the federal reserve

sells government bonds

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals

$150 billion

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

100 * 10 = 1000 / 200 = 5

in the U.S., monetary policy is conducted by the

Federal Reserve

the costs of expected inflation cause productive resources of an economy to be expended on adjusting to changing prices. Explain how each of these inflation distorts the allocation of productive resources: a. shoeleather costs b. menu costs

Fisher effect = an increase in pi (inflation) causes an equal increase in i (nominal interest rate), one-for-one relationship a. if expected inflation is high, more people will hold money themselves & less within the banking system. b. Expected inflation distorts the allocation of productive resources within menu costs by the costs of changing prices. For example, a restaurant will have menu costs by having to print new menus.

Consider two countries, Hitech and Lowtech. In Hitech new arrangements for making payment, such as credit cards and ATMs, have been enthusiastically adopted by the population, thereby reducing the proportion of income that is held as real money balances. Over this period no such changes occurred in Lowtech. If this rate of money growth and the growth rate of real GDP were the same in Hitech and Lowtech over this period, then how would the rate of inflation differ between the two countries?

Hitech will have a higher inflation. This is because differences in velocity are related to differences in rates of inflation, when money growth & growth rate of real GDP are the same. The increase in velocity will lead to a higher inflation rate.

Year Interest Rate(Annual %)Annual Inflation Rate(%)1981 14.03 10.3 1982 10.69 6.21983 8.63 3.2Interest rates played a part in the 1984 U.S. presidential debates. Some politicians claimed that interest rates rose over the 1981-1983 period, while others claimed rates fell. This table shows interest rates and annual inflation rates from 1981 to 1983. Reconcile these conflicting claims.

Interest rates rose compared to annual inflation rates. Between 1981-1983, interest rates fell by 5.4% while inflation fell by 7.1%. That 1.7% difference means that interest "fell" but still rose by 1.7% compared to the annual inflation rates. Both rates "fell" but interest increased compared to annual inflation rates.

As the 2008-2009 financial crisis unfolded, one major U.S. bank had a leverage ratio of 50. In Canada regulators put a ceiling of 20 on bank leverage ratios. Compare the change in asset values that would push the capital in the U.S. bank to zero with the change required to eliminate capital in a Canadian bank at the ceiling-leverage ratio. What is the implication of the differences in maximum leverage ratios for the stability of the banking system?

Leverage ratio = Assets / capital (aka equity). The lower the leverage ratio, the more capital is at hand. The Canadian bank is at a lower danger of financial instability unlike the U.S. bank which will be exposed to a greater risk of insolvency during the financial crisis.

Assume an economy where only burgers are traded. In a year, 100 burgers are traded at the rate of $5 per burger. Assume two scenarios a. the economy has $100 in the form of 20 $5 bills b. the economy has $100 in the form of 100 $1 bills Calculate the velocity of money for both situations

M x V = P x Y 100V = 500 V = 5 The velocity does not change due to the different distribution in bills of the same amount of money

Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. Government spending (G) is 1,000 and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r, I:

is unchanged and r rises by 10 percentage points

Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total spells of unemployment were attributable to the long-term unemployed?

long-term unemployed / total unemployed 10 / 110 = .09 9 percent

earlier retirement in Europe than in the U.S. contributes to

lower employment-to-population ratios in Europe than in the U.S.