Macroeconomics Final Exam

What is the difference between gross private domestic investment and net private domestic investment?

Gross private domestic investment less depreciation is net private domestic investment.

The Five Fundamental Questions are

- What goods and services will be produced? - How will the goods and services will be produced? - Who will get the output? - How will the system accommodate change? - How will the system promote progress?

A production possibilities curve illustrates

scarcity.

If inventories decline by $1 billion during 2022, then $1 billion would be

subtracted from both gross private domestic investment and gross domestic product.

The law of increasing opportunity costs states that

if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of another good to do so.

According to the "real-balances effect," if prices

decline, the purchasing power of assets will rise, so spending at each income level should rise.

The crowding-out effect is

a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending.

b. According to the "wealth effect," a change in consumer wealth causes

a shift in consumer spending and a shift of the aggregate demand curve.

Suppose that initially Goldstar Bank is completely "loaned up." A customer then deposits $90,000 into the bank. The reserve requirement is 10 percent. a.) What amount of excess reserves will Goldstar Bank now have as a result of this deposit? b.) What is the maximum amount in new deposits and loans that the banking system can generate as a result of the $90,000 deposit into Goldstar Bank?

a.) $81,000 b.) $810,000

a.) The monetary multiplier is defined as b.) The monetary multiplier is

a.) 1/R, where R is the required reserve ratio. b.) inversely related to the reserve ratio.

Suppose the Federal Reserve sets the reserve requirement at 20 percent, banks hold no excess reserves, and no additional currency is held. a.) What is the money multiplier? b.) By how much will the total potential money supply change if the Federal Reserve changes the amount of reserves by −$90 million? c.) Suppose the Federal Reserve wants to increase the total money supply by $600 million. By how much should the Federal Reserve change reserves to achieve this goal?

a.) 5 b.) $ -450 million c.) $ 120 million

Cost-push inflation occurs in the presence of

rising per-unit production costs

A fundamental difference between the command system and laissez-faire capitalism is that, in command systems

the division of output is decided by central planning rather than by individuals operating freely through markets.

The downsloping aggregate demand curve can be explained by

the interest-rate effect, the real-balances effect, and the foreign purchases effect.

Nominal GDP is

the market or money value of all final goods and services produced by the economy in a given year, whereas real GDP is adjusted for inflation.

Excess reserves are equal to

actual reserves - required reserves.

a.) The basic determinant of the transactions demand for money is the b.) The basic determinant of the asset demand for money is the c.) Total money demand is the d.) The equilibrium interest rate in the money market is determined e.) Complete the following statement: If there is an increase in the total demand for money,

a.) level of nominal GDP. b.) interest rate. c.) horizontal sum of the transactions demand for money and the asset demand for money. d.) at the intersection of the total demand for money curve and the supply of money curve. e.) the equilibrium interest rate will rise.

When bond prices go up, interest rates go

down

A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent, and the Fed is currently mandating a reserve ratio of 10 percent. How much of the $100,000 borrowed by the bank must it keep as required reserves?

$0 The reserve ratio does not apply to money that commercial banks borrow from the Fed.

Suppose GDP is $15 trillion, with $8 trillion coming from consumption, $2.5 trillion coming from gross investment, $3.5 trillion coming from government expenditures, and $1 trillion coming from net exports. Also suppose that across the whole economy, personal income is $12 trillion. If the government collects $1.5 trillion in personal taxes, then disposable income is:

$10.5 trillion

The Bureau of Labor Statistics (BLS) calculates the inflation rate from one year to the next by

subtracting the CPI of the previous year from the CPI of the most recent year, and then dividing by the CPI of the previous year.

Production Possibilities Curve

the maximum amounts of two goods that can be produced, assuming the full use of available resources.

The unemployment rate is defined as

the number of unemployed persons divided by the labor force.

Net exports are a country's export of

goods and services less its imports of goods and services.

The four factors of production are

land, labor, capital, and entrepreneurial ability.

Suppose that in a given month $59 million is deposited into the banking system while $67 million is withdrawn. Also suppose that the Fed has set the reserve requirement at 16 percent and that banks have no excess reserves at the beginning of the month. What is the maximum amount of new checkable-deposit money that can be created (or removed) by the banking system as a result of these deposits and withdrawals?

-50 million

Suppose that a country has 9 million people working full-time. It also has 1 million people who are actively seeking work but are currently unemployed, along with 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this country's unemployment rate?

10 percent

Personal consumption expenditures $ 80 Purchases of stocks and bonds 30 Net exports −10 Government purchases 20 Sales of secondhand items 8 Gross investment 25 What is the country's GDP for the year?

115 Billion

In the United States, who is responsible for maintaining money's purchasing power?

Board of Governors of the Federal Reserve System

Real GDP = nominal GDP/price index (in hundredths) Nominal GDP = real GDP × price index (in hundredths) Price index (in hundredths) = nominal GDP/real GDP

Formioli

How does the purchasing power of money relate to the price level?

It is inversely related to the price level.

Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar?

It will rise by a third (33.3 percent).

In 2009, the inflation rate reached negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5 percent, what value does the Taylor Rule predict for the Fed's target interest rate back then? Would that rate have been possible given the zero lower bound problem?

Negative 4.6 percent; not possible.

Who measures the labor force, and how is it defined?

The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are employed and those who are actively seeking work.

a.) Suppose the town of Boone has a total population of 50,000 people. Of those, 45,000 people are employed. There are 1,000 full-time students who are not employed or actively seeking work. The rest of the people are out of work but have been actively seeking work within the past four weeks. b.) Suppose there are 1,000 people who are unemployed because of frictional unemployment and another 2,000 people unemployed due to cyclical unemployment. How many people are unemployed from structural unemployment?

a.) 8.2% b.) 1,000 people explanation: Unemployment rate = unemployed/labor force × 100 = 4,000/49,000 × 100 = 8.2 percent.

a.) What are the components of the M1 money supply? b.) What is the largest component of M1? c.) Which of the components of M1 is legal tender? d.) What near-monies are included in the M2 money supply?

a.) Currency in circulation and checkable deposits b.) Checkable deposits c.) Currency d.) Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances

a.) Each member of the Board of Governors of the Federal Reserve System is selected by b.) The Federal Open Market Committee (FOMC) includes c.) Other than its main role of controlling the supply of money, the functions of the Federal Reserve include

a.) the U.S. president and confirmed by the Senate. b.) members of the Board of Governors and 5 of the 12 presidents of the Federal Reserve Banks, of which the president of the New York Fed has a permanent voting seat. c.) issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.

a.) A balance sheet must always balance because b.) The major assets on a commercial bank's balance sheet include

a.) the sum of assets must equal the sum of liabilities plus net worth. b.) reserves, securities, loans, and vault cash.

a.) The basic objective of monetary policy is b.) A major strength of monetary policy is c.) Monetary policy is easier to conduct than fiscal policy because

a.) to assist the economy in achieving a full-employment, noninflationary level of total output. b.) its speed and flexibility. c.) monetary policy has a much shorter administrative lag than fiscal policy.

a.) When economists say that monetary policy can exhibit cyclical asymmetry, it means that b.) Cyclical asymmetry is important to policymakers because

a.)expansionary monetary policy and restrictive monetary policy do not have the same potential for economic expansion and contraction. b.)monetary policy is more effective in fighting inflation than a recession.

The Consumer Price Index (CPI) is determined each month by

comparing the value of a market basket of goods that consumers typically purchase to the value of the basket in a base year.

In what type of business do the owners bear no personal financial responsibility for the company's debts and obligations?

corporations

If there is an increase in the nation's money supply, the interest rate will

fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

An economic system

is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

The three basic functions of money are

medium of exchange, store of value, unit of account

In sequential order, the four phases of the business cycle are

peak, recession, trough, and expansion.

Real GDP is nominal GDP divided by the

price index.

The two conflicting goals facing commercial banks are:

profit and liquidity.

The more reliable measure for comparing changes in the standard of living over a series of years is

real GDP.

Government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both.