Macroeconomics Mid Term Study Guide

23. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in 2007 was 125, then how much did a magazine cost in 2007?

$2.50

47. Refer to Table 29-6. Metropolis National Bank is holding 2% of its deposits as excess reserves. Assume that no banks in the economy want to maintain holdings of excess reserves and that people only hold deposits and no currency. The Fed makes open market purchases of $10,000. The person who sold bonds to the Fed deposits all the funds in Metropolis National Bank. If the bank now loans out all its excess reserves, by how much will the money supply increase?

$200,000

55. Refer to Table 29-4. Assume the Fed's reserve requirement is 5 percent and all banks besides the Bank of Cheerton are exactly in compliance with the 5 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Cheerton decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?

$24,000.00

27. If in a closed economy Y = $11 trillion, which of the following combinations would be consistent with national saving of $3 trillion?

C = $7 trillion, G = $1 trillion

44. Real GDP per person is $10,000 in Country A, $20,000 in Country B, and $30,000 in Country C. The saving rate increases by the same rate in all three countries. Other things equal, we would expect that

Country A will grow the fastest

74. Last year, Jane spent all of her income to purchase 200 units of corn at $5 per unit. This year, she spent all of her income to purchase 180 units of corn at $6 per unit

Jane's nominal income increased this year, but her real income decreased.

5. An economy's natural rate of unemployment is the

amount of unemployment that the economy normally experiences.

28. Which of the following is an example of an efficiency wage?

an above-equilibrium wage offered by a firm to attract a more talented pool of job applicants

41. U.S. GNP

excludes production of foreigners working in the U.S. but includes production by U.S. citizens working in foreign countries

31. Net exports equal

exports minus imports.

45. Suppose a person receives an education in her home country. Which of the following will tend to make the increase in GDP of the person's home country larger than the increase in this person's income?

externalities but not brain drain

58. Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

fall, and investment spending fall

35. Fred operates his own business; Fred would be counted as employed

in the household but not the establishment survey

59. A company in Panama pays a U.S. architect to design a factory building. By itself this transaction

increases Panama's imports and so decreases the Panama's trade balance

68. By definition, equity finance

is accomplished when firms sell shares of stock

86. You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds

is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.

12. According to the definitions of national saving and private saving, if Y, C, and G remained the same, an increase in taxes would

leave national saving unchanged and reduce private saving.

66. Economists differ in their views of the role of the government in promoting economic growth. At the very least, the government should

lend support to the invisible hand by maintaining property rights and political stability

1. Suppose the price for one gallon of gasoline rises from $3.50 to $4.00 and the price of one gallon of milk rises from $3.00 to $3.20. If the CPI rises from 120 to 132, then people likely will buy

less gasoline and more milk.

98. You hold currency from a foreign country. If that country has a lower rate of inflation than the United States, then over time the foreign currency will buy

more goods in that country and buy more dollars

71. You are planning a graduation trip to Mexico. Other things the same, if the dollar appreciates relative to the peso, then the dollar buys

more pesos. Your hotel room in Mexico will require fewer dollars

97. If U.S. net exports are negative, then net capital outflow is

negative, so American assets bought by foreigners are greater than foreign assets bought by Americans

37. A closed economy does not engage in international trade, therefore

net exports (NX) are zero.

3. Suppose an economy produces only eggs and ham. In 2009, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham sold at $4 per pound. In 2010, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2009,

nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.

32. Suppose a country repealed its investment tax credit. The effects of this are represented by shifting the a. demand for and the supply of loanable funds to the right. b. demand for and the supply of loanable funds to the left. c. supply of loanable funds to the right and the demand for loanable funds to the left. d. None of the above is correct

none of the above is correct

92. The behavior of market prices over time indicates that natural resources are

not a limit to economic growth.

89. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases

the inflation rate and the nominal interest rate by the same number of percentage points.

84. In the long run, the unemployment rate equals

the natural rate of unemployment

62. National saving is

the total income in the economy that remains after paying for consumption and government purchases.

21. Michelle bought word-processing software in 2009 for $75. Michelle's cousin, Barry, bought an upgrade of the same software in 2010 for $75. To which problem in the construction of the CPI is this situation most relevant?

unmeasured quality change

42. To encourage formation of small businesses, the government could provide subsidies; these subsidies

would not be included in GDP because they are transfer payments

19. Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by

$0.30

80. In 2013, ABC Corporation had total earnings of $200 million and 40 million shares of the corporation's stock were outstanding. If the price-earnings ratio for ABC is 20, then what is the price of a share of its stock?

$100

90. Refer to Scenario 26-1. For this economy, private saving amounts to

$25,000

9. Dewey earned a salary of $75,000 in 2001 and $95,000 in 2006. The consumer price index was 177 in 2001 and 266 in 2006. Dewey's 2006 salary in 2001 dollars is

$63,214.29

6. Fine Edge manufactures lawn mowers. In 2014 it had $2 million worth of lawn mowers in inventory. In 2015 it sold $10 million worth of lawn mowers to consumers and had $1 million worth of lawn mowers in inventory. How much did the lawn mowers produced by Fine Edge add to GDP in 2015?

$9 million

81. Refer to Table 28-4. If the local government imposed a minimum wage of $4 in Productionville, how many people would be unemployed?

0

34. Allied Business Consultants employs five researchers that each work 8-hour days. In one day, the researchers prepared 10 reports for its 2 largest clients. What was Allied Business Consultants' productivity?

1/4 report per hour

25. Suppose that the Bureau of Labor Statistics reports that the entire adult population of Mankiwland can be categorized as follows: 25 million people employed, 3 million people unemployed, 1 million discouraged workers, and 1 million people who are either students, homemakers, retirees, or other people not seeking employment. What is the unemployment rate?

10.7%

91. If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?

2 gallons of Argentinean milk/1 gallon of U.S. milk

4. Refer to Table 24-14. The value of the Consumer Price Index in 2014 was approximately

236.7.

72. A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can, given the reserve requirement. It follows that the reserve requirement is

25 percent

46. Refer to Table 23-12. Calculate the rate of inflation for 2012.

27.5%

79. Tyler puts $450 into an account when the interest rate is 8 percent. Later he checks his balance and finds he has about $612.22. How long did Tyler wait to check his balance?

4 years

24. Refer to Table 24-15. If the base year is 2015, the value of the Consumer Price Index in 2013 is

41.7

83. Refer to Table 29-5. This bank's leverage ratio is

50

51. The manager of the bank where you work tells you that your bank has $10 million in excess reserves. She also tells you that the bank has $500 million in deposits and $455 million in loans. Given this information you find that the reserve requirement must be

7.0 percent

33. Refer to Table 24-4. If 2013 is the base year, then the consumer price index was

80.8 in 2012, 100 in 2013, and 107.7 in 2014

52. In one year, you meet 52 people who are each unemployed for one week and eight people who are each unemployed for the whole year. What percentage of the unemployment spells you encountered ended within one week and therefore was short term, and what percentage of the unemployment you encountered in a given week was long term?

86.7% was short term; 13.3% was long term

14. The consumer price index was 200 in 2008 and 190 in 2009. The nominal interest rate during this period was 4.5 percent. What was the real interest rate during this period?

9.5 percent

61. Which of the following bonds has the highest interest rate?

A long term and a high credit risk

36. Which of the following is a financial-market transaction?

A saver buys a bond a corporation has just issued so it can purchase capital.

76. Refer to Figure 27-2. From the appearance of Alex's utility function, we know that

Alex is not risk averse

10. The opening of a new American-owned factory in Algeria would tend to increase Algeria's GDP more than it increases Algeria's GNP because a. some of the income from the factory accrues to people who do not live in Algeria. b. gross domestic product is income earned within a country by both residents and nonresidents, whereas gross national product is the income earned by residents of a country while producing both at home and abroad. c. all of the income from the factory is included in Algeria's GDP. d. All of the above are correct.

All of the above are correct.

50. On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

An interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account

20. . Ethan purchases a new house for $170,000. Ethan's purchase of the house contributes $170,000 to which magnitude in the identity Y = C + I + G?

I

53. Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Interest rates rise and truck prices rise

99. One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports.

Its trade deficit rose

93. Refer to Figure 27-1. From the appearance of the utility function, we know that

Jasmine is risk averse

2. Which of the following is correct? a. Joan takes some of her income and buys mutual fund shares. Joan's purchase will be included in the investment category of GDP. b. If a share of stock in Virtual Pizza Corporation sells for $77, the earnings per share are $5, and the dividend per share is $2, then the P/E ratio is 11. c. In order to use equity finance, a firm must sell about equal values of stocks and bonds. d. None of the above is correct

None of the above is correct.

94. Which of the following accurately describes of the effect of the government budget deficit on the open economy?

Real interest rates rise, which causes crowding out of domestic investment; the currency appreciates pushing the trade balance toward deficit.

87. In answering which of the following questions would you find it necessary to calculate a present value?

Should ABC Corporation buy a factory today for $3 million, knowing that the factory will yield the corporation $5 million after 3 years?

60. Which of the following is not an example of monetary policy?

The Federal Reserve facilitates bank transactions by clearing checks

96. If a country experiences capital flight, which of the following curves shift right?

The demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.

70. Which of the following best represents fiat money?

The euro

64. Which of the following can a country increase in the long run by increasing its money growth rate?

The nominal wage

22. In an imaginary economy, consumers buy only razors and cologne. The fixed basket consists of 6 razors and 4 bottles of cologne. A razor cost $20 in 2009 and $25 in 2010. A bottle of cologne cost $30 in 2009 and $40 in 2010. Using 2009 as the base year, which of the following statements is correct?

The rate of inflation is 29.17% in 2010

67. Which of the following is an example of human capital?

The things you have learned this semester

16. Matilda just graduated from college. In order to devote all her efforts to college, she didn't hold a job. She is going to tour around the country on her motorcycle for a month before she starts looking for work. Other things the same, the unemployment rate

and the labor-force participation rate are both unaffected

56. Two of the economy's most important financial intermediaries are

banks and mutual funds.

77. When the Fed decreases the discount rate, banks will

borrow more from the Fed and lend more to the public. The money supply increases.

82. If Alan is risk-averse, then he will always

choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5.

54. A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a U.S. company. As a result of these transactions, Chinese net exports

decrease, and U.S. net capital outflow decreases

15. Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the bondholders. This failure is referred to as a

default

26. Rosa deposits $100 in a bank account that pays an annual interest rate of 20 percent. A year later, after Rosa has accumulated $20 in interest, she withdraws her $120. Rosa's purchasing power

did not change if the inflation rate was 20 percent

39. People who buy newly issued stock in a corporation such as Crate and Barrel provide

equity finance and so become part owners of Crate and Barrel

49. Suppose a country's net capital outflow does not change, but its investment declines by $420 billion. Its saving must have

fallen by $420 billion, but its net exports are unchanged.

100. If you are vacationing in Spain and the dollar depreciates relative to the euro, then the dollar buys

fewer euros. It will take more dollars to buy a good that costs 50 euros

13. Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills is called

frictional unemployment

48. According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money

gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.

63. Index funds typically have a

higher rate of return and lower costs than managed mutual funds

95. In 1998, the Russian government defaulted on its bonds. According to the open-economy macroeconomic model, this should have

increased Russian interest rates and net exports

7. Refer to Table 24-5. The cost of the basket

increased from 2004 to 2005 and increased from 2005 to 2006.

18. Amy is working part-time. Tavaris is on temporary layoff. Who is included in the Bureau of Labor Statistics' "employed" category?

only Amy

40. By not taking into account the possibility of consumer substitution, the CPI

overstates the cost of living.

8. A bond that never matures is known as a

perpetuity

73. An increase in the government's budget surplus means public saving is

positive and increasing

30. In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would happen to public and national saving?

public and national saving would fall

17. In a simple circular-flow diagram, firms

purchase resources from households

29. If real GDP doubles and the GDP deflator doubles, then nominal GDP

quadruples

38. Which of the following will increase a country's real GDP per person?

reducing restrictions on foreign trade and foreign investment

57. Given that Sarah's income exceeds her expenditures, Sarah is best described as a

saver or as a supplier of funds.

88. The economy of Umrica uses gold as its money. If the government discovers a large reserve of gold on their land the

supply of money increases, the value of money falls, and prices rise.

69. In a closed economy, public saving is the amount of

tax revenue that the government has left after paying for its spending

65. An understanding of the best ways to produce goods and services is called

technology.

43. Core CPI is

the CPI excluding food and energy

85. A problem that the Fed faces when it attempts to control the money supply is that

the Fed does not control the amount of money that households choose to hold as deposits in banks

11. Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the basket's cost was $80; in 2008, the basket's cost was $92; and in 2010, the basket's cost was $108. The base year must be

the base year cannot be determined from the given information

78. . Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2

the equilibrium value of money decreases.

75. The principle of monetary neutrality implies that an increase in the money supply will increase

the price level, but not real GDP