Macroeconomics Midterm 1

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

$12,000

If bread is produced by using a constant returns to scale production function, then if the:

amounts of equipment and workers are both doubled, twice as much bread will be produced

Suppose instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate?

as velocity grows, inflation increases because the same amount of money is being used more often to chase the same amount of goods. In this case, the money supply should grow more slowly to make up for the growth in velocity.

If the production function describing an economy is Y = 100 K^0.25 L^0.75, then the share of output going to labor:

is 75 percent; ((1-alpha)(Y/L) x L)/Y

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their:

marginal productivities

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases

The CPI is determined by computing:

the price of a fixed basket of goods and services, relative to the price of the same basket in a base year

Two equivalent ways to view GDP are as the:

total income of everyone in the economy or the total expenditure on the economy's output of goods and services

Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, the value included in GDP should be:

$2

If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and net exports are -$1,910, then government purchases are:

$2,977; GDP = C + I + G + NX

If GDP (measured in billions of current dollars) is $5,465 and the same of consumption, investment, and government purchases is $5,496, while exports equal $673, imports are:

$704; GDP = C + I + G + (X-M)

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by:

0.85

If nominal GDP in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator?

1.27; (nominal/real) x 100

Based on the table, what is the reserve-deposit ratio at the bank? (Reserves = $10,000; Deposits = $100,000)

10 percent; R/D x 100

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

2.5; m = (cr + 1)/(cr +rr)

If the disposable income is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to:

300; Y-C-G

If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately ___________ percent

4.7; unemployed/labor force

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is:

500; Y-T-C

According to the quantity theory a 5 percent increase in money growth increases inflation by ______ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by ________

5;5

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals ______ percent.

60; LFPR = (LF)/(AP x 100)

How would inflation be different if real income growth were higher?

An increase in real income growth will result in a lower average inflation rate

The reserve-deposit ratio is determined by:

business policies of banks and the laws regulating banks

To increase the monetary base, the Fed can:

conduct open-market purchases

Real GDP is measured in _______ prices _______ time

constant; per unit of

According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates:

decrease

When the Fed makes an open-market sale, it:

decreases the monetary base (B)

When the Fed decreases the interest rate paid on reserves, it:

decreases the reserve-deposit ratio (rr)

The general demand function for real balances depends on the level of income and the:

nominal interest rate

Consumption depends _________ on disposable income, and investment depends ________ on the real interest rate

positively; negatively

A competitive, profit-maximizing firm hires labor until the:

price of output multiplies by the marginal product of labor equals the wage

The amount of capital in an economy is a _______ and the amount of investment is a _________

stock; flow

An increase in the price of imported goods will show up in:

the CPI but not in the GDP deflator

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise

If increased immigration raises the labor force, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise

The quantity theory of money assumes that:

velocity is constant; MV = PY (line over the "v")

According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates:

increase

In a closed economy, private saving equals:

Y-T-C

The marginal product of labor is:

additional output produced when one additional unit of labor is added

A production function is a technological relationship between:

factors of production and the quantity of output produced

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases.

downward; more

Unlike the GDP deflator, the CPI includes the prices of:

imported goods

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

increase by 1 percent

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

increase by more than $1 million

The production function feature called "constant returns to scale" means that if we:

increase capital and labor by 10 percent each, we increase output by percent

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings:

increases by 0.15 units

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, public saving:

rises by $100 billion