ECO 2307 Final (Edwards) - Sample MC

The price tag on a tennis ball in 1975 read $.10, and the price tag on a tennis ball in 2005 read $1. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. The price of a 1975 tennis ball in 2005 dollars is

$.37

you are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited into a bank and earned 2% interest every year for 140 years, how much would be in the account today according to the rule of 70?

$16

Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5%, Yoyo would be willing to pay

$160,000, but not $170,000

In a certain economy, when income is $400, consumer spending is $350. The value of the multiplier for this economy is 3.125. It follows that, when income is $450, consumer spending is

$384. For this economy, and initial impulse of $50 in consumer spending translates into a $156.25 increase in AD

If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as

$40 purchased in 1975

Belinda knows that she has about $95 in her bank account. She knows she earned an interest rate of 4%, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

$91.35

In the open-economy macroeconomic model, the demand for $ shifts right if at any given exchange rate

- foreign residents want to buy more US goods and services - US residents want to buy fewer foreign goods and services

You put money into an account an earn a real interest rate of 4%. inflation is 2% and your marginal tax rate is 20%. What is your after-tax real rate of interest?

2.8%

A worker received $5 for a daily wage in 1930, which has the equivalent value of $63.24 today. If the CPI was 17 in 1930 what is the value of the CPI today, rounded to the nearest whole number?

215

In the small closed economy of san Lucretia, the currency is the denar. Statistics for last year show that private saving was 60 billion denars, taxes were 70 billion denars, government purchases of goods and services were 80 billion denars, there were no transfer payments by the government, and GDP was 400 billion denars. What were consumption and investment in San Lucretia?

270 billion denars, 50 billion denars

Based on the quantity equation, if M=150, V=4, and Y=200, then P=

3

At a wage of $7, quantity demanded is 9,000 and quantity supplied is 14,000. What is unemployment?

5,000

suppose the real exchange rate is .8 pounds of bananas in Guatemala per pound of bananas in the U.S. If a pound of bananas in the US costs $.50 and the exchange rate is 8 Guatemalan Quetzals per dollar, what is the price of bananas in Guatemala?

5.00 Quetzals per pound

In 1972, one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag of charcoal for about $2.50. If the same goods today cost $6, then what pair of CPIs would make the cost in today's dollars the same for both years?

65 in 1972 and 156 today

Four employers have justified their actions as follows. Whose logic is not consistent with the logic of efficiency wage theory? A. Kay pays her workers less than the equilibrium wage so they won't have time or money to look for work somewhere else B. Jay develops a new assembly line technology that limits the amount of shirking workers can do, so he reduces what he pays his employees so as to make it closer to the equilibrium wage C. Ray pays his workers in a developing country more than the going wage hoping that they will get a better diet and so be more productive

A. Kay pays her workers less than the equilibrium wage so they won't have time or money to look for work somewhere else

Which of the following shifts AD to the left? A. a decrease in the money supply B. an increase in the price level C. congress passes a new investment tax credit D. an increase in net exports

A. a decrease in the money supply

An increase in government spending initially and primarily shifts

AD to the right

Which of the following is NOT included in M1? A. a $5 bill in your wallet B. $100 in your checking account C. $500 in your savings account D. all of the above are included in M1

C. $500 in your savings account

Which of the following would a macroeconomist consider an investment? A. Marisa purchases a bond issued by P&G B. Karlee purchases stock issued by TI C. Charlie builds a new coffee shop D. All of the above are correct

C. Charlie builds a new coffee shop

Suppose the interest rate is 85. Consider three payment options: 1. $200 today 2. $220 one year from today 3. $240 two years from today Which of the following is correct? A. Option 1 has the highest present value and Option 2 has the lowest B. Option 2 has the highest PV and Option 3 has the lowest C. Option 3 has the highest PV and Option 1 has the lowest D. none of the above is correct

C. Option 3 has the highest PV and Option 1 has the lowest

Which of the following is correct? A. Risk-averse people will not hold stock B. Diversification cannot reduce firm-specific risk C. the larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return D. stock prices are determined by fundamental analysis

C. the larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return

Critics of active stabilization policy argue that A. there is a lag between the time policy is passed and the time policy has an impact on the economy B. the impact of policy may last longer than the problem it was designed to offset C. policy can be a source of, instead of a cure for, economic fluctuations D. All of the above

D. all of the above

A person who is counted as unemployed by the Bureau of Labor Statistics A. must be at least 16 years old B. must have recently looked for work or be on temporary layoff C. is also in the labor force D. all of the above are correct

D. all of the above are correct

Suppose the economy is in LR equilibrium. In a short span of time, there is a sharp decline in the stock market, a tax cut, an increase in the money supply, and a decline in the value of the dollar. In the short run, A. neither the price level nor real GDP will change B. the price level and real GDP will both fall C. the price level and real GDP will both rise D. all of the above are possible

D. all of the above are possible

For the Bureau of Labor Statistics to place someone in the "unemployed" category, that person must A. have tried to find employment during the previous year B. not have been laid off C. have worked no more than 10 hours during the past week D. none of the above is correct

D. none of the above is correct

Darin grows and sells marijuana to Jennifer. Thomas is an organic farmer who sells broccoli to Jennifer. Marijuana is an illegal good and broccoli is a legal good. Assume that if Jennifer marries either, they give her what they use to sell her. What is consistent with the way GDP is computed

GDP will fall if Jennifer marries Thomas but not if she marries Darin

The Patersons bought a home that was newly constructed in 2007 for $275,000. They sold the home in 2009 for $205,000. What is correct regarding the sale of the house?

The 2009 sale affected neither 2007 GDP nor 2009 GDP

Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004 and 2005. However, the inflation rate was higher between 2004 and 205 than it was between 2003 and 2004. What is consistent with this assumption?

The CPI was 100 in 2003, 105 in 2004, and 130 in 2005

Some people who are employed or who are not making serious effort to find employment will report themselves as unemployed. Some people who want to find work will be counted as out of the labor force.

The first fact tends to make the reported unemployment rate higher than otherwise, while the second fact tends to make the reported unemployment rate lower than otherwise

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the AD curve?

With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.

The inflation rate in year 2 equals

[(GDP deflator in year 2 - GDP deflator in year 1)/GDP deflator in year 1]x100

Suppose that the real exchange rate between the US and Kenya is defined in terms of baskets of goods. Other things the same, which of the following will increase the real exchange rate?

a decrease in the price in Kenyan currency of Kenyan goods

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left

What raises the interest rate?

an increase in government expenditures and a decrease in the money supply

a central bank sets out to reduce unemployment by changing the money supply growth rate. The LRPC shows that in comparison to their original rates, this policy will eventually lead to

an increase in the inflation rate and no change in the unemployment rate

What would cause prices and real GDP to rise in the short run?

an increase in the money supply

If you believe that stock prices follow a random walk, then probably you

believe in the validity of the efficient markets hypothesis

opponents of active stabilization policy

believe some effects of monetary policy may be long-lived

When the actual change in the price level differs from its expected change, which of the following can explain why firms might change their production?

both menu costs and mistaking a price level change for a change in relative prices

example of physical capital

bulldozers, backhoes and other construction equipment

If money demand shifted to the right and the Fed desired to return the interest rate to its original value, it could

buy bonds to increase the money supply

To decrease the interest rate the Fed could

buy bonds. The fall in the interest rate would decrease investment spending

Suppose the US imposes an import quota on steel. US exports

decrease, the real exchange rate of the US dollar appreciates, and US net capital outflow is unchanged

If the Fed conducts open-market bond sales, the money supply

decreases and aggregate demand shifts left

Marcus puts a greater proportion of his portfolio into government bonds. Marcus's action

decreases both risk and the average rate of return

Assuming the Fisher Effect holds, and given US tax laws, an increase in inflation

does not change the real interest rate but reduces the after-tax real rate of interest

According to the quantity equation, the price level would change less than proportionately with a rise in the MS if there were also

either a rise in output or a fall in velocity

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

fact that the multiplier effect is represented by an infinite geometric series

If there is a decrease in aggregate demand, then in the short run the price level

falls and unemployment falls

If policymakers decrease AD, then in the SR the price level

falls and unemployment rises

The LRAS curve shows that by itself a permanent change in aggregate demand would lead to a long-run change

in the price level, but not output

The LRAS shows that by itself a permanent change in AD would lead to a long run change

in the price level, but not output

On behalf of your firm, you make frequent trips to Singapore. You notice that you always have to pay fewer dollars to get enough local currency to get your nails manicured than you have to pay to get manicured in the US. This is

inconsistent with purchasing power parity, but might be explained by limited opportunities for arbitrage in manicuring across international borders

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

increase the price level but not real GDP

Bolivia buys railroad engines from a US firm and pays for them with Bolivianos. By itself, this exchange

increases both US net exports and US net capital outflow

The misperceptions theory of the SRAS curve says that the quantity of output supplied will increase if the price level

increases by more than expected so that firms believe the relative price of their output has increased

According the the LRPC, it the long run monetary policy influences

inflation but not the unemployment rate; this is consistent with classical theory

From the standpoint of the economy as a whole, the role of

insurance is to spread risks around more efficiently

The nominal interest rate is the

interest rate as usually reported by banks

Money

is the most liquid asset

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

is upward sloping and her marginal utility function is downward sloping

Other things the same, a decrease in the price level motivates people to hold

less money, so they lend more, and the interest rate falls

The "natural" rate of unemployment is the unemployment rate toward which the economy gravitates in the

long run, and the natural rate changes over time

prices in both the US and China rise, but prices in China increase by a smaller percentage. According to purchasing-power parity, the US dollar

loses value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy

If a country's saving rate declined, then other things the same, in the long run the country would have

lower productivity and lower real GDP per person

The sticky-price theory of the SRAS curve says that if the price level rises by 5% and people were expecting it to rise by 2%, then firms have

lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should

make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher

in the long run, technological progress

makes the price level fall, while increases in the money supply make prices rise

GDP adds together many different kinds of goods and services into a single measure of the value of economic activity. To do this, GDP makes use of

market prices

According to liquidity preference theory, a decrease in the price level shifts the

money demand curve leftward, so the interest rate decreases

Suppose banks decide to hold fewer excess reserves relative to deposits. Other things the same, this action will cause the

money supply to rise. To reduce the impact of this the Fed could sell treasury bonds

Other things the same, a decrease in the price level makes consumers feel

more wealthy, so the quantity of goods and services demanded rises

Suppose that money supply growth increases. In the LR, this increases employment according to

neither the LRPC nor the AD/AS model

What implies that an increase in the money supply growth rate permanently changes the unemployment rate?

neither the LRPC nor the LRAS

What policy would Keynes's followers support when an increase in business optimism shifts the AD curve away from LR equilibrium?

none

A decrease in the expected price level shifts

only the SRAS curve right

The Economic Development Minister of a country has a list of things she thinks may explain her country's low growth of real GDP per person relative to other countries. She asks you to pick the one you think most likely explains her country's low growth.

poorly enforced property rights

If the US put an import quota on clothing, it would

raise US net exports of clothing and lower net exports of other US goods

What rises when US price level falls?

real wealth

If Kenya experienced capital flight, the supply of Kenyan schillings in the market for foreign-currency exchange would shift

right, which would make the real exchange rate of the Kenyan schilling depreciate

If banks and speculators in the US decided to exchange US dollars for the foreign currencies of other countries, but foreigners do not desire to increase their holdings in US dollars, then US net exports would

rise and aggregate demand would shift right

Other things the same, continued technological progress and continued increases in the money supply would unambiguously lead to

rising real GDP only (no effect on price)

Aggregate demand shifts right if

taxes fall and shifts left if stock prices fall

If people anticipate higher inflation, but inflation remains the same, then

the SRPC would shift right and unemployment would rise

If you are vacationing in France 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

What effects help to explain the slope of the AD curve?

the interest-rate effect the wealth effect the exchange rate effect

Assume there is a multiplier effect, some crowding out, and not accelerator effect. An increase in government expenditures changes aggregate demand more,

the larger the MPC and the weaker the influence of income on money demand

If your buy a burger and fries at your favorite fast food restaurant,

then both GDP and consumption spending will be higher

The SRPC shows the combinations of

unemployment and inflation that arise in the SR as AD shifts the economy along the SRAS

If output is above its natural rate, then according to sticky-wage theory,

will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level