ECO 348 Exam 1 Review

In the classical model with fixed output, the supply and demand for goods and services are balanced by: A. fiscal policy B. the interest rate C. government spending D. taxes

B. the interest rate

Private saving is: A. taxes minus government spending B. income minus consumption minus government spending C. disposable income minus consumption D. disposable income minus government spending

C. disposable income minus consumption

In the long run, the level of national income in an economy is determined by its: A. real and nominal interest rate B. government budget surplus or deficit C. factors of production and production function D. rate of economic and accounting profit

C. factors of production and production function

Public saving is: A. disposable income minus consumption B. disposable income minus government spending C. government revenue minus government spending D. income minus consumption minus government spending

C. government revenue minus government spending

Macroeconomists call assets used to make transactions: A. consumption B. nominal income C. money D. real income

C. money

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: A. inflation rate is constant B. money supply is constant C. real interest rate is constant D. velocity is constant

C. real interest rate is constant

When the demand for money parameter, k, is large, the velocity of money is ______ and money is changing hands ______ A. large; frequently B. large; infrequently C. small; infrequently D. small; frequently

C. small; infrequently

The costs of unexpected inflation, but not of expected inflation, are: A. menu costs B. the costs of relative price variability C. unintended distortions of individual tax liabilities D. the arbitrary redistribution of wealth between debtors and creditors

D. the arbitrary redistribution of wealth between debtors and creditors

If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then: A. nominal GDP is fixed B. the price level is fixed C. real GDP is proportional to the money supply D. the price level is proportional to the money supply

D. the price level is proportional to the money supply

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: A. 2.5 B. 0.6 C. 2.0 D. 1.67

A. 2.5

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. A. 4 B. 3 C. 11 D. 9

B. 3

If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is equal to: A. 1,000 B. 300 C. 500 D. 700

B. 300

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 _____. A. 1; 1 B. 5; 5 C. 1; 5 D. 5; 1

B. 5; 5

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have _____ inflation. A. decreasing B. high C. low D. constant

B. high

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 ______ divided by ______ multiplied by B. A. (cr+1); (cr+rr) B. (rr+cr); (rr+1) C. (rr+1); (rr+cr) D. (rr+cr); (cr+1)

A. (cr+1); (cr+rr)

If the Fed announces that it will raise the money supply in the future but does not change the money supply today, A. Both the nominal interest rate and the current price level will increase B. Both the nominal interest rate and the current price level will decrease C. The nominal interest rate will increase and the current price level will decrease D. The nominal interest rate will decrease and the current price level will increase

A. Both the nominal interest rate and the current price level will increase

A bank balance sheet consists of only the following items: Deposits $1,000 Reserves $100 Securities $400 Debt $500 Loans $2,000 What is the value of bank capital? A. +$500 B. +$1,000 C. -$1,000 D. -$1,500

B. +$1,000

Based on the table, owners' equity will fall to zero if loan defaults reduce the value of total assets by _____ percent. Bank Balance Sheet Assets Reserves $10,000 Loans $100,000 Securities $40,000 Liabilities & Net Worth Deposits $100,000 Debt $20,000 Equity $30,000 A. 10 B. 20 C. 40 D. 30

B. 20

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: A. 2 percent B. 5 percent C. 20 percent D. 10 percent

B. 5 percent

If the real interest rate is 1 percent and the inflation rate is 5 percent, the nominal interest rate is: A. -4 percent B. 6 percent C. 1 percent D. -5 percent

B. 6 percent

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent. A. 1 B. 7 C. 3 D. 4

B. 7

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, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy? A. 3 percent B. 7 percent C. 13 percent D. 10 percent

B. 7 percent

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level. A. increase; decrease B. decrease; increase C. increase; increase D. decrease; decrease

B. decrease; increase

If the quantity of real money balances is kY, where k is a constant, then velocity is: A. P/k B. kP C. k D. 1/k

D. 1/k

The marginal product of labor is: A. output divided by labor input B. value of additional output when one dollar's worth of additional labor is added C. additional output produced when one additional unit of labor and one additional unit of capital are added D. additional output produced when one additional unit of labor is added

D. additional output produced when one additional unit of labor is added

Money's liquidity refers to the ease with which: A. loans can be floated B. illegally obtained money can be laundered C. coins can be melted down D. money can be converted into goods and services

D. money can be converted into goods and services

The two most important factors of production are: A. labor and energy B. goods and services C. capital and labor D. saving and investment

C. capital and labor

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: A. I is unchanged and r rises by 10 percentage points. B. I rises by 1,000 and r rises by 10 percentage points. C. I rises by 1,000 and r is unchanged. D. I is unchanged and r rises by 15 percentage points.

A. I is unchanged and r rises by 10 percentage points.

A country that is on a gold standard primarily uses: A. commodity money B. the barter system C. fiat money D. credit money

A. commodity money

If output is described by the production function Y = AK0.2L0.8, then the production function has: A. constant returns to scale B. a degree of returns to scale that cannot be determined from the information given C. diminishing returns to scale D. increasing returns to scale

A. constant returns to scale

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will: A. increase B. decrease C. remain unchanged D. either increase or decrease, depending on whether consumption is greater or less than investment

A. increase

The demand for real money balances is generally assumed to: A. increase as real income increases B. decrease as real income increases C. be constant D. be exogenous

A. increase as real income increases

Crowding out occurs when an increase in government spending ______ the interest rate and investment ______ A. increases; decreases B. increases; increases C. decreases; increases D. decreases; decreases

A. increases; decreases

The money supply will increase if the: A. monetary base increases B. currency-deposit ratio increases C. discount rate increases D. reserve-deposit ratio increases

A. monetary base increases

All of the following assets are included in M1 except: A. money market deposits B. currency C. travelers checks D. demand deposits

A. money market deposits

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate. A. positively; negatively B. negatively; positively C. negatively; negatively D. positively; positively

A. positively; negatively

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve-deposit ratio, then the total money supply is: A. reserves times rr B. reserves divided by rr C. reserves divided by (1-rr) D. 1/rr

B. reserves divided by rr

If a technological advancement increases productivity, the neoclassical theory of distribution predicts that: A. both the real wage and the real rental price of capital will fall. B. the real wage will fall, and the real rental price of capital will rise. C. both the real wage and the real rental price of capital will rise. D. the real wage will rise, and the real rental price of capital will fall.

C. both the real wage and the real rental price of capital will rise

To increase the money supply, the Federal Reserve: A. buys corporate stocks B. sells corporate stocks C. buys government bonds D. sells government bonds

C. buys government bonds

Assuming that all firms maximize profits, economic profit is zero if: A. all factors are paid their marginal products B. no firms are competitive C. all factors are paid their marginal products and the law of diminishing returns is valid D. all factors are paid their marginal products, and there are constant returns to scale

D. all factors are paid their marginal products, and there are constant returns to scale

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply: A. decreases by $100 B. increases by more than $100 C. increases by $100 D. remains the same

D. remains the same