Econ 202 Final Exam
35. If a certain automotive part can be purchased in Mexico for 50 pesos or in the United States for $10.00, then for purchasing power parity the nominal exchange rate must be _______ peso(s) per U.S. dollar. A) 5 B) 500 C) 50 D) 1/5 E) 60
A; 5 A U.S part costs $10.00 A Mexico part costs 50 pesos The nominal exchange rate= (50/10) = 5 pesos/U.S dollar
4. Data for an economy shows that the unemployment rate is 10%, the participation rate 75 percent, 200 million people 16 years or older are not in the labor force. How many people are employed in this economy? A) 540 million B) 180 million C) 720 million D) 600 million E) 800 million
A; 540 million
Use the table below to answer the question. Y: 4,000 , 6,000, 8,000 C: 3,000 , 4,800, 6,600 Ip: 800, 800, 800 G: 400, 400, 400 X: 400, 400, 400 IM: 200, 400, 600 T: -400, 400, 1,200 For the table above, the value of the marginal tax rate is: A. 0.30 B. 0.40 C. 0.20 D. 0.50 E. 0.10
.40; MTR= (Change in T/Change in Y) MTR = (800/ 2,000) = .40
A $100 deposit to a bank account earns an annual nominal interest rate of 4%. The only good in the economy is pens, which are initially $1 each. How many pens can you buy the next year, if inflation is 3% (round to the next integer)? How many pens more/less than before can you buy now, in percentage change? A. 101; 1 B. 101; 4 C. 104; 4 D. 100; 0 E. 100; 4
101; 1 ; V1 = 100* (1 + .04) = 104 V1 = 100 * (1 + .03) = 103
If a certain food can be purchased in Mexico for 120 pesos and if the nominal exchange rate is 12 Mexico pesos per U.S. dollar, then, for purchasing power parity, the purchase price of the exact same food in the U.S. must be ______ dollars.
10;
If the Consumer Price Index was 100 in one year and 120 in the next year, then the rate of inflation is approximately. A. 20.0 % B. 9.0 % C. 9.1 % D. 5.0 % E. 10.0 %
20.0%; Inflation rate= (CPI in current year - CPI in previous year) / (CPI in previous year) Rate= (120 - 100)/100 = 20.0%
14) If a bank deposit increases from $1000 to $1239.70 while at the same time (one year) the price of a shmoo increase by 15%, then the SIMPLE ONE-YEAR REAL return from the deposit will be _____%. A)7.80 B) 8.20 C) 8.97 D) 7.50 E) 8.60
A; 7.80 V1= V0 *(1 + i) V0 = initial deposit of 1,000 V1 = 1,000 * (1 + x) = 1,239.70 1000 + 1000x = 1,239.70 1000x = 239.70 = .2397 -------------------------------
The expected return to a U.S. resident from putting funds into a Mexico peso deposit yielding a simple annual nominal return of 12% while the U.S. dollar is expected to depreciate at a simple rate of 20% over the year would be a simple rate of ______.
40.0%;
10. Money supply is to wealth as A) stock is to flow B) stock is to stock. C) flow is to stock. D) flow is to flow. E) induced is to autonomous.
B; Stock is to Stock
36. Foreign purchases of U.S. assets would be recorded in the U.S. balance of payments _________ account. A) current B) capital and financial C) trade D) asset E) official settlements balance
B; capital and financial
During the Christmas shopping season, the demand for money increases significantly. If the Fed desires to offset the increase in money demand to keep the nominal interest rate constant in the short-run, then it can ____.
Buy Treasury securities in the open market
The link between inflation and depreciation makes economic sense because .....
Inflation implies that a nation's currency is losing purchasing power in the domestic market. Analogously, exchange rate depreciation implies that the nation's currency is losing purchasing power in international markets
16. From the table, the value of the income-expenditure multiplier is ______. Y: 7000, 8000, 9000 C: 5000, 5500, 6000 Ip: 100, 500, 900 G: 1300, 1300, 1300 X: 900, 900, 900 IM: 100, 200, 300 T: 900, 900, 900 A) 10 B) 2 C) 8 D) 5 E) 4
D; Multiplier = (change in equilibrium income / change in autonomous planned expenditures) MPC= (1000/500) = .5 Autonomous Spending = C + I + G + NX = 500 + 400 + 0 + 0 = 7300 (1000/ = 5 ??????????
28) With instantaneously compounded growth rates, if the velocity of money is growing at a rate of 2% while at the same time output (Y) is growing at a rate of 3% and the inflation rate is 8%, then the equation of exchange implies the money growth rate is _____%. A)12 B) 2.5 C) 13 D) 5.5 E) 9
E; 9 (Growth rate of the money supply + growth rate of the velocity of money) = (inflation rate + growth rate of output) = (X + 2%) = (8% + 3%) = (X + 2%) = (11%) (11% - 2%) = 9%
A "Growth Rate Rule" (as indicated in the PowerPoint slides) states that the growth rate of a product is the product of the growth rates; that is, GR(x*y) = GR(x)*GR(y).
False;
According to the PowerPoint slides, the Current account of the U.S. Balance of Payments accounts records imports of currently produced goods and services plus net interest income receipts plus net unilateral current transfers received.
False;
An increase in the real interest rate is assumed to result in a decrease in saving.
False;
Using the link provided, the nominal exchange rate value of the Hong Kong dollar (script e for Hong Kong), is approximately equal to 7.75 U.S. dollars. Note: Since this assignment was created in advance, exchange rates are not going to be exact since values change over time. Answer false if the difference in values is at least 20%.
False;
Using the link provided, the nominal exchange rate value of the United Kingdom Pound (script e for United Kingdom), is approximately equal to .764 U.S. Dollars. Note: Since this assignment was created in advance, exchange rates are not going to be exact since values change over time. Answer false only if the difference in values is at least 20%.
False;
Economists focus on _____ as a measure of a country's standard of living.
real GDP per person
The nominal money demand curve will shift to the right if ____.
real income increases
If Congress requires NOMINAL social security payments to increase each year by 2%, then, approximately, when the inflation rate is 4%, . A. real social security payments will increase by 2% B. nominal social security payments will increase by 4% C. real social security payments will increase by 6% D. nominal social security payments will increase by 6% E. real social security payments will decrease by 2%
real social security payments will decrease by 2%; -
If the Federal Reserve wants to implement expansionary monetary policy, it can: A. reduce reserve requirements. B. reduce taxes C. conduct open-market sales. D. increase the discount rate. E. increase the federal funds rate.
reduce reserve requirements
The principal suppliers of U.S. dollars in the foreign exchange market are:
U.S. households or firms wishing to purchase foreign goods or assets.
The investment in human capital that contributed to the rapid economic recovery in Germany and Japan after World War II was mainly achieved through _____.
an apprentice system and on-the-job training
A possible SHORT-RUN effect of a one-time only decrease in the money supply is _____ .
an increase in the cyclical unemployment rate
Because of the power of ____ small differences in growth rates of real GDP per person over the long run produce large differences in the average standard of living.
compound interest
The precise name for a decrease in the official value of a currency in a fixed-exchange-rate system is a(n) ______.
devaluation
People who create new economic enterprises are called _____.
entrepreneurs
If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n) A. supply-side fiscal policy. B. contractionary monetary policy. C. expansionary fiscal policy. D. contractionary fiscal policy. E. distortionary fiscal policy.
expansionary fiscal policy;
The interest rate banks charge each other for short-term loans is called the _____.
federal funds rate
Wage is to money as... A. flow is to stock B. stock is to stock C. savings is to saving D. flow is to flow E. stock is to flow
flow is to stock;
All of the following government policies are likely to increase economic growth EXCEPT _____.
fostering a political and legal environment that reduces regulation rather than aligns people's self interest with economically productive behavior
Keanu did not like his job as a receptionist, so he quit the job and is looking for one that better suits his artistic talents. Alexandros would like to work, but employers are not willing to hire him because he does not speak English. Keanu is unemployed and Alexandros is unemployed. A. frictionally; cyclically B. structurally; frictionally C. frictionally; structurally D. cyclically; structurally E. structurally; cyclically
frictionally; structurally
The nominal demand for money is _____.
generally higher when the nominal interest rate declines
With typical fixed nominal interest rate loans, unexpectedly high inflation lenders and borrowers? A. helps; hurts B. helps; helps C. hurts; does not affect D. hurts; hurts E. hurts; helps
hurts; helps
If the MPC in an economy is 0.8, government can increase the autonomous consumption by $ 10 from: A. increasing taxes by $ 8.0 B. reducing taxes by $ 8.0 C. reducing taxes by $ 10.0 D. reducing taxes by $ 12.5 E. increasing taxes by $ 10.0
reducing taxes by 12.5; C = Co + Cy (Y - T) C= 10 + 0.8(Y - 12.5) C= 10 + 0.8Y - 10 (10 and 10 cancel eachother out, therefore 12.5 has to be the correct answer) C = 0.8Y
A Federal Reserve tool to expand the money supply is ______ .
reserve requirement decreases
Economists generally agree that _____ is the single most important source of improvements in productivity.
the application of new technologies to production and distribution
A Quantity Theory of Money implication is the proposition that in the long run with output equal to a fixed level of potential output _______ .
the inflation rate equals the money supply growth rate
Real GDP per person MUST decrease even when average labor productivity remains constant if ____.
the proportion of the population employed decreases
Suppose there is $24 million of cash in existence with $20 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 25%, how large will the money supply be if banks hold no excess reserves? A. $ 104 million B. $ 30 million C. $ 24 million D. $ 84 million E. $ 80 million
$84 million; -If there is $24 million of cash in existence with $20 million of it held in bank vaults as reserves, then the cash in the hands of the public is the difference, or $4 million, which is part of the money supply. = (24,000,000 - 20,000,000) = 4,000,000 held in hands of public -In addition, if bank reserves = $20 million and if the required reserve to checking deposit ratio = 25% with banks holding no excess reserves, then: Actual reserve deposit ratio is: .25 = (Reserves/Deposits) .25=($20 million/Deposits) = (1/4) So Deposits = $80 million (by cross multiplying) Money supply= ($80 million in checking account deposits + $4 million of cash in the hands of the public) =$84 million.
Suppose that a U.S.-made computer costs $2,400, and a similar Japanese-made computer costs 242,000 yen, and the nominal exchange rate "e" was ¥110/$1, the domestic price P (of a computer) was $2,400, and the foreign price Pf was ¥242,000. The Real Exchange Rate for computers is _______
((110 yen/$1) * $2,400)/ (242,000) = (264,000 yen)/(242,000 yen) = 1.09
Real exchange rate =
(Price of domestic good)/(Price of foreign good in dollars)
When the real exchange rate is high....
-Domestic goods are on average more expensive than foreign goods (when priced in the same currency). -Domestic producers will have difficulty exporting to other countries (domestic goods will be "overpriced"), while foreign goods will sell well in the home country (because imported goods are cheap relative to goods produced at home). -Tends to reduce exports and increase imports, therefore net exports will tend to be low when the real exchange rate is high.
When the real exchange rate is low...
-The home country will find it easier to export (because its goods are priced below those of foreign competitors) -While domestic residents will buy fewer imports (because imports are expensive relative to domestic goods). -Thus, net exports will tend to be high when the real exchange rate is low.
The disposable income and consumption data are for a private, closed economy. Disposable Income: $10,000, $12,000, $14,000, $16,000, $18,000 Consumption: $1,500, $3,000, $4,500, $6,000, $7,500 The marginal propensity to consume is: A. 0.75 B. 0.8 C. 0.6 D. 1 E. 0.2
0.75
Let PAE = 950 + 0.8 Y. Current output, Y, equals 4,750, while potential output is 4,800. Hence, we are in a recessionary gap. You are part of the government and, by using G, public spending, you try to bring the economy to the potential. How much is the value of the shift? (For the simplicity of discussion, Let's assume that T = 0, so that Y = Y - T) A. 40 B. 0 C. 950 D. 50 E. 10
10
The unemployment rate in an economy is 7.5%. The total population of the economy is 250 million and the size of the (civilian) labor force is 180 million. The number of employed workers in this economy is: A. 13.5 million B. 112.2 million C. 15.7 million D. 166.5 million E. 174.6 million
166.5 million; Unemployment Rate= (Unemployed/ Labor Force) 0.075 = (x/180,000,000) x (Unemployed) = 13,500,000 Labor Force= (unemployed + employed among the working-age population) 180,000,000 = (13,500,000 + x) x (Employed) = 166,500,000
In 2015, a pizza maker paid $1 for boxes made that year. In 2016, the pizza maker paid $2 for tomato sauce (made that year with $1 of tomatoes grown in 2016). In 2017, the pizza maker paid $3 for extra-virgin olive oil and $2 for mozzarella both produced in 2017, and sold the pizza, made and packaged with all of the purchased items, for $10 in 2017. Then all of these activities contribute to 2016 GDP. A. 1 B. 10 C. 2 D. 5
2
In a small town of 145 people there are 15 people under 16. Out of the remaining persons, there are 15 retired people, 75 people will full-time jobs, 10 people with part-time jobs, 5 full-time students, 5 full-time homemakers, and 20 people who do not have jobs, but want them. Only 5 of these latter 20 people without jobs had actively looked for a job in the preceding four weeks. In this town, the unemployment rate (U3) is and the labor force participation rate is %. A. 4.7; 65.4 B. 6.0; 58.2 C. 3.8; 58.2 D. 5.5; 65.4 E. 5.2; 58.2
5.5; 65.4
If, in the long run, the velocity of money is constant, output is at potential output, the money growth rate is 10% per year, and the potential output growth rate is 3% per year, then according to the equation of exchange the long run equilibrium inflation rate is _______ per year.
7% ; (10% - 3%) = 7%
In the hypothetical example of the Japanese and U.S. computers, the price of the domestic (U.S.) good relative to the price of the foreign (Japanese) good is ______
= ($2,400)/($2,200) = 1.09 So the U.S. computer is 9% more expensive than the Japanese computer, putting the U.S. product at a competitive disadvantage
Suppose that a U.S.-made computer costs $2,400, and a similar Japanese-made computer costs 242,000 yen. If the nominal exchange rate is 110 yen per dollar, which computer is the better buy?
=Price in yen = (Price in dollars) *(Value of dollar in terms of yen) (Note that the value of a dollar in terms of yen is just the yen-dollar exchange rate. Making this substitution and solving, we get) Price in Dollars = (Price in Yen)/(Yen-dollar exchange rate) =(242,000 yen)/(110 yen/$1) = $2,200 Our conclusion is that the Japanese computer is cheaper than the U.S. computer at $2,200, or $200 less than the price of the U.S. computer, $2,400. The Japanese computer is a better deal.
Which of the following is the best example of money used as a store of value? A. A plumber unclogs a drain for a carpenter, who repairs broken steps for the plumber. B. On the island of Yap, large stones are used to purchase real estate. C. In a prisoner of war camp, the prices of food, candy, and socks are quoted in terms of the number of cigarettes required to purchase each. D. A farmer stores $100 dollar bills in a strong box under the floor in a barn. E. Prices of products in a store in Mexico are marked in terms of U.S. dollars.
A farmer stores $100 dollar bills in a strong box under the floor in a barn; - Store of Value means the function of an asset that can be saved, retrieved and exchanged at a later time
13. In Econland, the population is constant, but the average standard of living is increasing. If a larger proportion of the population is retired, then total output is ______ and average labor productivity is ______. A) increasing; increasing B) decreasing; decreasing C) increasing; remaining constant D) decreasing; increasing E) increasing; decreasing
A: increasing; increasing
28. The expected return to a U.S. resident from putting funds into a Canadian dollar deposit yielding a simple annual nominal return of 4.5% while the U.S. dollar is expected to depreciate by 5% over the year would be _______. A) 10% B) 4.5% C) .5% D) 9.5% E) -.5%
A; Arbitrarily choose $100 as the initial amount of U.S. funds and arbitrarily choose the initial nominal exchange rate as C$1/$1. $100 then converts to C$100. With a simple annual return of 4.5%, the Canada deposit would have a final value at the end of year equal to V0*(1 + i) = C$100 * (1 + .045) = C$104.50. If the U.S. dollar depreciates by 5% over the year, then the nominal exchange rate at the end of the year would be (.95* C$1/$1) or C$.95/$1. At that exchange rate, C$104.50 would convert to C$104.50/(C$.95/$1) equal to $110. The rate of return, then, would be ($110 - $100)/$100 = 10%.
39. Use the information below to calculate the value added by the firm: Rent paid for office space: $20,000 Wages paid to workers: $60,000 Value of produced inputs used up to produce the firm's output that were purchased from other firms: $420,000 Value of firm's output: $600,000 A)$180,000 B)$140,000 C)$200,000 D)$120,000 E)$100,000
A; Valued added is the value of the firm's output minus the cost of inputs purchased from other firms.
4. Bob's Barber Shop cut 2,500 heads of hair in the year 2000 and 3,000 in the year 2001. The price of a hair cut was $10 in 2000 and $11 in 2001. If the year 2000 is the base year, what was Bob's contribution to real GDP in the year 2001? A) $30,000 B) $33,000 C) $25,000 D) $27,500 E) $29,000
A; $30,000
23. Suppose a bond, with a principal amount of $5000, has a 9% coupon, and has one year left to maturity at which time it will pay its last interest payment. If bonds of similar risk currently have a one-year interest rate of 3%, then the bond can be sold today, rounded to the nearest dollar, for as much as, but no more than, A) $5291 B) $5150 C) $4854 D) $5614 E) $4942
A; $5291
38) A country reports the total expenditures for a typical household as $10,000 in the base year 2000. The cost of purchasing exactly that same basket of goods in 2006 is $12,000 while total expenditures on the goods actually purchased in 2006 is $15,000. As a consequence, the country's CPI for 2006 is equal to _____. A)120 B) 67 C) 80 D) 125 E) 150
A; 120
16)In 2005, a farmer sells wheat to a miller for $2 and the miller makes the wheat into flour and sells it a baker for $3. In 2006, the baker makes the wheat into bread and sells it a grocer for $5 and the grocer sells the bread to the public for $7. The contribution of all these activities to 2005 GDP is $_____. A)3 B) 1 C) 5 D) 0 E) 2
A; 3 2005 GDP includes selling the flour for $3
9) Y: 1500, 3500, 5500 C: 1000, 2600, 4200 Ip: 600, 700, 800 G: 700, 700, 700 X: 400, 400, 400 IM: 200, 400, 600 T: 100, 500, 900 For the table above, the value of the marginal expenditure rate is _____. A)3/4 B) 11/20 C) 7/10 D) 17/20 E) 4/5
A; 3/4 Y = PAE Autonomous Expenditure = C + I + X - IM = (1000 + 600 + 400 - 200) = 1,8000 = (2600 + 700 + 400 - 400) = 3,300 = (3,300 - 1,800) = 1,500 MER = ΔPAE/ΔY = (1500/2000) MER = 3/4
14. Y: 4000, 5000, 6000 C: 2800, 3600, 4400 Ip: 500, 700, 900 G: 700, 700, 700 X: 900, 900, 900 IM: 900, 1000, 1100 T: 900, 900, 900 For the table above, the level of equilibrium disposable income equals A) 3100. B) 4100. C) 5100 D) 4000. E) 5000.
A; 3100 = (Y - T) = (4000 - 900) = 3,100
39) Suppose there is $600 million of cash in existence with $400 million of it held in bank vaults as reserves. A bank run reduces the cash held in bank vaults as reserves to $200 million when the public withdraws $200 million of cash from the banks. If the required reserve to checking deposit ratio is 25% and if banks never hold excess reserves, then the money supply will _____ as a result of the bank run. (Hint: One method of solution is to calculate the money supply both before and after the bank run.) A)decrease by $600 million B)decrease by $50 million C)decrease by $200 million D)decrease by $800 million E)not change
A; Decrease by $600 million If there is $600 million of cash in existence with $400 million of it held in bank vaults as reserves, then the cash in the hands of the public is the difference, or $200 million, which is part of the money supply. = (600,000,000 - 400,000,000) = 200,000,000 held in hands of public -Bank reserves = $400 million and if the required reserve to checking deposit ratio = 25% with banks holding no excess reserves, then: Actual reserve deposit ratio is: .25 = (Reserves/Deposits) .25=($400 million/Deposits) = (1/4) So Deposits = $1,600 billion (by cross multiplying) Money supply= ($800 million in checking account deposits + $200 million of cash in the hands of the public) Money Supply Before = 1 Billion Money Supply After= (.25 = 200 million/Deposits) Deposits = 800 million Money Supply (800 million in deposits + = Decrease of $600 million. ---------------------------------------------
7) If U.S. domestic assets are purchased by foreigners with U.S. currency abroad, then recordedfor the U.S. balance of payments accounts is _____. A)a credit and a debit in the capital and financial account B)a credit in the current account and a debit in the capital and financial account C)a credit in both the capital and financial and current accounts D)a credit in the capital and financial account and a debit in the current account E)a credit and a debit in the current account
A; a credit and a debit in the capital and financial account
15)Which of the following would NOT shift the aggregate demand curve to the right? A)a decrease in price B)an increase in the velocity of money C)an increase in the money supply D)an increase in exports E)a decrease in taxes
A; a decrease in price
6. Which of the following would reduce national saving when it isincreased? A) consumption spending B) private saving C) taxes D) income E) none of the other choices
A; consumption spending
36. The U.S. trade deficit would be recorded in the U.S. Balance of Payments _________ account. A) current B) capital and financial C) official settlements balance D) trade E) asset
A; current account
11. Fiscal policy includes: A) decisions to determine the level of government spending. B) government policy directed toward increasing exports and reducing imports. C) the provision of additional cash to the banking system by the government. D) policies to reduce the power of unions and monopolies. E) government policies aimed at promoting high-technology industries and aimed at protecting the environment.
A; decisions to determine the level of government spending
10. People who would like to work full time, but are able to find only part-time work are officially counted as: A) employed. B) unemployed. C) out of the labor force. D) discouraged workers. E) chronically unemployed.
A; employed
24) For the money market, as defined and used in the course material, the equilibrium nominal interest rate increases when the _____. A)level of real income increases B)money supply increases C)natural unemployment rate decreases D)cyclical unemployment rate increases E)price level decreases
A; level of real income increases
25) If nominal GDP increases from one year to the next by 2% while real GDP increases by 5%, then _____. A)physical production increased and prices decreased B)physical production increased, but prices could have increased, decreased, or remained the same C)both prices and physical production increased D)physical production decreased and prices increased E)both prices and physical production decreased
A; physical production increased and prices decreased
32. If the money supply is less than money demand, people will ____ bonds which will cause bond prices to ____ and the nominal interest rate to _____ until money demand equals money supply. A) sell; fall; rise B) sell; fall; fall C) buy; rise; rise D) buy; fall; rise E) buy; rise; fall
A; sell, fall, rise
9. Debt is to saving as A) stock is to flow. B) stock is to stock. C) flow is to stock. D) flow is to flow. E) induced is to autonomous.
A; stock is to flow
36) If both borrower and lender agree to a fixed REAL interest rate of 3% on a loan when inflation is expected to be 2%, but the inflation rate turns out to be 6% instead over the life of the loan, then ____. A)the dollar payments of the borrower will be higher than expected B)the real payments of the borrower will be lower than expected C)it is not possible to tell who is hurt and who is helped in terms of purchasing power from what was expected D)the real payments of the borrower will be higher than expected E)the dollar payments of the borrower will be lower than expected
A; the dollar payments of the borrower will be higher than expected
29. According to the equation of exchange, if the income velocity of money is constant and if output is constant, then it is always true that A) the ratio of the money supply to the price level is constant. B) the ratio of the money supply to the level of output is constant. C) the ratio of the level of output to the price level is constant. D) the equilibrium inflation rate is zero. E) the equilibrium inflation rate is never zero.
A; the ratio of the money supply to the price level is constant
If the Mexico price level is 25% higher than the price level last year while the the U.S. price level is 50% higher than the price level last year, then for purchasing power parity to remain, the Mexico Peso must, at a simple one-year rate, ______ relative to the U.S. dollar from its level last year. (Hint: Use a numerical example with specific price levels and exchange rate to determine the answer.)
Appreciate by 20%
Use the following graph to answer the next question: (Graph shows a leftward shift in the Aggregate Demand Curve) What combination would most likely cause a shift from AD1 to AD3? A. A decrease in taxes and an increase in government spending B. An increase in taxes and a decrease in government spending C. A decrease in taxes and a decrease in government spending D. An increase in taxes and an increase in government spending E. A decrease in taxes and unchanged government spending
An increase in taxes and a decrease in government spending;
13. In Econland, population is constant, but the average standard of living is decreasing. If a larger proportion of the population is employed, then total output is ______ and average labor productivity is ______. A) increasing; increasing B) decreasing; decreasing C) increasing; decreasing D) decreasing; increasing E) decreasing; remaining constant
B; -The average standard of living is defined as the ratio of output to population or the value of output per person. -If it is decreasing while the population is constant, then it must be true that output is decreasing. -Average labor productivity = (output/ number of people employed, or output per worker) -The following equality must be true by division and multiplication: (output/population) = (output/workers)*(workers/population) -Thus, the average standard of living can only increase if either average labor productivity increases or the proportion of the population employed increases. -In this problem, the average standard of living has declined and the proportion of the population employed has increased. -Therefore, average labor productivity must have decreased significantly to offset the increase in the employment-population ratio to bring down the average standard of living.
8. A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract. The CPI is 100 in the first year and 110 in the second year. What dollar wage must be paid in the second year? A) $16.80 B) $16.83 C) $15.30 D) $17.00 E) $17.15
B; $16.83 To find the indexed wage in year two, the wage that would maintain the purchasing power from the first year, take the nominal wage in year one and multiply it by the CPI: = (15 * 110) = $1,650 Then, since the contract calls for an increase in the real wage by 2%, the indexed wage must be increased by 2 percent: = (1,650 * 1.02) = $16.83
11) Suppose a family earned a nominal income of $42,000 in 2003 when the CPI was 210. By 2008, that family's nominal income increased to $84,000, while the CPI increased to 280. The family's 2008 REAL income equals _____. A)$42,000 B)$30,000 C)$60,000 D)$84,000 E)$63,000
B; $30,000 -Real income is income expressed in the base-year price level, which is 100. -Since the 2008 nominal income of $84,000 is expressed in the current price level of 280, to value it in the base-year price level which is 100/280s of the current price level, it is necessary to multiply nominal income by 100/280. -A real value is the nominal value deflated, or the nominal value must be divided by the current price level and multiplied by the base-year price level. = (84,000) * (100/280) = $30,000
40. Assume for 2000, nominal GDP is $50,000 and the GDP deflator is 125. For 2001, the nominal GDP is $75,000 and the GDP deflator is 150. Then the exact change in REAL GDP between 2000 and 2001 is from _____ to _____. A) $50,000 to $75,000 B) $40,000 to $50,000 C) $50,000 to $60,000 D) $60,000 to $75,000 E) $50,000 to $65,000
B; $40,000 to $50,000 2000: RGDP = (NGDP/Deflator) * 100 RGDP = (50,000/125) * 100 = $40,000 2001: RGDP = (NGDP/Deflator) * 100 RGDP = (75000/150) * 100 = $50,000
33) In Okunland, a country that operates according to Okun's law, potential output equals $10,000 and the natural rate of unemployment is 6 percent. If the actual unemployment rate is 9 percent, then the actual (or short-run equilibrium) level of output equals ____. A)$9,700 B)$9,400 C)$10,400 D)$10,600 E)$9,600
B; $9,400 = (Y - Y*)/(Y*) x 100 = -2 x (u - u*) = (Actual Output - Potential Output)/(Potential Output) * 100 = -2(actual un. rate - natural un. rate) = (Y - 10,000)/(10,000) * 100 = -2(9% - 6%) = (Y - 10,000)/(10,000) * 100 = -18% - 12% = $9,400
12) Data for Smallville shows 360 people are employed. If 640 people are classified as in the working age population with 240 of them classified as out of the labor force and with 2000 people in the total population, then the unemployment rate for Smallville is _____%. A)11.11 B) 10 C) 14 D) 6.25 E) 2
B; 10 Unemployment rate= (unemployed/ labor force) NILF= WAP - L 240 = 640 - LF Labor Force = 400 Labor Force = (employed + unemployed) 400 = (360 + unemployed) Unemployed = 40 = (40/400) = .10 or 10%
1. If the price of a shmoo increases at a simple annual rate of 10%, while at the same time (one year) a $2000 bank deposit increases to $2860, then the SIMPLE ONE-YEAR REAL return from the deposit will be A) 33%. B) 30%. C) 10%. D) 35%. E) 43%.
B; 30% or 33% (takes both answers) -Since the price level goes up by 10%, the inflation rate = 10%. -Meanwhile, since the bank deposit goes up by 43% (2000 -> 2860), the nominal interest rate = 43%. Real interest rate = (Nominal interest rate - inflation rate) = 43% - 10% = 33%
5) Of the following, the best policies to eliminate an expansionary (inflationary) gap would be totake measures to _____. A)have the FED sell bonds in the open market, decrease taxes, and decrease exports B)increase reserve requirements, increase taxes, and decrease planned investment C)increase government spending, reduce the money supply, and increase imports D)decrease reserve requirements, decrease government spending, decrease exports E)have the FED buy bonds in the open market, increase imports, and decrease consumption
B; increase reserve requirements, increase taxes, and decrease planned investment
2) Holding all else constant, an increase in Mexico real GDP will ____ the demand for dollars in the foreign exchange market and ____ the equilibrium Mexico peso/U.S. dollar exchange rate. A)decrease; decrease B)increase; increase C)increase; decrease D)decrease; increase E)not change; not change
B; increase, increase
30. The amount of wealth an individual chooses to hold in the form of money is called: A) the natural money rate. B) the demand for money. C) the wealth effect. D) the autonomous supply of money. E) the induced supply of money.
B; the demand for money
23) Suppose the price of a U.S. made television is $1800 in New York City and the price of an equal quality South Korea made television is 1,320,000 Won in Seoul. If the nominal exchange rate is 1100 Won per U.S. dollar, then, for televisions only and for the U.S. and South Korea, ignoring transportation costs, ______ . A)the numerical value of the U.S. real exchange rate is 0.5 B)the price of the South Korea television in New York City is $1200 C)the numerical value of the U.S. real exchange rate is 3.0 D)the price of the U.S. made television in Seoul is 880,000 Won E)there is purchasing power parity
B; the price of the South Korea television in New York City is $1200
21. All of the following would be included in planned expenditures EXCEPT: A) government purchases of military weapons. B) unplanned changes in inventories by business. C) sales of domestically produced goods to foreigners. D) autonomous household spending on services. E) induced household spending on residential construction.
B; unplanned changes in inventories by businesses
Suppose that a bushel of wheat costs 5 Australian dollars in Sydney and 150 rupees in Bombay. If the law of one price holds for wheat, What is the nominal exchange rate between Australia and India?
Because the market value of a bushel of wheat must be the same in both locations, we know that the Australian price of wheat must equal the Indian price of wheat, so that: 5 Australian dollars = 150 Indian rupees (divide both sides by 5) 1 Australian dollar = 30 Indian rupees Thus, the nominal exchange rate between Australia and India should be 30 rupees per Australian dollar
14. From the table, the level of equilibrium private saving equals: Y: 7000, 8000, 9000 C: 5000, 5500, 6000 Ip: 100, 500, 900 G: 1300, 1300, 1300 X: 900, 900, 900 IM: 100, 200, 300 T: 900, 900, 900 A) 2500. B) 2000. C) 1600. D) 3000. E) 2100.
C; -The level of equilibrium private saving is the level of private saving at equilibrium income. -Equilibrium income= (output = planned expenditures) - Equilibrium private saving = (Y-T)-C (8000 - 900) - 5500 = 1,600
31. Of the following, the best policies for the government to eliminate an expansionary gap would be to A) increase consumption, reduce the money supply, and decrease taxes. B) decrease consumption, have the Fed buy bonds in the open market, and decrease investment. C) increase imports, have the Fed sell bonds in the open market, and increase saving. D) reduce consumption spending, lower reserve requirements, and decrease government spending. E) reduce the discount rate, increase taxes, and decrease exports.
C; For the government to eliminate an expansionary gap, it is necessary to reduce planned expenditures. Only answer "C" has ALL items that would lead to reductions in either C, Ip, G, or NX. For this, recall that Ip is inversely related to the interest rate, which the Federal Reserve is assumed to control through its policy tools influencing the size of the money supply.
15. From the table, the value of the marginal propensity to consume out of income, Y, is Y: 7000, 8000, 9000 C: 5000, 5500, 6000 Ip: 100, 500, 900 G: 1300, 1300, 1300 X: 900, 900, 900 IM: 100, 200, 300 T: 900, 900, 900 A) 2/7 B) 11/16 C) 1/2 D) 9/10 E) 4/5
C; Marginal propensity to consume = ΔC/ΔY ΔC = 500 ΔY = 1000 = (500/1000) = 1/2
27. Suppose the price of gold is 2000 pesos/ounce in Mexico. The nominal exchange rate between the United States and Mexico is 10 Mexico pesos per U.S. dollar. For the real exchange rate value of an ounce of U.S. gold to be 2, the price of gold in the United States must be $ ____ /ounce. A) 600 B) 300 C) 400 D) 2000 E) 200
C; The real exchange rate is equal to ep/pf. The real exchange rate value of the U.S. dollar, then, would be as follows. 2 Mexico gold ounces per U.S. gold ounce equals 10 Mexico pesos/U.S. dollar multiplied by p divided by 2000 pesos/ounce of Mexico gold. 2 = 10p/2000 so that p equals $400 per U.S. ounce.
7. If $600,000 of aluminum is produced in 1999 with $400,000 used for the production of $1,200,000 of cans in 1999 and $100,000 used for $300,000 of cans in 2000 (with $100,000 of aluminum unused at the end of 2000), then these activities will contribute to 1999 & 2000 GDP: A) $1,200,000; $300,000 B) $2,100,000; $300,000 C) $1,400,000; $200,000 D) $800,000; $200,000 E) none of the other choices
C; $1,400,000; $200,000
3. For a hypothetical economy in a given year, real GDP is $9000 per year, the GDP deflator is 120 and real consumption is $6000 per year. What is the value of the nominal GDP for that year? A) $6000 B) $9000 C) $10800 D) $7500 E) $7200
C; $10,800 RGDP = (NGDP/Deflator) * 100 9000 = (NGDP/120) * 100 90 = (NGDP/120) (90 * 120) = $10,800
29) Use the information below to calculate the value added by the firm: Rent paid for office space: $40,000 Wages paid to workers: $60,000 Value of produced inputs used up to produce the firm's output that was purchased from other firms: $200,000 Value of the firm's output: $500,000 A)$200,000 B)$400,000 C)$300,000 D)$460,000 E)$440,000
C; $300,000 Value Added = (500,000 - 200,000) = $300,000
13) An implication of the QUANTITY THEORY OF MONEY is that an increase in the money supply growth rate from 3% to 7% would, for an economy in LONG-RUN equilibrium, _____. A)decrease the growth rate of the velocity of money by 4 percentage points B)increase the real potential output growth rate by 4 percentage points C)increase the nominal GDP growth rate by 4 percentage points D)decrease the velocity of money by 4 percentage points E)increase the real output growth rate by 4 percentage points
C; increase the nominal GDP growth rate by 4 percentage points
2. In the base year, real GDP ______ nominal GDP. A) is always greater than B) is always less than C) is always equal to D) could be less than or more than E) is usually less than
C; is always equal to
18. Suppose there is $40 million of cash in existence with $10 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 20%, how large will the money supply be if banks hold no excess reserves? A) $18 million B) $50 million C) $80 million D) $90 million E) $40 million.
C; $80 million -If there is $40 million of cash in existence with $10 million of it held in bank vaults as reserves, then the cash in the hands of the public is the difference, which is part of the money supply. = (40,000,000 - 10,000,000) = 30,000,000 held in hands of public -In addition, if bank reserves = $10 million and if the required reserve to checking deposit ratio = 20% with banks holding no excess reserves, then: Actual reserve deposit ratio is: .20 = (Reserves/Deposits) .20=($10 million/Deposits) So Deposits = $50 million (by cross multiplying) Money supply= ($50 million in checking account deposits + $30 million of cash in the hands of the public) =$80 million.
35) If in Econland in the year 2000, real GDP is $40,000 per year, nominal GDP is $64,000 per year and real saving is $20,000 per year, then the GDP deflator for the year 2000 is _____. A)106.7 B) 62.5 C) 160 D) 210 E) 200
C; 160 RGDP = (NGDP/Deflator) * 100 40,000 = (64000/Deflator) * 100 400 = (64000/Deflator) = (64000/400) = 160
40 ) To maintain purchasing power parity, when the domestic exchange rate (as defined in the course) is growing at a rate of 5% and when the domestic inflation rate is 15%, requires a foreign inflation rate of _____ (assuming instantaneous rates of compounding). A)10% B) (1/3)% C) 20% D) 3% E) 75%
C; 20% (15% domestic + 5% growing exchange rate) Foreign inflation rate = 20%
27. Suppose the price of gold is 2400 pesos/ounce in Mexico. The nominal exchange rate between the United States and Mexico is 6 Mexico pesos per U.S. dollar. For the real exchange rate value of one ounce of U.S. gold to be 1/2, the price of gold in the United States must be $ ____ /ounce. A) 600 B) 300 C) 200 D) 2400 E) 400
C; 200 Gold is 2400 pesos in Mexico Nominal Exchange Rate = 6 Pesos/Dollar 6= (2400/x) = Gold is $400 dollars in the U.S If U.S exchange rate value= 1/2 = ($400 * 1/2) = $200/ounce
39. The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2000, the base year, the typical consumer purchased 10 books for $20 each and 300 hamburgers for $1 each. In 2001, the typical consumer purchased 20 books for $12 each and 200 hamburgers for $1.80 each. The CPI inflation rate between 2000 and 2001 is ________ . A) 10% B) 20% C) 32% D) 40% E) -9%
C; 32% The CPI uses base year basket of goods: = 10 books and 300 hamburgers At $12 per book & $1.80 per hamburger: Expenditure on the base-year basket= (10 * 12) + (300 * 1.80) = 660 At $20 per book & $1 per hamburger: Expenditure on base-year basket= (20 *10 ) + (1 * 300) = 500 Inflation rate= (CPI in current year - CPI in previous year) / (CPI in previous year) = (660 - 500)/(500) = 32%
27) The expected simple return to a U.S. resident from putting funds into a Mexico peso deposit account yielding a simple annual nominal return of 16.16% while the U.S. dollar is expected to appreciate against the peso by a 10% simple rate over the year would be ______%. A)29.07 B) 5.80 C) 5.60 D) 6.16 E) 26.16
C; 5.60% -Choose any initial dollar amount, say $10, and any initial exchange rate, say 100 pesos per dollar. -The $10 converts to 1000 pesos, which becomes 1,616 pesos at the end of the year with a 16.16% interest rate = (V1 = V0(1 + i)) -Since the dollar is assumed to appreciate by 10%, the end of the year exchange rate would be = 1.10 -100 pesos per dollar or 110 pesos per dollar. -At that rate, (1,161/110) = $10.55 Which is a rate of return of ($10.55 - $10)/$10 = about 5.60%
3) Y: 1500, 3500, 5500 C: 1000, 2600, 4200 Ip: 600, 700, 800 G: 700, 700, 700 X: 400, 400, 400 IM: 200, 400, 600 T: 100, 500, 900 For the table above, the value of equilibrium NATIONAL SAVING _____. A) 200 B) -200 C) 600 D) 400 E) 1300
C; 600 *** using column 3 for the numbers National Saving (S) = (Private Saving + Public Saving) Spr= ((Y-T)-C) Spu= (T - G) = ((Y-T)-C) + (T - G) = ((5500 - 900) - 4200) + (900 - 700) = 400 + 200 = 600
5. Data for an economy shows that the unemployment rate is 10%, the participation rate 80 percent, and 800 million people are in the labor force. How many people are employed in this economy? A) 640 million B) 576 million C) 720 million D) 900 million E) 800 million
C; 720 million Unemployment Rate= (Unemployed/ Labor Force) 0.10 = (x/800 million) x (Unemployed) = 80,000,000 Labor Force= (unemployed + employed among the working-age population) 800 million = (80,000,000 + x) x(Employed) = 720 million
8. Which of the following would increase the investment component of U.S. GDP? A) You purchase a vacation at Disney World in Florida. B) You purchase shares of Disney stock, which are listed on the New York Stock Exchange. C) Disney World in Florida increases its inventory of Mickey Mouseclothing, which were produced in Ohio. D) You purchase a vacation at a Disney theme park in France. E) A French person purchases shares of Disney stock, which are listed on the Paris Stock Exchange.
C; Disney World in Florida increases its inventory of Mickey Mouseclothing, which were produced in Ohio.
12. Which of the following would be considered an example of monetary policy? A) A broad government initiative to promote high-technology industries and to clean the environment. B) An increase in income tax rates by the government to reduce consumer disposable income. C) Provision of additional cash by the government to the banking system D) An attempt to reduce the government budget deficit by reducing spending. E) A decision by a developing country to reduce government control of the economy and to become more market-oriented.
C; Provision of additional cash by the government to the banking system
34) _____ is NOT a major determinant of average labor productivity as discussed in the course. A)Entrepreneurship B)The legal environment C)The share of the population employed D)Land E)Human capital
C; The Share of the population employed
37. Using aggregate demand and supply curves as defined in class, an increase in the nominal money supply will: A) increase output and price in the short-run. B) increase price in the short-run, but leave output unchanged. C) increase output in the short-run, but leave price unchanged. D) increase output in the long-run. E) decrease output in the long-run.
C; increase output in the short-run, but leave price unchanged
19. If the FEDERAL RESERVE wants to have expansionary monetary policy, it should: A) increase reserve requirements. B) lower tax rates. C) lower the discount rate. D) raise the federal funds rate. E) sell government securities.
C; lower the discount rate
34. In an economy where planned expenditure is given by PAE = 4,800 + .7Y - 30,000 r, the central bank is currently setting the interest rate at 0.06 (6 percent). If potential output equals 12,000, the central bank must ______ the interest rate to ______ . A) lower; remove an expansionary gap B) raise; remove an expansionary gap C) lower; remove a recessionary gap D) raise; remove a recessionary gap E) not change; maintain output at potential output
C; lower, remove a recessionary gap To determine the type of gap, evaluate PAE at potential output and compare to potential output. PAE = 4,800 + .7Y - 30,000 r, = 4,800 +.7*(12,000) - 30,000*.06 at potential output Therefore, PAE = 11,400, which is less than potential output (12,000). -Thus, at potential output, there is not enough demand to purchase all output, which means there is a recessionary gap and actual output will be below potential output. -Lowering interest rates increases planned investment and/or consumption, which increases planned expenditures increasing PAE and tending to eliminate the recessionary gap.
30) According to the model of aggregate demand and supply, a decrease in the money supply will _____. A)decrease output in the long-run B)increase output in the short-run C)not affect output in the long-run D)not affect output in the short-run E)decrease price in the short-run
C; not affect output in the long-run
11. If a borrower and lender agree to a REAL interest rate of 5% on a loan when inflation is expected to be 3% and inflation turns out to be 6% over the life of the loan, then, in terms of purchasing power, the borrower is _____ and the lender is ______ from the higher inflation rate. A) helped; helped B) helped; hurt C) not affected; not affected D) hurt; helped E) hurt; hurt
C; not affected, not affected
26. If the fixed-exchange-rate value of the Hong-Kong dollar is changed by the Hong-Kong government from $.10/HKD to $.13/HKD, then this is called a(n): A) appreciation B) depreciation C) revaluation D) devaluation E) overvaluation
C; revaluation
30. The demand for money is: A) unlimited since people want to hold as much money as possible. B) limited by the amount of currency printed by the government. C) the amount of wealth an individual chooses to hold in the form of money. D) a flow measured by the part of income each period an individual chooses to hold in the form of money. E) inversely related to the price level; that is, as the price level increases, the quantity of nominal money demanded decreases.
C; the amount of wealth an individual chooses to hold in the form of money.
25. Assume the natural rate of unemployment is 5 percent. What is the actual rate of unemployment if the output is 4 percent below potential? A) 1% B) 3% C) 13% D) 7% E) 9%
D; 7%
33. In an economy where planned expenditure is given by PAE = 5,500+.6Y-20,000r, the central bank is currently setting the interest rate at 0.05 (5 percent). If potential output equals 10,750, the central bank must ____ the interest rate to _______ . A) lower; remove a recessionary gap B) lower; remove an expansionary gap C) raise; remove a recessionary gap D) raise; remove an expansionary gap E) not change; keep equilibrium output at potential output
D; PAE at potential output is equal to 5,500 + .6*(10,750) - 20,000*(.05) = 10,950. Therefore, planned expenditures are greater than potential output implying shortages and an expansionary gap. The interest rate must be increased to lower planned expenditures to potential output to eliminate the expansionary gap.
6. If $800,000 of aluminum is produced in 1999 with $500,000 used for the production of $1,300,000 of cans in 1999 and $200,000 used for $500,000 of cans in 2000 (with $100,000 of aluminum unused at the end of 2000), then these activities will contribute to 1999 & 2000 GDP: A) $1,300,000; $500,000 B) $1,600,000; $500,000 C) $2,100,000; $300,000 D) $1,600,000; $300,000 E) $2,100,000; $500,000
D; $1,600,000; $300,000
9. A labor contract provides for a first-year wage of $12 per hour, and specifies that the REAL wage will rise by 5 percent in the second year of the contract. The CPI is 100 in the first year and 115 in the second year. What dollar wage must be paid in the second year? A) $12.60 B) $12.00 C) $13.80 D) $14.49 E) $14.40
D; $14.49
22) An economy produces 1100 computers valued at $1000 each. Households purchase 400 computers of which 100 are imported. Businesses purchase 500 computers of which 200 are imported. The government purchases 100 domestically produced computers and 300 domestically produced computers are sold abroad. The unsold computers at the end of the year are held in inventory by the computer manufacturers. What is value of the investment component of GDP from these activities? A)$300,000 B)$100,000 C)$400,000 D)$600,000 E)$500,000
D; $600,000 The investment component is equal to business purchases of computers plus the change in business inventories, or: 500 + (1100 - 300 - 300 - 100 - 300) = 600 at $1000 each. = $600,000
19) Dave's Mirror Company expects to sell $900,000 worth of mirrors while producing $600,000 worth of mirrors in the coming year. The company plans to, and does, purchase, $500,000 of new equipment during the year. Sales for the year turn out to be $500,000. ACTUAL INVESTMENT by Dave's Mirror Company equals _____ and PLANNED INVESTMENT equals _____. A)$900,000; $500,000 B)$600,000; $500,000 C)$900,000; $200,000 D)$600,000; $200,000 E)$600,000; $800,000
D; $600,000; $200,000 -If Dave's Mirror Company expects to sell $900,000 worth of mirrors and plans to produce only $600,000 worth of mirrors in the coming year, then it plans to reduce inventories by $300,000. = Planned investment= -$300,000 -In addition, it plans on purchasing $500,000 of new equipment so total planned investment is the sum of the two: (-300,000 + 500,000) = $200,000 -Sales for the year turn out to be only $500,000 resulting in an actual inventory increase of $100,000 (since it is producing $600,000 worth of mirrors) -Actual investment = (increase in inventories added + new equipment purchases) =$200,000 + $500,000 = $700,000 -----------------------------------------
18. Suppose there is $45 million of cash in existence with $20 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 40%, how large will the money supply be if banks hold no excess reserves? A) $20 million. B) $45 million. C) $65 million. D) $75 million. E) $53 million.
D; $75 million -If there is $45 million of cash in existence with $20 million of it held in bank vaults as reserves, then the cash in the hands of the public is the difference, which is part of the money supply. = (45,000,000 - 20,000,000) = 25,000,000 held in hands of public -In addition, if bank reserves = $20 million and if the required reserve to checking deposit ratio = 25% with banks holding no excess reserves, then: Actual reserve deposit ratio is: .40 = (Reserves/Deposits) .40=($20 million/Deposits) So Deposits = $50 million (by cross multiplying) Money supply= ($50 million in checking account deposits + $25 million of cash in the hands of the public) =$75 million.
3. For a hypothetical economy in a given year, nominal GDP is $9000 per year, the GDP deflator is 120 and nominal consumption is $6000 per year. What is the value of real GDP for that year? A) $6000 B) $9000 C) $10800 D) $7500 E) $7200
D; $7500 RGDP = (NGDP/Deflator) * 100 RGDP = (9000/120) * 100 = 75 * 100 = $7,500
4) Y: 1500, 3500, 5500 C: 1000, 2600, 4200 Ip: 600, 700, 800 G: 700, 700, 700 X: 400, 400, 400 IM: 200, 400, 600 T: 100, 500, 900 For the table above, the value of the marginal tax rate is ____. A)1/15 B) 1/4 C) 1/7 D) 1/5 E) 9/55
D; 1/5 MTR= (Change in T/Change in Y) = (400/2000) = 1/5
28. The expected return to a U.S. resident from putting funds into a Mexico peso deposit yielding a simple annual nominal return of 15.5% while the U.S. dollar is expected to appreciate by 5% over the year would be _______. A) 20.0% B) 20.5% C) 10.5% D) 10.0% E) 15.5%
D; 10.0% -Arbitrarily choose $100 as the initial amount of U.S. funds and arbitrarily choose the initial nominal exchange rate as C$1/$1. -$100 then converts to C$100. -With a simple annual return of 15.5%, the Mexico deposit would have a final value at the end of year equal to: = V0(1 + i) = C$100 (1 + .155) = C$115.5 -If the U.S. dollar appreciates by 5% over the year, then the nominal exchange rate at the end of the year would be: = (1.05 * C$1/$1) or (C$1.05/$1) -At that exchange rate, C$115.5 would convert to C$115.5/(C$1.05/$1) = $110 The rate of return, then, would be: = ($110 - $100)/$100 = 10%.
2. If the price of a shmoo increases at a simple annual rate of 15%, while at the same time (one year) a $1000 bank deposit increases to $1380, then the SIMPLE ONE-YEAR REAL return from the deposit will be A) 23%. B) 25%. C) 15%. D) 20%. E) 38%.
D; 20% Nominal interest rate = 38% inflation rate = 15%. Real interest rate = (Nominal interest rate - inflation rate) = 23% (or 20%) takes both answers
1) The price of gold is $1400 per ounce in New York and 700,000 pesos per ounce in Santiago, Chile. For purchasing power parity to hold for gold, the nominal exchange rate must be _____ Chile pesos per U.S. dollar. A).0021 B) .002 C) 5 D) 500 E) 470
D; 500 A U.S piece of gold costs $1400 A Chile piece of gold costs 700,000 pesos The nominal exchange rate= (700,000/1400) = 500 Chile Pesos/dollar
24. The Board of Governors of the Federal Reserve System consists of ____ governors appointed for staggered ___-year terms. A) 5; 12 B) 5; 14 C) 7; 12 D) 7; 14 E) 12; 4
D; 7 governors with 14-year terms
10) Hana purchased for $100,000 two-year Treasury notes with a total principal amount of $110,000 and all with coupon rates of 5% paid annually. With one year before the notes mature (and after receiving the coupon payments for the first year), Hana sells the notes in the open market when Treasury notes with one year left to maturity are yielding 11.0577%. Hana's rounded one-year rate of return earned from her purchase of the Treasury notes is equal to _____%. A)0.45 B) 15.00 C) 4.55 D) 9.50 E) 5.00
D; 9.50% - Purchase Price = $100,000 -Face Value = $110,000 -Maturity of Bill = 1 year -Discount Yield= (110,000 - 10,000) -Investment Yield = [(FV - PP)/PP] * M = (10,000/ 100,000)*5 + (10,000/ 100,000) * 11.0577 = 9.50%
5. Consumption expenditures include spending by households on: A) exports. B) inventories. C) residential housing . D) services. E) taxes.
D; Services
20. When output is greater than planned expenditures, then it is always true that A) unplanned expenditures are greater than planned expenditures. B) unplanned expenditures are less than planned expenditures. C) autonomous expenditures are greater than induced expenditures. D) actual expenditures are greater than planned expenditures. E) autonomous expenditures are less than induced expenditures.
D; actual expenditures are greater than planned expenditures
20)The aggregate demand curve, as defined and used in the course, is _____. A)downward sloping with a higher price indicating output falls below potential output B)vertical indicating price adjusts until output is at potential output C)downward sloping with a higher price indicating less expensive goods are substituted D)downward sloping with both the money supply and its velocity constant along it E)upward sloping indicating firms adjust both output and price to meet demand
D; downward sloping with both the money supply and its velocity constant along it
12. Discouraged workers are: A) employed workers who are constantly changing jobs. B) involuntary part-time workers who are, nevertheless, counted as employed. C) counted as unemployed. D) not counted as part of the labor force. E) full-time workers who are unhappy with their current employment.
D; not counted as part of the labor force.
34. An overvalued currency can be maintained: A) by lowering interest rates. B) if the exchange rate is above the fundamental value of the exchange rate. C) if the exchange rate is below the fundamental value of the exchange rate. D) only until international reserves are exhausted E) as long as the government is willing to defend the currency.
D; only until international reserves are exhausted
17. If, in a closed economy, output, Y, is equal to $1000 when consumption, C, = $750, planned investment, Ip, = $100. and taxes, T, = $50, then A) the MPC = 3/4. B) the MPC = 8/10. C) private saving = $250. D) private saving = $200. E) unintended investment is $100.
D; private saving = $200 Spr= (Y - T) - C (1000 - 50) - 750 950 - 750 Private Saving = $200
26) If Congress were to index the minimum wage to an accurate Consumer Price Index (CPI), then during a year when the CPI increases by 8% the _____. A)nominal minimum wage would increase but by less than 8% B)real minimum wage would increase by 8% C)nominal minimum wage would increase by more than 8% D)real minimum wage would remain constant E)real minimum wage would fall
D; real minimum wage would remain constant
21. All of the following would be included in planned expenditures EXCEPT: A) purchases of services provided by government employees. B) planned changes in inventories. C) sales of domestically produced goods to foreigners. D) social security payments. E) consumer spending on services.
D; social security payments.
31) In the United States, the discount rate is the interest rate charged on loans from _____ to _____. A)banks; banks B)the Federal Reserve; the U.S. Treasury C)the U.S. Treasury; the Federal Reserve D)the Federal Reserve; banks E)banks; the Federal Reserve
D; the Federal Reserve; banks
22. When actual (or equilibrium) output is smaller than potential output, it is always true that: A) there is a government budget surplus. B) there is a positive expansionary gap. C) there is a negative recessionary gap. D) the natural unemployment rate is less than the actual unemployment rate. E) the frictional unemployment rate is negative.
D; the natural unemployment rate is less than the actual unemployment rate.
17)If, on a deposit to a bank account, the simple annual NOMINAL interest rate is 7% and the simple annual REAL interest rate is 2%, then at the end of one year, approximately, _____ . A)the bank account will show a dollar balance 5% higher B)the bank account will show a dollar balance 2% higher C)the purchasing power of the deposit will be 5% higher D)the purchasing power of the deposit will be 2% higher E)the purchasing power of the deposit will be 9% higher
D; the purchasing power of the deposit will be 2% higher
35. If the nominal exchange rate is 8 pesos per U.S. dollar and if a certain automotive part can be purchased in Mexico for 40 pesos, then for purchasing power parity to prevail, the same automotive part can be purchased in the United States for _______. A) $3.20 B) $320.00 C) $32.00 D) $.20 E) $5.00
E; Purchasing Power Parity prevails if the real exchange rate equals 1 Mexico auto part per U.S. auto part; that is, (ep/pf) = 1 Mexico auto part/U.S. auto part. Substitute to obtain (8 pesos/U.S. dollar)*(p)/(40 pesos/Mexico auto part) = 1 Mexico auto part/U.S. auto part.Solve for p to obtain $5 per U.S. auto part.
29. According to versions of the quantity theory of money, if the money supply is growing at an instantaneous annual rate of 15% while the potential output is increasing at an instantaneous annual rate of 3%, then the long-run equilibrium inflation rate will be ______. A) 15% B) 3% C) 5% D) 18% E) 12%
E; The quantity theory of money involves the equation of exchange, MV=PY, with V constant at least. Using growth rate rules, gr(M)+gr(V)=gr(P)+gr(Y) where gr(x) is the growth rate of x. Here, .15 + 0 = gr(P) + .03, which solves to gr(P) = .12 or 12%.
23. Paula purchases a newly-issued, two-year government bond with a principal amount of $15,000 and a coupon rate of 5% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Paula sells the bond in the bond market. What price (rounded to the nearest dollar) will Paula receive for her bond if the prevailing interest rate is 10%? A) $16500. B) $13682. C) $17325. D) $13636 E) $14318.
E; $14,318 -Principal amount = $15,000 -Coupon rate = 5% paid annually - Bond pays= (.05*$15,000) of interest annually = $750 -After the first year's interest is collected, the bond will pay another $750 at the end of the second year as well as the principal amount of $15,000 for a total of $15,750 -Prevailing interest rate = 10%, people will pay value, P, for Ralph's bonds so that they can earn that 10% on it. -Therefore: = P*(1.10) = $15,750 -They will pay the present value of the $15,750 at a 10% interest rate since if they pay that, they will earn the 10% when the bond matures. P = ($15,750/1.10) = $14,318
18) A labor contract provides for the first-year wage of $24 per hour and specifies that the real wage will rise by 5 percent in the second year of the contract. The CPI is 120 in the first year and 144 in the second year. What dollar wage must be paid in the second year? A)$30.00 B) $31.25 C) $36.29 D) $31.00 E) $30.24
E; $30.24 First years wage = $24 per hour Inflation rate = 20% 25.2 Second Years wage= 24 + ((144 - 120)/120) + .05) = $30.24 _________________________________________________
38. Suppose a family earned a money income of $40,000 in 2000 when the CPI was 80. By 2004, that family's nominal income increased to $60,000, while the CPI increased to 120. In 2004, the family's REAL income equaled ____________ A)$40,000 B)$25,000 C)$52,000 D)$60,000 E)$50,000
E; $50,000 -Real income is income expressed in the base-year price level, which is 100. -Since the 2004 nominal income of $60,000 is expressed in the current price level of 120, to value it in the base-year price level which is 100/120s of the current price level, it is necessary to multiply nominal income by 100/120. -A real value is the nominal value deflated, or the nominal value must be divided by the current price level and multiplied by the base-year price level. = (60,000) * (100/120) = $50,000
8) If the natural rate of unemployment equals 5%, the frictional rate of unemployment equals 2%, and the actual rate of unemployment equals 7%, then the cyclical rate of unemployment equals _____ (where "unknown" below means not enough information is provided to determine the answer). A)10% B)3% C)unknown D)5% E)2%
E; 2% Cyclical Rate = (actual unemployment rate - natural unemployment rate) = (7% - 5%) = 2%
32) Suppose the price of a hamburger is $3.20 in New York and is 160 India rupees in New Delhi, India. If the value of the actual U.S. dollar nominal exchange rate is 60 India rupees per U.S. dollar, then a "burger standard" implies the actual U.S. dollar nominal exchange rate is _____. A)20 percent undervalued B)consistent with purchasing power parity C)12 percent overvalued D)12 percent undervalued E)20 percent overvalued
E; 20% overvalued
21) Y: 1500, 3500, 5500 C: 1000, 2600, 4200 Ip: 600, 700, 800 G: 700, 700, 700 X: 400, 400, 400 IM: 200, 400, 600 T: 100, 500, 900 For the table above, if government expenditures were equal to 450 instead of 700, equilibrium output would have been _____. A)3500 B) 2500 C) 5500 D) 1500 E) 4500
E; 4,500
25. Assume the actual rate of unemployment is 7%. What is the natural rate of unemployment if the output is 2 percent above potential? A) 9% B) 5% C) 6% D) 7% E) 8%
E; 8% = (Y - Y*)/(Y*) x 100 = -2 x (u - u*) = (Y+2%)-(Y*) x 100 = -2 x (7% - x) = (Y+2%)-(Y*) x 100 = -14% * 2x
7. Which of the following would increase U.S. GDP? A) You purchase a vacation at a Disney World theme park in France. B) You purchase shares of Disney stock, which are listed on the New York Stock Exchange. C) Disney World purchases equipment for rides from an amusement park in Ohio, which was shutting down its own rides and no longer had any use for the equipment. D) A French person purchases shares of Disney stock, which are listed on the Paris Stock Exchange. E) A French firm produces ice cream in Florida.
E; A French firm produces ice cream in Florida.
32. If the money supply exceeds money demand, people will ________ bonds which will cause the nominal interest rate to _______ and investment expenditures to _________ . A) sell; fall; rise B) sell; rise; rise C) sell; rise; fall D) buy; rise; fall E) buy; fall; rise
E; buy, fall, rise
24. The Federal Funds rate is the interest charged on loans from _____ to ______. A) the Federal Reserve: commercial banks B) the Federal Reserve; the U.S. Treasury C) commercial banks; best corporate customers of commercial banks D) the U.S. Treasury; the Federal Reserve E) commercial banks; commercial banks
E; commercial banks, commercial banks
33. An increase in interest rates when there is an overvalued currency leads to a(n) ______ in international reserve losses and a(n) ______ in the fundamental value of the exchange rate. A) increase; increase B) increase; decrease C) increase; no change D) decrease; decrease E) decrease; increase
E; decrease, increase
20. The components of planned expenditure that change when real GDP changes are known as _________ A) unplanned expenditures. B) autonomous expenditures. C) planned expenditures. D) actual expenditures. E) none of the other choices.
E; none of the other choices.
38. Sarah was researching the economic growth of a country between 2000 and 2003. Using 2000 as the base year, she calculated a six percent increase for real GDP and a two percent increase for nominal GDP. Her results indicate that: A) both prices and output decreased over the period. B) both prices and output increased over the period. C) output decreased over the period, but there is not enough information to determine what happened to prices. D) prices increased, but output decreased over the period. E) prices decreased, but output increased over the period.
E; prices decreased, but output increased over the period.
31. Of the following, the best policies for the government to eliminate a recessionary gap would be to ___________ A) reduce the money supply, decrease consumption, and increase taxes. B) increase reserve requirements, increase net exports, and reduce government spending. C) have the Fed buy bonds in the open market, decrease exports, and decrease taxes. D) have the Fed sell bonds in the open market, increase consumption, and increase government spending. E) reduce the discount rate, reduce saving, and increase exports.
E; reduce the discount rate, reduce saving, and increase exports.
19. If the FEDERAL RESERVE wants to have contractionary monetary policy, it should: A) reduce reserve requirements. B) raise tax rates. C) lower the discount rate. D) lower the federal funds rate. E) sell government securities.
E; sell government securities.
37. An increase in the nominal money supply will: A) shift the short-run aggregate supply curve up. B) shift the short-run aggregate supply curve down. C) shift the long-run aggregate supply curve to the right. D) shift the long-run aggregate supply curve to the left. E) shift the aggregate demand curve to the right.
E; shift the aggregate demand curve to the right.
22. When actual (or equilibrium) output is smaller than potential output, it is always true that: A) there is a government budget deficit. B) there is a positive expansionary gap. C) there is a negative recessionary gap. D) the natural unemployment rate is less than the structural unemployment rate. E) social security payments.
E; social security payments.
6) Bank balance is to consumption as _____. A)stock is to stock B)flow is to flow C)flow is to stock D)positive is to normative E)stock is to flow
E; stock is to flow
26. An undervalued exchange rate is an exchange rate: A) at which the number of units of a foreign currency is greater than the number of units of domestic currency that can be exchanged. B) at which the number of units of the domestic currency is greater than the number of units of a foreign currency that can be exchanged. C) at which the quantities of currencies demanded and supplied in the foreign exchange market are equal. D) at which the real exchange rate is grater than one. E) that has an officially fixed value less than its fundamental value.
E; that has an officially fixed value less than its fundamental value
37) If average labor productivity in two countries is the same, then the average standard of living will be higher in the country with _____ . A)the higher real GDP growth rate B)the greater amount of natural resources C)the smaller population D)the higher rate of technological progress E)the higher fraction of the population employed
E; the higher fraction of the population employed
1. If, on a deposit to a bank account, the annual NOMINAL interest rate is 8% and the annual REAL interest rate is 5%, then at the end of one year A) the purchasing power of the deposit will be 8% higher. B) the bank account will show a dollar balance 5% higher. C) the purchasing power of the deposit will be 3% higher. D) the bank account will show a dollar balance 3% higher. E) the purchasing power of the deposit will be 5% higher.
E; the purchasing power of the deposit will be 5% higher.
17. If, in a closed economy, output, Y, is equal to $1000 when consumption, C, = $750, planned investment, Ip, = $100. and government spending, G, = $50, then A) the MPC = 3/4. B) the MPC = 8/10. C) private saving = $250. D) private saving = $200. E) unintended investment is $100.
E; unintended investment is $100.
The portfolio allocation decision is the decision about _____.
determining which mix of assets to hold
An increase in the rate the Treasury is issuing new Treasury bonds is an example of expansionary monetary policy.
False
Julia obtained a loan from her credit union to buy a house. The loan is _______________ A. Julia's asset and the car is the credit union's liability B. Julia's liability and the car is the credit union's asset C. the credit union's asset and the car is the credit union's liability D. the credit union's asset and the car is Julia's liability E. Julia's liability and the car is Julia's asset
Julia's liability and the car is Julia's asset
In which of the following situations would a person most prefer to be the borrower? A. The nominal interest rate is 2% and the expected inflation rate is 1% B. The nominal interest rate is 3% and the expected inflation rate is 0% C. The nominal interest rate is 4% and the expected inflation rate is 4% D. The nominal interest rate is 10% and the expected inflation rate is 14% E. The nominal interest rate is 6% and the expected inflation rate is 4%
The nominal interest rate is 10% and the expected inflation rate is 14%; (Borrower would want a high inflation rate) High Inflation: - Helps -> Borrowers - Hurts -> Lenders
The aggregate demand curve (graphed with P on the vertical axis and Y on the horizontal axis) will shift to the left EXCEPT when ______ .
The price level increases
Which of the following is likely to be the least preferred asset to hold, if there are likely to be inflation rate increases that are currently unanticipated by market participants?
Treasury Bonds
An exchange rate is overvalued when it has an officially fixed value greater than its fundamental value.
True
If the U.S. dollar appreciates by 1/4 against the Canada dollar, then the Canada dollar depreciates by 1/5 against the U.S. dollar. (Hint: Use a numerical example with a specific exchange rate to determine the answer.)
True
If there is disinflation, prices are increasing.
True
The growth rate of M*V is equal to the inflation rate plus the growth rate of output, Y (all as measured at instantaneous rates).
True
The income velocity of money, V, is defined as P*Y/M.
True
To help remove an expansionary gap, the Federal Reserve can take actions that will result in an increase in the federal funds rate.
True
Using the link provided, the nominal exchange rate value of the China Yuan Renminbi (script e for China), is approximately equal to 15.02 U.S. cents. Note: Since this assignment was created in advance, exchange rates are not going to be exact since values change over time. Answer false only if the difference in values is at least 20%.
True
Using the link provided, the nominal exchange rate value of the European Union Euro (script e for European Union), is approximately equal to 1.11 U.S. dollars. Note: Since this assignment was created in advance, exchange rates are not going to be exact since values change over time. Answer false only if the difference in values is at least 20%.
True
Using the link provided, the nominal exchange rate value of the Norway Kroner (script e for Norway), is approximately equal to .117 U.S. dollars. Note: Since this assignment was created in advance, exchange rates are not going to be exact since values change over time. Answer false if the difference in values is at least 20%.
True
Using the link provided, the nominal exchange rate value of the U.S. Dollar (script e for U.S.), is approximately equal to 18.76 Mexico Pesos. Note: Since this assignment was created in advance, exchange rates are not going to be exact since values change over time. Answer false only if the difference in values is at least 20%.
True
Suppose India experiences SIGNIFICANT INFLATION so that the price of a bushel of wheat in Bombay rises from 150 to 300 rupees. Australia has no inflation, so the price of wheat in Sydney remains unchanged at 5 Australian dollars. If the law of one price holds for wheat, what will happen to the nominal exchange rate between Australia and India?
We know that the market value of a bushel of wheat must be the same in both locations. Therefore: 5 Australian dollars = 300 rupees. (Divide by 5 on both sides) 1 Australian dollar = 60 rupees The nominal exchange rate is now 60 rupees per Australian dollar. Before India's inflation, the nominal exchange rate was 30 rupees per Australian dollar. So, in this example, inflation has caused the rupee to depreciate against the Australian dollar. Conversely, Australia, with no inflation, has seen its currency appreciate against the rupee.
In the Keynesian model, a $5 billion increase in autonomous planned investment leads to in short-run equilibrium output. A. a $5 billion decrease B. no change C. a $5 billion increase D. more than a $5 billion decrease E. a greater than $5 billion increase
a greater than $5 billion increase
If the exchange rate moves from 12 Mexico pesos per U.S. dollar to 10 Mexico pesos per U.S. dollar, then the Mexico peso has ______ and the U.S. dollar has _____.
appreciated; depreciated
For future bond buyers, the nominal interest rate (yield) _____ when fixed coupon bond prices _____.
decreases; increase
When the Federal Reserve sells Treasury securities in the open market, the quantity of reserves in the banking system __________ and the money supply _________ A. increases; ultimately decreases B. does not change; does not change C. decreases; ultimately decreases D. increases; ultimately increases E. decreases; ultimately increases
decreases; ultimately decreases
All else being equal, with flexible exchange rates, if the Federal Reserve engages in expansionary monetary policy, the equilibrium value of the U.S. dollar will:
depreciate
To maintain purchasing power parity between countries when the domestic inflation rate is 15% per year while the foreign inflation rate is 5% per year, the domestic currency must _____. (All growth rates assume exponential compounding. Hint: Use the growth rate rules to determine the answer.)
depreciate at a rate of 10% per year; (15% - 10%) = depreciation of 5%
Suppose the Fed intervenes to boost the economy. Starting from full employment, the increase in money supply results in _________ in the short run and in ___________ in the long-run. A. increase in the level of output; decrease in the price level B. decrease in the level of output increase in the price level C. increase in the level of output; increase in the price level D. decrease in the level of output; decrease in the price level E. increase in the level of output; increase in the price level
increase in the level of output; increase in the price level
The components of planned aggregate expenditure that change when real GDP changes are known as: A. induced expenditures B. unplanned expenditures C. actual expenditures D. planned expenditures E. average expenditures
induced expenditures
In March 2019, Red Cedar Motors produced an automobile that was delivered to a local dealership in December 2019. The auto was then sold to a customer for personal use in February of 2020. Following national income accounting practices, this auto would be counted as part of: A. negative consumption in 2019 and negative consumption in 2020. B. investment in 2019 and negative investment in 2020. C. consumption in 2019 and consumption in 2020. D. consumption in 2019 and investment in 2020. E. negative investment in 2019 and consumption in 2020.
investment in 2019 and negative investment in 2020.
With asset diversification _____.
it may be possible to reduce risk without reducing expected return
A benefit of holding money (cash) is _______, while the opportunity cost of holding money is _______.
its usefulness as a store of value; the nominal interest rate
Which of the following is a signal that more people that used to look for a job, couldn't find it, and are now discouraged and stopped looking for one? A. none of the other alternatives B. lower unemployment rate and higher/equal labor force participation rate C. higher unemployment rate and lower/equal labor force participation rate D. higher unemployment rate and higher/equal labor force participation rate E. lower unemployment rate and lower/equal labor force participation rate
lower unemployment rate and lower/equal labor force participation rate
Machines, equipment, and buildings used to produce goods and services are called _____.
physical capital
According to the Keynesian model, if firms maintain preset prices in the short run, then the primary cause of outputs gaps is changes in: A. (production) technology B. planned spending. C. the frictional unemployment rate. D. the natural unemployment rate. E. potential output.
planned spending
The main assumption in the AD/AS model is that in the long run: structural unemployment rate is greater than the natural unemployment rate A. output adjusts to meet demand while price remains constant B. prices are sticky C. price adjusts so output is at potential output D. the cyclical unemployment rate is positive
prices adjust so output is at potential output
If the Federal Reserve wants to fight high inflation it will implement contractionary monetary policy, by ___________ Treasury bonds. This will lead to a ____________ price level. A. selling; higher B. buying; higher C. buying; higher D. selling; lower E. buying; lower
selling; lower
Human Capital is _______
the skills and training of workers
Which of the following current expenditures would definitely increase the consumption component of U.S. GDP? A. You purchase a new car produced in Michigan. B. When in Paris(France), you buy a bottle of California, U.S. wine. C. You buy a gummy bear made in Germany. D. You buy 100 shares of stock. E. You buy a second-hand bike.
you purchase a new car produced in Michigan
