ECON 222 Midterm 2

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. The base year for the country's CPI is 2004. Suggestion: Calculate the price of the basket in each year, then calculate the CPI in each year and then calculate the inflation rate in each year. Year Price ofMeat Price of aToy 2004 $2 per pound $2 2005 $3 per pound $6 2006 $5 per pound $8 The cost of the basket in 2006 was

$180

A hypothetical country of Lalaland produces only movies . Quantities and prices of movies for the last several years are shown below. The base year is 2016.Prices and Quantities Year Price ofMovies Quantity of Movies 2015 $8.00 400 2016 $10.00 500 2017 $12.00 600 2018 $12.00 800 What was this country's growth rate of real GDP from 2016 to 2017?

20%

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. The base year for the country's CPI is 2004. Suggestion: Calculate the price of the basket in each year, then calculate the CPI in each year and then calculate the inflation rate in each year. Year Price ofMeat Price of aToy 2004 $2 per pound $2 2005 $3 per pound $6 2006 $5 per pound $8 The CPI in 2005 is

200

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. The base year for the country's CPI is 2004. Suggestion: Calculate the price of the basket in each year, then calculate the CPI in each year and then calculate the inflation rate in each year. Year Price ofMeat Price of aToy 2004 $2 per pound $2 2005 $3 per pound $6 2006 $5 per pound $8 The inflation rate from 2005 to 2006 was ?

50%

A hypothetical country of Lalaland produces only movies . Quantities and prices of movies for the last several years are shown below. The base year is 2016.Prices and Quantities Year Price ofMovies Quantity of Movies 2015 $8.00 400 2016 $10.00 500 2017 $12.00 600 2018 $12.00 800 What is the real GDP in 2018 in constant base year dollars?

8,000

An example of hyperinflation would be

Zimbabwe in 2008

Bank reserves are included in

M0

Which of the following statements is correct about the relationship between the real interest rate and the nominal interest rate?

The nominal interest rate is the real interest rate plus the rate of inflation.

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. The base year for the country's CPI is 2004. Suggestion: Calculate the price of the basket in each year, then calculate the CPI in each year and then calculate the inflation rate in each year. Year Price ofMeat Price of aToy 2004 $2 per pound $2 2005 $3 per pound $6 2006 $5 per pound $8 From 2004 to 2005

The nominal price of meat increased and the real price of meat decreased

Which of the following is accurate?

Though monetary policy is neutral in the long run, it may have effects on real variables in the short run such as real GDP.

Scenario: Suppose the Fed decides to expand the money supply (M1) by 40 billion dollars. Suppose also that the reserve requirement is 10%, banks do not hold any excess reserves, and no currency is held by the public but instead is deposited into checking accounts.In the above scenario, what is the most common way for the Federal Reserve to act to accomplish their goal?

Use open market purchases

During the depression in the 1930s

all: The monetary base increased, excess reserves of banks increased, there were bank runs, the assets of banks decreased because of bad loans.

Required reserves

all: are set by the Federal Reserve., determine the theoretical money multiplier, are the fraction of checking deposits that a bank must legally hold

Accommodative monetary policy

all: will eventually cause inflation, is sometimes known as loose monetary policy, tends to stimulate the economy

Many economists and central banks (including our own central bank called the Federal Reserve) believe that an optimal rate of inflation in the economy is

an amount that would keep the CPI growing at a rate of 2 %

Intermediate goods, like car engines sold to an auto manufacturer, are

are not included in GDP

When the FDIC was established

bank failures decreased

If depositors become worried about the safety of their deposit accounts, they may trigger a

bank run

If people's preferences change and they begin to hold more cash (currency) by depositing less money into their accounts at their bank, the money creation process by the banking system will (ceteris paribus)

decrease

Scenario: Suppose the Fed decides to contract the money supply (M1) by 40 billion dollars. Suppose also that the reserve requirement is 10%, banks do not hold any excess reserves, and no currency is held by the public but instead is deposited into checking accounts.In the above scenario, If the Fed does act in the usual fashion, how much will the monetary base change?

decrease by 4 billion

M1 includes

demand (checking) deposits.

If Y and M are constant and V drops in half, the quantity equation implies that the price level

falls to half it's original level.

The monetary base

includes cash in circulation and all bank reserves

Hyperinflation would tend to

increase the velocity of money

If the most recent CPI numbers released by the Bureau of Labor Statistics for last month show that inflation increased 1% you know

inflation over the latest month was 1% seasonally adjusted

The federal funds rate is the interest rate that

is a very short-term nominal interest rate

Real GDP

is nominal GDP adjusted for changes in the price level.

Fiat money

is not backed up by anything of value

If the Federal Open Market Committee decides to increase the money supply M2, then

it can create dollars and use them to purchase government bonds from the public.

If the Fed raises the reserve requirement on checking deposits from 10 percent to 15 percent, what would happen to the money supply M2(assuming that banks keep no excess reserves)?

it would decrease

The actual money multiplier is always _____________ the theoretical money multiplier

less than

The "dual mandates" of the Federal Reserve set by congress are for

maximum sustainable employment and stable prices

According to the quantity theory by Irving Fisher

money is neutral

The two types of policy instruments that the Federal Reserve can focus on to conduct monetary policy are

money supply and interest rates

The CPI is calculated and reported

monthly

If money was neutral, then an increase in the money supply, ceteris paribus, would

none of the above: increase velocity, increase real gdp, have no effect on prices, shift out ppf

Changes in real GDP reflect

only changes in the amounts being produced

real GDP is published every

quarter as an annual growth rate

The country of Caspir produces only cereal and milk. Quantities and prices of these goods for the last several years are shown below. The base year is 2008. Prices and Quantities Year Price of Cereal Quantity of Cereal Price of Milk Quantity ofMilk 2008 $4.00 50 $1.00 150 2009 $4.00 100 $2.00 200 2010 $5.00 200 $3.00 200 2011 $6.00 250 $3.50 200 In 2009, this country's

real GDP was 600

In periods of generally rising prices,

real GDP will grow slower than nominal GDP

If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980, while the nominal interest rate was 7 percent and the inflation rate was 2 percent in 2001, then

real rates were higher in 2001

Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?

the FOMC

Which of the following do NOT effect the actual money multiplier

the monetary base

Suppose that the real rate of interest is 4% and the rate of inflation is 2%. According to the Fisher effect, if inflation was to increase to 3% then

the nominal interest rate would be 7%

If the nominal interest rate on 1 year T-bills have been lower than the inflation rate over the last year then

the real interest rate is negative.

If the price of tennis rackets has increased, but less than the average price of goods and services in the CPI basket over some time period, then

the real price of tennis rackets has decreased

Suppose that the quantity of money is fixed but that the price level falls. According to the equation of exchange which of the following could explain the decrease in the price level?

velocity fell

There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that

velocity rose. The rise in velocity would help to increase the rise in prices.

Wealth is redistributed (there are those that gain and those that lose) from lenders to borrowers when

when there is unexpected inflation

Suppose that the typical consumer in the USA buys some imported Columbian coffee. An increase in the price of Columbian coffee

would show up in an increase in the consumer price index if it is in the basket.