Macroeconomics Midterm Review 1

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?

7% —> Avg. Inflation = Money Supply - Real Output = 10 - 3

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:

760 —> Real rate of interest = Nominal rate of interest - Inflation rate = 10 - 2 = 8, I = 1000 - 30(8) = 1000 - 240

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a _____ real interest rate and _____ in the quantity of investment.

Higher; an increase

If the money supply is held constant, then an increase in the nominal interest rate will _____ the demand for money and _____ the price level.

decrease, increase

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage:

decreased 2 percent —> Real Wage = Nominal Wage - Inflation = 4 - 6 = -2%

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

increases by 1 percent —> r = i - pi = -1 = i - 2, i = +1%

According to the classical dichotomy, when the money supply decreases, _____ will decrease.

price level

The core inflation rate:

the rate of inflation excluding the effects of food and energy prices

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals:

3,000 —> Y = 50*(1000)^1/2 = 5000, C = 500 + 0.5Y = 500 + 0.5(5000) = 3000

Assume that the consumption function is given by C = 200 + 0.7 (Y - T), the tax function is given by T = 100 + 0.2Y, and Y = 50K0.5L0.5, where K = 100. If L increases from 100 to 144, then consumption increases by:

560 *remember that it is constant (ignore C=200, T=100)*

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.

7% —> Cost of Holding Money = Real Return + Expected Rate of Inflation = 3 + 4 = 7

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

rises by $100 billion —> Public Savings = Y - C - G

Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, gross domestic product (GDP) increases by:

$2

A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by the miller is:

$2 = (3-1)

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

1.27 —> GDP Deflator = (Nominal GDP/Real GDP) = (14/11)

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 5 in 2009, then the gross domestic product (GDP) deflator in 2009, using a base year of 2002, was approximately:

1.7 —> GDP Deflator = (Nominal/Real GDP) = 100*[(1.0+1.5)/(0.5+1.0)]

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

2.5 —> Money Multiplier = (cr+1.0)/(cr+rr) = (0.5+1.0)/(0.5+0.1)

If the unemployment rate is 6 percent and the number of employed is 188 million, then the labor force equals _____ million.

200 = 188*(0.06) + 188

Consider the money demand function that takes the form (M/P)d = Y/(4i), where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

4i —> M/P = Y/V

Labor force participation rate

Actively working (employed) + actively seeking work (unemployed) / adult population (everyone)

Establishment survey provides estimates of the number of workers _____.

On firms' payrolls

Bureau of Labor Statistics provides estimates of the number of workers _____,

With jobs

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

$800 billion —> Money Supply = Monetary Base * Money Multiplier = 400*2

If real gross domestic product (GDP) grew by 6 percent and population grew by 2 percent, then real GDP per person grew by approximately _____ percent.

4% = (6% - 2%)

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

4.7 = [7/(143+7)]

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

500 —> Private Savings = (Y - T) - C = (4800-800) - 3500 = 500

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

60 = (150/250)

If nominal gross domestic product (GDP) increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP _____ by _____ percent.

Increased; 2 —> Real GDP = Nominal GDP - GDP Deflator = 5% - 3%

When the demand for loanable funds exceeds the supply of loanable funds, households and the government want to save _____ than firms want to invest, and the interest rate _____.

Less; rise

Gross national product (GNP) equals gross domestic product (GDP) _____ income earned domestically by foreigners _____ income that nationals earn abroad.

Minus; plus

A fixed-weight price index like the consumer price index (CPI) _____ the change in the cost of living because it _____ take into account that people can substitute less expensive goods for ones that have become more expensive.

Overestimates; does NOT

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

falls by $40 billion —> Private Savings = (Y-T) - C

If the gross domestic product (GDP) deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009?

$12 trillion —> Real GDP = (GDP Deflator/Nominal) = (15/1.25)

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:

$150 billion —> Monetary Base = Public Savings + Reserves = 100 + 50

If an increasing proportion of the adult population is retired, then the labor-force participation rate:

will decrease

According to the quantity theory of money and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

3% Fisher Eqn: r = i - pi

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real gross domestic product (GDP) must be _____ percent.

3% —> M+V=P+Y, 12-4=5+Y, Y = 8 - 5 = 3

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

-4% —> r = i - pi = r = 1 - 5 = -4

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. In addition, assume G = 0. In this case, equilibrium investment is:

1,500 —> Savings = Y - C - G = 5000 - [500+0.6(5000)] - 0

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6 (Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate, in percent. In this case, the equilibrium real interest rate is:

13% —> Investments = Savings, Public Savings = Y - C - G = 5000 - [500+0.6(5000-600)] - 1000 = 860 = 2610 - 100r = 13

If output is described by the production function Y = AK0.2L0.8, then the production function has:

Constant return to scale

In the classical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving _____ and private saving _____.

Decreases; increases