Macroeconomics Test One Review
An economy has a monetary base of $1,000. a. What is the money supply if all money is held as currency?
$1000
b. What is the money supply if all money is held as demand deposits and banks hold 100 percent of deposits as reserves?
$1000
d. What is the money supply if people hold equal amounts of currency and demand deposits and banks hold 25 percent of deposits as reserves?
$1600
c. What is the money supply if all money is held as demand deposits and banks hold 25 percent of deposits as reserves?
$4000
Suppose the government increases both taxes (T) and government purchases (G) by equal amounts. Assuming income (Y) is fixed by the factors of production, the change in national saving (ΔS) will be
(MPC-1) x change T
Many economists believe that the sharp decline in the money supply in the early 1930s was at least partially responsible for the severity of the Great Depression. The check tax was intended to increase government revenue. However, the unintended consequence of the check tax was to decrease deposits in banks, which reduced the money supply further. From this perspective, the check tax policy was a bad idea.
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Macroeconomics can be considered a science because it
- uses real-world data to test and confirm predictions - constitutes a systematized body of knowledge based on observed facts.
Labor's share of total income in the economy is
1/3
In the national incomes accounts, the share of national income going to workers in general would be
2/3
Assign the correct functions of money to each example below. Note that more than one function may be assigned to a box.
A Rembrandt painting: store of value A Starbucks gift card: store of value, medium of exchange, unit of account A credit card: store of value, medium of exchange
Which of the following may cause the demand for loanable funds to increase?
A positive outlook on a firm's expectations about the future.
What are the three functions of money?
A store of value, a medium of exchange, a unit of account
Which of the following may cause the supply of loanable funds to decrease?
An increase in government spending. A temporary fall in consumer incomes.
Define as Consumption, Government Purchases, Investment, and Exports
Consumption: Apple sells a computer to Paris Hilton Government Purchases: Apple sells a computer to a public school in Paris, Kentucky Investment: Apple sells a computer to an accounting firm in Paris, Illinois; Apple builds a computer to be sold next year Exports: Apple sells a computer to a bakery in Paris, France
d. Defining the implicit price deflator as nominal spending divided by real spending, compute the deflator for each year. How does the deflator change from year 1 to year 2?
Deflator in year 1 is 1. Deflator in year 2 is 0.5. The deflator has fallen by half.
Identify whether each of the following events increases or decreases the money supply:
INCREASE: the fed lowers the interest rate it pays on reserves. The Fed lowers the discount rate. The Fed lowers reserve requirements. DECREASE: the Fed sells bonds in open-market operations. Banks become apprehensive about the economy, so they decide to hold more excess reserves. A rumor spreads via social media that makes people nervous about banks, so they decide to hold more of their money as currency rather than demand deposits.
If a 10 percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreasing returns to scale. If it causes output to increase by more than 10 percent, the production function is said to exhibit increasing returns to scale. Why might a production function exhibit decreasing or increasing returns to scale? Consider three different scenarios (A, B, and C) described below. Place each scenario letter (A, B, or C) into the proper category, as most likely to exhibit either increasing or decreasing returns to scale. Scenario A: A small economy has many unemployed workers and much unused capital. However, unemployed workers have less work experience and education than those currently working. An increase in consumer demand causes all firms in the economy to hire 10% more workers and lease 10% more capital. Scenario B: A developing national economy currently employs a small percentage of its available labor force and capital. Increased global demand for the nation's output requires its firms to employ 10% more labor and 10% more capital. This change allows firms to try new and novel combinations of labor and capital in their production processes. Scenario C: A small island nation's economy consists solely of commercial fishing firms. These firms currently employ modest boats manned by small crews to efficiently harvest all of the 10-mile offshore perimeter of the nation's sovereign ocean waters. Each day, these boats go out to sea and return to the island to deliver their catch to buyers. A new treaty expands this legal fishing area to a 20-mile offshore perimeter. The firms respond by employing 10% more boats and 10% more crews to exploit this new opportunity.
INCREASING RETURNS TO SCALE: Scenario B DECREASING RETURNS TO SCALE: Scenario A & Scenario C
The Fed reduces its lending to banks through its Term Auction Facility.
Monetary Base: decrease Money multiplier: no effect Money supply: decrease
The fed increases the interest rate it pays banks for holding reserves.
Monetary Base: increase Money multiplier: decrease Money supply: decrease
The Fed flies a helicopter over 5th Avenue in New York City and drops newly printed $100 bills.
Monetary Base: increase Money multiplier: may increase or decrease Money supply: increase
Rumors about a computer virus attack on ATMs increase the amount of money people hold as currency rather than demand deposits.
Monetary Base: no effect Money multiplier: decrease Money supply: decrease
The federal reserved buys bonds using open market operations
Monetary base: increase Money multiplier: no effect Money supply: increase
Calculate the money supply in 1933 if the currency-deposit ratio had risen to its 1933 level but the reserve-deposit ratio had remained at its 1929 level.
Money supply 21.504
Calculate the money supply in 1933 if the reserve-deposit ratio had risen to its 1933 level but the currency-deposit ratio had remained at its 1929 level.
Money supply 25.96
A closed economy has income Y of 1200, consumption C of 800, government purchases G of 200, and taxes T of 150. Investment is determined by the equation I = 300 − 20r.
National saving = 200 Public saving = -50 Private saving = 250 Equilibrium interest rate = 5 New equilibrium interest rate = 7 (if gov't increases its purchases to 240)
b. Compute Abby's nominal spending on apples in each year. How does it change from year 1 to year 2?
Nominal spending in year 1 is $10. Nominal spending in year 2 is $10. Nominal spending has stayed the same.
An economy has the following Cobb-Douglas production function: 𝑌=100𝐾13𝐿23Y=100K13L23. The economy has 125 units of capital and 64 units of labor.
Outputs is 8000. Capital's share of income is 1/3. Labor's share of income is 2/3. MPK = 21.33 MPL = 83.33 If the economy increases the amount of capital: - the capital share remains the same - the real rental price of capital decreases. - the real wage increase.
If taxes are increase by $100 billion, then:
Public saving increases by $100 billion Private saving will decrease by $40 billion. National saving will increase by $60 billion. Investment will increase by $60 billion.
c. Using year 1 as the base year, compute Abby's real spending on apples in each year. How does it change from year 1 to year 2?
Real spending in year 1 is $10. Real spending in year 2 is $20. Real spending has doubled.
Was Robert Kennedy right? If so, why do we care about GDP and related measures?
Robert Kennedy was mostly correct. Real GDP is a summary measure of a nation's total income and expenditure on goods and services. It cannot tell us everything about a society and its well-being. If real GDP per capita increases then citizens will generally be able to afford more and better goods and services, consume more nutritious foods, obtain better healthcare, and live longer lives.
Public saving is defined as
T-G
Use these data about the recent performance of the U.S. economy to classify each of the following statements as true or false.
TRUE: - In early 2018, real output in the economy rose, while unemployment declined. - growth of real output slowed between the last quarter of 2017 and the first quarter of 2018. - the low unemployment rate of early 2018 could have resulted from many discouraged workers leaving the labor force. FALSE: - The prices of all domestic products and services rose in 2017.
The graph will now present the components of GDP as their percentage of total GPD. Use these data to determine whether the following four statements are true or false.
TRUE: - Personal consumption has been the dominant component of GDP over the last half century. - Domestic investment has fallen slightly over the last half century. FALSE: - The U.S. economy has evolved from a net importer to a net exporter over the last half century. - Total government spending has generally remained under 20% of GDP over the last half century.
Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2 each, green apples cost $1 each, and Abby buys 10 green apples. Assume that year 1 is the base year in which the consumer basket is fixed. a. Compute the CPI for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2?
The CPI for year 1 is 100. The CPI for year 2 is 200. The CPI has doubled.
How does this policy affect the demand curve for business investment?
The demand curve for business investment shifts to the right.
How does this policy affect the demand curve for residential investment?
The demand curve for residential investment remains unchanged.
A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. When the engineer eats the bread, what is the value added by each person? What is the bread's contribution to GDP?
The farmer's added value is $1 The miller's added value is $2 The baker's added value is $3 The bread's contribution to GDP is $6
Assume that the government borrows $4 billion to pay for its increased purchases. Adjust the graph below to reflect this change. Be sure to indicate the new market equilibrium.
The new equilibrium interest rate is 6% Investment at the new equilibrium is $8 billion. If consumption were not affected by the interest rate, crowding out would have resulted in private investment of $6 billion. This analysis implies that the more responsive is consumption—and thus saving—to changes in the interest rate, the smaller will be the crowding out effect.
To increase tax revenue, the U.S. government imposed a 2-cent tax on checks written on bank account deposits in 1932 (in today's dollars, about 34 cents per check). Complete the following statements on the impact of this tax on the money multiplier and the money supply.
The tax on written checks would make people less likely to write checks. Thus, people might start holding more money as currency. This would increase the currency-deposit ratio.
e. Suppose that Abby is equally happy eating red or green apples. How much has the true cost of living increased for Abby? Compare this answer to your answers to parts (a) and (d).
The true cost of living has stayed the same.
Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than an employee). Consider how this marriage impacts how output in the economy is calculated.
When the butler stops receiving a wage after the marriage, the value of GDP decreases. However, if GDP is meant to reflect the value of all domestically produced goods and services then perhaps GDP should remain unchanged because the butler's services continue to be provided.
b. General Motors sells a car to Avis, the car rental company, out of its inventory.
Y does not change C does not change I does not change G does not change NX does not change
d. The federal government gives the Jackson family a tax cut, the proceeds from which the Jacksons save to buy a car in the future.
Y does not change C does not change I does not change G does not change NX does not change
c. Volvo, the Swedish car company, makes a car and sells it to an American family.
Y does not change C increases I does not change G does not change NX decreases
d. General Motors makes a car and sells it to a family in Mexico.
Y increases C does not change I does not change G does not change NX increases
b. General Motors makes a car and sells it to the Baltimore police department.
Y increases C does not change I does not change G increases NX does not change
c. General Motors makes a car and sells it to Avis, the car rental company.
Y increases C does not change I increases G does not change NX does not change
Private saving is defined as
Y-T-C(Y-T)
Consider whether each of the following events is likely to increase or decrease real GDP. In each case, do you think the well-being of the average person mentioned will increase, decrease, or not change?
a. A hurricane in Florida forces Disney World to shut down for a month. Real GDP will decrease the well-being of those in the area will decrease. b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests. Real GDP will increase the well-being of the average person will increase. c. Increased hostility between unions and management sparks a rash of strikes. Real GDP will decrease the well-being of those in the area will decrease. d. Firms throughout the economy experience falling demand, causing them to lay off workers. Real GDP will decrease the well-being of the average person will decrease. e. Congress passes new environmental laws that prohibit firms from using production methods that emit large quantities of pollution. Real GDP will decrease the well-being of the average person will increase. f. Fathers around the country reduce their work weeks to spend more time with their children. Real GDP will decrease the well-being of the average person will increase.
Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the events described below. Assume that production follows a Cobb-Douglas production function.
a. A wave of immigration increases the labor force. The real wage will decrease and the real rental price of capital will increase. b. An earthquake destroy some of the capital stock.The the real wage will decrease and the real rental price of capital will increase. c. A technological advance improves the production function. The real wage will increase and the real rental price of capital will increase. d. High inflation doubles the prices of all factors and outputs in the economy. The real wage will remain unchanged and the real rental price of capital will remain unchanged.
Suppose that an economy's production function is Cobb-Douglas with parameter. 𝛼=0.3
a. Capital and labor receive shares of income of 0.3 and 0.7. respectively. b. Suppose immigration increases the labor force by 10 percent.(i) Total output will increase by 6.9%.(ii) The rental price of capital will increase by 6.9%.(iii) The real wage will decrease by 2.8%. c. Suppose that a gift of capital from abroad raises the capital stock by 10 percent.(i) Total output will increase by 2.9%.(ii) The rental price of capital will decrease by 6.5%.(iii) The real wage will increase by 2.9%. d. Suppose that a technological advance raises the value of the parameter A by 10 percent.(i) Total output will increase by 10%.(ii) The rental price of capital will increase by 10%.(iii) The real wage will increase by 10%.
How do each of the following events affect the current level of U.S. GDP (Y) and its four components (C, I, G, and NX)? For this question, assume that General Motors does all its manufacturing in the United States and that all people and firms are American unless otherwise specified.
a. General Motors makes a car and sells it to the Garcia family. Y increases C increases I does not change G does not change NX does not change
How do each of the following events affect the current level of U.S. GDP (Y) and its four components (C, I, G, and NX)? For this question, assume that General Motors does all its manufacturing in the United States and that all people and firms are American unless otherwise specified.
a. General Motors sells a car to the Kim family out of its inventory. Y does not change C increases I decreases G does not change NX does not change
In Year 1, an economy produces and consumes 2 apples and 2 oranges, each of which sell for $4. In Year 2, the economy produces and consumes 4 apples, which still sell for $4, and 1 orange, which sells for $12.Year 1 is the base year and the time when the basket for the CPI is set.
a. In Year 1, nominal GDP is $16 and real GDP is $16. b. In Year 2, nominal GDP is $28 and real GDP is $20. c. What was the inflation rate (the percentage increase in the price level) between Year 1 and Year 2, according to the GDP deflator? Inflation rate using GDP deflator: 40% d. What was the inflation rate (the percentage increase in the price level) between Year 1 and Year 2 according to the CPI? Inflation rate using CPI: 100% e. A Paasche (changing basket) index tends to understate inflation, whereas a Laspeyres (fixed basket) index tends to overstate inflation.
An economy has a monetary base of 1,000 $1 bills. Calculate the money supply in scenarios a - d. Then answer part e.
a. all money is held as currency Money supply = $1000 b. all money is held as demand deposits. banks are required to hold 100% of deposits as reserves. Money supply = $1000 c.mall money is held as demand deposits. banks are required to hold 20% of deposits as reserves. Money supply = $5000 People hold equal amounts of currency and demand deposits. Banks hold 20% of deposits as reserves. Round to the nearest dollar. Money supply = $1667 The central bank wants to increase the money supply by 10%. In each of the above scenarios, by how much must it increase the monetary base? Money base increase = $100
If labor's share of income is approximately constant, the real wage
closely tracks labor productivity.
Decreasing returns means that increasing the number of college degrees in the economy will __________ the wage premium enjoyed by workers holding a college degree. Increasing the number of college degrees will __________ the earnings of unskilled workers in the economy.
decrease; increase
Under this check tax, the money supply would have
decreased, because the currency-deposit ratio increased, which in turn decreases the money multiplier.
How often does the price you pay for a haircut change? What does your answer imply about the usefulness of market-clearing models for analyzing the market for haircuts? The market-clearing model is useful in describing the market for haircuts because
even though haircut prices are slow to change, they consistently adjust toward the market-clearing equilibrium price over time.
Suppose workers can move freely between being farmers or being barbers (i.e., no additional costs are required to switch between occupations). This implies that the nominal wages of
farmers and of barbers will be equal.
Over the past century, the productivity of farmers (MPLf) has risen substantially due to technological progress. According to the neoclassical theory, farmers' real wage (Wf/Pf) should have
increased.
An increase in human capital will ______ the marginal product of human capital.
lower
An economy has 100 people working full-time, 20 people working half-time, 40 people looking for work, and 20 people who would like to work but have given up looking for a job after an unsuccessful search, 20 retirees, and 30 children. Calculate the following labor statistics.
number of employed: 120 number of unemployed: 40 size of the labor force: 160 unemployment rate: 25% labor-force participation rate: 80%
An increase in human capital will ________ the marginal product of labor.
raise
Over the past century, the productivity of barbers (MPLb) has remained constant. According to the neoclassical theory, barbers' real wage (Wb/Pb) should have
remained constant.
Your answers in parts a through d imply that the relative price of haircuts, Pb, has __________ relative to the price of food, Pf.
risen
As a result of the change in consumer expectations, the interest rate _______, and investment _______.
rises; falls
The larger is the MPC (the closer it is to 1), the ________ will be the decline in investment, and the ________ will be the increase in the interest rate.
smaller; smaller
Based on your answers in a and b, which ratio had the largest impact on the money supply during that time period?
the currency-deposit ratio
in arts a and b, real wages are measured as
units of output per hour worked.