EC 202 Exams 1-3 Craig

12. Ceteris paribus, to _______ the money supply and _______ nominal interest rates, the Fed could _______.

decrease; increase; increase the required reserve ratio

12. Suppose the CPI accurately measures inflation, and: Suppose in 1961 your grandfather earned $12,000 and the CPI in 1961 was 30. IN 2020, the CPI was 260. Ceteris paribus, it follows that your grandfather's salary in 2020 dollars equals:

$104,000 V in 2020= $12,000 x (260/30)= $104,000

5. Suppose nominal GDP in Annaville in 2019 was $21.4. Some of the components, on the expenditure side of the equation, were as follows: Consumption= $14.2; Investment= $3.7; Gov. purchases of goods and services= $3.7; and Exports= $1.9, all in trillions of (nominal) Annaville dollars. From this information, it follows that the nominal value of imports in 2019 was:

$2.1 trillion GDP= Consumption +Investments+ Govt. Expenditures + Exports-Imports 21.4= 14.2 + 3.7 + 3.7 + (1.9-x) x= 2.1

2. What is the deadweight loss from this tax?

$2.5 million DWL= (5x1)/2=2.5

TEST 1: 1. To answer Questions #1 through #4 use the following information: Suppose that in the nation state of Raleighville there are 2 final goods produced in the economy-- dog food and kitten chow. Suppose the economy produces 15 units of dog food and 5 units of kitten chow in 2000 (the base year), and 20 units of dog food and 10 units of kitten chow in 2020. Further suppose the price of dog food was $1.00 per unit in 2000, and $3.00 per unit in 2020; whereas the price of kitten chow was $1.00 in 2000 and $2.50 in 2020. What was the nominal GDP for Raleighville in 2000?

$20.00 (1x15)+ (1x5)= 20

2. What was the real GDP for Raleighville in 2000?

$20.00 Since 2000 is also the base year, Nom GDP= Real GDP

3. How much consumer surplus is "lost" after the imposition of the tax -- i.e. by how much does consumer surplus decrease as a result of the tax?

$3.0 million (2x1) + ((2x1)/2)= 3.0

3. What was the real GDP for Raleighville in 2020?

$30.00 (1x20)+(1x10)=30

19. Ceteris paribus, if the real interest rate is 2 percent and the nominal interest rate is 3 percent, then what is the inflation rate?

1 percent 2=3-%Δcpi %Δcpi= 1

TEST 2: 1. To answer questions #1-3, refer to the following diagram, showing supply and demand before and after the imposition of a $5.00 per unit excise tax. https://docs.google.com/document/d/18SwW7qbomGlX8fpqr_yoa0BUuRg0zOoGT9I0SeCOtlU/edit?usp=sharing How much will the government collect in annual tax revenue from this tax?

$5 million

13. Suppose the CPI accurately measures inflation, and: At the end of 2020, the U.S. federal min wage was $7.25 an hour, and the CPI was 260. In 1983, the min wage was $3.35, and the CPI was 100. Ceteris paribus, it follows that value of the min wage in 1983, as measured in 2020 dollars was:

$8.71 $3.35 x (260/100)= $8.71

20. What was the labor force participation rate in ABC?

((5+30)/40)x100= 87.5%

19. Use the following info to answer #19 and #20. Suppose country ABC has a total population of 50 and a working-age population of 40 citizens. Of the working age population, there are 5 people who are not employed and not actively seeking work. There are 30 people who are employed. There are also 5 people who are not employed but who are actively seeking work. What is the (U-3) official unemployment rate in ABC?

(5/(5+30)) x 100% = 14.3%

16. Suppose Home Depot issues 30-year bonds on which it pays a 5.0% (nominal) interest rate. Further, suppose that both Home Depot and the purchasers of its bonds anticipate inflation will average 2.75% during the life of the loan. Now suppose the inflation rate after the loan is made (i.e. after the bond is purchased) is actually 4.75% per annum. It follows that the actual real rate of interest is _____________ and, ceteris paribus, ____________ are (is) financially better off than anticipated as a result of the difference between the anticipated and the actual rate of inflation.

0.25%, Home Depot Real rate= 5.0%- 4.75%= 0.25% Bondholders expect to receive 2.25% (5.0%-2.75%), but they actually receive 0.25%, so Home Depot is better off.

11. Suppose the CPI accurately measures inflation, and: In 1983 the CPI in Land of Oz was 100; at the end of 2002, the CPI was 111.1. If the CPI at the end of 2003 was 113.2, then the rate of inflation (or deflation) in 2003 was _________, and the avg. annual compounded rate of inflation between 1983 and 2003 was _______?

1.89%; 0.62% Inflation rate: 2.1/111.1= 1.89% Avg. annual compounded rate: ((113.2/100)^.05 - 1) x 100= 0.62%

The Gold Standard

1.A country defines its currency in terms of a commodity - e.g. gold. 2.The country creates a mint to coin gold at the defined rate. 3.The banking system stands ready to convert its liabilities - e.g. notes, checks - into gold at defined rate. As long as gold reserves grow at roughly the rate of real GDP, there will be price stability.

4. The GDP deflator for Raleighville, for 2020, is ______________; and it follows that Raleighville experience ____________ between 2000 and 2020.

283.33; inflation GDP deflator: (Nom GDP/Real GDP)x 100 (85/30) x 100= 283.33 Inflation since GDP deflator went from 100 to 283

6. Suppose your economist tells you the "free-market" demand for X is given by: P=20 - 2X; and the "free-market" supply of X is given by P=10 + 3X. Ceteris paribus, the equilibrium quantity exchanged in this market is _____, and equilibrium price is _____.

2; 16

22. Suppose the money supply is $4 trillion; nominal GDP is $20 trillion; and real GDP is $10 trillion. Ceteris paribus, it follows that the price level is __________, and the velocity is __________.

2; 5 V=(PY)/M P= Real GDP M= Money Supply MV= PY 4x=10x P=2 V= 5

7. Suppose your economist tells you the "free-market" demand for X is given by: P=20 - 2X; and the "free-market" supply of X is given by P=10 + 3X. Ceteris paribus, the consumer surplus in this market is _____, and producer surplus is _____.

4; 6 CS: ((20-16)x2)/2=4 PS: ((16-10) x 2)/2=6

23. Ceteris paribus, suppose the money supply grew at an annual compounded rate of 8%, velocity was constant, the nominal interest rate averaged 3%, and real output grew at an average annual rate of 3%. According to the Quantity Theory of Money, inflation averaged _______ per annum, and the real interest rate was _______.

5%; -2% r=i- inflation rate 5= 8-3 -2= 3-5

14. Suppose you obtain a 30-year mortgage loan on which you have to pay a 7.0% (fixed) interest rate. Further suppose that both you and your lender anticipate inflation will average 2.0% during the life of the loan. Now suppose the post-loan inflation rate is actually 1.0% per annum. It follows that your real rate of interest is __________ and, ceteris paribus, ____________ financially better off as a result of the difference between the anticipated and the unanticipated rate of inflation.

6%, your lender is r= i - %Δcpi (inflation rate) Expected real rate: 5.0%= 7.0%-2.0% Real rate: 6% (This leaves the lender of better (6%) than anticipated (5%)

The Modern Macroeconomic Trilemma

A country can have up to two of the following, but not all three: 1.Fixed exchange rates 2.An independent/discretionary monetary policy 3.Free (international) flow of capital •Under the gold standard, the U.S. chose 1 and 3. Today we - i.e. the U.S. - choose 2 and 3.However, many countries today choose 1 and 2

24. Suppose you were evaluating three assets: A, B and C. Suppose you learned that the long-run (i.e. over the past century or so) average annual compounded rate of return for the three assets were as follow: A=9.5%; B=4.95%; and C= 6.25%. Ceteris paribus Asset _______ is most likely a diverse portfolio of U.S. common stocks; Asset ______ is most likely a diverse portfolio of U.S. corporate bonds; and Asset _______ is most likely a portfolio of U.S. Treasury securities.

A;C;B

17. Ceteris paribus, which of the following Fed actions would most likely bring about the change in the money supply from MS1 to MS2, as indicated in the diagram above? https://quizlet.com/cdn-cgi/image/f=auto,fit=cover,h=200,onerror=redirect,w=240/https://o.quizlet.com/LhftQO-EHKh6fni-gvAuLA.png

An open market purchase of securities, by the Fed, from commercial banks.

How and why did the system of the Gold Standard "break down"?

During the Great Depression, the Fed, and other central banks, protected the Gold Standard, keeping upward pressure on real interest rates, rather than pumping liquidity into the banking system.

21. Suppose the standard of living is accurately measured by real GDP per capita. Then, ceteris paribus, which of the following would unambiguously promote long-run growth in the standard of living?

Education

15. Suppose you read in the Wall Street Journal that the Fed was "increasing its target interest rate." It follows that the rate in question is the ______, and one way in which Fed could achieve its new, higher target rate is by _______.

Federal Funds Rate; conducting an open market sale

4. Ceteris paribus, one would typically expect the dollar value of _________ to be greater than __________; and ___________ to be greater than ___________.

M2; M1; M1; Currency

15. Suppose a ten-year bond with a $10,000 face value pays a 7.625% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 7.5%. Which of the following would give you the present value - i.e. the price - of the bond?

Present Value = Price = [$762.50/(1.075)] + [$762.50/(1.075)^2] +[$10,000/(1.075)^2]

22. Of the following individuals, which would be included in the Bureau of Labor Statistics' categorization of "discouraged" for the calculation of its U-4 Unemployment rate?

Priya, who is not working, would like to work, but has given up looking for work.

25. Let Ps be the current market price of a share of common stock of Company X. Let Pf be the "fundamental" value of a share of common stock of Company X. Let r be the long-run average annual compounded rate of return on common stocks, and b be the long-run annual compounded rate of return on corporate bonds. Finally, let ε be a random error term. Which of the following equations best characterizes the Efficient Markets Hypothesis?

Ps = Pf + ε

5. Which of the following best describes the economic concept of "deadweight loss"?

The decrease in total surplus resulting from the distortion" to the market from a tax.

23. In the Loanable Funds Market Model, ceteris paribus, which of the following events would best explain an increase in interest rates, together with a decrease in investment?

The government went from running a budget surplus to running a budget deficit

8. Ceteris paribus, which of the scenarios below will unambiguously lead to an increase in real GDP?

The production of final goods and services increases.

10. In the United States, from the most recent fiscal data we reviewed in class, total government spending is roughly 39% of GDP; yet, using the expenditure method for calculating GDP, government expenditures on goods and services were only 17% of GDP. Which of the following most likely explains the difference?

Transfer payments are included in the first figure, but not the second one

7. In the US., for fiscal 2016, total govt. spending was roughly 38% of GDP; yet, using the expenditure method for calculating GDP, government expenditures on goods and services were only 18% of GDP. Which of the following most likely explains the difference?

Transfer payments are included in the first figure, but not the second one.

17. Assuming the nominal interest rate is positive, ceteris paribus, which of the following statements is correct?

When the inflation rate is positive, ceteris paribus, the real interest rate will be less than the nominal rate.

18. Suppose you read in the Wall Street Journal that, during the fourth quarter of 2020, the U.S. economy expanded at the fastest rate in two decades. It follows that one would expect ___________ in the unemployment rate and ___________ in real GDP during the fourth quarter of 2020.

a decrease; an increase

21. Ceteris paribus, the primary advantage of investing in mutual funds over individual stocks or bonds is that mutual funds:

allow investors with relatively small amounts of money to diversify their investment portfolios

6. Suppose XYZ bank has excess reserves of $20,000 and loans ABC Fishshack, a local restaurant chain, the $20,000 to remodel one of its restaurants near campus. Now suppose ABC deposits the loan in a checking account at LMN bank and pays its construction contractor with a check from that account. On their respective balance sheets, this loan is _______, and, ceteris paribus, _______:

an asset of XYZ bank and a liability of ABC; the loan will increase the money supply

25. Ceteris paribus, which of the following would be the most likely to contribute to a substantial decrease in cyclical unemployment?

an increase in real GDP

18. In 2010, bond yields on Greek government debt increased dramatically. This was most likely caused by the bond market expecting _________ of Greek government debt.

an increase in the default risk

TEST 3: 1. Which of the following statements regarding the Federal Reserve System (i.e. the Fed) is INCORRECT? a) The President of the NY Fed has a permanent seat on the Fed Open Market Committee (FOMC) b) The Comptroller of the Currency chairs the Federal Open market Committee (FOMC). c) There are twelve "regional" (or district) Federal Reserve Banks in the United States. d) The Federal Open Market Committee (FOMC) has 12 voting members.

b) The Comptroller of the Currency chairs the Federal Open market Committee (FOMC).

6. Suppose that, as a result of an increase in the price of wheat, several large U.S. grocery chains, increase the prices of all their bread products. It follows that, ceteris paribus, the increase in the price will increase:

both the CPI and the GDP deflator

9. Currently, in the U.S. economy, the largest component on the expenditures side of the GDP equation is typically________; whereas on the income side of the equation the largest component is typically _____.

consumption; wages and salaries

3. Suppose the required reserve ratio increased from 20 percent to 40 percent, and suppose banks kept no excess reserves. Ceteris paribus, it follows that the "money" (or "deposit") multiplier would:

decrease from 5 to 2.5. Money multiplier= 1/Reserve ratio 1/20= 5% 1/40= 2.5%

4. Suppose the market for pizza is characterized by a downward sloping demand curve and an upward sloping supply curve. Now supposed an excise tax, to be collected by pizza sellers, is imposed. Ceteris paribus, it follows that the Consumer Surplus will _________ , and the Producer Surplus will _________.

decrease; decrease

16. Suppose a ten-year bond with a $10,000 face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 7.5%. Further suppose you purchase this bond, but then, after you purchase it, you discover that the credit (i.e. "default" risk) on the bond has increased. Ceteris paribus, it follows that the present value (i.e. the market price) would _____, and the yield would _____.

decrease; increase

17. Suppose a ten-year bond with a $10,000 face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 7.5%. Further suppose you purchase this bond, but then, after you purchase it, you discover that the inflation risk on the bond has increased. Ceteris paribus, it follows that the present value (i.e. the market price) would _____, and the yield would _____.

decrease; increase

14. Suppose some of the country's largest commercial banks decide to increase their holdings of excess reserves relative to deposits. Ceteris paribus, this action will put _______ pressure on the money supply, and to reduce the impact of this action the Fed could _______.

downward; conduct open market purchases

13. If the Fed is increasing the required reserve ratio, then one would expect, ceteris paribus, that this activity would: (1) put ________ pressure on the money supply; and (2) in the short run put ________ pressure on nominal interest rates.

downward; upward

8. In general, if the Fed is selling short-term government securities on the "open market," then one would expect, ceteris paribus, that this activity would: (1) put ________ pressure on the money supply; and (2) in the short run put ________ pressure on nominal interest rates.

downward; upward

20. Suppose a thirty-year bond with a $10,000 face value pays a 2.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 1.0%. Ceteris paribus, it follows that the current market price of the bond should be _______.

greater than $10,000. Present value= Price = [$200/(1.01)] + [$200/(1.01)2] + [$10,000/(1.01)2]= $10,197.04>$10,000

2. Suppose the required reserve ratio decreased from 20 percent to 5 percent, and suppose banks kept no excess reserves. Ceteris paribus, it follows that the "money" (or "deposit") multiplier would:

increase from 5 to 20. Money multiplier= 1/Reserve ratio 1/20= 5% 1/5= 20%

20. Suppose that, in the long run, a change in the money supply is "neutral". Further suppose the velocity of money is constant. Ceteris paribus, it follows that if growth rate of the money supply is greater than the growth rate of real GDP, then, eventually-- i.e. in the long run-- there will be a(n)

increase the price level, i.e. inflation

24. Ceteris paribus, if Anna, who is 21 and who has never before been in the labor market, enters the labor market, but cannot immediately find employment, it follows that the unemployment rate will _______; and the labor force participation rate will _______________.

increase; increase

19. Suppose earlier this morning, your broker recommended you sell German federal government bonds from your personal investment portfolio. Ceteris paribus, it follows that she thinks the market is currently _______ German bonds, and she expects German bond yields to _______ in the future.

over-pricing; increase

11. Ceteris paribus, when the Fed conducts an "open-market sale,"

it sells Treasury securities, which puts downward pressure on the money supply

14. The primary economic function of the "financial system" is to provide "financial intermediation," which means:

matching one person's borrowing with another person's saving.

10. Suppose, as an instrument of monetary policy, the Fed increases the interest rate it pays on commercial bank reserves held at the Fed. Ceteris paribus, it follows that the commercial banks will want to hold _______ reserves at the Fed; and thus there would be _____ pressure on the money supply; and there would be _______ pressure on nominal interest rates

more; downward; upward

13. Because public goods are said to be _______, it follows that _______.

non-excludable; people have an incentive to be free riders

5. Ceteris paribus, on a typical dull Tuesday in March, in which of the following actions would one most likely expect the Fed to be engaged?

open market operations

15. For many everyday applications, when economists adjust nominal dollar figures for inflation, they use the CPI rather than the GDP deflator, because the CPI reflects a ________; whereas the GDP deflator reflects __________.

representative market basket of goods and services consumed by typical "urban consumers"; "all" goods and services in GDP

10. The real GDP of country ABC is $1,000. The population of ABC is 250. The real GDP of country XYZ is $125. The population of XYZ is 5. Ceteris paribus, it follows that the _______ in ABC is ________ than it is in XYZ.

standard of living; is lower Per capita real GDP= Real GDP/Population $1000/250= $4 in ABC $125/5= $25 in XYZ $4 < $25

23. Suppose you find yourself laid off from your current job, and the best advice your economist gives you is that you should "retrain" and obtain new skills because your current skills are technologically obsolete. Ceteris paribus, it follows that you are most likely a victim of ____________ unemployment.

structural

25. According to the Taylor rule, ceteris paribus, if the actual inflation rate is below the Fed's target inflation rate, and if the growth rate of real GDP is below the long-run average growth rate, then_______.

the Fed would be expected to decrease the Federal Funds Rate.

24. According to the Taylor rule, ceteris paribus, if the actual inflation rate is above the Fed's target inflation rate, and if the growth rate of real GDP is below the long-run average growth rate, then_______.

the Fed's behavior could not be predicted without more information.

11. Which of the following is the best example of a good or service that would be considered non-rival and non-excludable?

the United States Navy

12. Which of the following is the best example of a good or service that would be considered rival and excludable?

the clothes on your back

18. According to the Quantity Theory of Money, if the velocity of money is constant, and if the money supply increases, while at the same time real GDP decreases, then, ceteris paribus, it follows that in the long run:

the price level will increase - i.e. the economy will experience inflation.

21. When economists say: "money is neutral," ceteris paribus, they most likely mean that, in the long run, the Fed can only influence_______

the price level, not real interest rates or output.

8. When an economist refers to "an efficient allocation of resources," she typically means _______ is maximized.

the sum of consumer and producer surplus

9. Ceteris paribus, goods with "positive externalities" tend to be_______ by the free-market private sector; thus, in modern developed economies these goods are often_______ by the government.

under-supplied; supplied or otherwise subsidized

16. Ceteris paribus, if the Fed increases the money supply from MS1 to MS2, as indicated in the diagram above, it follows that, in the short run, there will be _______ pressure on the price level, and _______ pressure on nominal interest rates. https://quizlet.com/cdn-cgi/image/f=auto,fit=cover,h=200,onerror=redirect,w=240/https://o.quizlet.com/LhftQO-EHKh6fni-gvAuLA.png

upward; downward

7. In general, if the Fed is buying short-term government securities on the "open market," then one would expect, ceteris paribus, that this activity would: (1) put ________ pressure on the money supply; and (2) in the short run put ________ pressure on nominal interest rates.

upward; downward

9. In general, if the Fed is conducting "quantitative easing", then one would expect, ceteris paribus, that this activity would: (1) put ________ pressure on the money supply; and (2) in the short run put ________ pressure on nominal interest rates.

upward; downward

22. In the Loanable Funds Market Model, ceteris paribus, it typically follows that when the federal government runs a budget deficit, there will be______ pressure on interest rates and _______ pressure on private investment. This is referred to as _______.

upward; downward; crowding out