Eco 119 exam 1

In the classical model, according to the quantity theory of money and the fisher equation, an increase in money growth increases:

the nominal interest rate

the neoclassical theory of distribution explains the allocation of:

income among factors of production

Over the past century, the productivity of farmers (MPLf) has risen substantially because of technological progress. According to the neoclassical theory, what should hav e happened to farmer's real wage (Wf/Pf)?

real wages should increase

Over the past century, the productivity of barbers (MPLb) has remained constant. According to the neoclassical theory, what should have happened to farmers' real wage (Wb/Pb)?

real wages should remain constant

Consider the money demand function that takes the form M / P = 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 percent

A Rembrandt painting

a store of value

What are the three functions of money?

a store of value, a medium of exchange, a unit of account

The inflation tax is paid

by all holders of money

In the classical model with fixed income, a reduction in the government budget deficit will lead to lead to a:

lower real interest

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments labor depending on their

marginal productivities

Unlike the real world, the classical model with fixed output assumes that:

capital and labor are fully utilized

In the case of an unanticipated increase in inflation

creditors with an indexed contract are hurt because they pay more than they contracted for in a nominal terms

The preferences of households determine the:

currency-deposit ratio

According to the model developed in chapter 3, when taxes are increased but government spending is unchanged, interest rates:

decrease

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

The investment function slopes _________ because there are _______ investments projects that are profitable as the interest rate

downward more

In a fractional-reserve banking system, banks create money because:

each dollar for reserves generate many dollars of demand deposits

In the long run, the level of national income in an economy is determined by its:

factors of production and production function

in the long run, the level of national income in an economy is determined by its:

factors of production and production function

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

increase by more than $1 million

Inflation ____________ the variability of relative prices and _______ the efficiency of the allocation of resources

increases decreases

the demand for loanable funds is equivalent to:

investment

When a firm sells a product out of inventory, GDP

is not changed

Because inflation has risen, a clothing company decides to issue a new catalog monthly instead of quaretely

menu costs

the characteristics of the classical model that the money supply does not affect real variables is called:

monetary neutrality

Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value

shoeleather costs

Given that M / P = kY, when the demand for parameter, k, is large, the velocity of money is _________, and money is changing hands _________.

small infrequently

If the nominal interest rate increases, then:

the demand for money decreases

Suppose workers can move freely between being farmers or being barbers. What does this imply about the nominal wage of each occupation?

the nominal wages should be equal

In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ________ determines real GDP and _________ determines nominal GDP.

the productive capability of the economy; the money supply

In computing GDP

the value of intermediate goods is included in the market price of all final goods

Two equivalent ways to view GDP are as the:

total income of everyone in the economy or the total expenditure on the economy's output of goods and services

If the demand for the real money balance is proportional to real income, velocity will:

be constant

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of:

both barbers and farmers should have risen over time

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

When a firm sells a product out of inventory, investment expenditure _________, and consumption expenditures _______.

decrease increase

An increase in the supply of capital will:

decrease the real rental price of capital

A women marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but her husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage:

decreases GDP by 60,000

The ex ante real interest rate is based on _______ inflation, while the ex post real interest rate is based on ________ inflation.

expected actual

Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.

inconveniences of a changing price level

Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. Complete the following: If the Fed does nothing, the money supply will tend to _________. However, the Fed can hold the money supply constant by __________ bonds in open-market operations.

increase selling

The demand for real money balances is generally assumed to:

increase as real income increases.

In the United States, the money supply is determined

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held.

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers _________ raises.

less smaller

Real GDP is a better measure of economic well-being than nominal GDP because real GDP:

measure changes in the quantity of goods and services produced by holding prices constant.

hyperinflation ultimately are the result of excessive growth rates of money supply; the money supply; the underlying motive for for the excessive money growth rate is frequently a government's:

need to generate revenue to pay for spending

A fixed-weight price index like the 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

Consumption depends _________ on disposable income, and investment depends _______ on the real interest rate.

positively negative

The currency-deposit ratio is determined by:

preferences of households about the form of money they wish to hold

If the government raises taxes by 100 billion when the marginal propensity to consume is 0.6, what happens to each of the following variables?

public saving will increase by 100 billion private saving will decrease by 40 billion national saving will increase by 60 billion investment will increase by 60 billion

If the ration of reserves to deposits (rr) increases, while the ration of currency to deposist (cr) is a constant and the monetary base (B) is constant, then:

the money supply decreases

in the classical model, what adjusts to eliminate any unemployment of labor in the economy?

the real wage

Table: Bank Balance Sheet Based on the table, what is the reserve-deposit ration at the bank?

10 percent

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:

5 percent

Gita lives in an economy with an inflation rate of 10%. Over the past year, she earned a return of $50,000 on her million dollar portfolio of stocks and bonds. Because her tax rate is 20%, sh paid $10,000 to the government.

Altered tax liability

How are real wages measured in parts a and b?

As units of output per hour worked

Exhibit: Saving, Investment, and the interest rate 1 The economy begins in equilibrium at point E, representing the real interest r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding al other factors constant?

Point A

Cigarettes in a a POW camp

Store of value Medium of exchange Unit of account

A subway token used in the subway system

Store of value medium of exchange unit of account

Excess reserves are reserves that banks keep:

above the legally required amount.

if nominal wages cannot be cut, then the only way to reduce real wages is by:

adjustments via inflation

In a system with fractional-reserve banking

all banks must hold reserves equal to a fraction of their deposits

People use money as a store of value when they:

hold money to transfer purchasing power into the future

(Exhibit: Saving, investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)?

point A

To increase the money supply, the Federal Reserve:

buys government bonds

Grandpa buys an annuity for $100,000 from an insurance company, which promises to pay $10,000 a year for the rest of his life. After buying it, he is surprised that high inflation triples the price level over the next few years

cost of unexpected inflation

According to the model developed in Chapter 3, when government spending increases without a change in taxes:

investment decreases

When bread is baked but put away for later sale, this is called:

investment in inventory

A small country might want to use the money of a large country rather than print its own money if the small country

is likely to be unstable, whereas the large country is likey to me stable

The classical dichotomy:

is said to hold when the values of real variables can be determined without any references to nominal variables or the existence of money

When the demand for loanable funds exceeds the supply of loanable funds, household want to save ________ than firms want to invest, and the interest rate _________.

less rise

Assume that an increase in consumer confidence raises consumers expectations of future income and thus the amount they want to consume today for any given level of disposable income. The shift, in a neoclassical economy, will:

lower investment and raise the interest rate

During World War II, both Germany and England had plans for a paper weapon: they each printed the other's currency, with the intention of dropping large quantities by airplane, so as to increase the other's money supply.

menu and shoe-leather costs would rise Hyperinflation could undermine the public's could undermine the publics confidence in the economy. relative prices would become more variable

open-market operations change the _________; changes in interest rate paid on reserves change the _________ ; and changes in the discount rate change the _________.

monetary base money multiplier monetary base

your answers in parts a through d imply that the relative price of haircuts, PB has ________ relative to the price of food Pf

risen

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, national saving:

rises by 60 billion