ECON 301 Midterm 1

A leverage ratio of 15 means that for every dollar of capital that bank owners have contributed, the bank has 15:

dollars of assets

In the U.S. economy today, real GDP per person, compared with its level in 1900 is about

eight times as high

Suppose that an economy has the production function Y = K0.5L0.5, with K = 10,000, and L = 400. The consumption function is C = 0.6(Y − T), and G = 500, T = 0.25Y, and I = 1,000 − 40r. The equilibrium real interest rate in this economy is _____ percent (rounded to the nearest whole number). Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices

r = 10 percent interest rate

In a fractional-reserve banking system, the fraction of deposits that a bank keeps as reserves is called the:

reserve-deposit ratio

Which is/are NOT considered part of M1?

savings deposits

A graph of the rate of inflation in the United States over the twentieth century shows:

some periods of deflation mixed with mostly positive rates of inflation before 1955 but only positive rates of inflation after 1955.

Which of the following is the best example of a sticky price?

the price of soda in a vending machine

When disposable income is $6,000, government purchases are $800, consumption is $4,000, and tax revenues are $800, then public saving equals _____, and investment is _____.

$0, and $2000

When a competitive firm has hired an additional worker at a real wage of W / P = 6 hamburgers per hour, and the worker produces an additional 6 hamburgers, then the firm should hire _____ additional workers if their only goal is to maximize profits.

0

A borrower has agreed to pay 3.5 percent on a mortgage, and the inflation rate during the current year is 2 percent. This borrower faces a nominal interest rate of 3.5 percent and a real interest rate of _____ percent.

1.5%

The marginal product of labor for the production function Y = 2K + 3L is:

3

From 2007 to 2014, the U.S. monetary base increased about _____ percent, while M1 increased about _____ percent.

400; 100

Suppose that the consumption function is given by C = 500 + 0.75 (Y − T). If taxes decrease by 200, then saving will change by:

50

When the economy is characterized by the consumption function C = C(Y − T) = 500 + 0.75 (Y − T), and income increases by 100, and taxes increase by 20, then consumption will increase by:

60

When disposable income is $6,000, government purchases are $800, consumption is $4,000, and tax revenues are $800, then total output is equal to:

6800

Suppose that a $100 purchase of government bonds by the U.S. Federal Reserve causes a $200 increase in the money supply in an economy in which banks hold 25 percent of deposits as reserves. What percentage of bank deposits is held as currency?

A $100 purchase of government bonds by the Federal Reserve would increase the monetary base by $100, so the $200 increase in the money supply means that the money multiplier in this economy is 2; the money multiplier is m = (cr + 1) / (cr + rr), so 2 = (cr + 1) / (cr + 0.25), which implies cr = 0.5, so deposits are equal to half of deposits.

exogenous variable

A variable that is determined outside the model Sometimes called an autonomous variable or an independent variable.

From 2007 to 2014 the U.S. monetary base increased about 400 percent, but M1 increased by only about 100 percent. This means that the money multiplier _____ during this period.

decreased

Which of the following is NOT an example of investment?

Bill purchases a home in 2015 that was built in 2005.

The _____ is a new mechanism that the Federal Reserve has set up that allows for banks to borrow from it.

Term Auction Facility

real GDP

The total income of everyone in the economy adjusted for the level of base year prices

Which is an example of a fiat money?

U.S. dollar bills

endogenous variable

a variable that is determined within the model (kind of like a dependent variable)

The assumption of continuous market clearing means that:

at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price.

macroeconomists are like scientists in that they both:

collect data, develop hypotheses, and analyze the results

Bill's Bank chooses to hold 100 percent of deposits as reserves. If a customer withdraws $5,000 from his checking account, the bank's deposits will _____ $5,000, while its reserves will _____.

decrease; decrease $5,000

From 2007 to 2014, the U.S. monetary base increased about 400 percent but M1 increased by only about 100 percent. This occurred because banks wanted to:

hold more reserves during the financial crisis and economic downturn of this period.

Suppose that the Federal Reserve requires all lending to commercial banks go through the Term Auction Facility (TAF) only. This would _____ the Federal Reserve's ability to control the monetary supply.

improve

As the economy recovered following the economic downturn of 2007-2008, some observers were concerned that banks would reduce their holdings of excess reserves by making loans. In response to this problem, the Federal Reserve decided to _____ the interest paid on reserves in order to _____ bank lending.

increase; discourage

Jose's Bank chooses to hold 100 percent of deposits as reserves. If a customer deposits $5,000 to his checking account, the bank's deposits will _____ $5,000, while its reserves will _____.

increase; increase $5,000

According to some economists, the U.S. Federal Reserve might have reduced the severity of the Great Depression if it had:

increased the monetary base even more than it did

In a simple model of the supply and demand for pizza, when buyers' income increases, the price of pizza _________ and the quantity purchased _________.

increases; increases

Money is NOT a

input to production.

In the relationship expressed in functional form Y = G(K, L), Y stands for real GDP, K stands for the amount of capital in the economy, and L stands for the amount of labor in the economy. In this case G( ):

is the function telling how the variables in the parentheses determine real GDP

Money serves as a _____ when people use money to buy and sell goods and services.

medium of exchange

In order to reduce the transaction costs associated with verifying the weight and purity of gold in a gold standard, the government can:

mint the gold coins

The government's control over the money supply is called:

monetary policy

macroeconomics

the study of the economy as a whole

When the quantity of labor and capital does not change, output produced:

will increase with improved technology.