econ exam 3

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

Private saving is positive; public saving is negative.

If the government repeals an investment tax credit and increases income taxes,

real GDP and the price level fall.

Which of the following changes in the price index produces the greatest rate of inflation: 12 to 15, 20 to 24, or 30 to 35?

12 to 15

If the consumer price index changes from 125 in September to 150 in October, what is the rate of inflation?

20.0%

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

Interest rates would rise.

Kroger's grocery chain wants to finance the purchase of a new warehouse. It decides to sell bonds.

Kroger's plans to use debt financing and its action is part of the demand for loanable funds.

Ms. Lane borrowed $1,000 from her bank for one year at an interest rate of 10 percent. During that year, the price level went up by 15 percent. Which of the following statements is correct?

Ms. Lane's repayment will give the bank less purchasing power than it originally loaned her.

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

The real interest rate is the nominal interest rate minus the rate of inflation.

Data from the Bureau of Labor Statistics show that the largest category of consumer spending is housing.

True

Henry Ford paid his workers $5 a day in 1914, when the CPI was 10. Today, with the price index at 177, the $5 a day is worth $88.50.

True

. Other things the same, which bond would you expect to pay the highest interest rate?

a bond issued by a new chain of Brazilian-style restaurants

The initial impact of an increase in an investment tax credit is to shift

aggregate demand right.

If the demand for loanable funds shifts to the right, then the equilibrium interest rate

and quantity of loanable funds rises.

Which of the following is a certificate of indebtedness?

bonds but not stocks

A creditor of a corporation holds

bonds sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders.

Which of the following shifts aggregate demand to the right?

both an investment tax credit and a decrease in income tax rates

If the Fed sells government bonds to the public, then reserves

decrease and the money supply decreases.

Rosa deposits $100 in a bank account that pays an annual interest rate of 20 percent. A year later, after Rosa has accumulated $20 in interest, she withdraws her $120. Rosa's purchasing power

did not change if the inflation rate was 20 percent.

Net exports equal

exports minus imports.

During recessions, income

falls and unemployment rises.

Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by

$0.30.

The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by

$1,600.

Marion collected Social Security payments of $250 a month in 1985. If the price index rose from 90 to 108 between 1985 and 1986, then her Social Security payments for 1986 should have been

$300.

David earned a salary of $43,500 in 1994 and $89,000 in 2010. The consumer price index was 148.2 in 1994 and 215.3 in 2010. David's 1994 salary in 2010 dollars is

$63,195.34

If the reserve ratio is 10 percent, the money multiplier is

10.

Lenders buy bonds and borrowers sell them.

False

The real interest rate measures the change in dollar amounts.

False

When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling shares of stock.

False

Suppose a basket of goods and services has been selected to calculate the CPI and 2009 has been selected as the base year. In 2007, the basket's cost was $64; in 2009, the basket's cost was $68; and in 2011, the basket's cost was $70. The value of the CPI in 2011 was

102.94.

Table 24-1 The table below lists annual consumer price index and inflation rates for a country over the period 2005-2010. Assume the year 2005 is used as the base year. Year Consumer $ Index Inflation Rate 2005 100 2006 115 B 2007 125 C 2008 140 D 2009 A 10% 2010 160 E What belongs in space D?

12%

The table below pertains to Iowan, an economy in which the typical consumer's basket consists of 4 pounds of pork and 3 bushels of corn. year price of pork price of corn 2012 $20 per lb $12 per bush 2013 $25 per lb $18 per bush. If 2012 is the base year, then the CPI for 2013 was

132.8.

Table 24-1 The table below lists annual consumer price index and inflation rates for a country over the period 2005-2010. Assume the year 2005 is used as the base year. Year Consumer Price Index Inflation Rate 2005 100 2006 115 B 2007 125 C 2008 140 D 2009 A 10% 2010 160 E What belongs in space A?

154

Table 24-9 The table below lists the per gallon prices of gas and milk for the months of April, May, and June. Assume that the typical consumer buys 60 gallons of gas and 4 gallons of milk each month, and that April is the base period. Month Price of Gas Price of Milk April $2.00 $3.50 May $3.50 $3.25 June $3.85 $3.58 What is the consumer price index for May?

166

Suppose the CPI was 56 in 1967, and suppose one must spend $349 today to obtain the same basket of goods and services that could be bought for $100 in 1967. Then today's CPI is

195.4.

Table 24-15 The following table shows the prices of good X and good Y for 2013-2015. In addition, assume the basket of goods used to compute the Consumer Price Index consists of 3 units of good X and 4 units of good Y. Year $ of Good X $of Good Y 2013 2.00 1.00 2014 3.00 2.00 2015 4.00 3.00 The inflation rate in 2015 was approximately

41%.

Which bond is likely to have higher interest rate due to a higher default risk?

A junk bond.

Which of the following statements about mutual funds is correct?

A mutual fund is a financial intermediary. A mutual fund acquires its funds primarily by selling shares to the public. People who buy shares from a mutual fund accept all of the risk and return associated with the mutual fund's portfolio.

We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have identical characteristics except that

Bond A has a term of 1 year and Bond B has a term of 5 years.

Which of the following pairs of values of the consumer price index (CPI) is consistent with an inflation rate of 10 percent for 2014?

CPI in 2013 = 210; CPI in 2014 = 231

Which of the following would shift the demand for loanable funds to the right?

Congress and the president pass an investment tax credit

Suppose the government deficit increases, but the interest rate remains the same. Which of the following things might have happened simultaneously to keep interest rates the same?

Consumers decide to decrease consumption and work more.

If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would

Decrease

. If total spending rises from one year to the next, then the economy must be producing a larger output of goods and services.

False

An increase in the budget deficit shifts the demand for loanable funds to the right.

False

If Brazil buys $100 million of tractors from the U.S., then U.S. net exports will decrease.

False

Which of the following are financial intermediaries?

both banks and mutual funds

If the government currently has a budget deficit, then

it does not necessarily have a debt. its debt is increasing. government expenditures are greater than taxes.

Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. -. During a recession the economy experiences

falling employment and income.

You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices?

five cents (today's CPI / 1962 CPI)

Which of the following will not help to prevent bank runs?

fractional reserve banking

Under a fractional-reserve banking system, banks

generally lend out a majority of the funds deposited.

. Aggregate demand shifts right if

government purchases increase and shifts left if stock prices fall.

19. The nominal interest rate tells you

how fast the number of dollars in your bank account rises over time.

The nominal interest rate tells you

how fast the number of dollars in your bank account rises over time.

In the CPI, goods and services are weighted according to

how much consumers buy of each good or service.

In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have

increased both the money multiplier and the money supply.

Other things the same, if reserve requirements are increased, the reserve ratio

increases, the money multiplier decreases, and the money supply decreases.

When the money supply decreases

interest rates rise and so aggregate demand shifts left.

When public saving falls by $2b and private saving falls by $1b in a closed economy,

investment falls by $3b.

A mutual fund

is a financial intermediary. is a financial institution that stands between savers and borrowers. allows people with small amounts of money to diversify their holdings.

The bond market

is a financial market, as is the stock market.

For the purpose of calculating the consumer price index, the basket of goods

is kept the same from year to year so that the effects of price changes are isolated from the effect of any quantity changes that might be occurring at the same time.

The Federal Reserve

is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks.

When the Fed conducts open-market purchases,

it buys Treasury securities (bonds), which increases the money supply.

If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $1,000,

it will be able to make new loans up to a maximum of $880.

According to the definitions of private and public saving, if Y, C, and G remained the same, an increase in taxes would

lower private saving and raise public saving.

A decrease in the budget deficit

makes investment spending rise.

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold

more reserves, so the reserve ratio will rise.

he slope of the demand for loanable funds curve represents the

negative relation between the real interest rate and investment.

A closed economy does not engage in international trade, therefore

net exports (NX) are zero.

Which of the following both shift aggregate demand right?

net exports rise for some reason other than a price change and government purchases rise.

Larry buys stock in A to Z Express Company. Curly Corporation builds a new factory. Whose transaction would be an act of investment in the language of macroeconomics?

only Curly Corporation's

Banks are able to create money only when

only a fraction of deposits are held in reserve.

A budget surplus

reduces the government's debt.

If the tax revenue of the federal government is less than its spending, then the federal government necessarily

runs a budget deficit.

The Fed can decrease the money supply by conducting open-market

sales or by raising the discount rate.

If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?

saving and the interest rate

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

selling bonds. This selling would reduce reserves.

Which of the following would cause prices to fall and output to rise in the short run?

short-run aggregate supply shifts right

You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?

sixty cents x (1962 CPI / today's CPI)

Which of the following would both shift aggregate demand right?

taxes decrease and government expenditures increase.

Aggregate demand shifts right if at a given price level

taxes fall and shifts right if the money supply increases.

Recessions in Canada and Mexico would cause

the U.S. price level and real GDP to fall.

Economic expansions in Europe and China would cause

the U.S. price level and real GDP to rise.

In a closed economy, private saving is

the amount of income that households have left after paying for their taxes and consumption.

If the CPI was 110 this year and 100 last year, then

the cost of the CPI basket of goods and services increased by 10 percent this year.

Nastech Pharmaceuticals announced it has developed a nasal spray that would reduce hunger cravings. Other things the same we would expect

the demand for existing shares of stock in this company to increase, so the price would rise.

the interest rate the Fed charges on loans it makes to banks is called

the discount rate.

Suppose that over the past year, the real interest rate was 3 percent and the inflation rate was 1 percent. It follows that

the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 3 percent.

Table 24-12. Will's expenditures on food for three consecutive years, along with other values, are presented in the table below. Year 2009 2010 2011 Expe. on Food$5,000 $5,800 $6,600 Cons.PriceIndex 160.0 168.0 x Suppose Will's 2009 food expenditures in 2011 dollars amount to $5,670. Then

the inflation rate in 2011 was 8 percent.

In the language of macroeconomics, investment refers to

the purchase of new capital.

If net exports is a negative number for a particular year, then

the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.

When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply,

those assets are government bonds and the Fed's reason for selling them is to decrease the money supply.

Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers. The consumer price index

understates this price decrease due to the substitution bias.

Price changes from year to year are not proportional, and consumers respond to these changes by altering their spending patterns. The problem this creates for inflation calculations is called

unmeasured quality change.

Indexation refers to

using a law or contract to automatically correct a dollar amount for the effects of inflation.