ECON Final Exam Review

Year Potential GDP Real GDP $ Level 2016 17.5 17.5 112.8 2017 18.1 17.8 114.2 If the Congress and the President are successful in keeping real GDP at its potential level in 2017, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action. (Note: you are comparing the variables at the new equilibrium point with the ones at the old equilibrium point in which the policy hasn't been implemented.) (a) Real GDP (b) Potential GDP (c) Inflation Rate (d) Unemployment Rate

(a) higher (b) no change (c) higher (d) lower

The budget balance tends to decline during a recession because... A. a tax revenue automatically declines B. transfer payments automatically decline C. government spending automatically declines D. the government must got spending as tax revenue automatically declines

A. a tax revenue automatically declines

Suppose that the Federal Reserve makes $15 million discount loan to Chase bank by increasing Chase's reserves at the Fed. What is the maximum total increase in the money supply can result from the Fed's discount loan? (RR ratio is at 10%)

Amount of discount loan x (1/required reserve ratio) 15,000,000 x (1/0.1) 15,000,000 x 10 = $150,000,000

Suppose you deposit $3,000 in currency into your checking account at Federal Savings Bank in Durham, which we will assume has no excess reserves at the time you make your deposit. Also assume that the required reserve ratio is 0.15. Use a T-account to show the initial effect of this transaction on Federal Savings Bank's (FSB) balance sheet.

Assets Liabilities Reserves: +$3,000 Deposits: +$3,000

Suppose you buy a house for $150,000. One year later, the market price of the house has risen to $165,000. According to your answer in part (1) and (2), which borrowing strategy will give you the highest return on your investment in the house?

Borrowing more will result in a higher return on your investment because you are not spending your own money

The total debt of the U.S. federal government... A. is the same as the public debt B. is measured by the difference between the government's revenue and spending for a particular year C. increases when the government runs a budget deficit D. decreases when the government runs a budget deficit

C. increases when the government runs a budget deficit

When the economy is experiencing a recession, automatic stabilizers will cause what? A. transfer payments to decrease and tax revenues to decrease B. transfer payments to increase and tax revenues to increase C. transfer payments to increase and tax revenues to decrease D. transfer payments and tax revenues to be unaffected

C. transfer payments to increase and tax revenues to decrease

Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget? A. If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures decrease and tax revenues increase. B. If the budget is balanced at potential GDP and the economy moves into recession, then the budget will remain balanced as government expenditure increases and tax revenue decreases will exactly offset each other. C. If the budget is balanced at potential GDP and the economy moves into recession, then the budget will remain balanced as government expenditure decreases and tax revenue decreases will exactly offset each other. D. If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

D. If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

Year Potential GDP Real GDP $ Level 2016 17.5 17.5 112.8 2017 18.1 17.8 114.2 If the Congress and the President want to keep real GDP at its potential level in 2017, should they use an expansionary policy or contractionary policy? In your answer, be sure to explain whether Congress and the President should increase or decrease government purchases and taxes.

In 2017, the real GDP is below the potential GDP, so the economy doesn't produce at full capacity. The government should use expansionary fiscal policy to increase the real GDP. The government could either increase purchases directly to increase GDP or cut taxes, or a combination of both.

Suppose you deposit $3,000 in currency into your checking account at Federal Savings Bank in Durham, which we will assume has no excess reserves at the time you make your deposit. Also assume that the required reserve ratio is 0.15. Suppose that FSB makes the maximum loan it can from the funds you deposited. What is the maximum increase in checking account deposits that can result from your $3,000 deposit?

Increases in checking account deposits = changes in bank reserves x money multiplier 3000 x (1/0.15) = $20,000

Suppose you deposit $3,000 in currency into your checking account at Federal Savings Bank in Durham, which we will assume has no excess reserves at the time you make your deposit. Also assume that the required reserve ratio is 0.15. What is the maximum increase in the money supply that can result from your deposit? Explain.

Increases in the money supply = increases in checking account deposits - changes in bank reserves 20,000 - 3000 = $17,000

Is the following counted in M1 or M2? the coins in your pocket

M1

Is the following counted in M1 or M2? the funds in your checking account

M1

Is the following counted in M1 or M2? the traveler's checks that you have left over from a trip

M1

Is the following counted in M1 or M2? the funds in your savings account

M2

A change in government purchases of goods and services results in a change in real GDP equal to $200 million. Assuming the absence of taxes, international trade, and changes in aggregate price level, answer the following question: Given the value of the multiplier you calculated in part (2), what marginal propensity to consume have led to that value of multiplier?

Multiplier = 1/(1-MPC) MPC = 0.9

A change in government purchases of goods and services results in a change in real GDP equal to $200 million. Assuming the absence of taxes, international trade, and changes in aggregate price level, answer the following question: Now suppose that the change in government purchases of goods and services was $20 million. What value of the multiplier would result in an increase in real GDP of $200 million?

Multiplier = changes in real GDP / changes in government purchases 200/20 = 10

A change in government purchases of goods and services results in a change in real GDP equal to $200 million. Assuming the absence of taxes, international trade, and changes in aggregate price level, answer the following question: Suppose that the multiplier is 4. What was the size of the change in government purchases of goods and services that resulted in the increase in real GDP of $200 million?

Multiplier = changes in real GDP / changes in government purchases. With multiplier equal to 4, the changes in government purchases = changes in real GDP / 4 200/4 = $50 million

Suppose that the Federal Reserve makes $15 million discount loan to Chase bank by increasing Chase's reserves at the Fed. Assume that before receiving the discount loan, Chase has no excess reserves. What is the maximum amount of this $15 million that Chase can lend out? Assume that the required reserve ratio is 10 percent.

The maximum amount that can be lended is $15 million

Suppose you buy a house for $150,000. One year later, the market price of the house has risen to $165,000. What if you made a down payment of 5 percent and borrowed the other 95 percent? Be sure to show your calculations in your answer.

[(Market price - original price)/down payment] x 100 [(165,000 - 150,000)/(150,000 x 0.05)] x 100 (15,000/7,500) x 100 2 x 100 = 200 There is a 200% return on investment

Suppose you buy a house for $150,000. One year later, the market price of the house has risen to $165,000. What is the return on your investment in the house if you made a down payment of 20 percent and took out a mortgage loan for the other 80 percent? Be sure to show your calculations in your answer.

[(Market price - original price)/down payment] x 100 [(165,000 - 150,000)/(150,000 x 0.2)] x 100 (15,000/30,000) x 100 0.5 x 100 = 50 There is a 50% return on investment

Is the following counted in M1 or M2? your Citibank Platinum Master Card

neither M1, nor M2 (credit/debit cards are not part of the money supply)