Intermediate Macro Midterm 1

A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by the miller is: 1. $1 2. $2 3. $3 4. $6

$2 miller value added is $2 baker value added $6

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals: 1. $100 billion 2. $150 billion 3. $600 billion 4. $650 billion

$600 billion money supply = currency + deposits money supply = 100 + 500 = 600

If GDP measured in billions of current dollars is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, then net exports are: 1. $131 2. -$131 3. $31 4. -$31

-$31 Y=C+I+G+NX 5465=3657+741+1098+NX NX=-$31

If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is equal to: 1. 300 2. 500 3. 700 4. 1000

300 National saving = public saving + private saving Private saving=disposable income - consumption private saving = 4000-3500=500 Public saving= (taxes of net transfers)-Government spending Public saving= 800-1000= -200 National saving = 500 + -200 = 300

Which of the following is the best example of a sticky price? 1, the price of a barrel of oil 2. the price of the U.S. dollar in terms of euros 3. the price of a share of stock 4. the price of a soda in a vending machine

4. the price of a soda in a vending machine

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent.

5;5 direct relationships money growth increase inflation growth increase inflation increase nominal interest rate increase

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor-force participation rate equals ______ percent. 1. 50 2. 58 3. 60 4. 67

60 labor force = (unemployed + employed)/ population 150/250 = 60%

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:

760 r = i - π real interest rate=nominal interest rate - inflation rate r = 10-2 = 8% I = 1,000 - 30(8) = 760

John withdraws $100 from his checking account and deposits it in his saving account. What will be the effect of this transaction on different measures of money, such as C, M1, and M2?

C doesn't change because there it not more or less money in circulation. M2 doesn't change either because checking and savings accounts are accounted for in M2 and M1 decreases because it includes checking accounts because they are highly liquid forms of money but does not include savings accounts.

Holding other factors constant, legislation to cut taxes in an open economy will:

reduce national saving and lead to a trade deficit.

Cass was paid $500 in Social Security from the government. Though it was an expenditure made by the government, it is not included in the G component of GDP. Explain why.

Government Spending in relation to GDP does not include any transfer payments, which would include society security payments. Rather it only include the expenses on final goods.

Assume an economy where only burgers are traded. In a year, 100 burgers are traded at the rate of $5 per burger. Assume two scenarios:a. The economy has $100 in the form of 20 $5 bills.b. The economy has $100 in the form of 100 $1 bills.Calculate the velocity of money for both situations.

In both scenarios the velocity is 5. M*V=P*Y 100V=500 Velocity = 5 The velocity does not change due to the different distribution in bills of the same amount of money

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment:

decreases and the interest rate rises

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow.

deficit; negative

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment.

downward-sloping; vertical

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

each dollar of reserves generates many dollars of demand deposits.

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 billion

In a small open economy, if the introduction of automatic teller machines reduces the demand for money, then net exports:

increase, and the real exchange rate remains unchanged.

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports ______, and U.S. imports ______.

increase; decrease

If the production function describing an economy is Y = 100 K^.25L^.75, then the share of output going to labor:

is 75%

For a country A, the GDP growth rate is 8 percent and inflation is 4 percent. If the velocity of money remains constant, what is the change in real money balances?

Rate of growth money supply = GDP growth rate + inflation = 8% + 4% = 12% money supply - inflation = real money balances 12% - 4% = 8%

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 the government raises taxes, holding other factors constant?

Savings increase and interest rate decrease

What is the effect of the following on the money supply?a. Increase in currency-deposit ratio, keeping all other things constantb. Decrease in reserve-deposit ratio, keeping all other things constant

a. decrease money supply b. increase money supply

Assume that the demand for real money balance (M / P) is M / P = 0.6Y - 100i, where Y is national income, and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be? b. If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be?

a. i=4% and P=1/2 or 0.5 i=r+π i = 3% + 1% = 4% (M/P) = 0.6Y-100i (100/P)=0.6(1,000)-100(4) (100/P) = 600-400 (100/P) = 200 100/200=P=1/2=0.5 b. i=5% and P=1

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than the expected rate of inflation.