Macro Final
13. Suppose that, as result of the recent pandemic, the economy enters a recession, and the U.S. Treasury borrows an additional $3 trillion to fund economic recovery efforts. Ceteris paribus, it follows that the ______ loanable funds to the private-sector would _______, putting _______ pressure on the equilibrium interest rate. A. supply of; decrease; upward B. supply of; increase; downward C. demand for; decrease downward D. demand for; increase; upward
Answer A Chapter 18 - This is just crowding out. See slides #10-#14 from Lecture #15 In this scenario, it is likely that the additional borrowing by the U.S. Treasury would increase the supply of loanable funds to the private sector, putting downward pressure on the equilibrium interest rate. This is because the U.S. Treasury would be issuing more bonds to finance its additional borrowing, which would increase the total supply of loanable funds in the economy. As a result, the increased supply of loanable funds would cause the equilibrium interest rate to decrease, as investors would be willing to lend their money at lower rates in order to compete for a larger pool of loanable funds.
14. Suppose a thirty-year bond with a $10,000 face value pays a 2.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 1.0%. Ceteris paribus, it follows that the current market price of the bond should be _______. A. greater than $10,000. B. $10,000 C. less than $10,000. D. The market price of the bond cannot be determined from the information given
Answer A Chapter 19, Lecture #16 - Just use the bond pricing equation in slide #5 from Lecture #16: Present Value = Price = [$200/(1.01)] + [$200/(1.01)2 ] + [$10,000/(1.01)2 ] = $10,197.04>$10,000. This is because the bond's coupon rate is lower than its discount rate, which means that investors would not be able to earn the same return on their investment as they could by investing in other assets with similar risks. As a result, investors may be willing to pay a lower price for the bond in order to compensate for the lower potential return.
6. Ceteris paribus, if Ann, who is 20 and who has never before been in the labor market, enters the labor market, but cannot immediately find employment, it follows that the unemployment rate will _______; and the labor force participation rate will _______. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease
Answer A Chapter 20 and Lectures #7 and #8 - The unemployment rate will increase, since the numerator increases proportionally more than the denominator. The labor force participation rate increases, because the numerator increases, but the denominator does not. (See the calculations associated in slides #11 and #12 in Lecture #7.) When a person who has never before been in the labor market enters the labor force but cannot find employment, the unemployment rate will increase because the number of people in the labor force who are looking for work but cannot find it will increase. However, the labor force participation rate will also increase because the number of people in the labor force will increase, even though some of them may not be able to find employment right away.
12. Suppose earlier this morning, your broker recommended you sell German federal government bonds from your personal investment portfolio. Ceteris paribus, it follows that she thinks the market is currently _______ German bonds, and she expects German bond yields to _______ in the future. A. over-pricing; increase B. over-pricing; decrease C. under-pricing; increase D. under-pricing; decrease
Answer A Chapters 18 and 19 and Lectures #15 and #16 - If she recommends you sell, then she sees the bonds as over-valued by the market, and, ceteris paribus, she expects a decrease in the market price of the bonds in the future. If the price is "too" high today, then she expects the price to decrease in the future. Thus, bond yields will increase, because of the inverse relationship between prices and yields. See the discussion in slides #3-#10 from Lecture #16.
25. In the modern macroeconomic trilemma, it is possible for a country to have_______ and the _______, but not _______: A. fixed exchange rates; free (international) movement of capital; an independent/discretionary monetary policy B. free (international) movement of capital; the gold standard; fixed exchange rates C. fixed exchange rates; gold standard; the free (international) movement of capital D. gold standard; an independent/discretionary monetary policy; floating exchange rates
Answer A Lectures #24 - This is taken directly from slide #13 from Lecture #24. "B" is incorrect, because with the free movement of capital and the gold standard, you CAN have fixed exchange rates. This is how the world worked on the gold standard. "C" is incorrect, because it is just a restatement of "B", i.e. you CAN have all three. "D" is incorrect, because you can't have both the gold standard and a discretionary monetary policy. The latter violates the rules of the former. This was one of the problems with the gold standard during the Great Depression.
4. In 1966, Sandy Koufax, a professional baseball pitcher, signed a contract with the Los Angeles Dodgers for $125,000 a year, and the CPI was 32.4. In 2016, Zack Greinke, also a pitcher, signed a contract with the Arizona Diamondbacks for, roughly, $35,000,000 a year, and the CPI in 2016 was 237.5. How much was Koufax's salary in 2016 dollars? A. $17,052 B. $916,281 C. $4.8 million D. $259.8 million
Answer B Chap 16 and Lecture #6 - To answer this question, we need to adjust Koufax's salary for inflation using the CPI. We can do this by dividing Koufax's salary by the CPI in 1966 and then multiplying that number by the CPI in 2016. This will give us the equivalent amount in 2016 dollars. Using the information provided, we can calculate Koufax's salary in 2016 dollars as follows: Koufax's salary in 2016 dollars = (125,000 / 32.4) * 237.5 = $916,281
19. If the Fed establishes a required reserve ratio of 25 percent, then, ceteris paribus, the "money multiplier" will be: A. 2.5 B. 4 C. 25 D. 40
Answer B Chapter 21 and Lecture #20 - The "money" or "deposit" multiplier is 1/required reserve ratio; thus in this case the multiplier is 1/0.25=4. See slide #12 in Lecture #20 If the Fed establishes a required reserve ratio of 25 percent, then the money multiplier will be 4. The money multiplier is a measure of the extent to which an increase in the money supply can lead to a larger increase in the amount of money in circulation. It is calculated as the reciprocal of the required reserve ratio, which is the percentage of deposits that banks are required to hold in reserve. In this case, the required reserve ratio is 25 percent, which means that the money multiplier is 1 / 0.25 = 4
24. Suppose every country in the world was on the gold standard, and suppose that major new deposits of gold were discovered on several continents. Ceteris paribus, if monetary neutrality holds, then it follows the most likely outcome would be _______ A. the world would experience deflation. B. the world would experience inflation. C. the world would, by definition be on a "floating exchange rate system." D. the world would be on a "post-Bretton Woods" standard.
Answer B Lectures #22-#24 - MV=PY. In a gold standard world, gold is, ultimately, just money, M; thus, if monetary neutrality holds, then, ceteris paribus, upward pressure on M will result in upward pressure on P, i.e. inflation If every country in the world was on the gold standard, and major new deposits of gold were discovered on several continents, then the most likely outcome would be that the world would experience inflation. Under the gold standard, the value of a country's currency is pegged to the value of gold, and the supply of money is tied to the supply of gold. In this scenario, the discovery of major new deposits of gold would increase the supply of gold, which would increase the supply of money. This increase in the money supply could lead to higher prices for goods and services, as there would be more money in circulation to buy them.
5. Suppose Home Depot issues 30-year bonds on which it pays a 4.00% (nominal) interest rate. Further, suppose that both Home Depot and the purchasers of its bonds anticipate inflation will average 2.00% during the life of the loan. Now suppose the inflation rate after the loan is made (i.e. after the bond is purchased) is actually 1.00% per annum. It follows that the actual real rate of interest is__________ and, ceteris paribus, _________ are (is) better off than anticipated as a result of the difference between the anticipated and the actual rate of inflation. A. 2.00%, Bondholders B. 2.00%, Home Depot C. 3.00%, Bondholders D. 3.00%, Home Depot
Answer C Chapter 16 and Lecture #6 - Real rate = nominal rate - inflation rate, i.e. 4.0% - 1.0% = 3.0%. So bondholders (i.e. the lenders in this example) win: They expected to receive 2.0% (i.e. 4.0% - 2.0%), but they received 3.0%. Ceteris paribus, Home Depot loses; it pays a higher real rate than expected.
11. Suppose a ten-year bond with a $10,000 face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 6.5%. Further suppose you purchase this bond, but then, after you purchase it, you discover that the inflation risk on the bond has increased. Ceteris paribus, it follows that the present value (i.e. the market price) would _____, and the yield would _____. A. increase; decrease B. increase; increase C. decrease; increase D. decrease; decrease
Answer C Chapter 19, Lecture #16 - See the discussion of inflation risk and the bond pricing equation in slides #3- #10 from Lecture #16. It is likely that the increase in inflation risk would cause the present value of the bond to decrease, and the yield to increase. This is because higher inflation can erode the purchasing power of the bond's future coupon payments and principal repayment, making the bond less valuable to investors. As a result, investors may be willing to pay a lower price for the bond, which would decrease its present value. At the same time, the higher inflation risk may also cause investors to demand a higher yield in order to compensate them for the increased risk. This would cause the bond's yield to increase.
17. In general, if the Fed is buying short-term government securities on the "open market," then one would expect, ceteris paribus, that this activity would: (1) put ________ pressure on the money supply; and (2) in the short run put ________ pressure on nominal interest rates. A. upward; upward B. downward; upward C. upward, downward D. downward; downward
Answer C Chapter 21 and Lecture #20 - If the Fed is engaged in open market operations and is purchasing securities, then it is increasing bank reserves, which, ceteris paribus, should induce banks to make loans, and, through the money creation process - the money multiplier - increase the money supply, while simultaneously putting downward pressure on interest rates. See slides #5-#12 in Lecture #20 If the Fed is buying short-term government securities on the open market, then this activity would put upward pressure on the money supply and downward pressure on nominal interest rates. When the Fed buys securities on the open market, it is injecting money into the financial system, which increases the money supply. This increase in the money supply can lead to lower interest rates, as the increased supply of money can make it easier for households and businesses to borrow and invest. In the short run, this can put downward pressure on nominal interest rates, as investors may be willing to lend their money at lower rates in order to compete for a larger pool of loanable funds.
23. Ceteris paribus, suppose over some period of time the money supply grew at an average annual compounded rate of 7%, velocity was constant, the nominal interest rate averaged 8%, and real output grew at an average annual rate of 1%. According to the Quantity Theory of Money, inflation averaged _______ per annum, and the real interest rate was _______. A. 8%; 2%. B. 7%; 1%. C. 6%; 2%. D. 8%; 1%.
Answer C Chapter 22 and Lecture #23 - This just follows from the Quantity Theory of Money and the real interest rate: %ΔM + %ΔV = %ΔP + %ΔY or 7 + 0 = 6 + 1; and r = i - %ΔP or 2 = 8 - 6. According to the Quantity Theory of Money, inflation averaged 6% per annum and the real interest rate was 2%. The Quantity Theory of Money is an economic theory that explains the relationship between money supply, velocity, and the rate of inflation. It states that the rate of inflation is determined by the rate of growth of the money supply, the velocity of money, and the rate of growth of real output. In this scenario, the money supply grew at an average annual compounded rate of 7%, velocity was constant, the nominal interest rate averaged 8%, and real output grew at an average annual rate of 1%. Based on the Quantity Theory of Money, the rate of inflation is equal to the rate of growth of the money supply minus the rate of growth of real output. In this case, the rate of inflation is 7% - 1% = 6%. The real interest rate, on the other hand, is equal to the nominal interest rate minus the rate of inflation. In this case, the real interest rate is 8% - 6% = 2%.
21. Suppose that currently the money supply is $500, nominal GDP is $5,000, and the price level is 2. Ceteris paribus, it follows that real GDP is _______, and the velocity of money is _______? A. $5,000; 10 B. $5,000; 20 C. $2,500; 10 D. $2,500; 20
Answer C Chapter 22 and Lectures #22 and #23. Nominal GDP is equal to the price level (P) times real GDP (Y). Therefore, the price level is: P = (P x Y)/Y = $5,000/$2,500 = 2. The velocity of money refers to the average number of times per year that a typical dollar is used in transactions to generate nominal GDP. To calculate the velocity of money: V = (P x Y)/M = $5,000/$500 = 10. See Mankiw, "Velocity and the Quantity Equation," pp. 463-466. (Note a version of this question was on the third exam.)
16. Which of the following officials is NOT a voting member of the Federal Open Market Committee? A. The President of the New York Federal Reserve Bank B. The Chair of the Board of Governors of the Federal Reserve System C. The Vice-Chair of the Board of Governors of the Federal Reserve System D. The U.S. Secretary of the Treasury
Answer D Answer: D, Chapter 21 and Lecture #19 - See slide #13 in Lecture #19 The U.S. Secretary of the Treasury is NOT a voting member of the Federal Open Market Committee (FOMC). The FOMC is the monetary policy-making body of the Federal Reserve System, and it is composed of 12 voting members. These members include the seven members of the Board of Governors of the Federal Reserve System, the President of the New York Federal Reserve Bank, and four of the other 11 Presidents of the regional Federal Reserve Banks, who serve on a rotating basis. The U.S. Secretary of the Treasury is not a voting member of the FOMC, although he or she may attend the meetings and participate in the discussions.
10. The primary economic function of the "financial system" is to provide "financial intermediation," which means: A. keeping the inflation rate at zero, ceteris paribus. B. keeping the inflation rate at the Treasury's "target rate", ceteris paribus. C. matching one person's consumption expenditures with another person's capital expenditures. D. matching one person's borrowing with another person's saving
Answer D Chapter 18 and 19 and Lecture #14 - See slide #4 in Lecture #14. The primary economic function of the financial system is to provide financial intermediation, which means facilitating the flow of funds between savers and borrowers. The financial system does this by providing a range of financial products and services, such as banks, insurance companies, and stock markets, that help people and businesses to save, borrow, and invest money.
7. Ceteris paribus, which of the following would be the most likely to contribute to a substantial decrease in cyclical unemployment? A. a decrease in the minimum wage B. a decrease in real GDP C. an increase in the minimum wage D. an increase in real GDP
Answer D Chapter 20 and Lecture #8 - A decrease in unemployment and an increase in real GDP - which marks an upturn in the business cycle - are two sides of the same coin. Note that the minimum wage has nothing to do with cyclical unemployment, which, as the name suggests, revolves around the business cycle. (See the discussion in Mankiw Chapter 20, passim, and slides #5 - #13 from Lecture #8.) Cyclical unemployment is the type of unemployment that occurs when the economy is in a recession or downturn. During these times, there is typically a decrease in demand for goods and services, which leads to a decrease in demand for labor. In this situation, the most likely factor that would contribute to a substantial decrease in cyclical unemployment is an increase in real GDP, because an increase in economic activity would lead to an increase in demand for labor and a decrease in the unemployment rate.
20. If the Fed _______ the required reserve ratio, then, ceteris paribus, the "money multiplier" will _______, and there will be _______ pressure on the money supply. A. increases; increase; upward B. increases; decrease; upward C. decreases; decrease; downward D. decreases; increase; upward
Answer D Chapter 21 and Lecture #20 - See #19 above; and slides #6-#11 in Lecture #21
18. Suppose the Fed is engaged in open market purchases. Ceteris paribus, it follows that one would expect there to be _______pressure on the price of U.S. Treasury securities, and _______ pressure on the yield of U.S. Treasury securities. A. downward; upward B. downward; downward C. upward; upward D. upward; downward
Answer D Chapters 18-19 and 21-22 and various lectures form Units #4 and #5 - If the Fed is engaged in the open market purchasing of securities, then it is also putting upward pressure on bond prices and downward pressure on yields. See, specifically, slide #10 in Lecture #20. If the Fed is engaged in open market purchases, then one would expect there to be downward pressure on the price of U.S. Treasury securities and upward pressure on the yield of U.S. Treasury securities. When the Fed buys securities on the open market, it increases the demand for those securities, which can cause their prices to rise. However, the increased demand for U.S. Treasury securities can also lead to higher yields, as investors may be willing to lend their money at higher rates in order to compete for a smaller pool of loanable funds.
15. Including the chairperson, the Board of Governors of the Federal Reserve System has _______ members; whereas there are _______ regional Federal Reserve Banks across the country. A. 5; 7 B. 7; 7 C. 5; 12 D. 7; 12
Answer D The Board of Governors of the Federal Reserve System has 7 members, whereas there are 12 regional Federal Reserve Banks across the country. The Federal Reserve System is the central banking system of the United States, and it is composed of the Board of Governors, the 12 regional Federal Reserve Banks, and other member banks. The Board of Governors is the governing body of the Federal Reserve System, and it is composed of seven members who are appointed by the President of the United States and confirmed by the Senate. The 12 regional Federal Reserve Banks, on the other hand, are responsible for implementing the monetary policy decisions of the Federal Reserve System and providing financial services to depository institutions and the U.S. government.
3. Suppose the consumer price index (CPI) accurately measures inflation, and at the end of 2000, the CPI in the nation state of Craigville was 105.1. If the CPI at the end of 2001 was 113.2, then what was the rate of inflation (or deflation) in 2001? A. 1.20% B. 7.71% C. 8.10% D. 13.2%
Answer: B Chapter 15 and Lecture #3 - For real GDP use the base year prices with the current year output: (220 x 10) + (350 x 3) = 3250. See slides #10 - #12 in Lecture #3
1. Suppose nominal GDP in Annaville in 2019 was $20.4. Some of the components, on the expenditure side of the equation, were as follows: Consumption = $14.4; Investment = $3.7; Government purchases of goods and services = $3.7; and Imports = $3.3, all in trillions of (nominal) Annaville dollars. From this information, it follows that the nominal value of Exports in 2019 was: A. $0.0 trillion B. $0.9 trillion C. $1.9 trillion D. $3.3 trillion
Answer: C Chap 15 and Lecture #2 - The answer follows from the expenditure method of calculating GDP; GDP=C+I+G+EX-IM; or 20.4 = 14.4 + 3.7 + 3.7 + (1.9 - 3.3). (See Mankiw, pp. 306-312; and note that this is essentially the same question as Questions for Review #5 on p. 322, only with real-world figures.)
