Midterm 1 quizzes

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

-$10 billion

economic profit is zero if:

all factors are paid their marginal products and there are constant returns to scale.

Unlike the real world, the classical model with fixed output assumes that:

all factors of production are fully utilized.

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports ______ and net capital outflows ______.

do not change; do not change

In the long run, the level of national income in an economy is determined by its:

factors of production and production function.

"Financial repression" can occur when a government with ________ inflation imposes a cap on _________ interest rates.

high; nominal.

An effective policy to reduce a trade deficit in a small open economy would be to:

increase taxes.

In a small open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant.

increase; decrease

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____.

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 percent.

According to the definition used by the U.S. Bureau of Labor Statistics, a person is not in the labor force if that person:

is going to school full time.

When a firm sells a product out of inventory, GDP:

is not changed

The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports.

less; greater

The quantity equation for money, by itself:

may be thought of as a definition for velocity of money.

The ex ante real interest rate is equal to the nominal interest rate:

minus the expected inflation rate.

Evidence from the past 40 years in the United States supports the Fisher effect and shows that when the inflation rate is high, the ______ interest rate tends to be ______.

nominal; high

A statement that is generally true about capital in a large open economy is that it is:

not perfectly mobile, but the country influences world financial markets.

A competitive firm chooses the:

quantity of labor and capital to employ.

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant.

If the demand for real money balances is proportional to real income, velocity will:

remain constant

If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the unemployment rate is approximately:

s/(s + f)

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

shoeleather costs.

In a steady state:

the number of people finding jobs equals the number of people losing jobs.

In a Cobb-Douglas production function the marginal product of capital will increase if:

the quantity of labor increases

Currency in the hands of the public (C) is

Part of the money supply (M) and part of the monetary base (B)

Assume that the job finding rate has fallen because of a decline in matching efficiency. What is also likely to have happened?

The Beveridge Curve shifted out.

Which of the following will increase the monetary base?

The Fed's purchase of securities from a bank.

Which of the following was partially responsible for a drop in the money multiplier after the Great Recession of 2008-09?

The payment of interest on bank reserves.

A Beveridge Curve plot shows the empirical relationship between what two labor-market variables?

Unemployment and vacancies.

The property of diminishing marginal product means that, after a point, when additional quantities of:

a factor is added when another factor remains fixed, the marginal product of that factor diminishes.

Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges cost $0.50 each. In this case, the value of GDP is:

$7

Reserve balance accounts held by commercial banks at their regional Federal Reserve Banks are

Not part of the money supply (M) but part of the monetary base (B).

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

Imputed values included in GDP are the:

estimated value of goods and services that are not sold in the marketplace.

Exogenous variables are

fixed at the moment they enter the model

Measuring the rate of inflation using a market basket that excludes food and energy prices is preferred by some analysts because this measure, called core inflation,

gives a better measure of ongoing, sustained price changes.

According to our discussion in class, two reasons why capital may not flow to poor countries are that the poorer countries may:

have inferior production capabilities (such as a low value of A in the production function) and not enforce property rights (so that investments in the poor countries might be expropriated by the governments there).

Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is:

$20,000

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?

7 percent

If you hear in the news that the Federal Reserve conducted open-market operations, then you should expect ______ to change.

the monetary base

According to the model developed in Chapter 3, when taxes decrease without a change in government spending:

consumption increases and investment decreases.

An increase in the supply of capital will:

decrease the real rental price of capital.

GDP is all of the following except the total: -expenditure on the economy's output of domestically produced goods and services. -output of the economy. -income of everyone in the economy. -expenditure of everyone in the economy.

expenditure of everyone in the economy

The total income of everyone in the economy is exactly equal to the total:

expenditure on the economy's output of goods and services.

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

falls, while the real exchange rate rises and net exports fall.

To avoid double counting in the computation of GDP, only the value of ______ goods are included.

final

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______.

increases; depreciates

In a large open economy, the real interest rate is determined by:

national saving, the domestic investment function, and the net capital outflow function.

The opportunity cost of holding money is the:

nominal interest rate.

If an increasing proportion of the adult population is retired, then the labor force participation rate:

will decrease

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by:

175

If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals:

2,800

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss good(s) per U.S. good.

2.5

If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately ______ percent.

4.7

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is:

5 percent

Which of the following is most likely to cause a jump up in the price level P?

An increase in autonomous consumption.

Which of the following is most likely to cause a jump up in the rate of velocity V?

An increase in autonomous consumption.

According to our discussion in class, which of the following shifts the Beveridge Curve?

An increase in mismatch or some other factor that causes a decline in matching efficiency.

The inflation tax is paid:

by all holders of money.

One possible benefit of moderate inflation is:

better functioning labor markets.

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

borrowing from abroad.

A trade deficit can be financed in all of the following ways except by:

borrowing from domestic lenders.

If the Fed announces that it will raise the rate of growth of the money supply in the future but does not change the money supply today,

both the nominal interest rate and the current price level will increase.

Which of the following is NOT an effect of expected inflation?

causes lower real wages.

In a large open economy, an increase in "animal spirits" for investment raises the real interest rate, ______ the trade balance, and ______ net capital outflow.

decreases; decreases