ECON 2010 LSU Final

Policymakers' use of stabilization policy to eliminate output gaps is more appropriate when an economy self corrects very _________ and when the output gap is very ____________.

slowly; large

Which of the following does not belong to M1?

small time deposit

Your barber charges $10 for a haircut. In turn, the barber pays his assistant $2 per haircut in return for sharpening the scissors, sweeping the floor, and other chores. For each haircut given, what is the total contribution of the barber and his assistant, taken together, to GDP?

$10

Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bond matures (after receiving the coupon payment for the first year). Syndey sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 5% coupon rate?

$10,095

A labor contract provides for a first-year wage of $12.00 per hour and specifies that the real wage will rise by 2 percent in the second year of the contract and by another 2 percent in the third year. The CPI is 1.00 in the first year, 1.05 in the second year, and 1.10 in the third year. What are the dollar wages that must be paid in the THIRD year of the contract?

$13.73

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. It the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. If the temperature next year does not change, there won't be any return. There is a 50% chance that it will be colder than average next year, a 25% chance that it will be warmer than average, and 25% chance of no temperature change. If you purchase one share of ABC stock and one share of XYZ stock, your expected gain will be:

$15

If bountiful Orchard grows $100,000 worth of peaches, sells $50,000 worth of peaches to consumers and uses the rest to make jam that is sold to consumers for $100,000, Bountiful Orchard's contribution to GDP is:

$150,000

If you bought a house on 1/28/2018 and the price of this house is $200,000, the house was constructed in 1990. The commission you paid to the realtor is 10%. What is your contribution to 2018's GDP?

$20,000

The typical consumer's food basket in the base year 2015 is as follows: 30 chickens at $4 each 10 hams at $5 each 10 steaks at $8 each A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each in 2016, and the price of steaks is unchanged. Suppose that consumers are completely indifferent between two chickens and one ham. After the substitution, what is the living cost in 2016?

$255

In 1950, the minimum wage prescribed by federal law was $0.75 per hour. in 2013 it was $7.25 per hour. What's the real minimum wage in 2013? The CPI was 0.24 in 1950 and 2.29 in 2013.

$3.17

the effect of a one unit increase in autonomous expenditure on short-run equilibrium output; 1/(1-mpc)

income-expenditure multiplier

We assume there is one commercial bank in this economy. This bank currently has the following T-bill, and it wants to keep a 10% reserve-deposit ratio. Citizens don't hold cash and put all their money in this bank. What is the total deposit of this bank has after it lends out the extra reserve to the borrowers, and the borrowers deposit the loan into the bank again (only ONE round of lending)? Assets Liabilities Bank Reserve: $1,000,000 Deposit: $3,439,000 Loan: $2,095,100

$4,095,100

Suppose when you are 21 years old, you deposit $1,000 into a bank account that pays annual compound interest, and you do not withdraw from the account until your retirement at the age of 65, 44 years later. How much more will be in your account if the interest rate is 6 percent rather than 5 percent?

$4,428

Whats is the value of Taylor's assets? 15,000 two cars 400,000 house 300,000 mortgage 1,000 cash 5,000 car loans 3,000 checking account balance 3,000 credit card balance

$419,000

In Macroland there is $12,000,000 in currency. The public hold half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 12.5%, deposits in Macroland equal __________ and the money supply equals____________.

$48,000,000; $54,000,000

The Spends and the Thrifts are similar families. Spends save 5% of their income each year and the Thrifts save 20%. The two families began to save at the beginning of 1980. Both families earn $40,000 a year in real terms in the labor market, and both put their savings in a mutual fund that has yielded a real return of 8 percent per year. What's the consumption difference between these two families in the second year (at the end of 1981)?

$5,640

Based on the following information, the value of the M1 measure of the money supply is ____________ and the value of the M2 measure of the money supply is_______________. Assets in terms of billions 20 currency 500 demand deposits 800 money market mutual funds 10 travelers checks 1800savings deposits 200 other checkable deposits 1100small denomination time deposits

$530 billion; $4,230 billion

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year. The company purchases $300,000 worth of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals ____________ and planned investment equals____________.

$650,000; $550,000

1,000 comsumption expenditures 600 imports 700 government purchases 500 construction of new homes and apts. 600 sales of existing homes and apts. 500 exports 200 government payments 300 household purchases of durable goods 500 beginning inventory 600 ending inventory 300 business fixed investment Given the data, compute the government purchases component of GDP.

$700

The population of Alpha totals one million people, 40 percent of whom are employed. Average output per worker in Alpha is $20,000. Real GDP per person in Alpha totals:

$8,000

In a certain economy, the components of planned spending are given by: C= 500 + 0.8(Y - T) - 300r Ip= 200 - 400r G= 200 NX= 10 T= 150 Given the information about the economy above, which expression below gives autonomous expenditures

(790 - 700r)

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then the output gap equals (use Okun's law):

-2%

The CPI in 1931 equaled 0.15. The CPI in 1932 equaled 0.14. The rate of inflation between 1931 and 1932 was _____________ percent.

-6.7

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are _____________ Jordanian dinars per U.S. dollar

0.712

A British-made automobile is priced at E20,000. A comparable U.S.-made car costs $26,000. One pound trades for $1.50 in the foreign exchange market. Find the real exchange rate from the perspective of the United States ( when dollar is the domestic currency and pound is the foreign currency).

0.867

Technological improvements:

increase aggregate supply

According to BLS website, what is the Labor Union membership rate in 2017?

10.7%

Using the following given information to construct the PAE function. Find out by how much would autonomous expenditure have to decrease to eliminate the output gap. C= 4,000+0.75(Y-T) Ip=2,000 G=3,500 NX=100 T=3,000 Y*=29,000

100

If short-run equilibrium output equals 10,000, the mpc equals 0.9, and potential output (Y*) equals 9,000, then taxes must be increased by approximately _________________ to eliminate any output gap.

111

The Federal Reserve consists of _____________ regional banks, ________ governors on the Board of Governors, and ___________ voting members of the Federal Open Market Committee

12; 7; 12

The following set of equations describe an economy: C= 14,400 + 0.5(Y- T) - 40,000r Ip= 8,000 - 20,000r G= 7,800 NX= 1,800 T= 8,000 Y*= 40,000 At what value should the Fed set the real interest rate to eliminate any output gap?

13.33%

If the money supply equals 1,000, velocity equals 5, and real GDP equals 2,500, then the price level equals:

2

The Federal Open Market Committee (FOMC) judges that inflation at the rate of ___________ percent is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment.

2

If potential output equals $8 billion and actual output equals $10 billion, then this economy's output gap should be expressed as

25%

If planned aggregate spending in an economy can be written as PAE = 15,000+0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full-employment?

3%

Suppose you deposit some money in your saving account and the bank uses the compound interest rate. If the interest rate is 2 percent per year, it will take __________ years for the initial sum to double

36

According to the BLS website, what is the U.S. unemployment rate in January 2018?

4.1%

If there is 3 percent frictional unemployment, 4 percent structural unemployment, and -2 percent cyclical unemployment, then the natural rate of unemployment equals:

7%

The following provides data for an economy in a certain year. $50 consumption expenditure $40 imports $20 government purchases $30 construction of new homes and apts. $40 sales of existing homes and apts. $50 exports $10 government payments $20 household purchases of durable goods $10 beginning inventory $20 ending inventory $30 business fixed investment Given the data, compute the investment component of GDP.

70

You expect a share of EconNews.com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5%. How much is your risk premium?

8.0%

1,000,000 Population of 16 and older 80% Participation Rate 720,000 Employed Workers Based on the information, how big is the labor force?

800,000

Suppose the following information describes the economy: 8000 consumption 1000 investment 1000 government purchases 0 net exports 500 government transfers and payments 1700 government tax collections Private saving equals_____________; public saving equals______________; national saving equals______________.

800; 200; 1,000

In Econland, autonomous consumption equals 700, the marginal propensity to consume equals 0.8, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Autonomous expenditure equals:

900

Which of the following is an example of an intermediate good?

A new CD player sold to an automaker for installation in a car

Which of the following workers is most likely to lose their job during a recession?

Construction worker

For any period, a measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year

Consumer price index (CPI)

the process of dividing a nominal quantity by CPI to express the quantity in real terms

Deflating

the interest rate that commercial banks charge each other for very short-term (usually overnight) loans; because the Fed frequently sets its policy in this term, this rate is closely watched in financial markets

Federal funds rate

The basic measure of an economy's output is ________________, the market value of the final goods and services produced in a country during a given period.

Gross Domestic Product (GDP)

Which of the following is an example of frictional unemployment?

Hector looked for a job for five weeks after finishing college. He turned down several jobs that didn't fit his skills, but now has a job that requires the expertise he gained in college.

the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in CPI; prevents the purchasing power of the nominal quantity from being eroded by inflation

Indexing

In a certain economy, the components of planned spending are given by: C= 500+0.8(Y-T) - 300r Ip= 200 - 400r G= 200 NX= 10 T= 150 Given the information about the economy above, what would be the impact on induced expenditures of a one-percentage point increase in the real interest rate?

Induced expenditures would not change

Who is the current Chairman of the Board of Governors of the Federal Reserve System?

Jerome Powell

the same of currency outstanding and balances held in checking accounts

M1

all the assets in M1 plus some additional assets that are usable in making payment but at greater cost or inconvenience than currency or checks

M2

Exports - Imports

Net Exports

Y-Y*/Y* = -2(u-u*)

Okun's Law

compound interest

P(1+i)^n

A measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; measures the actual physical volume of production

Real GDP

the wage paid to workers measured in terms of purchasing power; calculated by dividing the nominal wage by the CPI for that period

Real wage

Saving divided by income

Saving rate

Which of the following is a flow variable?

The United States GDP in 2016

Which of the following is a real quantity?

The number of tons of steel produced in 2005

for any firm, the market value of its product or service minus the cost of inputs purchased from other firms

Value added

A large decrease in oil prices is an example of:

a positive inflation shock

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

a positive inflation shock

If you put a $20 bill in the pocket of your winter coat at the beginning of spring so that you will be surprised when you find it again next winter, you are using money as:

a store of value

the percentage of the working-age population in the labor force, either employed or looking for work

participation rate

a curve that shows the amount of output consumers, firms, government, and customers abroad want to purchase at each inflation rate, holding all other factors constant

aggregate demand curve

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has __________ and the U.S. dollar has _____________.

appreciated; depreciated

consumption spending that is NOT related to the level of disposable income

autonomous consumption

output per employed worker

average labor productivity

total taxes divided by total before-tax income

average tax rate

a situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositor to rush to withdraw their funds

banking panic

Saving done for the purpose of leaving an inheritance

bequest saving

a legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments

bond

Fiscal policy can shift

both aggregate demand and potential output

short-term fluctuations in GDP and other variables

business cycles

The two main responsibilities of the Federal Reserve System are to_______________ and to_______________.

conduct monetary policy; oversee financial markets

C = C(auto) +mpc(Y-T)

consumption function

GDP can be expressed as the sum of four types of expenditure:

consumption, investment, government purchases, and net exports

A long-lived good that is used in the production of other goods and services

capital good

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm:

changes prediction levels to meet demand

Menu costs are the costs of:

changing prices

The rate of increase of all prices except energy and food

core rate of inflation

regular interest payments mande to the bondholder

coupon payments

The interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond

coupon rate

The degree to which the public believe the central bank's promises to keep inflation low, even if doing so may impose short-run economic costs, is the ________________ of monetary policy

credibility

the extra unemployment that occurs during periods of recession

cyclical unemployment

Holding other factors constant, if a larger proportion of the population enters the labor force as a result of a growing social acceptance of women working, then the real wages of workers will ___________ and employment of workers will_______________.

decrease; increase

Economists refer to the talents, training, and education of workers as:

human capital

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2008, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2009, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same. Between 2008 and 2009, a typical family's cost of living:

decreased by 4.5%

When the central bank sells $1,000,000 worth of government bonds to the public, the money supply:

decreases by less than $1,000,000

the amount of wealth an individual or firm chooses to hold in the form of money

demand for money

changes in planned spending that are not caused by changes in output of the inflation rate

demand shocks

people who say they would like to have a job but have not made an effort to find one in the past four weeks

discouraged workers

If Alex uses $800 from her checking account to pay her credit card balance, wealth:

does not change

The slope of the consumption function:

equals the marginal propensity to consume

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will:

fall

Only ________________________________ are counted in GDP, since they are the only goods and services that directly benefit final users.

final goods and services (which include capital goods)

firms that extend credit to borrowers using funds raised from savers

financial intermediaries

decisions about how much the government spends and how much tax revenue it collects

fiscal policy

a measure that is defined per unit of time

flow

a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent

fractional-reserve banking system

the short-term unemployment associated with the process of matching workers with jobs

frictional employment

medium of exchange unit of account store of value

functions of money

the excess of government spending over tax collections

government budget deficit

The excess of government tax collections over government spending; equals public saving

government budget surplus

Purchases by federal, state, and local governments of final goods and services; government purchases do NOT include transfer payments, which are payments made by the government in return for which no current goods or services are received, nor do they include interest paid on the government debt

government purchases

To obtain a given real rate of return, lenders must charge a __________ nominal interest rate in the face of increasing inflation.

higher

Starting from full-employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must __________ in order to avoid a ____________.

increase the target inflation rate; recessionary gap

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ___________ econs, assuming that the public does not wish to change the amount of currency it holds.

increase to 4,667

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418. The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.68. The real cost of gasoline between 1972 and 2005:

increased

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by _____________ the real interest rate by ____________ percent

increasing; 2.0

To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be:

indexed

Someone who is committed to maintaining low inflation even at the short-run cost of reduce output and employment is called a(n):

inflation hawk

a sudden change in the normal behavior of inflation, unrelated to the nation's output gap

inflation shock

the delay between the date a policy change is needed and the date it is implemented

inside lag

_________________________________, which are used up in the production of final goods and services, are not counted in GDP, nor are sales of existing assets.

intermediate goods and services

the total number of employed and unemployed people in the economy

labor force

The duration of an unemployment spell is a measure of the:

length of time a spell of unemployment lasts

saving to meet long-term objectives such as retirement, college attendance, or the purchase of a home

life-cycle saving

a situation in which the AD and AS curves intersect at potential output Y*

long-run equilibrium

the amount by which consumption rises when disposable income rises by $1

marginal propensity to consume

the amount by which taxes rise when before-tax income rises by one dollar

marginal tax rate

the inside lag is relatively shorter for ____________ policy; the outside lag is relatively shorter for ______________ policy.

monetary; fiscal

Anti-inflationary monetary policy might be politically unpopular because it leads to

more unemployment and less economic growth

the saving of the entire economy, equal to GDP minus consumption expenditures and government purchases, or Y - C- G

national saving

the part of the total unemployment that is attributable to frictional and structural unemployment, u*

natural rate of unemployment

GDP measured in terms of current-year prices is called

nominal GDP

a quantity that is measured in terms of its current dollar value

nominal quantity

the purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply

open-market purchase

the sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply

open-market sale

Suppose the economy is initially in long-run equilibrium and the government reduces the marginal tax rate. What will happen to output and inflation if the effects the tax cuts are stronger on aggregate demand than on potential GDP?

output and inflation will increase

(Y-Y*)/Y*

output gap

the delay between the date a policy change is implemented and the date by which most of its effects on the economy have occurred

outside lag

the maximum sustainable amount of output (real GDP) that an economy can produce

potential output

Saving for protection against unexpected setbacks such as the loss of a job or a medical emergency is called ____________ saving.

precautionary

saving for protection against unexpected setbacks such as the loss of a job or a medical emergency

precautionary saving

In the long-run, output gaps are eliminated by:

price changes

the saving of the private sector of the economy is equal to the after-tax income of the private sector minus consumption expenditures (Y-T-C); can be further broken down into household saving and business saving

private saving

the saving of the government sector is equal to net tax payment minus government purchases (T-G)

public saving

money times velocity equals nominal GDP: M*V = P*Y

quantity equation

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r, the interest rate is currently 2 percent. If potential output equals 8,000, the central bank must ______________ the interest rate to close the _____________ gap.

raise; expansionary

The key indicator of a country's living standard and economic well-being is:

real GDP per person

a quantity that is measured in physical terms

real quantity

the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

risk premium

In an open market sale, the Federal Reserve ____________ government bonds and the supply of bank reserves __________.

sells; decreases

a situation where the AD and AS curves intersect at a level of real GDP that is above or below potential

short-run equilibrium

a measure that is defined at a point in time

stock

the long-term and chronic unemployment that exists even when the economy is producing at a normal rate

structural unemployment

The tendency for nominal interest rates to be high when inflation is high and low when inflation is low is known as:

the Fisher effect

A price index measures:

the average price of a given class of goods or services relative to the price of the same goods and services in a base year

A country's nominal exchange rate, e, is defined as the number of units of:

the foreign currency that one unit of the domestic currency will buy

If average labor productivity in two countries is the same, average living standards will be lower in the country with:

the lower share of population employed

Suppose last year Moe faced a 25% marginal tax rate. This year tax rates increase and now Moe daces 30% marginal tax rate. Moe may choose to work fewer hours this year because:

the opportunity cost of leisure has fallen

when imports exceed exports

trade deficit

when exports exceed imports

trade surplus

The end of a recession is called the:

trough

the number of unemployed people divided by the labor force

unemployment rate

a measure of the speed at which money changes hands in transactions involving final goods and services, or nominal GDP divided by the stock of money. (P*Y)/M

velocity

value of assets minus liabilities

wealth

the tendency of changes in asset prices to affect households' wealth and thus their consumption spending

wealth effect