Econ 202 Midterm 2

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Consider the following table where each column is the value for the corresponding variable in the following list respectively. Y (GDP/Output/Income): 2500, 5500, 8500 C (consumption expenditure): 2000, 4200, 6400 Ip (planned investment) : 300, 400, 500 G (Gvt. purchases): 800, 800, 800 X (Exports): 600, 600, 600 IM (Imports): 200, 500, 800 T (Govt. Revenue through taxes): 100, 200, 300 At output 2500, the amount of unplanned investment is ______.

-1000; Actual Investment = (planned invest. + unplanned change in inventories) -Unintended investment is equal to the difference between output and planned expenditures = Y - {C+Ip+G+X-IM} = 2500 - (2000 + 300 + 800 + 600 - 200) = (2500 - 3500) = -1000

If C = 400 + (4/5)(Y-T) G = 300 NX = -100 T = 500 Ip = 1000 Then the autonomous component of planned expenditure is ______.

1,200; Autonomous Component: independent of output -C & T are both induced expenditures, so they are not a part of this component = 1000 + 300 + -100 = 1,200

1,500; Actual Investment = (planned invest. + unplanned change in inventories) Output = 8500 Unplanned Chang. Invenstment = Y - {C+Ip+G+X-IM} = 8500 - (6400 + 500 + 800 + 600 - 800) = (8500 - 7500) = 1,000 Actual Investment= (Planned in. + 1,000) Actual Investment= (500 + 1,000) = 1,500

1/30; MTR= (Change in T/Change in Y) = (100/3,000) = 1/30

Assuming equilibrium, or actual, output is 12500, and there is an expansionary gap of -1000, then potential output, Y*, is equal to _____ .

11,500; Actual Output + expansionary gap = potential output = (12,500 + -1000) = 11,500

Assuming equilibrium, or actual output, is 10500, and there is a recessionary gap of 1000, then potential output, Y*, is equal to _____ .

11,500; Y* = (Actual Output + Recessionary Gap) Potential Output (Y*) = 11,500

If C = 400 + (2/3)(Y-T), G = 300, NX = -100, T = 500, and Ip = 1000, then the marginal expenditure rate is _____ and the value of the income-expenditure multiplier is _____.

2/3, 3; MER= Fraction within C Income Ex. Multiplier= (1/ ((1 -(MER))) = 1/ (1 - (2/3)) = 3

If C = 400 + (2/3)(Y-T), G = 300, NX = -100, T = 500, and Ip = 1000, then the marginal propensity to consume out of income, Y, is ____ .

2/3; MPC= the amount by which consumption rises when current disposable income rises by one dollar =Pulled from the consumption equation

Consider the following table where each column is the value for the corresponding variable in the following list respectively. Y (GDP/Output/Income): 2500, 5500, 8500 C (consumption expenditure): 2000, 4200, 6400 Ip (planned investment) : 300, 400, 500 G (Gvt. purchases): 800, 800, 800 X (Exports): 600, 600, 600 IM (Imports): 200, 500, 800 T (Govt. Revenue through taxes): 100, 200, 300 The MER (marginal expenditure rate) is equal to ______.

2/3; PAE= C + Ip + G + NX = C + MPC(Y-T) + Ip + G + NX (filling in possible answers for MPC) Y = 2200 + (.666)(2500 - 100) + 300 + 800 + 600 Y= 2200 + 1600 + 300 + 800 + 600 Y= 5,500, which means MPC/MER has to be 2/3

Consider the following table where each column is the value for the corresponding variable in the following list respectively. Y (GDP/Output/Income): 2500, 5500, 8500 C (consumption expenditure): 2000, 4200, 6400 Ip (planned investment) : 300, 400, 500 G (Gvt. purchases): 800, 800, 800 X (Exports): 600, 600, 600 IM (Imports): 200, 500, 800 T (Govt. Revenue through taxes): 100, 200, 300 The MPC (marginal propensity to consume) out of disposable income, Y-T, is ______.

22/29; C= c0 + MPC(Y - T) c0 = autonomous consumption MPC= Change in the consumption/Change in income Change in Income (Y) = (8500 - 2500) = 6,000 Change in Consumption (C) = (6400 - 2000) = 4,200 = (4,200/ 6,000)

Consider the following table where each column is the value for the corresponding variable in the following list respectively. Y (GDP/Output/Income): 2500, 5500, 8500 C (consumption expenditure): 2000, 4200, 6400 Ip (planned investment) : 300, 400, 500 G (Gvt. purchases): 800, 800, 800 X (Exports): 600, 600, 600 IM (Imports): 200, 500, 800 T (Govt. Revenue through taxes): 100, 200, 300 The value of the income-expenditure multiplier is _____.

3; Income Exp. Multiplier = (1/1 - MPC) MPC = Change in C/ Change in Y C: (4200 - 2000) = 2,200 Y: (5500 - 2500) = 3,000 (2,200/ 3,000) = .73333 1/1 - .73333 = .266666 1/.26666 = 3

If C = 400 + (4/5)(Y-T), G = 300, NX = -100, T = 500, and Ip = 1000, then at output, Y, equal to 8000, unintended investment, Iu, is equal to _____.

400; Iu + Ip = Investments 8000= 400 + (4/5)(8000-500) + 300 + (1000 - Iu) +-100 8000 = 400 + 300 +-100 + 6,000 + (1000 - Iu) 8000= 6,600 +1000 - Iu (subtract 6,600 from both sides) 1,400 = 1000 - Iu Iu = 400

400; Private Saving= ((Y-T)-C) Spr= ((2500 - 100) - 2000) 2400 - 2000 =400

5,500; Take average of Y: =(2,500 + 5,500 + 8,500)/3 =5,500

Consider the following table where each column is the value for the corresponding variable in the following list respectively. Y (GDP/Output/Income): 2500, 5500, 8500 C (consumption expenditure): 2000, 4200, 6400 Ip (planned investment) : 300, 400, 500 G (Gvt. purchases): 800, 800, 800 X (Exports): 600, 600, 600 IM (Imports): 200, 500, 800 T (Govt. Revenue through taxes): 100, 200, 300 The equilibrium level of NATIONAL saving is ______.

500; National Saving (S) = Private Saving + Public Saving Spr= ((Y-T)-C) Spu= (T - G) = ((Y-T)-C) + (T - G) = ((5,500 - 200) - 4200) + (200 - 800) = 1,100 + -600 = 500

If C = 400 + (4/5)(Y-T) G = 300 NX = -100 T = 500 Ip = 1000 Then equilibrium income, Y, is equal to _____ .

6,000; Y = C+Ip+G-IM Y = 400 + (4/5)(Y - 500) + 1000 + 300 + -100 Y = (400 + 1000 + 300 + -100) + (.8)(Y-500) Y= 1,600 + .8Y - 400 1Y= 1,200 + .8Y .2Y = 1,200 Y= 6,000

Output Gap =

= ((Y - Y*)/(Y*)) * 100 ((actual output - potential output)/potential output) X 100

Cyclical Unemployment =

= (u - u*) (actual unemployment rate - natural unemployment rate)

13. Dave's Mirror Company expects to sell $2,000,000 worth of mirrors and to produce $1,750,000 worth of mirrors in the coming year. The company purchases $500,000 of new equipment during the year. Sales for the year turn out to be $1,500,000. ACTUAL investment by Dave's Mirror Company equals _____ and PLANNED investment equals _______. A) $750,000; $250,000 B) $250,000; $500,000 C) $500,000; $500,000 D) $250,000; $250,000 E) $750,000; $750,000

A; -If Dave's Mirror Company expects to sell $2,000,000 worth of mirrors and plans to produce only $1,750,000 worth of mirrors in the coming year, then it plans to reduce inventories by $250,000. = Planned investment= -$250,000 -In addition, it plans on purchasing $500,000 of new equipment so total planned investment is the sum of the two = $250,000. -Sales for the year turn out to be only $1,500,000 resulting in an actual inventory increase of $250,000 (since it is producing $1,750,000 worth of mirrors). -Actual investment = (increase in inventories added + new equipment purchases) =$250,000 + $500,000 = $750,000 -(Because sales were $500,000 lower than expected, actual investment was $500,000 higher than planned.)

21. Assume for 2000, nominal GDP is $11000 and the GDP deflator is 110. For 2001, nominal GDP is $14400 and the GDP deflator is 120. Then the change in REAL GDP between 2000 and 2001 is approximately A) 20% B) 31% C) 9% D) 22% E) 43%

A; -If nominal GDP = $11000 when the GDP deflator is 110, then real GDP =($11000/110)*100 = $10000. -If nominal GDP = $14400 when the GDP deflator is 120, then real GDP = ($14400/120)*100 = $12000. -Percentage Change= (New-Old)/(Old) = $2000/$10000 =20%.

9. In Macroland potential output equals $200 billion and the natural rate of unemployment is 5 percent. If the actual unemployment rate is 3 percent, then the output gap equals: A) -$8 billion. B) -$2 billion. C) -$4 billion. D) $4 billion. E) $8 billion.

A; -If the natural rate of unemployment = 5% and the actual rate of unemployment = 3%, then: -this is an economy with an expansionary gap and with a cyclical unemployment rate of negative 2%. -Thus, actual output is above potential output as indicated by the low actual unemployment rate. -Okun's law indicates a 2% gap for each 1% of cyclical unemployment. -The gap here, then, = -4%, or negative 4% of $200 billion -Which = negative $8 billion. -By definition, expansionary gaps are negative. -Actual output = $208 billion (although that was not asked).

15. Y: 1000, 3000, 5000 C: 1000, 2500, 4000 Ip: 800, 800, 800 G: 800, 800, 800 X: 600, 600, 600 IM: 200, 700, 1200 T: 100, 300, 500 For the table above the value of the marginal tax rate is A) .1 B) .2 C) .3 D) .4 E) .5

A; -The value of the marginal tax rate is the tax bracket. -Marginal Tax Rate= additional tax owed on the last dollar earned -That is = ΔT/ΔY. -Take any two rows, find the difference in Y and divide that difference into the change in the value of T for the same two rows. T: (300-100) = 200 Y: (3000 - 1000) = 2000 = (200/ 2000) = .1

17. Y: 1000, 3000, 5000 C: 1000, 2600, 4200 Ip: 300, 300, 300 G: 500, 500, 500 X: 600, 600, 600 IM: 900, 1000, 1100 T: 100, 300, 500 For the table above, the level of unintended investment at income 5000 is: A) 500 B) -2200 C) 800 D) 0 E) -600

A; -Unintended investment is equal to the difference between output and planned expenditures = Y - {C+Ip+G+X-IM}. -In this case, unplanned investment = (5000 - {4200+300+500+600-1100}) = (5000 - 4500) = 500.

26. If the income velocity of money and real output are both constant, then the equation of exchange leads us to the conclusion that if the money supply, M, is doubled, then _____ A) the price level doubles B) the price level remains constant C) nominal output remains constant D) nominal output drops in half E) the price level drops in half.

A; IF M*V = P*Y and if V and Y are constant then: = (M/P) = (V/Y) = k, some constant. Therefore, if M is doubled, k can stay constant only if P doubles as well.

23. The money supply is to GDP as A) stock is to flow. B) stock is to stock. C) flow is to stock. D) flow is to flow. E) induced is to autonomous.

A; Stock is to flow

1. The coupon rate on a new bond issue, generally, will be higher if the term is _______, default risk is _______, and is ________ for federal income tax purposes. A) longer; higher; taxable B) shorter; lower; exempt C) longer, higher; exempt D) shorter; higher; taxable E) longer; lower; taxable

A; longer, higher, taxable

7. If the Federal Reserve wants to implement expansionary monetary policy, it should: A) reduce reserve requirements. B) increase the discount rate. C) conduct open-market sales. D) reduce the amount of reserves borrowed from it by commercial banks. E) increase the federal funds rate.

A; reduce reserve requirements

9. In Okunland, a country that operates according to Okun's law, potential GDP equals $8,000 billion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real GDP in Okunland? A) $7,360 billion B) $7,680 billion C) $7,520 billion D) $8,320 billion E) $8,480 billion

B; -According to Okun's law, twice the rate of cyclical unemployment is equal to the output gap as a percent of potential output. -Here, the cyclical unemployment rate = (actual rate of unemployment - natural rate of unemployment) = 2%. -Okun's law then implies that the output gap is 4% of potential output (since the gap is twice the cyclical unemployment rate). -The gap, therefore, = (.04 * $8000b) = $320b. -With a positive recessionary gap of $320b: -Actual real output must be: = ($8000b - $320b) = $7680b.

18. Y: 1000, 3000, 5000 C: 1000, 2600, 4200 Ip: 300, 300, 300 G: 500, 500, 500 X: 600, 600, 600 IM: 900, 1000, 1100 T: 100, 300, 500 For the table above, the value of the income-expenditure multiplier is A) 3 B) 4 C) 5 D) 6 E) 2

B; -The value of the income-expenditure multiplier can be found in two ways. -First, using the formula, = 1/(1-MER) where MER is the marginal expenditure rate -MER= ΔPAE/ΔY; that is the change in planned aggregate expenditures divided by the change in Y. -Using the first and third rows, MER = 3000/4000 (after using that new planned expenditure column) = MER = 3/4. -Therefore, the income-expenditure multiplier is 1/(1-(3/4)) or 1/(1/4) or 4. -The second approach is to determine the amount of expenditure necessary to change equilibrium income. -Since equilibrium income = 3000, it is necessary to determine the change in, say, G, necessary to make, say, 4500 the new equilibrium income. -If G rises to 1000 from 500, then 5000 will be the equilibrium level of income since planned expenditures will also equal 5000 at output 5000 with G = 1000. -The income-expenditure multiplier, therefore, will equal ΔYe/ΔG, or (5000-3000)/(1000-500) = 4.

15. Y: 1000, 3000, 5000 C: 1000, 2600, 4200 Ip: 300, 300, 300 G: 500, 500, 500 X: 600, 600, 600 IM: 900, 1000, 1100 T: 100, 300, 500 A For the table above, the value of the marginal propensity to consume (MPC) OUT OF INCOME Y is A) .75 B) .80 C) .85 D) .50 E) 1.60

B; The value of the marginal propensity to consume (MPC) OUT OF INCOME Y is ΔC/ΔY between any two rows. Using the first and third rows: ΔC = 3200 ΔY = 4000. = (ΔC/ΔY) = .80

22. When investment spending increases, the multiplier having a value greater than one reflects that A) autonomous spending increases as well. B) consumption spending increases as well. C) investment spending increases more than by the original increase. D) nominal GDP decreases by more than investment spending increases. E) investment rises by more than the increase in private saving.

B; consumption spending increases as well.

19. The components of planned aggregate expenditures that change when real GDP changes are known as A) unplanned expenditures. B) induced expenditures. C) planned expenditures. D) actual expenditures. E) average expenditures.

B; induced expenditures

11. In the LONG RUN, actual output is assumed to be determined by: A) the actual unemployment rate. B) potential output. C) total planned spending. D) the frictional unemployment rate. E) the inflation rate.

B; potential output

20. If the price of a shmoo increases from $100 to $120 during a year and if the simple nominal return on a bank deposit is 50% during the same year, then the simple real return from the deposit is: A) 10%. B) 20%. C) 25%. D) 30%. E) 35%.

C (25%); (.50/.20) = 25%

21. For a hypothetical economy in a given year, the GDP deflator is 80, nominal GDP is $4000 and real consumption is $3000. What is the value of real GDP for that year? A) 4000 B) 3000 C) 5000 D) 3750 E) 3200

C; -Real GDP is nominal GDP deflated, or Real GDP = (Nominal GDP/P)*100. -Therefore, RGDP = ($4000/80)*100 = $5000.

5. Suppose there is $24 million of cash in existence with 2/3 of it held in bank vaults as reserves. If the required reserve to checking the deposit ratio is 20%, how large will the money supply be if banks hold no excess reserves? A) $80 million B) $84 million C) $88 million D) $24 million E) $120 million

C; Money Supply = (Currency held by public + bank reserves/desired reserve-deposit ratio) -If there is $24 million of cash in existence with (2/3) or $16 million of it held in bank vaults as reserves, then the cash in the hands of the public is the difference, or: = (24m - 16m)= 8 million (which is part of the money supply) -In addition, if bank reserves = $16 million and if the required reserve to checking deposit ratio = 20% with banks holding no excess reserves, then the actual reserve to deposit ratio is 20% = (Reserves/Deposits) = .20 =($16 million/Deposits) = (1/5) -So Deposits = $80 million (by cross multiplying). -Money supply= ($80 million in checking account deposits + $8 million of cash in the hands of the public) Money Supply = (80m + 8m) = $88 million

2. You have just won $20 million in the Michigan lottery! The state promises to pay you $20 million at the end of one year. How much money would the state be willing to offer and you be willing to accept today in exchange for the $20 million payment one year from now if the market rate of interest is 25 percent (ignoring taxes)? A) $25 million B) $15 million C) $16 million D) $5 million E) $18 million

C; Present value, V0, is determined by: V1 = V0*(1+i) V1 = future value one year into the future i = promised interest rate In this case, $20m = V0*(1+.25), or V0 = ($20m/1.25) = $16m.

13. Dave's Mirror Company expects to sell $4,000,000 worth of mirrors and to produce $4,250,000 worth of mirrors in the coming year. The company purchases $500,000 of new equipment during the year. Sales for the year turn out to be $3,750,000. UNPLANNED investment by Dave's Mirror Company equals _____ and PLANNED investment equals _______. A) $500,000; $750,000 B) $500,000; $250,000 C) $250,000; $750,000 D) $250,000; $500,000 E) $500,000; $500,000

C; Unplanned =$250,000 Planned = $750,000 -Unplanned investment= (the difference between output and planned expenditures) = (4,250,000 - 4,000,000) = $250,000 -Actual Investment = (planned invest. + unplanned change in inventories) -If Dave's Mirror Company expects to sell $4,000,000 worth of mirrors and plans to produce $4,250,000 worth of mirrors in the coming year, then it plans to increase inventories by $250,000. = Planned investment= $250,000 + eq. purchases Planned Investment= $750,000

6. The voting members of the Federal Open Market Committee consist of _____ governors of Board of Governors and _____ of the regional Federal Reserve Bank presidents including the president of the Federal Reserve Bank of _____. A) 5; 7; New York B) 5; 12; Chicago C) 7; 5; New York D) 7; 12; San Francisco E) 5; 7; Chicago

C; 7 governors, 12 b.o.d, Bank of New York

3. Each of the following are examples of financial intermediaries EXCEPT: A) commercial banks. B) state government pension funds. C) bond markets. D) insurance companies. E) mutual funds.

C; Bond markets

12. When banks borrow funds via the Fed's discount window: A) interest rates rise. B) the reserve/deposit ratio falls. C) bank reserves are increased and, ultimately bank deposits and the money supply are likely to increase. D) bank reserves are decreased and, ultimately bank deposits and the money supply are likely to increase. E) bank reserves are increased and, ultimately bank deposits and the money supply are likely to decrease.

C; bank reserves are increased and, ultimately bank deposits and the money supply are likely to increase.

7. The interest rate the Federal Reserve charges commercial banks to borrow reserves from the Federal Reserve is called the _______ A) federal funds rate. B) prime rate. C) discount rate. D) commercial bank rate. E) federal money market interest rate.

C; discount rate

22. It must be true that the steeper the planned expenditure line, the A) greater is autonomous expenditure. B) smaller is autonomous expenditure. C) larger the multiplier. D) smaller the multiplier. E) greater is the average propensity to consume.

C; larger the multiplier

5. Suppose there is $24 million of cash in existence with $20 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 25%, how large will the money supply be if banks hold no excess reserves? A) $24 million B) $30 million C) $80 million D) $84 million. E) $104 million.

D; -If there is $24 million of cash in existence with $20 million of it held in bank vaults as reserves, then the cash in the hands of the public is the difference, or $4 million, which is part of the money supply. -In addition, if bank reserves = $20 million and if the required reserve to checking deposit ratio = 25% with banks holding no excess reserves, then the actual reserve to deposit ratio is 25% = (Reserves/Deposits) = .25 =($20 million/Deposits) = (1/4) So Deposits = $80 million (by cross multiplying). Money supply= ($80 million in checking account deposits + $4 million of cash in the hands of the public) =$84 million.

25. If output, Y, is equal to $1000 when consumption C = 750, actual investment I = 100, and government spending = 50, then A) the MPC = 3/4. B) the MER = 9/10. C) saving = 250. D) net exports = 100. E) unintended investment is 100.

D; -The government defines all output to be purchased and measures GDP by purchases. -Therefore, it must be true that output equals actual purchases; that is = Y = C+I+G+NX. -Substituting, 1000 = 750+100+50+NX. 1000 = 900 + NX Net Exports = 100

1. If the principal amount of a bond is $2,000, the coupon rate is 6%, the inflation rate is 4%, and the return (yield-to-maturity) to a current holder of the bond is 8%, then the annual interest payments made to the holder of the bond are _____ per year. A) $160 B) $40 C) $80 D) $120 E) $200

D; The annual interest payment is equal to the coupon rate multiplied by the principal value of the bond; that is, = $2000*.06 = $120.

6. The Federal Reserve System first began operations in: A) 1945. B) 1789. C) 1898. D) 1914. E) 1933.

D; 1914

4. Barter can definitely occur if there is A) a unit of account. B) an asset that is a store of value. C) a medium of exchange. D) a double coincidence of wants. E) production specialization.

D; a double coincidence of wants

12. An open-market sale of government securities by the Fed will: A) increase bank reserves, and ultimately the money supply is likely to increase. B) decrease bank reserves, and ultimately the money supply is likely to increase. C) increase bank reserves, and ultimately the money supply is likely to decrease. D) decrease bank reserves, and ultimately the money supply is likely to decrease. E) decrease bank reserves, but increase the reserve/deposit ratio.

D; decrease bank reserves, and ultimately the money supply is likely to decrease.

14. Short-run equilibrium output is the level of output at which actual output: A) equals potential output. B) is greater than potential output. C) is less than potential output. D) equals planned aggregate expenditure. E) is greater than planned aggregate expenditure.

D; equals planned aggregate expenditure.

23. GDP is to government budget deficit as A) stock is to flow. B) stock is to stock. C) flow is to stock. D) flow is to flow. E) autonomous expenditure is to induced expenditure.

D; flow is to flow.

25. If consumption is $9 when aftertax disposable income is $10, then: A) investment spending is $1 B) the MPC is 0.9. C) taxes equal $1. D) none of the other choices necessarily. E) the MPC is 0.1.

D; none of the other choices necessarily

14. In the short run with predetermined prices, when output is less than planned expenditures: A) potential output is greater than GDP. B) potential output is less than GDP. C) potential output equals GDP. D) planned investment is greater than actual investment. E) planned investment is less than actual investment.

D; planned investment > actual investment.

10. According to the Keynesian model, if firms maintain preset prices in the short run, then the primary cause of outputs gaps changes in: A) potential output. B) the frictional unemployment rate C) technology D) planned spending E) the natural unemployment rate.

D; planned spending

24. Frictional unemployment is: A) the unemployment that results when people retire or leave the labor force. B) the additional unemployment not captured in official statistics resulting from discouraged workers and the involuntary part-time workers. C) the extra unemployment that occurs during slowdown in the rate of economic expansion. D) the short-term unemployment that is associated with normal labor market turnover. E) the long-term and chronic unemployment that exists even when the economy is producing at a normal rate.

D; the short-term unemployment that is associated with normal labor market turnover.

24. Structural unemployment occurs because: A) of normal labor market turnover. B) workers differ in their skills and experience. C) jobs differ in their location, skills required, and working conditions. D) there are long-term mismatches between workers' skills and jobs available. E) the economy is experiencing a period of unusually low production.

D; there are long-term mismatches between workers' skills and jobs available.

16. Y: 1000, 3000, 5000 C: 1000, 2500, 4000 Ip: 800, 800, 800 G: 800, 800, 800 X: 600, 600, 600 IM: 200, 700, 1200 T: 100, 300, 500 For the table above, the value of the marginal expenditure rate (MER) is A) 0.80 B) 1.00 C) 0.85 D) 0.75 E) 0.50

18. Y: 1000, 3000, 5000 C: 1000, 2500, 4000 Ip: 800, 800, 800 G: 800, 800, 800 X: 600, 600, 600 IM: 200, 700, 1200 T: 100, 300, 500 For the table above, the value of the income-expenditure multiplier is A) 3 B) 4 C) 5 D) 6 E) 2

20. If the simple inflation rate over one year is 10% and if a bank deposit grows from $1000 to $1430, then the simple annual real return from the deposit is A) 10%. B) 43%. C) 33%. D) 20%. E) 30%.

E; -If the simple inflation rate over one year is 10% and if a bank deposit grows from $1000 to $1430, then the simple annual real return from the deposit is determined by measuring the percentage change in purchasing power over the period. -If, say, the price of a shmoo is $10 (you could choose anything), then the $1000 would purchase 100 shmoos. -At the end of the year, the shmoo price will have advanced by 10%, to $11 = (1+.10)*$10. -The $1430 can then purchase $1430/$11 per shmoo or 130 shmoos. -The percentage increase in purchasing power is: = (New-Old)/(Old) =(130 - 100)/100 = (30/100) = 30%.

2. Ralph 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 (and after receiving the coupon payment for the first year), Ralph sells the bond in the bond market. What price (rounded to the nearest dollar) will Ralph receive for his bond if the prevailing interest rate is 4%? A) $9,615 B) $10,392 C) $9,811 D) $10,400 E) $10,192

E; -Principal amount = $10,000 -Coupon rate = 6% paid annually - Bond pays= (.06*$10,000) of interest annually = $600. -After the first year's interest is collected, the bond will pay another $600 at the end of the second year as well as the principal amount of $10,000 for a total of $10,600. -Prevailing interest rate = 4%, people will pay value, P, for Ralph's bonds so that they can earn that 4% on it. -Therefore: = P*(1.04) = $10,600; -They will pay the present value of the $10,600 at a 4% interest rate since if they pay that, they will earn the 4% when the bond matures. P = $10,600/1.04 = $10,192.

16. Y: 1000, 3000, 5000 C: 1000, 2600, 4200 Ip: 300, 300, 300 G: 500, 500, 500 X: 600, 600, 600 IM: 900, 1000, 1100 T: 100, 300, 500 For the table above, the level of equilibrium private saving equals A) 0 B) 400 C) 800 D) 300 E) 100

E; -The level of equilibrium private saving is the level of private saving at equilibrium income. -Equilibrium income= (output = planned expenditures) -Creating an eighth column to the right equal to planned expenditures equal to = C+Ip+G+X-IM, the following values are obtained for each of the rows respectively: 1500, 3000, 4500. -Therefore, output 3000 is the equilibrium level of output since all of it is willingly purchased; that is, planned expenditures = 3000. -At equilibrium income 3000, consumption is 2600, and taxes are 300. Therefore, equilibrium private saving is (Y-T)-C = 100.

19. Equilibrium aggregate demand is the level of output when A) actual expenditures equal output. B) unintended investment equals actual investment C) unplanned inventory change is positive D) unplanned inventory change is negative E) actual expenditures equal planned expenditures.

E; actual expenditures = planned expenditures.

3. When the interest rate on newly issued bonds decreases, then for most existing bonds: A) the coupon decreases. B) the coupon increases C) price decreases. D) term decreases. E) price increases.

E; Price increases

11. Stock (equity) prices decrease when expected future dividends ____, interest rates _____, and/or the additional return required due to risk ______ A) increase; increase; increases B) increase; increase; decreases C) decrease; decrease; increases D) increase; decrease; decreases E) decrease; increase; increases

E; decrease, increase, increases

8. When actual (or equilibrium) output is greater than potential output there is a(n): A) government budget deficit B) a negative natural unemployment rate C) positive cyclical unemployment rate D) recessionary gap that is positive E) expansionary gap that is negative.

E; expansionary gap that is negative

8. The natural rate of unemployment is the unemployment rate when there is only: A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) structural and cyclical unemployment. E) structural and frictional unemployment.

E; structural and frictional unemployment

4. When money is used as a yardstick for measuring economic value, it serves as a: A) medium of exchange. B) way of meeting a double coincidence of wants. C) means of holding wealth. D) way of diversifying wealth. E) unit of account.

E; unit of account.

An equal decrease in government expenditures and taxes has no effect on planned aggregate expenditures.

False

Autonomous planned expenditures is the part of planned expenditures that changes when the income changes.

False

If a firm sells more than it expected, its actual investment will be greater than its planned investment.

False

In the basic Keynesian model, in the SHORT-RUN, output will always adjust to potential output.

False

According to our model, in the short-run, firms will adjust prices to meet demand.

False;

In our basic Keynesian model, the four components of planned aggregate expenditures are actual Consumer Expenditure (C), planned Investment (Ip), actual Government spending (G) and actual Net Exports (X-IM).

True

In the aggregate, within the short-run basic Keynesian model, when output equals PLANNED expenditures, there is no unintended change in inventories.

True

In the basic Keynesian model, an expenditure is induced if it changes when income changes.

True

The Keynesian model assumes aggregate consumption spending is determined primarily by income.

True

______ is a flow variable while ______ is a stock variable

consumption; debt

Real Interest Rate=

r= (i - π) r= (nominal interest rate - rate of inflation)

If consumption spending is $600 when income, Y, is $800, then the marginal propensity to consume out of income, Y, is _______.

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