Econ 203 Final Exam

RGDP Growth = $145,000 - $120,000 / $120,000 = 21% $ change Deflator = 119 - 100 / 100 = 19% The economy grew by 21% from 2020 to 2021 & the price level increased 19%

1. Calculate Nominal & Real GDP using year 2020 as the base year 2. Calculate the GDP Deflator using 2020 as the base year 3. Compute growth in the real economy & growth in price level

Technological process

According to the Solow Growth Model, the source of long-term economic growth is...

3.7%

According to the U.S. Bureau of Labor Statistics report on Friday, November 4 2022, the unemployment rate increased to ______ in October, 2022

The quantity of goods & services, the government, households, firms, & customers abroad want to buy

Aggregate demand includes

Fall & aggregate demand to decrease

An increase in household saving causes consumption to

Real GDP Growth: RGDP2 - RGDP1 / RGDP1 = $120,000 - $100,000 / $100,000 = 1 / 5 = 20%

By how much did GDP grow?

Output falls & prices increase

During periods of stagflation, what happens to output & prices in the economy?

Year 1: 100 x ($21,000 / $21,000) = 100 Year 2: 100 x ($25,000 / $21,000) = 123

Calculate CPI using year 1 as the base year

Labor, capital, natural resources & technological knowledge

Changes in what four variables will shift the long run aggregate supply curve?

Y/L = A x F(1, K/L, H/L, N/L)

Constant returns to scale

A budget surplus increases national saving (increases public savings which in turn increases national saving) & the supply of loanable fund which reduces the equilibrium interest rate & increases the equilibrium quantity of loanable funds & investment.

Imagine that the government starts with a balanced budget & then, because of a decrease in government spending (&/or increase in taxes), starts running a budget surplus. Draw a diagram showing the changes in equilibrium. What happens to the equilibrium values of the interest rate & investment?

Y = A x F(L,K,H,N)

Production Function

11%; 9.09

What is the reserve ratio R & the money multiplier of Econ203 Bank?

Less money is needed to buy the same amount of goods, so the value of money arises.

When the Consumer Price Index decreases from 140 to 125...

An open-market purchase of bonds by the Federal Reserve

Which of the following events could explain a shift of the money-supply curve from MS1 TO MS2?

The value of the bank's assets is less than the value of its liabilities.

A bank is insolvent when...

B in the short run & A in the long run

A decrease in taxes would move the economy from C to

The price level, but not real GDP

The principle of monetary neutrality implies that an increase in the money supply will increase...

John Maynard Keynes

Who is credited for the original development of the model of aggregate demand & aggregate supply?

(total income - taxes - consumption) + (taxes - government purchases) = investment (1,000 - 150 - C) + (150 - 200) = 250 (850 - C) + (-50) = 250 800 - C = 250 - C = -550 C = 550 Private Saving = 1,000 - 150 - 550 = $300

A closed economy has income of $1,000, government spending of $200, taxes of $150, & investment of $250. What is private saving?

Nominal GDP = P X Y = $8 x $1,800 = $14,400 Velocity V = P X Y / M = $14,400 / $3,600 = 4

Assume there is only one good in the economy, corn. The economy has enough labor, capital, & land to produce 1,800 bushels of corn. Velocity V is constant. In 2019, money supply was $3,600 & the price of corn was $8/bushel. Compute nominal GDP & velocity in 2019

43%

At the end of the first year, the relevant money-supply curve was the one labeled MS1. At the end of the second year, the relevant money-supply curve was the one labeled MS2. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for the second year?

The Board of Governors runs the Federal Reserve. It has seven members who are appointed by the U.S. president with the advice & consent of the Senate. The voting members of the Federal Open Market Committee include the 7 members of the Board of Governors & 5 of the 12 regional bank presidents, rotated among the 12 regional presidents, always including the president of the New York Fed. The chair of the BOG also serves as chair of the FOMC meets about every six weeks in Washington, D.C. to discuss the condition of the economy & to consider changes in monetary policy.

Compare the Board of Governors & the Federal Open Market Committee

Labor force = 158.9 + 5.8 = 164.7 million Unemployment rate = 5.8 / 164.7 = 0.035 x 100 = 3.52% Adult population = 158.9 + 5.8 + 99.7 = 264.4

Compute the labor force, unemployment rate, adult population, & labor force participation rate using this data

Consumer Price Index = Price of basket goods & services in current year / Price of basket in base year x 100

Consumer Price Index (CPI)

a) When Esther pays James $50 to mow her lawn, that transaction is part of GDP b) If James & Esther get married, & James continues to mow Esther's lawn, the value of the mowing is now left out of GDP because James' service is no longer sold in a market

Esther pays James $50 to mow her lawn. a) What happens with GDP? b) Will your answer to the previous question change if Esther & James get married?

When the price level increases, the purchasing power of money held on hand & in bank accounts declines. This decline makes people feel less wealthy so that they lend less. The reduction in lending causes the interest rate to rise. The rise in interest rates discourages spending on investment goods so that the aggregate quantity of goods & services demanded decreases. As the interest rate increases, the supply of dollars in the market for foreign-currency exchange falls as people wish to purchase fewer foreign assets. This makes the dollar appreciate which decreases net exports.

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment & net exports?

In response to tax reform, households are encouraged to save more than they previously saved.

Figure 1 below depicts a demand-for-loanable-funds curve & two supply-of-loanable-funds curves. Refer to Figure 1, which of the following events would shift the supply curve from S1 to S2?

S = I + NX

For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption & government purchases, then for an economy, it is true that

Capital equipment, inventories, & structures, including household purchases of new housing

For the purpose of calculating GDP, investment is spending on...

Time-consuming job search

Frictional unemployment is unemployment which arises due to...

100 x Nominal GDP / Real GDP

GDP Deflator

Y (GDP) = C (consumption) + I (investment) + G (government spending) + NX (net exports)

GDP equation

$17,000

Given the assets & liabilities of Econ203 Bank above, what is the value X of the loan that the bank has given out?

Y = C + I +G + NX (Y = GDP, C = Consumption, I = Investment, G = Government Purchases, NX = Net Exports)

Gross Domestic Product (GDP, Y)

Currency, demand deposits, traveler's checks, & other checkable deposits (M1 = $20.3 trillion as of September 2022)

How to calculate M1

Everything in M1 plus saving deposits, small time deposits, money market mutual funds, & a few minor categories (M2 = $21.5 trillion as of September 2022)

How to calculate M2

H / L; H = Human capital & L = Quantity of labor

Human Capital per worker equation

C to D

If the economy is in long-run equilibrium, then an adverse shift in short-run aggregate supply would move the economy from

4,000

If the government imposes a minimum wage of $8, then how many workers will be unemployed?

25,000 x 0.092 = 2,300 2,750 - 2,300 = $450

If the reserve requirement set by the Federal Reserve is 9.2% or 0.092, how much excess reserves is the bank currently holding?

Both the price level & the real GDP rise

Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected & stay high for some time

The price level is higher & real GDP is the same

Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected & stay high for some time. How is the new long-run equilibrium different from the original one?

The expected price level rises. New wage contracts are negotiated at higher wages.

Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected & stay high for some time. In the long run, what happens to the expected price level & what impact does this have on wages bargaining?

The economic system of a particular country determines how resources are allocated. Countries with a market-based economy produce a more efficient allocation of resources. In addition, the desire of firms to earn a profit within this type of system plays an important role beyond the profit itself. This can cause the economy to grow. On the other hand, countries with a command-based system often either control the means of production or determine prices & quantities that are produces through some type of central planning board. These systems produce an inefficient allocation of resources because central planners lack the necessary specialized knowledge to allocate resources efficiently. An example of a command-based economy is North Korea while that of a market economy is South Korea. The differences in economic well-being are telling.

In at least 3 sentences, discuss what economic institutions are & how they affect economic growth, within the context of our discussion in class. Make sure to give real-world examples to support your discussion.

0.6%

In the second quarter of 2022, Real GDP in the U.S. decreased at an annual rate of...

Output fall & prices rise

In the short-run an increase in the costs of production makes

$0

In the year 2020, Levi Ackerman sells a five-year-old care to Used Car Inc. for $3,000. In the same year, Used Car Inc. resells the car to Erwin Smith for $3,500. What is the contribution of this transaction to GDP in the year 2020?

Benjamin

In the year 2022, Lee, the owner of Econ203 Inc. decides to issue both stocks & bonds to raise money for the corporation. Andrew buys some of the shares of the corporation, while Benjamin buys the corporate bond. In the year 2023, Econ203 Inc. faces financial challenges & decides to file for bankruptcy. Which of the following people has/have priority in terms of repayment?

Andrew

In the year 2022, Lee, the owner of Econ203 Inc. decides to issue both stocks & bonds to raise money for the corporation. Andrew buys some of the shares of the corporation, while Benjamin buys the corporate bond. In the year 2023, Econ203 Inc. makes huge profits & decides to pay higher dividends. Which of the following people is/are more likely to benefit from this event?

Inflation rate in year 2 = GDP deflator in year 2 - GDP deflator in year 1 / GDP deflator in year 1 x 100

Inflation Rate

A small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP

Investment is

James is counted as employed & Elyse is counted as unemployed. James' job takes precedence over his non-labor force activity of going to school, as does Elyse's search for work

James & Elyse are high school students. James works after school at a fast-food restaurant, & Elyse is seeking a part-time job at the same establishment (also after school). James & Elyse are the people of interest.

Labor force = Employed + Unemployed

Labor Force equation

Lisa is considered employed. She falls into a group called unpaid family workers, which includes any person who worked without pay for 15 hours or more per week in a business or farm operated by a family member with whom they live. Unpaid family workers comprise a small portion of total employment.

Lisa spends most of her time taking care of her home & children, but she helps in her husband's computer software business all day, Friday & Saturday.

Sticky wages, sticky prices, & misperceptions about relative prices

List the three alternative explanations for the upward slope of the short run aggregate supply curve

The wealth effect, the interest-rate effect, & the exchange -rate effect

List the three reasons for why the aggregate-demand curve slopes downward

Marcus is considered unemployed. While he has not made any effort to seek a job, he is waiting to be recalled from layoff.

Marcus was laid off from the local plant of a major automaker when the firm began retooling to produce a new model car. Marcus knows he will be called back to work as soon as the model changeover is completed, & he also knows it is unlikely that he would be able to find a job for the period he is laid off; so, although he is available to work, he is not seeking a job.

& the labor-force participation rate are both unaffected.

Matilda just graduated from college. In order to devote all her efforts to college, she didn't hold a job. She is going to tour around the country on her motorcycle for a month before she starts looking for work. Other things the same, the unemployment rate...

d) All of the above

Money is... a) A medium of exchange b) A store of value c) A unit of account d) All of the above

Katherine Marie is not in the labor force. She is neither working nor has actively looked for work in the past 4 weeks. It also says nothing of her availability to work. She does not meet the activity test of unemployed people since she does not show any specific effort of.

Ms. Jenkins tells the interviewer that her teenage daughter, Katherine Marie, was thinking about looking for work in the prior 4 weeks but knows of no specific efforts she has made. The person of interest is her daughter, Katherine Marie.

Total Expenditure (Y) = C + I + G + NX

National Income Identity equation

N / L; N = Natural Resources & L = Quantity of labor

Natural Resources per worker equation

NX = X - M

Net Exports equation

More foreign bonds. The real exchange rate falls

Other things the same, if the U.S. residents want to buy

K / L; K = Physical capital & L = Quantity of labor

Physical Capital per worker equation

Productivity = Y / L; Y = Real GDP, & L = Quantity of labor

Productivity equation

M (money supply) x V velocity) = P (price level) x Y (real GDP)

Quantity equation

Real wage = W (price of labor) / P (price of goods & services)

Real Wage equation

Total value of production, using market prices from a specific base year to value each unit produced

Real gross domestic product is the...

a) Public holds the $100 as currency Money supply = $100 b) Assets: Reserves ($100), Loans ($0) Liabilities: Deposits ($100) Money supply = currency + deposits = 0 + 100 = 100 in a 100% reserve banking system, banks do not affect size of money supply c) First bank loans all but 10% of the deposit to Nick: Assets: Reserves ($10), Loans ($90) Liabilities: Deposits ($100) Depositors have $100 in deposits, Nick (the borrower) has $90 in currency Money supply = currency + deposits = 90 + 100 = $190

Suppose $1,00 of currency is in circulation. To determine banks' impact on money supply, we calculate the money supply in 3 different cases: a) No banking system b) 100% reserve banking system (banks hold 100% of deposits as reserves, make no loans) c) Fractional reserve banking system, R = 10%

Real GDP per person & productivity in Eurnesia

Suppose that a new government is elected in Eurnesia. The new government takes steps toward improving the court system & reducing government corruption. The citizens of Eurnesia find these efforts credible & outsiders believe these changes will be effective & long lasting. These changes will probably raise...

28.5 million (50 million x 0.60 = 30 million 30 million x 0.05 = 1.5 million 30 million - 1.5 million = 28.5 million)

Suppose that some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, & an unemployment rate of 5 percent. How many people were employed?

Junk Bond

Suppose that you are a broker, & a client tells you the following "I want a high return & I am willing to take a lot of risk to get it". What sort of bond would you recommend to the client?

Consumption, investment, government purchases, & net exports

Suppose the economy begins at point A. Decreases in what four variables could result in a movement to point D?

P2 & Y1

Suppose the economy starts at P3 & Y2. If there is a decrease in government purchases, identify the price & output levels that the economy would move to in the short run

Aggregate demand has decreased

Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P1 & Y1, then it must be the case that

8,000.0

Suppose the relevant money-demand curve is the one labeled MD1; also suppose the velocity of money is 4. If the money market is in equilibrium, then the economy's real GDP amounts to...

3.75-4.00

The Federal Open Market Committee (FOMC) seeks to achieve maximum employment & inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to ________ percent in November 2022.

The nominal interest rate minus inflation

The Fisher equation says that the real interest rate is equal to...

Number of working age adults not working & actively seeking employment divided by the number of working age adults who are either employed or actively seeking employment

The definition of the unemployment rate is the...

Fall & remain lower for a long time

The dictator of Turan has recently begun to arbitrarily seize farms belonging in his political opponents, & he has given the farms to his friends. His friends don't know much about farming. The courts in Turan have ruled that the seizures are illegal, but the dictator has ignored the rulings. Other things equal, we would expect that the growth rate in Turan will...

Why the aggregate-demand curve slopes downward

The exchange-rate effect helps explain what feature in the aggregate demand & aggregate supply model?

13.91%

The inflation rate, using CPI as the price index, is...

Gross domestic product

The market value of the final goods & services produced within the borders of a country during a particular period of time is...

Y2

The natural level of output occurs at

To compare the two figures, we can adjust the box office revenue for the 2001 Harry Potter movie to 2011 dollars: 318 million x 98.1/79.8 = $390.92 million Therefore, Harry Potter & the Sorcerer's Stone (2001) was more successful at the box office

The nominal gross box office revenues for Harry Potter & the Deathly Hallows Part 2 (2011) were $381 million. The nominal gross box office revenues of Harry Potter & the Sorcerer's Stone (2001) were $318 million. The GDP deflator in 2001 & 2011 was 79.8 & 98.1, respectively. Which Harry Potter movie was more successful at the box office? How do you know?

$10/shirt divided by $5/ice cream cone Rearranging gives us: $10/shirt x ice cream cone/$5 = 2 ice cream cones/shirt

The price of an ice cream cone is $5, & the price of a shirt is $10. What is the relative price of a shirt? The relative price of a shirt (The price of a shirt in terms of an ice cream cone):

Why the short run aggregate-supply curve slopes upward

The sticky-price theory helps explain what feature of the aggregate demand & aggregate supply model?

The slope of the aggregate-demand curve

The wealth effect, interest-rate effect, & exchange-rate effect are all explanations for

The GDP deflator & the consumer price index

Two common measures of the overall level of prices are...

Unemployment Rate = Number of unemployed / Labor force x 100

Unemployment Rate equation

1. Decline in prices 2. AD curve shifts left 3. Decline in prices of production 4. AD curve shifts left

Use the AD-AS diagram for the U.S. economy to show the effects of the following events: 1. A recession occurs in Canada 2. A ten-year-old investment tax credit expires 3. A decrease in oil prices 4. A decrease in production costs

43.4%

Using year 1 as the base year, real GDP growth from year 1 to year 2 is...

113.91

Using year 1 as the base year, the CPI level in year 2 is...

Sell treasury securities in order to withdraw reserves from the banking system

We understand that the Fed is pursuing a contractionary monetary policy (to fight inflation). Implementing this policy via Open Market Operations means that the Fed will...

1. Consumption 2. Does not affect GDP 3. Investment 4. Government Purchases

What components of GDP (if any) would each of the following transactions affect? 1. Uncle Fester buys a new refrigerator from a domestic manufacturer. 2. The Huang family buys an old Victorian house from the Ellis family. 3. As a tax accountant, you file your husband's tax returns. 4. California hires workers to repave Highway 66

M1 = Demand Deposits + Other Checkable Deposits + Traveler's Checks + Currency = $300 + $50 + $5 + $150 = $505 billion

What is the M1 money supply in Economica?

M2 = M1 + Small Time Deposits + Money Market Mutual Funds + Saving Deposits + Miscellaneous Categories = $505 + $80 + $200 + $65 + $30 = $880 billion

What is the M2 money supply in Economica?

8.2%

What is the annual inflation rate for the 12 months ended September 2022 released by the BLS in the U.S.?

The Classical Dichotomy is the theoretical separation of nominal variables & real variables. On the other hand, Money Neutrality is the proposition that changes in the money supply do not affect real variables. Doubling money supply causes nominal variables to rise but real variables stay the same.

What is the difference between Classical Dichotomy & Money Neutrality?

Increases & so aggregate demand shifts right

When the Fed buys bonds the supply of money

d) Growth rate of real GDP per person

Which of the following measures how the level of well-being in a country has changed over time? a) Growth rate of nominal GDP b) Growth rate of the GDP deflator c) Level of nominal GDP per person d) Growth rate of real GDP per person

b) The expected future profitability of a corporation influences the demand for that corporation's stock

Which of the following statements is correct? a) The owners of bonds sold by the Microsoft Corporation are part owners of that corporation b) The expected future profitability of a corporation influences the demand for that corporation's stock c) Perpetuities are short-term bonds d) When a corporation sells stock as a means of raising funds, it is engaging in debt finance

More workers post their resumes at LinkedIn.com, & more employers use LinkedIn.com to find suitable workers to hire

Which of the following would be most likely to reduce frictional unemployment?

e; Frictional unemployment in the market occurs because there is a gap between the time a person leaves a job and when he gets a new job, now websites like LinkedIn.com and other such services will help people and the employer meet, thereby reducing the frictional unemployment in the market.

Which of the following would be most likely to reduce frictional unemployment? a) The government eliminates the minimum wage b) The government increases unemployment insurance benefits c) A new law bans labor unions d) More workers post their resumes at LinkedIn.com, & more employers use LinkedIn.com to find suitable workers to hire e) Sectoral shifts become more frequent

Quantity of output = natural rate of output + a(actual price level - expected price level)

Write the mathematical expression that summarizes the three alternative explanations for the upward slope of the short run aggregate supply curve.

a) Real Interest Rate = Nominal Interest Rate - Inflation Rate Case 1: Real Interest Rate = 12% - 1% = 11% Case 2: Real Interest Rate = 24% - 12% = 12% The real interest rate is highest in CASE 2 b) Case 1: Interest Income = Nominal Rate x Amount Deposited = 12% x 10,000 = $1,200 Taxes paid on Interest Income = Tax Rate x Interest Income = 20% x $1,200 $240 Case 2: Interest Income = Nominal Rate x Amount Deposited = 24% x 10,000 = $2,400 Taxes paid on Interest Income = Tax Rate x Interest Income = 20% x $2,400 = $480 The most taxes paid is in CASE 2 c) Case 1: After-tax nominal interest rate = 0.80 x 12% = 9.6% After-tax real interest rate = 9.6% - 1% = 8.6% Case 2: After-tax nominal interest rate = 0.80 x 24% = 19.2% After-tax real interest rate = 19.2% - 12% = 7.2%

You deposit $10,000 in the bank for one year. CASE 1: Inflation = 1%, Nominal interest rate = 12% CASE 2: Inflation = 12%, Nominal interest rate = 24% a) In which case is the real interest rate the highest? b) In which case do you pay the most taxes on interest income? c) Compute the after-tax nominal interest rate, then subtract inflation to get the after-tax real interest rate for both cases.

a) Public Savings = Tax Revenue - Government Spending = -$1.2 trillion (Whenever there is a budget deficit, it simply means there is negative public saving (probably due to borrowing) b) Tax Revenue = $1.3 trillion (Public Savings = Tax Revenue - Government Spending; can be rearranged as Tax Revenue = Public Savings + Government Spending = -1.2 + 2.5 = $1.3 trillion) c) Private Savings = $4.7 trillion (Private Saving = Y - C - T = 19 - 13 - 1.3 = $4.7 trillion) d) National Saving = $3.5 trillion (National Saving = Private Saving + Public Saving = $4.7 trillion + (-$1.2 trillion) = $3.5 trillion) e) Investment = National Saving = $3.5 trillion

You have the following information: GDP = $19 trillion, Consumption = $13 trillion, Government Spending = $2.5 trillion, & Budget Deficit = $1.2 trillion. Find the following: a) Public saving b) Tax revenue c) Private saving d) National saving e) Investment (Hint: Budget Deficit occurs when G > T)

Amount in today's (2022) dollars = $310 x 256.6 / 30.9 = $2,574.30

Your great grandpa's first full time job was a car mechanic in 1963, & he was earning $310/month CPI in 1963: 30.9 CPI in 2022: 256.6 How much are great grandpa's earnings in current dollars?

a) 9,240 x (251.1 / 130.7) = $17,751.8 = (35,830 - 17,751.80 / 17,751.80) x 100 = 101.84% 1,908 x (251.1 / 130.7) = $3,665.60 = (10,230 - 3,665.60 / 3,665.60) x 100 = 179.1% $906 x (251.1 / 130.7) = $1,740.60 = (3,660 - 1,740.60 / 1,740.60) x 100 = 110.3%

a) Express the 1990 tuition figures in 2018 dollars, then compute the percentage increase in real terms for all 3 types of schools b) Which type experienced the largest increase in real tuition costs?