Econ 302 Exam 1

Which best describes changes in US GDP over time?

Real GDP rises over time, but its growth is not steady.

Firm has the Cobb-Douglas production function 𝑌 = 𝐴𝐾^a 𝐿^(1-a) . Incompetitive firm and factor markets, assuming all else equal, how do real wages change when the capital stock increases if 𝛼 = 2?

Real wages decrease.

Which one is correct about the PCE-deflator-based inflation?

All of the above.

M1 includes:

Coins, paper currency, and checkable deposits

Suppose that a change in transaction technology reduces the amount of currencypeople want to hold relative to demand deposits. If the Fed does nothing, themoney supply tend to ... But the Fed can hold the money supply constant by ...bonds in open-market operations.

Increase; selling

From 1960 to today, women's labor force participation rate in the US

Increased from about 40% to 60%.

Firm has the Cobb-Douglas production function 𝑌 = 𝐴𝐾^a 𝐿^(1-a). Incompetitive firm and factor markets, assuming all else equal, how do real rental rates of capital change after there is double the amount of labor in the economy if𝛼 = 0.4

Increases by about 52%

If the factor markets are competitive, all else equal, if the total factor productivity increases, the real wage ... and the real rental price of capital ..

Increases; increases

The production function 𝑌 = 𝐾𝐿 exhibits a

Increasing return to scale

Which best describes the path of US inflation?

Inflation in recent decades has been less volatile.

Firm has the Cobb-Douglas production function 𝑌 = 𝐴𝐾^a 𝐿^(1-a). If the extraterrestrial alien destroys half of the capital, how does that affect the share of national income toward capital?

It is unaffected

Which of the following is not part of the M2 money supply?

Large-denominated time deposits

A competitive firm observes that the marginal product of labor is 4 units per hour,the marginal product of capital is 10 units per machine, the wage is $30 per hour,the rental price of capital is $40 per machine, and the price of output is $5 perunit. For the firm to maximize profit, it should hire ... labor and rent ... capital.

Less; more

Assuming no other changes, if balances in money market deposit accountsincrease by $50 billion and small-denominated time deposits decrease by $50billion, the

M1 and M2 money supplies will not change.

In real terms, money loses purchasing power but people sill demand to holdmoney. What is the rationale for them to do so?

Money provides liquidity so people can buy things.

... is a stock variable while ... is a flow variable.

Money; income

.... Is used to make purchases while ... is the total collection of pieces of propertythat serve to store value.

Money; wealth

Firm has the Cobb-Douglas production function 𝑌 = 𝐴𝐾^a 𝐿^(1-a) . In a competitive firm and factor markets, assuming all else equal, how do real rental rates of capital change when there is an immigration of labor into the economy if𝛼 = 0.5

Rental rates of capital increase.

If a central bank wants to increase the money supply, it can .... bonds in open-market operations or .... reserve requirements.

buy; decrease

Because of leverage, a 5 percent decline in the value of a bank's assets causes the value of the banks .... to fall by .... than 5 percent.

capital; more

Which is a possible negative result of increased government spending?

crowding out of investment

unemployment that occurs due to the business cycle is

cyclical unemployment

The market basket used to measure price changes is

fixed in the CPI but changing in the GDP deflator

Market-clearing models assume that prices are ..... and are best applied to understand the economy in the ...... run

flexible, long

Labor force =

unemployed + employed (does not include discouraged)

a contraction in consumer demand likely causes .... in the short run, and ..... in the long run

unemployment; deflation

Microeconomics is

useful of understanding the decisions behind macroeconomic relationships

In a system of fractional-reserve banking, bank lending increases the

money supply

Which best describes the path of US unemployment over time?

There is no discernible long-term trend in unemployment.

What is the money supply if people hold currency:demand deposits = 1:2 andbanks hold 25 percent of deposits as reserves?

$200

Suppose that banks face the requirement to hold 20% of deposits in reserves. If abank has checkable deposits of $4 million and actual reserves of $1 million, it cansafely lend out

$200,000

For the original deposit of $100, what will the money supply be after 2 rounds ofmoney supply creation through the reserve banking (involving 2 banks) with 10%of the reserve requirement?

$271

The economy has a monetary base of $100. What is the money supply if allmoney is held as demand deposits and banks hold 20% of deposits as reserves?

$500

A closed economy has income Y of 1,000, consumption C of 400, governmentpurchases G of 100, and taxes T of 100. What are the private saving, publicsaving, and national saving respectively?

$500, $0, $500

Assume Company X deposits $100,000 in cash in commercial bank A. If noexcess reserves exist at the time this deposit is made and the reserve ratio is20%, Bank A can increase the money supply by a maximum of

$80,000

According to 25., and if the investment is determined by I = 600 - 10r, what is theequilibrium real interest rate?

10

According to 25., if the government to cut its spending to G = 50, what would bethe equilibrium real interest rate? And how does this affect investment?

5; investment goes up by $30

The unemployment rate in an economy is 6 percent. The total population of theeconomy is 290 million, and the size of the labor force is 150 million. The numberof unemployed workers in this economy is

9 million

If you write a check on a bank to purchase a used Honda Civic, you are usingmoney primarily as

A medium of exchange

Checkable deposits are classified as money because

They can be readily used in purchasing goods and paying debts

In a fractional reserve banking system,

Banks can create money through the lending process.

The production function Y = 3K + L exhibits a

Constant return to scale

When the Fed increases the interest payment on reserves, it ... the moneymultiplier, and therefore ... the money supply.

Decreases; decreases

All else equal, if half of the capital stock disappears, the real wage ... and therental price of capital ...

Decreases; increases

The production function 𝑌 = 3𝐾 + 2√𝐿 exhibits a

Decreasing return to scale

Banks borrow from the Federal Reserve at the ..

Discount rate

Core inflation ...

Excludes food and energy

Which of the following most likely increases the money supply?

People deposit more rather than holding cash.

If you place a part of your summer earnings in a savings account, you are usingmoney primarily as a

Store of value

... measures the prices of only the goods and services bought by consumers,whereas ... measures the prices of all goods and services produced. Moreover,the imported goods do not show up in the ...

The CPI-based inflation; The GDP-deflator inflation; the GDP-deflator inflation

Which action increases the GDP instantaneously?

The government exports oil to foreign countries.

How do economists define investment?

The purchase of newly created goods and services to add to the capital stock.

The Bureau of Labor Statistics tends to report the unemployment rate that is ...compared to what it should be in reality. One reason is that discouraged workersare ...

Too low; do not get counted in the labor force

The actual inflation rate tends to be what is between 3. And 4. Because thechanging basket (Paasche index) tends to ... inflation, while a Laspeyres (fixedbasket index) tends to ... inflation.

Understate; overstate

When the Federal Reserve reduces the interest rate it pays on reserves, this tends to .... the money multiplier and .... the money supply.

increase; increase

In US history, deflation

is rare now but has occurred at times in the past

If nominal GDP and real GDP both fall by 4%, then the GDP deflator

is unchanged

A bank's total assets relative to the bank owners' equity is the

leverage ratio

The Fed can increase the money supply by

lowering the interest payment on reserves, decreasing the discount rate

Why are models useful when studying economics?

models can help us dispense with irrelevant details and focus on underlying connections.

The prices of capital goods are:

not included in the CPI but are included in the GDP deflator

Which is not a variable determining the supply of money?

the marginal propensity to save

What variable adjusts to bring the market for goods and services to equilibrium?

the real interest rate