ECON 410 ZHANG EXAM 2

An important factor in the evolution of commodity money to fiat money is:

A desire to reduce transaction costs

When a firm sells a product out of inventory, investment expenditures _, and consumption expenditures ___.

Decrease; increase

When the Fed makes an open-market sale, it:

Decreases the monetary base (B)

All of the following are considered major functions of money except as a:

Display of wealth

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:

Falls by $40 billion

Open-market operations are:

Federal Reserve purchases and sales of government bonds

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

Gives a better measure of ongoing, sustained price changes

In the circular flow diagram, firms receive revenue from the _ market, which is used to purchase inputs in the ___ market.

Goods; factor

People use money as a store of value when they:

Hold money to transfer purchasing power into the future.

Credit card balances are included:

In neither M1 nor M2

The neoclassical theory of distribution explains the allocation of:

Income among factors of production.

The demand for real money balances is generally assumed to:

Increase as real income increases

When the Fed increases the discount rate, it:

Is likely to decrease the monetary base (B)

When the demand for loanable funds exceeds the supply of loanable funds, households want to save ___ than firms want to invest and the interest rate ___.

Less; rises

Net national product equals gross national product (GNP):

Minus depreciation

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

Minus the expected inflation rate

High-powered money is another name for the:

Monetary base (B)

Data on unemployment in the United States shows that:

Most weeks of unemployment are attributable to the long-term unemployed

In a closed economy, Y-C-G equals:

National saving

The preferences of households determine the:

currency-deposit ratio (amount of currency people hold in relation to aggregate deposit)

Public saving is:

Either positive, negative, or zero

If nominal gross domestic product (GDP) increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP _ by ___ percent.

Increased; 2

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate implied by the Fisher equation:

Increases by 1%

Inflation _ the variability of relative prices and ___ the efficiency of the allocation of resources.

Increases; decreases

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:

Labor productivity is growing rapidly

Macroeconomists call assets used to make transactions:

Money

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's:

Need to generate revenue to pay for spending

Credit card balances are included in:

Neither M1 nor M2

In a system with 100-percent-reserve banking:

No banks can make loans using deposits made at their institutions.

The concept of monetary neutrality in the classical model means that an increase in the money supply growth rate will increase:

Nominal interest rates

The labor force equals the:

Number of employed and unemployed individuals

The rate of inflation is the:

Percentage change in the level of prices

Which of these would be called a hyperinflation?

Price increases averaged 1% per day

The definition of the transactions velocity of money is:

Prices multiplied by transactions divided by money (PY/M)

The hyperinflation experienced by interwar Germany illustrates how fiscal policy can be connected to monetary policy when government expenditures are financed by:

Printing large quantities of money

National saving is:

Private saving plus public saving

A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by the miller is:

$2

Assuming that goods and factor markets are perfectly competitive, which one of these explains the increasing share of capital in national income?

technological advancement that has decreased the role of labor and increased the role of capital in production

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by _ percent.

5; 5

According to the quantity equation, if the transactions velocity of money remains constant while the quantity of money doubles, the:

price of the average transaction multiplied by the number of transactions must double.

The central bank in the United States is:

the federal reserve

"Inflation tax" means that:

As the price level rises, the real value of money held by the public decreases

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

Consumption increases and investment decreases

The right of seigniorage is the right to:

Create money

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by:

0.85 Units (C=autonomous consumption + MPC*Income)

If nominal gross domestic product (GDP) in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator?

1.27 (GDP Deflator=NGDP/RGDP*100)

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real gross domestic product (GDP) must be _____ percent.

3

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

4.7 (UE: #of unemployed/labor force)

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ___ times per year:

5

According to the quantity theory of money and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

5 percent (nominal interest = real interest + inflation)

The inflation tax is paid:

By all holders of money

The employment statistics computed from the establishment survey do NOT include:

Those who are self-employed

The marginal product of labor is:

additional output produced when one additional unit of labor is added.

In the circular flow model, the flow of dollars from firms to households is paid _, and the flow of dollars from households to firms is paid ___.

as wages, capital income, and profits; for goods and services

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

$800 billion

Demand deposits are funds held in:

Checking accounts

A country that is on a gold standard primarily uses:

Commodity money

In a classical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would:

Crowd out between 0 and $10 Billion of investment

Variables expressed in terms of physical units or quantities are called _____ variables.

Real (Nominal is expressed as $)

Compared to typical open-market operations, when engaging in quantitative easing operations conducted by the Federal Reserve between 2007 and 2011, Federal Reserve purchases tended to be _____ securities.

Riskier and longer term

Economists call the changes in the composition of demand among industries and regions:

Sectoral shifts

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

Shoeleather costs

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

The Federal Reserve

In the classical model with fixed output, the supply and demand for goods and services are balanced by:

The interest rate

In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then _ determines real gross domestic product (GDP) and ___ determines nominal GDP.

The productive capability of the economy; the money supply

The quantity equation, viewed as an identity, is a definition of:

Transactions velocity of money

A policy that increases the job-finding rate _____ the natural rate of unemployment.

Will decrease

Economists use the term money to refer to:

assets used for transactions (fiat, commodity, barter)

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have _ rates of inflation and decades of low money growth tended to have ___ rates of inflation.

high; low

Open-market operations change the _; changes in interest rate paid on reserves change the ; and changes in the discount rate change the __.

monetary base; money multiplier; monetary base (Money multiplier = 1/required reserve ratio)

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts that:

the real wage will fall and the real rental price of capital will rise.