ECON Final
A basket of goods cost $800 in the U.S. The same basket of goods costs $1,000 in France and the exchange rate is .80 euros per dollar. The same basket of goods costs 960 Australian dollars and the exchange rate is 1.2 Australian dollars per U.S. dollar. Purchasing power parity with the U.S. holds in
Australia but not France
Suppose we are in a one good (apples) economy. The economy has enough labor, capital, and land to produce Y = 800 apples. Assume V is constant. In 2019, M = $200, P = $0.50/apple Compute nominal GDP in 2019
$400 P x Y
A bank's reserve ratio is 5 percent and the bank has $2,280 in reserve. Its deposits amount to
$45,600.
If nominal GDP is $8 trillion and real GDP is $10 trillion, then the GDP deflator is
80, and this indicates that the price level has decreased by 20% since the base year
The term economists use to describe a situation in which the economy's overall price level is rising is
Inflation
Suppose one year ago the price index was 100 and Maria purchased $20,000 worth of bonds. One year later the price index is 105. Maria redeems her bonds for $22,000 and is in a 40 percent tax bracket. What is the real after-tax rate of interest that Maria earned on her bond investment?
Inflation rate = (105-100)/100 = 5% Nominal interest rate on bond = (22000-20000)/20000 = 10% Tax rate of 40% means nominal after tax interest rate on bond = 0.6 x 10% = 6% Real after tax interest rate on bond = nominal after tax interest rate - inflation rate = 6% - 5% = 1%
What happens to the Pakistani rupee compared to the U.S. dollar when we look at the GDP adjusted Big Mac Index for Jan 2020?
It became overvalued, at 9.4% overvaluation.
A bank has a 5 percent reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement. How much does it have in reserves/loans?
It has $250 in reserves and $4,750 in loans.
suppose a bank has a 10% reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement
It has $500 in reserves and $4,500 in loans
The catch-up effect refers to the idea that
It is easier for a country to grow fast and so catch-up if it starts out relatively poor
Why is the bank prime loan rate as well as the 30 year mortgage rate above the fed funds rate?
It is riskier to lend to consumers, so banks have to be compensated for higher risk through higher rates. Fed funds transactions (when banks lend to each other overnight) is NOT risky, so low rate
Which of the variables that contribute to productivity (A, L, K, H, N) is affected by the following policy? Offer tax incentives for investment by foreign firms
K
Which of the variables that contribute to productivity (A, L, K, H, N) is affected by the following policy? Offer tax incentives for investment by local firms
K
Which of the variables that contribute to productivity (A, L, K, H, N) is affected by the following policy? Give away condoms
L (Labor)
Economists differ in their views of the role of the government in promoting economic growth. At the very least, the government should
Lend support to the invisible hand by maintaining property rights and political stability
Under liquidity trap: fed has developed tools that still allow them to somewhat affect AD
Quantitative easing Forward guidance "Operation Twist" (changing Fed holdings of short term treasury bonds to long term treasury bonds)
d: Country C will grow the fastest
Real GDP per person is $30,000 in Country A, $20,000 in Country B, and $11,000 in Country C. Saving per person is $1,000 in all three countries. Other things equal, we would expect that a. all three countries will grow at the same rate. b. Country A will grow the fastest. c. Country B will grow the fastest. d. Country C will grow the fastest.
All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unity?
Output will rise but by one less than it did when the previous unit was added
The president of Suldinia, a developing country proposes that his country needs to help domestic firms by reducing trade restrictions. What type of policy is this?
Outward-oriented, most economists believe they would have beneficial effects on growth in Suldinia
c: South Korea had a higher growth rate than the United States even though it had a similar ratio of investment to GDP.
Over the period 1960-1991, a. South Korea had a higher growth rate than the United States because it had a higher ratio of investment to GDP. b. the United States had a higher growth rate than South Korea because it had a higher ratio of investment to GDP. c. South Korea had a higher growth rate than the United States even though it had a similar ratio of investment to GDP. d. the United States had a higher growth rate than South Korea even though it had a similar ratio of investment to real GDP.
An economy's production form takes the form Y=AF(L,K,H,N), K represents the quantity of
Physical capital only
What do you think would happen to the slope of the SRAS curve if the proportion of "sticky price" firms in the economy increases?
SRAS would become flatter, approaching a completely flat SRAS curve crossing the y-axis at the expected P Visualize: P = Pe, which implied a flat SRAS intersecting the vertical axis at P= Pe
To decrease the money supply, The Fed could
Sell government bonds, Increase the discount rate, Increase the reserve requirement
Suppose the teacher's union negotiated higher wages and better benefits for all unionized teachers. At the going wage, the public school system is only willing to keep a certain number of teachers and let the rest go. As a result John lost his teaching job at the local public school. This represents frictional or structural unemployment?
Structural
What does a price level decrease do to supply of loanable funds under the interest rate effect?
Supply of LF increases, pushes down interest rate and boosts investment
Suppose all of a sudden the country goes through a consumption fever. Everyone wants to buy more stuff. What would this do to the market for loanable funds (in terms of the impact on demand or supply)?
Supply shifts in
Social security payments are indexed for inflation using
The CPI
Why do CPI and GDP deflator give different inflations?
The CPI weights the price of goods by quantities purchased in base year, the GDP deflator weights are given for price of goods and quantities purchased in current year
Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?
The FOMC
When looking at the raw Jan 2020 Big Mac Index on The Economist's website, which of the following currencies are overvalued against the U.S. dollar?
The Swiss Fran & The Norwegian Krone
the final element of a financial crisis is
a viscous circle
foreign portfolio investment
an investment that is financed with foreign money but operated by domestic residents
The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents
an upward-sloping short-run aggregate supply curve
from peak to trough
contraction or recession
The Fed's primary tool to change the money supply is
conducting open market operations.
You bake cookies. One day you double the time you spend, double the number of chocolate chips, flour, eggs, and all your other inputs, and bake twice as many cookies. Your cookie production function has....
constant returns to scale
What type of policy can shift aggregate demand to the left?
contractionary fiscal or monetary policy
An important function of the U.S. Federal Reserve is to
control the supply of money.
Rank these from most to least liquid: stocks, fine art, currency.
currency, stocks, fine art
from the trough to the peak
expansion
When looking at a graph of nominal and real interest rates you notice that nominal rates always lie above real rates. From this you conclude
consumer prices were always rising in the time frame represented on the graph
Other things the same, if workers and firms expected prices to rise by 3 percent but instead they rise by 2 percent, then
employment and production fall explanation: P < expected P, so real wages rise. Firms hire less workers and cut back on production, so employment and production both fall
What are two things that reduce net exports?
exports fall, imports rise
A country purchases $3 billion of foreign-produced goods and services and sells $2 billion dollars of domestically produced goods and services to foreign countries. It has
exports of $2 billion, imports of $1 billion, and a trade deficit of $1 billion
If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would
fall from 10 to 5.
to lower Federal funds rate (FFR)...
fed BUYS bonds
The sticky price theory of SRAS implies that
firms will increase their prices because they observe output above the potential level of output, leading to a positive correlation between P and Y.
Under a fractional-reserve banking system, banks
generally lend out a majority of the funds deposited.
What sequences best represents the crowding-out effect?
government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?
it increases by $150,000
When the Fed conducts open-market sales,
it sells Treasury securities, which decreases the money supply.
When a country saves a larger portion of its GDP than it did before...
it will have more capital and higher productivity
in a fractional-reserve banking system, a bank
keeps only a fraction of its deposits in reserve
In a fractional-reserve banking system, a bank
keeps only a fraction of its deposits in reserve.
The Fed can directly protect a bank during a bank run by
lending reserves to the bank.
opportunity cost of economic growth is...
less current consumption
If the discount rate is raised then banks borrow
less from the Fed so reserves decrease, decrease money supply
If the discount rate is raised then banks borrow
less from the Fed so reserves decrease.
if the discount rate is raised then banks borrow
less from the Fed so reserves decrease.
The money supply increases when the Fed
lowers the discount rate. The increase will be larger the smaller the reserve ratio is.
As opposed to a payments system based on barter, a payments system based on money
makes trades less costly.
You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money?
medium of exchange
suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the
money supply to fall. To reduce the impact of this the Fed could lower the discount rate
If the discount rate is lowered, banks borrow
more from the Fed so reserves increase, increase money supply
What is included in the aggregate demand for goods and services?
consumption demand, investment demand, net exports
When the Fed purchases $1000 worth of government bonds from the public, the U.S. money supply eventually increases by
more than $1000.
when inflation goes up
homeowners gain, banks lose
If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to
increase by $360 billion.
If expected inflation is constant, then when the nominal interest rate increases, the real interest rate
increase by the change in the nominal interest rate
Crack down on corruption
increase in A (technology)
Cash for school attendance
increase in H (human capital)
tax incentives for local and foreign investment
increase in K
Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?
The demand for loanable funds would shift right.
a: diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries.
The traditional view of the production process is that capital is subject to a. diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries. b. diminishing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich countries. c. increasing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries. d. increasing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich countries.
c. It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2.
Use diagram: Which of the following is correct? a. A wave of optimism could move the economy from point a to point b. b. If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run. c. It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2. d. All of the above are correct.
Prisoners sometimes determine a single good to be used as money. This good becomes
a medium of exchange and a unit of account.
What are the three approaches to measuring economic activity?
product, income, expenditure
Consumption consists of spending by households on goods and services, with the exception of
purchase of new houses
The Fed can increase the money supply by conducting open-market
purchases or by lowering the discount rate.
The nominal exchange rate is 30 Thai bhat for one U.S. dollar. A sub sandwich combo deal in the U.S. costs $6 dollars and 120 bhat in Thailand. The real exchange rate is
q = 1.5
Money demand depends negatively on...
r (interest rate)
a larger budget deficit...
raises the interest rate and reduces investment
If Congress instituted an investment tax credit, the interest rate would
rise and saving would rise
If the supply for loanable funds shifts to the left, then the equilibrium interest rate
rises and the quantity of loanable funds falls.
An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level
rises, shifting short run aggregate supply left
At the broadest level, the financial system moves the economy's scarce resources from
savers to borrowers
Bonds/stock are a form of
saving
If the Federal Open Market Committee decides to decrease the money supply, it will
sell government bonds.
If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by
selling bonds. This would reduce reserves
When conducting an open-market sale, the Fed
sells government bonds, and in so doing decreases the money supply.
what would a fall in investment spending do to aggregate demand?
shift left / inward
People go to the bank more frequently to reduce currency holdings when inflation is high. The sacrifice of time and convenience that is involved in doing that is referred to as
shoeleather cost
when prices are stickier...
short-run aggregate supply is flatter
What causes prices to fall and output to rise in the short run?
short-run aggregate supply shifts RIGHT
Market for Loanable Funds: when demand is more elastic (flatter)
smaller impact on IR, larger impact on investment
US dollar has....
strengthened overall
Efficiency wages (above equilibrium) create...
structural unemployment
saving is a source of
supply for loanable funds
The supply of loanable funds would shift to the right if either
tax reforms encouraged greater saving or the budget deficit became smaller
The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of
the FOMC
The discount rate is the interest rate that
the Fed charges banks for loans.
The agency responsible for regulating the money supply in the United States is
the Federal Reserve.
A tax cut shifts the aggregate demand curve the farthest if
the MPC is large and if the tax cut is permanent.
Economic expansions in Europe and China would cause
the U.S. price level and real GDP to rise.
If a bank has a reserve ratio of 8 percent, then
the bank keeps 8 percent of its deposits as reserves and loans out the rest.
banks
play a role in creating an asset that people can use as a medium of exchange.
The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change in...
the price level, but not the output
During periods of expansion, automatic stabilizers cause government expenditures...
to fall and taxes to rise
In a closed economy, what does (Y - T - C) represent?
private saving
reducing inflation causes a rise in....
unemployment
Sue lost her job and begins looking for a new one. what happens?
unemployment rate (u) increases
Sam, the sole earner in his family of 5, just lost his $80,000 job as a research scientist. Immediately, he takes a part-time job at McDonald's until he can find another job in his field. what happens to the unemployment rate?
unemployment rate (u) stays the same
The measure of the money stock called M1 includes
wealth held by people in their checking accounts.
in a closed economy, suppose: GDP (Y) = $10 trillion,Consumption (C) = $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion ($0.3 trillion). Please find GOVERNMENT SAVING (Sg)
$-0.3 trillion
The Bigdrill company drills for oil, which it sellsfor $200 million to Bigoil company. The Bigoil company's gas is sold for a total of $600 million. What is the total contribution to the country's GDP from companies Bigdrill and Bigoil?
$600 million
The inflation rate in year 2 equals
(GDP deflator in year 2 −GDP deflator in year 1) ÷ (GDP deflator in year 1) x 100
What does it mean when the slope of the short-run aggregate supply curve is flatter (more elastic)?
- Output supplied is more sensitive to deviations of current price level from expected price level - Current price level is less sensitive to deviations of current output from potential output
What is associated with recessions?
- They tend to be associated with rising unemployment rates. -Real GDP growth must fall for 2 consecutive quarters. -Investment falls during recessions. -Unpredictable
Using the quantity theory of money, what could explain the price level increasing by a smaller percentage than the money supply? MV = PY
- Velocity is declining, no change in Y OR - no change in velocity, increase in output (Y)
To improve standard of living...
- encourage savings and investment - encourage investment from abroad - encourage education -improve health and nutrition - protect properties and political stability
Suppose your income goes up by $5 and your consumption goes up by $2 as a result, what is your MPC?
0.4
If R represents the reserve ratio for all banks in the economy, then the money multiplier is
1/R.
Calculate total labor force: # of employed 158.7 million # of unemployed 5.9 million total not in labor force 94.9 million
164.6
Suppose we are in a one good (apples) economy. The economy has enough labor, capital, and land to produce Y = 800 apples. Assume V is constant. In 2019, M = $200, P = $0.50/apple Compute velocity in 2019 (type in numerical answer directly).
2
December 2019 Inflation Rate?
2%
If the nominal interest rate is 5 percent, and the rate of inflation is 3 percent, then the real interest rate is equal to?
2%
What is the Fed's inflation target?
2%
What are three reasons for structural unemployment?
Unions, minimum wage laws, efficiency laws
sell government bonds, which will reduce the money supply
Use Diagram. Suppose Y N is the potential level of output, and the economy is currently at point A. To restore full employment, the Federal Reserve should
a: an increase in productivity
When Mexico experiences investment from abroad, it experiences, as a result, a. an increase in productivity. b. a decrease in Gross National Product (GNP). c. lower wages for Mexican workers. d. None of the above is correct.
The confidence you have that a retailer will accept dollars in exchange for goods is based primarily on money
being a medium of exchange.
When the Fed decreases the discount rate, banks will
borrow more from the Fed and lend more to the public. The money supply increases.
when real interest rate goes down
borrowers gain, lenders lose
A Portuguese company exchanges euros for $60,000 from a U.S. bank. The Portuguese firm then uses the dollars to purchase $60,000 of canning equipment from a U.S. company. As a result of these two transactions alone
both US NCO and US net exports rise
When the Federal Reserve conducts open-market operations to increase the money supply, it
buys government bonds from the public.
Suppose investment spending falls exogenously. To offset the change in output the Federal government could
cut corporate tax. This tax cut would also move the price level closer to its value before the decline in investment spending
In a simple circular-flow diagram a) Households spend all of their income b) All goods and services are brought by households c) Expenditures flow through the markets for goods and services, while income flows through the markets for the factors of production d) All of the above are correct
d) All of the above are correct
GDP does not reflect a) the value of leisure b) the value of goods and services produced at home c) the quantity of the environment d) all of the above are correct
d) all of the above are correct
An increase in population growth _________ capital per worker
decreases. However, there is some evidence that a higher population growth rate may increase the pace of technological progress
investment is the source of
demand for loanable funds
The interest rate that the Fed charges banks that borrow reserves from it is the
discount rate
Ann, a U.S. citizen, uses some previously obtained euros to purchase a bond issued by a Spanish company. This transaction
does NOT change US NCO.
Allow free trade
increase in A (technology)
The feds control of the money supply is not precise because
the amount of money in the economy depends in part on the behavior of depositors and bankers
According to the theory of liquidity preference....
the demand for money is represented by a downward-sloping line in a money supply-and-demand model
Using the liquidity-preference model, when the Federal Reserve decreases the money supply
the equilibrium interest rate increases
Would you be more likely to support active stabilization policy if wages, prices, and expectations adjust slowly in response to economic changes (compared to if they adjust quickly)? (stickier)
yes
If your currency is overvalued....
you will have a hard time exporting
What does an increase in expected price level do to short-run aggregate supply?
Shift left (upward)
What does a reduction in government purchases do to aggregate demand?
Shift left / inward
What would an increase in technology or human capital stock do to long-run aggregate supply?
Shift right / outward
what does a tax cut do to aggregate demand?
Shift right / outward
there is a downward shift in production function if you
increase L
When the Fed conducts open-market purchases,
it buys Treasury securities, which increases the money supply.
What happens to LRAS when Labor (L) decreases?
shifts left/inward
The consumer price index was 225 in 2008 and 232.2 in 2009. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?
3.3 percent, (232.2 - 225)/225 x100= 3.2, 6.5 - 3.2 = 3.3 Nominal interest rate - Inflation rate= Real interest rate
a: World Bank
An organization that tries to encourage the flow of investment to poor countries is the a. World Bank. b. Organization of Less Developed Countries. c. Alliance of Developing Countries. d. International Development Alliance.
QUIZ5: A budget surplus... A. occurs when the government has debt equal to zero. B. reduces the government's debt. C. causes government debt to increase. D. exists when government spending is greater than tax revenues.
B. reduces the government's debt.
Which of the following countries had the lowest level of real GDP per person in 2010?
Bangladesh
In a system of 100% reserve banking
Banks do not influence the supply of money
Changes in nominal GDP reflect
Both changes in prices and changes in the amounts being produced
QUIZ5: Which of the following equations represents GDP for a closed economy? A. Y = C + I + G + NX B. NX = I - G C. Y = C + I + G D. I = Y - C + G + NX
C. Y = C + I + G
Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs in the U.S. Which pair of GDP growth rates and unemployment rates is realistic? A 10%, 1% B 2%, 12% C -1%, 8% D -2%, 2%
C: -1%, 8%
QUIZ5: If in a closed economy Y = $11 trillion, which of the following combinations would be consistent with national saving of $3 trillion? A. C = $8 trillion, G = $3 trillion B. C = $9 trillion, G = $5 trillion C. C = $7 trillion, G = $1 trillion D. C = $13 trillion, G = -$1 trillion
C: C = $7 trillion, G = $1 trillion
determine the effects on the CPI and GDP deflator: Starbucks raises the price of Frappuccinos
CPI and Deflator Rise
Monetary policy affects employment
Only in the short run
Country A and Country B both increase their capital stock by one unit. Output in COuntry A increases by 12 while output in Country B increases by 15. Other things the same, diminishing returns implies that..
Country A is richer than Country B. If Country A adds another unit of capital, output will increase by less than 12 units.
if the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve?
Creates dollars and uses them to purchase government bonds from the public
Ivan, a Russian citizen, sells several hundred cases of caviar to a restaurant chain in the United States. By itself, this sale
Decreases US net exports and increases Russian net exports
Productivity
Explains most of the differences in the standard of living across countries
a drop in federal funds rate (FFR) means
FOMC made an expansionary policy
The interest rate of fed funds transactions (interbank loans)
Fed funds rate
Who is included in unemployed?
People who are jobless, looking for a job in the last 4 weeks, and are available for work
public saving
T - G
The percentage change in the price level from one period to another is called
The inflation rate
True or False: All items that are included in M1 are included also in M2.
True
d: South Korea
Which of the following countries benefited significantly from the catch-up effect in the last half of the twentieth century? a. Ethiopia b. the United States c. Canada d. South Korea
The inflation tax is
a tax on everyone who holds money
A firm in the United Kingdom hires a firm in the U.S. to train its managers. By itself this transaction a. increases U.S. exports and increases U.S. net exports. b. increases U.S. imports and decreases U.S. net exports. c. increases U.S. imports and increases U.S. net exports. d. increases U.S. exports and decreases U.S. net exports.
a. increases U.S. exports and increases U.S. net exports.
Surplus....
adds to national savings, increases supply of LF
3 month treasury bill is....
almost identical to Federal funds rate (FFR)
What does a large MPC mean?
each $ increase in income will generate more consumption, which will boost income further. Large MPC - AD shifts more
QUIZ 6: Purchasing-power parity describes the forces that determine
exchange rates in the long run
The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it
increases income and thereby increases consumer spending.
What happens when the Fed lowers the reserve requirement?
increases money multiplier AND money supply
Which tool of monetary policy does the Federal Reserve Use most often
open-market operations
crowding out
reduces economic growth and productivity and GDP
Deficit
reduces national savings, decreases supply of LF
People can reduce the inflation tax by
reducing cash holdings
when the fed buys government bonds
the money supply increases and the federal funds rate decreases
In a closed economy, suppose:GDP (Y) = $10 trillion,Consumption (C) = $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion ($0.3 trillion). We know from Question 1, Sg = -$0.3 trillionWe know from Question 2, T = $1.7 trillion We know from Question 3, Sp = $1.8 trillion Please find NATIONAL SAVING (S)
$1.5 trillion
In a closed economy, suppose:GDP (Y) = $10 trillion,Consumption (C) = $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion ($0.3 trillion). We know from Question 1, Sg = -$0.3 trillionWe know from Question 2, T = $1.7 trillionWe know from Question 3, Sp = $1.8 trillionWe know from Question 4, S = $1.5 trillion Please find INVESTMENT (I)
$1.5 trillion, same as national savings in a closed economy
In a closed economy, suppose: GDP (Y) = $10 trillion,Consumption (C) = $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion ($0.3 trillion). We know from Question 1, Sg = -$0.3 trillion Please find TAXES (T)
$1.7 trillion
In a closed economy, suppose:GDP (Y) = $10 trillion,Consumption (C) = $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion ($0.3 trillion). We know from Question 1, Sg = -$0.3 trillion We know from Question 2, T = $1.7 trillion Please find PRIVATE SAVING (Sp)
$1.8 trillion
If in some year real GDP was $5 trillion and the GDP deflator was 200, what was nominal GDP?
$10 trillion, GDP Deflator= Nominal GDP/ Real GDP x 100, 200= (x/5)x100 2=x/5 x=10
In 1969, Malcolm bought a Pontiac Firebird for $2,500. If the price index was 36.7 in 1969 and the price index was 180 in 2009, then what is the price of the Firebird in 2009 dollars?
$12,261.58
In 1940, the price of a movie ticket was $1. the CPI was 10 in 1940, and 150 in 2008. Using 2008 prices, what is the cost of a movie in 1940?
$15
Calculate the labor force participation rate # of employed 158.7 million # of unemployed 5.9 million total not in labor force 94.9 million
63.4
QUIZ7: Last year a country had exports of $100 billion, imports of $70 billion, and purchased $60 billion worth of foreign assets. What was the value of domestic assets purchased by foreigners?
$30 billion: NX = EX - IM = 100 billion - 70 billion = 30 billion Since NX is 30 billion, we know NCO must be 30 billion. NCO = foreign assets purchased by domestic residents - domestic assets purchased by foreigners 30 billion = 60 billion - domestic assets purchased by foreigners domestic assets purchased by foreigners = 60 billion - 30 billion = 30 billion
In the economy of Ukzten in 2010, consumption was $4000, exports were $800, GDP was $9500, imports were $200, and investments was $1000. What were Ukzten's government purchases in 2010?
$3900, Y=C+I+G+MX --> 9500=4000 +1000 +G +(800-200)
If a bank that desires to hold no excess reserves and has just enough reserves to meet the required reserve ratio of 15 percent receives a deposit of $600, it has a
$510 increase in excess reserves and a $90 increase in required reserves.
In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is...
$60.75 multiplier = 1/(1-MPC) ==> MPC = 1 - 1/multiplier = 1 - 1/4 = 0.75 So each $1 increase in income will increase consumption by $0.75. Hence if income is at $101 ($1 increase from the initial $100 income), then consumption has got to be $60 + $0.75 = $60.75.
In 2009, the imaginary nation of Florastan had a population of 8,044 and real GDP of 36,198,000. In 2010 it had a population of 7,800 and real GDP of 35,880,000. What was the growth rate of real GDP per person in Florastan between 2009 and 2010?
2.2 percent
If the multiplier is 3, then the MPC is
2/3 multiplier = 1/(1-MPC) ==> MPC = 1 - 1/multiplier = 1 - 1/3 = 2/3
Suppose a bank has $10,000 in deposits and $8,000 in loans. It has loaned out all it can, given the reserve requirement. It follows that the reserve requirement is
20 percent
Suppose we are in a one good (apples) economy. The economy in 2019: Y = 800 apples, M = $200, P = $0.50/apple, V = 2 The economy in 2020: Y = 800 apples, Fed increases M by 5% to $210, V = 2. Compute the 2020 values of nominal GDP and P. Compute the inflation rate for 2019-2020.
2020: MV = PY => $210 x 2 = PY (nominal GDP) = $420 2020: MV = PY => P = MV/Y = $420/800 = $0.525 2020: inflation rate = ($0.525 - $0.5)/$0.5 = 0.05 = 5%
If the reserve ratio is 4 percent, then the money multiplier is
25 (mm= 1/reserve ratio)
Calculate the total adult population # of employed 158.7 million # of unemployed 5.9 million total not in labor force 94.9 million
259.5
Calculate the unemployment rate # of employed 158.7 million # of unemployed 5.9 million total not in labor force 94.9 million
3.58
if $300 of new resources generates $800 of new money in the economy, then the reserve ratio is
37.5%
If the MPC = 0.75, then the government purchases multiplier is about
4: multiplier = 1/(1-MPC) = 1/(1 - 0.75) = 1/0.25 = 4
At any meeting of the Federal Open Market Committee, that committee's voting members consist of
5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors.
At any given time, the voting members of the Federal Open Market committee include
5 of the 12 presidents of the regional Federal Reserve banks, the presidents of the Federal Reserve Bank of New York, the seven members of the Board of Governors
A bank has $500,000 in deposits and $475,000 in loans. It has loaned out all it can. It has a reserve ratio of
5 percent.
Suppose current nominal exchange rate is e = 20 Mexican pesos per USD. Suppose the price of a tall Starbucks latte is P = $3 in USD and P* = 60 pesos in Mexico. What is the price of a US latte measured in Pesos?
60 pesos (e x P) = (3 x 20) = 60
In the U.S. a digital camera costs $200. The same camera in London sells for 90 pounds. If the exchange rate were 0.50 pounds per dollar, then which of the following would be correct? A The real exchange rate is greater than 1. A person in London with $200 could exchange them for pounds and have more than enough to buy the camera there. B The real exchange rate is greater than 1. A person in London with $200 could exchange them for pounds but then wouldn't have enough to buy the camera there. C The real exchange rate is less than 1. A person in London with $200 could exchange them for pounds and have more than enough to buy the camera there. D The real exchange rate is less than 1. A person in London with $200 could exchange them for pounds but then wouldn't have enough to buy the camera.
A
What can shifts short-run, but NOT long-run aggregate supply right?
a decrease in the expected price level
Which of the variables that contribute to productivity (A, L, K, H, N) is affected by the following policy? Allow free trade
A (technology)
Which of the variables that contribute to productivity (A, L, K, H, N) is affected by the following policy? Crack down on government corruption
A (technology)
Liquidity trap
A situation in a severe recession in which the Fed's injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand. FED CAN NO LONGER LOWER INTEREST RATE
The classical dichotomy and monetary neutrality are represented graphically by
A vertical long-run aggregate supply curve
QUIZ5: The slope of the supply of loanable funds curve represents the: A. positive relation between the real interest rate and saving. B. positive relation between the real interest rate and investment. C. negative relation between the real interest rate and investment. D. negative relation between the real interest rate and saving.
A: positive relation between the real interest rate and saving
b: increase growth more for a poor country than for a rich country, but raise growth temporarily.
An increase in the saving rate would, other things the same, a. increase growth more for a poor country than for a rich country, and raise growth permanently. b. increase growth more for a poor country than for a rich country, but raise growth temporarily. c. increase growth more for a rich country than for a poor country, and raise growth permanently. d. increase growth more for a rich country than for a poor country, but raise growth temporarily.
which of the following lists two things that both increase the money supply: a.) Lower the discount rate, raise the reserve requirement b.) lower the discount rate, lower the reserve requirement c.) raise the discount rate, raise the reserve requirement d.) raise the discount rate, lower the reserve requirement
B
QUIZ5: If the demand for loanable funds shifts to the left, then the equilibrium interest rate A: rises and the quantity of loanable funds falls. B. and quantity of loanable funds falls. C. falls and the quantity of loanable funds rises. D. and quantity of loanable funds rises.
B. and quantity of loanable funds falls.
QUIZ5: The fictional country of Alpetra increases the income tax rate so that tax revenues increase by $50 million. If GDP, consumption, and government spending remains the same and Alpetra is a closed economy, what is the change in investment? A.$50 million B.No change C.Cannot be determined from the information given D.$100 million
B: no change. Why? tax changes get cancelled out because private savings goes down while public savings goes up by the same amount. So, not impact on S or I.
Other things the same, as domestic price levels decrease it induces greater spending on
Both net exports and investment
The Galactic Empire Central Bank increases the money supply at the same time the Parliament of the Empire passes a new investment tax credit. Which of these policies shift aggregate demand to the right?
Both!
If an American construction company built a road in Kuwait, this activity would be A excluded from U.S. GNP. B fully included in U.S. GDP. C included in U.S. GNP only for that portion that was attributable to American capital and labor. D included in U.S. GDP but not in U.S. GNP.
C
Suppose stock prices rise. To offset the resulting change in output and temper down inflationary pressure the Federal Reserve could A increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices. B increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices. C decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices. D decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices.
C decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices
If an economy consistently suffers from 20% inflation per year, which of the following costs of inflation would NOT be a concern? A) shoeleather costs from reduced holdings of money B) Menu costs from more frequent price adjustment C) redistribution of wealth between debtors and creditors D) Distortions from the taxation of nominal capital gains
C) redistribution of wealth between debtors and creditors
determine the effects on the CPI and GDP deflator: Armani raises the price of the Italian jeans it sells in the U.S.
CPI rises, deflator unchanged
determine the effects on the CPI and GDP deflator: Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory
CPI unchanged, deflator rises
You put money in the bank. The increase in the dollar value of your savings A and the change in the number of goods you can buy with your savings are both nominal variables. B and the change in the number of goods you can buy with your savings are both real variables. C is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable. D is a real variable, but the change in the number of goods you buy with your savings is a nominal variable.
C: is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable.
If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied: A. there is a surplus and the interest rate is below the equilibrium level. B. there is a surplus and the interest rate is above the equilibrium level. C. there is a shortage and the interest rate is below the equilibrium level. D. there is a shortage and the interest rate is above the equilibrium level.
C: there is a shortage and the interest rate is below the equilibrium level
If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, A. there is a shortage and the interest rate is above the equilibrium level. B. there is a surplus and the interest rate is below the equilibrium level. C. there is a surplus and the interest rate is above the equilibrium level. D. there is a shortage and the interest rate is below the equilibrium level.
C: there is a surplus and the interest rate is above the equilibrium level
You deposit $1000 in the bank for one year. CASE 1: π = 0%, i = 10% CASE 2: π = 10%, i = 20% In which case does the real value of your deposit grow the most?
Case 1: real rate of return = 10 Case 2: real rate of return = 10 The real value of the deposit grows the SAME amount in both cases
d: higher in Old York than in New Frank, and it is the same in Old York and Ganzee.
Consider three imaginary countries. In Old York, saving amounts to $3,000 and consumption amounts to $7,000; in New Frank, saving amounts to $2,000 and consumption amounts to $8,000; and in Ganzee, saving amounts to $4,500 and consumption amounts to $10,500. The saving rate is a. higher in Old York than in Ganzee, and it is higher in Ganzee than in New Frank. b. higher in New Frank than in Ganzee, and it is higher in Ganzee than in Old York. c. higher in Ganzee than in New Frank, and it is the same in New Frank and Old York. d. higher in Old York than in New Frank, and it is the same in Old York and Ganzee.
In each of the following cases, determine which component of GDP is affected (if at all), CHECK ALL THAT APPLY: General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them. -Consumption -Investment - Government Spending -Net Export -None of the above
Consumption and Investment
Suppose the world had only two countries and domestic residents of country A purchased $50 billion of assets from country B and country B purchased $30 billion of assets from country A. What would the net capital outflows of both countries be?
Country A: NCO increases by 50 billion, but then decreases by 30 billion, so total increase of 20 billion Country B: NCO increases by 30 billion but decreases by 50 billion, so total decrease of 20 billion
If U.S. exports are $300 billion and U.S. imports total $350 billion, which of the following is correct? a. The U.S. has a trade deficit of $350 billion. b. The U.S. has a trade surplus of $350 billion. c. The U.S. has a trade surplus of $50 billion. d. The U.S. has a trade deficit of $50 billion.
D
Money a. is more efficient than barter. b. makes trades easier. c. allows greater specialization d. all of the above
D
Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basket's cost was $100, in 2013, the basket's cost was $105, and in 2014, the basket's cost was $110. The value of the CPI was A) 100 in 2012 B) 105 in 2013 C) 110 in 2014 D) All of the above are correct
D
Which of the following is NOT correct? A) If the inflation rate exceeds the nominal interest rate, then the purchasing power of an interest-earning deposit falls over time B) If there is deflation, then the purchasing power of an interest-earning deposit rises by more than the nominal interest rate over time C) the higher the rate of inflation, the small increase in the purchasing power of an interest-earning deposit D) the purchasing power of an interest-earning deposit can increase or decrease over time, but it cannot stay the same
D
Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units. Suppose further that a current estimate of the value of the condominium owners' housing services is the same as the rent they previously paid. What happens to GDP as a result of this conversion? A GDP necessarily increases. B GDP necessarily decreases. C GDP is unaffected because neither the rent nor the estimate of the value owner-occupied housing services is included in GDP. D GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced in GDP by the estimate of the value of owner occupied housing services.
D GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced in GDP by the estimate of the value of owner occupied housing services.
If there are sticky wages, and the price level is greater than what was expected, then A the quantity of aggregate goods and services supplied falls, which is shown by a shift of the short-run aggregate supply curve to the left. B the quantity of aggregate goods and services supplied falls, as shown by a movement to the left along the short-run aggregate supply curve. C the quantity of aggregate goods and services supplied rises, as shown by a shift of the short-run aggregate supply curve to the right. D the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve.
D the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve.
A tax cut shifts aggregate demand A by more than the amount of the tax cut. B by the same amount as the tax cut. C by less than the tax cut. D None of the above is necessarily correct.
D) none of the above
Identify which of the following is included in the government purchases component of GDP? A) salary of a state court judge B) Social Security Payments C) The payment made by the federal government for a jet fighter D) A & C
D: A and C. SS payments are NOT included in government purchases
Which of the following is NOT an example of monetary policy? A The Federal Open Market Committee decides to sell bonds. B The Federal Open Market Committee decides to buy bonds. C The Federal Reserve reduces the reserve requirements. D The Federal Reserve facilitates bank transactions by clearing checks.
D: Clearing checks is NOT monetary policy
Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output? a. a decrease in the money supply and an increase in government purchases. b. an increase in the money supply and an increase in government purchases. c. an increase in the money supply and a decrease in government purchases. d. a decrease in the money supply and a decrease in government purchases.
D: a decrease in the money supply and a decrease in government purchases.
QUIZ5: In a closed economy, national savings equals: A. investment. B. income minus the sum of consumption and government purchases. C. private saving plus public saving. Correct D. All of the above are correct.
D: all of the above
According to the classical dichotomy, which of the following is affected by monetary factors? A nominal wages B the price level C nominal GDP D all of the above
D: all of the above (Bc these are all measured in $$$, so will be affected by monetary factors)
The long-run aggregate supply curve would shift left if the amount of labor available A decreased or Congress abolished the minimum wage. B increased or Congress abolished the minimum wage. C increased or Congress made a substantial increase in the minimum wage. D decreased or Congress made a substantial increase in the minimum wage.
D: decreased or Congress made a substantial increase in the minimum wage
QUIZ5: The slope of the demand for loanable funds curve represents the... A. negative relation between the real interest rate and saving. B. positive relation between the real interest rate and saving. C. positive relation between the real interest rate and investment. D. negative relation between the real interest rate and investment.
D: negative relation between the real interest rate and investment
Which of the following shifts the short-run aggregate supply curve to the right? A both an increase in the price level that is greater than expected and an increase in the expected price level. B an increase in the price level that is greater than expected, but not an increase in the expected price level. C an increase in the expected price level, but not an increase in the price level that is greater than expected. D neither an increase in the price level that is greater than expected nor an increase in the expected price level.
D: neither an increase in the price level that is greater than expected nor an increase in the expected price level
If the real exchange rate between the U.S. and Argentina is 1, then a. purchasing-power parity does not hold, but the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentine pesos to buy the same goods in Argentina. b. purchasing-power parity does not hold, but 1 U.S. dollar buys 1 Argentine peso. c. purchasing-power parity holds, and 1 U.S. dollar buys 1 Argentine peso. d. purchasing-power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentine pesos to buy the same goods in Argentina.
D: purchasing-power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentine pesos to buy the same goods in Argentina.
Forecast indicates a very strong economy ahead, so firms believe it is very likely that in a few years demand for their products or services would increase dramatically. What would this do to the market for loanable funds (in terms of the impact on demand or supply)?
Demand shifts out
A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move
Doesn't change GDP bc gambling is never included in GDP
Which groups of countries tend to have undervalued currency against the USD?
East Asia, South Asia Why? P* tends to be low in these countries as well as real GDP/capita and cost of living. Why? they depend on exports
What is important about the Federal Funds Rate (FFR)?
FFR is a market interest rate determined through supply and demand, so even though FOMC sets a target for ffr, it cannot force banks to conduct fed funds transactions at the target rate. All the FOMC can do is change supply of reserves to "push" the ffr towards its target range
How can monetary policy and fiscal policy contradict each other?
Fed might conduct contractionary policy (AD shifts left), but the gov could make this useless by increasing government spending (AD shifts right)
c: either foreign direct investment or foreign portfolio investment.
Foreign saving is used for domestic investment when foreigners engage in a. foreign direct investment. b. foreign portfolio investment. c. either foreign direct investment or foreign portfolio investment. d. None of the above is correct.
Suppose Marissa lost her job in the typewriter factory when her company went out of business because people stopped buying typewriters and buys computers and printers instead. This represents frictional or structural unemployment?
Frictional
Which of the variables that contribute to productivity (A, L, K, H, N) is affected by the following policy? Give cash payments for good school attendance
H (Human Capital)
national saving in open economy
I + NX
c: foreign direct investment
If an American-based firm opens and operates a new watch factory in Panama, then it is engaging in a. foreign portfolio investment. b. foreign financial investment. c. foreign direct investment. d. indirect foreign investment.
a: foreign portfolio investment
In the 1800s, Europeans purchased stock in American companies that used the funds to build railroads and factories. The Europeans who did this engaged in a. foreign portfolio investment. b. indirect domestic investment. c. foreign direct investment. d. foreign indirect investment.
Gross domestic product measures
Income and expenditures
If the reserve ratio is 8%, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves
Increase by $20 million and the money supply eventually increases by $250 million
What does the government do to increase stabilization policies?
Increase government spending, decrease taxes, increase money supply. ALL of these shift Aggregate demand to the right
What does depreciation do to exports and imports due to the exchange rate effect?
Increases exports, decreases imports
What would allow for the taxation of only real interest earnings?
Indexing the tax system to take into account the effects of inflation.
The introduction of the video cassette recorder in the 1970s exemplified a problems in measuring the cost of living: that problem is the problem of
Introduction of new goods
In each of the following cases, determine which component of GDP is affected (if at all), CHECK ALL THAT APPLY: Jane spends $800 on a computer to use in her editing business. She got last year's model on sale for a great price from a local manufacturer. -Consumption -Investment - Government Spending -Net Export -None of the above
Investment
In each of the following cases, determine which component of GDP is affected (if at all), CHECK ALL THAT APPLY: Sarah spends $1200 on a new laptop to use in her publishing business. The laptop was built in China. - Consumption -Investment - Government Spending -Net Export -None of the above
Investment and Net Export
d: all of the above
Investment from abroad a. is a way for poor countries to learn the state-of-the-art technologies developed and used in richer countries. b. is viewed by economists as a way to increase growth. c. often requires removing restrictions that governments have imposed on foreign ownership of domestic capital. d. All of the above are correct.
d: both countries would have temporary increases in their growth rates, but the increase would be smaller in Lower Equitorial.
Lower Equitorial and Upper Equitorial are the same except Lower Equitorial has a larger capital stock. Both countries undertake policies that raise their saving rates to the same higher level. We would expect that a. both countries would have permanent increases in their growth rates, but the increase would initially be larger in Lower Equitorial. b. both countries would have permanent increases in their growth rates, but the increase would initially be smaller in Upper Equitorial. c. both countries would have temporary increases in their growth rates, but the increase would be larger in Lower Equitorial. d. both countries would have temporary increases in their growth rates, but the increase would be smaller in Lower Equitorial.
Demand deposits are included in
M1 and M2.
Take the following information as given for a small, imaginary economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. What is MPC? What is the multiplier?
MPC = 0.75 Multiplier = 4
Determinants of Productivity
N/L (natural resources/labor) H/L (human capital/labor) K/L (physical capital/labor) A (technology)
Is real interest rate (r) effected by classical dichotomy?
NO
Is spending on stocks and bonds investment?
NO
Suppose the government decides to impose a 80% income tax for everyone. Assume no change to government expenditure or household consumption. What would this do to the market for loanable funds (in terms of the impact on demand or supply)?
No impact
GDP Deflator =
Nominal GDP/ Real GDP x 100
Which groups of countries tend to have overvalued currencies against the US dollar?
Northern European countries (Sweden, Norway)
b: increases. This increase is smaller at larger values of capital per worker.
On a production function, as capital per worker increases, output per worker a. increases. This increase is larger at larger values of capital per worker. b. increases. This increase is smaller at larger values of capital per worker. c. decreases. This decrease is larger at larger value of capital per worker. d. decreases. This decrease is smaller at larger value of capital per worker.
Changes in real GDP reflect
Only changes in the amounts being produced
faster than relatively rich countries; this is called the catch-up effect
Other things equal, relatively poor countries tend to grow
b: higher productivity, but not a higher growth rate of real GDP
Other things the same, if a country increased its saving rate, in 40 years or so it would likely have a. higher productivity, and a higher growth rate of real GDP. b. higher productivity, but not a higher growth rate of real GDP. c. the same productivity and growth of real GDP it began with. d. None of the above is correct.
b: increase U.S. GDP more than it would increase U.S. GNP.
Suppose Japanese-based Sony Corporation builds and operates a new digital camera factory in the United States. Future production from such an investment would a. increase U.S. GNP more than it would increase U.S. GDP. b. increase U.S. GDP more than it would increase U.S. GNP. c. not affect U.S. GNP, but would increase U.S. GDP. d. have no affect on U.S. GNP or GDP.
a: increase Honduran GDP more than it would increase Honduran GNP.
Suppose U.S.-based Intel Corporation builds and operates a new computer chip factory in Honduras. Future production from such an investment would a. increase Honduran GDP more than it would increase Honduran GNP. b. increase Honduran GNP more than it would increase Honduran GDP. c. not affect Honduran GNP, but would increase Honduran GDP. d. have no affect on either Honduran GDP or GNP.
Lead to higher GDP growth for a period of several decades
Suppose that Slovenia undertakes a policy to increase its saving rate. This policy will likely
B: higher productivity, but another unit of capital would increase output by less than before
Suppose that a country increased its saving rate. In the long run it would have a. higher productivity, and another unit of capital would increase output by more than before. b. higher productivity, but another unit of capital would increase output by less than before. c. lower productivity, and another unit of capital would increase output by more than before. d. lower productivity, but another unit of capital would increase output by less than before.
a: foreign direct investment. American saving is used to finance Finish investment.
Suppose that an American opens and operates a candy factory in Finland. This is an example of a. foreign direct investment. American saving is used to finance Finish investment. b. foreign direct investment. American saving is used to finance American investment. c. foreign portfolio investment. American saving is used to finance Finish investment. d. foreign portfolio investment. American saving is used to finance American investment.
d: both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital.
Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. In the long run a. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with more capital. b. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with less capital. c. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with more capital. d. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital.
b: the country that started with less capital per worker will grow faster
Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital per worker and so it has more real GDP per worker than the other. Finally, suppose that the saving rate in both countries increases from 4 percent to 7 percent. Over the next ten years we would expect that a. the growth rate will not change in either country. b. the country that started with less capital per worker will grow faster. c. the country that started with more capital per worker will grow faster. d. both countries will grow and at the same rate.
b: it is easier for a country to grow fast and so catch-up if it starts out relatively poor.
The catch-up effect refers to the idea that a. saving will always catch-up with investment spending. b. it is easier for a country to grow fast and so catch-up if it starts out relatively poor. c. population eventually catches-up with increased output. d. if investment spending is low, increased saving will help investment to "catch-up."
c: new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital.
The logic behind the catch-up effect is that a. workers in countries with low incomes will work more hours than workers in countries with high incomes. b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital. c. new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital. d. None of the above is correct.
d: all of the above
The opening of a new American-owned factory in Egypt would tend to increase Egypt's GDP more than it increases Egypt's GNP because a. some of the income from the factory accrues to people who do not live in Egypt. b. gross domestic product is income earned within a country by both residents and nonresidents, whereas gross national product is the income earned by residents of a country while producing both at home and abroad. c. all of the income from the factory is included in Egypt's GDP. d. All of the above are correct.
b: is positive and gets flatter as capital per worker rises.
The slope of the production function with capital per worker on the horizontal axis and output per worker on the vertical axis a. is positive and gets steeper as capital per worker rises. b. is positive and gets flatter as capital per worker rises. c. is negative and gets steeper as capital per worker rises. d. is negative and gets flatter as capital per worker rises.
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
The supply of loanable funds would shift rightward and investment would increase.
d: the increase in output growth from an increase in the saving rate falls over time, and that, other things the same, poor countries should grow faster than rich ones.
The traditional view that the production process has diminishing returns implies that a. the increase in output growth from an increase in the saving rate rises over time, and that, other things the same, rich countries should grow faster than poor ones. b. the increase in output growth from an increase in the saving rate falls over time, and that, other things the same, rich countries should grow faster than poor ones. c. the increase in output growth from an increase in the saving rate rises over time, and that, other things the same, poor countries should grow faster than rich ones. d. the increase in output growth from an increase in the saving rate falls over time, and that, other things the same, poor countries should grow faster than rich ones.
What is true about US exports since the 1950s?
US exports as a percentage of GDP have about tripled since the 1950s. the US currently has a trade deficit. exports are currently about 12%. Currently the line for imports is above the line for exports
If the actual dollar exchange rate (e) is HIGHER than the implied PPP (e^PPP), then the currency is...
Undervalued compared to USD
Jon, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work. what happens to the unemployment rate?
Unemployment (u) decreases
d: The growth rate of output increases, but diminishes to its former level as time passes.
Which of the following best describes the response of output as time passes to an increase in the saving rate? a. The growth rate of output does not change. b. The growth rate of output increases and gets even larger as time passes. c. The growth rate of output increases and does not change as time passes. d. The growth rate of output increases, but diminishes to its former level as time passes.
d: all of the above
Which of the following is consistent with the catch-up effect? a. The United States had a higher growth rate before 1900 than after. b. After World War II the United States had lower growth rates than war-ravaged European countries. c. Although the United States has a relatively high level of output per person, its growth rate is rather modest compared to some countries. d. All of the above are correct.
What does selling government bonds do to AD?
Will cause AD to shift in/left, reduces money supply
Suppose that banks desire to hold no excess reserves, the reserve requirement is 5%, and a bank recieves a new deposit of $1,000. This bank
Will increase its required reserves by $50, will initially see its total reserves increase by $1,000, wil be able to make a new loan of $950
Do countries close to each other have nominal exchange rates that are closer to suggested PPP?
YES: people close to the border would just cross and buy things in Canada if Canada was very close
What can increase the money supply?
a decrease in the discount rate and a decrease in the IOER
Crowding out occurs when investment declines because
a budget deficit makes interest rates rise.
Which of the following functions of money is also a common function of most other financial assets?
a store of value
Most financial assets other than money function as
a store of value, but not a unit of account nor a medium of exchange
Who can vote on Federal Open Market Committee decisions?
all of the members of the Board of Governors and some of the Federal Reserve Bank presidents
If you go to the bank and notice that a dollar buys more Japanese yen than it used to, then the dollar has
appreciated. other things the same, the appreciation would make Americans MORE likely to travel to Japan
When prisoners use cigarettes or some other good as money, cigarettes become
commodity money and function as a unit of account.
QUIZ6: Net capital outflow measures the imbalance between the amount of a. foreign assets held by domestic residents and domestic assets held by foreign residents. b. foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners. c. foreign assets bought by domestic residents and the amount of domestic goods and services sold to foreigners.
b. foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.
Take the following information as given for a small, imaginary economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. For this economy, an initial increase of $200 in net exports translates into a(n) a. $800 increase in aggregate demand when the crowding-out effect is taken into account. b. $1,400 increase in aggregate demand in the absence of the crowding-out effect. c. $800 increase in aggregate demand in the absence of the crowding-out effect. d. $570 increase in aggregate demand when the crowding-out effect is taken into account.
c. $800 increase in aggregate demand in the absence of the crowding-out effect. (First you must calculate the multiplier which is 4. 4 x 200 = 800)
QUIZ6: If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity? a. P = e/P* b. 1 = e/P* c. e = P*/P
c. e = P*/P
For the purpose of calculating GDP, investment is spending on
capital equipment, inventories, and structures, including households purchase of new housing
QUIZ6: If a country has Y > C + I + G, then a. S < I and it has a trade surplus. b. S < I and it has a trade deficit. c. S > I and it has a trade deficit. d. S > I and it has a trade surplus.
d. S > I and it has a trade surplus.
QUIZ6: If the U.S. real exchange rate appreciates, U.S. exports,
decrease and U.S. imports increase. (makes US goods more expensive)
If the public decides to hold more currency and fewer deposits in banks, bank reserves
decrease and the money supply eventually decreases
The misperceptions theory of the short-run aggregate supply curve says that if the price level is lower than people expected, then some firms believe that the relative price of what they produce has
decreased, so they decrease production. Explanation: P < Pe. Producers aren't sure if prices have dropped due to a decrease in demand or a decrease in overall price level (in which case they wouldn't change production), so they cut production either way.
Emma, a U.S. citizen, exchanges some of her saving in US dollars to euros to purchase a bond issued by a Spanish company. This transaction
does NOT change US NCO. Explanation: If foreigners gets ahold of dollars it's considered a purchase of domestic assets by foreigners. If U.S. citizens gets ahold of euros it's considered a purchase of foreign assets by domestic residents. Hence the exchange of dollars for euros would increase both components in the calculation of NCO and hence leave the final impact zero.
According to the misperceptions theory of the short-run aggregate supply curve, if a firm thought that inflation was going to be 4 percent and actual inflation was 5 percent, then the firm would believe that the relative price of what it produces had
increased, so it would increase production
According to the liquidity preference theory, an increase in the overall price level of 10 percent
increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded Explanation: inflation going up means P goes up. If P goes up, we need more money to consume hence money demand rises at every level of r. This causes Md curve to shift up, increasing equilibrium r. Higher r causes lower investment and hence lower aggregate demand.
An open-market purchase
increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.
Other things the same, if reserve requirements are increased, the reserve ratio
increases, the money multiplier decreases, and the money supply decreases.
When a bank loans out $1,000, the money supply
increases.
A country can increase its level of investment by
increasing its savings and attracting foreign investment
The Fed's policy decisions have an important influence on
inflation in the long run and employment and production in the short run.
The federal funds rate is the
interest rate at which banks lend reserves to each other overnight.
Which part of real GDP fluctuates most over the course of the business cycle?
investment expenditures
If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level
is lower and output is the same as the original long-run equilibrium
The Federal Reserve
is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks.
The interest-rate effect
is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
Credit card limits are included in
neither M1 nor M2.
If the inflation rate is zero, then
neither the nominal interest rate nor the real interest rate can fall below zero. Explanation: i = r + inflation, if inflation is 0, i = r. In the U.S., we have never had negative nominal interest rates, which means neither i nor r can be negative.
Are credit cards included in m1?
no
Are savings deposits included in M1?
no
The model of aggregate demand and aggregate supply explains the relationship between
real GDP and the price level
when inflation rate is lower than expected
real interest rate is higher than expected
when there is deflation...
real return > nominal return
The aggregate quantity of goods and services demanded changes as the price level rises because
real wealth falls, interest rates rise, and the dollar appreciates
On a banks T-account
reserves are assests and deposits are liabilites
The position of the long-run aggregate supply curve is determined by....
resource and technology use
If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would
rise
Suppose the U.S. offered a tax credit for firms that built new factories in the U.S.. Then,
the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.
cyclical unemployment rate
the difference between the unemployment rate (blue line) and red line (natural rate of unemployment) is what?
You are staying in London over the summer and you have a number of dollars with you. If the dollar appreciates relative to the British pound, then other things the same...
the dollar will buy more pounds. The appreciation would encourage you to buy more British goods and services.
Inflation is when...
the economy's overall price level is rising
Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?
the interest rate would decrease and the quantity of loanable funds would increase.
Market for Loanable Funds: The less elastic supply curve is (more Steep)....
the larger the impact will be on equilibrium IR and investment
To calculate the CPI, the Bureau of Labor Statistics uses
the prices of SOME consumer goods
Productivity is...
the quantity of goods and services produced from each unit of labor input
Ricardian Equivalence
the theory that rational private households might shift their saving to offset government saving or borrowing. Ex: If government is borrowing less, they will tax us less in the future (bc the gov wont be in debt.) Households will then reduce saving today in order to consume more in the future. Counteracts the effects of an increase in savings. Supply curve will not shift as far right.
If the reserve requirement is 5 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $10, then this bank
will be able to make new loans up to a maximum of $9.50.
