ECON PRACTICE EXAMS 3

Y C Ip G X IM T 4000 2800 500 700 900 900 900 5000 3600 700 700 900 1000 900 6000 4400 900 700 900 1100 900 For the table above, the value of the marginal expenditure rate (MER) is ______.

.9

Y C Ip G X IM T 7000 5000 100 1300 900 100 900 8000 5500 500 1300 900 200 900 9000 6000 900 1300 900 300 900 For the table above, the value of the marginal propensity to consume out of income, Y, is

1/2

Y C Ip G X IM T 1500 1000 600 700 400 200 100 3500 2600 700 700 400 400 500 5500 4200 800 700 400 600 900 For the table above, the value of the marginal tax rate is ____.

1/5

Data for Smallville shows 360 people are employed. If 640 people are classified as in the working age population with 240 of them classified as out of the labor force and with 2000 people in the total population, then the unemployment rate for Smallville is _____%.

10

Y C Ip G X IM T 4000 2800 500 700 900 900 900 5000 3600 700 700 900 1000 900 6000 4400 900 700 900 1100 900 For the table above, the value of the income-expenditure multiplier is ______.

10

The expected return to a U.S. resident from putting funds into a Canadian dollar deposit yielding a simple annual nominal return of 4.5% while the U.S. dollar is expected to depreciate by 5% over the year would be _______.

10%

The expected return to a U.S. resident from putting funds into a Mexico peso deposit yielding a simple annual nominal return of 15.5% while the U.S. dollar is expected to appreciate by 5% over the year would be _______.

10%

Which of the following would reduce national saving when it is increased?

consumption spending

The U.S. trade deficit would be recorded in the U.S. Balance of Payments _________ account.

current

Fiscal policy includes:

decisions to determine the level of government spending

Suppose there is $600 million of cash in existence with $400 million of it held in bank vaults as reserves. A bank run reduces the cash held in bank vaults as reserves to $200 million when the public withdraws $200 million of cash from the banks. If the required reserve to checking deposit ratio is 25% and if banks never hold excess reserves, then the money supply will _____ as a result of the bank run. (Hint: One method of solution is to calculate the money supply both before and after the bank run.)

decrease by $600 million

An increase in interest rates when there is an overvalued currency leads to a(n) ______ in international reserve losses and a(n) ______ in the fundamental value of the exchange rate.

decrease; increase

In Econland, population is constant, but the average standard of living is decreasing. If a larger proportion of the population is employed, then total output is ______ and average labor productivity is ______.

decreasing; decreasing

The amount of wealth an individual chooses to hold in the form of money is called:

demand for money

The aggregate demand curve, as defined and used in the course, is _____.

downward sloping with both the money supply and its velocity constant along it

The components of planned expenditure that change when real GDP changes are known as

none of the other choices

According to the model of aggregate demand and supply, a decrease in the money supply will _____.

not affect output in the long-run

If a borrower and lender agree to a REAL interest rate of 5% on a loan when inflation is expected to be 3% and inflation turns out to be 6% over the life of the loan, then, in terms of purchasing power, the borrower is _____ and the lender is ______ from the higher inflation rate.

not affected; not affected

Discouraged workers are

not considered as part of the labor force

An overvalued currency can be maintained:

only until international reserves are exhausted.

An undervalued exchange rate is an exchange rate:

that has an officially fixed value less than its fundamental value.

In the United States, the discount rate is the interest rate charged on loans from _____ to _____.

the Federal Reserve; banks

The demand for money is:

the amount of wealth an individual chooses to hold in the form of money

When actual (or equilibrium) output is smaller than potential output, it is always true that:

the cyclical unemployment rate is positive.

If both borrower and lender agree to a fixed REAL interest rate of 3% on a loan when inflation is expected to be 2%, but the inflation rate turns out to be 6% instead over the life of the loan, then ____.

the dollar payments of the borrower will be higher than expected

If $600,000 of aluminum is produced in 1999 with $400,000 used for the production of $1,200,000 of cans in 1999 and $100,000 used for $300,000 of cans in 2000 (with $100,000 of aluminum unused at the end of 2000), then these activities will contribute to 1999 & 2000 GDP:

$1,400,000; $200,000

If $800,000 of aluminum is produced in 1999 with $500,000 used for the production of $1,300,000 of cans in 1999 and $200,000 used for $500,000 of cans in 2000 (with $100,000 of aluminum unused at the end of 2000), then these activities will contribute to 1999 & 2000 GDP:

$1,600,000; $300,000

For a hypothetical economy in a given year, real GDP is $9000 per year, the GDP deflator is 120 and real consumption is $6000 per year. What is the value of nominal GDP for that year?

$10800

A labor contract provides for a first-year wage of $12 per hour, and specifies that the REAL wage will rise by 5 percent in the second year of the contract. The CPI is 100 in the first year and 115 in the second year. What dollar wage must be paid in the second year?

$14.49

Paula purchases a newly-issued, two-year government bond with a principal amount of $15,000 and a coupon rate of 5% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Paula sells the bond in the bond market. What price (rounded to the nearest dollar) will Paula receive for her bond if the prevailing interest rate is 10%?

$14318.

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract. The CPI is 100 in the first year and 110 in the second year. What dollar wage must be paid in the second year?

$16.83

Use the information below to calculate the value added by the firm. Rent paid for office space: $20,000 Wages paid to workers: $60,000 Value of produced inputs used up to produce the firm's output that were purchased from other firms: $420,000 Value of firm's output: $600,000

$180,000

Bob's Barber Shop cut 2,500 heads of hair in the year 2000 and 3,000 in the year 2001. The price of a hair cut was $10 in 2000 and $11 in 2001. If the year 2000 is the base year, what was Bob's contribution to real GDP in the year 2001?

$30,000

Suppose a family earned a nominal income of $42,000 in 2003 when the CPI was 210. By 2008, that family's nominal income increased to $84,000, while the CPI increased to 280. The family's 2008 REAL income equals _____.

$30,000

A labor contract provides for a first-year wage of $24 per hour, and specifies that the real wage will rise by 5 percent in the second year of the contract. The CPI is 120 in the first year and 144 in the second year. What dollar wage must be paid in the second year?

$30.24

Use the information below to calculate the value added by the firm. Rent paid for office space: $40,000 Wages paid to workers: $60,000 Value of produced inputs used up to produce the firm's output that were purchased from other firms: $200,000 Value of firm's output: $500,000

$300,000

Assume for 2000, nominal GDP is $50,000 and the GDP deflator is 125. For 2001, nominal GDP is $75,000 and the GDP deflator is 150. Then the exact change in REAL GDP between 2000 and 2001 is from _____ to _____.

$40,000 to $50,000

If the nominal exchange rate is 8 pesos per U.S. dollar and if a certain automotive part can be purchased in Mexico for 40 pesos, then for purchasing power parity to prevail, the same automotive part can be purchased in the United States for _______.

$5.00

Suppose a family earned a money income of $40,000 in 2000 when the CPI was 80. By 2004, that family's nominal income increased to $60,000, while the CPI increased to 120. In 2004, the family's REAL income equaled _____.

$50,000

Suppose a bond, with principal amount of $5000, has a 9% coupon, and has one year left to maturity at which time it will pay its last interest payment. If bonds of similar risk currently have a one-year interest rate of 3%, then the bond can be sold today, rounded to the nearest dollar, for as much as, but no more than,

$5291

An economy produces 1100 computers valued at $1000 each. Households purchase 400 computers of which 100 are imported. Businesses purchase 500 computers of which 200 are imported. The government purchases 100 domestically produced computers and 300 domestically produced computers are sold abroad. The unsold computers at the end of the year are held in inventory by the computer manufacturers. What is value of the investment component of GDP from these activities?

$600,000

Dave's Mirror Company expects to sell $900,000 worth of mirrors while producing $600,000 worth of mirrors in the coming year. The company plans to, and does, purchase, $500,000 of new equipment during the year. Sales for the year turn out to be $500,000. ACTUAL INVESTMENT by Dave's Mirror Company equals _____ and PLANNED INVESTMENT equals _____.

$600,000; $200,000

Suppose there is $45 million of cash in existence with $20 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 40%, how large will the money supply be if banks hold no excess reserves?

$75 million

For a hypothetical economy in a given year, nominal GDP is $9000 per year, the GDP deflator is 120 and nominal consumption is $6000 per year. What is the value of real GDP for that year?

$7500

Suppose there is $40 million of cash in existence with $10 million of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 20%, how large will the money supply be if banks hold no excess reserves?

$80 million

In Okunland, a country that operates according to Okun's law, potential output equals $10,000 and the natural rate of unemployment is 6 percent. If the actual unemployment rate is 9 percent, then the actual (or short-run equilibrium) level of output equals ____.

$9,400

According to versions of the quantity theory of money, if the money supply is growing at an instantaneous annual rate of 15% while potential output is increasing at an instantaneous annual rate of 3%, then the long-run equilibrium inflation rate will be ______.

12%

A country reports the total expenditures for a typical household as $10,000 in the base year 2000. The cost of purchasing exactly that same basket of goods in 2006 is $12,000 while total expenditures on the goods actually purchased in 2006 is $15,000. As a consequence, the country's CPI for 2006 is equal to _____.

120

If in Econland in the year 2000, real GDP is $40,000 per year, nominal GDP is $64,000 per year and real saving is $20,000 per year, then the GDP deflator for the year 2000 is _____.

160

Y C Ip G X IM T 7000 5000 100 1300 900 100 900 8000 5500 500 1300 900 200 900 9000 6000 900 1300 900 300 900 For the table above, the level of equilibrium private saving equals

1600

If the natural rate of unemployment equals 5%, the frictional rate of unemployment equals 2%, and the actual rate of unemployment equals 7%, then the cyclical rate of unemployment equals _____ (where "unknown" below means not enough information is provided to determine the answer).

2%

Suppose the price of a hamburger is $3.20 in New York and is 160 India rupees in New Delhi, India. If the value of the actual U.S. dollar nominal exchange rate is 60 India rupees per U.S. dollar, then a "burger standard" implies the actual U.S. dollar nominal exchange rate is _____.

20 percent overvalued

If the price of a shmoo increases at a simple annual rate of 15%, while at the same time (one year) a $1000 bank deposit increases to $1380, then the SIMPLE ONE-YEAR REAL return from the deposit will be

20%

To maintain purchasing power parity, when the domestic exchange rate (as defined in the course) is growing at a rate of 5% and when the domestic inflation rate is 15%, requires a foreign inflation rate of _____ (assuming instantaneous rates of compounding).

20%

Suppose the price of gold is 2400 pesos/ounce in Mexico. The nominal exchange rate between the United States and Mexico is 6 Mexico pesos per U.S. dollar. For the real exchange rate value of one ounce of U.S. gold to be 1/2, the price of gold in the United States must be $ ____ /ounce.

200

In 2005, a farmer sells wheat to a miller for $2 and the miller makes the wheat into flour and sells it a baker for $3. In 2006, the baker makes the wheat into bread and sells it a grocer for $5 and the grocer sells the bread to the public for $7. The contribution of all these activities to 2005 GDP is $_____.

3

Y C Ip G X IM T 1500 1000 600 700 400 200 100 3500 2600 700 700 400 400 500 5500 4200 800 700 400 600 900 For the table above, the value of the marginal expenditure rate is _____.

3/4

If the price of a shmoo increases at a simple annual rate of 10%, while at the same time (one year) a $2000 bank deposit increases to $2860, then the SIMPLE ONE-YEAR REAL return from the deposit will be

30%

Y C Ip G X IM T 4000 2800 500 700 900 900 900 5000 3600 700 700 900 1000 900 6000 4400 900 700 900 1100 900 For the table above, the level of equilibrium disposable income equals

3100

The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2000, the base year, the typical consumer purchased 10 books for $20 each and 300 hamburgers for $1 each. In 2001, the typical consumer purchased 20 books for $12 each and 200 hamburgers for $1.80 each. The CPI inflation rate between 2000 and 2001 is ________ .

32%

Which of the following would increase U.S. GDP?

A French firm produces ice cream in Florida.

Suppose the price of gold is 2000 pesos/ounce in Mexico. The nominal exchange rate between the United States and Mexico is 10 Mexico pesos per U.S. dollar. For the real exchange rate value of an ounce of U.S. gold to be 2, the price of gold in the United States must be $ ____ /ounce.

400

Y C Ip G X IM T 1500 1000 600 700 400 200 100 3500 2600 700 700 400 400 500 5500 4200 800 700 400 600 900 For the table above, if government expenditures were equal to 450 instead of 700, equilibrium output would have been _____.

4500

If a certain automotive part can be purchased in Mexico for 50 pesos or in the United States for $10.00, then for purchasing power parity the nominal exchange rate must be _______ peso(s) per U.S. dollar.

5

Y C Ip G X IM T 7000 5000 100 1300 900 100 900 8000 5500 500 1300 900 200 900 9000 6000 900 1300 900 300 900 For the table above, the value of the income-expenditure multiplier is ______.

5

The expected simple return to a U.S. resident from putting funds into a Mexico peso deposit account yielding a simple annual nominal return of 16.16% while the U.S. dollar is expected to appreciate against the peso by a 10% simple rate over the year would be ______%.

5.60

The price of gold is $1400 per ounce in New York and 700,000 pesos per ounce in Santiago, Chile. For purchasing power parity to hold for gold, the nominal exchange rate must be _____ Chile pesos per U.S. dollar.

500

Data for an economy shows that the unemployment rate is 10%, the participation rate 75 percent, 200 million people 16 years or older are not in the labor force. How many people are employed in this economy?

540 million

Y C Ip G X IM T 1500 1000 600 700 400 200 100 3500 2600 700 700 400 400 500 5500 4200 800 700 400 600 900 For the table above, the value of equilibrium NATIONAL SAVING _____.

600

Assume the natural rate of unemployment is 5 percent. What is the actual rate of unemployment if output is 4 percent below potential?

7%

If a bank deposit increases from $1000 to $1239.70 while at the same time (one year) the price of a shmoo increases by 15%, then the SIMPLE ONE-YEAR REAL return from the deposit will be _____%.

7.80

Data for an economy shows that the unemployment rate is 10%, the participation rate 80 percent, and 800 million people are in the labor force. How many people are employed in this economy?

720 million

The Board of Governors of the Federal Reserve System consists of ____ governors appointed for staggered ___-year terms.

7;14

Assume the actual rate of unemployment is 7%. What is the natural rate of unemployment if output is 2 percent above potential?

8%

With instantaneously compounded growth rates, if the velocity of money is growing at a rate of 2% while at the same time output is growing at a rate of 3% and the inflation rate is 8%, then the equation of exchange implies the money growth rate is _____%.

9

Hana purchased for $100,000 two-year Treasury notes with a total principal amount of $110,000 and all with coupon rates of 5% paid annually. With one year before the notes mature (and after receiving the coupon payments for the first year), Hana sells the notes in the open market when Treasury notes with one year left to maturity are yielding 11.0577%. Hana's rounded one-year rate of return earned from her purchase of the Treasury notes is equal to _____%.

9.50

Which of the following would increase the investment component of U.S. GDP?

Disney World in Florida increases its inventory of Mickey Mouse clothing, which were produced in Ohio

Which of the following would be considered an example of monetary policy?

Provision of additional cash by the government to the banking system.

_____ is NOT a major determinant of average labor productivity as discussed in the course.

The share of the population employed

If U.S. domestic assets are purchased by foreigners with U.S. currency abroad, then recorded

a credit and a debit in the capital and financial account

Which of the following would NOT shift the aggregate demand curve to the right?

a decrease in price

When output is greater than planned expenditures, then it is always true that

actual expenditures are greater than planned expenditures.

If the money supply exceeds money demand, people will ________ bonds which will cause the nominal interest rate to _______ and investment expenditures to _________ .

buy; fall; rise

Foreign purchases of U.S. assets would be recorded in the U.S. balance of payments _________ account.

capital and financial

The Federal Funds rate is the interest charged on loans from _____ to ______.

commercial banks; commercial banks

People who would like to work full time, but are able to find only part-time work are officially

employed

In the base year, real GDP ______ nominal GDP.

equals

Of the following, the best policies for the government to eliminate an expansionary gap would be to

increase imports, have the Fed sell bonds in the open market, and increase saving.

Using aggregate demand and supply curves as defined in class, an increase in the nominal money supply will:

increase output in the short-run, but leave price unchanged.

Of the following, the best policies to eliminate an expansionary (inflationary) gap would be to take measures to _____.

increase reserve requirements, increase taxes, and decrease planned investment

An implication of the QUANTITY THEORY OF MONEY is that an increase in the money supply growth rate from 3% to 7% would, for an economy in LONG-RUN equilibrium, _____.

increase the nominal GDP growth rate by 4 percentage points

Holding all else constant, an increase in Mexico real GDP will ____ the demand for dollars in the foreign exchange market and ____ the equilibrium Mexico peso/U.S. dollar exchange rate.

increase; increase

In Econland, population is constant, but the average standard of living is increasing. If a larger proportion of the population is retired, then total output is ______ and average labor productivity is ______

increasing; increasing

For the money market, as defined and used in the course material, the equilibrium nominal interest rate increases when the _____.

level of real income increases

If the FEDERAL RESERVE wants to have expansionary monetary policy, it should:

lower the discount rate.

In an economy where planned expenditure is given by PAE = 4,800 + .7Y - 30,000 r, the central bank is currently setting the interest rate at 0.06 (6 percent). If potential output equals 12,000, the central bank must ______ the interest rate to ______ .

lower; remove a recessionary gap

If nominal GDP increases from one year to the next by 2% while real GDP increases by 5%, then _____.

physical production increased and prices decreased

Sarah was researching the economic growth of a country between 2000 and 2003. Using 2000 as the base year, she calculated a six percent increase for real GDP and a two percent increase for nominal GDP. Her results indicate that:

prices decreased, but output increased over the period.

If, in a closed economy, output, Y, is equal to $1000 when consumption, C, = $750, planned investment, Ip, = $100. and taxes, T, = $50, then

private saving = $200.

In an economy where planned expenditure is given by PAE = 5,500+.6Y-20,000r, the central bank is currently setting the interest rate at 0.05 (5 percent). If potential output equals 10,750, the central bank must ____ the interest rate to _______ .

raise; remove an expansionary gap

If Congress were to index the minimum wage to an accurate Consumer Price Index (CPI), then during a year when the CPI increases by 8% the _____.

real minimum wage would remain constant

Of the following, the best policies for the government to eliminate a recessionary gap would be to

reduce the discount rate, reduce saving, and increase exports.

If the fixed-exchange-rate value of the Hong-Kong dollar is changed by the Hong-Kong government from $.10/HKD to $.13/HKD, then this is called a(n):

revaluation

If the FEDERAL RESERVE wants to have contractionary monetary policy, it should:

sell government securities

If the money supply is less than money demand, people will ____ bonds which will cause bond prices to ____ and the nominal interest rate to _____ until money demand equals money supply.

sell; fall; rise

Consumption expenditures include spending by households on:

services

An increase in the nominal money supply will:

shift the aggregate demand curve to the right.

All of the following would be included in planned expenditures EXCEPT:

social security payments

Bank balance is to consumption as _____

stock is to flow

Debt is to saving as

stock is to flow.

Money supply is to wealth as

stock is to stock.

If average labor productivity in two countries is the same, then the average standard of living will be higher in the country with _____ .

the higher fraction of the population employed

Suppose the price of a U.S. made television is $1800 in New York City and the price of an equal quality South Korea made television is 1,320,000 Won in Seoul. If the nominal exchange rate is 1100 Won per U.S. dollar, then, for televisions only and for the U.S. and South Korea, ignoring transportation costs, ______ .

the price of the South Korea television in New York City is $1200

If, on a deposit to a bank account, the simple annual NOMINAL interest rate is 7% and the simple annual REAL interest rate is 2%, then at the end of one year, approximately, _____ .

the purchasing power of the deposit will be 2% higher

If, on a deposit to a bank account, the annual NOMINAL interest rate is 8% and the annual REAL interest rate is 5%, then at the end of one year

the purchasing power of the deposit will be 5% higher.

According to the equation of exchange, if the income velocity of money is constant and if output is constant, then it is always true that

the ratio of the money supply to the price level is constant.

If, in a closed economy, output, Y, is equal to $1000 when consumption, C, = $750, planned investment, Ip, = $100. and government spending, G, = $50, then

unintended investment is $100.