Economics Exam II

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

$800 billion

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 1,000. Government spending is 600. In this case, equilibrium investment is:

1,500

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal:

20,000

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals:

3,000

If output is described by the production function Y = AK 0.2L0.8, then the production function has:

Constant returns to scale

What is the value of bank capital?

+$1,000

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

National saving

In equilibrium, total investment equals:

National saving

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:

50

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:

760

If saving exceeds investment demand, and consumption is not a function of the interest rate:

E

Percentage change in P is approximately equal to the percentage change in:

M minus percentage change in Y plus percentage change in velocity

A consumption function shows the relationship between consumption and:

disposable income

Credit card balances are included in:

neither M1 nor M2

Other things equal, an increase in the interest rate leads to:

a decrease in the quantity of investment goods demanded

"Inflation tax" means that:

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

The inflation tax is paid:

by all holders of money

If the Federal Reserve wishes to increase the money supply, it should:

decrease the discount rate

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

decrease the monetary base (B)

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

increase by 1 percent

The income velocity of money:

is defined in the identity MV=PY

Financial intermediation is the process of:

transferring funds from savers to borrowers

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a:

unit of account

In the United States, bank reserves consist of:

vault cash and deposits at the Federal Reserve

The nominal interest rate is the:

rate of interest that investors pay to borrow money.

The supply and demand for loanable funds determines the:

real interest rate

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve-deposit ratio, then the total money supply is:

reserves divided by rr

When the demand for money parameter, k, is large, the velocity of money is ______ and money is changing hands ______

small;infrequently

In the classical model with fixed income, if households want to save more than firms want to invest, then:

the interest rate falls

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases

The rate of inflation is the:

percentage change in the level of prices

If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to:

300

Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by:

425

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is:

500

The nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

-4 percent

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by:

175

In a 100-percent-reserve banking system, banks:

cannot affect the money supply

The demand for output in a closed economy is the sum of

consumption, investment, and government spending

Investment goods as measured in the GDP are purchased by:

business firms and households

The reserve-deposit ratio is determined by:

business policies of banks and the laws regulating banks

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

less, rises