FINAL- ECONOMICS

Which of the following statements best reflects the concept of present value?

"You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now."

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years. How much will be required to pay off the loan at the end of the five years?

$401.47

The Federal Reserve System's three administered rates are the

IORB rate, ON RRP rate, and discount rate.

Suppose that the linear equation for consumption in a hypothetical economy is C = 40 + 0.8Y. Also suppose that income (Y) is $400. Determine the values for the following:

The marginal propensity to consume = 0.8 The marginal propensity to save = 0.2 The level of consumption = $ 360 The average propensity to consume = 0.9 The level of saving = $ 40 The average propensity to save = 0.1

Which of the following statements is incorrect about the money market?

The money market is relatively insignificant since the federal funds rate is not a main tool of Fed policy.

If you are estimating your total expenses for school next semester, you are using money primarily as

a unit of account.

When economists say that money serves as a store of value, they mean that it is

a way to keep wealth in a readily spendable form for future use.

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion.

Discretionary fiscal policy will likely cause budget

deficits during recessions and surpluses during periods of demand-pull inflation.

Compound interest

describes how quickly an interest-bearing asset increases in value.

The collateral used for overnight reverse repos is (are)

government securities.

The size of the MPC is assumed to be

greater than zero but less than one.

Checkable deposits are

included in M1.

The consumption schedule is drawn on the assumption that as income increases, consumption will

increase absolutely but decline as a percentage of income.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to

increase government expenditures or reduce taxes.

The Federal Reserve System changes the money supply by

providing forward guidance about how it intends to conduct monetary policy.

Which of the following Fed actions will decrease the money supply?

raising the overnight reverse repo rate

A recession is defined as a period in which

real GDP falls.

The APC can be defined as the fraction of a

specific level of total income that is consumed.

If Trent's MPC is 0.80, this means that he will

spend eight-tenths of any increase in his disposable income.

The difference between M1 and M2 is that

the latter includes small-denominated time deposits and money market mutual fund balances.

The most important determinant of consumer spending is

the level of income.

The sale of government securities by the Fed will cause

the money supply to decrease.

If the Federal Reserve System buys government securities,

the money supply will increase.

The unemployment rate that is consistent with full employment is _________

the natural rate of unemployment

Assume that Jimmy Cash has $2,000 in his checking account at Folsom Bank and uses his checking account debit card to withdraw $200 of cash from the bank's ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?

$ 0

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years. How much will be required to pay off the loan at the end of 10 years?

$1,079.46

$1,000 invested at a compounded interest rate of 4 percent will be worth how much at the end of 7 years?

$1,316

(Advanced analysis) If the equation for the consumption schedule is C = 20 + 0.8Y, where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is

$100.

Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound. What will be the value of your investment 4 years from now?

$117

As of November 2021, the supply of money (M1) in the United States was about

$20.3 trillion.

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

$210

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?

$255.26

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?

$540

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. The MPC is

0.90.

Draw two separate demand-and-supply diagrams that illustrate, respectively, bond purchases and bond sales by the Fed. In each figure, the price of bonds is the vertical axis variable while the quantity of bonds demanded or supplied is the horizontal axis variable. In each of the two figures, show the initial equilibrium before the Fed action and the new equilibrium after the Fed has 1. increased the demand for bonds in the first figure and 2. increased the supply of bonds in the second figure.

1. 2.. Refer to the graphs below. In the graph on the right, the Fed has taken action to increase the demand for government bonds. The Fed could do this by announcing their intent to make a significant purchase of bonds. This action would cause the demand curve to shift rightward to D' which would cause the equilibrium price to rise from P* to P' as shown. In the graph on the left, the Fed has taken action to increase the supply of government bonds. The Fed could do this by selling a significant amount of bonds. This action would cause the supply curve to shift rightward to S' which would cause the equilibrium price to fall from P* to P' as shown. Since bond prices and interest rates move in opposite direction, we could infer that an increase in bond price to P' as shown in the graph on the left would be followed by a decrease in interest rates. Similarly, decrease in bond price as shown in the graph on the right would be followed by an increase in interest rates.

Suppose that a country has 9 million people working full-time. It also has 1 million people who are actively seeking work but are currently unemployed, along with 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this country's unemployment rate?

10 percent

Refer to the table for Moola below to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate recessionary output gap , and, if either, what is the amount? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?

5 percent $20 recessionary output gap $20 $ 100 increase 2

Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is

6 percent.

The table contains information about a hypothetical economy. All figures are in millions. The unemployment rate is Unemployed 7 Total Population 145 Employed 95 Discourage 3

6.9 percent.

Suppose a bond with no expiration date has a face value of $10,000 and annually pays $800 in fixed interest. a. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. b. What generalization can you draw from the completed table?

8,989 12,903 10% 8% 7.3% b. Bond prices and interest rates are inversely related.

Suppose that you desire to get a lump-sum payment of $100,000 two years from now. How many current dollars will you have to invest today at 10 percent interest to accomplish your goal?

82,645

a. The Federal Reserve may use open-market operations to influence interest rates and the money supply. Open-market operations involve the Federal Reserve _________ b. If the Federal Reserve wanted to influence interest rates to increase it could _________.

A. either buying or selling bonds B. sell bonds

Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chance that it will be worth $140 in a year. A. What is its average expected rate of return? B. Next, figure out what the investment's average expected rate of return would be if its current price were $130 today. C. Does the increase in the current price increase or decrease the asset's average expected rate of return? D. At what price would the asset have a zero average expected rate of return?

A.3.12 percent B. -4.8 percent C. Decrease D. 123.76

Refer to the diagram, in which Qf is the full-employment output. Expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD0.

Examine the nearby Dual-Mandate Bullseye chart that shows where the U.S. economy was exactly one year before the COVID-19 lockdowns began. Write a brief essay of just a paragraph or two explaining how an FOMC member might have reacted to this information, including whether the Fed was getting mixed signals and what policies they might have recommended to move the red dot toward the center of the bullseye. (Note that at that time, the Fed believed the full-employment rate of unemployment to be about 4.2 percent of the labor force.)

An FOMC member in March 2019 would have seen that the current unemployment and inflation data were giving them mixed signals. On the one hand, inflation was below the 2-percent inflation target, suggesting that an expansionary monetary policy might be useful. On the other hand, the unemployment rate was less than the 4.2 percent unemployment target that prevailed back then, suggesting that the economy was overheating and that a restrictive monetary policy might be useful. However, it should be noted that difference between the actual rates and the targeted rates for both inflation and unemployment were quite small. Thus, an FOMC member would likely not have been very motivated to make any changes given that both gaps were small, and both were indicating opposite policy stances.

Suppose that the amount of saving that occurs at each level of national income falls by $20 but that the values of b and (1 − b) remain unchanged. Restate the saving and consumption equations inserting the new numerical values. Which of these factors might have caused this change?

C = 100.+ 0.6 Y S = -100 + 0.4 .Y An increase in the stock market's value

Linear equations for the consumption and saving schedules take the general form C = a + bY and S = −a + (1 − b)Y, where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents the slope of the consumption schedule. Use the following data to substitute numerical values for a and b in the consumption and saving equations.

C = 80 .+ 0.6 Y S = -80 + 0.4 Y

The group of three economists who provide fiscal policy recommendations to the president is the

Council of Economic Advisers.

D&E. D. Assume that arbitrage continues until C and D have the same expected rate of return. When arbitrage ends, will C and D have the same price? E. We know that arbitrage will equalize rates of return. Does it also guarantee to equalize prices?

D. No, they will have different prices. E. NO In what situations will it also equalize prices? When assets have the same payment.

A $20 bill is a

Federal Reserve Note.

In the United States, monetary policy is the responsibility of the

Federal Reserve System.

What is the difference between economic and financial investments?

Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods.

Which of the following is both an economic and a financial investment?

Intel builds a new computer chip factory

Which of the following statements is true about buying an old factory?

It is a financial investment but not an economic investment.

Assuming no other changes, if balances in money market mutual fund accounts increase by $50 billion and small-denominated time deposits decrease by $50 billion, the

M1 and M2 money supplies will not change.

Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the

M1 money supply will decline and the M2 money supply will remain unchanged.

B. What is the economic meaning of b? What is the economic meaning of (1 − b)?

MPC MPS

Which of the following is correct?

MPC + MPS = APC + APS.

Place the phases of the business cycle in order, starting with the highest level of GDP: recession, trough, peak, expansion.

Peak, Recession, Trough , expansion

What is the primary reason that changes in total spending lead to cyclical changes in output and employment?

Prices are sticky in the short run.

Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90. A. What are the rates of return of assets A and B at their current prices?

Return on asset A = 25.00 Return on asset B = 11.11 Given these rates of return, which asset should investors buy and which asset should they sell? Buy asset A and asset B

Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90. C. What are the rates of return of assets C and D at their current prices?

Return on asset C = 25.00 Return on asset D = 11.11 Given these rates of return, which asset should investors buy and which asset should they sell? Buy asset C and sell asset D .

Which of the following statements is true about causes of business cycle fluctuations?

There are a wide range of theories as to the underlying causes of business cycle movements.

Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90. B. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ends, will A and B have the same price?

Yes, they will have the same price.

Which of the following represents the most contractionary fiscal policy?

a $30 billion decrease in government spending

Which one of the following will cause a movement down along an economy's consumption schedule?

a decrease in disposable income

The relationship between consumption and disposable income is such that

a direct and relatively stable relationship exists between consumption and income.

Isaiah just purchased a house built in 2019 that he expects will appreciate in value over time. His purchase would be considered

a financial investment but not an economic investment.

When economists say that money serves as a medium of exchange, they mean that it is

a means of payment.

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

a medium of exchange.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing

a negative GDP gap.

Assume that the following data characterize the hypothetical economy of Trance: money supply = $200 billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate. a. What is the equilibrium interest rate in Trance? b. At the equilibrium interest rate, what are the quantity of money supplied, the quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance?

a. 4 .percent Quantity of money supplied = $ 200 billion Quantity of money demanded = $ 200 billion Amount of money demanded for transactions = $ 150 billion Amount of money demanded as an asset = $ 50 billion

Suppose the price level and value of the U.S. dollar in year 1 are 1 and $1, respectively. a. If the price level rises to 1.25 in year 2, what is the new value of the dollar? b. If, instead, the price level falls to 0.50, what is the value of the dollar?

a. $ 0.80 b. $ 2.00

Assume that the following asset values (in millions of dollars) exist in Ironmania: a. What is M1 in Ironmania? b. What is M2 in Ironmania?

a. $ 2,380 million b. $ 2,880 million

Suppose the wealth effect is such that $10 changes in wealth produce $1 changes in consumption at each level of income. a. If real estate prices tumble such that wealth declines by $80, what will be the new level of consumption at the $340 billion level of disposable income? b. What will be the new level of saving?

a. $316 b. $24

Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year's net revenue. a. What is the expected rate of return? b. If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Will it invest in the machine if the real interest rate is 9 percent? If it is 11 percent?

a. 10 percent b. yes yes no

Suppose that a risk-free investment will make three future payments of $100 in 1 year, $100 in 2 years, and $100 in 3 years. a. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investment? b. What is the price of this investment if the Federal Reserve raises the risk-free interest rate to 10 percent?

a. 257.70 b. 248.68

Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion, and saving goes up by $2 billion. a. What is the economy's MPC? b. What was the APC before the increase in disposable income?

a. MPC = 0.9 ± 0.1 What is its MPS? MPS = 0.1 ± 0.1 b. APC before = 0.750 ± 0.001 What was the APC after the increase? APC after = 0.764 ± 0.002

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.

a. Mariam just graduated from college and is looking for a job. Frictional unemployment b. A recession causes a local factory to lay off 30 workers. Cyclical unemployment c. Thousands of bus and truck drivers permanently lose their jobs to self-driving vehicles. Structural unemployment d. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India. Structural unemployment

a. The Federal Reserve's three administered rates are: b. The rate that is most important rate in terms of helping to mitigate or avoid bank runs is:

a. the IORB rate, the discount rate, and the ON RRP rate. b. the discount rate

The economy of the United States' is considered to be at full employment when

about 3 to 4 percent of the labor force is unemployed.

An interest rate set by a central bank to help it manage market-determined interest rates defines

an administered rate.

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward

an excess of government expenditures over tax receipts.

Most economists agree that the majority of most business cycle variations are caused by

an unexpected change in the level of total spending.

The money market comprises short-term lending markets that include markets for

bank certificates of deposit.

An example of a security is a(n)

bond issued by Deere & Company.

In a reverse repo transaction, the Fed _________blank money.

borrows

Currency in circulation is part of

both M1 and M2.

Recurring increases and decreases in an economy's real GDP over periods of years are called

business cycles.

In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?

capital goods

The MPC can be defined as that fraction of a

change in income that is spent.

In the United States, the money supply (M1) includes

coins, paper money, checkable deposits, and savings deposits.

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to

consume is three-fifths.

Dissaving occurs when

consumption exceeds income.

The APC is calculated as

consumption ÷ income.

Which of the following is correct? When the Federal Reserve transacts a reverse repo agreement with a nonbank firm, the money supply

contracts because that money will sit in the Fed's vaults.

If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the

cyclical unemployment rate is 4 percent.

Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would

decline.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to

do nothing since the economy appears to be achieving full-employment real output.

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with

expansionary fiscal policy.

Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and to begin a better job in two weeks with company B. Kyle will be considered

frictionally unemployed.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

According to the concept of the time value of money,

money is more valuable to a person the sooner it is received.

The M2 money supply includes

individual shares in money market mutual funds.

Discretionary fiscal policy is so named because it

involves specific changes in taxes and government spending undertaken expressly for stabilization at the option of Congress.

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability.

The near-money components of M2 are

less liquid than the M1 components of M2.

Most economists agree that the immediate determinant of the volume of output and employment is the

level of total spending.

The largest component of the money supply (M1) is

liquid deposits other than checkable deposits at commercial banks.

Which of the following is an economic investment?

newly built houses

Coins held in commercial bank vaults are

not part of the nation's money supply.

Which of the following is a tool of monetary policy?

open-market operations

The three main tools of monetary policy are

open-market operations, forward guidance, and changing the administered interest rates.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce taxes by $80 billion.

The effect of expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve.

Financial assets such as stocks and bonds that are tradable in organized markets such as the New York Stock Exchange are

securities.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

shift the AD curve to the left.

The unemployment rate of

teenagers is much higher than that of adults.

The natural rate of unemployment is

that rate of unemployment occurring when the economy is at its potential output.

At the point where the consumption schedule intersects the 45-degree line,

the APC is 1.00.

In a reverse repo transaction,

the Fed borrows money from financial institutions.

The consumption schedule is such that

the MPC is constant and the APC declines as income rises.

Which of the following would most likely move the economy into a recession in the short term?

the central bank printing less money than was anticipated

U.S. monetary policy is conducted by

the central bank.

During a severe recession, we would expect output to fall the most in

the construction industry.

What are the two most important factors influencing investor preferences?

the desire for high rates of return and the dislike of risk and uncertainty

Open-market operations refer to

the purchases and sales of U.S. government securities by the Fed.

The phase of the business cycle in which output and employment is at a minimum is called

the trough.

(Advanced analysis) If the equation C = 20 + 0.6Y, where C is consumption and Y is disposable income, were graphed,

the vertical intercept would be +20 and the slope would be +0.6.

In defining money as M1, economists exclude time deposits because

they are not directly or immediately a medium of exchange.

Checkable deposits are classified as money because

they can be readily used in purchasing goods and paying debts.

Stock market price quotations best exemplify money serving as a

unit of account.

Present value is best defined as the

value today of some amount of money that is to be received at a future date.

To say "money is what money does" means that

whatever performs the functions of money extremely well is considered to be money.