Test 1 Econ 3

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when: real interest rates are low. capital's share of income is growing rapidly. labor productivity is growing rapidly. real interest rates are high.

labor productivity is growing rapidly.

Suppose government increases both taxes and government purchases. change in national savings will be...

(MPC-1)*delta T

Public saving

(T - G) government revenue - government spending

A decrease in government purchases of goods and services, holding taxes constant, will the equilibrium real interest rate and investment. increase, increase increase, decrease decrease, increase decrease, decrease

, decrease increase

If national income is $1,200, consumption is $600, taxes are $200, and government purchases are $300, then national saving is $300. $400. $500. $600.

300

GDP is all of the following except: the total expenditure of everyone in the economy. the overall expenditure on the economy's output of goods and services. the total income of everyone in the economy. the total output of the economy.

A

Diminishing marginal product

A characteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant.

T/F: Government transfer payments are an example of a leakage in the economy.

False

T/F: The GDP deflator tends to overstate the rate of inflation because of the substitution bias. A true B false

False

T/F: government transfer payments are an example of a leakage in the economy

False

Is GDP a stock or flow?

Flow (GDP is per year)

Core rate of inflation excludes...

Food and energy products

Budget surplus

G<T

Why is it called a GDP deflator?

Real= nominal/deflator it is used to deflate (that is, take inflation out of) nominal GDP to yield real GDP.

Leakage

Remove dollars from circular flow (saving, taxes, imports)

Real money balances

Represents the purchasing power of a given stock of money

Holding all things constant, rise in consumption will ??? interest rate and ??? invesstment

Rise and lower

If government spending exceeds government revenue......

Runs a budget deficit Public saving is negative

THe larger the MPC is ????? the decline in investment, and ??? will be the increase in the interest rate

Smaller, smaller

Loanable funds

The flow of resources available to finance capital accumulation.

Not in labor force

full-time student, homemaker, or retiree, discouraged worker (gave up looking)

Durable consumption goods

good that last a long time (cars and TVs)

Consumption

goods and services purchased by consumers

Budget deficit

government spending in excess of tax revenues. Funds by issuing government debt (borrowing in financial market)

An example of an imputed value in the GDP is the: value added of meals cooked at home. rental services of automobiles to their owners. housing services enjoyed by homeowners. value of illegal drugs sold.

housing services enjoyed by homeowners.

What does the parameter k mean?

hows how much money people want to hold for every dollar of income If people are holding fewer dollars, then each dollar must be used more times to purchase the same quantity of good and services, which means higher velocity of money

An economy's factors of production and its production function determine the economy's: labor-force participation rate. population growth rate. budget surplus or deficit. output of goods and services.

output of goods and services

Real interest equation

real interest rate (r)= nominal interest rate (i) - inflation rate (pi)

What is the opportunity cost of holding money? A the real rate of interest B the expected rate of inflation C the real rate of interest - the expected rate of inflation D the real rate of interest + the expected rate of inflation

real rate of interest

If high inflation doubles the prices of all factors and outputs in the economy, real and and real rental?

real wage remains unchanged real rental price of capital remains unchanged

An increase in the interest rate investment. nominal, increases nominal, decreases real, increases real, decreases

real, decreases

Menu costs

result of firms having to change their posted prices more often

Shoe leather costs

result of people having to convert bonds into money. As prices go up, you have to convert money more and more often The cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank.

Real wage

the payment to labor measured in units of output rather than in dollars.

Inflation is measured as...

the percentage change in the price level

Real GDP

the production of goods and services valued at CONSTANT prices. Shows what happens when only quantities change

Nominal GDP

the production of goods and services valued at CURRENT prices

IN Cobb Douglas, the MPL will increase if

the quantity of capital increases

Because most loans are specified in nominal terms, high ??? inflation hurts ???. expected, debtors expected, creditors unexpected, debtors unexpected, creditors

unexpected, creditors

Nominal variables

variables measured in monetary units

Real variables

variables measured in physical units

Real wage equation

wage rate/price level

When does crowding out occur?

when governments must borrow funds which causes interest rates to rise and thus private investment is reduced (savings supply vertical is moved left)

Are transfer payments included in GDP?

No, not counted as expenditures either

When disposable income is $6,000, government purchases are $800, consumption is $4,000, and tax revenues are $800, then the quantity of loanable funds supplied equals _____, and the quantity of loanable funds demanded equals _____. $0; $2,000 $3,200; $2,400 $2,000; $2,000 $2,000; $0

$2,000; $2,000

Are used goods included in GDP?

No, only the original selling price is included, GDP measures CURRENTLY produced

Costs of unexpected inflation

-Arbitrary redistribution of purchasing power: real returns on loans decrease :( -Increased uncertainty

Money has a real return of...

-e(pi) (expected rate of inflation)

Real interest rate

Nominal interest rate corrected for the effects of inflation. TRUE COST OF BORROWING

Fisher effect

1% increase in money supply= 1% increase in inflation and 1% increase in inflation= 1% increase in nominal interest rate

4 income accounts of GDP

1. Consumption 2. Investment 3. Government purchases 4. Net exports

3 main differences between GDP deflator and CPI

1. GDP deflator measures prices of all g/s produced, CPI measures prices of all g/s BOUGHT BY CONSUMERS 2. GDP deflator only focuses on domestically produced items, CPI includes imports 3. GDP deflator assigns changing weights, while CPI assigns fixed weights to prices of different goods

How is the PCE deflator like the CPI?

1. Includes only the prices of g/s that consumers buy 2. Includes imports

Neoclassical theory of income distribution

1. Prices adjust to supply and demand 2. Demand for each factor of production depends on the marginal productivity of that factor 3. Wages, prices, and interest rates are FLEXIBLE

GDP (2 definitions)

1. Total income of everyone in the economy 2. Total expenditure on the economy's output of goods and services Measures INCOME

Does CPI overstate inflation?

1. Yes: doesn't account for substitution so can overstate impact of high prices 2. yes: when new goods are introduced the purchasing power of the dollar increases, not reflected in CPI 3. yes: doesn't account for quality changes, like comfort or safety

How is the PCE deflator like the GDP deflator?

1. the PCE deflator allows the basket of goods to change over time as the composition of consumer spending changes.

How much does CPI overstate inflation?

1.1%

a 100 rise in G will cause... in national saving

100 FALL in national saving

What was the peak of inflation in US in 1979/1980?

13%

Total investment in the US makeup

15% of GDP

In 2013, the GDP of the United States totaled about: $16.8 billion. $16.8 trillion. $168 trillion. $168 billion.

16.8 trillion

Zimbawe inflation

18000% per month. Made US dollar the official currency to rectify

Government purchases makeup

20% GDP

Suppose that expected inflation is 5 percent and the nominal interest rate is 8 percent. If actual inflation is 2 percent lower than expected, then the ex ante real interest rate is _____, the ex post real interest rate is 5 percent, and there is an unexpected transfer of wealth from _____.

3; borrowers to lenders

Suppose the demand for real money balances is equal to Y/5i. The velocity of money is ___. A 5i B 5 C 1/5i D 1/5

5i

Consumption makeup

67% GDP

Consumer Price Index

A measure of the overall level of prices that shows the cost of a fixed basket of consumer goods relative to the cost of the same basket in a base year. Weighted average

National saving

A nation's income minus consumption and government purchases; the sum of private and public saving.

What does it mean to have constant returns to scale?

A production function has constant returns to scale if an equal percentage increase in all factors of production causes an increase in production of the same percentage.

Cobb douglas production function

A production function of the form F (K, L) = AKαL1−α, where K is capital, L is labor, and A and α are parameters

Constant returns to scale

A property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion.

Consumption function

A relationship showing the determinants of consumption; for example, a relationship between consumption and disposable income, C = C (Y − T).

Competitive firm

A situation in which there are many individuals or firms, so that the actions of any one of them do not influence market prices. Can't influence the wages of the workers So.... Takes price of outputs and inputs as given by market conditions

Injections

Add dollars to the circular flow (investment, government purchases, exports, transfer payments)

Benefits of inflation

Allows the central bank to use negative real interest rates as a policy tool easier to reduce real wages by raising nominal wages by less than the rate of inflation

Personal income

Amount of income that households/noncorporate businesses receive

Hyperinflation is usually caused by ___. A large trade surplusses B too much saving C large government budget deficits D too much borrowing and investment

C

Factors of production

An input used to produce goods and services; for example, capital or labor.

Joe buys a bond with a nominal interest rate of 6% that will mature in 2 years. In the next year, prices unexpectedly double in price. What is the cost of the inflation demonstrated by this example. A Businesses must post new prices more often. B There is an arbitrary redistribution of income from lenders to borrowers. C People will have to convert bonds to money more often. D The dollars usefulness as a measure of relative prices is undermined.

B

Which of the following events would affect the CPI but not the GDP deflator? A. Boeing, the American airplane manufacturer, raises the price it charges the U.S. Air Force for fighter jets. B. Volvo, the Swedish auto maker, raises the prices of the cars it sells in the United States. C. Kellogg, the American cereal maker, cuts the price of a box of corn flakes. D. Barbers around the country raise the prices they charge for haircuts.

B

Why do people hold money? A Money pays a rate of return of r. B Money provides liquidity. C Money is both a liquid and interest bearing asset. D Money has a higher real rate of return than bonds.

B

chain-weighted measures of GDP

Base prices changes continuously. Average prices of 2 years is used to measure real growth in year

PCE deflator

Based only on the consumer portion of expenditures

When does hyperinflation begin/end?

Begins when central bank rapidly increases money supply Ends when central bank reduces rate of growth in money supply. Must reduce government spending and raise taxes

Who computes the GDP?

Bureau of Economic Analysis every 3 months

Who computes the CPI?

Bureau of Labor Statistics

Who measures unemployment rate?

Bureau of Labor Statistics (BLS)

Which of the following represents the shoe leather cost of inflation? A Businesses must post new prices more often. B There is an arbitrary redistribution of income from lenders to borrowers. C People will have to convert bonds to money more often. D The dollars usefulness as a measure of relative prices is undermined.

C

What variables are endogenous?

C, I, r (interest rates)

When prices of different goods are increasing by different amounts, the price index that will rise the fastest is: the CPI. the PCE index. the GDP deflator. a Paasche index.

CPI

Taxes on production/imports

Certain taxes on businesses, such as sales taxes, less offsetting business subsidies. These taxes place a wedge between the price that consumers pay for a good and the price that firms receive.

The most commonly used measure of prices in the economy is....

Consumer price index

Household demand for g/s

Consumption

Another name for depreciation

Consumption of fixed capital. Equal to about 16% of GNP

If the expected inflation rate is 5 percent and the nominal interest rate is 8 percent, then the ex post real interest rate: is greater than 3 percent. cannot be determined. is less than 3 percent. is 3 percent.

Correct: cannot be determined

A potential benefit of inflation is ___. A the government earns more tax revenue B the nominal interest rate will always be above zero C borrowers learn to anticipate inflation D the labor market works more efficiently

D

When a firm sells a product out of inventory, investment expenditures ______, and consumption expenditures ______. decrease; increase remain unchanged; increase increase; decrease decrease; remain unchanged

Decrease, increase

Assume immigration increases the labor force in an economy with a Cobb-Douglas production function. Please complete the following statement. As a result, the real wage ???and the rental price of capital ???

Decreases, increases

Which GDP measures prices?

Deflator

Imputed value

Estimate of the value of a good or service that is not sold in the marketplace and therefore does not have a market price. Ex: owning a house because you don't pay rent. Department of Commerce estimates what you would have paid for rent and includes it in GDP

The market value of all final goods and services produced within an economy in a given period of time is called: general durable purchases. gross domestic product. the GDP deflator. industrial production.The market value of all final goods and services produced within an economy in a given period of time is called: general durable purchases. gross domestic product. the GDP deflator. industrial production.

GDP

What variables are exogenous?

Government purchases and net taxes

Balanced budget

Government purchases equal taxes minus transfers, then G=T

Higher disposable incomes leads to ..... consumption

Greater

Higher income ??? demand real money balances

Higher income= higher demand for real money balances

Higher nominal interest rate ??? demand for real money balances

Higher nominal interest= lower the demand for real money balances

Euler's theorem

If the production function has constant returns to scale and the factors are paid their marginal products then economic profit = 0

Compensation of employees

Includes wages, salaries, and various supplements—employer contributions to social insurance and pension funds, for example—paid to households by firms and by the government.

Which of the following is a flow variable? the number unemployed wealth income government debt

Income

Disposable income

Income remaining after the payment of taxes (Y-T) Divided into consumption and saving

Inflation

Increase in overall level of prices

Hyperinflation

Inflation that exceeds 50% per month

What guarantees that the sum of consumption, investment, and government purchases will be equal to amount produced?

Interest rate (balances supply and demand for g/s and loanable funds)

Business demand for g/s

Investment

Are used goods counted in GDP (reselling)?

No

Is the "underground economy" counted in GDP?

No

Investment

Items bought for future use. 3 subcategories: business fixed investment Residential investment Inventory investment

Capital

K Set of tools that workers use (crane, calculator, computer)

Labor

L time people spend working

When prices of goods are changing by different amounts, does Laspeyres or Paasche overstate the increase in cost of living?

Laspeyres (fixed) Ignores substitution

When interest rate rises, are there more are less profitable investment projects?

Less

Higher interest rate .... investment

Lower

Real Money balances equation

M/P Quantity of money/price level

Computational definition of GDP

Market value of all final goods and services produced within an economy in a given period of time

GDP deflator definition

Measure of the overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of that basket in a base year

National income definition

Measurement of how much everyone in the economy has earned

Gross National Product

Measures total income earned by all people of the nation. (takes into account US citizens earning abroad)

In equilibrium, total investment equals: private saving. public saving. national saving. household saving.

National saving

??? GDP measures the value of the economy's output at current prices and is a ???variable.

Nominal, flow

When disposable income increases, the consumption function will:

Not change Changes in disposable income will cause a movement along the existing consumption function.

Establishment survey

Only data from employers (ignores self employed) Because of large sample size, many economists believe that it yields more accurate information

Inflation

Overall increase in prices

What is the Fed's preferred measure of inflation?

PCE deflator

Which of the following is an example of a Paasche index? A CPI B PPI C PCE deflator D BMI

PCE deflator

When prices of goods are changing by different amounts, does Laspeyres or Paasche understate the increase in cost of living?

Paasche (changing) Ignores reduction in consumer welfare that comes from substitution

What does it mean for k to be big?

People want to hold a lot of their money inside. So, V is small (v=1/k)

Unemployment rate percentage

Percentage of labor force that is unemployed

Fisher index

Price index using an AVERAGE of Laspeyres and Paasche

Paasche index

Price index with a CHANGING basket

Laspeyres Index

Price index with a FIXED basket of goods

Residential investment

Purchase of new housing by households/landlords

Quantity theory of money says that

Quantity of money (M) determines the dollar value of the economy's output (P*Y) And because Y is fixed by production function, we can say that ... price level is proportional to the money supply So, money supply affects price level and therefore inflation level

Which GDP measures quantities?

Real

if a wave of immigration increase labor force, what happens to real wage and real capital?

Real wage decreases real capital increases

assume an economy that has the cobb-doubglas production function y=10K^1/3L^2/3. If the economy's stock of capital doubles, the share of total income paid to the owners of capital will increase by 2/3 stay the same increase by 10% increase by 1/3

Stay the same. SHARE of total income will always be 1/3 for capital (and 2/3 for labor)

When does Paasche fail?

Tends to understate the increase in the cost of living. Although it accounts for the substitution of alternative goods, it does not reflect the reduction in consumers' welfare that result from such substitutions.

National income accounting

The accounting system that measures GDP and many other related statistics.

Marginal product of capital

The amount of extra output produced when the capital input is increased by one unit.

Marginal product of labor

The amount of extra output produced when the labor input is increased by one unit.

Accounting Profit

The amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated. (Cf. economic profit, profit.)

Economic profit

The amount of revenue remaining for the owners of a firm after all the factors of production have been compensated

Factor prices

The amount paid for one unit of a factor of production. ex: if factor of production= capital, then factor price is rent on capital ex: if factor of production= labor, then factor price is wage

Real rental price of capital

The amount paid to rent one unit of capital rental price measured in units of goods rather than in dollars.

Interest reflects...

The cost of funds needed for investment (rate of return on project must be higher than the interest rate)

Quantity theory of money

The doctrine emphasizing that changes in the quantity of money lead to changes in nominal GDP expenditure. Velocity of money is constant

National income accounts identity

The equation showing that GDP is the sum of consumption, investment, government purchases, and net exports. (CIGX)

What does it mean for MPC to be .7?

The household spends 70 cents of each dollar, saves 30 cents

Corporate profits

The income of corporations after payments to their workers and creditors.

Profit

The income of firm owners; firm revenue minus firm costs.

Proprietors' income

The income of noncorporate businesses, such as small farms, mom-and-pop stores, and law partnerships.

Rental income

The income that landlords receive, including the imputed rent that homeowners "pay" to themselves, less expenses, such as depreciation.

Marginal propensity to consume

The increase in consumption resulting from a one-dollar increase in disposable income. Between 0 and 1: extra dollar of income increases consumption but by less than 1 dollar

Net interest

The interest domestic businesses pay minus the interest they receive, plus interest earned from foreigners.

Interest rate

The market price at which resources are transferred between the present and the future; the cost of borrowing.

Production function

The mathematical relationship showing how the quantities of the factors of production determine the quantity of goods and services produced; for example, Y = F (K, L).

Labor force participation rate

The percentage of the adult population in the labor force.

Income velocity of money

The ratio of national income, as measured by GDP, to the money supply. The income velocity of money tells us the number of times a dollar bill enters someone's income in a given period of time. (V)

PCE deflator

The ratio of nominal personal consumption expenditure to real personal consumption expenditure; a measure of the overall level of prices that shows the cost of the currently consumed basket of goods relative to the cost of that basket in a base year.

Ex post real interest rate

The real interest rate actually realized; the nominal interest rate minus actual inflation.

Ex ante real interest rate

The real interest rate anticipated when a loan is made; the nominal interest rate minus expected inflation

Crowd out

The reduction in investment that results when expansionary fiscal policy raises the interest rate.

For an investment project to be profitable...

The return (revenue from future production) must exceed its cost (payments for borrowed funds)

Real interest rate

The return to saving and the cost of borrowing after adjustment for inflation

Nominal interest rate

The return to saving and the cost of borrowing without adjustment for inflation

Nominal interest rate

The return to saving and the cost of borrowing without adjustment for inflation Rate of interest that investors pay to borrow money

Seigniorage

The revenue raised by the government through the creation of money; also called the inflation tax.

Classical dichotomy

The theoretical separation of real and nominal variables in the classical model, which implies that nominal variables do not influence real variables.

GDP (book definition)

The total income earned domestically, including the income earned by foreign-owned factors of production; the total expenditure on domestically produced goods and services.

Value added

The value of a firm's output minus the value of the intermediate goods the firm purchased.

Labor force

Those in the population who have a job or are looking for a job.. Sum of employed and unemployed

Total output of economy equals...

Total income

Net exports

Trade with other countries. (exports-imports)

T/F: A production has the form F(K,L) = KL + L, where initially K = 1 and L = 2. This production function exhibits constant returns to scale.

True

T/F: Income and expenditures for the economy have the same value

True

T/F: Income and expenditures for the economy have the same value.

True

T/F: MPC is between 0 and 1

True

T/F: the MPL schedule is also the firm's labor demand curve.

True

Stock

Variable measured as a QUANTITY

Flow

Variable measured as a quantity per unit of TIME

When does Laspeyres fail?

When prices of different goods are changing by different amounts, a Laspeyres (fixed basket) index tends to overstate the increase in the cost of living because it does not take into account the fact that consumers have the opportunity to substitute less expensive goods for more expensive ones

Identify the production function that does NOT exhibit constant returns to scale. Y = K0.3 L0.8 Y = 0.5L + 0.5K Y = K0.3L0.7 Y = K0.5L0.5

Y = K0.3 L0.8

Economic profit equation

Y-(MPL*L)-(MPK*K)

Private saving

Y-T-C (disposable income - consumption)

production function equation

Y=F(K,L)

Discouraged worker

a person who wants a job but has given up looking. "not in the labor force"

If the demand for real money balances depends on the nominal interest rate, then higher inflation can increase the quantity of real money balances. reduce the nominal interest rate. be caused by an acceleration in the rate of real GDP growth. arise from the expectation of future money growth.

arise from the expectation of future money growth.

According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed: only to the labor used in production. partly between labor and capital used in production, with the surplus going to the owners of the firm as profits. between the labor and capital used in production, according to their marginal productivities. equally between the labor and capital used in production

between the labor and capital used in production, according to their marginal productivities.

business fixed investment

business purchases of factories, offices, machinery, intellectual property, and equipment

Hyperinflations tend to occur when monopoly firms raise prices above competitive levels. the menu costs of price changes become too small. central banks finance large government budget deficits. monetary policymakers act independently of fiscal policy.

central banks finance large government budget deficits.

The largest component of GDP is

consumption

The Ford Motor Company makes a car in 2020 and sells it to the Jones family in 2021. This event increases

consumption in 2021 and GDP in 2020.

A financial crisis that closes many bank branches and their respective automatic teller machines (ATMs) would _____ money velocity. increase and then decrease not affect decrease increase

decrease

As interest rates rise, number of projects that will be profitable...

decreases and investment falls

If immigration increases the labor force in an economy with a Cobb-Douglas production function, the wage and the rental price of capital . increases, increases increases, decreases decreases, increases decreases, decreases

decreases, increases

If a person quits his job to become at a stay-at-home parent, the labor-force participation rate ??? and the unemployment rate ???

falls, rises

When government spending increases and taxes are increased by an equal amount, interest rates: increase. decrease. remain the same. can vary wildly.

increase

In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______. decreases; increases increases; increases increases; does not change decreases; does not change

increases; does not change

If saving exceeds investment demand and consumption is not a function of the interest rate: saving will fall. the demand for loans exceeds the supply of loans. the interest rate will rise. the interest rate will fall

interest rate will fall

According to the classical model with fixed factors of production, an increase in spending on public infrastructure projects such as new airports, roads, and railways will increase government purchases and decrease: investment. capital. wages. taxes.

investment

When C + I + G is less than Y = F(K, L), the demand component that will adjust is _____. This adjustment is triggered by a fall in the real interest rate. profit wages capital investment

investment

According to the model developed in Chapter 3, when government spending increases without a change in taxes: investment increases. consumption decreases. consumption increases. investment decreases.

investment decreases

When bread is baked but put away for later sale, this is called: investment in inventory. saving. fixed investment. waste.

investment in inventory.

When the quantity of the factors of production is fixed and technology does not change, then the supply of goods and services for the entire economy: is fixed. will increase by a figure determined by the multiplication of the factors of production by the production function. will increase gradually by the rate of inflation. cannot be determined based on this information.

is fixed

If nominal GDP and real GDP both rise by 10 percent, then the GDP deflator

is unchanged

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will: raise investment and lower the interest rate. lower investment and raise the interest rate. raise both investment and the interest rate. lower both investment and the interest rate.

lower investment and raise the interest rate.

Real GDP is a better measure of economic well-being than nominal GDP because real GDP: measures changes in the quantity of goods and services produced by holding prices constant. excludes the value of goods and services exported abroad. includes the value of government transfer payments. adjusts the value of goods and services produced for changes in the foreign exchange rate.

measures changes in the quantity of goods and services produced by holding prices constant

GNP equals GDP ______ income earned domestically by foreigners ______ income that nationals earn abroad. minus; plus minus; minus plus; minus plus; plus

minus plus

The irrelevance of money in determining the values of real variable is known as ___.

monetary neutrality

A manager of a perfectly competitive firm observes that the marginal product of labor is 5 units per hour, the marginal product of capital is 40 units per machine, the wage is $20 per hour, the rental price of capital is $120 per machine, and the price of output is $5 per unit. To maximize profit, the manager should hire labor and rent capital. more, more more, less less, more less, less

more, more

Demand for liquidity is ??? related to nominal rate of interest

negative

Fisher equation

nominal interest rate = real interest rate + inflation Nominal interest rate changes because of real or because of inflation

Demand for real money balances depends on...

nominal interest rate and income

Inflation rate

percentage change in level of prices

0 gini coefficient means...

perfect income equality

1 gini coefficient means...

perfect income inequality

demand for liquidity is ??? related to income

positively

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate. positively; negatively negatively; negatively positively; positively negatively; positively

positively; negatively

A competitive, profit-maximizing firm hires labor until the: marginal product of labor equals the wage. wage equals the rental price of capital. price of output multiplied by the marginal product of labor equals the wage. real wage equals the real rental price of capital.

price of output multiplied by the marginal product of labor equals the wage.

National saving equation

private saving + public saving

In the long run, the economy's output is determined by the quantity of factors of production available and the: factor prices. diminishing marginal product. real rental price of capital. production function.

production function

If a household has a lower marginal propensity to consume the higher its disposable income, then the consumption function for the household has a shape similar to that of the: the slope of the GDP deflator. production function. marginal product of labor curve. investment function.

production function.

Transfer payments

public assistance for the poor and Social Security payments for the elderly NOT IN GDP but increase disposable income

If government raises taxes by 100 when MPC is .6 public saving private saving national saving

public saving increases by 100 private saving decreases by 40 national saving increases by 60

Bonds have a real return of...

r (real rate of interest)

Opportunity cost of holding money

r+e(pi)=i

Increase in the expected future money supply will do what to expected rate of inflation nominal rate of interest demand for real money balances price level

raise raise reduce increase

Government purchases

spending on goods and services by local, state, and federal governments. Does not include social security

An economy has the Cobb-Douglas production function Y = 10 K 1 / 3 L 2 / 3 . If the economy's stock of capital doubles, the share of total income paid to the owners of capital will increase by 10 percent. increase by one-third. increase by two-thirds. stay the same.

stay the same

In the classical model with fixed income: an increase in G changes total output. factor prices equal the gross domestic product divided by the marginal products of the factors of production. supply determines the total output produced in the economy. the capital stock has the crucial role of equilibrating supply and demand.

supply determines the total output produced in the economy.

An increase in the price of imported goods will show up in: neither the CPI nor the GDP deflator. the GDP deflator but not in the CPI. both the CPI and the GDP deflator. the CPI but not in the GDP deflator.

the CPI but not in the GDP deflator.

An estimate of the number of unemployed workers in the economy can be obtained from: neither the household survey nor the establishment survey. the establishment survey but not from the household survey. both the household survey and the establishment survey. the household survey but not from the establishment survey.

the household survey but not from the establishment survey.

Inventory investment

the increase in firms' inventories of goods. If inventories are falling, inventory investment is negative

Because the factors of production and the production function together determine the total output of goods and services...

they also determine national income

unemployed qualifications

those who were not employed, were available for work, and had tried to find employment during the previous four weeks. It also includes those waiting to be recalled to a job from which they had been laid off.

Employed qualifications

worked as paid employees, worked in their own business, or worked as unpaid workers in a family member's business. It also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather.

Constant returns to scale equation

zY=F(zK,zL) where z is a constant

Profit-maximizing firms will hire additional workers up to the point at which additional workers generate no additional profit. This condition can be written as: P × MPL > 0. P × MPL + W > 0. Δ Revenue − Δ Cost > 0. Δ Revenue − Δ Cost = 0.

Δ Revenue − Δ Cost = 0.

When the marginal propensity to consume is MPC = 0.75, a 100 increase in G leads to a change in national saving of _____, while a tax cut of 100 leads to a change in national saving of −100; −75 100; 75 100; −75 −100; 75

−100; −75