Econ 104 - Macro Test 2

Using the income version of the quantity theory of money, calculate the annual inflation rate if the following events occur: money supply increase 6%, velocity of circulation increases 3% and real quantity output increases at 2%. The inflation rate will be: up 6%M up 3% V = P Q up 2%; 9%-2%= A. 7% B. 11% C. 1% D. Negative 11% (11% deflation) E. None of the above is correct.

A. 7%

Which of the following would not be a factor in influencing velocity of circulation? A. The level of money intermediated transactions. B. Federal Reserve Open Market Operations. C. Expected changes in the value of money. D. Political and economic instability E. Expected yields in other safe but slightly less liquid assets (T-Bills etc)

B. Federal Reserve Open Market Operations.

Which of the following is true? A. A useful economic theory would be a minor reflection of the reality it describes. B. If the price of shoes falls, the demand for shoes will increase. C. Minimum price controls cause surpluses in the market. D. Unemployed resources mean these goods and services are no longer scarce. E. Technology tends to make the CPI understate the actual rate of inflation

C. Minimum price controls cause surpluses in the market.

Which of the following statements about money is not true? A. Money is a medium of exchange, store of value, and unit of account. B. Money solves the double co-incidence of wants problem C. The lowering of transactions costs of trade has propelled the evolution of money. D. Paper money requires legal tender laws before people will trust it and accept it. E. Privately produced coins and paper money have also served as a form of free advertising.

D. Paper money requires legal tender laws before people will trust it and accept it.

Which of the following is included in gross national product (GNP) statistics? A. The value of leisure time B. The value of intermediate of higher order stage transactions such as buying corporate stock. C. The value of non-market, non-cash intermediated transactions D. The final output of all consumer goods and services available for immediate consumption. E. the level of environmental quality

D. The final output of all consumer goods and services available for immediate consumption.

Which of the following is an accurate statement about "jobs"? A. Economic efficiency is maximized at zero unemployment. B. Jobs are ends not means to an end. C. In a fully employed economy there would be no unemployment. D. The natural rate of unemployment is the amount of unemployment that exists when the economy is fully employed. E. All of the above are correct.

D. The natural rate of unemployment is the amount of unemployment that exists when the economy is fully employed.

Which of the following is not a serious problem associated with calculation of an inflation index such as CPI? A. The proportions of "weights" of goods consumed by a "representative consumer" in their budget may differ from the index. B. The quality of goods changes. C. The composition of the goods comprising the index are always changing. D. There may be insufficient money that is needed to buy the goods making up the index. E. All of the above are problems with the CPI.

D. There may be insufficient money that is needed to buy the goods making up the index.

3. Which of the following is true? A. People in Group 1 pay the inflation tax on their cash balances. B. the difference between nominal GNP and real GNP is that nominal GNP has been adjusted by a price deflator to account for changes in the value of money (inflation) C. Interest is the price of money D. the real money supply is equal to the nominal money supply divided by a price index E. the expected costs and returns for holding money are important for estimating the supply of real cash balances (Cambridge version of the Quantity theory

D. the real money supply is equal to the nominal money supply divided by a price index

Which of the following is not true with respect to money? A. Money evolved from barter exchange. B. Money solves the "double co-incidence" of wants problem C. Many economic goods have served as money including livestock, tobacco, and furs or skins. D. Paper money originated in Europe in 1641 because of legal tender laws.

e. Lydian govt 650 bc minted first money

Which of the following is true? A. In a monetary economy, economic goods and services have relative price but not a nominal price. B. In a barter economy, nominal price inflation is impossible. C. Aggregate supply and aggregate demand curves determine the relative market price for economic goods and services. D. If the nominal interest rate is below the real rate of interest, inflation prices are expected in the future E. It is logically impossible for the nominal price of every economic good and service to increase.

B. In a barter economy, nominal price inflation is impossible.

Which of the following is true? A. Gov't only has 3 sources of revenue: direct taxes, borrowing, and indirect inflation taxes on cash-balances of Group 1 B. The outstanding money supply is always held in form of cash-balances. C. New money creation always places everyone into Group 3. D. Government budgetary deficit cause inflation. E. In monetary equilibrium there is a tendency for the price level to move.

B. The outstanding money supply is always held in form of cash-balances.

If the exchange rate between dollars and yen is 1 dollar to 100 yen and America increases real interest rates relative to Japan. Before the exchange rate adjusts, which of the following is true? A. There will be an increase in interest rates in Japan B. There will be an excess supply of yen in America relative to dollars C. There will be a surplus of dollars in Japan relative to yen. D. There will be a depreciation of the dollar against the yen. E. There will be no reason for a change in exchange rates.

B. There will be an excess supply of yen in America relative to dollars

Suppose we have the following data: (4th order) value of trees $5 per tree and 1,000 trees harvested; (3rd order) 1,000 trees fabricated in to $25 wood pulp per ton (1,000 tons); (2" order) 500,000 sheets of book paper $010 per sheet) and 1,000 rolls of facial tissue ($10 each); (1st order) 2,000 hardback books at boarders for $20 each and 50,000 boxes of Kleenex tissue at Safeway for $1 each. Which of the following is the correct calculation of GNP? A. $540,000 B. $400,000 C. $90,000 D. $30,000 E. none of the above is correct

C. $90,000

Which of the following is not true? A. The monetary transmission mechanism of money to nominal prices runs through actual cash-balances and desired cash-balances B. Human do not have an unlimited portfolio demand to hold cash-balances. C. In the case of excess demand for cash-balances (at existing nominal prices), competitive overbidding pushes nominal prices upward. D. As a group, the economy cannot get rid of excess cash-balances by trading them away. E. Price level adjustments equate the real value of cash-balances held with the real value of outstanding cash-balances.

C. In the case of excess demand for cash-balances (at existing nominal prices), competitive overbidding pushes nominal prices upward.

Which of the following is not true? A. Purchasing power parity is a long-run theory of exchange rate formation. B. Real interest rate parity is a short-run theory of exchange rate formation C. Real interest rate parity essentially says "like goods in different countries should cost the same" (absent trade and transaction costs) D. Purchasing power parity looks at changes in domestic versus foreign price levels. E. Exchange rates changes eliminate differences in rates of return on investments in Real Interest Parity

C. Real interest rate parity essentially says "like goods in different countries should cost the same" (absent trade and transaction costs)

Which of the following is true about tariffs (import taxes) applied to imports? A. They enhance specialization and division of labor. B. They reduce dead-weight losses. C. They reduce the consumer's welfare. D. They reduce unemployment across the economy. E. They increase the gains from trade.

C. They reduce the consumer's welfare.

4. Which of the following is true? A. The aggregate supply curve relates to the "M" variable in the quantity theory. B. the aggregate demand curve slopes downward because of relative price changes and the "law of demand" C. if the aggregate supply curve is vertical, increases in aggregate demand curse deflation of the price level D. the variable determining the supply and demand curves in micro-economic theory are generally independent from each other, whereas in aggregate supply and demand macroeconomics they are somewhat interrelated. E. All of the above are true.

D. the variable determining the supply and demand curves in micro-economic theory are generally independent from each other, whereas in aggregate supply and demand macroeconomics they are somewhat interrelated.

Which of the following is true? A. The reason central bank must create more money is because prices are rising. B. Hyper-inflation is only important for understanding ancient history; hyper-inflation cannot happen in the modern world. C. Economists usually define hyper-inflation at a rate exceeding 500% per month. D. Inflation can be controlled by fixing price maximums, since the cause of inflation is rising prices. E. A repressed inflation actually magnifies inflation.

E. A repressed inflation actually magnifies inflation.

Which of following is true? A. Frictional unemployment arises from a lack of information on the labor market. B. Cyclical unemployment exists because of the economy is in a recession. C. It is logically possible for both the unemployment rate and the employment rate to both simultaneously increase or decrease together. D. Structural unemployment exists because of mismatched worker skills and job availability. E. All of the above is true.

E. All of the above is true.

Which of the following is the typical sequence of the hyperinflation pattern? A. Money supply increases--maximum price controls--legal tender laws--rapid inflation of nominal prices--government controls money (Group 1)--velocity accelerates--shortages--disaster. B. Money supply increases--legal tender laws--maximum price controls--gov't controls money (Group 3)--shortages--rapid inflation of nominal prices--velocity accelerates--disaster. C. Government controls the money (group 1)-- rapid inflation of nominal prices--shortages--maximum price controls--legal tender laws--velocity accelerates--disaster. D. Gov't controls money (group 3)--shortages--maximum price controls--legal tender laws-rapid inflation of nominal prices--velocity accelerates--disaster. E. Gov't controls money (Group 1)--legal tender laws--rapid inflation of nominal prices--maximum price controls--shortages--velocity accelerates--disaster.

E. Gov't controls money (Group 1)--legal tender laws--rapid inflation of nominal prices--maximum price controls--shortages--velocity accelerates--disaster.

Which of the following would not increase the real value of money ceteris paribus? A. Increasing the demand for cash-balances B. Decreasing the money supply C. Increasing capital accumulation D. Decreasing velocity of circulation E. Increasing inflation expectations

E. Increasing inflation expectations

Say's law implies which of the following? A. Recessions are caused by a general over-production of all economic goods under consumption (inability to consume what we produce) B. Recessions are not possible because prices are perfectly flexible. C. Since supply creates its own demand, the money market is in continuous equilibrium. D. What pays for economic goods and services is money E. None of the above is implied by Say's law.

E. None of the above is implied by Say's law.

Metallic money did not solve which problem relative to livestock money. A. Portability B. Hideability C. Divisibility D. Durability E. Valuability

E. Valuability

What is not true with respect to various versions of the quantity theory? A. In the Fisher version money is primarily a medium of exchange whereas in the Cambridge version it is primarily an asset. B. The fisher version is a tautological identity while Cambridge version allows us to make a distinction between actual and desired cash holdings. C. In the fisher version, the left side of the equation is the money transfer side and right side is the goods and services transfer side. D. the income version excludes the value of all intermediate transactions from the income circuit E. increasing the quantity of money (ceteris paribus) leads to the increase in all three version.

E. increasing the quantity of money (ceteris paribus) leads to the increase in all three version.

Which of the following would a classical macro-economist agree with? A. The interest rate is the price of money B. Nominals effect reals. C. Recessions are caused by an over production of economic goods. D. Prices should be as inflexible as possible. E. none of the above

E. none of the above

List three versions of the quantity theory of money in the form of an equation of exchange. Be sure to label each equation and define all the variables used in these equations.

Fisher Version -- MV = PT Income Version -- MV = PQ (Y) Cambridge Cash-Balance Version-- M = KPQ (Y) M= money supply V=velocity of circulation P=average nominal prices t=transactions ( including intermediary) Q= real output of goods and services K= 1/v or the demand to hold cash balances y=income

EC 1. What kind of monetary system does Murray Rothbard advocate in his book, "What has Government done to our money?" Why does he advocate this? (5-6 Sentences

Murray Rothbard advocates for private monetary system not controlled by the gov't. this would allow for less inflation since less money would be printed, since people wouldn't have to accept it. There would be no legal tender laws. It would also allow for multiple mediums of exchange such as Euros, dollars, and yen which could save economy when 1 medium starts to inflate.

What is the definition of Say's Law? Give 3 reasons why it is so important for understanding macroeconomics?

Say's law says that every form of demand comes from an earlier form of supply. Reasons its important: 1. Its important in macro because prices are not all perfectly flexible and these price rigidities cause recessions. 2. In macro movement of one curve affects the other. The Supply and Demand curves are not independent of each other. (The equilibrium is not the end). 3. The dead-weight loss in one sector spreads to others in Macro. (Spread of Contagious Idleness for example)

In Henry Hazlitt's chapter, "Who is protected by Tariffs," he points out that raising tariffs to save jobs destroy more jobs on the net. Explain at least two ways this happens. (5-6 sentences)

Taxing the good makes supply decrease. This decreases quantity supplied which means the employer doesn't need as many workers. So they eat the work force. The tariffs also cause higher prices on the good which means consumers have less to spend on other goods, lowering the demand of all the other goods. this in turn lowers quantity demanded in sectors, leading to more workers being laid off.