macro 1-5

Consider the money demand function that takes the form of M/P=kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate and k is constant, what is the average inflation rate in this economy?

7 percent

If nominal wages cannot be cut, then the only way to reduce real wages is by:

adjustments via inflation

The inflation tax is paid:

by all holders of money

suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. complete the following statement: If the central bank does nothing, the money supply will tend to _______. But the central bank can hold the money supply constant by ________ bonds in open-market operations.

increase, selling

assets. liabilities reserves 10,000. deposits 100,000 loans 100,000. debt 20,000 securities 40,000. equity 30,000 based on info above, what is the reserve-deposit ratio?

10 percent

according t o the quantity theory of money and the fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

5 percent

the ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _______ inflation.

expected; actual

Suppose workers can move freely between being farmers or being barbers (i.e., no additional costs are required to switch between occupations) . this implies that the nominal wage of

farmers and barbers is equal

People use money as a store of value when they:

hold money to transfer purchasing power into the future

the demand fro loanable funds is equivalent to:

investment

according to the model developed in chapter 3, when government spending increases without a change in taxes:

investment decreases

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their:

marginal productivities

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

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's:

need to generate revenue to pay for spending

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

positively; negatively

If the nominal interest rate increases, then:

the demand for money decreases

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

Two equivalent ways to view GDP are as the:

total income of everyone in the economy or the total expenditure on the economy's output of goods and services

How are real wages measured in parts a and b?

units of output worked per hour

the demand for real money balances is generally assumed to:

increase as real income increases

according to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers _______ raises

less; smaller

During WWII, both Germany and England had plans for a paper weapon. they each printed the other's currency with the intention of dropping large quantities by airplane, thereby increasing each other's money supply. select all of the following reasons that might have made this an effective weapon.

- menu and shoe leather costs would rise - relative prices would become more variable -hyperinflation could undermine the public's' confidence in the economy

if the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wages of:

both barbers and farmers should have risen over time

to increase the money supply, the federal reserve:

buys gov bonds

if the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and _______ the price level

decrease; increase

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage:

decreased by 2 percent

A woman marries her butler. Before they get married she pays him 60,000 dollars per year. he continues to wait on her as before (but as her husband rather than a wage earner). She earns 1,000,000 dollars per year both before and after her marriage. The marriage:

decreases GDP by 60,000

In the long run, the level of national income in an economy is determined by its:

factors of production and production function

the neoclassical theory of distribution explains the allocation of:

income amount factors of production

Cost of inflation: Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.

inconvenience of changing price level

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

increase by more than $1 million

inflation______ the variability of relative prices and ______ the efficiency of the allocation of resources

increases; decreases

assume that in 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 neoclassical economy, will:

lower investment and raise interest rate

in the classical model with fixed income, a reduction in the government budget deficit will lead to a

lower real interest rate

cost of inflation: because inflation has risen, a clothing company decides to issue a new catalog m monthly instead of quarterly

menu costs

open-market operations change the ________; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the _________.

monetary base; money multiplier, monetary base

The currency-deposit ratio is determined by:

preferences of households about the form of money they wish to hold.

The government raises lump- sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change,. If the marginal propensity to consume is 0.6, national saving:

rises by 60 billion

In computing GDP

the value of intermediate goods is included in the market price of the final goods.

in the United States, the money supply is determined:

Jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding other factors constant?

Point A (left on I1 line)

Given that M/P=kY when the demand for money parameter, k, is large, the velocity of money is________ and money is changing hands __________.

Small ; infrequent

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases.

downward; more

in a fractional-reserve banking system, banks create money because:

each dollar of reserves generates many dollars of demand deposits

A fixed-weight price index like the CPI ______ the change in the cost of living because it ______ take into account that people can substitute less expensive goods for ones that have become more expensive.

over estimates, does not

The economy begins in equilibrium at point E, representing the real interest rate r1 nat which saving S1 equals desired investment I1. What will be the new equilibrium or real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy?)

point A (shift down nowhere else)

Over the past century, the productivity of barbers (Mpl) has remained constant. According to the neoclassical theory , what should hav happened to farmers' real wage (W/P)?

remained constant

Your answers in parts a through d imply that the relative prices of haircuts, P, has _____ relative to the price of food P.

risen

Costs of inflation: Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value.

shoe leather costs

In the classical model, accounting to the quantity theory of money and the Fisher equation, an increase money growth increases:

the nominal interest rate

In the long run, according. to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then __________ determines GDP and __________ determines nominal GDP

the productive capability of the economy; the money supply

in the classical model, what adjusts to eliminate any unemployment of labor in the economy?

the real wage

cost of inflation: grandma buts and annuity for $100,000 from an insurance company, which promises to pay $10,000 a year for the rest of her life. After buying it, she is surprised that high inflation triples the price level over the next few years

cost of unexpected inflation

In the case of unanticipated inflation:

creditors with an unindexed contract are hurt because they get less than they expected in real terms.

the preferences of households determine the:

currency-deposit ratio

according to the model developed in chapter 3, when taxes are increased but the government spending is unchanged, interest rates:

decrease

an increase in the supply of capital will:

decrease the real rental price of capital

when a firm sells a product out of inventory investment expenditures_______ and consumption expenditures ________

decrease, increase

Over the past century, the productivity of farmers (MPLf) has risen substantially because of technological progress. According to the neoclassical theory, what should have happened to farmers' real wage (W/P)?

increases

When bread is baked but put away for later sale, this is called

investment in inventory

When a firm sells a product out of inventory, GDP

is not changed

the characteristic of the classical model that they money supply does not affect real variables is called:

monetary neutrality

Unlike the real world, the classical model with fixed output assumes that:

capital and labor are fully utilized

If the government raises taxes by $100 billion when the marginal propensity to consume is 0.6, what happens to each of the following variables?

Puboic saving will increase by $100 billion Private saving will decrease by $40 billion National saving will increase by $60 billion investment will increase by $60 billion

identify which of the three functions of money these items satisfy. - a credit card: store of value, unit of account, medium of exchange - a painting by Rembrandt: store of value, unit of account, medium of exchange - a Starbucks gift card: store of value, unit of account, medium of exchange - Bitcoin: store of value, unit of account, medium of exchange

- a credit card: store of value, medium of exchange - a painting by Rembrandt: store of value - a Starbucks gift card: store of value, unit of account, medium of exchange - Bitcoin: store of value, unit of account, medium of exchange

A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by each is

1 farmer 2 miller 3 baker 6 to GDP

Cost of inflation: Gita lives in an economy with an inflation rate of 10%. Over the past year, she earned a return of $50,000 on her million-dollar portfolio of stocks and bonds. Because her tax rate is 20%, she paid $10,000 to the government.

Altered by tax liability

excess reserves are reserves that banks keep:

above the legally required amount

in a system with fractional-reserve banking:

all banks must hold reserves equal to a fraction of their deposits

If the demand for real money balances is proportional to real income, velocity will:

be constant

the classical dichotomy:

is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money.

A small country might want to use the money of a large country rather than print its own money if the small country:

is unlikely to be stable, whereas the large country is likely to be stable.

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

less; rises