Macroeconomics Exam 1 (ECON3070)
MPL (Marginal Product of Labor) from Cobb-Douglas function:
(1-a)(Y/L)
An economy with constant velocity of money has real GDP growth of 3%, money growth of 7%, and a real interest rate of 2%. The nominal interest rate is:
6%
Public Saving formula
T - G
Complete the following statement. If a central bank wants to increase the money supply, it can _____ bonds in open-market operations or _____ reserve requirements.
buy; decrease
A newspaper article once reported that the U.S. economy was experiencing a low rate of inflation. It said that "low inflation has a downside: 45 million recipients of Social Security and other benefits will see their checks go up by just 2.8% next year." Is the small increase in benefits a "downside" of low inflation, as the article suggested? a. Yes, because Social Security recipients' benefits should be linked to GDP instead. b. Yes, beneficiaries should obtain increases in benefits above inflation because prices of goods and services are always rising at a more rapid rate. c. No, as long as inflation is measured correctly, Social Security beneficiaries' purchasing power will not change. d. No, because Social Security recipients also obtain free Medicare coverage.
c
Technological advances typically have a _____ impact on investment a. negative b. negligible c. volatile d. positive
d
an example of fiat money is: a. beaver pelts b. gold coins c. cigarettes d. paper bills
d
the gdp deflator enables economists to make adjustments for changes in: a. quality b. output c. population d. prices
d
the national income identity is expressed as: a. output = income b. S = I c. NX = Exports - Imports d. Y = C + I + G + NX
d
Assume immigration increases the labor force in an economy described by a Cobb-Douglas production function. Please complete the following statement. As a result, the real wage _____ , and the rental price of capital _____ .
decreases; increases
Market-clearing models assume that prices are _____ and are best applied to understand the economy in the _____ .
flexible; long-run
A typical trend during a recession is that: a. incomes rise b. incomes fall c. gdp rises
incomes fall.
Complete the following statement. If the Federal Reserve reduces the interest rate it pays on reserves, it will tend to _____ the money multiplier and _____ the money supply.
increase; increase
Variables expressed in terms of money are called _____ variables.
nominal
Money Multiplier
(1+cr)/(cr+rr)
NIA identity in a open economy
(I - S) + NX = 0
An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. What is the velocity of money?
2
The Ford Motor Company makes a car in 2020 and sells it to the Jones family in 2021. Use this information to complete the statement below. This event increases consumption in _____ and increases GDP in _____ .
2021; 2020
which statement is true? a. the system of fractional-reserve banking creates money but not wealth b. the system of fractional-reserve banking creates both money and wealth c. the fed determines commercial banks' excess reserves d. with fractional-reserve banking, each round of loan and deposit creates a growing addition to the money supply
A
ruritania has a labor force of 50 million people. currently 48.2 million are employed. what is the unemployment rate? a. 96.4% b. 3.6% c. 3.7% d. 1.8%
B
Saving
S = Y - C - G
Private Saving
S = Y - C - T
NIA identity in a closed economy
S=I(r)
Public Saving
T - G
In an economic model: a. exogenous variables affect endogenous variables b. endogenous variables affect exogenous variables
a.
Assume an economy has a national income of $1,200. Consumption is $600, taxes are $200, and government purchases are $300. Answer the following question. In this economy, national saving is: a. $1200 b. $300 c. $400 d. $600
b
Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, gross domestic product (GDP) increases by: a. $1 b. $2 c. $3
b
In a Cobb-Douglas production function, the marginal product of capital will increase if: a. capital increases b. the quantity of labor increases
b
In principle, the GDP accounts should—but do not—have an imputation for: a. housing services enjoyed by homeowners. b. rental services of automobiles driven by owners. c. meals cooked in restaurants. d. housing services enjoyed by renters.
b
In the national income accounts, government purchases are goods and services purchased by: a. anyone b. the federal, state, and local governments c. the president
b
Payment is deferred by using _____, but immediate access to funds occurs when using _____. a. currency; demand deposits b. credit cards; debit cards c. demand deposits; savings deposits d. debit cards; credit cards
b
If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will: a. increase by $1 million b. decrease by $1 million c. increase by more than $1 million d. decrease by more than $1 million
c
The rate of inflation is the: a. median level of prices. b. average level of prices. c. percentage change in the overall level of prices. d. measure of the overall level of prices.
c
Which is true concerning the relationship between money growth and inflation? a. monthly data show the impact of growth in the money supply on inflation better than decades-long data b. inflation and money growth are inversely related c. there is a strong correlation between growth in the money supply and inflation d. inflation is a function of growth in real output rather than growth in the money supply
c
a bank's total assets relative to the bank owners equity is the: a. required reserve ratio b. monetary base c. leverage ratio d. capital requirment
c
if the currency-deposit ratio is 0.7 and the reserve-deposit ratio is 0.2, what is the money multiplier? a. 0.53 b. 0.90 c. 1.89 d. 3.50
c
which equation describes the marginal product of a factor (MP)? a. (P x MP) - W b. W/P c. F(j, i + 1) - F(j,i) d. Y = F(j,i)
c
Which equation is used to derive the quantity theory of money? a. Y = F(K,L) b. r = i - pi c. M/P = L(r + E(pi), Y) d. MV=PY
d
Complete the following statement. A decrease in government purchases of goods and services, holding taxes constant, will _____ the equilibrium real interest rate and _____ investment.
decrease; increase
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 Fed does nothing, the money supply will tend to _____ . However, the Fed can hold the money supply constant by _____ bonds in open-market operations.
increase; selling
In U.S. history, deflation: a. is rare now but has occurred at times in the past b. is happening right now c. has never happened
is rare now but has occurred at times in the past
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
If real income growth were higher, inflation would be
lower
In a system of fractional-reserve banking, bank lending increases the _____ .
money supply
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. Please complete the following statement. To maximize profit, the manager should hire _____ labor and _____ capital.
more; more
_____ measures the value of the economy's output at current prices and is a _____ .
nominal gdp; flow variable
Complete the following statement. An increase in the _____ interest rate causes investment to _____ .
real; decrease
The larger is the MPC (the closer it is to 1), the _____ will be the decline in investment, and the _____ will be the increase in the interest rate.
smaller; smaller
An assumption of _____ is more plausible for studying the short-run behavior of the economy, while an assumption of _____ is more plausible for studying the long-run, equilibrium behavior of the economy.
sticky prices; flexible prices
Because most loans are specified in nominal terms, high _____ inflation hurts _____ .
unexpected; creditors
Using a market-clearing model to analyze the labor market is _____ because wages usually change _____.
unrealistic; infrequently
Quantity equation if V is constant
π = %change in M - Real GDP Growth
If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is equal to: a. 300 b. 500 c. 700 d. 1,000
a
In a fractional-reserve banking system, banks create money because: a. each dollar of reserves generates many dollars of demand deposits b. banks have the legal authority to issue new currency c. funds are transferred from households wishing to save to firms wishing to borrow d. the wealth of the economy expands when borrowers undertake new debt obligations
a
Some economic historians have noted that during the period of the gold standard, gold discoveries were most likely to occur after a long deflation. What might explain this observation? a. After a long period of deflation, an ounce of gold would buy more goods and services. This created a greater incentive to look for new gold deposits. b. After a long period of deflation, the government would charter prospectors to find gold deposits to help alleviate the deflation. c. The government knew where all the gold deposits were. When deflation went on for too long, the government would tip off prospectors to help alleviate the deflation. d. After a long period of deflation, an ounce of gold was worth a lot less in terms of goods and services. This created a greater incentive to look for new gold deposits.
a
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 wages of: a. farmers and of barbers will be equal b. farmers will be higher than barbers c. barbers will be higher than farmers d. barbers and farmers will incalculable
a
The inflation rate measures how fast: a. prices are rising b. the money supply is growing c. the economy is growing d. personal income is growing
a
Which best describes changes in U.S GDP over time? a. real gdp rises over time, but its growth is not steady b. real gdp is constant; only nominal gdp changes c. real gdp grows at a consistent rate over time d. real gdp falls in about as many years as it rises
a
Which of the following is not part of the money supply? a. The balances that are in your retirement account b. The funds that are in your checking account c. The metal coins that are in your pocket d. The paper currency that is in your wallet
a
how do economists define 'invesment'? a. the purchase of newly created goods and services to add to the capital stock b. the purchase of shares in a publicly-traded corporation c. the purchase of interest-bearing assets such as bonds d. the purchase of existing productive assets in the capital stock
a
the neoclassical theory of distribution combined with the cobb-douglas production function suggests a linkage between: a. productivity growth and real wages b. productivity growth and nominal output growth c. capital and labour productivity d. population growth and real output growth
a
which is an example of the cobb-douglas production function? a. F(K,L) = AK^(a) x L^(1-a) b. F(K,L) = AK^(a) + L^(1-a) c. F(K,L) = AK^(a) x L^(1+a) d. F(K,L) = A(K^(a))/(L^(1-a))a
a
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 the miller is: a. $1 b. $2 c. $3 d. $6
b
Assume that the consumption function is given by C = 150 + 0.85 (Y - T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by: a. 925 b. 425 c. 300 d. 0
b
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: a. rise b. fall c. stay the same
c
Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be: a. 240 b. 700 c. 760 d. 970
c
If an increase of an equal percentage in all factors of production increases output of the same percentage, then a production function has the property called: a. euler's theorem b. cobb's rule c. constant returns to scale d. increasing returns to scale
c
If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals: a. $100 billion b. $150 billion c. $600 billion d. $650 billion
c
If nominal GDP and real GDP both rise by 10 percent, then the GDP deflator: a. increases b. decreases c. remains unchanged
c
If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor-force participation rate equals ______ percent. a. 50 b. 58 c. 60 d. 67
c
If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on: a. only the current money supply. b. only the expected future money supply. c. both the current and expected future money supply. d. neither the current nor the expected future money supply.
c
If the demand for real money balances depends on the nominal interest rate, then higher inflation can: a. reduce the nominal interest rate. b. increase the quantity of real money balances. c. arise from the expectation of future money growth. d. be caused by an acceleration in the rate of real GDP growth.
c
Over the past century, the productivity of barbers (MPLb) has remained constant. According to the neoclassical theory, barbers' real wage (Wb/Pb) should have: a. increased b. decreased c. remained constant
c
The concept of monetary neutrality in the classical model means that an increase in the money supply growth rate will increase: a. real gross domestic product (GD. b. real interest rates. c. nominal interest rates. d. both saving and investment by the same amount.
c
Which of the following is the best example of a sticky price? a. the price of a barrel of oil b. the price of the U.S. dollar in terms of euros c. the price of a share of stock d. the price of a soda in a vending machine
c
what is the most important measure of overall economic performance? a. net national income b. net exports c. gdp d. the unemployment rate
c
If GDP measured in billions of current dollars is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, then net exports are: a. $131 b. -$131 c. $31 d. -$31
d
The ex post real interest rate will be greater than the ex ante real interest rate when the: a. rate of inflation is increasing b. rate of inflation is decreasing c. actual rate of inflation is greater than the expected rate of inflation d. actual rate of inflation is less than the expected rate of inflation
d
Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment: a. increases and the interest rate rises b. is unchanged and the interest rate rises c. and the interest rate are both unchanged d. decreases and the interest rate rises
d
What does real GDP measure? a. The market value of all goods sold in a given time period b. the total income of everyone in the economy in a given time period c. the value of all goods sold in a given time period adjusted for price changes d. the total income of everyone in the economy in a given time period adjusted for price changes
d
the fed sees that commercial banks hold adequate reserves by: a. posting a bank examiner in each commercial bank's accounting office b. setting an appropriate required reserve ratio c. conducting appropriate open-market operations d. paying the banks interest on their reserves
d
the neoclassical theory of distribution suggests that factor demand is based on: a. monospony power b. the rule, "from each according to his abilities, to each according to his needs." c. the capital-labor ratio d. the marginal productivity of that factor
d
the prices of capital goods are a. not included in the gdp deflator but are included in cpi b. included in neither the gdp deflator nor the cpi c. included in both the gdp deflator and the cpi d. not included in the cpi but are included in the gpd deflator
d
the use of borrowed funds to make investments is called a. hedging b. the balance sheet c. fractional-reserve banking d. leveraging
d
what enables money creation in addition to that directly created by the central bank? a. the federal reserve b. open-market operations c. off-shore banking d. fractional-reserve banking
d
1. Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the events described below. Assume that production follows a Cobb-Douglas production function. If an earthquake destroys some of the capital stock, then the real wage would _____ , and the real rental price of capital would _____ .
decrease; increase
Complete the following statement. Because of leverage, a 5-percent decline in the value of a bank's assets will cause the value of the bank's _____ to fall by _____ than 5 percent.
fall; more
Assume a person quits his job to become at a stay-at-home parent. Please complete the statement below. The labor-force participation rate _____ , and the unemployment rate _____ .
falls; rises
1. Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the events described below. Assume that production follows a Cobb-Douglas production function. b. If a technological advance improves the production function, the real wage would _____ , and the real rental price of capital would _____ .
increase; increase
According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent.
5;5
how do economists define 'gross national product'? a. total expenditure on an economy's output of final goods and services b. total expenditure on an economy's output of final goods and services plus net foreign earning c. gdp minus depreciation d. disposable personal income plus income taxes and nontax payments
B
what does the annual percentage change in the gdp deflator tell us? a. the unemployment rate b. the change in real gdp c. the inflation rate d. the change in nominal gdp
C
Recessions are periods of: a. falling incomes b. rising incomes c. high inflation d. low inflation
a
Private Saving formula
Y - T - C(Y-T)
Economists use models because they: a. show how exogenous variables influence endogenous variables and clarify our thinking b. are fun
a
Endogenous variables are: a. determined within the model b. determined outside the model
a
Economists use the term money to refer to:
assets used for transactions
Suppose the government increases both taxes (T) and government purchases (G) by equal amounts. Assuming income (Y) is fixed by the factors of production, the change in national saving (ΔS) will be
(MPC - 1) * (change in T)
If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately _____ percent. a. 4.7 b. 10 c. 2
a
If many banks fail, this is likely to: a. increase the ratio of currency to deposits. b. decrease the ratio of currency to deposits. c. have no effect on the ratio of currency to deposits. d. decrease the amount of currency in circulation if the Fed takes no action.
a
If nominal wages cannot be cut, then the only way to reduce real wages is by: a. adjustments via inflation. b. unions. c. legislation. d. productivity increases.
a
Macroeconomic models: a. make different assumptions to explain different aspects of the macroeconomy b. are always correct
a
Over the past century, the productivity of farmers (MPLf) has risen substantially due to technological progress. According to the neoclassical theory, farmers' real wage (Wf/Pf) should have: a. increased b. decreased c. remained constant
a
Prior to the Covid-19 pandemic, the United States experienced its longest expansion in history with the unemployment rate in February 2020 falling to: a. 3.5% b. 2.5% c. 10% d. 0%
a
A newspaper article once reported that the U.S. economy was experiencing a low rate of inflation. It said that "low inflation has a downside: 45 million recipients of Social Security and other benefits will see their checks go up by just 2.8% next year." Policymakers link increases in Social Security and other benefits to inflation because: a. they are hoping to get more people in the U.S. interested in topics like inflation. b. they cannot link benefits to the stock market because of the Great Recession. c. they wish to ensure that the real value of these benefits is constant over time. d. the Bureau of Labor Statistics lobbied to link benefits to inflation in the 1980s.
c
To reduce the money supply, the Federal Reserve:
sells government bonds
MPK (marginal product of capital) from Cobb-Douglas Function
a(Y/K)
Fisher equation
i = π + r
What is the relationship between the parameter k and the velocity of money? a. There is no relationship between k and V, i.e., the amount of money people hold is not related to the velocity of money. b. 𝑉=1/𝑘: k is inversely related to velocity, i.e., the more money people hold for a given real income, the smaller velocity is, and vice versa. c. 𝑉=𝑘: k is directly related to velocity, i.e., the more money people hold for a given real income, the larger velocity is, and vice versa. d. 𝑉=𝑘𝑃𝑌/𝑀: k times the ratio of nominal output to the money supply is related to velocity, i.e., the more money people hold, the larger velocity is, and vice versa.
b
When the Fed decreases the interest rate paid on reserves, it: a. increases the reserve-deposit ratio (rr). b. decreases the reserve-deposit ratio (rr). c. increases the monetary base (B). d. decreases the monetary base (B).
b
inflation and nominal interest rates are: a. independent of one another b. highly positively correlated c. highly negatively correlated d. very weakly correlated
b
According to the quantity equation, the percentage change in P is approximately equal to the percentage change in: a. M. b. M minus the percentage change in Y. c. M minus the percentage change in Y plus the percentage change in velocity. d. M minus the percentage change in Y minus the percentage change in velocity.
c
Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than an employee). Consider how this marriage impacts how output in the economy is calculated. When the butler stops receiving a wage after the marriage, the value of GDP _____ . However, if GDP is meant to reflect the value of all domestically produced goods and services, then perhaps GDP should _____ because the butler's services continue to be provided.
decreases; stay the same
When a person purchases a 90-day Treasury bill, he or she cannot know the: a. ex post real interest rate. b. ex ante real interest rate. c. nominal interest rate. d. expected rate of inflation.
ex post real interest rate.
According to the Fisher effect, an increase in _____ inflation causes an equal increase in the _____ interest rate.
expected; nominal
The total income of everyone in the economy is exactly equal to the total:
expenditure on the economy's output of goods and services.
How will a permanent (once-and-for-all) increase in the level of interest rates affect the level and growth rate of velocity? a. A one-time increase in the nominal interest rate will cause a one-time increase in velocity, and the growth rate of velocity will now be negative. b. A one-time increase in the nominal interest rate will cause a one-time increase in velocity, but it will not affect the growth rate of velocity. c. A one-time increase in the nominal interest rate will cause a one-time increase in the growth rate of velocity, but it will not affect the level of velocity. d. A one-time increase in the nominal interest rate will cause a one-time increase in velocity, and the growth rate of velocity will now be positive.
b
Hyperinflations tend to occur when: a. monopoly firms raise prices above competitive levels. b. central banks finance large government budget deficits. c. the menu costs of price changes become too small. d. monetary policymakers act independently of fiscal policy.
b
If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to _____ multiplied by B. a. (rr + 1)/(rr + cr) b. (cr + 1)/(cr + rr) c. (rr + cr)/(rr + 1) d. (rr + cr)/(cr + 1)
b
If the production function describing an economy is Y = 100 K^(.25)L^(.75), then the share of output going to labor: a. is 25 percent b. is 75 percent c. depends on the quantities of labor and capital d. depends on the state of technology
b
Important characteristics of macroeconomic models include all of these EXCEPT: a. simplifying assumptions b. functional relationships based on randomized control trials. c. endogenous and exogenous variables d. implicit or explicit consistency with microeconomic foundations
b
Suppose that instead of a constant money demand function, the velocity of money in this economy was growing steadily due to financial innovation. Assuming everything else was unchanged, how would that affect the inflation rate? a. The inflation rate would decrease. b. The inflation rate would increase. c. The inflation rate would fluctuate. d. The inflation rate would remain unchanged.
b
The largest component of GDP is: a. exports b. consumption c. imports d. government purchases
b
The unemployment rate measures the fraction of the: a. population that is not working b. labor force that is not working c. employed people that are working
b
To end a hyperinflation, a government trying to reduce its reliance on seigniorage would: a. create additional money. b. raise taxes and cut spending. c. lower taxes and increase spending. d. lower interest rates.
b
how do economists define the 'real interest rate'? a. the one-year rate on treasury bills b. the difference between the nominal interest rate and the rate of inflation c. the rate borrowers pay according to the contracts between them and lenders d. the nominal interest on a contract minus the risk premium
b
suppose that each factor of production increases by 10 percent and ouput subsequently increase by 10 percent. which phrase describes this situation? a. cobb-douglas production function b. constant returns to scale c. unit elasticity d. constant opportunity costs
b
when comparing economic performance in different years, economists: a. adjust for changes in output b. adjust for changes in prices c. adjust for changes in both output and prices d. do not have to make any adjustments
b
which is not a roley money plays in the economy? a. store of value b. factor of production c. unit of account d. medium of exchange
b
which is not a variable determining the supply of money? a. the monetary base b. the marginal propensity to save c. the reserve-deposit ratio d. the currency-deposit ratio
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. Barbers around the country raise the prices they charge for haircuts. d. Kellogg's, the American cereal maker, cuts the price of a box of corn flakes.
b.