Micro Midterm 2
Money Multiplier =
(1+Currency to Deposit Ratio)/(Currency to Deposit Ratio + Excess Reserves to Deposit Ratio + Reserve Requirement)
If the money supply grows at 5% and real GDP grows at 6%, the quantity theory predicts the inflation rate will be
-1%
Which of the following is considered to be one of the major types of unemployment?
1. Frictional 2. Cyclical 3. Structural
What is depreciation?
1. It is the reduction in the capital stock that occurs because capital goods (machinery, equipment, etc.) become obsolete due to technological progress. 2. It is the reduction in the capital stock that occurs because capital goods (machinery, equipment, etc.) break down or become worn out.
Functions of Money in Economy
1. medium of exchange 2. unit of account 3. store of value 4. Standard of deferred payment
The economy is at full employment when
1. the economy is at its natural rate of unemployment 2. those out of work are experiencing either frictional or structural unemployment only. 3. there is no cyclical unemployment.
Which of the following equations best represents the concept of constant returns to scale?
3Y = AF(3K, 3L)
Hyperinflation occurs when the inflation rate rises above ____ per month.
50%
Unit of Account
A way of measuring value in an economy in terms of money.
Standard of Deferred Payment
An asset that facilitates transactions over time
Which of the following best explains why the monetary base is often called "high-powered money"?
Because an increase in the monetary base can result in a much larger increase in the money supply.
Why does the Fed have greater control over the monetary base than over the money supply?
Because the money supply is influenced by the money multiplier, which is, in part, affected by the nonbank public.
What are the distinguishing characteristics of a Cobb-Douglas production function? (Check all that apply.)
Capital and labor both earn shares of total income equal to the value of their exponents in the production function. It exhibits constant returns to scale. This is the correct answer. It exhibits diminishing returns.
Consider the following statement: The central bank is the only entity that can print money. Therefore, the central bank has complete control over the money supply. Do you agree with this statement? Explain.
Disagree—The central bank directly controls the monetarybase, but the central bank has only limited control over the entire money supply.
________ unemployment is short term, but ________ unemployment can last for longer periods because workers need time to acquire new skills.
Frictional ; Structural
Assume that the growth rate of real GDP is 2.8%, the growth rate of velocity is 0%, and the rate of growth of the money supply is 5.6%. The current inflation rate is:
Money Supply - real GDP = 2.8
Which of the following is one of the most important benefits of money in an economy?
Money makes exchange easier, leading to more specialization and higher productivity.
What is labor-augmenting technological change?
New technology, including new methods of organizing production and improvements in the skill level of the labor force, that make workers more productive and so increase the efficiency of labor. Improvements in economic efficiency that increase the productivity of labor but that do not directly make capital goods more efficient.
A real wage above equilibrium causes unemployment by (check all that apply):
Preventing the establishment of a labor market equilibrium. Inducing workers to make more labor available for sale than firms wish to purchase. Allowing an excess supply of labor to persist.
Medium of Exchange
Something that is generally accepted as payment for goods and services
Store of Value
The accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future.
Unemployment is at the natural rate and the labor market is in equilibrium when which two flows are equal?
The number of workers separating from their jobs and the number of workers finding jobs.
What is the difference between the quantity equation and the quantity theory of money?
The quantity theory of money assumes that velocity is constant, whereas the quantity equation does not require the same assumption.
With the aggregate production function given by Y = AF(K, L), the equation representing the per worker production function would be
Y/L = AF(K/L,1)
Hyperinflations occur because of:
a rapidly increasing growth rate of the money supply, often due to persistent budget deficits.
During the late nineteenth century, the United States experienced a period of sustained deflation, or a falling price level. Explain using the quantity theory of money how deflation is possible. Is it necessary for the quantity of money to decline for deflation to occur? If velocity is held constant,
as long as the growth rate of real GDP is greater than the growth rate of the money supply, deflation will occur.
Monetary Base =
currency in circulation + bank reserves
If the required reserve ratio increases and the monetary base is unchanged, the value of the money multiplier will ________ and the value of the money supply will ________
decline;decline
An increase in foreign investment in Brazil's mining industry will increase the capital stock in Brazil. All else equal, as the capital stock increases, the marginal product of capital (MPK) will
decrease due to diminishing marginal returns.
The sale of Treasury securities by the Federal Reserve will, in general,
decrease the quantity of reserves held by banks.
When the growth rate of the labor force decreases, the break-even level of investment
decreases
The marginal product of capital is the ________ curve for capital and the marginal product of labor is the ________ curve for labor.
demand;demand
If the actual inflation rate turns out to be less than the expected inflation rate, the actual real interest rate will be ________ the expected real interest rate.
greater than
In the long run, an increase in the growth rate of the money supply causes the inflation rate to ________, which then causes the nominal interest rate to ________.
increase;increase
Why is inflation costly to an economy even when it is expected
induces households and firms to hold less money, thereby necessitating more frequent trips to the bank. produces tax distortions that may reduce the level of saving and investment in the economy. enables government to profit from issuing fiat money at the expense of the holders of money. generates menu costs that can distort relative prices and thus impair the efficiency of markets.
Break-even investment is the
investment rate that keeps the capital-labor ratio constant by offsetting the effects of both depreciation and labor force growth.
Why does the marginal product of capital decrease as more capital is added?
less labor to work with, so output increases at a decreasing rate.
If the actual inflation rate turns out to be greater than the expected inflation rate, the actual real interest rate will be _____ the expected real interest rate.
less than
The standard of living ultimately depends on labor productivity because
limits exist to the input of labor (the number of workers). there is no limit to how much labor productivity can increase.
Fiat money has
little to no intrinsic value and is authorized by the central bank or governmental body.
The often made statement that inflation "greases the wheels of the labor market" means simply that
low inflation allows for real wage adjustments when nominal wages are sticky, thereby permitting labor market adjustments that improve the market's efficiency.
Money Supply =
money multiplier x monetary base
The demand curve for labor is downward sloping because
of the law of diminishing marginal returns.
In today's economy, dollar bills serve as money because
people have confidence that others will accept them as money.
The marginal product of capital is always ________ and it ________ as the capital stock increases.
positive;decreases
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the firm's
production function
If the nominal rental price of capital divided by the price of output is less than the marginal product of capital, a firm that wishes to maximize profits will
purchase more capital goods.
What is the balanced growth path?
real GDP per hour worked grows over time when the economy is at the steady state and experiencing balanced growth.
The per worker production function describes how
real GDP per worker is related to capital per worker and total factor productivity.
A firm that wishes to maximize profits will continue to hire labor until the
real wage = MPL.
Seigniorage is also known as the inflation tax because it
reduces the purchasing power of money.
Frictional Unemployment
short-term unemployment that arises from the process of matching the job skills of workers to the requirements of jobs
All else equal, continued increases in the labor supply in an economy will lead to
smaller increases in real GDP.
The Fisher Effect
states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.
The two factors determining labor productivity are
the capital-labor ratio and total factor productivity.
The economy is at full employment when (check all that apply):
the economy is at its natural rate of unemployment. there is no cyclical unemployment. those out of work are experiencing either frictional or structural unemployment only
The aggregate production function is an equation that shows the relationship between ________ and ________.
the inputs employed by firms; the maximum output firms can produce with those inputs
Economic growth in endogenous AK growth models depends on:
the national saving rate
Firms decide the amount of labor and capital to use in production by employing inputs to the point where
the real wage equals the marginal product of labor and the real rental price of capital equals the marginal product of capital.
A major shortcoming of a barter economy is
the requirement of a double coincidence of wants.
If actual inflation is lower than expected inflation,
there is a redistribution of wealth from borrowers to lenders.
Seigniorage
the government's profit from issuing fiat money. Often called inflation tax because it reduces the purchasing power of money
Cyclical Unemployment
unemployment caused by a recession and measured as the difference between the actual level of unemployment and the level when the unemployment rate equals the natural rate of unemployment
Structural Unemployment
unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirements of jobs