Midterm #1 - Discussions

The Indian government purchases a phones manufactured in China for $15.000. 1) Which component(s) of Indian GDP is/are affected by this transaction? 2) Which component(s) of China's GDP is/are affected by this transaction?

1) G↑, Imports ↑ 2) Exports ↑

What are three ways the FED can increase money supply?

1) Reduce the required ratio 2) Reduce the discount rate 3) Buy securities (bonds)

If the nominal wage rate increased by 10% and the inflation rate was 8%, what was the change in the real wage rate? a. 2% b. 10% c. 8% d. 18%

2%

If the nominal wage rate is $12 per hour and the real wage rate is $10 per hour, what is the inflation rate? a. 20% b. 10% c. 15% d. 5%

20%

Which of the following are reported as liabilities on a bankʹs balance sheet? A) Discount loans B) Reserves C) U.S. Treasury securities D) Loans

A) Discount loans

________ predicts that real GDP per person can grow indefinitely. A) New growth theory B) Classical growth theory C) Profit growth theory D) Neoclassical growth theory

A) New growth theory

A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. B) a bank suffers a large deposit outflow. C) a bank has to call in a large volume of loans. D) a bank is not allowed to borrow from the Fed.

A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements.

Neoclassical growth theory predicts that A) advances in technology increase the productivity of capital, which leads to an increase in investment and rising real GDP per person. B) advances in technology are a result of discoveries motivated by the pursuit of profits. C) growth in real GDP can increase without any increase in investment. D) growth in real GDP can continue indefinitely

A) advances in technology increase the productivity of capital, which leads to an increase in investment and rising real GDP per person.

Barter is an inefficient means of exchange because a. barter transactions require a double coincidence of wants b. barter only occurs in relatively primitive economies c. demand will not necessarily equal supply. d. in a barter transaction only one party needs to want what the other party has to sell

A) barter transactions require a double coincidence of wants.

The decreasing slope of a production function reflects A) diminishing returns. B) rising unemployment. C) decreasing costs. D) increasing aggregate demand.

A) diminishing returns.

When the Fed buys $100 worth of bonds from First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.

A) increase by $100.

When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.

A) increase by $100.

When the Federal Reserve purchases a government bond from a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases

A) increase; increases

Neoclassical growth theory A) predicts that growth rates and incomes per person throughout the world will converge. B) predicts that the faster growing underdeveloped nations will overtake and then surpass the industrial nations. C) predicts that nations that enjoy a technological advantage will maintain that advantage. D) makes no predictions about the relative growth or incomes among countries.

A) predicts that growth rates and incomes per person throughout the world will converge.

All of the following lead to more rapid economic growth EXCEPT A) restricting international trade. B) encouraging higher rates of saving. C) supporting more research and development. D) encouraging higher quality education.

A) restricting international trade.

Neoclassical growth theory attributes economic growth to A) technological change. B) fiscal policy. C) the law of diminishing returns. D) increasing population growth.

A) technological change.

Bank capital is equal to ________ minus ________. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings

A) total assets; total liabilities

What is the difference between nominal GDP and real GDP? A. Nominal GDP measures economic output in current dollar values, while real GDP measures economic output in constant dollar values B. Nominal GDP measures economic output in constant dollar values, while real GDP measures economic output in current dollar values C. There is no difference between nominal GDP and real GDP D. Nominal GDP measures economic output in foreign currency values, while real GDP measures economic output in domestic currency values

A. Nominal GDP measures economic output in current dollar values, while real GDP measures economic output in constant dollar values

Using the spending approach, indicate which spending-component changes and whether or not GDP changes: A. Volkswagen imports 4000 Tiguan from Mexico B. California State buys 500 computers for highschools C. Roberto Samaniego goes to the Farmers Market and spends $400 dollars in groceries. D. Aldi Germany buys 4 tons of beef from a slaughterhouse in the US

A. Volkswagen imports 4000 Tiguan from Mexico (M↑, I↑, GDP Constant) B. California State buys 500 computers for highschools (G↑, GDP↑) C. Roberto Samaniego goes to the Farmers Market and spends $400 dollars in groceries. (C↑, GDP↑) D. Aldi Germany buys 4 tons of beef from a slaughterhouse in the US (Exports↑, GDP↑)

A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds.

B) calling in loans.

The monetary liabilities of the Federal Reserve include A) government securities and discount loans. B) currency in circulation and reserves. C) government securities and reserves. D) currency in circulation and discount loans.

B) currency in circulation and reserves. (make up the monetary base)

A problem with the neoclassical growth theory is its A) prediction that population growth lowers the real wage rate. B) inability to explain persistent differences between countriesʹ GDP growth rates. C) prediction that population growth raises the real wage rate. D) comparison of the economy to a perpetual motion machine.

B) inability to explain persistent differences between countriesʹ GDP growth rates.

A central proposition of the new growth theory is that A) growth will cease but prosperity will persist. B) knowledge is not subject to diminishing returns. C) government direction and oversight is necessary for consistent growth. D) growth is often just an illusion fostered by growth accounting.

B) knowledge is not subject to diminishing returns.

Bank capital is listed on the ________ side of the bankʹs balance sheet because it represents a ________ of funds. A) liability; use B) liability; source C) asset; use D) asset; source

B) liability; source

Neoclassical growth theory proposes that A) technological progress increases the population growth rate and drives down real wages. B) real GDP per person grows because technological change increases profit opportunities. C) real GDP growth is caused by growth in the population. D) discoveries result from choices that increase profits.

B) real GDP per person grows because technological change increases profit opportunities.

The quantity of labor supplied depends on the A) money wage rate not the real wage rate. B) real wage rate not the money wage rate. C) price of output not the money wage rate nor the real wage rate. D) level of profits.

B) real wage rate not the money wage rate.

The fraction of checkable deposits that banks are required by regulation to hold are A) excess reserves. B) required reserves. C) vault cash. D) total reserves.

B) required reserves.

An important foundation of the new growth theory is that A) we will get more technological advances the more the government is involved in deciding which technology to pursue. B) we will get more technological advances the greater the rewards people receive from making technological advances. C) the growth rate of the capital stock is more important than the growth rate of new knowledge in generating economic growth. D) improvements in labor productivity are poor measures of technological growth.

B) we will get more technological advances the greater the rewards people receive from making technological advances.

How is nominal GDP affected by inflation? A. Nominal GDP is not affected by inflation B. Nominal GDP increases with inflation C. Nominal GDP decreases with inflation D. Nominal GDP fluctuates with inflation

B. Nominal GDP increases with inflation

What is the expenditure approach to measuring GDP?

C + I + G + (X-M) Remember: (X-M) AND (NX)= Net Exports

Which of the following statements are true? A) A bankʹs assets are its sources of funds. B) A bankʹs liabilities are its uses of funds. C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital. D) A bankʹs balance sheet indicates whether or not the bank is profitable.

C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital.

Which of the following is associated with classical growth theory? I. Growth in real GDP can continue indefinitely. II. Technological growth increases as the population grows. III. Population explosions bring real GDP per person back to subsistence levels. A) I B) II C) III D) I and III

C) III

New growth theory economists believe that: I. Economic growth can continue as long as we keep finding new ideas. II. The marginal product of capital diminishes very rapidly, so we must rely upon technological advances to create economic growth. A) I only B) II only C) both I and II D) neither I nor II

C) both I and II

Which of the following ideas apply to the neoclassical growth theory? I. Technological change results from chance. II. Growth in real GDP stops if technology stops advancing. A) I only B) II only C) both I and II D) neither I nor II

C) both I and II

The monetary base consists of A) currency in circulation and Federal Reserve notes. B) currency in circulation and the U.S. Treasuryʹs monetary liabilities. C) currency in circulation and reserves. D) reserves and Federal Reserve Notes.

C) currency in circulation and reserves.

When the Federal Reserve calls in a discount loan from a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) decreases; decrease D) decreases; remains unchanged

C) decreases; decrease

According to the neoclassical growth theory, A) increases in labor productivity are only temporary. B) technological change depends on peopleʹs choices. C) forces other than GDP growth determine population growth. D) higher saving rates generate permanently faster growth in GDP per person.

C) forces other than GDP growth determine population growth.

Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; government securities C) government securities; discount loans D) government securities; reserves

C) government securities; discount loans

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities

C) liabilities; assets

As labor increases, there is a A) shift of the aggregate production function, but no movement along it. B) movement along the aggregate production function, but no shift in it. C) movement along the aggregate production function and real GDP will increase less with each additional increase in labor. D) movement along the aggregate production function and real GDP will decrease less with each additional increase in labor.

C) movement along the aggregate production function and real GDP will increase less with each additional increase in labor.

Purchases and sales of government securities by the Federal Reserve are called A) discount loans. B) federal fund transfers. C) open market operations. D) swap transactions.

C) open market operations.

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities. D) repay its discount loans from the Fed.

C) sell $3 million of securities.

If the Fed decides to reduce bank reserves, it can A) purchase government bonds. B) extend discount loans to banks. C) sell government bonds. D) print more currency

C) sell government bonds.

Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and short-term Treasury securities. C) vault cash and deposits at the Fed. D) deposits at other banks and deposits at the Fed.

C) vault cash and deposits at the Fed.

Of the following, which would be the first choice for a bank facing a reserve deficiency? A) Call in loans B) Borrow from the Fed C) Sell securities D) Borrow from other banks

D) Borrow from other banks

Which of the following ideas apply to the neoclassical growth theory? I. The rate of technological change influences the rate of economic growth. II. Technological change promotes saving and investment. III. Convergence of economic growth rates across countries. A) I only B) III only C) I and II D) I, II and III

D) I, II and III

When the Federal Reserve sells a government bond to a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases

D) decrease; decreases

According to new growth theory, technological change is driven by A) random chance. B) government policies. C) foreign firmsʹ attempts to increase their sales in the domestic market. D) firmsʹ attempts to increase their profit.

D) firmsʹ attempts to increase their profit.

How is nominal GDP calculated? A. By adding up all consumer spending in a given period B. By adding up all government spending in a given period C. By adding up all investment spending in a given period D. By adding up the market value of all goods and services produced in a given period within certain borders

D. By adding up the market value of all goods and services produced in a given period within certain borders

The income approach to measuring GDP sums together E) compensation of employees, rental income, corporate profits, net interest, proprietors' income, subsidies paid by the government, indirect taxes paid, and depreciation. F) compensation of employees, rental income, corporate profits, net interest, proprietors' income, indirect taxes paid, and depreciation and subtracts subsidies paid by the government. G) the sales of each firm in the economy. H) the costs of each firm in the economy and then subtracts indirect business taxes and depreciation.

F) compensation of employees, rental income, corporate profits, net interest, proprietors' income, indirect taxes paid, and depreciation and subtracts subsidies paid by the government.

quantitative easing

Huge open market operation

Jeep-USA produces 5400 new cars in a plant in Illinois in November 2021. The cars are kept in the factory until a car dealer in Canada buys them in 2022. What component in 2022 US GDP will change (if any)?

Investment decreases

If GDP deflator increases between two years, then real GDP growth must have been smaller, larger, or the same as/than nominal GDP growth?

Smaller than nominal GDP growth

The real wage rate equals a. (money wage rate)/(price level). b. (price level)/(money wage rate). c. (money wage rate) × (price level). d. (money wage) + (number of hours worked)/(price level).

a. (money wage rate)/(price level).

The most direct way in which money replaces barter is through its use as a a. medium of exchange b. recording device c. store of value. d. unit of account.

a. medium of exchange

M1 is a measure of a. money and includes both currency and checking deposits b. liquidity and in which the most liquid asset is money c. money and includes both savings deposits and currency d. money and includes both savings deposits and money market mutual funds.

a. money and includes both currency and checking deposits

The real wage rate measures the a. quantity of goods and services that an hour of work will buy. b. average weekly earnings in dollars of a worker. c. dollar value of an hour of work. d. dollar value of what a worker could earn in another job

a. quantity of goods and services that an hour of work will buy.

Liquidity is the a. degree to which an asset acts as money without a loss of value b. ease with which an asset can be converted into a means of payment with little or no loss of value c. degree to which money can be converted into an asset with little or no loss of value d. ease with which credit cards are accepted as a means of payment

b. ease with which an asset can be converted into a means of payment with little or no loss of value

Which of the following does NOT describe a function of money? a. unit of account b. hedge against inflation c. medium of exchange d. store of value

b. hedge against inflation

Rachel inherited a valuable painting from her grandmother. She offers Ben, who is selling her car, to trade the painting for the car. The problem that arises is that a. The painting is much older than the car b. It's hard to compare the value of a painting with the value of the car c. Ben needs to also want the painting and consider they have the same value d. It is hard to move the painting around

c. Ben needs to also want the painting and consider they have the same value

What is the relationship between the nominal wage rate and the real wage rate? a. The nominal wage rate is always higher than the real wage rate b. The real wage rate is always higher than the nominal wage rate c. The nominal wage rate and the real wage rate are always equal d. The relationship between the nominal wage rate and the real wage rate depends on the rate of inflation

d. The relationship between the nominal wage rate and the real wage rate depends on the rate of inflation

The definition of M2 includes a. M1. b. savings deposits. c. time deposits d. all of the above

d. all of the above

How would you advice Fed to change the discount rate (at which it loans to commercial banks) if it would like to stimulate economy?

increase money supply