Midterm 1 Flashcards
Chapters 1-7
Exogenous variables are:
fixed at the moment they enter the model.
The assumption of continuous market clearing means that:
at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price.
GDP is all of the following except the total:
expenditure of everyone in the economy.
The total income of everyone in the economy is exactly equal to the total:
expenditure on the economy’s output of goods and services.
Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges cost $0.50 each. In this case, the value of GDP is:
$7.
When a firm sells a product out of inventory, GDP:
is not changed.
Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is:
$20,000.
To avoid double counting in the computation of GDP, only the value of ______ goods are included.
final
Imputed values included in GDP are the:
estimated value of goods and services that are not sold in the marketplace.
Measuring the rate of inflation using a market basket that excludes food and energy prices is preferred by some analysts because this measure, called core inflation,
gives a better measure of ongoing, sustained price changes.
According to the definition used by the U.S. Bureau of Labor Statistics, a person is not in the labor force if that person:
is going to school full time.
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.
4.7
If an increasing proportion of the adult population is retired, then the labor force participation rate:
will decrease.
In the long run, the level of national income in an economy is determined by its:
factors of production and production function.
Unlike the real world, the classical model with fixed output assumes that:
all factors of production are fully utilized.
A competitive firm chooses the:
quantity of labor and capital to employ.
The property of diminishing marginal product means that, after a point, when additional quantities of:
a factor is added when another factor remains fixed, the marginal product of that factor diminishes.
An increase in the supply of capital will:
decrease the real rental price of capital.
Economic profit is zero if:
all factors are paid their marginal products and there are constant returns to scale.
If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor:
is 75 percent.
In a Cobb–Douglas production function the marginal product of capital will increase if:
the quantity of labor increases.
If the consumption function is given by C = 500 + 0.5(Y – T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals:
2,800.
Assume that the consumption function is given by C = 200 + 0.7(Y – T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by:
175
Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 – 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is:
5 percent.
According to the model developed in Chapter 3, when taxes decrease without a change in government spending:
consumption increases and investment decreases.
If the demand for real money balances is proportional to real income, velocity will:
remain constant.
Consider the money demand function that takes the form (M/P)d = 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
The quantity equation for money, by itself:
may be thought of as a definition for velocity of money.
The inflation tax is paid:
by all holders of money.
The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:
real interest rate is constant.
Evidence from the past 40 years in the United States supports the Fisher effect and shows that when the inflation rate is high, the ______ interest rate tends to be ______.
nominal; high
The ex ante real interest rate is equal to the nominal interest rate:
minus the expected inflation rate.
The opportunity cost of holding money is the:
nominal interest rate.
If the Fed announces that it will raise the rate of growth of the money supply in the future but does not change the money supply today,
both the nominal interest rate and the current price level will increase.
Which of the following is NOT an effect of expected inflation?
causes lower real wages.
The inconvenience associated with reducing money holdings to avoid the inflation tax is called:
shoeleather costs.
One possible benefit of moderate inflation is:
better functioning labor markets.
If you hear in the news that the Federal Reserve conducted open-market operations, then you should expect ______ to change.
the monetary base.
Which of the following will increase the monetary base?
The Fed’s purchase of securities from a bank.
Which of the following is most likely to cause a jump up in the price level P?
An increase in autonomous consumption.
Which of the following is most likely to cause a jump up in the rate of velocity V?
An increase in autonomous consumption.
Which of the following was partially responsible for a drop in the money multiplier after the Great Recession of 2008-09?
The payment of interest on bank reserves.
Currency in the hands of the public (C) is
Part of the money supply (M) and part of the monetary base (B).
Reserve balance accounts held by commercial banks at their regional Federal Reserve Banks are
Not part of the money supply (M) but part of the monetary base (B).
“Financial repression” can occur when a government with ________ inflation imposes a cap on _________ interest rates.
high; nominal.
In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:
–$10 billion.
In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:
borrowing from abroad.
A trade deficit can be financed in all of the following ways except by:
borrowing from domestic lenders.
If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports ______ and net capital outflows ______.
do not change; do not change
Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____.
increase; decrease
According to our discussion in class, two reasons why capital may not flow to poor countries are that the poorer countries may:
have inferior production capabilities (such as a low value of A in the production function) and not enforce property rights (so that investments in the poor countries might be expropriated by the governments there).
The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports.
less; greater
In a small open economy with perfect capital mobility, a reduction in the government’s budget deficit ______ net exports and the real exchange rate ______.
increases; depreciates
In a small open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant.
increase; decrease
An effective policy to reduce a trade deficit in a small open economy would be to:
increase taxes.
If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss good(s) per U.S. good.
2.5
A statement that is generally true about capital in a large open economy is that it is:
not perfectly mobile, but the country influences world financial markets.
In a large open economy, the real interest rate is determined by:
national saving, the domestic investment function, and the net capital outflow function.
In a large open economy, an increase in “animal spirits” for investment raises the real interest rate, ______ the trade balance, and ______ net capital outflow.
decreases; decreases
In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:
falls, while the real exchange rate rises and net exports fall.
If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the unemployment rate is approximately:
s/(s + f).
In a steady state:
the number of people finding jobs equals the number of people losing jobs.
A Beveridge Curve plot shows the empirical relationship between what two labor-market variables?
Unemployment and vacancies.
Assume that the job finding rate has fallen because of a decline in matching efficiency. What is also likely to have happened?
The Beveridge Curve shifted out.
According to our discussion in class, which of the following shifts the Beveridge Curve?
An increase in mismatch or some other factor that causes a decline in matching efficiency.
