Test

Question 1

An economy’s ______ equals its ______

Answer 1

Total income
Total expenditure on goods and services

Question 2

Which of these is a flow variable?

Answer 2

Income

Question 3

The value added of an item produced refers to:

Answer 3

The value of a firm’s output less the value of the intermediate goods that the firm purchase

Question 4

Real GDP

Answer 4

Price of the base year x Number purchased current year

Question 5

An increase in the price of goods bought only by firms and the government will show up in

Answer 5

The GDP deflator but not in the CPI

Question 6

The labor force participation rate is the percentage of the

Answer 6

Adult population that is in the labor force

Question 7

In computing gross domestic product (GDP)

Answer 7

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

Question 8

The government purchase component of GDP includes all of these EXCEPT

Answer 8

Federal spending on transfer payments

Question 9

In closed economy with fixed output, when government spending increases

Answer 9

Public saving decreases

Question 10

MPL

Answer 10

(1-a)A K^a L^-a

Question 11

Real rental rate of capital equals

Answer 11

MPK

Question 12

MPK

Answer 12

aA K^a-1 L^1-a

Question 13

Y = A K^a L^1-a

A increases by 2%, in equilibrium this would

Answer 13

Increase the real wage and the share of labor income in total income each by 2%

Question 14

Y = A K^a L^1-a

Number of workers L increases, the real rental rate of capital

Answer 14

Real rental rate of capital = MPK
MPK increases and the Real wage (MPL) decreases

Question 15

Y = A K^a L^1-a

a = 0.3
A = 100

L and K increase by 10%

Answer 15

Real rental rate of capital increases by 10%

Question 16

Y = 5000
C = 1000 + 0.3(Y-T)
I = 1500 - 25r
T = 1000
G = 1500

In equilibrium, the value of r is ___ percent

Answer 16

Y = C + I + G
5000 = 1000 + 1200 + 1500 - 25r + 1500
5000 = 5200 - 25r
25r = 200
r = 8

8

Question 17

Y = 5000
C = 1000 + 0.3(Y-T)
I = 1500 - 25r
T = 1000
G = 1500

Equilibrium value of consumption is

Answer 17

C = 1000 + 0.3(Y-T)
C = 1000 + 0.3(5000-1000)
C = 1000 + 1200
C = 2200

2200

Question 18

Y = 5000
C = 1000 + 0.3(Y-T)
I = 1500 - 25r
T = 1000
G = 1500

Suppose G increases (leaving Y and T constant). Then national savings

Answer 18

National Savings = Y - C - G

Decreases and the real interest rate increases

Question 19

Y = 5000
C = 1000 + 0.3(Y-T)
I = 1500 - 25r
T = 1000
G = 1500

Suppose instead that the marginal propensity to consume decreases. Then, national savings

Answer 19

Increase and the real interest rate decreases

Question 20

The money supply consists of

Answer 20

Currency plus demand deposits

Question 21

What is leverage ratio at the bank?

Assets
Reserves 10,000
Loans 100,000
Securities 40,000

Liabilities and Equity
Deposits 100,000
Debt 20,000
Equity 30,000

Answer 21

Leverage ratio = assets / capital

Assets = reserves + loans + securities = 150,000
Capital = equity 30,000

Leverage ratio = 150,000 / 30,000 = 5

5

Question 22

Ratio of reserves to deposits (rr) increases
Ratio of currency to deposits (cr) is constant
Monetary base (B) is constant
The…

Answer 22

Money supply = mB

m = cr + 1 / cr + rr

Money supply decreases

Question 23

M / P = kY, when demand for money parameter k is large the velocity of money is ____ and money changes hands ____

Answer 23

Small, infrequently

Question 24

If the real interest rate declines by 1% and the inflation rate increases by 2%, the nominal interest rate implied by the Fisher equation

Answer 24

i = r + pi
Nominal int.rate = Real int.rate + pi

Increases by 1 percent

Question 25

The **ex post** interest rate will be greater than **ex ante** real interest rate when the:

Answer 25

ex ante = i - Epi en post = i - pi pi has to be smaller than Epi, Actual interest rate is less than the expected rate of inflation

Question 26

The costs of unexpected inflation, but not of expected inflation, are

Answer 26

The arbitrary redistribution of wealth between debtors and creditors

Question 27

The % change in the nominal exchange rate = the % change in the real exchange rate + the

Answer 27

Foreign inflation rate - domestic inflation rate

Question 28

In small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate

Answer 28

Falls and net exports rise

Question 29

s is the rate of job separation f is the rate of job finding Both rates are constant The steady state unemployment rate is approximately

Answer 29

s / (s+f)

Question 30

When the real wage is above the level that equilibrates supply and demand

Answer 30

The quantity of labor supplied exceeds the quantity demanded

Question 31

Y = A K^0.5 L^0.5 K = 16 L = 100 Real minimum wage = 4 A = 18 The unemployment rate is ___%

Question 32

Y = A K^0.5 L^0.5 K = 16 L = 100 Real minimum wage = 4 A = 18 At what minimum value of Aa would the minimum wage not lead to unemployment?

Answer 32

MPL = (1-a)A K^a L^-a MPL = 0.5A x 4 x 1/10 A = 20

Question 33

Efficiency wage theories suggest that firm may pay workers more than the market-clearing wage for all of these reasons except:

Answer 33

Reduce the firm’s wage bill

Question 34

Per worker production is y = k^0.5 y output per worker k capital per worker 10% of capital depreciates per year Neither population growth nor technological progress Saving rate (s) is 0.4 consumption per worker in the steady state is___?

Answer 34

Neither population growth nor technological progress —> delta k equals 0 delta k = sf(k) - k depreciation 0 = 0.4 x k^0.5 - 0.1k 0.4k^0.5 = 0.1k k^0.5 = 0.4 / 0.1 k = 16 C = (1-s)y C = 1-0.3 x 4 = 0.6 x 4 = 2.4 **C = 2.4**

Question 35

Per worker production is y = k^0.5 y output per worker k capital per worker 10% of capital depreciates per year Neither population growth nor technological progress Golden Rule: Consumption per worker in the steady state is maximized for a savings rate (s) of

Answer 35

1/2

Question 36

Suppose the savings rate increased to a value above the golden rule level. This would lead to

Answer 36

Increase in steady state real wage

Question 37

GDP growth declines, investment spending typically ___ and consumption spending typically ____

Answer 37

Decreases, decreases

Question 38

Okun’s law is the _____ relationship between real gross domestic product (GDP) and the ____

Answer 38

Negative, inflation rate

Question 39

The natural level of output is

Answer 39

The level of output at which the unemployment rate is at **its natural level**

Question 40

In this graph assume that economy starts at point A, and there is a favorable supply shock that does not last forever. In this situation, point ___ represents short-run equilibrium and the point ___ represents long-term equilibrium

Answer 40

Favorable supply shock —> SRAS shifts down New equilibrium for short run —> where new SRAS and AD intersect Long run —> A because shock doesn’t last forever E ; A

Question 41

Keynesian Cross Firms are producing at level Y3, then inventories will___, inducing firms to _____ production. where there is a gap between Actual Expenditure and Planned Expenditure. Y3 directly at PE line, and AE line before

Answer 41

Rise, decrease

Question 42

Keynesian cross analysis MPC = 2/3. Suppose the government simultaneously increases its purchases (G) and its taxes (T) by the same amount, 10 The resulting change in equilibrium income is

Answer 42

1. Delta**Y** / Delta**G** = 1 / 1 - MPC Delta**Y** / 10 = 1 / 1 - 2/3 = 30 2. Delta**Y** / Delta**T** = -MPC / 1 - MPC Delta**Y**= -20 **Change in Y = 30 - 20 = 10**

Question 43

Keynesian cross analysis MPC = 2/3. Suppose the government simultaneously increases its purchases (G) and its taxes (T) by the same amount, 10 The resulting change in equilibrium consumption is

Answer 43

Delta**C** = MPC ( Delta**Y** - Delta**T** ) Delta**C** = 2/3 (10-10) = 0 **Change in C = 0**

Question 44

Keynesian cross analysis MPC = 2/3. Suppose the government simultaneously increases its purchases (G) and its taxes (T) by the same amount, 10 The resulting change in equilibrium (national) saving is

Answer 44

0

Question 45

IS-LM fiscal policy Decrease in government spending generated new equilibrium at…

Answer 45

Shifted IS curve down, and where it now crosses LM curve r3, Y2

Question 46

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ____ for an increase in government purchases using the Keynesian-cross analysis

Answer 46

Smaller than the multiplier

Question 47

The Pigou effect suggests that falling prices will increase income because real balances influence ___ and will shift the ____ curve

Answer 47

Consumer spending, IS

Question 48

What of these policy actions would be considered unconventional monetary policy?

Answer 48

Forward guidance

Question 49

Economy in the short-run IS-LM framework Y = C + I + G (M/P) = Y - dr G = 700 M = 3000 Equilibrium level of income is…

Answer 49

1. Just plug everything in **Y function first** 2. Then in (M/P) and **find r** 3. Then **plug r in Y function**

Question 50

Economy in the short-run IS-LM framework Y = C + I + G (M/P) = Y - dr G = 700 M = 3000 The equilibrium interest rate is…

Answer 50

1. Just plug everything in **Y function first** 2. Then in (M/P) and **find r**

Question 51

Economy in the short-run IS-LM framework Y = C + I + G (M/P) = Y - dr G = decreased to 600 Bank wants to simultaneously adjust M in order to keep equilibrium income constant at the value calculated before. The corresponding change in the money supply M is…

Answer 51

1. Already know Y, so **just calculate r** 2. Calculate (M/P) function what is M 3. Now **found M - before M** 4. Answer is 2000

Question 52

Economy in the short-run IS-LM framework Y = C + I + G (M/P) = Y - dr The interest rate associated with the equilibrium from the last question is…

Answer 52

Already know Y, so **just calculate r** r = 15

Question 53

The basic aggregate supply equation implies that output exceeds natural output when the price level is…

Answer 53

Greater than the expected price level

Question 54

AD-AS Shifts Long run equilibrium at A, price level P1. Unexpected monetary contraction shifts aggregate demand from AD1 to AD3. Short-run nonneutrality is represented by the movement from:

Answer 54

New crossing with AS curve, cuz AS remains the same A to G

Question 55

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by

Answer 55

Basing their opinions on recently observed inflation

Question 56

In the case of demand-pull inflation, other things being equal

Answer 56

The inflation rate rises but the unemployment rate falls

Question 57

The time between a shock to the economy and the policy action responding to that shock is called the:

Answer 57

Inside lag

Question 58

All of these could be considered automatic stabilizers EXCEPT

Answer 58

Discretionary changes in taxes

Question 59

A time inconsistency problem in macroeconomic policy can occur when the policymaker…

Answer 59

Changes stated policy because it benefits their current circumstances at the expense of public trust

Question 60

Holding other factors constant, the ratio of government debt to gross domestic product (GDP) can decrease as a result of any of these changes EXCEPT

Answer 60

Decrease in tax revenues

Question 61

The logic of Ricardian Equivalence implies that

Answer 61

Tax cuts do not influence consumer spending but changes in government spending do so