Test Flashcards
An economy’s ______ equals its ______
Total income
Total expenditure on goods and services
Which of these is a flow variable?
Income
The value added of an item produced refers to:
The value of a firm’s output less the value of the intermediate goods that the firm purchase
Real GDP
Price of the base year x Number purchased current year
An increase in the price of goods bought only by firms and the government will show up in
The GDP deflator but not in the CPI
The labor force participation rate is the percentage of the
Adult population that is in the labor force
In computing gross domestic product (GDP)
The value of intermediate goods is included in the market price of the final goods
The government purchase component of GDP includes all of these EXCEPT
Federal spending on transfer payments
In closed economy with fixed output, when government spending increases
Public saving decreases
MPL
(1-a)A K^a L^-a
Real rental rate of capital equals
MPK
MPK
aA K^a-1 L^1-a
Y = A K^a L^1-a
A increases by 2%, in equilibrium this would
Increase the real wage and the share of labor income in total income each by 2%
Y = A K^a L^1-a
Number of workers L increases, the real rental rate of capital
Real rental rate of capital = MPK
MPK increases and the Real wage (MPL) decreases
Y = A K^a L^1-a
a = 0.3
A = 100
L and K increase by 10%
Real rental rate of capital increases by 10%
Y = 5000
C = 1000 + 0.3(Y-T)
I = 1500 - 25r
T = 1000
G = 1500
In equilibrium, the value of r is ___ percent
Y = C + I + G
5000 = 1000 + 1200 + 1500 - 25r + 1500
5000 = 5200 - 25r
25r = 200
r = 8
8
Y = 5000
C = 1000 + 0.3(Y-T)
I = 1500 - 25r
T = 1000
G = 1500
Equilibrium value of consumption is
C = 1000 + 0.3(Y-T)
C = 1000 + 0.3(5000-1000)
C = 1000 + 1200
C = 2200
2200
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
National Savings = Y - C - G
Decreases and the real interest rate increases
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
Increase and the real interest rate decreases
The money supply consists of
Currency plus demand deposits
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
Leverage ratio = assets / capital
Assets = reserves + loans + securities = 150,000
Capital = equity 30,000
Leverage ratio = 150,000 / 30,000 = 5
5
Ratio of reserves to deposits (rr) increases
Ratio of currency to deposits (cr) is constant
Monetary base (B) is constant
The…
Money supply = mB
m = cr + 1 / cr + rr
Money supply decreases
M / P = kY, when demand for money parameter k is large the velocity of money is ____ and money changes hands ____
Small, infrequently
If the real interest rate declines by 1% and the inflation rate increases by 2%, the nominal interest rate implied by the Fisher equation
i = r + pi
Nominal int.rate = Real int.rate + pi
Increases by 1 percent
The ex post interest rate will be greater than ex ante real interest rate when the:
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
The costs of unexpected inflation, but not of expected inflation, are
The arbitrary redistribution of wealth between debtors and creditors
The % change in the nominal exchange rate = the % change in the real exchange rate + the
Foreign inflation rate - domestic inflation rate
In small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate
Falls and net exports rise
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
s / (s+f)
When the real wage is above the level that equilibrates supply and demand
The quantity of labor supplied exceeds the quantity demanded
Y = A K^0.5 L^0.5
K = 16
L = 100
Real minimum wage = 4
A = 18
The unemployment rate is ___%
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?
MPL = (1-a)A K^a L^-a
MPL = 0.5A x 4 x 1/10
A = 20
Efficiency wage theories suggest that firm may pay workers more than the market-clearing wage for all of these reasons except:
Reduce the firm’s wage bill
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___?
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
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
1/2
Suppose the savings rate increased to a value above the golden rule level. This would lead to
Increase in steady state real wage
GDP growth declines, investment spending typically ___ and consumption spending typically ____
Decreases, decreases
Okun’s law is the _____ relationship between real gross domestic product (GDP) and the ____
Negative, inflation rate
The natural level of output is
The level of output at which the unemployment rate is at its natural level
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
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
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
Rise, decrease
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
- DeltaY / DeltaG = 1 / 1 - MPC
DeltaY / 10 = 1 / 1 - 2/3 = 30 - DeltaY / DeltaT = -MPC / 1 - MPC
DeltaY= -20
Change in Y = 30 - 20 = 10
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
DeltaC = MPC ( DeltaY - DeltaT )
DeltaC = 2/3 (10-10) = 0
Change in C = 0
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
0
IS-LM fiscal policy
Decrease in government spending generated new equilibrium at…
Shifted IS curve down, and where it now crosses LM curve
r3, Y2
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
Smaller than the multiplier
The Pigou effect suggests that falling prices will increase income because real balances influence ___ and will shift the ____ curve
Consumer spending, IS
What of these policy actions would be considered unconventional monetary policy?
Forward guidance
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…
- Just plug everything in Y function first
- Then in (M/P) and find r
- Then plug r in Y function
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…
- Just plug everything in Y function first
- Then in (M/P) and find r
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…
- Already know Y, so just calculate r
- Calculate (M/P) function what is M
- Now found M - before M
- Answer is 2000
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…
Already know Y, so just calculate r
r = 15
The basic aggregate supply equation implies that output exceeds natural output when the price level is…
Greater than the expected price level
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:
New crossing with AS curve, cuz AS remains the same
A to G
The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by
Basing their opinions on recently observed inflation
In the case of demand-pull inflation, other things being equal
The inflation rate rises but the unemployment rate falls
The time between a shock to the economy and the policy action responding to that shock is called the:
Inside lag
All of these could be considered automatic stabilizers EXCEPT
Discretionary changes in taxes
A time inconsistency problem in macroeconomic policy can occur when the policymaker…
Changes stated policy because it benefits their current circumstances at the expense of public trust
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
Decrease in tax revenues
The logic of Ricardian Equivalence implies that
Tax cuts do not influence consumer spending but changes in government spending do so
