EC 309 Practice Questions for Test 1
EC 309 Practice Questions for Test 1 EC 309
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This 9 page Study Guide was uploaded by Julie Knight on Monday February 22, 2016. The Study Guide belongs to EC 309 at University of Alabama - Tuscaloosa taught by Hoda A El-Karasky in Spring2015. Since its upload, it has received 224 views. For similar materials see Intermediate Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 02/22/16
Hoda Karasky ** These are practice questions from the homework, quizzes, and other test questions online ** The first bullet is the question and the second is the answer or answers ** I’ve highlighted the questions Professor Karasky pointed out in class as well as the important math Homework and Quiz Questions and Other Practice Tests Questions: Chapters 1-3 GDP is: o Income of everyone in the economy o Expenditure on the economy’s output of goods and services o Output of the economy The total income of everyone in the economy is exactly equal to the total: o Expenditure on the economy’s output of goods and services An economy’s _______ equals its _______: o Income; expenditure on goods and services Measures of the GDP: o Income from all production in the economy o Expenditures on all final goods and services produced o Value of all final production It is a national income accounting rule that all expenditure on purchases of products is necessarily equal to: o Income of the producers of the products Two equivalent ways to view GDP are as the: o Total income of everyone in the economy or the total expenditure on the economy’s output of goods and services Consumption depends positively on _______ and investment depends negatively on _______ o Disposable income; the real interest rate Example of a flow variable: o Income o The government budget deficit o The number of new automobile purchases o The number of people losing their jobs o Business expenditures on plant and equipment Example of a stock variable: o Wealth o The number of unemployed people o The amount of capital in the economy The amount of capital in an economy is a ______ and the amount of investment is a ______: o Stock; flow 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: o (4)(1) + (6)(.5)= 7 When a firm sells a product out of inventory, GDP: o Is not changed Hoda Karasky When bread is baked but put away for later sale, this is called: o Investment in inventory Variables that a model tries to explain are called: o Endogenous A measure of how fast prices are rising is called the: o Inflation rate Deflation occurs when: o Prices fall The assumption of flexible prices is a more plausible assumption when applied to price changes that occur: o In the long run The assumption of continuous market clearing means that: o At any given instant, byers can buy all that they want and sellers can sell all that they want at the going price Variables that a model takes as given are called: o Exogenous The value added on an item produced means: o The value of a firm’s output less the value of the intermediate goods that the firm purchases A woman marries her butler. Before they were married, she paid him $20,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner) She earns $1,000,000 per year both before and after her marriage. The marriage: o Decreases GDP by $20,000 Unlike the GDP deflator, the CPI includes the price of: o Imported goods The CPI is determined by computing: o The price of a fixed basket of goods and services, relative to the price of the same basket in a base year An increase in the price of goods bought by firms and the government will show up in: o The GDP deflator but not in the CPI When prices of different goods are increasing by different amounts, the price index that will rise the fastest is: o The CPI Economic profit is zero if: o All factors are paid their marginal products and there are constant returns to scale If total investment equals $741, business fixed investment is $524, and residential fixed investment is $222, then inventory investment is: o $-5 In the national income accounts, net exports equal: o Exported goods and services minus imported goods and services In the national income accounts, consumption expenditures include all of the following except household purchases of: o New residential housing In a closed economy, private saving equals: Hoda Karasky o Y – T – C In a closed economy with fixed output, when government spending increases: o Public savings decreases According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their: o Marginal productivities 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: o 20,000 The value added of an item produced refers to: o The value of a firm’s output less the value of the intermediate goods that the firm purchases Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is: o 22,000-10,000= $12,000 In computing GDP: o The value of intermediate goods is included in the market price of the final goods To avoid double counting in the computation of GDP, only the value of ________ goods are included o Final If the consumption function is given by C= 500 + 0.5(Y – T), and Y is 6000 and T is given by T= 200+0.2Y, then C equals: o 2800 If the consumption function is given by C= 150 + 0.85Y and Y increases by 1 unit, then savings: o Increases by 0.15 Imputed values included in GDP are the: o Estimated value of goods and services that are not sold in the marketplace An example of an imputed value in the GDP is the: o Housing services enjoyed by homeowners In principle, the GDP accounts should- but do not- have an imputation for: o Rental services of automobiles driven by owners The underground economy: o Includes domestic workers for whom Social Security tax is not collected Nominal GDP is measured in ________ dollars _______ time: o Current; per unit of Nominal GDP means the value of goods and services is measured in ______ prices: o Current Real GDP means the value of goods and services is measured in ________ prices: o Constant Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was: Hoda Karasky o Real GDP= (5)(.5) + (4)(1)= $6.50 The best measure of the economic satisfaction of the members of a society is: o Real GDP If nominal GDP in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator o (14)/(11)= 1.27 If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009 o (1.25) = (15)/(real GDP) real GDP = $12 trillion The GDP deflator is equal to: o The ration of nominal GDP to real GDP Assume that apples costs $0.50 in 2002 and $1 in 2009, whereas oranges in oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then the GDP deflator in 2009, using a base year or 2002, was approximately: o Nominal GDP= 9.5 and Real GDP= 5.5 so, GDP deflator= (9.5)/(5.5)= 1.7 Real GDP is a better measure of economic well-being than nominal GDP, because real GDP: o Measures changes in the quantity of goods and services produced by holding prices constant In the national income accounts, net exports equal: o Exported goods and services minus imported goods and services If GDP (measured in billions of current dollars) is $5,465 and the sum of consumption, investment, and government purchases is $5,496, while exports equal $673, imports are: o 5465= 5496 + (673 – imports) Imports= $704 GNP equals GDP ________ income earned domestically by foreigners ______ income that nationals earn abroad: o Minus; plus Prices of items included in the CPI are: o Weighted according to quantity of the item purchased by the typical household Assume that apples costs $0.50 in 2002 and $1 in 2009, whereas oranges in oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, the CPI for 2009, using 2002 as the base year is: o (cost of current basket)/(cost of basket in base year) = (9.5)(5) = ??????? Assume that the adult population of the US is 191.6 million, total employment is 117.6 million, and 9.4 million are unemployed. Then the unemployment rate, as normally computed, is approximately: o (number of unemployed)/ (labor force) *100 (9.4)/(127.3) = 7.4% If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately: o (number of unemployed)/ (labor force) *100 (7)/(150) = 4.7% If the unemployment rate is 6% and the number of employed is 188 million, then the labor force equals: Hoda Karasky o (unemployment rate) = (number of unemployed)/ (labor force) *100 o (.06) = (x)/(188+x)*100 labor force= 11.28 million If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals: o (labor force)/(population) (150)/(250) = 60% The employment statistic computed from the establishment survey do not include: o the self-employed they do include: workers with two jobs workers on firms’ payrolls part time workers on firms’ payrolls A worker with two jobs is counted: o Once in the household survey, but twice in the establishment survey Chapters 3-6 If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts: o The real wage will fall and the real rental price of capital will rise According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates: o Increase The classical dichotomy: o Is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will: o Increase The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving: o Falls by $40 billion When the demand for loanable funds exceeds the supply of loanable funds, households want to save _______ than firms want to invest and the interest rate _______ o Less; rises Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C= 500 + 0.6Y. No government exists. In this case, equilibrium investment is: o Y= C+I+G o 5000= 3500 + I o I= 1500 The value of net exports is also the value of o The excess of national saving over domestic investment Economists use the term money to refer to: o Assets used for transactions All of the following are considered major functions of money: o Medium of exchange o Unit of account Hoda Karasky o Store of value When a pizza maker lists the price of pizza as $10, this is an example of using money as a: o Unit of account To make a trade in a barter economy requires: o A double coincidence of wants In a country on a gold standard, the quantity of money is determined by the: o Amount of gold Open market operations are: o Federal Reserve purchases and sales of government bonds Currency equals: o The sum of coins and paper money All of the following assets are included in M1: o Currency o Demand deposits o Traveler’s checks The definition of the transactions velocity of money is: o Transactions divided by prices multiplied by money If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is _____ times per year o (10/200)*(100) = 5 If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal: o (M)/(P) = (200,000)/(10) = $20,000 If the quantity of real money balances is kY, where k is constant, then velocity is: o (1)/(k) Consider the money demand function that takes the form (M/P) = kY, where M is the quantity of money, P is the price level, and Y is real output. If the money supply is growing at a 10% rate, real output is growing at a 3% rate, and k is constant, what is the rate of inflation? o Money supply changes: 10% o Real output changes: 3% o So, inflation= 10 – 3 = 7% Percentage change in P is approximately equal to the percentage change in: o M minus % change in Y plus % change in velocity o % ∆ P = M - % ∆ Y + % ∆ V The right of seigniorage is the right to o Print money “Inflation tax” means that: o as the price level rises, taxpayers are pushed into higher tax brackets If the real interest rate declines by 1% and the inflation rate increases by 2%, the nominal interest rate must: o Fisher effect: i = r + π o = -1% + 2% = 1% Evidence from the past 40 years in the U.S. supports the Fisher effect and shows that when the inflation rate is high, the ______ interest rate tends to be ________ Hoda Karasky o Nominal; high Equilibrium in the market for goods and services determines the ______ interest rate and the expected rate of inflation determines the _____ interest rate: o Ex ante real; ex ante nominal The opportunity cost of holding money is the o Nominal interest rate Consider a money demand function that takes the form (M/P) = Y/4i, where M is the quantity of money, P is the price level, and Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy? o Start with MV=PY o Then, MV/P = Y o Then, M/P= Y/V o So, V= 4i According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices _______ each year and give workers _______ raises o Less; smaller Inflation _______ the variability of relative prices and ________ allocative efficiency o Increases; decreases In the case of an unanticipated inflation: o Creditors with an unindexed contract are hurt because they get less than they expected in real terms If inflation is 6% and a worker received a 4% wage increase, then the worker’s real wage: o Decreased 2% A rate of inflation that exceeds 50% per month is typically referred to an a: o Hyperinflation The major source of government revenue in most countries that experience a hyperinflation is: o Seigniorage In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, the government must: o Lower taxes and raise government spending An example of a nominal variable is the o Money supply People use money as a medium of exchange when they: o Use money to buy goods and services A country that is on a gold standard primarily uses: o Commodity money To reduce the money supply, the Federal Reserve: o Sells government bonds In the U.S., monetary policy is controlled by: o The Federal Reserve Money market mutual fund shares are included in: o M2 only Credit card balances are included in: o Neither M1 nor M2 Hoda Karasky In the U.S., the money supply is determined: o Jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held In a 100% reserve banking system, banks: o Cannot affect the money supply The value of banks’ owners’ equity is called bank: o Capital If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals: o B = C + R o So, $100 + $50 = $150 billion The ratio of the money supply to the monetary base is called: o The money multiplier: M = m*B High powered money is another name for: o M2 If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: o rr= R/D and cr= C/D and B= C+R and money supply = M = C+D o therefore, that can increase rr is to decrease D, which decreases the money supply o So, the money supply decreases The money supply will increase if the: o Monetary base increases If you hear in the news that the Federal Reserve conducted open market purchases, then you should expect the ________ to increase: o The money supply When the Fed increases the interest rate paid on reserves, it: o Increases the reserve deposit ratio (rr) Assume that the monetary base (B) is $100 billion, the reserve deposit ratio (rr) is 0.1, and the currency deposit ratio (cr) is 0.1 o Find money supply. 100 = C+R 0.1= R/D 0.1= C/D M= C+D = $550 billion o If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply $366.67 o If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply $400 In a small open economy, policies that increase: o Investment tend to cause a trade deficit (exports < imports) Assume that a small open economy gets involved in a global war, in which its government purchases increase and the rest of the world's government purchases also increase. Then, for the small country, net exports: o May increase or decrease If the real exchange rate between the US and Japan remains unchanged, and the inflation rate in the US is 6% and the inflation rate in Japan is 3%, the: o Yen will appreciate by 3% against the dollar The doctrine of purchasing power parity: Hoda Karasky o Provides a reason to expect that movements in the real exchange rate will typically be small or temporary A small open economy with perfect capital mobility is characterized by: o It engages in international trade o Its net capital outflow always equals the trade balance o Its government does not impede international borrowing or lending A depreciation of the real exchange rate in a small open economy could be the result of: o The expiration of an investment tax credit Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit. Then, if world saving does not depend on the interest rate, world investment: o Will remain unchanged and home country investment will fall A trade deficit can be financed by: o Borrowing from foreigners o Selling domestic assets to foreigners o Selling foreign assets owned by domestic residents to foreigners In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow: o Surplus; positive For a closed economy, when a graph is made with net capital outflow along the horizontal axis and the real interest rate along the vertical axis, the result is a: o Vertical line In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate: o Falls and net exports rise In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _______ and ______ net capital outflow: o Deficit; negative When the real exchange rate rises: o Exports will decrease and imports will increase The labor force participation rate is the percentage of the: o Adult population that is in the labor force
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