macro midterm two: questions

the unemployment rate is computed as 100 times the number of people unemployed divided by the number of people:

in the labor force

what happens to the unemployment rate and labor force participation rate when:

someone dies while enjoying retirement

no effect on unemployment rate

LFPR increases (adult population decreases)

what happens to the unemployment rate and labor force participation rate when:

after looking for a job for a while, someone gives up and retires

unemployment rate decreases

LFPR decreases

what happens to the unemployment rate and labor force participation rate when:

a woman quits her job to be a stay at home mother

unemployment rate increases

LFPR decreases

what happens to the unemployment rate and labor force participation rate when:

someone becomes an adult and immediately starts looking for a job

unemployment rate increases

LFPR increases

what happens to the unemployment rate and labor force participation rate when:

someone dies while working long hours in the office

unemployment rate increases

LFPR decreases

If the natural rate of unemployment is 5% and the actual rate of unemployment is 5.5%, then

there is cyclical unemployment amounting to 0.5% of the labor force

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills is called

frictional unemployment

if wage is kept above its equilibrium level for any reason, the result is:

structural unemployment

what kind of unemployment do sectoral shifts cause?

frictional unemployment

unemployment benefits may ___ job search efforts which by itself would ___.

reduce; raise frictional unemployment

efficiency wages create

a surplus of labor and so create structural unemployment

paying efficiency wages mean that wages aer

above equilibrium level and unemployment is higher than otherwise

according to efficiency wage theory, the increase in wages will:

raise productivity but increase unemployment

if a firm stops paying efficiency wages, it is likely to see:

a decrease in the quality of job applicants and need to replace workers more frequently

state which of the following are considered money in the US economy and which aren’t:

US penny, peso, painting, credit card

only the penny is money in US economy

credit card, painting, and peso are not considered money

what is used to defer payments and is therefore not considered money?

credit cards

what best defines commodity money?

money that takes the form of a commodity with intrinsic value (like gold)

which asset is most liquid?

money

when the Fed buys government bonds to increase the money supply, the Fed is:

conducting an open-market purchase

the amount of reserves banks must hold against deposits is known as the:

reserve requirement

under what reserve ratio is the bank unable to create money?

100 percent

Assume that banks hold no excess reserves. If the Fed decreases the reserve ratio from 20% to 10%, then the money multiplier:

increases from 5 to 10

which of the following decrease when the Fed makes open-market purchases?

neither currency nor reserves

when there is a common fear of pickpocketing and people start to hold less currency, what happens to the money supply?

it increases

• people deposit their currency into banks, making the MS increase

when the FOMC increases its target for the federal funds rate, what happens to the money supply?

it decreases

when the Fed increases the interest rate it pays on reserves, what happens to the money supply?

decreases

if the Fed wishes to decrease the money supply, what’s one way to do that through open-market operations?

selling bonds to the public

the Fed conducts open-market operations that cause bank withdrawals and lending to decrease. The Fed has:

conducted open-market sales

one reason that the Fed’s control of the money supply is not precise is:

the Fed does not control the amount that banks choose to lend

which of the following describes the relationship between the value of money and the price level?

as the price level rises, the value of money falls

A decrease in the value of money is associated with

an increase in P (the price of goods and services measured in money)

how do you describe the meaning of the demand for money?

wealth that people want to hold in liquid form

what explains why the supply curve for money is vertical?

the quantity of money supplied is fixed by the Federal Reserve

what explains why the demand curve for money is downward sloping?

people want to hold larger quantity of money when each dollar buys less.

what describes the effect of a decrease in the money supply?

MS curve shifts left

price level decreases

value of money increases

what describes the effect of an increase in the money supply?

MS curve shifts right

price level increases

value of money decreases

what’s the immediate effect of a monetary injection?

the money supply increases, whereas the economy’s ability to supply goods and services does not change

what describes money equilibrium in the long run?

the quantity of money that people want to hold equals the quantity of money supplied by the Fed

what describes monetary neutrality?

changes in the money supply affect nominal variables but not real ones.

the principle of monetary neutrality implies that an increase in the money supply will ___

increase the price level but not real GDP

the inflation tax is not exactly like other taxes because

no one receives a bill from the government for the tax

what happens to menu costs and shoeleather costs as inflation rises?

both increase

how to calculate after-tax real income rate?

get the nominal interest rate

• possibly by nom = real + inflation

multiply the nominal interest rate by the marginal income tax rate (as a percentage, small decimal)

subtract the inflation from the after-tax nominal interest rate to get real

If a nation’s purchases of foreign assets is less than the purchases of that nation’s goods by foreigners, it has ____ NCO and ___ NX.

negative NCO, negative net exports

A Mexican company sells drilling equipment to a Colombian company, which pays in Colombian currency. This transaction:

increases Mexican NCO because Mexico acquires foreign assets.

an Australian firm buys pineapples from Indonesia with Indonesian rupiah it got in exchange for Australian dollars. Indonesian residents use these dollars to purchase wool from Australia. what happens to Indonesia’s NCO and NX?

neither Indonesia’s NX nor Indonesia’s net capital outflow increase

if Vietnam has a trade surplus, foreign countries purchase ___ Vietnamese assets than Vietnam purchases from them. This makes Vietnamese saving ___ than Vietnamese domestic investment.

fewer; greater

describe the difference between foreign direct investment and foreign portfolio investment. who is more likely to engage in each type of investment (corporation or individual investor)?

foreign direct investment = establishing a lasting control over a business in another country, setting up foreign operations or acquiring full companies (longer-term, more often carried out by corporations)

foreign portfolio investment = purchasing foreign financial assets like stocks and bonds without gaining any active control in foreign corporations (shorter-term, for individual investors often through a mutual fund)

if purchasing-power parity holds, then the nominal exchange rate is

e = P* / P

the ratio of foreign prices to US prices

if purchasing-power parity holds, then purchasing power of US dollars

is the same in the United States as it is in foreign countries

if purchasing-power parity holds, then dollar

will buy enough foreign currency to buy as many goods as it does in the US

if purchasing-power parity holds, then the real exchange rate

equals one