Macroecon test review 1

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:

falls by $40 billion

A competitive firm chooses the:

quantity of labour and capital to employ

National income differs from net national product by an amount called:

statistical discrepancy

If competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal:

total output

The household survey conducted by the Bureau of Labor Statistics provides estimates of the number of
workers ______, while the establishment survey provides estimates of the number of workers ______

with jobs; on a firms pay roll

The money supply will increase if the:

monetary base increases

In the national income accounts, consumption expenditures include all of the following except household purchases of

new residential housing

The Real interest rate is the:

nominal interest rate minus the rate of inflation

When bread is baked but put away for later sale, this is called:

investment in inventory

If the production function describing an economy is Y = 100 K.25 L.75, then the share of output going to labour:

is 75%

In the national income accounts, the purchases of durables, nondurables, and services by households are classified as:

consumption

An increase in the price of imported goods will show up in:

the CPI but not in the GDP deflator

The minimum amount of owners' equity in a bank mandated by regulators is called a _____ requirement

capital

Endogenous variables are:

determined within the model

In a Cobb–Douglas production function, the marginal product of capital will increase if:

the quantity of labour increases

Recessions are periods when real GDP

decreases mildly

Public saving depends on governments:

tax collections relative to its expenditures

When government spending increases without a change in taxes:

investment decreases

To increase the money supply, the Bank of Canada can:

switch government deposits its holds to chartered banks

In principle, the GDP accounts should—but do not—have an imputation for:

rental services of automobiles driven by owners

In a simple model of the supply and demand for pizza, when buyers' income increases, the price of pizza _____ and the quantity purchased ____

increases; increases

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would:

crowd out between zero and $10 billion of investment

People use money as a store of value when they:

hold money to transfer purchasing power into the future

High-powered money is another name for:

the monetary base

Assume that the consumption function is given by C = 150 + 0.85(Y – T) and the tax function is given by T =t 0 + t 1Y. If t 0 increases by 1 unit, then consumption

decreases by 0.85 units

The use of borrowed funds to supplement existing funds for purposes of investment is called:

leverage

Since 1990, the share of income that flows to the bottom 50 percent of income earners has:

decreased in Canada

Crowding out occurs when an increase in government spending _____ the interest rate and investment _____.

increases; decreases

The production function feature called "constant returns to scale" means that if we:

increase capital and labour by 10 percent each, we increase output by 10 percent

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by:

0.85 units

All of the following transactions that took place in 2009 would be included in GDP for 2009 except the purchase of a:

2001 Honda Civic

Real GDP is a better measure of economic well-being than nominal GDP because real GDP:

measures changes in the quantity of goods and services produced by holding prices constant

The study of the economy as a whole is called:

macroeconomics

If nominal GDP increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP _____ by _____ percent

increased; 2%

In 1932, the U.S. government imposed a 2-cent tax on cheques written on deposits in bank accounts. This action would be expected to _____ the currency–deposit ratio and _____ the money supply

increase; decrease

Chequing account balances that are linked to debit cards are included in:

both M1 and M2

Consider the money demand function that takes the form
(M / P)d = Y / (4i), where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

4

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

Liquidity preference model believes and increase in the money supply will decrease interest rates. The quantity theory predicts and increase in the money supply will increase inflation, via the Fischer effect, will increase the nominal interest rate. They are different because the liquidity preference model uses fixed prices in the short run, while the quantity theory and the Fischer effect are long run effects when prices are flexible.

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 – MPC?

If MPS rises, the expenditure falls. So, when government expenditure rises MPC rises because their incomes increase.

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

increasing

Why is the aggregate supply curve vertical in the long run and horizontal in the short run?

In the short run prices are sticky to the price level and don't change. In the long run prices fluctuate to in response to changes in the price level.

If the Fed reduces the money supply by 5 percent, then the real interest rate:

rise in the short run but return to its equilibrium level in the long run

Explain how technological changes that have reduced the demand for low-skilled workers can change the natural rate of unemployment in the presence of rigid wages for this group.

The demand for low-skilled workers will reduce the equilibrium real wage. This creates a large disparity between the rigid wage and the equilibrium wage, so unemployment increases.

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations

Frictional unemployment is inevitable because:

the demand for goods always fluctuates

A favorable supply shock occurs when:

prices fall

Greater spending on unemployment insurance tends to _____ unemployment, and more "active" labor-market policies tend to _____ unemployment

increase; decrease

Sectoral shifts:

make frictional unemployment inevitable

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.

real

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be _____ percent

3%

An LM curve shows combinations of:

the relationship between interest rates and income in the market for real money balances

The right of seignorage is the right to:

levy taxes on the public

The demand for real money is generally considered to:

increase as real income increases

If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then:

the price level is proportional to the money supply

When GDP growth declines, investment spending typically _____ and consumption spending typically __

decreases; decreases

One reason for unemployment is that:

it takes time to match workers and jobs

If the Bank of Canada announces that it will raise the money supply in the future but does not change the money supply today,

both nominal interest rate and the current price level will increase

Evidence from the past 40 years in Canada supports the Fisher effect and shows that when the inflation rate is high, the _____ interest rate tends to be ____

nominal; high

In the aggregate demand–aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run and long-run aggregate supply.

Differences in unemployment rates across demographic groups are most closely correlated with differences in:

job-seperation rates

The inflation tax is paid:

by all holders of money

In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP

the productive capability of the economy; the money supply

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on_____ inflation

expected; actual

Frictional unemployment is unemployment caused by:

the time it takes for workers to search for a job

A country has changed its labor laws and decreased the minimum age of working from 18 years to 16 years. What is the effect of this change on equilibrium wage?

Equilibrium wage decreases. More people available to work at minimum wage.

Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will ___.

Buy; fall

Based on the graph, if the interest rate is r3, then people will _____ bonds, and the interest rate will ___

sell; rise

Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:

A

In the Keynesian-cross model, a decrease in the interest rate _____ planned investment spending and _____ the equilibrium level of income

increases; increases

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent

5; 5

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:

inflation of 1 percent and the nominal interest rate of 1 percent.

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ prices and ______ output in the short run

higher; lower

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _____ in the short run and change _____ in the long run

only output; only prices

What is the predicted impact of a decline in consumer confidence on the exchange rate and U.S. trade balance?

the increase in private saving caused by a loss of consumer confidence will lower the exchange rate and move the trade balance toward surplus

Compare the impact of an increase in the government's budget deficit on investment spending in a small open economy versus in a comparable closed economy.

Investment decreases in the closed economy but does not change in the open economy. In a closed economy, the increase budget deficit reduces savings and increases the interest rate thus lowering the interest rate. In an open economy, the interest rate remains unchanged at the world interest rate.

What type of fiscal policies must the large industrial countries undertake in order to promote currency appreciation in the small open economies?

Contractionary fiscal policies to lower the world interest rate

Would protectionist policies (higher tariffs and more quotas) or freer trade policies (tariff reductions \n and quota eliminations) be more effective in generating currency appreciation?

protectionist policies cause currency appreciation

The real interest rates and real exchanges rates are constant and equal in North Country and South Country. The Fisher equation and purchasing-power parity hold in both countries. If the nominal interest rate is 8 percent in North Country and 10 percent in South Country, do you expect North Country's nominal exchange rate to \n appreciate, depreciate, or remain the same?

North Country’s nominal exchange rate should appreciate.

compare the impact of a tax cut on output in the short run and in the long run.

output is unchanged in both the short run and long run

compare the impact of a tax cut on consumption in the short run and in the long run.

Tax cuts increase income, so consumption is higher in both the short run and long run

compare the impact of a tax cut on investment in the short run and in the long run.

investment is unchanged in the short run and the long run because there is no change in the world interest rate

compare the impact of a tax cut on net exports in the short run and in the long run.

In the short run and long, net exports decrease by the amount consumption increases because the exchange rate increases. Trade deficit results in both cases.

compare the impact of a tax cut on exchange rate in the short run and in the long run.

In the short run and long run, the exchange rate is higher because tax cuts put upward pressure on the domestic interest rate, which attracts capital inflows and increases the exchange rate.

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell–Fleming model with fixed exchange rates, lead to:

a fall in income and net exports

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, \n according to the Mundell–Fleming model, with fixed exchange rates, lead to:

a fall in consumption and income

What is the difference between trade surplus and trade deficit? Explain.

A country is a net lender if it is in a trade surplus; a country is a net borrower if it is in a trade deficit.

One argument favoring a floating-exchange-rate system is that it:

allows monetary policy to be used for other purposes

If short-run equilibrium in the Mundell–Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM\* curve:

is vertical because the exchange rate does not enter into the LM\* equation

The nominal exchange rate between the U.S. dollar and the Japanese yen (measured in $ / yen) is the:

number of Yen you can get for lending $1

The value of net exports is also the value of:

the difference of national saving an domestic investment

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have:

free capital flows, a fixed exchange rate, and an independent monetary policy

If there is a fixed-exchange-rate system, then in the short run described by the Mundell–Fleming model:

both the nominal and real exchange rates are fixed

If there is a fixed-exchange-rate system, then in the long run:

the nominal exchange rate is fixed, but the real exchange rate is free to vary

If the purchasing-power parity theory is true, then:

all changes in the nominal exchange rate result from changes in price levels.

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

vertical line at 0.

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate.

capital inflow

A "closed" economy is one in which the:

domestic interest rate ensures saving equals investment.

In a large open economy, the exchange rate adjusts so that net exports equal:

net capital outflow

The principal economic loss when a country dollarizes is the loss of:

seignorage revenue

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

The central bank's foreign-currency reserves are increasing.