ECO 119 Study Set

When a firm sells a product out of inventory, GDP:

is not changed.

In computing GDP:

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

When a firm sells a product out of inventory, investment expenditures ______, and consumption expenditures ______.

decrease; increase

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.

A woman marries her butler. Before they were married, she paid him $60,000/year. He continues to wait on her as before (but as a husband). She earns $1,000,000/year both before and after marriage. The marriage:

decreases GDP by $60,000.

Two equivalent ways to view GDP are as the:

total income of everyone in the economy or the total expenditure on the economy's output of goods and services.

A fixed-weight price index like the CPI ______ the change in the cost of living because it ______ take into account that people can substitute less expensive goods for ones that have become more expensive.

overestimates; does not

A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns it into flour and sells to a baker for $3. The baker makes bread and sells it to an engineer for $6. Value added by each? Bread's contribution to GDP?

Farmer's value added: $1; Miller's: $2; Baker's: $3; Bread's contribution to GDP: $6

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

investment in inventory.

In the long run, the level of national income in an economy is determined by its:

factors of production and production function.

Unlike the real world, the classical model with fixed output assumes that:

capital and labor are fully utilized.

An increase in the supply of capital will:

decrease the real rental price of capital.

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate.

positively; negatively

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases.

downward; more

In the classical model with fixed income, a reduction in the government budget deficit will lead to a:

lower real interest rate.

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 ______.

less; rises

The demand for loanable funds is equivalent to:

investment.

According to the model developed in Chapter 3, when government spending increases without a change in taxes:

investment decreases.

Assume an increase in consumer confidence raises expectations of future income and desired consumption today. In a neoclassical economy, this will:

lower investment and raise the interest rate.

According to the neoclassical theory of distribution, total output is divided between payments to capital and labor depending on their:

marginal productivities.

If farmer productivity rises substantially due to technological progress, and workers move freely between farming and being barbers, the neoclassical theory predicts real wages of:

both barbers and farmers should have risen over time.

The neoclassical theory of distribution explains the allocation of:

income among factors of production.

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?

the real wage

According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates:

decrease.

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, national saving:

rises by $60 billion.

If the government raises taxes by $100 billion when the marginal propensity to consume is 0.6, what happens to public saving?

Public saving will increase by 100 billion

If the government raises taxes by $100 billion when the marginal propensity to consume is 0.6, what happens to private saving?

Private saving will decrease by 40 billion

If the government raises taxes by $100 billion when the marginal propensity to consume is 0.6, what happens to national saving?

National saving will increase by 60 billion

If the government raises taxes by $100 billion when the marginal propensity to consume is 0.6, what happens to investment?

increase by 60 billion

To increase the money supply, the Federal Reserve:

buys government bonds.

People use money as a store of value when they:

hold money to transfer purchasing power into the future.

In the United States, the money supply is determined:

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held.

Bank Balance Sheet: Reserves $10,000, Loans $100,000, Securities $40,000, Deposits $100,000, Debt $20,000, Equity $30,000. What is the reserve-deposit ratio?

10 percent

In a fractional-reserve banking system, banks create money because:

each dollar of reserves generates many dollars of demand deposits.

In a system with fractional-reserve banking:

all banks must hold reserves equal to a fraction of their deposits.

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:

the money supply decreases.

The preferences of households determine the:

currency-deposit ratio.

Excess reserves are reserves that banks keep:

above the legally required amount.

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

increase by more than $1 million.

The currency-deposit ratio is determined by:

preferences of households about the form of money they wish to hold.

Open-market operations change the ___; changes in interest rate paid on reserves change the ___; and changes in the discount rate change the ___.

monetary base; money multiplier; monetary base

If a change in transaction technology reduces the currency people want to hold relative to demand deposits and the central bank does nothing, the money supply will tend to ___. The central bank can hold the money supply constant by ___ bonds in open-market operations.

increase; selling

The demand for real money balances is generally assumed to:

increase as real income increases.

In the long run, if velocity is constant, then ___ determines real GDP and ___ determines nominal GDP.

the productive capability of the economy; the money supply

Consider M/P = kY, money growing 10%, real output growing 3%, k constant. Average inflation rate?

7 percent

The inflation tax is paid:

by all holders of money.

Quantity theory + Fisher equation: money growth increases 3%, real interest rate = 2%. Nominal interest rate increases by:

3 percent.

In the classical model, quantity theory + Fisher equation, an increase in money growth increases:

the nominal interest rate.

The ex ante real interest rate is based on ___ inflation, the ex post real interest rate is based on ___ inflation.

expected; actual

If the money supply is held constant, an increase in the nominal interest rate will ___ the demand for money.

the demand for money decreases.

If money supply is held constant, an increase in nominal interest rate will ___ demand for money and ___ price level.

decrease; increase

Reducing inflation will not make workers richer because firms increase prices ___ each year and give workers ___ raises.

less; smaller

In the case of an unanticipated increase in inflation:

creditors with an unindexed contract are hurt because they get less than they expected in real terms.

If nominal wages cannot be cut, the only way to reduce real wages is by:

adjustments via inflation.

Inflation ___ the variability of relative prices and ___ the efficiency of the allocation of resources.

increases; decreases

If inflation was 6% last year and a worker received a 4% nominal wage increase, the worker's real wage:

decreased 2 percent.

A small country might want to use the money of a large country rather than print its own if the small country:

is likely to be unstable, whereas the large country is likely to be stable.

Hyperinflations result from excessive money growth; the underlying motive is frequently a government's:

need to generate revenue to pay for spending.

The classical dichotomy:

is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money.

The characteristic of the classical model that money supply does not affect real variables is called:

monetary neutrality.

If the demand for real money balances is proportional to real income, velocity will:

be constant.

Given that M/P = kY, when the demand for money parameter, k, is large, the velocity of money is ___, and money is changing hands ___.

small; infrequently