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Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002
and $0.50 in 2009. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and
10 oranges were purchased in 2009, the CPI for 2009, using 2002 as the base year, is:
A) 0.75.
B) 0.80.
C) 1.
D) 1.25.
In order to compensate for an expected future decline in the Japanese yen relative to the
U.S. dollar, the interest rate in Japan must be ______ the interest rate in the United
States.
A) higher than
B) lower than
C) equal to
D) fixed relative to
Assume that people form expectations rationally and that the sticky-price model
describes the aggregate supply curve in the economy. For each of the following
scenarios explain whether or not monetary policy can have real effects on the economy.
a. The central bank determines monetary policy using the same information available to
all firms and at the same time firms are setting prices, so that both firms and
policymakers have all of the same information.
b. The central bank determines monetary policy after firms have set prices using
information not available at the time prices were set.
In the classical model with fixed income, an increase in the real interest rate could be
the result of a(n):
A) increase in government spending.
B) decrease in government spending.
C) decrease in desired investment.
D) increase in taxes.
Given a reduction in income tax withheld, but no change in income tax owed,
households that act according to Ricardian equivalence would ______ the extra
take-home pay, while those facing binding borrowing constraints would ______ the
extra-take home pay.
A) spend; spend
B) spend; save
C) save; save
D) save; spend
An increase in the trade surplus of a small open economy could be the result of:
A) a domestic tax cut.
B) an increase in government spending.
C) an increase in the world interest rate.
D) the implementation of an investment tax-credit provision.
Mary Tsai is paid $3,000 every 30 days. Her salary is deposited directly in her bank.
She spends all her money at a constant rate over the 30 days and must pay cash. She can
(1) withdraw all of the money at once; (2) withdraw half at once and the rest after 15
days; (3) withdraw one-third at once, one-third after 10 days, and one-third at 20 days;
or (4) make any number of evenly spaced withdrawals. Each withdrawal costs her $2 in
terms of time and inconvenience. For each day that Mary has a dollar in the bank, she
gets .03 cents (.0003 per dollar) in interest. Thus, if she withdraws half of her money
immediately and half in 15 days, she has $1,500 in the bank for 15 days and earns $6.75
interest.
a. Create a table showing transaction costs, interest earned, and total net earnings (+) or
cost (") associated with one, two, three, or four withdrawals per month.
b. How many withdrawals per month lead to the largest net earnings? If Mary chooses
this number, what will be her average amount of cash on hand over the 30 days?
All of the following are examples of financial intermediaries except:
A) commercial banks.
B) stock exchanges.
C) pension funds.
D) insurance companies.
In the circular flow model, households receive income from the _____ market and save
through the _____ market.
A) goods; financial
B) factor; financial
C) goods; factor
D) factor; goods
A reduction in the demand for money is the equivalent of a(n) _______ in velocity and
will shift the aggregate demand curve to the _____.
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left
Recessions are periods when real GDP:
A) increases slowly.
B) increases rapidly.
C) decreases mildly.
D) decreases severely.
Empirical results justify substantial government subsidies to research based on the
finding that the:
A) the private return to research is greater than the social return to research.
B) the private return to research is approximately equal to the social return to research.
C) the private return to research is less than the social return to research.
D) the private return to research is positive, but the social return to research is negative.
Theex ante real interest rate is equal to the nominal interest rate:
A) minus the inflation rate.
B) plus the inflation rate.
C) minus the expected inflation rate.
D) plus the expected inflation rate.
The assumption of flexible prices is a more plausible assumption when applied to price
changes that occur:
A) from minute to minute.
B) from year to year.
C) in the long run.
D) in the short run.
The Federal Reserve's tools to control the money supply include: open-market
operations, the discount rate, and interest payments on reserves.
a. How should each instrument be changed if the Fed wishes to decrease the money
supply?
b. Will the change affect the monetary base and/or the money multiplier?
Many policymakers are concerned that Americans do not save enough. Using the Solow
growth model, with no technological change and no population growth, explain why:
a. for a given production function and depreciation rate, the saving rate determines the
level of output per worker.
b. a higher saving rate will not necessarily generate more consumption per worker.
c. a higher saving rate will not produce a faster steady-state growth rate of output per
worker.
Leading economic indicators are:
A) the most popular economic statistics.
B) data that are used to construct the consumer price index and the unemployment rate.
C) variables that tend to fluctuate in advance of the overall economy.
D) standardized statistics compiled by the National Bureau of Economic Research.
If y = k1/2, there is no population growth or technological progress, 5 percent of capital
depreciates each year, and a country saves 20 percent of output each year, then the
steady-state level of capital per worker is:
A) 2.
B) 4.
C) 8.
D) 16.
Exhibit: Market for Real Money Balances
(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1,
then people will ______ bonds and the interest rate will ______.
A) sell; rise
B) sell; fall
C) buy; rise
D) buy; fall
Which of the following is not held constant along a dynamic aggregate demand curve?
A) the inflation target
B) the natural rate of output
C) the demand shock
D) the money supply
When a long-term aggregate supply curve is drawn with real GDP (Y) along the
horizontal axis and the price level (P) along the vertical axis, this curve:
A) slopes upward and to the right.
B) slopes downward and to the right.
C) is horizontal.
D) is vertical.
For borrowing from the discount window, the Fed sets the _____ of borrowing,
compared to borrowing using the Term Auction Facility, where the Fed sets the _____
of borrowing.
A) maximum quantity; minimum quantity
B) minimum price; maximum price
C) quantity; price
D) price; quantity
Endogenous variables are:
A) fixed at the moment they enter the model.
B) determined within the model.
C) the inputs of the model.
D) from outside the model.
The function showing total spending on investment would be shifted inward and to the
left by:
A) a technological innovation that increases the production function parameter A.
B) any event that raises the marginal product of capital.
C) any event that raises the purchase price of capital.
D) an accident that destroyed one-quarter of the U.S. capital stock while leaving the
labor supply intact.
According to the model developed in Chapter 3, when taxes decrease without a change
in government spending:
A) consumption and investment both increase.
B) consumption and investment both decrease.
C) consumption increases and investment decreases.
D) consumption decreases and investment increases.
Fill in the blanks:
a. In a closed economy, IS-LM model fiscal expansion raises _______________
whereas in a small open economy with a floating exchange rate leaves
_______________ at the same level.
b. In the Mundell-Fleming model, monetary and fiscal policy depends on
________regime.
Mutual funds that buy a diversified pool of assets can:
A) eliminate all risk.
B) eliminate systematic risk.
C) reduce idiosyncratic risk.
D) reduce systematic risk.
When the federal government incurs additional debt to acquire an asset, under current
budgeting procedures the deficit ______, while under capital budgeting procedures the
deficit ______.
A) does not change; increases
B) increases; does not change
C) does not change; decreases
D) decreases; does not change
In a 100-percent-reserve banking system, banks:
A) can increase the money supply.
B) can decrease the money supply.
C) can either increase or decrease the money supply.
D) cannot affect the money supply.
Let the symbol p stand for the rate of inflation, with Ep the expected inflation rate, both
measured in percent. The letter u is the unemployment rate and un is the natural rate of
unemployment. Suppose the short-run Phillips curve is u = un " a(p " Ep) applies in a
certain economy. The Fed's loss function is L(u, p) = u + gp2. The analysis in the
appendix to textbook Chapter 18 shows that if the Fed minimizes its loss function under
the assumption that Ep is fixed and "rational" private agents know this, the expected
inflation rate will be Ep = a/2g, and this will also be the inflation rate the government
chooses.
a. Suppose that a = 0.5 and g = 0.05. What are the expected and actual inflation rates?
b. Suppose a = 0.5 and g = 0.50. In this case, does the Fed have greater or lesser relative
distaste for inflation than in part a? What are the expected and actual inflation rates with
g = 0.50? Why do they differ from the inflation rates in part a?
