The table below contains data for the country of Batterland, which produces only waffles and pancakes. The base year is 2006.
2005 $2 100 $1 100
2006 $2 120 $2 150
2007 $3 150 $3 200
2008 $4 180 $3 220
1. Refer to Table 1. In 2007, Batterland’s GDP deflator was
2. Which of the following statements about real and nominal interest rates is correct?
a. When the nominal interest rate is rising, the real interest rate is necessarily rising; when the nominal interest rate is falling, the real interest rate is necessarily falling.
b. If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is 7 percent.
c. An increase in the real interest rate is necessarily accompanied by either an increase in the nominal interest rate, an increase in the inflation rate, or both.
d. When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate.
3. If 2004 is the base year, then the inflation rate for 2005 equals
4. If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would
c. be unchanged.
d. move in an uncertain direction.
5. Efficiency-wage theory suggests that paying
a. low wages might be profitable because they raise the efficiency of a firm’s workers.
b. low wages might be profitable because they lower the efficiency of a firm’s workers.
c. high wages might be profitable because they raise the efficiency of a firm’s workers.
d. high wages might be profitable because they lower the efficiency of a firm’s workers.
6. Which of the following does not help reduce frictional unemployment?
a. government-run employment agencies
b. public training programs
c. unemployment insurance
d. All of the above help reduce frictional unemployment.
7. Which of the following is included in M2 but not in M1?
a. demand deposits
b. corporate bonds
c. large time deposits
d. money market mutual funds
8. If banks desire to hold no excess reserves, the reserve ratio is 10 percent, and a bank that was previously just meeting its reserve requirement receives a new deposit of $400, then initially the bank has a
a. $400 increase in excess reserves and no increase in required reserves.
b. $400 increase in required reserves and no increase in excess reserves.
c. $360 increase in excess reserves and $40 increase in required reserves.
d. $40 increase in excess reserves and $360 increase in required reserves.
9. When the Fed buys government bonds,
a. the money supply increases and the federal funds rate increases.
b. the money supply increases and the federal funds rate decreases.
c. the money supply decreases and the federal funds rate increases.
d. the money supply decreases and the federal funds rate decreases.
10. Wealth is redistributed from debtors to creditors when inflation was expected to be
a. high and it turns out to be high.
b. low and it turns out to be low.
c. low and it turns out to be high.
d. high and it turns out to be low.
11. Which of the following shifts aggregate demand to the left?
a. an increase in the price level
b. a decrease in the money supply
c. an increase in net exports
d. Congress passes a new investment tax credit
12. In normal, non- recessionary conditions, the aggregate supply curve is upward sloping in
a. the short and long run.
b. neither the short nor long run.
c. the long run, but not the short run.
d. the short run, but not the long run.
13. Imagine two economies that are identical except that for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $500 billion. It follows that
a. real GDP and the price level are lower in country B.
b. real GDP, but not the price level, is lower in country B.
c. the price level, but not real GDP is lower in country B.
d. neither the price level or real GDP is lower in country B.
14. Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time What happens?
a. aggregate demand shifts right
b. aggregate demand shifts left
c. aggregate supply shifts right.
d. aggregate supply shifts left.
15. A decrease in the availability of an important major resource such as oil shifts
a. aggregate supply right.
b. aggregate supply left.
c. aggregate demand right.
d. aggregate demand left.
16. Figure16. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
Assume the money market above is always in equilibrium. ,
a. the quantity of goods and services demanded is higher at P2 than it is at P1.
b. the quantity of money is higher at Y1 than it is at Y2.
c. an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2.
d. All of the above are correct.
17. If the Fed conducts open-market sales, the money supply
a. increases and aggregate demand shifts right.
b. increases and aggregate demand shifts left.
c. decreases and aggregate demand shifts right.
d. decreases and aggregate demand shifts left.
18. The most important automatic stabilizer is
a. open-market operations.
b. the tax system.
c. unemployment compensation.
d. welfare benefits.
19. Wealth is redistributed from creditors to debtors when inflation is
a. high, whether it is expected or not.
b. low, whether it is expected or not.
c. unexpectedly high.
d. unexpectedly low.
20. Which of the following statements is correct?
a. In the special case of 100-percent-reserve banking, the reserve ratio is 1, the money multiplier is 2, and banks create money.
b. In the special case of 100-percent-reserve banking, the reserve ratio is 1, the money multiplier is 1, and banks do not create money.
c. When the reserve ratio is 0.5, then the money multiplier is 1 and banks do not create money.
d. When the reserve ratio is 0.125, then the money multiplier is 8, and each bank loans $8 for every $1 that it accept in deposits.
II. Short Answer
The model of the market for loanable funds shows that an investment tax credit will cause interest rates to rise and investment to rise. Yet we also suppose that higher interest rates lead to lower investment. How can these two conclusions be reconciled?
1. Following the recession of 2008, there was a month in which employment and the unemployment rate both rose. Assuming the computations were correct, how is it possible for both to have increased?
Answer: After the recession of 2008, the overall living standard of the U.S. economy fell. The employment level fell drastically. But after a few years, the economy began to recover. During that time, the real GDP, and employment began to increase. During a particular month, this transition took place. During this transition period, both, employment rate and the unemployment rate rose.
2. During the early 1930s there were a number of bank failures in the United States. What did this do to the money supply? The New York Federal Reserve Bank advocated open market purchases. Would these purchases have reversed the change in the money supply and helped banks? Explain
Answer: During the early 1930s there were a number of bank failures in the United States. As a result, the money supply in the economy reduced greatly.
Many critics of the Federal Reserve Act criticize this act by saying that this Act was greatly responsible for the great depression of 1930s. Taking this point in view, some regulations must be adopted. In other words, the actions of the Federal Reserves should be partially controlled by Congress and the Administration. The Fed will adopt monetary policy keeping the long term growth objective in mind. For long term sustainability, the Fed must raise the interest rates and stop buying government bonds. The US needs to encourage the demand of the consumers so that production and export increases.