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Mac Review

Mac Review . Assorted Topics. Supply demand review. Grab clickers. All those GDP formulas…. GDP=C+I+G+Nx ---the spenders Remember changes in inventories? GDP=W+R+I+P -receivers of income, FOP Net Domestic Product (NDP): GDP-CFC

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Mac Review

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  1. Mac Review Assorted Topics

  2. Supply demand review • Grab clickers

  3. All those GDP formulas… • GDP=C+I+G+Nx ---the spenders • Remember changes in inventories? • GDP=W+R+I+P -receivers of income, FOP • Net Domestic Product (NDP): GDP-CFC • National Income (NI): income earned by FOP owned by U.S. citizens. • Personal Income (PI): household income not counting personal income taxes • Disposable Income (DI): household income after subtracting income taxes

  4. Inflation • What is a market basket? • Base year: 1 pack Ritz crackers = $5, 1 can EZ cheese = $3 • Base-year mkt basket P = ___ • Base-year price index = ($8/$8)X100 = _____ • Year 2 mkt basket P = $10 • Year 2 P index = ($__/$__)X100 = _____ • Year 3 P index = ($16/$__)X100 = _____ • What was inflation between years 2 and 3??? • [(200-125)/125]=0.6=60%

  5. Suppose that a typical consumer buys the following quantities of three commodities in ‘93 and ‘94. • CommodityQuantity ‘93 per ‘94 per • unit priceunit price • Food 5 units $6.00 $5.00 • Clothing 2 units $7.00 $9.00 • Shelter 3 units $12.00 $19.00 • Which of the following can be concluded about the CPI during this period? • A) It remained unchanged • B) It decreased by 25% • C) It decreased by 20% • D) It increased by 20% • E) It increased by 25%

  6. Inflation • What are real wages? • Say inflation is 8%/yr, and I get a raise this year of 7%. • What happened to my real wages? • What happened to my purchasing power? • Am I better off or worse off? • What is the real interest rate? • r=i-inflation • Say you loan money out & charge 10%. Inflation during this period is 9%. What can you say about the money paid back to you?

  7. Inflation • Who does unexpected inflation hurt? • Who does it help? • It hurts lenders at fixed rates. • It helps borrowers at fixed rates.

  8. Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation? • A) Inflation had been underpredicted. • B) The real interest rate had exceeded the nominal interest rate. • C) The real interest rate had been negative. • D) People who borrowed funds at the nominal interest rate during this time would lose. • E) The economy would expand because of increased investment and spending.

  9. Think fast! • If GDP in the country of Mordor is $1,000 this year… • and the price index (GDP deflator) is 200… • what is Real GDP this year???

  10. The major difference between GDP and real GDP is that real GDP • A) excludes gov’t transfer payments • B) excludes imports • C) is adjusted for price-level changes using a price index • D) measures only the value of final goods and services that are consumed • E) measures the prices of a market basket of goods purchased by a typical urban consumer

  11. If real GDP is increasing at 3% and nominal GDP is increasing at 7%, which of the following is necessarily true? • A) Unemployment is increasing. • B) The price level is increasing. • C) Exports exceed imports. • D) The economy is in a recession. • E) The gov’t is running a budget deficit.

  12. Economic Growth • Ways to show economic growth: • LRAS shifts right • PPF shifts out • Not economic growth: • Increase in output/real GDP • Increase in AD

  13. VI. Factors Influencing Economic Growth • Amount & quality of the FOP: • Natural resources • more capital stock • higher productivity • Skilled/growing labor force, education*** • Entrepreneurs • How can gov’t help a country get more capital stock?

  14. Changes in which of the following factors would affect the growth of an economy? • I. Quantity & quality of human and natural resources • II. Amount of capital goods available • III. Technology • A) I only • B) I and II only • C) I and III only • D) II and III only • E) I, II, & III

  15. The long-run growth rate of an economy will be increased by an increase in all of the following EXCEPT • A) capital stock • B) labor supply • C) real interest • D) rate of technological change • E) spending on education & training

  16. An increase in which of the following is consistent with an outward shift of the production possibilities curve? • A) Transfer payments • B) Aggregate demand • C) Long-run aggregate supply • D) Income tax rates • E) Exports

  17. Which of the following best explains a decline in potential GDP? • A) Negative net investment • B) The discovery of vast new oil deposits • C) A lower price level • D) A decrease in the infant mortality rate • E) A decrease in wages and profits

  18. Multipliers • Spending=1/1-MPC (or 1/MPS) • Tax=-MPC/1-MPC (or -MPC/MPS) • Money=1/Reserve Ratio • The reserve rate is 10%. If I take the $1,000 I’ve been hiding in my mattress, and deposit it at the bank, how much can that bank loan out? • What is the maximum total increase in the money supply? • What if the Fed buys $1,000 in bonds?

  19. An increase in the MPC causes an increase in which of the following? • A) MPS • B) spending multiplier • C) savings rate • D) exports • E) aggregate supply

  20. If a commercial bank has no excess reserves and the reserve requirement is 10%, what is the value of new loans this single bank can issue if a new customer deposits $10,000? • A) $100,000 • B) $90,333 • C) $10,000 • D) $9,000 • E) $1,000

  21. Assume that the reserve requirement is 20%, but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in • A) an increase in the money supply of $5 million • B) an increase in the money supply of less than $5 million • C) a decrease in the money supply of $1 million • D) an decrease in money supply of $5 million • E) an decrease in money supply of more than $5 million

  22. If on receiving a checking deposit of $300 a bank’s excess reserves increased by $255, the required reserve ratio must be • A) 5% • B) 15% • C) 25% • D) 35% • E) 45%

  23. The value of the spending multiplier decreases when • A) tax rates are reduced • B) exports decline • C) imports decline • D) government spending increases • E) the marginal propensity to save increases

  24. If, at full employment, the gov’t wants to increase spending by $100 billion without increasing inflation in the short-run, it must do which of the following? • A) Raise taxes by more than $100 billion. • B) Raise taxes by $100 billion. • C) Raise taxes by less than $100 billion. • D) Lower taxes by $100 billion. • E) Lower taxes by less than $100 billion

  25. M1-M3 • M1=cash plus checking (demand deposit) accounts • M2=M1+bunch of other stuff • M3=M1+M2+large time deposits

  26. Loanable Funds Market • Where does the supply of loanable funds come from? • Where does the demand for loanable funds come from?

  27. If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the LF market will change how in the short-run? • Demand for LoansReal Interest Rate • A) Increase Increase • B) Increase Decrease • C) Decrease Increase • D) Decrease Decrease • E) Decrease Not Change

  28. 2005 frq #2

  29. Phillips Curve • AD shifts? • AS shifts?

  30. According to the short-run Phillips curve, there is a trade-off between • A) interest rates and inflation • B) the growth of the money sup0ply and interest rates • C) unemployment and economic growth • D) inflation and unemployment • E) economic growth and interest rates

  31. According to the long-run Phillips curve, which of the following is true? • A) Unemployment increases with an increase in inflation • B) Unemployment decreases with an increase in inflation • C) Increased automation will lead to lower levels of structural unemployment in the long-run. • D) Changes in the composition of the overall demand for labor tend to be deflationary in the long-run. • E) The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.

  32. Which best explains how an economy can have both high inflation and high unemployment? • A) Gov’t increases spending but not taxes. • B) Gov’t increases taxes but not spending. • C) Inflation expectations decline. • D) Women and teens stay out of labor force. • E) Negative supply shocks cause factor prices to increase.

  33. 2005 frq #3

  34. Current Acct vs Capital Acct • Current = net exports + net foreign investment/factor income • Capital = net investments • balance of payments = current + capital • balance of payments must equal 0!!!

  35. Keynesian vs Classical

  36. The classical economists argued that involuntary unemployment would be eliminated by • A) increasing gov’t spending to increase AD • B) increasing the money supply to stimulate investment spending • C) self-correcting market forces stemming from flexible prices and wages • D) maintaining the growth of the money supply at a constant rate • E) decreasing corporate income taxes to encourage investment

  37. Which of the following arguments is typically associated with classical economists? • A) A market economy is self-correcting and thus will not remain in a recession indefinitely . • B) a market economy has stable prices & thus is usually free from inflation. • C) A market economy requires a strong government to ensure that the market meets the needs of the people. • D) A market economy needs only moderate assistance from the gov’t to avoid an extended recession. • E) A market economy eventually results in monopolies in both the input and output markets.

  38. Fiscal vs Monetary • Expansionary fiscal = more AD, higher i (crowding out effect) • Expansionary monetary = more AD, lower i

  39. To stimulate investment in new plant and equipment without increasing the level of real output, the best policy mix is to • A) decrease the money supply and increase gov’t spending • B) increase the money supply and decrease gov’t spending • C) decrease the money supply & increase income taxes • D) decrease income taxes and increase gov’t spending

  40. Quantity Theory of Money • MV=PQ • V is usually stable, & Q (output) is determined by resources, so • when M increases… • P increases. • Remember***, Q is output (real GDP) • & PQ is nominal GDP.

  41. If the economy is at full employment, and there is a big increase in the money supply, the quantity theory of money predicts and increase in • A) the velocity of money • B) real output • C) interest rates • D) unemployment • E) the price level

  42. If the money stock decreases but nominal GDP remains constant, which of the following has occurred? • A) Income velocity of money has increased. • B) Income velocity of money has decreased. • C) Price level has increased. • D) Price level has decreased. • E) Real output has decreased.

  43. Money Market: Short term Money Supply controlled by Fed (perfectly inelastic) Interest rates are nominal Demand for money affected by economy Loanable Funds Market: Long term Quantity supplied of loanable funds affected by real interest rate Interest rates are real. Supply and Demand for loanable funds affected by economy: Households save more or less Fed monetary policy Demand for loans Money Market or Loanable Funds Market: What’s the Difference?

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