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 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

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%

Suppose that a typical consumer buys the following quantities of three commodities in ‘93 and ‘94.

Commodity Quantity ‘93 per ‘94 per unit price unit 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%

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?

Inflation

Who does unexpected inflation hurt? Who does it help?

It hurts lenders at fixed rates. It helps borrowers at fixed rates.

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.

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???

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

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.

Economic Growth

Ways to show economic growth: LRAS shifts right PPF shifts out

Not economic growth: Increase in output/real GDP Increase in AD

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?

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

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

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

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

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?

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

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

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

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%

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

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

M1-M3

M1=cash plus checking (demand deposit) accounts

M2=M1+bunch of other stuff M3=M1+M2+large time deposits

Loanable Funds Market

Where does the supply of loanable funds come from?

Where does the demand for loanable funds come from?

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 Loans Real Interest Rate A) Increase Increase B) Increase Decrease C) Decrease Increase D) Decrease Decrease E) Decrease Not Change

2005 frq #2

Phillips Curve

AD shifts? AS shifts?

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

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.

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.

2005 frq #3

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!!!

Keynesian vs Classical

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

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.

Fiscal vs Monetary

Expansionary fiscal = more AD, higher i (crowding out effect)

Expansionary monetary = more AD, lower i

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

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.

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

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.

Money Market or Loanable Funds Market: What’s the Difference?

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