Exam 2 Review. 2. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1000.

Transcription

1 Exam 2 Review 1. If output is described by the production function Y = AK 0.2 L 0.8, then the production function has: A) constant returns to scale. B) diminishing returns to scale. C) increasing returns to scale. D) a degree of returns to scale that cannot be determined from the information given. 2. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) The demand for output in a closed economy is the sum of: A) public saving and private saving. B) the quantity of capital and labor and production technology. C) consumption, investment, and government spending. D) government purchases and transfer payments minus tax receipts. 4. A consumption function shows the relationship between consumption and: A) income. B) personal income. C) disposable income. D) taxes. 5. If the consumption function is given by the equation C = Y, the production function is Y = 50K 0.5 L 0.5, where K = 100 and L = 100, then C equals: A) 1,000. B) 2,500. C) 3,000. D) 5,000. Page 1

2 6. Assume that the consumption function is given by C = (Y T), the tax function is given by T = t1y, and Y = 50K 0.5 L 0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by: A) 70. B) 140. C) 175. D) Assume that the consumption function is given by C = (Y T), the tax function is given by T = t0 + t1y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by: A) 85. B) 425. C) 500. D) Investment goods as measured in the GDP are purchased by: A) business firms alone. B) households alone. C) business firms and households. D) business firms, households, and governments. 9. Other things equal, an increase in the interest rate leads to: A) a decrease in the quantity of investment goods demanded. B) no change in the quantity of investment goods demanded. C) an increase in the quantity of investment goods demanded. D) sometimes an increase and sometimes a decrease in the quantity of investment goods demanded. 10. The nominal interest rate is the: A) rate of interest that investors pay to borrow money. B) same as the real interest rate. C) rate of inflation minus the real rate of interest. D) real rate of interest minus the rate of inflation. Page 2

3 11. Assume that the investment function is given by I = 1,000 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be: A) 240. B) 700. C) 760. D) In a closed economy, Y C G equals: A) national saving. B) private saving. C) public saving. D) financial saving. 13. If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to: A) 300. B) 500. C) 700. D) 1, If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is: A) 300. B) 500. C) 1,000. D) 1, In equilibrium, total investment equals: A) private saving. B) public saving. C) national saving. D) household saving. 16. The supply and demand for loanable funds determines the: A) real wage. B) real rental price of capital. C) real interest rate. D) nominal interest rate. Page 3

4 17. If saving exceeds investment demand, and consumption is not a function of the interest rate: A) the demand for loans exceeds the supply of loans. B) the interest rate will fall. C) the interest rate will rise. D) saving will fall. 18. In the classical model with fixed income, if households want to save more than firms want to invest, then: A) the interest rate rises. B) the interest rate falls. C) output increases. D) output falls. 19. 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. A) more; rises B) more; falls C) less; rises D) less; falls 20. Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = (Y T). Taxes (T) are equal to 1,000. Government spending is 600. In this case, equilibrium investment is: A) 600. B) 1,100. C) 1,500. D) 2,200. Page 4

5 Use the following to answer questions 21-24: Exhibit: Saving, Investment, and the Interest Rate (Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in rate, saving, and investment if the government cuts spending, holding other factors constant? 22. (Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in rate, saving, and investment if the government cuts taxes, holding other factors constant? Page 5

6 23. (Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in rate, saving, and investment if the government increases spending, holding other factors constant? 24. (Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in rate, saving, and investment if the government raises taxes, holding other factors constant? Use the following to answer questions 25-26: Exhibit: Saving, Investment, and the Interest Rate 2 Page 6

7 25. (Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in rate, saving, and investment if there is a technological innovation that increases the demand for investment goods? 26. (Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)? 27. When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: A) store of value. B) unit of account. C) medium of exchange. D) flow of value. 28. Credit card balances are included in: A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M In the United States, bank reserves consist of: A) currency and demand deposits. B) vault cash and deposits at the Federal Reserve. C) gold deposits at the Federal Reserve. D) the money supply. Page 7

8 30. 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. 31. If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve deposit ratio, then the total money supply is: A) reserves divided by rr. B) 1/rr. C) reserves times rr. D) reserves divided by (1 rr). 32. Financial intermediation is the process of: A) settling disputes between borrowers and lenders. B) advising corporations on whether to expand using debt or equity. C) transferring funds from savers to borrowers. D) converting from a barter economy to a money economy. 33. A bank balance sheet consists of only the following items: Deposits $1,000 Reserves $100 Securities $400 Debt $500 Loans $2,000 What is the value of bank capital? A) $1,000 B) +$500 C) +$1,000 D) +$1,500 Use the following to answer questions 34-36: Bank Balance Sheet Assets Liabilities & Net Worth Reserves $ 10,000 Deposits $100,000 Loans 100,000 Debt 20,000 Securities 40,000 Equity 30,000 Page 8

9 34. (Table: Bank Balance Sheet) Based on the table, what is the leverage ratio at the bank? A) 3 B) 4.67 C) 5 D) (Table: Bank Balance Sheet) Based on the table, what is the reserve ratio at the bank? A) 3 percent B) 5 percent C) 10 percent D) 15 percent 36. (Table: Bank Balance Sheet) Based on the table, owners' equity will fall to zero if loan defaults reduce the value of total assets by percent. A) 10 B) 20 C) 30 D) The reserve deposit ratio is determined by: A) the Federal Reserve. B) business policies of banks and the laws regulating banks. C) preferences of households about the form of money they wish to hold. D) the Federal Deposit Insurance Corporation (FDIC). 38. 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: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change. 39. When the Fed makes an open-market sale, it: A) increases the money multiplier (m). B) increases the currency deposit ratio (cr). C) increases the monetary base (B). D) decreases the monetary base (B). Page 9

10 40. If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals: A) $200 billion. B) $400 billion. C) $800 billion. D) $1,000 billion. 41. If the Federal Reserve wishes to increase the money supply, it should: A) decrease the discount rate. B) increase interest paid on reserves. C) sell government bonds. D) decrease the monetary base. 42. The rate of inflation is the: A) median level of prices. B) average level of prices. C) percentage change in the level of prices. D) measure of the overall level of prices. 43. The income velocity of money: A) is defined in the identity MV = PY. B) is defined in the identity MV = PT. C) is the same thing as the transactions velocity of money. D) is the same as the number of times a dollar bill changes hands. 44. If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal: A) 10. B) 20,000. C) 200,000. D) 2,000, When the demand for money parameter, k, is large, the velocity of money is and money is changing hands A) large; frequently B) large; infrequently C) small; frequently D) small; infrequently Page 10

11 46. Percentage change in P is approximately equal to the percentage change in: A) M. B) M minus percentage change in Y. C) M minus percentage change in Y plus percentage change in velocity. D) M minus percentage change in Y minus percentage change in velocity. 47. Inflation tax means that: A) as the price level rises, taxpayers are pushed into higher tax brackets. B) as the price level rises, the real value of money held by the public decreases. C) as taxes increase, the rate of inflation also increases. D) in a hyperinflation, the chief source of tax revenue is often the printing of money. 48. The inflation tax is paid: A) only by the central bank. B) by all holders of money. C) only by government bond holders. D) equally by every household. 49. If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: A) 1 percent. B) 6 percent. C) 4 percent. D) 5 percent. 50. If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must: A) increase by 2 percent. B) increase by 1 percent. C) remain constant. D) decrease by 1 percent. 51. The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: A) money supply is constant. B) velocity is constant. C) inflation rate is constant. D) real interest rate is constant. Page 11