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QOD and On Call - Final Exam With Complete Solutions
The "w" in labor market graph stands for - ANSWER w = W/P = the real wage.
True or False. If wealth decreases, then the demand for labor increases. - ANSWER False. If wealth decreases, the supply of labor increases. If workers want to purchase the same number of goods, with lower wealthy, they now need higher income and would work more.
If s = .01 and f = .19, then the natural rate of unemployment is: - ANSWER U rate = s/s+f x 100 = .01/(.01 + .19) x 100 = 1/20 x 100 = 5%
The intertemporal budget constraint tells us that: - ANSWER the present value of lifetime consumption equals the present value of lifetime income.
If you expect to work for an additional 40 years from today, and expect to live for 10 years beyond that, and your income is $100,000 per year, then the life-cycle model predicts that your consumption per year will be: - ANSWER 40($100,000)/50 = $80,000.
True or False. If wealth is above a desired level of wealth (precautionary savings), then households will increase consumption. - ANSWER True. If wealth is higher than the desired level, households do not need to save as much and can consume more.
Which of the following is NOT a reason why households save. - ANSWER Households save because most consumers prefer to consume in the future rather than in the present.
Most consumers prefer to consume now rather than later (impatient and need to be rewarded for foregone consumption).
Investment is less volatile than consumption because firms prefer to smooth their
investment spending. - ANSWER False. Biologically, humans need to smooth consumption (food, clothing, shelter) to live, whereas firms do not, so consumption spending is less volatile than investment.
True or False. The permanent income hypothesis and the life cycle hypothesis both predict that households will smooth consumption when there are deviations in income, but income can deviate at any time from the average in the permanent income hypothesis, whereas the deviations in income come at certain parts of a person's life in the life-cycle model. - ANSWER True. The PIH states that C = mpc* YP, where YP is the average income of all the possible income levels at any point in life. The L-CH states that households borrow when they are young and earn low income, save in mid-life when income is high, and draw down on savings when old and retired.
True or False. An increase in the real interest rate will lead to a decrease in present consumption. - ANSWER True. The substitution effect shows that the opportunity cost or price of present consumption (which is foregone future consumption) increases as the real interest rate r rises. That is, a consumer is giving up more interest income that could be used to purchase future consumption as the real interest rate rises, so present consumption would decrease. The income effect depends on if the household is a lender (income would increase, so present C could increase) or a borrower (income would decrease, so C would decrease). The net effect though would have C decreasing as r increases.
If wealth is above a desired level of wealth (precautionary savings), then households will increase consumption. - ANSWER True. If wealth is higher than the desired level, households do not need to save as much and can consume more.
Do firms always act rationally? - ANSWER No, firms can be overtaken by periods of irrational optimism or pessimism that Keynes called "animal spirits."
Which of the following would result in an increase in the desired level of capital, K*? - ANSWER An increase in the expected marginal product of capital, MPKe.
Which of the following statements about Tobin's q is TRUE? - ANSWER - A firm's q value is a signal from participants in the financial markets about whether it is profitable for the firm to acquire more capital goods and use them to expand production.
True or False. The long-run aggregate supply curve is upward-sloping. - ANSWER False. The long-run supply curve is vertical.
True or False. The aggregate expenditure model shows spending as a function of the price level. - ANSWER False. The aggregate expenditure model shows spending as a function of income.
True or False. The 45° line represents all the points where actual aggregate expenditure equals income. - ANSWER True
True or False. If planned aggregate expenditure is less than production, there will be an unplanned increase in inventories and firms will cut production. - ANSWER True. When spending is less than production, people are not buying goods, so inventories build up. Firms will then cut back on production.
if the marginal propensity to consume is 0.6, then the lump-sum tax multiplier is - ANSWER -mpc/(1-mpc) = -0.6/(1-0.6) = -0.6/0.4 = -1.
True or False. If the real interest rate increases, the AE curve will shift up. - ANSWER False. If the real interest rate increases, then C, I, and NX decrease, so the AE curve shifts DOWN.
True or False. The IS curve will shift if there is a change in autonomous spending from a factor other than the real interest rate. - ANSWER True
True or False. Demand shocks will shift the IS curve. - ANSWER True
Which of the following is NOT an adjustment that is made to link the short-term nominal interest rate to the long-term real interest rate? - ANSWER The term structure, which is the difference between the short-term nominal interest rate and the short-term real interest rate.
Which of the following IS an adjustment that is made to link the short-term nominal interest rate to the long-term real interest rate? - ANSWER - The default risk premium, which is the difference between the interest on loans to households and firms, which have higher default risk, and the interest rate on U.S. Treasury securities, which have low default risk.
- Expected inflation, which is the difference between the long-term nominal interest rate and the long-term real interest rate.
- The term structure effect, which is the difference between the long-term nominal interest rate and the short-term nominal interest rate.
The MP curve will shift UP when - ANSWER - The term structure effect, TSE, increases
- The default risk premium, DP, increases
True or False. If the Fed wants to maintain a monetary policy target real interest rate, then it must match changes in money demand with equal changes in the money supply. - ANSWER True. If the money demand increases, the Fed must increase (shift) the money supply curve by the same amount so that the equilibrium short-term nominal interest rate, i, remains unchanged.
True or False. The Fed is currently targeting both the money supply growth rate and the Federal Funds rate. - ANSWER False. The Fed cannot simultaneously target both the money supply and the interest rate. The Fed is currently targeting the Federal Funds rate, and changes the money supply to match shifts in money demand to maintain the short-term nominal interest rate target.
True or False. Milton Friedman believed there was a structural relationship between unemployment and inflation, and that fiscal or monetary policy could be used so that a government could decide what level of inflation and unemployment they wanted to target. - ANSWER False. It was A.W.H. Phillips (the "Phillips Curve") who showed the relationship between unemployment and inflation. Milton Friedman did not believe there was a structural relationship. Friedman argued that if current inflation rates differed from past inflation rates (such as inflation resulting from expansionary monetary policy
- AD curve left in the aggregate demand-aggregate supply model.
- IS curve left in the IS-MP model.
True or False. Traditional tools used by the Federal Reserve consist of 1) open market operations, where the Fed purchases or sells mortgage backed securities; 2) changing the discount rate; and 3) paying interest on excess reserves. - ANSWER False. 1) The Fed was able to purchase mortgage-backed securities after Congress passed TARP in 2008, but open market operations consist of the purchase/sale of Treasury securities. Also, 3) the Fed sets the required reserve ratio to control the money multiplier. While it did start to pay interest on excess reserves after the financial crisis, this was a new tool.
If the Fed wants to pursue contractionary monetary policy to fight inflation, it will raise the target interest rate. - ANSWER True
True or False. The Federal Open Market Committee is made up of the Board of Governors + the presidents of the 12 Regional Reserve Banks. - ANSWER False. The Federal Open Market Committee is comprised of the Board of Governors + the president of the New York Fed + 4 of the 11 presidents of the Regional Federal Reserve Banks (rotates among the 11).
True or False. The most frequently used tool by the Central bank of the US is changes to the reserve requirement. - ANSWER False. The most frequently used tool by the Fed (central bank of the US) is open market operations. The China central bank uses changes to the reserve requirement most frequently
True or False. Quantitative easing, in which the Fed purchases long term securities to decrease the term-structure effect and drive down long-term nominal interest rates, was an unconventional tool used during the Great Recession. - ANSWER True. As the Fed purchases long-term securities, their price increases, which decreases the interest rate on long-term bonds.
True or False. One limitation of monetary policy is that interest rates cannot be lowered below zero, so there is a limit to how much monetary policy can expand the economy. -
ANSWER True. The "Zero Bound Constraint" says that nominal interest rates cannot be lowered below zero, so there is a limit on the expansionary effect.
True or False. If the economy experiences a negative supply shock, the Federal Reserve can either have inflation higher than expected inflation with the economy at potential GDP, or use contractionary monetary policy to bring inflation down to expected inflation, but with real GDP below potential. - ANSWER True. A negative supply shock shifts the Phillips curve up, but does not change the IS or MP curves.
