Macroeconomics Revision

1. When the consumer price index falls, the typical family

a. can spend fewer dollars to maintain the same standard of living.
b. has to spend more dollars to maintain the same standard of living.
can save less because they do not need to offset the effects of rising
c.
prices.
d. finds that its standard of living is not affected.
Because the price level and inflation reduces, so the consumer can now spend
fewer dollars to purchase the same goods and services

2. The economy's inflation rate is the

a. price level in the current period.

b. change in the price level from the previous period.
c. change in the gross domestic product from the previous period.
d. percentage change in the price level from the previous period.
What are the indices used to calculate inflation that you know?
CPI, GDP deflator….

3. You receive money as payment for babysitting your neighbors' children.

This best illustrates which function of money?

a. medium of exchange
b. unit of account
c. store of value
d. liquidity
What is the most important function of money? Why?
- Money's most important function is as a medium of exchange. Medium
of exchange: It was difficult to exchange goods since the exchange in a
barter system required a double coincidence of wants. Money has
removed this issue.
- Because without money, all transactions would have to be conducted by
barter, which involves direct exchange of one good or service for
another.
4. A macroeconomist — as opposed to a microeconomist — might study
 a. the effect of agricultural price support programs on the cotton
industry
b. the effect on U.S. steel producers of an import quota imposed on
foreign steel
c. the effect of an increasing inflation rate on national living standards
d. the effect of an increase in the price of imported coffee beans on the
U.S. coffee industry

5. The table below contains data for the country of Batterland, which
produces only waffles and pancakes. The base year is 2009.

Prices and Quantities

Year Price of Quantity Price of Quantity Nomina Real GDP Inflation

Waffles of Waffles Pancakes of l GDP GDP deflator
Pancakes
2008 $2.00 100 $1.00 100
2009 $2.00 120 $2.00 150
2010 $2.00 150 $3.00 200
2011 $4.00 180 $3.00 220

a. Calculate the country’s nominal GDP

b. Calculate the country’s real GDP

c. Calculate the country’s GDP deflator

d. Calculate the country’s inflation

b, Real GDP (base year 2009)

2008: $400

2009: $540
 2010: $700

a, Nominal GDP

2008: $300

2009: $540

2010: $900

2011: $1380

a, 300 540 900 1380

b, 400 540 700 800

c, 75 100 128.6 172,5

d, 33,33 26,6 34,1

6. Question: Suppose the SBV raises its interest rate, what would happen to
the VND: a) appreciates b) depreciates c) remains unchanged? Briefly explain
your answer
The higher interest rates that can be earned tend to attract foreign investment,
increasing the demand for and value of the home country's currency
7. Question: What is the equation of the Quantity Theory of Money? Explain
each term

- Quantity equation: M × V = P × Y

 Quantity of money (M)

 Velocity of money (V)
 Dollar value of the economy’s output of goods and services (P × Y )

 MV = PY
 M = Money supply
 V = Velocity of circulation (the number of times money changes hands)
 P = Average price level
 Y = Volume of transactions of goods and services, also known as real output
or real GDP

8. When the central bank increases the money supply, what would happen?
High rate of inflation

9. The table below reports nominal and real GDP for the U.S. from 1929
to 1932.

Year Nominal GDP Real GDP

1929 103.6 977
1930 91.2 892.8
1931 76.5 834.9
1932 58.7 725.8

a. Calculate the GDP deflator for the year 1931

b. Calculate inflation rate in 1931

c. Calculate the growth rate of nominal GDP and real GDP in 1930. Which is the
better gauge of economic

a. GDP deflator for the year 1931:

(76,5/834,9) x 100=9,2

b. 10.3%
c. - Real GDP is a better gauge of economic well-being than nominal GDP

+growth rate of real GDP in 1930= ((real gdp in 1930 – real gdp in 1929)/
real gdp in 1929) x100 = ((892-977)/977)x100= -8,7%

- nominal GDP: -0,12

real GDP: -0,1

(ending GDP - starting GDP)/starting GDP

So, the better gauge of economic well-being is the real GDP

Why is real GDP a better gauge of economic well-being?

Because real GDP is not affected by changes in prices, so it reflects only changes
in the amounts being produced. production or higher prices.

10. Suppose the Venezuelan economy produces only cereal and milk.
Quantities and prices of these goods for the last several years are shown
below. The base year is 2008.

Prices and Quantities

Year Price of Quantity of Price of Milk Quantity of

Cereal Cereal Milk
2008 $4.00 90 $1.50 150
2009 $4.00 100 $2.00 180
2010 $5.00 120 $2.50 200
2011 $6.00 150 $3.50 200

a. Calculate the country’s real GDP and GDP deflator in 2008

b. Calculate the country’s real GDP in 2009 and 2010

c. Calculate the country’s GDP deflator in 2009 and 2010

d. Calculate the country’s inflation in 2010 and 2011

a. Real GDP in 2008 = $585

Deflator in 2008 = 100%

b. Real GDP in 2009 = $670

Real GDP in 2010= $780

c. GDP deflator in 2009 = 113,4%

In 2010 = 141%
 Real GDP 2008= $585 = Nominal GDP
GDP deflator 2008= 100
b. Real GDP 2009 = $670
Real GDP 2010 = $780
c. GDP deflator 2009 =113.4
GDP deflator 2010 = 141
d. inflation in 2010 = 24.3%
and 2011 = 26.1%

11. if the exchange rate depreciates, the GDP will: a) increase; b) decrease; c)
remain unchanged. Briefly explain your answer

If the exchange rate falls, we will focus on exports rather than imports. Then, the
net export will increase => GPA increases GDP

Because the price of our country's products when exporting will be cheaper, we
will have a competitive advantage

12. What are the types of exchange rates that you know

There are four main types of exchange rate: freely floating, fixed, pegged and
managed float.

13. Question: Economists argue that the move from barter to money increased
trade and production. Do you think that this statement is wright or wrong?
Briefly explain your answer?

This statement is right:

 The use of money allows people to trade more easily.

-->When it is easier to trade, specialization increases. Increased specialization

increases production and the standard of living.

- Because barter may create difficulties in equilibrating the price and the value of a
product and preserving exchange products. Money is an special intermediate
commodity that fix the suitable price towards the products’ value and much easier
to preserve
 14. The SBV increases the reserve requirement, but it wants to offset the
effects on the money supply. Which of the following should it do? Briefly
explain why

a. sell bonds to increase reserves

b. sell bonds to decrease reserves SBV increase requirement => decrease in the
c. buy bonds to increase reserves money supply => interest rates rise.
d. buy bonds to decrease reserves

15. If the reserve ratio is 8 percent,

banks do not hold excess reserves, and
people do not hold currency, then when
the RBA purchases $20 million of government bonds, bank reserves

increase by $20 million and the money supply eventually increases by $250
a.
million.
decrease by $20 million and the money supply eventually increases by $250
b.
million.
increase by $20 million and the money supply eventually decreases by $250
c.
million.
decrease by $20 million and the money supply eventually decreases by $250
d.
million.

Money mutiplier =1/R=1/8% =12.5 The maximum money supply = 12.5x20 =$250
million

16. If the reserve ratio is 10 percent, banks do not hold excess reserves,
people hold only deposits and no currency, then when the Fed sells $10
million worth of bonds to the public, bank reserves

increase by $1 million and the money supply eventually increases by $10

a.
million.

increase by $10 million and the money supply eventually increases by $100
b.
million.

decrease by $1 million and the money supply eventually increases by $10

c.
million.

d. decrease by $10 million and the money supply eventually decreases by $100
 million.

17. If people decide to hold more currency relative to deposits, the money
supply

a. falls. The larger the reserve ratio is, the more the money supply falls.

b. falls. The larger the reserve ratio is, the less the money supply falls.

c. rises. The larger the reserve ratio is, the more the money supply rises.

d. rises. The larger the reserve ratio is, the less the money supply rises.

18. During recessions, banks typically choose to hold more excess reserves
relative to their deposits. This action

a. increases the money multiplier and increases the money supply.

b. decreases the money multiplier and decreases the money supply.

c. does not change the money multiplier, but increases the money supply.

d. does not change the money multiplier, but decreases the money supply.

19. A problem that the Fed faces when it attempts to control the money
supply is that

since the U.S. has a fractional-reserve banking system, the amount of money in
a.
the economy depends in part on the behavior of depositors and bankers.

the Fed has to get the approval of the U.S. Treasury Department whenever it
b.
uses any of its monetary policy tools.

while the Fed has the ability to change the money supply by a large amount, it
c.
does not have the ability to change it by a small amount.

federal legislation in the 1950s stripped the Fed of its power to act as a lender of
d.
last resort to banks.
 20. Which of the following will not help to prevent bank runs?

a. government insurance of deposits

b. fractional reserve banking

c. 100% reserve banking

d. All of the above prevent bank runs.

21. The velocity of money is

a. the rate at which the Fed puts money into the economy.

b. the same thing as the long-term growth rate of the money supply.

c. the money supply divided by nominal GDP.

d. the average number of times per year a dollar is spent.

22. Velocity is computed as

a. (P Y)/M.

b. (P M)/Y.

c. (Y M)/P.

d. (Y M)/V.

23. If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?

2.25

24. Metropolis National Bank is currently holding 2% of its deposits as

excess reserves.

Metropolis National Bank

 Liabilities
Assets

Reserv Deposi
$60,000 $500,00
es ts
0

$440,00
Loans
0

Refer to Balance Sheet of Metropolis National Bank. Metropolis National

Bank is currently holding 2% of deposits as excess reserves. What is the
reserve requirement?

a. 12 percent
b. 10 percent
c. 8 percent
d. 6 percent

Excess reserves = 2% x $500,000 = 0.02 x $500,000 = $10,000-->reserve

requirement=10%
25. Question: what is the equation for the aggregate demand curve?
AD=C+I+G+(X-M), so the AD equation is also the equation of GDP
26. Question: what is the difference between actual output and potential
output?
Output gap

27. In your opinion, what would be the most important factor causing the
SHORT-RUN AS curve to shift?
- natural resources
- capital
- change in technological knowledge
28. Question: what are the most important goals of the government or the
central bank
price stability

29. For an economy as a whole,

a. wages must equal profit.

b. consumption must equal saving..
c. income must equal expenditure.
d. the number of buyers must equal the number of sellers.

30. GDP is defined as the

a. value of all goods and services produced within a country in a given period
of time.
b. value of all goods and services produced by the citizens of a country,
regardless of where they are living, in a given period of time.
c. value of all final goods and services produced within a country in a given
period of time.
d. value of all final goods and services produced by the citizens of a country,
regardless of where they are living, in a given period of time. ( GNP )

31. a macroeconomist, as opposed to a microeconomist, to be particularly

interested in

a. explaining how economic changes affect prices of particular goods.

b. devising policies to deal with market failures such as externalities and
market power.
c. devising policies to promote low inflation.
d. identifying those markets that are competitive and those that are not
competitive.
32. Macroeconomists study

a. the decisions of individual households and firms.

b. the interaction between households and firms.
c. economy-wide phenomena.
d. regulations imposed on firms and unions.

33. the term inflation describes a situation in which

a. some prices are rising faster than others.

b. the economy's overall price level is rising.
c. the economy's overall price level is high, but not necessarily rising.
d. the economy's overall output of goods and services is rising faster than the
economy's overall price level.

34. The inflation rate you are likely to hear on TV and the Internet is
calculated from

a. the industrial production.

b. the CPI.
c. the VN index.
d. the GDP deflator.

35. You pay for milk tea and ice-cream from the shop with currency.
Which function of money does this best illustrate?

a. medium of exchange
b. unit of account
c. store of value
d. liquidity

36. Which list ranks assets from most to least liquid?

a. money, bonds, cars, houses

b. money, cars, houses, bonds
c. bonds, money, cars, houses
d. bonds, cars, money, houses

37. Under a fractional-reserve banking system, banks

a. hold more reserves than deposits.
b. generally lend out a majority of the funds deposited.
c. cause the money supply to fall by lending out reserves.
d. All of the above are correct.

38. Gross domestic product measures

a. income and expenditures.

b. income but not expenditures.
c. expenditures but not income.
d. neither income nor expenditures.

39. Which of the following statements about GDP is correct?

a. GDP measures two things at once: the total income of everyone in the
economy and the total expenditure on the economy’s output of goods and
services.
b. Money continuously flows from households to firms and then back to
households, and GDP measures this flow of money.
c. GDP is generally regarded as the best single measure of a society’s
economic well-being.
d. All of the above are correct.

40. Which of the following is a way to compute GDP?

a. add up the wages paid to all workers

b. add up the quantities of all final goods and services
c. add up the market values of all final goods and services
d. add up the difference between the market values of all final goods and
services and then subtract the costs of producing those goods and services

41. Which of the following would likely be studied by a macroeconomist

rather than a microeconomist?

a. the effect of an increase in the alcohol tax on the market for beer
b. the effect of foreign competition on the domestic auto industry
c. the effect of a price war in the airline industry
d. the effect of an increase in the minimum wage on an economy’s overall rate
of unemployment
 42. If the price level increased from 120 to 126, then what was the
inflation rate?

a. 3 percent
b. 5 percent
c. 6 percent
d. None of the above is correct.
43. When the central bank increases the money supply, the nominal exchange
rate will: a) Depreciate; b) Appreciate? Briefly explain your answers
A increases money supply has two effects: it lowers interest rates, which encourage
investment, and it puts more money in the hands of consumers, which makes them
feel wealthier and encourages consumption.

44. Metropolis National Bank is currently holding 2% of deposits as

excess reserves. Assume that no banks in the economy want to hold excess
reserves and that people only hold deposits and no currency. How much
does the money supply ultimately increase when Metropolis National
Bank lends out its excess reserves?

a. $100,000
b. $110,000
c. $120,000
d. None of the above are correct.

45. Metropolis National Bank is holding 2% of its deposits as excess

reserves. Assume that no banks in the economy want to maintain holdings
of excess reserves and that people only hold deposits and no currency. The
Fed makes open market purchases of $10,000. The person who sold bonds
to the Fed deposits all the funds in Metropolis National Bank. If the bank
now loans out all its excess reserves, by how much will the money supply
increase?

a. $190,000
b. $200,000
c. $240,000
d. None of the above are correct.