The Basics
What is the first rotunda principle?
Trade creates value
If the current rate of unemployment (u) is greater than the natural rate of unemployment (u*), then all of the following are true EXCEPT:
A. There is cyclical unemployment
B. Y<Y*
C. There is structural unemployment
D. Y>Y*
D
Describe what is meant by the law of diminishing product of capital and how this concept affects the shape of the Production Function.
The law of diminishing product of capital means that even though adding more capital increases total production, each new addition increases total production by less and less. This results in the production function being a curve that has a decreasing positive slope. At the beginning of the curve the slope is steep but it flattens out as adding capital to an economy has a decreasing marginal effect.
Which of the following is not a critique of Keynesian Fiscal Policy?
A. Crowding Out
B. Multiplication lag
C. Impact lag
D. Implementation lag
B
What must the BOP do?
Balance (outgoing payments must equal incoming payments). Each account can have a surplus or deficit but together they must balance/they mirror each other.
Balance of payments: an accounting record of transactions between a country (or across borders) and the rest of the world. It has a current account that tracks exchange of goods and services, current income from investments, and gifts. It has a capital account that tracks exchange of ownership rights to real/financial assets and financial derivatives.
What is the second rotunda principle?
Incentives Affect Behavior.
What is the real interest rate on a bond with a nominal interest rate of 15 when inflation is 2.3%?
R=12.7% (fisher equation)
Which of the following is not a reason why the Solow model (I & II) is incorrect and was replaced with Modern Growth Theory?
A. The notion of the Steady State implies Convergence
B. In the Solow Model, technological advancements are considered exogenous
C. Investment and growth are correlated across countries
D. Investment in rich countries should eventually fall to a point that only balances out depreciation
C (solow was based on this assumption)
Which of the following is true about the relationship between tax rates and revenue?
A. At high rates, a rate increase would cause a decrease in tax revenue
B. At low rates, a rate increase would cause a decrease in tax revenue
C. At high rates, a rate increase would cause an increase in tax revenue
D. At low rates, a rate decrease would cause an increase in tax revenue
A
Fill in the blank: the US has a current account ______
and a capital account _______
deficit, surplus
The production possibilities frontier demonstrates which of the following principles?
opportunity cost
A bond as a face value of 1,000, and you purchase it for a price of 850. What is the rate of return you will receive on the bond, with one decimal place?
((1000-850)/850)*100=17.6%
At equilibrium in the AD-AS model, all of the following is true except...
A. Prices are equal to the market clearing price
B. u=u*
C. Y=Y*
D. LRAS=SRAS=AD
A
(the Y axis is price level)
What is dollar appreciation?
Decrease in the dollar price of foreign currency
Why would a country depreciate their currency? How would they do this? and what is the tradeoff for this?
This makes their products cheaper in rest of world so they export more and AD increases. Therefore, in the short run, output will increase and unemployment will decrease.
How: increase money supply
Tradeoff: lower real wages for workers
What is the effect on q* and p* of a new technology that allows for more efficient production?
A new technology is a shift factor for supply, so the supply curve would shift to the right. The
intersection of the new supply curve and old demand curve results in a lower price and higher
quantity.
The economy of Atlantis, which has a population of 5,000,000 people is growing at 3% each year. If the current real GDP is $100,000,000, approximately how long will it take for the economy to double in size (round the years to one decimal place)?
doubling time = 70/3=23.3 years
IF the government spends $100, and the MPC of the recipients of the initial spending is 0.25, what is the total increase in spending resulting from the $100?
133
1/(1-0.25)=1.3333
1.33333*100=133
What factors affect the demand for foreign currency (name all 3)?
Price (moves us along the demand curve)
Demand for foreign goods and services
Demand for foreign assets
Name the 3 causes of a current account deficit
Strong economic growth - spending increases
Low domestic savings - have to borrow more
Fiscal policy (budget deficit) - government has to borrow from rest of world
Using the numbers below and using year 2 as the base year, calculate the growth in Real GDP between year 1 to year 2 to the nearest tenth of a percent (one decimal place).
Year 1; Nominal GDP 100; Price Level 1.0
Year 2; Nominal GDP 200; Price Level 1.5
Year 3; Nominal GDP 400; Price Level 1.7
The correct answer is 33.3%.
This is done by first calculating the Real GDP of the first two years, which is 100/1*1.5=150 for year one, and 200 for year two. The growth rate is then (200-150)/150*100, which yields 33.3%.
The economy of Atlantis, which has a population of 5,000,000 people and has a current real GDP is $100,000,000, is expected to have a real GDP of $110,000,000 next year with population growth of 1%. What is their rate of economic growth for the (in percentage terms, only one decimal)?
economic growth = change in real gdp per capita
current rGDP per capita = 100M/5M=20
future rGDP per capita = 110m/(5M*1.01)=21.782...
rate of economic growth: ((21.782...-20)/20)*100=8.9%
If the government spends $200 and total spending increases by $250... What is the spending multiplier? What is the Marginal Propensity to Consume?
Spending Multiplier=1.25 or 5/4
->250/200=1.25
MPC=0.2 or 1/5
->1/(1-MPC)=1.25
-->1/1.25=1-MPC
--->MPC=1-(1/1.25)
the choices of the foreign gov't
note that the supply is perfectly inelastic
Name three big observations about US Import and Export trends reviewed in class.
More imports than exports since 1970s (a trade deficit)
Trade (as a portion of GDP) has declined since 2008
The trade deficit is still huge