Macroeconomics Final

1. Give three examples of important trade-offs that you face in your life.
a. Balancing a work life with a personal life can be quite difficult as you must work more
hours to get more money in order to support your family. But in the process you miss out
on time with your family.
b. Saving your money can eat into the money you use on a day to day basis. It can result in
an overall smaller amount of happiness but increase one's self control.
c. Time management can be a major factor in life, especially after high school when you
have to decide whether or not to go to college or start your career right than to save the
money that you still have.

2. Is rational self-interest the same thing as selfishness? How does self-interest help achieve
society’s economic goals?

Rational self interest is acting in a way that economically maximizes profit while reducing the cost of it,
that is not the same thing as selfishness. Selfishness is where you act out of only your own self interest for
every action you make and do not care for others.

3. Why is there such a wide variety of goods and services supplied in a market system?

There is a wide variety of goods because we have a very large and diverse pallet. The more products that
are produced the more profit is made.

4. In what way are entrepreneurs and businesses at the helm of the economy, but at the same time,
commanded by consumers?

Businesses and entrepreneurs are the ones who continuously produce the goods and services that the
consumer wants. But without the consumer the products would not sell and the companies would be
making no profit. Leaving them both in a constant cycle of production and consumption.

5. Cite three examples of recent decisions that you made in which you, at least implicitly, weighed
marginal cost and marginal benefit.
a. I needed to do my laundry but it's ten dollars to fill up my account to use my washer and
dryer. I had to weigh the overall benefit of having clean clothes over dirty ones and would
ten dollars be worth that right now? My ultimate decision was no.
b. I wanted to go out and get a case of beer for myself because I've been feeling a craving
but didn't have the money so I had to decide if it was worth it to overcharge my account.
My decision was no.
c. I owed my friend a large amount of money but didn't have the cash to give to her. My
mom decided to help me by paying her but as a result I now owe her the same amount of
money.

6. Why do economists make assumptions?

Economists make assumptions to get a better outlook on things and build out examples for themselves for
future models and graphs.

7. Why do economists sometimes offer conflicting advice to policymakers?

An economist might have different viewpoints and values on how the government should be run and what
their policies should be.

8. Should an economic model describe reality exactly?

No it should not because it would be far too complicated to understand and would have way too many
moving pieces to it. An economic model should instead be a basic model of the overarching and
important factors pertaining to the subject.

9. What is an opportunity cost? How does the idea relate to the definition of economics?

An opportunity cost is the amount you give up to produce a different product. An example of this would
be if you bought a car you would not have any more money left over for dinner or to go out shopping at a
mall.

10. Which of the following decisions would entail the greater opportunity cost: Allocating a square
block in the heart of New York City for a surface parking lot or allocating a square block at the
edge of a typical suburb for such a lot? Explain.

The first option is correct because it would be much harder to build a parking lot in New York due to the
lack of available land where in the suburbs there is plenty of room for a new structure.

11. What is shown by the budget line in a two-product (A & B) case? Describe what happens when
there is a change in income or the price of a product.

When there is a price change in a product it will force the budget line to rotate along one axis. If A is on
the vertical axis and the price rises then the budget line will move down along the Vertical A axis toward
the origin. A decrease would result in the curve moving up the A axis and away from the point of origin.

12. Why do economists include only final goods and services when measuring GDP for a particular
year? Why don’t they include the value of the stocks and bonds bought and sold? Why don’t they
include the value of the used furniture bought and sold?

Because an economist is concerned with the production and quality of the goods being sold. If you sell a
used good and it's not facilitated then there is no production.

13. List the resource categories and give a brief description of each.
 1. Natural Resources: A natural resource is anything which can be found off the land and in
nature. They have no man made modifications and can be used in industrial work.
2. Human Capital (Labor): This resource is the work, abilities, and capabilities that a
human can provide or better put, the labor that they can provide.
3. Capital: It is a physical piece of machinery or equipment that a company of business uses
to produce goods and products.
4. Entrepreneurship: An entrepreneur's idea or pitch of a plan or business scheme to make
more money. It also can be seen as the value of ideas

14. Contrast how a market system and a command economy try to cope with economic scarcity.

While a market system produces most of its contents on its own, a command economy will make a certain
amount of something in response to the demand of those who need the goods more than others.

15.
a. Define net exports.

They are a measure of a nation's total capacity of trade.

b. Explain how U.S. exports and imports each affect domestic production.

If a country is exporting less than its importing than usual domestic production will fall. This is because
the country depends more on its exports or the products that they produce.

c. How are net exports determined?

You take the value of a nation's total export goods and services and subtract the value of all the goods and
services it imports and that equals its net exports.

d. Explain how net exports might be a negative amount.

Net exports might sit in the negative if the nation's imports are greater than its exports.

16.
a. List four components of GDP. Give an example of each.

1. Consumption: Purchasing groceries.

2. Government Purchases: Orders for a new shipment of firearms or ammunition.
3. Investment: Purchasing a company car for deliveries. (Fast food)
4. Net Exports: Selling goods between countries like America selling food to China.

b. Explain why an economy’s income must equal its expenditures.

Because every transaction will have a buyer and seller and for every dollar spent, there is another dollar
added to the seller's income.

17. Evaluate the statement: “The government should have no place in a capitalistic market system.”

The Government can provide economic growth and stability by making the market system fair and
balanced by providing rules and regulations such as the floor and ceiling price of goods and services.

18. Some politicians have suggested that the United States enact a constitutional amendment
requiring that the federal government balance its budget annually. Explain why such an
amendment, if strictly enforced, would force the government to enact a contractionary fiscal
policy whenever the economy experienced a severe recession.

In order to balance a budget you must first lower transfer payments and raise taxes because net tax
revenue falls when transfer payments are raised

19. Why might economists be quite concerned if the annual interest payment on the U.S. public debt
sharply increased as a percentage of GDP?

They would be concerned with the fact that debt would not increase because it is at an absolute size or
amount but the interest keeps going up. The government will then have to either use tax revenues or they
will go deeper into debt.

20. Why do economics nearly uniformly support an independent Fed rather than one beholden
directly to either the president or Congress?

They support an independent Fed because they will effectively and efficiently control the supply of
money and will maintain the price stability.

21. How does each of the following relate to the financial crisis of 2007-2008: declines in real estate
values, subprime mortgage loans, mortgage-backed securities.

● Declines in real estate values: It forced people to fall back on their subprime mortgage
loans as values on real estate dropped.
● Subprime mortgage loans: Banks would issue large loans to people but this would prove
to be a risky business as people would fall back on these loans a lot.
● Mortgage-backed securities: It put riskier mortgages together and would sell them to an
investor. It reduced the amount of risk that they exposed themselves to.

22. What effect should each of the following have on the demand for gasoline in a competitive
market? State what happens to demand. Explain your reasoning in each case and relate it to a
demand determinant.
a. an increase in the number of cars
It will increase the demand for gasoline as they are products which compliment each other.

b. the economy moves into a recession

The demand will decrease because the economy will have dropped and plummeted.

c. an increase in the price of car insurance, taxes, maintenance

The demand for gas will decrease because it is suddenly more expensive to own a car.

d. consumer expectations of substantial price increases in gasoline

The demand would sharply increase because people would want to get as much gas as possible before the
price gets jacked up.

23. Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold
from $100 million to $200 million between one year and the next.
a. Assuming that the price of gold increased by 100 percent over the same period, by what
numerical amount did Glitter Gulch’s real output change?

It doesn’t change.

b. If the price of gold had not changed, what would have been the change in Glitter Gulch’s
real output?

It increases by 100.

24. Why do you think macroeconomists focus on just a few key statistics when trying to understand
the health and trajectory of an economy? Would it be better to try to examine all possible data?

To try and keep track of every bit of information would be very difficult, especially since it’s always
changing every day. Processing that info would be a massive undertaking and is more trouble than it’s
worth.

25.
a. Explain the difference between nominal and real variables and give two examples of
each.

A nominal variable is a monetary value like the price of goods or services while real variables are a more
physical thing like wages or the comparable price of one good to another.

b. If inflation is less than expected, who benefits- debtors or creditors?

The creditors benefit more because they will receive payments from debtors which have a high real value.
 26.
a. What does the “invisible hand” of the market do

It helps a market reach an equilibrium without involving the government.

b. Explain the two main causes of market failure and give an example of each.

● Abuse of monopoly power: Unfair treatment or prices on monopolized products

to competitors and consumers.
● Lack of public goods: A fire fighter crew failing to provide aid to a burning
building.

27.
a. Who is John Maynard Keynes?

He was an economist whose ideas changed the practice and theory of macroeconomics forever. He also
refined methods of business cycles

b. What is Keynesian economics? How does it differ from classical economic theory?

Keynesian economics suggests that governments should use fiscal policy, especially during a recession.
Classic economics doesn’t have a lot of emphasis on fiscal policy and instead bases its work on
monetarism to manage its money.

28.
a. What is the basic objective of monetary policy?

It is to get a long term GDP growth trend and also maintain a low inflation rate.

b. Why is monetary policy easier to conduct than fiscal policy?

Fiscal policy addresses and states the total amount of spending while monetary is expandable and trying
to create economic activity.

29.
a. What is the difference between macroeconomics and microeconomics?

Macroeconomics is the study of the broader nationwide economics while Microeconomics is the study of
consumer and company wide economics.

b. What is the difference between positive economics and normative economics?

Positive economics is based around facts and can’t be disproven while normative economics is centered
around an ethical and fair form of economics which makes it based instead around values.

30. Explain the importance of the ceteris paribus or “other-things-equal” assumption.

This would mean the idea that certain things will always retain their value while others are given value
based on their government. Example would be cash having a value to people because we place a value on
it but gold will always retain its value because its a precious metal and is highly valued by everyone.

31. Consider a nation in which the volume of goods and services is growing by 5% per year. What is
the likely impact of this high rate of growth on the power and influence of its government relative
to other countries experiencing slower rates of growth? What about the effect of this 5 percent
growth on the nation’s living standards? Will these also necessarily grow by 5 percent per year,
given population growth? Why or why not?

A 5 percent increase in the volume of goods and services would mean that the country either had
developed a new piece of technology that allowed them to make that jump, or they had a drop in
unemployment rates. This wouldn't necessarily mean an improvement to the living standard as that money
could be put to anything other than improved domestic life like better technology or expanded businesses,
not homes.

32. Why is there a trade-off between the amount of consumption that people can enjoy today and the
amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both?

Because people must provide capital for themselves to save so they can invest in the future but not many
people want to or can save that kind of money

a. How does saving relate to investment and thus to economic growth?

By saving cash you will have more money to invest in the future and therefore that amount of capital will
lead to higher economic growth.

b. What role do banks and other financial institutions play in aiding the growth process

Financial institutions provide financial services that reduce the cost of information about saving and also
borrowing. This can serve the purpose of making the economy more efficient.

33. Use data in the table below to explain the economic effects of a price ceiling at $6, at $5, and at
$4.

If the price ceiling is at $6, there will be a shortage in the market since the quantity demanded is bigger
than the amount supplied for the market. There will be a shortage of 5,000 - 3,500 = 1,500 if this is the
case. If the price ceiling is at $5, then a shortage of 5,500 - 2,500 = 3,000 will occur. If the price ceiling is
at $4, a shortage of 5,000 - 1,500 = 3,500 will occur.
 Price Quantity demanded Quantity supplied

$7.00 4500 4500

$6.00 5000 3500

$5.00 5500 2500

$4.00 6000 1500

34. Below are six statements. Indicate whether each one pertains to microeconomics (MIC) or
macroeconomics (MAC).
a. “The inflation rate in the United States hit its lowest level in the last twenty years.”

Macroeconomics

b. “The profits of Microsoft rose 20 percent during the past quarter.”

Microeconomics

c. “Rains from El Nino again hit the California region causing severe flooding in farms.
The prices for citrus and produce are expected to rise sharply.”

Macroeconomics

d. “The nation’s economy grew at an annual rate of 3.7 percent in the final quarter of the
year.”

Macroeconomics

e. “The trade deficit in the United States was $20 billion last month.”

Macroeconomics

f. “General Motors plans to spend $800 million on a new automobile plant.”

Microeconomics

35. Explain the term “laissez faire capitalism”.

Laissez faire advocates for market systems to use fair economic systems. It also refuses help from the
government and handles everything in a hands-on manner.

36. List nine characteristics of the market system.

a. Competition.
 b. Consumer Sovereignty.
c. Economic Freedom.
d. Freedom of choice
e. Limited Government Involvement.
f. Motivation of self interest
g. Private Property.
h. Profit.
i. Voluntary Exchange.

37. What is the basic difference between a public good and a private good?

A public good is a product produced by the government for everyone. A private good is a company made
product to satisfy demand.

38. What is the difference between a slowdown in economic growth and a recession?

A slowdown in the economy is a decline or minor fall in the GDPs growth rate. A recession is a massive
drop in GDP. The difference between the two is a slowdown is small and minor whereas a recession is
large and very significant.

39. The next four questions refer to the following price and output data over a five-year period for an
economy that produces only one good. Assume that year 2 is the base year.
Year Units of output Price per unit

1 16 2

2 20 3

3 30 4

4 36 5

5 40 6
a. If year 2 is the base year, give the price index for year 3.

133%

b. Give the nominal GDP for year 4.

18,000

c. What is the real GDP for year 4?

15,000
 d. Tell which years you would deflate nominal GDP and which years you would inflate
nominal GDP in finding real GDP.

I would deflate the nominal GDP in year 2 and inflate the nominal GDP after finding real GDP is year 3.

40. What are the so-called Fundamental Questions that every economy must answer?
(I think you accidentally gave us the answer to this one.)
a. What goods and services will be produced?
b. How will the goods and services be produced?
c. Who will get the goods and services?
d. How will the system accommodate change?
e. How will the system promote progress?

41. Explain what is meant by a competitive market.

Competitive markets are systems in which no single individual, consumer or producer, can influence the
market. It also adheres to the supply curve when there is supply and demand.

42. Did economic output start growing faster than population from the beginning of the human
inhabitation of the earth? When did modern economic growth begin? Have all of the world’s
nations experienced the same extent of modern economic growth?

● No, the population growth has been greater than the economic output.
● Modern economic growth began ever since the Dawn of human civilization.
● No they have not because modern economic growth is a modern occurrence.

43. How does the size of the 2007–2009 recession compare with the Great Depression of the 1930s?

Price levels fell by 22 percent and real GDP fell by 31 percent during the Great Depression. In the
Recession however the prices rose slowly while the GDP fell by less than 4 percent.

44. List five basic determinants of market demand that could cause demand to decrease.

1. Buyer income
2. Consumer expectations of future supply and price
3. Consumer tastes
4. Price
5. Price of related goods

45. What are demand shocks? Give an example of a positive and a negative demand shock.

A demand shock is an unexpected event which can raise or decrease the demand for some goods and
services. An example of a positive demand shock would be if the world was coming out of a devastating
event like Covid, the other side of that would be if we entered a pandemic like Covid. That would be seen
as a negative demand shock.

46. What is the investment demand curve? List the events that could cause a shift in the investment
demand curve.

An investment demand curve will show the volume of investment spending every year. Some events that
can shift this curve are the cost of capital goods, the stock of capital technological change, and public
policy.

47. List basic determinants of market demand that could cause demand to increase.

● Income of buyers.
● Price of the goods or services.
● Prices of related goods or services
● The tastes or preferences of consumers can drive more demand.

48. Explain how the prices of related goods also affect demand.

If a substitute or rival good has its price dropped then the demand for it will increase and the other good
will drop in its amount of buyers. On the other hand if a good that goes well with another good decreases
in price the demand for that good and its complementary goods will go up.

49. Describe and give a reason for the law of supply. List six basic determinants of market supply.

If the price of a product goes up then the rate of supply will also go up to increase the amount of revenue
that they make.

1. Change in resource prices.

2. Change in technology.
3. Change in taxes and subsidies.
4. Change in the prices of other goods.
5. Change in expectations.
6. Change in the number of sellers.

50. What is a price ceiling and what are its economic effects?

A price ceiling is the maximum price a business can legally charge on a product and it is set in place by
the government.

51. What is a price floor and what are its economic effects?

A price floor is the minimum price a business can legally charge on a product and it is set in place by the
government.
 52. Define “consumer surplus.” Define “producer surplus.” Are consumer surplus and equilibrium
price directly or inversely related? Explain your answer.

● Consumer surplus: The consumer surplus is the difference between the price that a
consumer pays for a product and how much they are actually willing to pay before they
decide that they don't need the product.
● Producer surplus: The producer surplus is the difference between the amount that
someone would be willing to accept for a given amount of a good versus how much they
can actually make by selling that good.

These two are inversely related because they are based on two different outlooks. The consumer and the
producer both want different things in the end. One person is purchasing the goods and the other is selling
it.

53. If the population is 267 million, the labor force is 136 million, and the number measured as
unemployed is 6.8 million, what is the rate of unemployment?

The rate of unemployment is 5%.

54. Inflation is frequently described as “too much money chasing too few goods.” Is this an
acceptable definition?

Yes it is because inflation is when you have too much demand for a product but not a high enough supply
to meet the demand.

55. How is the labor force defined and who measures it?

The labor force divides the entire population into three groups and this is done by the BSS or the Bureau
of Labor Statistics.

a. How is the unemployment rate calculated?

Divide the amount of people who are unemployed by the number of people in the labor force. Then
multiply that number by 100.

b. Does an increase in the unemployment rate necessarily mean a decline in the size of the
labor force?

No it doesn’t because people can still go looking for jobs like college students or older folks.

c. Why is a positive unemployment rate—one more than zero percent—fully compatible

with full employment?
Because it will shut people out of their old minimum wage jobs and into higher paying careers.

56. What is “demand-pull” inflation

Demand-pull inflation is where there is not enough supply to meet the current rate of demand and prices.

57. Why is there a free-rider problem with public goods?

Public goods create this problem because they are free goods and consumers are able to just take them as
opposed to paying for them.

58. Define negative externality and give an example. Define positive externality and give an example.

Negative Externality is an economic action that creates a negative effect on a third party that might be
unrelated to the action. An example of this could be our factories burning fossil fuels to create electricity
but in the process it creates global warming and air pollution.

59. Describe the difference between real GDP and nominal GDP. Which concept is more useful for
measuring change in the economy over time? Why?

Real GDP is a year-long gauge of production and the change it goes through. Nominal GDP is more of a
measure of a consumer's purchasing power.

60. Unemployment is not only bad for the economy due to the loss of goods and services. Describe
some other reasons why unemployment has a negative effect on the economy.

A few reasons why unemployment is bad for the economy is it diminishes employee morale, erodes
purchasing power, and reduces the economy's output.

61. Which of the following are included and which are excluded in calculating this year’s GDP?
Explain in each instance.
a. A monthly scholarship check received by an economics student

It is not because they are a private or public financial transaction.

b. The purchase of a new truck by a trucking company

It is included because buying a vehicle is a major investment.

c. Government purchase of missiles from a private business

It is included because it is an act of government purchasing and investing.

d. The purchase of a used tractor by a farmer

It is not because it is no longer considered important in this field because it is not new.

e. The value of the purchase of shares of Microsoft by an individual

It is not because it is considered a swapping of paper shares.

62. Why do small differences in the rate of economic growth produce large differences in the size of
the economy over time? Illustrate with an example.

Because small differences now can turn into a very large difference after they compound together after
about a year. An example of this could be the United States employing about 2,766,000 people in 2002
and then around 2,814,000 people in 2012.

63. Summarize the four supply factors in economic growth.

● Natural resources: Natural born resources without human intervention.

● Capital goods: Pieces of equipment that are frequently used by a company.
● Human resources: This could be summed up as human labor and abilities that humans
possess.
● Technology: The driver behind economics as further technological advances can improve
the efficiency of the economic system.

a. Explain the demand factor in economic growth.

It is the amount of purchases needed in order to maintain full employment.

b. Summarize the antigrowth view of economic growth.

With more growth comes more pollution, climate change, issues with the environment, and doesn't help
the problem of homelessness.

64. What is meant by the term business cycle as described by economists? Describe the four phases
of the business cycle.

The business cycle is the state of the overall economy as time passes. The four phases of the business
cycle are as follows.
1. Expansion: Moves through the trough and into the peak. It will grow for two or more
consecutive quarters.
2. Peak: The highest point between the end of an economic expansion and the start of a
contraction in a business cycle.
3. Contraction: This phase is when an economy is on a decline.
4. Trough: The trough is the point where the economy stops dropping and begins to rise
once again.
 65. How is the severity of a recession measured? How severe was the recession of 2007–2009
compared with other recessions since 1950?

Recession and its severity is measured takes a score of 100 as long as the maximum decline in real GDP
during the recession equals a 4.2 percent decline.

a. How does the size of the 2007–2009 recession compare with the Great Depression of the
1930s?

During the Great depression the price level fell by 22 percent while the price levels rose slowly in
2008-2009. In addition real GDP fell by 31 percent in the Great Depression but during 2008-2009 it only
dropped by 4 percent.

b. What phase of the business cycle is our economy experiencing at the present time?
Justify your answer.

We are currently in the expansion phase and an example of this is that many movies are releaseign around
this time, for example we would receive about 2 marvel movies a year but this year we received about 4
and 3 TV shows. It is believed that this is due to the covid lag.

66. Why is it difficult to distinguish between frictional, structural, and cyclical unemployment

It is difficult because the amount of frictional and structural unemployment is always changing so it
makes it hard to know the employment and unemployment rates ultimately are.

a. Why is unemployment an economic problem? What are the noneconomic effects of

unemployment?

It's an economic problem because the future economic growth will be reduced. Some non economic
effects of unemployment are increased rates of homelessness and depression.

b. What are the consequences of a negative GDP gap?

What's not produced or the gap is lost and is not attainable anymore.

67. Explain the differences among the frictional, structural, and cyclical forms of unemployment.

Frictional unemployment can occur when someone is between jobs and moves from one to the next.
Structural unemployment has the capability of lasting for many years and can be caused by things like
shifting demographics and advancements in technology. Cylindrical unemployment can be caused by an
economic downturn or a change in the economy's structure.
 a. Define the “full-employment” or “natural” rate of unemployment and give its
approximate percentage rate as economists currently define it.

Natural unemployment is the measured rate of unemployment drawing from all factors aside from
fluctuations in aggregate demand. Economists hold the natural rate of unemployment to be around 4.1
percent and 4.7 percent.

68. Differentiate between the average propensity to consume and the marginal propensity to
consume.

APC or Average Propensity is the ratio between total consumption and income. MPC or Marginal
Propensity to Consume is the ratio between additional consumption and additional income.

a. If you know the marginal propensity to consume you can determine the marginal
propensity to save. How is that possible?

MPC = change in consumption / change in income.

69. Define the multiplier. How is it related to real GDP and the initial change in spending? How can
the multiplier have a negative effect? What is the relationship between the multiplier and the
marginal propensities?

The multiplier effect will measure the change in economic activity. Meaning it will also measure any
change in GDP. However when there is a decrease in spending it can lead to a fall in GDP.

70. Why is there a need for an aggregate demand and aggregate supply model of the economy?

Because anything that causes labor, capital, or efficiency to rise or fall will result in a fluctuation in the
economic output, shifting the model one way or the other.

a. Why can’t the supply and demand model for a single product explain developments in the
economy?

It doesn't explain why prices rise and fall, what changes the level of aggregate output, and what changes
the aggregate output overall.

71.
a. What are government’s fiscal policy options for ending severe demand-pull inflation

They can either increase taxes, reduce government spending, or do both.

b. Which of these fiscal options do you think might be favored by a person who wants to
preserve the size of government?
Increasing the Taxes.

c. A person who thinks the public sector is too large?

This person might support a reduction in government spending as it would slow or shrink the government.

d. What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy

The CEA provides economic advice to the president and also suggestions for discretionary fiscal policy
action.

72. Explain how built-in (or automatic) stabilizers work.

Automatic stabilizers are features that are built into the tax and transfer systems that help the economy
when it overheats or picks it back up when it falls.

a. What are the differences between proportional, progressive, and regressive tax systems as
they relate to an economy’s built-in stability?

Progressive will vary and change directly to the income, regressive also varies but indirectly with income,
and proportional always will stay constant.

73. Identify three functions of the Federal Reserve of your choice, other than its main role of
controlling the supply of money.

a. The Fed has the power to set reserve requirements and hold mandated reserves that are
not held in a vault.
b. The Fed can lend money to banks and thrifts.
c. The Fed acts as fiscal agents for the Federal government.

74. If the Fed wants to increase the money supply with open-market operations, what does it do?

If a Fed wants to increase their supply of money then it will buy bonds and increase the reserves in banks
that sell them. The supply would then increase because now the bank has money to lend.

75. Why don’t banks hold 100 percent reserves?

It's more profitable to make loans as they will collect interest slowly over time. Reserves do not allow the
bank to make money through interest payments.

a. How is the amount of reserves banks hold related to the amount of money the banking
system creates?
They are related through the money multipliers. If a bank holds a smaller amount of reserves than the
money multiplier will be higher.

b. What happens to the money supply when the Fed raises the discount rate?

Banks are forced to limit their lending and have to also increase their interest rates because the banks can
no longer afford to borrow a lot of money.

76. Why is frictional unemployment inevitable?

It will always happen because the economy is unpredictable so people will always be forced to shift or
change their jobs as the economy shifts.

a. How might the government reduce the amount of frictional unemployment?

By offering more job opportunities to those who remain unemployed.

77. Why can’t the Fed control the money supply perfectly?

The Fed can control the money supply perfectly because they have no control over the amount that a
household chooses to hold as deposits in the bank and they can control how much money the banks lend
out.

78. The following are two hypothetical ways in which the Federal Reserve Board might be appointed.
Would you favor either of these two methods over the present method? Why or why not?
a. Upon taking office, the U.S. president appoints seven people to the Federal Reserve
Board, including a chair. Each appointee must be confirmed by a majority vote of the
Senate, and each serves the same 4-year term as the president.
b. Congress selects seven members from its ranks (four from the House of Representatives
and three from the Senate) to serve at congressional pleasure as the Board of Governors
of the Federal Reserve System.

I would prefer A because there is not an uneven number of congress, meaning there would not be three
from the senate and four from the house of representatives. They would also have to be all voted in by the
senate. To conclude this they also only have a 4 year term so even if they do a bad job they only have so
much time in that position.

79. How do expectations about the future by households and businesses affect the effectiveness of
fiscal policy?

The fiscal policy offers changes to the government's spending and investments. This affects the general
income of a business or a household.
 a. Given all the complications that can result with fiscal policy, is fiscal policy still
considered an effective policy tool for stabilizing business cycle fluctuations?

It is still considered an effective tool though many economists believe that we should move away from it
and into a more physical and tangible method.

80. Who sits on the Federal Open Market Committee (FOMC)?

It has twelve members, The president of the federal reserve bank of new york, four members of the
federal reserve banks remaining presidents, and seven members of the board of governors of the federal
reserve system.

a. The Federal Reserve Banks are bankers’ banks. Explain.

Federal reserve banks are where other banks receive their own money and loans to distribute to people
who use the banks in the form of loans.

81. Define the reserve ratio.

A reserve ratio is the amount of money that a bank must hold on to and they can not lend it out or invest
in it.

82. Distinguish between the federal funds rate and the prime interest rate.

The federal funds rate is an interest rate that banks charge each other when they lend out money to each
other. Prime interest rates are always going to be 3 percent higher than the federal funds rate.

a. Why is one higher than the other?

Because when the Fed raises the federal funds rate the prime interest rate will always increase by 3
percent.

b. Why do changes in the two rates closely track one another?

Because both are tied to the available reserves a bank has.

83. Explain how the GDP and the interest rate are related to the transactions demand and asset
demand for money. Why is the money demand curve downsloping?

GDP can be the need to have a tangible and physical amount of money and this is related to interest rates
because we like to have money bonds which increase in price over time and also have that physical
tangibility.

Macroeconomics Rowan Core Quiz

Toontown is the world’s biggest wheat producer with a vibrant domestic market as well. The table below shows the demand and
supply schedule for the Toontown wheat market (in metric tons).

Green highlights are my answers

Quantity Demanded Price Quantity Supplied

5 7 9

6 6 8

7 5 7

8 4 6

9 3 5

10 2 4

11 1 3
Answer the following questions based on the table above.
1. What is the equilibrium price and quantity in Toontown?
(a) $3 and 5
(b) $4 and 6
(c) $5 and 7
(d) $6 and 8

2. Due to the COVID-19 shut down in Toontown, demand decreased by 4 units at each price and supply
decreased
by 2 units at each price, what would be its new equilibrium price and quantity?
(a) $3 and 5
(b) $4 and 4
(c) $5 and 7
(d) $6 and 8

3. There has been a bumper production of wheat in West City (a competitor of Toontown in the world
market). As a result, the international price of wheat has dropped substantially. The Federal Government
of Toontown decides to support its wheat farmers by setting a minimum price (price floor) of $3. As a
result of the government action:
(a) There will be a shortage of 6 metric tons in the market.
(b) There will be a surplus of 4 metric tons in the market.
(c) There will be a shortage of 4 metric tons in the market
(d) There will be a surplus of 6 metric tons in the market.

4. The Federal Government of Toontown decides to impose a $2 tax on wheat to increase revenue for
some of its social programs. What will happen in the Toontown wheat market as a result of this $2 tax?
(a) Demand will decrease, price will go up and equilibrium quantity will go up.
(b) Supply will increase, price will go down and equilibrium quantity will go up.
(c) Demand will increase, prices will go up and equilibrium quantity will go down.
(d) Supply will decrease, price will go up and equilibrium quantity will go down.

5. The President of Toontown wants to set up a social safety net program for the unemployed workers, but
in order to do this, she has to calculate the unemployment rate of the country. Toontown has a population
of 260 million people. Of these, 60 million are retired, in the military, institutionalized, or under 16 years
old. There are 188 million who are employed and 12 million who are unemployed. What is the
unemployment rate?
(a) 4 percent
(b) 6 percent
(c) 9 percent
(d) 27 percent

Next, the President wants the Economists to estimate the GDP of Toontown. The Economists have the
following data in hand (in billions of dollars).
Personal Consumption Expenditures $4,500

Consumption of fixed Capital 150

Gross Private Domestic Investment 800

Government Purchases 950

Exports 65

Imports 85
Answer the following questions based on the table above:
6. How much is the GDP of Toontown?
(a) $6,080 billion
(b) $6,230 billion
(c) $6,380 billion
(d) $6,400 billion

7. How much are the net exports of Toontown?

(a) $30 billion
(b) -$30 billion
(c) $80 billion
(d) -$20 billion

8. How much is the net domestic product?

(a) $6,080 billion
(b) $6,230 billion
(c) $6,380 billion
(d) $6,400 billion
Assuming that Toontown is a private, closed economy, the economists of the country have access to the
following information: Saving is $40 billion and planned investment is $28 billion at the $175 billion
level of output. The next 4 questions are based on this information.
9. What is true for the economy of Toontown?
(a) Planned investment is positive
(b) Planned investment is negative
(c) The economy is in equilibrium
(d) Planned investment is equal to actual investment

10. Suppose the economy is in equilibrium, that is savings is equal to planned investment ($28 billion),
how much is the GDP when the level of output is $210 billion.
(a) $250 billion
(b) $238 billion
(c) $182 billion
(d) $200 billion

11. Assume that the government sector is introduced in Toontown. Government collects $10 billion in
taxes and
spends $10 billion on government purchases. If all other information in question #9 remains the same, the
inclusion of the government sector in the economy will:
(a) Increase the GDP
(b) Decrease the GDP
(c) Will have no effect on the GDP
(d) Cannot be determined

12. Toontown opens its borders to foreign trade, such that we now have a public, open economy. The
correct formula for calculating GDP in this case is:
(a) GDP = C + Ig
(b) GDP = C + Ig + G
(c) GDP = C + Ig + Net Exports
(d) GDP = C + Ig + G + Net Exports