Transcript Demand for Loans Real Interest Rate

Mac Review
Assorted Topics
Supply demand review
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Grab clickers
All those GDP formulas…
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GDP=C+I+G+Nx ---the spenders
Remember changes in inventories?
GDP=W+R+I+P -receivers of income, FOP
Net Domestic Product (NDP): GDP-CFC
National Income (NI): income earned by
FOP owned by U.S. citizens.
Personal Income (PI): household income
not counting personal income taxes
Disposable Income (DI): household income
after subtracting income taxes
Inflation
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What is a market basket?
Base year: 1 pack Ritz crackers = $5, 1 can EZ
cheese = $3
Base-year mkt basket P = ___
Base-year price index = ($8/$8)X100 = _____
Year 2 mkt basket P = $10
Year 2 P index = ($__/$__)X100 = _____
Year 3 P index = ($16/$__)X100 = _____
What was inflation between years 2 and 3???
[(200-125)/125]=0.6=60%
Suppose that a typical consumer buys the
following quantities of three commodities in
‘93 and ‘94.
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Commodity Quantity
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Food
Clothing
Shelter
5 units
2 units
3 units
‘93 per
unit price
$6.00
$7.00
$12.00
‘94 per
unit price
$5.00
$9.00
$19.00
Which of the following can be concluded about the CPI
during this period?
A) It remained unchanged
B) It decreased by 25%
C) It decreased by 20%
D) It increased by 20%
E) It increased by 25%
Inflation
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What are real wages?
Say inflation is 8%/yr, and I get a raise this
year of 7%.
What happened to my real wages?
What happened to my purchasing power?
Am I better off or worse off?
What is the real interest rate?
r=i-inflation
Say you loan money out & charge 10%.
Inflation during this period is 9%. What can
you say about the money paid back to you?
Inflation
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Who does unexpected inflation hurt?
Who does it help?
It hurts lenders at fixed rates.
It helps borrowers at fixed rates.
Which of the following would be true if
the actual rate of inflation were less than
the expected rate of inflation?
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A) Inflation had been underpredicted.
B) The real interest rate had exceeded
the nominal interest rate.
C) The real interest rate had been
negative.
D) People who borrowed funds at the
nominal interest rate during this time
would lose.
E) The economy would expand because
of increased investment and spending.
Think fast!
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If GDP in the country of Mordor is
$1,000 this year…
and the price index (GDP deflator)
is 200…
what is Real GDP this year???
The major difference between GDP
and real GDP is that real GDP
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A) excludes gov’t transfer payments
B) excludes imports
C) is adjusted for price-level
changes using a price index
D) measures only the value of final
goods and services that are
consumed
E) measures the prices of a market
basket of goods purchased by a
typical urban consumer
If real GDP is increasing at 3% and
nominal GDP is increasing at 7%, which
of the following is necessarily true?
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A) Unemployment is increasing.
B) The price level is increasing.
C) Exports exceed imports.
D) The economy is in a recession.
E) The gov’t is running a budget
deficit.
Economic Growth
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Ways to show economic growth:
LRAS shifts right
PPF shifts out
Not economic growth:
Increase in output/real GDP
Increase in AD
VI. Factors Influencing Economic Growth
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Amount & quality of the FOP:
Natural resources
more capital stock
higher productivity
Skilled/growing labor force, education***
Entrepreneurs
How can gov’t help a country get more
capital stock?
Changes in which of the following factors
would affect the growth of an economy?
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I. Quantity & quality of human and
natural resources
II. Amount of capital goods available
III. Technology
A) I only
B) I and II only
C) I and III only
D) II and III only
E) I, II, & III
The long-run growth rate of an economy
will be increased by an increase in all of
the following EXCEPT
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A) capital stock
B) labor supply
C) real interest
D) rate of technological change
E) spending on education & training
An increase in which of the following
is consistent with an outward shift of
the production possibilities curve?
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A) Transfer payments
B) Aggregate demand
C) Long-run aggregate supply
D) Income tax rates
E) Exports
Which of the following best explains
a decline in potential GDP?
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A) Negative net investment
B) The discovery of vast new oil
deposits
C) A lower price level
D) A decrease in the infant
mortality rate
E) A decrease in wages and profits
Multipliers
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Spending=1/1-MPC (or 1/MPS)
Tax=-MPC/1-MPC
(or -MPC/MPS)
Money=1/Reserve Ratio
The reserve rate is 10%. If I take the
$1,000 I’ve been hiding in my mattress,
and deposit it at the bank, how much can
that bank loan out?
What is the maximum total increase in the
money supply?
What if the Fed buys $1,000 in bonds?
An increase in the MPC causes an
increase in which of the following?
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A) MPS
B) spending multiplier
C) savings rate
D) exports
E) aggregate supply
If a commercial bank has no excess
reserves and the reserve requirement is
10%, what is the value of new loans this
single bank can issue if a new customer
deposits $10,000?
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A) $100,000
B) $90,333
C) $10,000
D) $9,000
E) $1,000
Assume that the reserve requirement is
20%, but banks voluntarily keep some
excess reserves. A $1 million increase in
new reserves will result in
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A) an increase in the money supply of $5
million
B) an increase in the money supply of less
than $5 million
C) a decrease in the money supply of $1
million
D) an decrease in money supply of $5 million
E) an decrease in money supply of more
than $5 million
If on receiving a checking deposit of
$300 a bank’s excess reserves
increased by $255, the required reserve
ratio must be
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A) 5%
B) 15%
C) 25%
D) 35%
E) 45%
The value of the spending
multiplier decreases when
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A) tax rates are reduced
B) exports decline
C) imports decline
D) government spending increases
E) the marginal propensity to save
increases
If, at full employment, the gov’t wants to
increase spending by $100 billion
without increasing inflation in the shortrun, it must do which of the following?
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A) Raise taxes by more than $100
billion.
B) Raise taxes by $100 billion.
C) Raise taxes by less than $100
billion.
D) Lower taxes by $100 billion.
E) Lower taxes by less than $100
billion
M1-M3
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M1=cash plus checking (demand
deposit) accounts
M2=M1+bunch of other stuff
M3=M1+M2+large time deposits
Loanable Funds Market
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Where does the supply of loanable
funds come from?
Where does the demand for
loanable funds come from?
If investors feel that business conditions
will deteriorate in the future, the demand
for loans and real interest rate in the LF
market will change how in the short-run?
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Demand for Loans
A) Increase
B) Increase
C) Decrease
D) Decrease
E) Decrease
Real Interest Rate
Increase
Decrease
Increase
Decrease
Not Change
2005 frq #2
Phillips Curve
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AD shifts?
AS shifts?
According to the short-run Phillips
curve, there is a trade-off between
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A) interest rates and inflation
B) the growth of the money sup0ply
and interest rates
C) unemployment and economic
growth
D) inflation and unemployment
E) economic growth and interest
rates
According to the long-run Phillips
curve, which of the following is true?
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A) Unemployment increases with an increase in
inflation
B) Unemployment decreases with an increase in
inflation
C) Increased automation will lead to lower levels of
structural unemployment in the long-run.
D) Changes in the composition of the overall demand
for labor tend to be deflationary in the long-run.
E) The natural rate of unemployment is independent
of monetary and fiscal policy changes that affect
aggregate demand.
Which best explains how an economy
can have both high inflation and high
unemployment?
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A) Gov’t increases spending but not
taxes.
B) Gov’t increases taxes but not
spending.
C) Inflation expectations decline.
D) Women and teens stay out of
labor force.
E) Negative supply shocks cause
factor prices to increase.
2005 frq #3
Current Acct vs Capital Acct
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Current = net exports + net foreign
investment/factor income
Capital = net investments
balance of payments = current +
capital
balance of payments must equal 0!!!
Keynesian vs Classical
The classical economists argued that
involuntary unemployment would be
eliminated by
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A) increasing gov’t spending to
increase AD
B) increasing the money supply to
stimulate investment spending
C) self-correcting market forces
stemming from flexible prices and
wages
D) maintaining the growth of the
money supply at a constant rate
E) decreasing corporate income
taxes to encourage investment
Which of the following arguments is typically
associated with classical economists?
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A) A market economy is self-correcting and thus will
not remain in a recession indefinitely .
B) a market economy has stable prices & thus is
usually free from inflation.
C) A market economy requires a strong government
to ensure that the market meets the needs of the
people.
D) A market economy needs only moderate
assistance from the gov’t to avoid an extended
recession.
E) A market economy eventually results in
monopolies in both the input and output markets.
Fiscal vs Monetary
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Expansionary fiscal = more AD,
higher i (crowding out effect)
Expansionary monetary = more AD,
lower i
To stimulate investment in new plant and
equipment without increasing the level of
real output, the best policy mix is to
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A) decrease the money supply and
increase gov’t spending
B) increase the money supply and
decrease gov’t spending
C) decrease the money supply &
increase income taxes
D) decrease income taxes and
increase gov’t spending
Quantity Theory of Money
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MV=PQ
V is usually stable, & Q (output) is
determined by resources, so
when M increases…
P increases.
Remember***, Q is output (real GDP)
& PQ is nominal GDP.
If the economy is at full employment,
and there is a big increase in the money
supply, the quantity theory of money
predicts and increase in
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A) the velocity of money
B) real output
C) interest rates
D) unemployment
E) the price level
If the money stock decreases but
nominal GDP remains constant, which of
the following has occurred?
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A) Income velocity of money has
increased.
B) Income velocity of money has
decreased.
C) Price level has increased.
D) Price level has decreased.
E) Real output has decreased.
Money Market or Loanable Funds Market: What’s the
Difference?
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Money Market:
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Short term
Money Supply controlled
by Fed (perfectly
inelastic)
Interest rates are
nominal
Demand for money
affected by economy
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Loanable Funds
Market:
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Long term
Quantity supplied of
loanable funds affected by
real interest rate
Interest rates are real.
Supply and Demand for
loanable funds affected by
economy:
 Households save more or
less
 Fed monetary policy
 Demand for loans