Equilibrium Interest Rate Econ 104 final exam | Economics homework help

Equilibrium Interest Rate

Fill in the table below. The current wage is $200 and the price of output (Q) is $30. Each box is worth ½ of a point. Enter whole numbers only (no commas, no decimals, no dollar signs) and if a value is negative, be sure to enter the negative sign.

 L Q MPL MRP Marginal Profit  Total Profit
 0  0  – – – – –  – – – – –  – – – – – – – – – – –  0
 1  7 [removed] [removed] [removed] [removed]
 2  15 [removed] [removed] [removed] [removed]
 3  22 [removed] [removed] [removed] [removed]
 4  28 [removed] [removed] [removed] [removed]
 5  33 [removed] [removed] [removed] [removed]
 6  37  [removed] [removed] [removed] [removed]


Use the table from question 1 to complete the next six questions. Enter the correct values in the boxes below. Enter only whole numbers (no commas, no decimals, no dollar signs). Each fill-in-the-blank below is worth 3 points.

This profit maximizing firm will hire [removed]  workers.


This profit maximizing firm will produce [removed]  units of output.


This firm’s maximum profit equals [removed] .


Now suppose that the wage falls to $170. You will need to recalculate the values from the table, given this new wage, to answer the questions below.

This profit maximizing firm will now hire [removed]  workers.


This profit maximizing firm will now produce [removed]  units of output.


This firm’s maximum profit now equals [removed] .


Use the following information to answer the next nine questions. Each fill-in-the-blank is worth 3 points.

If your answer is in decimal form, enter it with 2 decimal places. For example, if your answer is .4, enter it into the fill-in-the-blank as .40, or if your answer is 1.4, enter it into the fill-in-the-blank as 1.40. If there are no decimals in your answer, you will simply enter the number; so if your answer is 2, enter 2 with no decimals. Do not use commas.

Suppose the economy is characterized as follows:

AE = C + I + G + (X-M)
C = 800 + .75(Y – T) – 30 (r)
I = 600 – 50(r)
G = 300
X- M = -25
T = 80
r = 5
Price level P is fixed at 1 (P=1)

Use the information above to get expressions for the consumption function and the AE equation.

The vertical intercept for the consumption function is [removed] .


The slope of the consumption function is [removed] .


The vertical intercept of the AE equation is [removed] .


The slope of the AE equation is [removed] .


Equilibrium output is equal to [removed] .


Equilibrium consumption is equal to [removed] .


Suppose the investment demand function changes and is now I=700 – 50(r).

The new value of equilibrium output is [removed] .


The new value of equilibrium consumption is [removed] .


Recall that the consumption function is C = 800 + .75(Y – T) – 30 (r). The Keynesian spending multiplier in this economy is [removed] .

17. Equilibrium Interest Rate

Use the following information to answer the next four questions. Each multiple choice question is worth 3 points.

mm = money multiplier = .8
MB = monetary base = 4000
Money Demand: Md = P X [ a0 + .5 (Y) – 200 (i) ]
where: a0 = 1200, Y = 6000

For simplicity we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%. Y is also held constant in this problem.

What is the equilibrium interest rate (i)?

[removed]  A) .20%
[removed]  B) 1%
[removed]  C) 5%
[removed]  D) 8%
[removed]  E) None of the above are correct

18. Equilibrium Interest Rate

Suppose a0 falls to 800. What is the new equilibrium interest rate?

A) .33%
B) 3%
[ C) 4%
D) 6%
E) None of the above are correct


Suppose that the Fed wanted to keep interest rates constant at their initial level (the value you found in #1). What would the Fed have to do in terms of open market operations to achieve this?

[removed]  A) 500 in open market sales
[removed]  B) 500 in open market purchases
[removed]  C) 400 in open market sales
[removed]  D) 400 in open market purchases
[removed]  E) 2800 in open market sales


Given the interest rate you found in #18, what is the ex-ante real interest rate?

[removed]  A) 1%
[removed]  B) 0%
[removed]  C) -1%
[removed]  D) 2%
[removed]  E) None of the above are correct


Suppose the price index in State College, PA is 151 and 275 in New York City (as always, we assume the basket is exactly the same in both locations). Suppose also that you are currently making $75,000 in State College. What income do you need to be offered in New York City to maintain the exact same purchasing power that you currently have in State College? Round your answer to the nearest dollar.

[removed]  A) $34,791
[removed]  B) $197,250
[removed]  C) $136,589
[removed]  D) $91,500
[removed]  E) None of the above are correct


Given equation Y=300+.7Y, what does Y equal?

[removed]  A) 1000
[removed]  B) 90
[removed]  C) 510
[removed]  D) 176.5
[removed]  E) None of the above are correct


Economics does not study correct or incorrect behaviors but rather it assumes that economic agents behave ________, meaning they make the best decisions given their knowledge of the costs and benefits.

[removed]  A) equitably
[removed]  B) rationally
[removed]  C) emotionally
[removed]  D) selfishly


Which of the following is a positive economic statement?

[removed]  A) People should not buy SUVs.
[removed]  B) The government should mandate electric automobiles.
[removed]  C) Scarcity necessitates that people make trade-offs.
[removed]  D) Foreign workers should not be allowed to work for lower wages than the citizens of a country.


In one hour of labor input, South Korea can produce either 100 computer chips or 50 bed linens. In the U.S., in one hour of labor input, either 150 computer chips or 100 bed linens can be made. Select the correct response below.

[removed]  A) The U.S. has a comparative advantage in computer chips manufacturing.
[removed]  B) Both the U.S. and S. Korea have comparative advantages in computer chips manufacturing.
[removed]  C) S. Korea has a comparative advantage in computer chips manufacturing.
[removed]  D) S. Korea has an absolute advantage in bed linen production.
[removed]  E) None of the above are correct


The extra cost associated with undertaking an activity is called

[removed]  A) net loss.
[removed]  B) marginal cost.
[removed]  C) opportunity cost.
[removed]  D) foregone cost.


Jen makes $16 per hour and Sammie makes $20 per hour. Both Jen and Sammie like to eat hamburgers that cost $4 each. Select the correct answer below.

[removed]  A) Sammie’s real wage is equal to 4 hamburgers
[removed]  B) Sammie’s real wage is higher than Jen’s real wage
[removed]  C) Jen’s real wage is higher than Sammie’s real wage
[removed]  D) Jen and Sammie’s real wages are equal
[removed]  E) Jen’s real wage is equal to 5 hamburgers.


In May 2009, the U.S. auto industry experienced a 34 percent decline in sales compared to May 2008. The automobile industry was experiencing the effects of

[removed]  A) deflation.
[removed]  B) the underground economy.
[removed]  C) the business cycle.
[removed]  D) depreciation.


Consumption expenditures $800
Investment expenditures 300
Government purchases 300
Government transfer payments 400
Exports 300
Imports 300

Refer to Table above.  Consider the data above (in billions of dollars) for an economy:  Gross domestic product (in billions of dollars) for this economy equals

[removed]  A) $2,000
[removed]  B) $2,300
[removed]  C) $1,700
[removed]  D) $1,400
[removed]  E) None of the above.


Year Guns Produced Price of Guns Butter Produced Price of Butter
2005 80 $5 40 $4
2011 90 6 60 10

Consider the above data for Tyrovia, a country that produces only two products: guns and butter.  Real GDP for Tyrovia for 2005 using 2011 as the base year equals

[removed]  A) $1,140
[removed]  B) $880
[removed]  C) $690
[removed]  D) $560
[removed]  E) None of the above are correct


Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of joblessness?

[removed]  A) inflation
[removed]  B) discouraged workers
[removed]  C) people employed in the underground economy
[removed]  D) unemployed persons falsely report themselves to be actively looking for a job


Your grandfather tells you that he earned $7,000/year in his first job in 1961. You earn $35,000/year in your first job in 2011. You know that average prices have risen steadily since 1961. You earn

[removed]  A) 5 times as much as your grandfather in terms of real income.
[removed]  B) more than 5 times as much as your grandfather in terms of real income.
[removed]  C) less than 5 times as much as your grandfather in terms of real income.
[removed]  D) less than 5 times as much as your grandfather in terms of nominal income.


Which of the following is a reason why decreases in the price level result in a rise in aggregate expenditure?

[removed]  A) Price level decreases cause firms and consumers to hold less money, which lowers the interest rate. Lower interest rates raise consumption and planned investment expenditures, which raises aggregate expenditure.
[removed]  B) Price level decreases reduce real wealth, which causes consumption spending and aggregate expenditure to rise.
[removed]  C) As the price level falls, government spending rises, which raises aggregate expenditure.
[removed]  D) Price level decreases in the United States relative to other countries lower net exports, which raises aggregate expenditure.


Which of the following functions of money would be violated if inflation were high?

[removed]  A) unit of account
[removed]  B) store of value
[removed]  C) certificate of gold
[removed]  D) medium of exchange


Which of the following is a reason why we should consider the federal national debt a problem?

[removed]  A) The federal government is in danger of defaulting on its debt.
[removed]  B) If the debt drives up interest rates, crowding out will occur.
[removed]  C) If the debt was incurred to finance improvements in infrastructure, crowding out will occur.
[removed]  D) If the debt was incurred to finance research and development, crowding out will occur.


A college must decide if it wants to offer more Internet-based classes. This decision involves answering the economic question of “what to produce.”

[removed]  A) True
[removed]  B) False


If a country produces only two goods, then it is not possible to have a comparative advantage in the production of both those goods.

[removed]  A) True
[removed]  B) False


Excluding underground economy production from measured GDP causes errors in GDP growth estimates in the long run.

[removed]  A) True
[removed]  B) False


The natural rate of unemployment consists of frictional unemployment plus structural unemployment.

[removed]  A) True
[removed]  B) False


An increase in the price of output will cause a firm’s MRP to shift upward.

[removed]  A) True
[removed]  B) False


If the effective tax rate on capital falls, that will result in the investment demand function shifting to the right.

[removed]  A) True
[removed]  B) False


If the US economy is growing faster than the rest of the world, then we would expect a surge in US imports.

[removed]  A) True
[removed]  B) False


The FOMC meets in Washington DC but the action of conducting open market operations takes place at the New York Fed (FRBNY).

[removed]  A) True
[removed]  B) False


During the lead up to Y2K, the Fed, to keep the federal funds rate from rising, had to conduct open market sales. This action is referred to as ‘accommodating’ the shock to reserve demand.

[removed]  A) True
[removed]  B) False


Spending by local governments to stimulate or slow down their local economies is an example of fiscal policy.

[removed]  A) True
[removed]  B) False


If the long-run aggregate supply curve is vertical so is the long-run Phillips curve.

[removed]  A) True
[removed]  B) False


If savings exceeds investment then the country is running a trade surplus.

[removed]  A) True
[removed]  B) False

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