01 Jun Question 1. Which of the listed prices is the most you would be willing to pay for $300 per year, every year, forever, starting three years from today? Let the interest rate be 10%.
Question
1. Which of the listed prices is the most you would be willing to pay for $300 per year, every year, forever, starting three years from today? Let the interest rate be 10%.
| A. $1,250 | B. $2,800 | C. $3,000 | D. $2,470 | E. $2,530 |
| 2. | Which of the following makes sense? Inflation decreases and the output ratio is constant if… |
| A. | a beneficial supply shock combines with a reduced rate of NGDP growth. |
| B. | an adverse supply shock combines with a reduced rate of NGDP growth. |
| C. | a beneficial supply shock combines with a constant rate of NGDP growth. |
| D. | an adverse supply shock combines with a constant rate of NGDP growth. |
| E. | an adverse supply shock combines with an increased rate of NGDP growth. |
| 3. | The Pigou Effect… |
| A. | explains the relationship of inflation and real interest rates. |
| B. | raises the real money supply when the price level is lower, and this larger money supply pushes down the interest rate. |
| C. | causes spending to rise in real terms when the price level is lower, so that a given stock of money buys more. |
| D. | is the relation between the level of output and the level of employment. |
| E. | is the relation between the level of inflation and the level of unemployment. |
| 4. | Nominal GDP is $20,000. Net public debt is $12,000. The nominal interest rate is 5% on government debt. Nominal GDP grows at 7% per year. Taxes = 30%*NGDP. The primary government budget is in balance and is expected to remain so. Which of the following is true? |
| A. | The debt/NGDP ratio is 60% and stable. |
| B. | The government is running a balanced total budget. |
| C. | The government will need to issue $600 (net) in new government bonds to cover its borrowing, and thus debt will grow as a share of nominal GDP. |
| D. | This government will need to move to a budget surplus to reduce its debt/NGDP ratio. |
| E. | The government will need to, on net, sell bonds to cover its deficit, and yet, the debt to nominal GDP ratio will fall. |
| 5. | In the FRED graph above, you should be able to figure out which line is which. From the graph we can see that…. |
| A. | real interest rates have been falling over the past year. |
| B. | deflation is likely, in the 0 to -1% range. |
| C. | inflation is rising. |
| D. | inflation is expected to be below 3% over the next decade. |
| E. | the Fisher effect is driving up both interest rates. |
| 6. | From James Surowiecki’s “A Brief History of Money” we learn that…. |
| A. | Marco Polo learned of the use of government issued standardize coins in the court of Kublai Khan. |
| B. | Feudal society depended upon the institution of money to bring cooperation between social classes. |
| C. | The massive gold inflows from the Spanish colonies in the New World disrupted the economies of Europe, devaluing gold be reducing its scarcity, leading to waves of deflation. |
| D. | wildcats weren’t just the Big 10’s most wonderful sports franchise, but were also banks that issued their own currencies. |
| E. | the gold standard allows central banks much more flexibility since they can act without worrying about loss of value of their currency. |
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