Q: Suppose the nominal exchange rate between the US dollar and the euro is $$1.20/\text{euro}$$, the US price level is $$120$$, and the European price level is $$100. $$What is the real exchange rate?

$$1.20 \times \frac{120}{100} = 1.44$$

Question 1

Suppose the real GDP of a country grows at a constant annual rate of 5%. According to the Rule of 70, approximately how many years will it take for the country's real GDP to double?

Accepted Answer

$$70 \div 5 = 14$$ years

Question 2

Which of the following best describes the difference between human capital and technology as determinants of productivity?

Accepted Answer

Human capital refers to the knowledge and skills of workers, while technology refers to the processes used to turn inputs into outputs.

Question 3

If the reserve ratio in a fractional reserve banking system is 20%, what is the value of the money multiplier?

Accepted Answer

$$\frac{1}{0.2} = 5$$

Question 4

A country has the following data: GDP ($$Y$$) = $$10,000$$, Taxes ($$T$$) = $$2,000$$, Consumption ($$C$$) = $$6,000$$, and Government Spending ($$G$$) = $$1,500. $$What is the value of national savings?

Accepted Answer

$$(Y - T - C) + (T - G) = (10,000 - 2,000 - 6,000) + (2,000 - 1,500) = 2,000 + 500 = 2,500$$

Question 5

Which of the following scenarios would most likely shift the supply of loanable funds (SLF) to the right in the loanable funds market?

Accepted Answer

A government budget surplus

Question 6

According to the Solow Growth Model, what happens to the marginal increase in output as capital per worker increases, holding technology constant?

Accepted Answer

The marginal increase in output diminishes due to diminishing returns to capital.

Question 7

Which of the following is NOT a function of money?

Accepted Answer

A means of production

Question 8

If the Federal Reserve wants to decrease inflation, which of the following actions is it most likely to take?

Accepted Answer

Increase the federal funds rate to contract the money supply

Question 9

Suppose the nominal exchange rate between the US dollar and the euro is $$1.20/	ext{euro}$$, the US price level is $$120$$, and the European price level is $$100. $$What is the real exchange rate?

Accepted Answer

$$1.20 	imes \frac{120}{100} = 1.44$$

Question 10

Which of the following best describes the short-run trade-off illustrated by the Phillips Curve?

Accepted Answer

There is an inverse relationship between inflation and unemployment in the short run.

Question 11

If a country experiences a depreciation of its currency, which of the following is the most likely immediate effect on its net exports?

Accepted Answer

Net exports will increase because exports become cheaper and imports more expensive.

Question 12

Which of the following is an example of fiat money?

Accepted Answer

A $20 bill issued by the US government

Question 13

If the central bank increases the money supply rapidly over a long period, what is the most likely long-run effect according to the quantity theory of money?

Accepted Answer

A sustained increase in the price level (inflation)

Question 14

Which of the following best explains the catch-up effect in economic growth?

Accepted Answer

Poor countries tend to grow faster than rich countries because they have less capital per worker and can achieve higher marginal returns from investment.

Question 15

A bank has deposits of $$1,000,000$$ and a required reserve ratio of $$10\%. $$What is the maximum amount of new loans the bank can make if it currently holds exactly the required reserves?

Accepted Answer

$$0$$

Question 16

Which of the following is a likely consequence of a government running a persistent budget deficit in the loanable funds market?

Accepted Answer

The demand for loanable funds increases, raising the real interest rate and potentially crowding out private investment.

Question 17

Which of the following is NOT included in the M1 definition of the money supply?

Accepted Answer

Small-denomination time deposits

Question 18

If the Federal Reserve acts as the lender of last resort, what is its primary function in this role?

Accepted Answer

To provide liquidity to banks to prevent collapse during financial crises

Question 19

Suppose the US government implements a policy that lowers taxes on interest income. According to the loanable funds model, what is the most likely effect?

Accepted Answer

The supply of loanable funds increases, leading to a lower real interest rate and higher investment.

Question 20

Which of the following best describes monetary neutrality?

Accepted Answer

Changes in the money supply affect only nominal variables, not real variables, in the long run.

Macroeconomics Study Notes: Economic Growth, Financial System, Money, Monetary Policy, and Open Economy

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