Answer Key: 2000 Great Plains ECONOMICS CHALLENGE
Round 2: MACROECONOMICS
1. A, increased productivity for labor means that each worker produces more output for each hour worked. If everyone is producing more output while working the same number of hours, then everyone can enjoy a higher standard of living.
2. C, labor that is unemployed for a period of time will not produce any goods or services during the period of unemployment. The lost output can never be regained and is considered the real cost of unemployment.
3. C, this is a definition. The real interest rate is the nominal rate minus the rate of inflation.
4. D, taxes reduce disposable income for consumers. Lowering taxes will increase income for consumers.
5. E, according to Keynes, an initial increase in investment will result in a multiple increase in spending over time. With a MPC (marginal propensity to consume) of .8, it means that the multiplier is 5. The multiplier is calculated as 1/1-MPC. Five times the increase in investment is $125.
6. B, by definition fiscal policy is the federal government's ability to control aggregate demand or total spending through its taxing and spending powers.
7. C, money serves as a medium of exchange, unit of account and store of value. We use money as a medium of exchange every day.
8. D, the components of MI are currency and coin, checkable deposits and travelers checks. Checking accounts are checkable deposits.
9. A, you deposit the $10,000 in your checking account. When a banker accepts the $10,000 in cash that you had stashed in a coffee can, 20% of the cash must be placed in the vault or as a deposit at the Fed to meet the 20% reserve requirement, and the other 80% could be used to make a new loan. New loans are an increase in the money supply.
10. D, open market operations are the most common method used by the Fed to increase the money supply. If the Fed buys bonds from a bank, then the bank receives reserves in exchange for the bonds. The bank can use the reserves to make new loans.
11. B, during a recession personal income falls because fewer people are working.
12. B, by definition, if the tax revenue of the federal government is greater than spending, then the government runs a surplus.
13. A, for the government to deficit spend, it must borrow in the credit markets, which pushes up interest rates. Higher interest rates will crowd out investment spending.
14.
E, by definition, subtracting inflation from nominal wage growth results in real wage growth.15. B, during inflationary periods prices are rising because firms are finding it very difficult to meet demand for their goods or services. Firms raise prices and several methods to slow inflation are to contract aggregate demand through monetary or fiscal policy.