1. Macroeconomics Review Test 1 Chapters 23,24,29,30

2. 1.What are the variables in calculating GDP? 2.Classify the following into GDP variables Household purchases of durable and non-durable goods Domestic purchase of foreign goods Government expenditures on public works New housing Household purchases of services Transfer payments Purchase of new structures Foreign purchases of domestically produced goods Inventory changes

3. 3.A set of tires is sold to a car manufacturer for $300 that is sold for $20,000. A second set of tires is sold to a customer at Town Fair Tire for $500. What is the effect on GDP? 4.What is the difference between real GDP and nominal GDP 5.What does real GDP measure? 6.Suppose the government subsidizes an industry or a firm, how does this effect GDP? 7.If total spending rises from Year 1 to Year 2, how does this effect GDP? 8.In Year 1 Price = $10, quantity = 100, In year 2 Price = $12, quantity = 120 Calculate nominal GDP in year 2 Calculate real GDP in year 2

4. 9.How do these secenarios get counted into GDP? A person makes moonshine and sells it illegally on the black market A person makes moonshine in a legal distillery in the U.S. and sells it in Mexico A person make moonshine in a legal distillery in Mexico and sells it in the U.S. 10.A person made $50,000 in 1990. CPI in 1990 was 50, and CPI in 2010 was 110. How much did the person make in 2010 dollars? 11. What is the relationship between real and nominal interest rates? 12.Why is CPI a better gauge of inflation than the GDP inflator? 13.What does CPI tend to do with cost of living when it measures inflation?

5. 14.If CPI = 110 in year 1 and 115 in year 2, what is the inflation rate? 15.If the $’s in a person’s bank account in #14 increased 5%, what was the real interest rate? 16.If the FOMC decides to decrease the money supply, what open market action should the Federal Reserve take? If a bank has deposits of $50,000 as liabilities, and reserves of $10,000 and Loans of $40,000 as Assets 17.What is the reserve ratio? 18.What is the money multiplier? 19.What are the 2 problems the Fed faces in controlling the money supply?

6. 20.What is the difference between commodity money and fiat money? 21.The agency responsible for regulating the money supply in the U.S. is? 22.What are the tools the Fed uses to control the money supply? Which is most used? Which is least used 23.What is the velocity of money? 24.Of borrowers/lenders, who bears the cost of high inflation? 25.As prices rise, what happens to the value of money? 26.What could cause the money supply to shift left? What is effect on: Value of money Prices Demand for money

7. 27.How would Hume categorize real interest? 28.How would Hume categorize nominal interest? 29.Is inflation real or nominal? 30.In periods of hyperinflation, what is the effect on: People who hold money? Prices? People who lent money at fixed interest rates? People who borrowed money? Firms Workers 31.If inflation is more than expected, who would benefit out of borrowers/lenders, savers/spenders, and firms/workers?

8. FRQ Know the effects when FOMC changes money supply on Prices Interest rates Inflation Prices Value of money Reserves