GMU ECON 104 MACROECONOMICS
FINAL EXAM QUESTIONS & VERIFIED
ANSWERS
The Quantity Theory of Money - Correct Answer ✔✔ MV = PQ A classical monetarist's
view that explains how changes in the money supply (M) will affect the price level (P)
and/or real output (Q) assuming the velocity of money (V) is fixed in the short run.
Monetary Theory of Inflation - Correct Answer ✔✔ The greater the rate of growth in
money, the greater the rate of inflation. You Increase M, you Increase P. Q is not
affected.
Nominals - Correct Answer ✔✔ Nominals are rates "as stated", without accounting for
factors such as inflation, fees, compound interest, etc. Nominals affect Nominals.
Reals - Correct Answer ✔✔ Reals are rates that have been accounted for all the
factors, and are the actual rates. Reals affect Reals.
The real or natural rate of interest - Correct Answer ✔✔ Bohm Bawerk, interest is the
price of time or productivity of capital.
Irving Fisher's Quantity Theory of Money - Correct Answer ✔✔ MV=PQ. A tautological
identity (true in all circumstances)
Keynes: M & V move in opposite directions
Friedman (Correct): M& V move in the SAME direction
Income Quantity Theory of Money - Correct Answer ✔✔ MV=PQ
Cambridge Cash Balance Quantity Theory of Money - Correct Answer ✔✔ M=KPQ,
Where K is 1/velocity, allows us to make a distinction between actual and desired cash
holdings
Say's Law - Correct Answer ✔✔ Keynes incorrectly argues that Say's Law meant he
believed Supply creates its own demand. Say's Law actually states EFFECTIVE
DEMAND COMES FROM PRIOR SUPPLY
Disproportionality Problems - Correct Answer ✔✔ Recessions are caused by a
disproportionate, excessive production of inferior goods. (Say's argument against
mercantilists incorrect belief that recessions are caused by general overproduction)
Classical Macro Theory - Correct Answer ✔✔ - Believed in Price Flexibility as a Policy
GOAL
, - Believed Interest as a price of time
- Quantity theory of money
- Nominals affect nominals, reals affect reals,
- Nominal rates minus expectations equal real interest rate
- Say's Law
Included in GNP and GDP statistics - Correct Answer ✔✔ the value of consumer goods
and services transactions
NOT included in GNP and GDP statistics - Correct Answer ✔✔ - Leisure time (People
consume leisure instead of work),
- non-market non-cash intermediated transactions (all the goods and services that add
up into making the final product), - environmental quality
Unemployment Rate - Correct Answer ✔✔ The percentage of labor force out of work
but LOOKING FOR WORK.
Both Unemployment and Employment rates can logically increase and decrease
together, it is possible for Unemployment rate to be increasing and Employment rate to
also be increasing.
Employment Rate - Correct Answer ✔✔ The percentage of the total population aged 16
or over that is employed.
It is possible for the employment rate and unemployment rate to raise or lower
simultaneously together.
How is it possible for unemployment and employment rate to both be increasing? -
Correct Answer ✔✔ Suppose: There is a population of 200 million.
Of that, 100 million is in the labor force. 90 million are working, 10 million are looking for
work. Employment rate is 90/200, so 45%. Unemployment is 10/100, so 10%.
Now suppose 20 million enter the labor force.
Suppose 10 million of them found jobs. 90+10=100. 100/200 = 50% Employment Rate.
10 million of them are looking for work. 10+10 = 20/120 = 16%.
Unemployment rate rose 6% While Employment rate rose 5%.
Natural Rate of Unemployment - Correct Answer ✔✔ the unemployment rate that arises
from the effects of frictional plus structural unemployment
A healthy labor market should have zero unemployment. - Correct Answer ✔✔ FALSE.
Zero unemployment does not equal full employment.
Why is some unemployment GOOD? - Correct Answer ✔✔ 1. Eliminating
unemployment would mean no one could quit their jobs (slavery). Employees quit when
they are not happy with their jobs, and forces employers to respect employees.
2. An employers right to fire an employee is highly desirable. They want productive
workers.
FINAL EXAM QUESTIONS & VERIFIED
ANSWERS
The Quantity Theory of Money - Correct Answer ✔✔ MV = PQ A classical monetarist's
view that explains how changes in the money supply (M) will affect the price level (P)
and/or real output (Q) assuming the velocity of money (V) is fixed in the short run.
Monetary Theory of Inflation - Correct Answer ✔✔ The greater the rate of growth in
money, the greater the rate of inflation. You Increase M, you Increase P. Q is not
affected.
Nominals - Correct Answer ✔✔ Nominals are rates "as stated", without accounting for
factors such as inflation, fees, compound interest, etc. Nominals affect Nominals.
Reals - Correct Answer ✔✔ Reals are rates that have been accounted for all the
factors, and are the actual rates. Reals affect Reals.
The real or natural rate of interest - Correct Answer ✔✔ Bohm Bawerk, interest is the
price of time or productivity of capital.
Irving Fisher's Quantity Theory of Money - Correct Answer ✔✔ MV=PQ. A tautological
identity (true in all circumstances)
Keynes: M & V move in opposite directions
Friedman (Correct): M& V move in the SAME direction
Income Quantity Theory of Money - Correct Answer ✔✔ MV=PQ
Cambridge Cash Balance Quantity Theory of Money - Correct Answer ✔✔ M=KPQ,
Where K is 1/velocity, allows us to make a distinction between actual and desired cash
holdings
Say's Law - Correct Answer ✔✔ Keynes incorrectly argues that Say's Law meant he
believed Supply creates its own demand. Say's Law actually states EFFECTIVE
DEMAND COMES FROM PRIOR SUPPLY
Disproportionality Problems - Correct Answer ✔✔ Recessions are caused by a
disproportionate, excessive production of inferior goods. (Say's argument against
mercantilists incorrect belief that recessions are caused by general overproduction)
Classical Macro Theory - Correct Answer ✔✔ - Believed in Price Flexibility as a Policy
GOAL
, - Believed Interest as a price of time
- Quantity theory of money
- Nominals affect nominals, reals affect reals,
- Nominal rates minus expectations equal real interest rate
- Say's Law
Included in GNP and GDP statistics - Correct Answer ✔✔ the value of consumer goods
and services transactions
NOT included in GNP and GDP statistics - Correct Answer ✔✔ - Leisure time (People
consume leisure instead of work),
- non-market non-cash intermediated transactions (all the goods and services that add
up into making the final product), - environmental quality
Unemployment Rate - Correct Answer ✔✔ The percentage of labor force out of work
but LOOKING FOR WORK.
Both Unemployment and Employment rates can logically increase and decrease
together, it is possible for Unemployment rate to be increasing and Employment rate to
also be increasing.
Employment Rate - Correct Answer ✔✔ The percentage of the total population aged 16
or over that is employed.
It is possible for the employment rate and unemployment rate to raise or lower
simultaneously together.
How is it possible for unemployment and employment rate to both be increasing? -
Correct Answer ✔✔ Suppose: There is a population of 200 million.
Of that, 100 million is in the labor force. 90 million are working, 10 million are looking for
work. Employment rate is 90/200, so 45%. Unemployment is 10/100, so 10%.
Now suppose 20 million enter the labor force.
Suppose 10 million of them found jobs. 90+10=100. 100/200 = 50% Employment Rate.
10 million of them are looking for work. 10+10 = 20/120 = 16%.
Unemployment rate rose 6% While Employment rate rose 5%.
Natural Rate of Unemployment - Correct Answer ✔✔ the unemployment rate that arises
from the effects of frictional plus structural unemployment
A healthy labor market should have zero unemployment. - Correct Answer ✔✔ FALSE.
Zero unemployment does not equal full employment.
Why is some unemployment GOOD? - Correct Answer ✔✔ 1. Eliminating
unemployment would mean no one could quit their jobs (slavery). Employees quit when
they are not happy with their jobs, and forces employers to respect employees.
2. An employers right to fire an employee is highly desirable. They want productive
workers.
