GMU ECON 104 Macroeconomics Final Exam questions
and answers
The Quantity Theory of Money - -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 - -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 - -Nominals are rates "as stated", without accounting for factors such as
inflation, fees, compound interest, etc. Nominals affect Nominals.
-Reals - -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 - -Bohm Bawerk, interest is the price of time or
productivity of capital.
-Irving Fisher's Quantity Theory of Money - -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 - -MV=PQ
-Cambridge Cash Balance Quantity Theory of Money - -M=KPQ, Where K is 1/velocity,
allows us to make a distinction between actual and desired cash holdings
-Say's Law - -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 - -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 - -- 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 - -the value of consumer goods and services
transactions
-NOT included in GNP and GDP statistics - -- 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 - -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 - -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? - -
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 - -the unemployment rate that arises from the effects of
frictional plus structural unemployment
-A healthy labor market should have zero unemployment. - -FALSE. Zero unemployment
does not equal full employment.
-Why is some unemployment GOOD? - -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.
3. Consumers have the right to spend their money where they want to. They shift the
demand from one industry to another. If people want hula hoops and not frisbees, frisbees
are going to face unemployment.
4. Technology. When Ford made the assembly line, buggy makers went out of business.
Buggy makers then go find jobs within Ford.
and answers
The Quantity Theory of Money - -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 - -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 - -Nominals are rates "as stated", without accounting for factors such as
inflation, fees, compound interest, etc. Nominals affect Nominals.
-Reals - -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 - -Bohm Bawerk, interest is the price of time or
productivity of capital.
-Irving Fisher's Quantity Theory of Money - -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 - -MV=PQ
-Cambridge Cash Balance Quantity Theory of Money - -M=KPQ, Where K is 1/velocity,
allows us to make a distinction between actual and desired cash holdings
-Say's Law - -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 - -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 - -- 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 - -the value of consumer goods and services
transactions
-NOT included in GNP and GDP statistics - -- 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 - -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 - -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? - -
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 - -the unemployment rate that arises from the effects of
frictional plus structural unemployment
-A healthy labor market should have zero unemployment. - -FALSE. Zero unemployment
does not equal full employment.
-Why is some unemployment GOOD? - -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.
3. Consumers have the right to spend their money where they want to. They shift the
demand from one industry to another. If people want hula hoops and not frisbees, frisbees
are going to face unemployment.
4. Technology. When Ford made the assembly line, buggy makers went out of business.
Buggy makers then go find jobs within Ford.
