EC102 Exam #2

On the consumption function, the vertical axis measures

real consumption spending

On the consumption function, the horizontal axis measures

real national income (or real GDP)

The theory of purchasing power parity _________ explain exchange rate well in the long run

does not

Determinants of Investment

expectations of future profitability taxes cash flow real interest rate

A faster income growth in other countries will cause a _________ the U.S. aggregate demand curve

rightward shift of

An increase in gov't purchases will cause a __________ the aggregate demand curve

rightward shift of

China's biggest resource

labor

An increase in interest rates will cause a _________ the aggregate demand curve

leftward shift of

An increase in state income taxes will cause a _______ the aggregate demand curve

leftward shift of

The slope of the consumption function is the

marginal propensity to consume

An increase in the price level will cause a _________ the aggregate demand curve

movement up along

China's restrictive capital markets

politically motivated credit markets (political based, not financial based) few investment options for household savings

Nominal exchange rate (E)

price of one currency in terms of another currency

price up --->

wealth down ---> C down

price down --->

wealth up ---> C up

For every extra dollar:

you spend MPC and save MPS

A car costs ​$35,000 in the United States and $3,675,000 yen in Japan. The exchange rate is​ $1 = 104 yen. The purchasing power parity of the dollar is...

104 yen

In the official government National Income and Product Accounts​ (NIPA), what component of investment includes purchases of new​ houses? A. "Residential" B. "Actual investment" C. "Plant and​ equipment" D. "Inventories"

A. "Residential"

If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100Billion of disposable income? A. $90 billion B. $80 billion C. $10 billion D. $9 billion

A. $90 billion

Consider the demand for U.S. dollarsU.S. dollars in exchange for Mexican pesosMexican pesos. Which of the following will not increase the foreign currency demand for the dollar​? A. Currency traders who believe that the value of the dollar in the future will be less than its value today. B. Currency traders who believe that the value of the dollar in the future will be greater than its value today. C. Foreign firms and consumers who want to buy goods and services from the United States. D. Foreign firms and consumers who want to invest in the United States.

A. Currency traders who believe that the value of the dollar in the future will be less than its value today.

Suppose that currency traders expect that the value of euro will fall in the future. How will this will affect the demand and supply of euro in the foreign exchange​ market? A. Demand for euros will decrease and supply of euros will increase. B. Demand for euros will decrease and supply of euros will decrease. C. Demand for euros will increase and supply of euros will increase. D. Demand for euros will increase and supply of euros will decrease.

A. Demand for euros will decrease and supply of euros will increase.

How would an increase in interest rates affect investment? A. Real investment spending declines B. Real investment spending may increase, decrease, or remain the same depending on the rate of inflation C. Real investment spending increases D. Real investment spending remains unchanged

A. Real investment spending declines

Which of the following is not a determinant of consumption spending? A. The growth rate in the United States relative to the growth rates in other countries B. Household wealth C. current disposable income D. the interest rate

A. The growth rate of the United States relative to the growth rates in other countries

An article in the Wall Street Journal on the housing market states that "Steady job growth, rising wages and low interest rates have helped prop up housing demand." Why do low interest rates increase the demand for housing? A. The lower the interest​ rate, the less expensive it is for households to borrow money. B. The lower the interest​ rate, the lower the price that sellers are willing to accept for their home. C. Lower interest rates induce consumers to save more money for future home purchases. D. When interest rates are​ low, the supply of housing increases.

A. The lower the interest​ rate, the less expensive it is for households to borrow money.

China purposely keeps its​ currency, the​ RMB, undervalued, for which of the following​ reasons? A. To stimulate its exports and curtail its imports B. To keep inflation in the country low C. To keep interest rates in the country high D. To stimulate its imports and curtail its exports

A. To stimulate its exports and curtail its imports

Which of the following causes savings to increase? A. an increase in the interest rate B. an increase in consumption C. an increase in unemployment D. an increase in the price level

A. an increase in the interest rate

Suppose that the exchange rate between the dollar and the euro was euro€0.8450.845 per dollar in December 2017December 2017 and euro€0.8570.857 per dollar in September 2018September 2018. From December 2017December 2017 to September 2018September 2018​, the euro A. depreciated against the dollar because more euros are needed to purchase one dollar. B. appreciated against the dollar because fewer euros are needed to purchase one dollar. C. depreciated against the dollar because fewer euros are needed to purchase one dollar. D. appreciated against the dollar because more euros are needed to purchase one dollar.

A. depreciated against the dollar because more euros are needed to purchase one dollar

A depreciation in the domestic currency will... A. increase exports and decrease​ imports, thereby increasing net exports. B. increase both exports and​ imports, thereby increasing net exports. C. decrease exports and increase​ imports, thereby decreasing net exports. D. decrease both exports and​ imports, thereby decreasing net exports.

A. increase exports and decrease​ imports, thereby increasing net exports.

All other things being​ equal, a decrease in interest rates in Britain would​ __________ which in turn would​ __________. A. lower​ e; raise NX B. lower​ e; lower NX C. lower​ E; lower NX D. raise​ E; raise NX

A. lower​ e; raise NX

Which two factors do economists combine to establish the real exchange rate between two​ countries? A. the relative price levels in the two countries and the nominal exchange rate between the two​ countries' currencies B. the money supply in each country and the fixed exchange rate between the two countries C. the balance of payments and whether the currency of either country faces a shortage or surplus in the foreign exchange market D. net exports and whether there is currency appreciation or depreciation between the two countries

A. the relative price levels in the two countries and the nominal exchange rate between the two​ countries' currencies

GDP =

Aggregate Expenditure (AE)

Suppose that currency traders expect that the value of euro will fall in the future. How will this will affect the demand and supply of euro in the foreign exchange​ market? A. Demand for euros will increase and supply of euros will increase. B. Demand for euros will decrease and supply of euros will increase. C. Demand for euros will decrease and supply of euros will decrease. D. Demand for euros will increase and supply of euros will decrease.

B. Demand for euros will decrease and supply of euros will increase.

Even thought it is not the largest component of aggregate expenditure, investment is still vitally important for an economy for all of the following reasons except... A. It represents the net change in a country's capital B. It depends how much more will be in savings accounts, stocks and bonds C. It represents how many more machines and tools a country will have available for production. D. It is the most volatile component of aggregate expenditure.

B. It depends how much more will be in savings accounts, stocks and bonds

If the real interest rate​ (r) increases in the U.S. relative to the rate in​ Japan, which of the following is most​ likely? A. Japanese net exports fall as the yen per dollar nominal exchange rate​ (E) rises. B. Japanese net exports rise as the yen per dollar nominal exchange rate​ (E) rises. C. U.S. exports increase as the real exchange rate​ (e) increases. D. U.S. exports increase as the nominal exchange rate​ (E) decreases.

B. Japanese net exports rise as the yen per dollar nominal exchange rate​ (E) rises.

In his article, "Unlocking Growth in Africa," Ken Rogoff names four things he sees as essential to the African development process. Which of the following is not one of them? A. More flexible price and exchange rate systems B. Large infusions of foreign developmental assistance C. Caution in dealing with debt D. More flexible product and labor markets.

B. Large infusions of foreign development assistance.

The article "A model of reform" details several reforms recommended by the OECD to sustain China's economic growth. Which of the following is not one of the suggested reforms? A. Aggressive restructuring of the public sector B. Opening the economy further to international trade C. Measures to deregulate and develop financial markets D. Reform of corporate law

B. Opening the economy further to international trade

If the real exchange rate between the U.S. and India is​ 1.75, which of the following would be​ true? A. The rupee is overvalued according to purchasing power parity. B. The rupee is undervalued according to purchasing power parity. C. The U.S. price level must be​ 17.5, and the Indian price level must be 10. D. There are no arbitrage opportunities between Indian and American goods.

B. The rupee is undervalued according to purchasing power parity.

According to the purchasing power parity​ theory, relative price levels play an important role in determining exchange rates in the​ long-run. Suppose prices have been rising faster in JapanJapan than in the United​ States, we then predict​ that: A. The value of the U.S. dollar and the yen will remain constant. B. The value of the yen must decline. C. The value of the the yen must increase. D. The value of the U.S. dollar must decline.

B. The value of the yen must decline.

What is the problem with: "The textbook said that a higher investment rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." A. higher interest rates are bad for savers B. confusing savings with investment C. savings accounts do not earn interest D. investment is not related to the interest rate

B. confusing savings with investment

The most important determinant of consumption is A. the interest rate B. current disposable income C. the price level D. household wealth

B. current disposable income

The theory of purchasing power parity states that the​ long-run level of the exchange rate must... A. be based on the supply and demand for currency. B. make it possible to buy equivalent bundles of goods in either country. C. be fair to the countries that are trading. D. make financial assets evenly priced in either country.

B. make it possible to buy equivalent bundles of goods in either country.

All of the following are reasons purchasing power parity might not​ hold, except A. many goods and services cannot be traded B. rates of economic growth vary widely across different countries C. consumer tastes and preferences vary widely across different countries D. goods produced in different countries are usually not perfect substitutes

B. rates of economic growth vary widely across different countries

Y (GDP) =

C + I + G + NX

wealth down --->

C down

r up --->

C down more incentive to save

wealth up --->

C up

r down --->

C up costs less to borrow and less incentive to save

The Economist article​ "McCurrencies" cautions against​ over-reliance on the​ "Big Mac​ Index" as a predictor of exchange rate movements. Which of the following is not one of the reasons cited to justify this​ caution? A. Taxes and the cost of​ non-tradeable inputs like rent can distort the price of Big Macs locally. B. Big Mac burgers cannot really be traded internationally. C. The Big Mac Index is very new and there is not yet enough data to validate it. D. The Big Mac Index suggests possible​ long-run trends, not​ short-term fluctuations.

C. The Big Mac Index is very new and there is not yet enough data to validate it.

If purchasing power parity​ holds, the price level in Turkey is​ 210, and the nominal exchange rate​ (E) = 0.84 Turkish lira ​= 1 Brazilian​ real, then the price level in Brazil​ (considering Brazil to be the​ "domestic" country) must be... A. 297.6 B. 275 C. 250 D. 200

C. 250

Which of the following points are made in the article​ "McCurrencies" regarding price levels and​ PPP: I. Prices are often higher in poor countries than in richer ones due to rampant inflation II. Every poor country today has a nominal exchange rate that is lower than the rate implied by PPP. III. Adjustment toward PPP levels does not need to come from changes in exchange rates. IV. The Big Mac Index is especially useful when evaluating the exchange rates of countries which have big differences in GDP per capita. V. A​ country's real exchange rate tends to rise as its GDP per capita rises. A. II and III B. I, III and V C. II, III and V D. II, IV and V

C. II, III and V

The experience of Cameroon, discussed in the chapter "Why Poor Countries are Poor," in the Hartford book, tends to support which of the approaches to growth and development? A. Environmental Approach B. International Trade Approach C. Institutional Approach D. None

C. Institutional Approach

According to the article "Catching up," what is one of the reasons some poor countries (particularly in sub-Saharan Africa) find it difficult to integrate fully with the global economy? A. the marginal product of capital is particularly low in poor countries B. Capital markets in poor countries fail to allocate funds efficiently. C. Rich countries maintain trade restrictions that hurt poor countries D. Labor markets in rich countries exploit poor countries.

C. Rich countries maintain trade restrictions that hurt poor countries

If the level of income increases, then this will result in... A. the consumption function shifting down B. a downward movement along the consumption function C. an upward movement along the consumption function D. the consumption function shifting up

C. an upward movement along the consumption function

If the government raises the amount of taxes, holding everything else constant, then A. government purchases will have to decrease B. disposable income will increase C. disposable income will decrease D. disposable income will remain unchanged

C. disposable income will decrease

Based on his article, "Institutions Matter, but Not for Everything," which of the following is not one of the alternatives mentioned for a poor, isolated region? A. Migration of the region's population from the interior to the coast B. Foreign aid to build transportation infrastructure C. exploitation of the region's natural resources D. continued inpoverishment

C. exploitation of the region's natural resources

In the summer of​ 2015, the exchange rate of​ China's currency, the​ yuan, declined against other currencies. The lower value for the yuan was expected to have a negative effect on firms such as Apple and Yum Brands​ (owners of KFC and Pizza​ Hut) that have stores or restaurants in China. But the lower value of the yuan was expected to benefit​ Foxconn, a firm based in Taiwan that assembles iPhones in China. ​ The decline in the value of the yuan would have a negative effect on​ firms, such as Apple and​ Yum, but would benefit other​ firms, such as​ Foxconn, that also operate in China because it takes... A. fewer dollars to buy a yuan so labor costs are lower for​ Foxconn, but the lower value of the yuan decreases the relative price of Apple and Yum Brands products. B. more dollars to buy a yuan so labor costs are lower for​ Foxconn, but the lower value of the yuan increases the relative price of Apple and Yum Brands products. C. fewer dollars to buy a yuan so labor costs are lower for​ Foxconn, but the lower value of the yuan increases the relative price of Apple and Yum Brands products. D. more dollars to buy a yuan so labor costs are lower for​ Foxconn, but the lower value of the yuan decreases the relative price of Apple and Yum Brands products.

C. fewer dollars to buy a yuan so labor costs are lower for​ Foxconn, but the lower value of the yuan increases the relative price of Apple and Yum Brands products.

A rise in stock prices and housing prices... A. increases household wealth which in turn increases consumption and leads to an upward movement along the consumption function B. reduces consumption due to increase in prices and causes the consumption function to shift downward C. increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function. D. does not affect consumption because they do not have any direct impact on disposable income.

C. increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

Of the four components of U.S. aggregate expenditure, each measured in real terms, consumption is the largest component, .... A. investment and gov't purchases are of roughly similar size, and net exports are positive B. gov't purchases are the second largest component, and investment and net exports are positive C. investment and gov't purchases are of roughly similar size, and net exports are negative D. investment is the second largest component, and government purchases and net exports are positive.

C. investment and gov't purchases are of roughly similar size, and net exports are negative

Real exchange rate is... A. the exchange rate determined by the demand and supply in the foreign exchange market most of the time with occasional government intervention to manage the​ currency's float. B. the exchange rate set by the demand and supply in the foreign exchange market. C. the price of domestic goods in terms of foreign goods. D. the exchange rate set by the central bank of a country.

C. the price of domestic goods in terms of foreign goods.

Determinants of Consumption

Current Disposable Income Y Expected Future Disposable Income r = Real interest rate Household Wealth Price level (P)

According to the chapter "How China Grew Rich" in The Undercover Economist, when Deng Xiaoping and other reformers "froze" the size of the state economic plan in 1985, the strategy was successful because: A. Their action was easy to understand B. The market operated at the margin C. People believed they would follow through on their strategy D. All of the above.

D. All of the above.

Why are imports subtracted from exports in the calculation of net​ exports? A. Exports are always less than imports. B. Imports are always less than exports. C. Goods and services produced domestically are not included in exports. D. C, I and G include goods and services not produced domestically.

D. C, I and G include goods and services not produced domestically.

Why are imports subtracted from exports in the calculation of net​ exports? A. Exports are always less than imports. B. Imports are always less than exports. C. Goods and services produced domestically are not included in exports. D. ​C, I and G include goods and services not produced domestically.

D. C, I and G include goods and services not produced domestically.

The nominal exchange rate​ (E) between the U.S. dollar and the Japanese yen is currently about 82 yen per dollar. If E goes from 82 to 72 over the next​ year, and the price levels in the two countries do not​ change, then which of the following is most​ likely? A. U.S. NX will increase as imports increase and exports decrease. B. U.S. NX will decrease as imports increase and exports decrease. C. Japanese NX will increase as imports decrease and exports increase. D. Japanese NX will decrease as imports increase and exports decrease.

D. Japanese NX will decrease as imports increase and exports decrease.

Which of the following statements regarding wealth and income is correct? A. Wealth is the amount of assets held by government and income is the amount of taxes collected by government B. Wealth and income can be considered identical measures of what people have to spend C. Wealth is the amount of income households have in order to spend and save D. Wealth represents the total value of a household's assets minus its liabilities while income is the amount of earnings households receive in the current period.

D. Wealth represents the total value of a household's assets minus its liabilities while income is the amount of earnings households receive in the current period.

The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as... A. MPC = 1 - MPS B. MPC + MPS = 1 C. MPS = 1 - MPC D. all of the above

D. all of the above

Which of the following is not a determinant of net exports? A. the real exchange rate B. the level of domestic GDP C. the level of foreign GDP D. all of the above are determinants of net exports

D. all of the above are determinant of net exports

The most important determinant of consumption spending is... A. household wealth B. expected future income C. the interest rate D. current personal disposable income

D. current personal disposable income

The growth in real consumption... A. trends smoothly upwards and downwards at regular intervals B. follows a smooth and uninterrupted trend. C. follows an erratic upward trend that is unrelated to the timing of recessions. D. follows a smooth, upward trend, interrupted only infrequently by brief recessions.

D. follows a smooth, upward trend, interrupted by only infrequently by brief recessions.

Which of the following is not an example of "external funds" in corporate financing? A. bank loans B. bonds issued by a company C. shares of stock D. retained earnings

D. retained earnings

If there is an increase in expected future income, then this will result in.. A. an upward movement along the consumption function B. the consumption function shifting down C. a downward movement along the consumption function D. the consumption function shifting up

D. the consumption function shifting up

What are the four main determinants of investment?

Expectations of future profitability Interest rates Taxes Cash flow

If the interest rate in the U.S. declines relative to the rate in the rest of the​ world, what will likely happen​ (assuming nothing else​ changes) to US​ exports, and​ why?

Exports will increase due to the depreciation of the US dollar

r up --->

I down

r down --->

I up

Weaknesses in India:

Lower investment Low productivity growth (services) Corruption Large gov't deficit

An increase in the growth rate of US GDP relative to other countries' _______ net exports

decrease

Household Wealth

Tot. Assets - Tot. Liabilities

When incomes rise faster in the United States than in other​ countries,

US net exports will fall

An increase in the interest rate will _______ consumption

decrease

Current Disposable Income

Y^D = Y - T (tot. taxes) + TR (transfer payments)

C + I + G + NX

aggregate expenditure

investment =

change in capital (delta K)

Marginal Propensity to Consume (MPC) =

change in consumption/change in disposable income

Weaknesses of China:

command economy at heart (export driven, investment-driven, restrictive capital markets, exchange rate artificially low)

The line that represents the relationship between consumption and disposable income is called

consumption function

An increase in price level will ________ consumption

decrease

An increase in the U.S. price level relative to other​ countries' price levels ______ net exports.

decrease

An increase in the exchange rate between the dollar and other currencies ________ net exports.

decrease

An increase in disposable income will _______ consumption

increase

An increase in expected future income will _______ consumption

increase

An increase in household wealth will _________ consumption

increase

South Korea is a major trading partner of the U.S. From 2007​ - 2009, the U.S. was in a severe​ recession, and U.S. GDP declined. By​ itself, this would tend to do what to US NX and Korean NX?

increase US NX and decrease Korean NX

If inflation in the United States is lower than inflation in other​ countries, then U.S. exports​ ________ and U.S. imports​ ________, which​ _________ net exports.

increase, decrease, increases

The Jones family buys a new house. Category of aggregate expenditure is:

investment expendicture

Suppose there is a graph that shows the demand and supply of U.S. dollars in exchange for euros​ (with the exchange rate expressed as euro€​/$). What would be the effect of an increase in interest rates in Europe by the European Central Bank​ (ECB) on the demand and supply of​ dollars? The demand for dollars will..._________ . The supply of dollars will..._________ . Due to the increase in European interest​ rates, the dollar has...__________ relative to the euro.

shift to the left, shift to the right, depreciated

Consumption Function

shows relationship between consumption and disposable income slope tells us how much consumption will go up if disposable income goes up (MPC)

Marginal Propensity to Save (MPS)

the increase in household savings when disposable income rises by $1 1 - MPC