ECO 2013 - Preliminary Examination II

In 2008, when the U.S. automobile industry was struggling, the price of Ford Motor Company bonds rose. If originally a one-year Ford bond had a face value of $10,000 and a price of $9,500, what was the interest rate?

5.26% FEEDBACK: The rate of return on the one-year bond is 5.26%. This is calculated using the formula R = (face value - initial price) / initial price.

What percentage of consumers' income was spent on fuels and utilities in September 2015?

5.3% FEEDBACK: Fuels and utilities make up 5.3% of housing expenditures. This information can be found under the Housing category.

What was the rate of inflation from 1985 to 1995?

50% FFEDBACK: To find the rate of inflation between the two years, we see that the CPI was 100 in 1985 and 150 in 1995. Using the formula to find the rate of inflation between these two years, we obtain 50%, or (150-100)/100 x 100.

Suppose you buy a bond for $940 and it will pay you back $1,000 one year from now. What interest rate are you receiving?

6.4% FEEDBACK: Recall that the formula to calculate the interest rate on a bond is R = (face value - initial value) / initial value. In this case, it's ($1,000-$940) / $940 = 6.4%.

Refer to the table below. This country produces only two goods CDs and books. You are told that the CPI for this country in 2012 was 141. If the base year is 2011, how many books should be present in the basket of goods and services that was used to calculate the CPI of 2012 rounded to the nearest whole book?

78 FEEDBACK: Let us say the unknown number of books in the basket is x. Then basket price in 2012 = 1500 + 20 x, while the basket price in 2011 = 1000 + 15x. Then the CPI in 2012 = (Basket price in 2012/Basket price in base year) x 100 which is given as 141.Plugging the given information into the formula we can write[(1500 + 20x)/(1000 + 15x)] x 100 = 141Solving the above equation we get, x = 78.

The Great Recession began in December 2007 and ended in June 2009. The Dow Jones Industrial Average was 13,407 at the beginning of the Great Recession. What was the Dow Jones Industrial Average in June 2009 if it fell 36%?

8,580 FEEDBACK: The Great Recession caused a sharp decline in the Dow Jones Industrial Average. By manipulating equation 6.4, found in chapter 6, to isolate the second-period index, the index is revealed to be about 8,580.

Refer to the following table below. Calculate the unemployment rate for this economy based on the data provided.

9.1% To solve this problem, you need to know the number of people employed and the number of people unemployed. The table provides the number of part-time and full-time workers. The number employed is equal to part-time workers plus full-time workers = 27+113 = 140. The table also tells you 14 million people are looking for work; this group should be counted as unemployed. The total labor force = employed + unemployed Labor force =140 + 14 = 154. Based on the equation for the unemployment rate we see thatUnemployment rate = (number unemployed ÷ labor force) × 100 = (14 ÷ 154) × 100 = 9.1%.

The Bureau of Labor Statistics reported the consumer price index as 211.4 in December 2007, and 231.1 in December 2012. By what percentage did the index increase from the end of 2007 to the end of 2012 (rounded to one decimal place)?

9.3% FEEDBACK: In December 2012, the CPI stood at 231.1, up from 211.4 in December 2007. This is a 9.3% increase: (231.1 - 211.4) ÷ 211.4 × 100 = 9.3.

Using the data provided in the table above, calculate the labor force participation rate is

90% FEEDBACK: The labor force participation rate is calculated by dividing the total number of people in the labor force by the total population, and multiplying by 100 to obtain a percentage figure. Using the data provided in the table, the labor force participation rate = (36,000 / 40,000) × 100 = 90%.

Which of the following people would be considered unemployed?

A 17-year-old offers to pet-sit, but no one hires her. FEEDBACK: To be considered unemployed, a person must be part of the labor force and searching for a job without success. The pet-sitter is looking but no one will hire her.

Which of the following situations would not be considered frictional unemployment?

A worker in a textile factory loses her job when manufacturing is mechanized. There are no other factories looking to hire someone with her skillset. FEEDBACK: Frictional unemployment occurs because of delays in matching workers to jobs. Delays happen because of a lack of information or because of government policies. Frictional unemployment also occurs when workers wait to find better opportunities. The worker in the textile factory is an example of structural unemployment because the job loss was due to changes in technology.

Use the Fisher equation to fill in the blanks in the following table.

A=, 5%; B=, 4%; C=, 4% FEEDBACK: The Fisher equation is: real interest rate = nominal interest rate - inflation rate. Row 1 - 2% = 7% - x, thus missing value is 5%.Row 2 - x = 6% - 2%, thus missing value is 4%.Row 3 - 2% = x - 2%, thus missing value is 4%.

Assume you earned $30,000 in 2012, and the CPI in 2013 was 238. How much of a raise did you need, in dollars, to keep up with the change in the inflation rate?

$1,044.00 FEEDBACK: The rate of inflation between 2012 and 2013 was 0.0348, or 3.48%. To keep up with inflation, your wages needed to rise by the same amount. Multiply the rate of inflation (not in index form) from 2012 to 2013 by your 2012 wage rate.

In 1991, the Barenaked Ladies released their hit song "If I Had a Million Dollars." How much money would the group need to have a million dollars' worth of purchasing power in 2012 rounded to the nearest cent? Note that the consumer price index in 1991 was 136.2 and in 2012 it was 230.0.

$1,688,693.10 FEEDBACK: $1,688,693.10. Recall that to convert 1991 prices to 2012 prices we need to multiply the old price by the ratio of the CPIs. $1,000,000 x (230.0 / 136.2) = $1,688,693.10.

A loaf of bread cost $0.18 in 1955 and the CPI was 26.8. The CPI in 2013 was 233. The cost of a loaf of bread in 1955 using 2013 dollars would be?

$1.56 FEEDBACK: If the price level in the later time is greater than the price level in the earlier time, the conversion of the earlier price will make the earlier price greater than its original value.

The table below shows nominal GDP and the price level in the two years 2005 and 2011. GDP in 2011, measured in 2005 dollars was

$13,342. FEEDBACK: We can use Equation 6.3 to determine 2011 GDP in 2005 dollars.

Which of the following can lower the level of frictional unemployment over time?

An increase in the number of online job search engines. FEEDBACK: Frictional unemployment occurs because of delays in matching workers to jobs. With more online job search engines, workers and employers will find each other more quickly. This will lower the level of frictional unemployment.

Let's say you plan to retire 40 years from now, and you decide you could live on $40,000 per year if you retired today. If the average annual inflation rate is 3% between now and your retirement date, how much money per year would you need to have saved?

$130,400 FEEDBACK: For this question, you would need to know how many future dollars match today's dollar. By using the bar chart in the Economics for Life box we can determine the equivalent of $1 in 40 years. The x-axis tells you that, at an inflation rate of 3%, you would need $3.26 (in 40 years) to match today's $1. To have enough savings to supply you with the equivalent of $40,000 per year at 3% average inflation rate: take 40,000 × $3.26, or $130,400 per year, just to keep pace with inflation.

Suppose that Country B has consumption, investment, government spending, imports, and exports as follows. Calculate Country B's GDP.

$200 FEEDBACK: Gross Domestic Product is the sum of consumption, investment, government spending, and net exports (exports minus imports). In this problem, that means we sum $90+$50+30+ $50-$20 = $200.

Suppose that Country A has consumption, investment, government spending, imports, and exports as in the table. Calculate country A' s GDP.

$210 FEEDBACK: Gross Domestic Product is the sum of consumption, investment, government spending, and net exports (exports minus imports). In this problem, that means we sum $140+$50+30+$10-$20 = $210.

The table shown here gives a cost-of-living index for 14 different cities. If you are living and working in Phoenix and earning $100,700 per year, to have the same standard of living in Manhattan you would need

$216,700 FEEDBACK: Using the information provided in the table, plug in the appropriate values. The cost of living index is 100.7 for Phoenix and 216.7 for Manhattan. In this case, you just need to multiply each index by 1,000: a salary of $100,700 in Phoenix is equal to a salary of $216,700 in Manhattan. Your nominal wage might increase significantly, but your real wage will not; it would take $216,700 per year in Manhattan to maintain the same standard of living you enjoyed in Phoenix.

You work for the Committee for Economic Evaluation in the small nation of Kinsdale. Your current job is to determine the country's gross domestic product in the past year. Being a very small country, the people only produce three things, which are listed in the table below. Based on the data in the table, what is the GDP for your country?

$290,000 FEEDBACK: By multiplying the price and the quantity for each of the goods listed and adding those results together you obtain GDP for Kinsdale.Bananas: 20,000 × $1.50 = $30,000Hiking Boots: 10,000 × $20.00 = $200,000Roses: 15,000 × $4.00 = $60,000GDP = $30,000 + $200,000 + $60,000 = $290,000

McDonald's charged $4.33 for its Big Mac burger in 2012. If the CPI in 2012 was 229 and the CPI in 2002 was 180, what is the price of a Big Mac in 2002 dollars?

$3.40 FEEDBACK: Price in earlier dollars = price today x (price level in earlier time /price level today). Thus the price of the Big Mac in 2002 dollars can be calculated as $4.33 x (180/229) = $3.40.

A movie ticket cost $0.75 in 1960. If movie tickets increased at the same rate as overall inflation, how much would the same movie ticket cost in 2012 dollars rounded to two decimal places?

$5.75 FEEDBACK: To find the price of the movie ticket in 2012 dollars, we need to know the price of the ticket in 1960 ($0.75) and the CPI for the years we are comparing. The 1960 CPI is 30 and the 2012 CPI is 230. Plug these numbers into the equation, and you'll see that a $0.75 movie ticket costs $5.75 in 2012.

Suppose the country Inflatistan had a nominal GDP of $48 billion in 2007 and a nominal GDP of $114 billion in 2013. If the price level was 100 in 2007 and 190 in 2013, what was the real GDP in 2013 (using 2007 dollars)?

$60.0 billion FEEDBACK: To find real GDP, we need to adjust nominal GDP for the increase in the price level. We divide $114 billion by 190 (price level in 2013) and then multiply by the 2007 price level of 100. $114 billion/190*100 = $60 billion. FEEDBACK: To find real GDP, we need to adjust nominal GDP for the increase in the price level. We divide $114 billion by 190 (price level in 2013) and then multiply by the 2007 price level of 100. $114 billion/190*100 = $60 billion.

What are 5 limitations of GDP as a measure of welfare of Society?

1. Underground economy is not included in GDP 2. Household production is not included in GDP 3. Environmental Damage is not included in GDP 4. Leisure Time 5. Economic Equality

If healthcare costs make up 8% of total consumer expenditures and they rise by 15% while the other components in the consumer price index remain constant, by how much will the price index rise?

1.2% FEEDBACK: Suppose the CPI in the first year is 100. If healthcare costs are 8% of total expenditures then they account for 8 of the 100 points, with the 92 other points falling in other categories. If healthcare prices rise by 15% in the second year, then those 8 points become 9.2 points. Since the prices of the other categories have not changed, the CPI now stands at 101.2, since 9.2 + 92 = 101.2.Using our formula for calculating the inflation rate, the rise in healthcare costs raised the overall price level by 1.2%.(101.2 - 100) ÷ 100 × 100 = 1.2%.

If the CPI today is 230, then the inflation rate since the base year is

130% FEEDBACK: The inflation rate since the base year can be calculated as [(230 - 100)/100] x 100 = 130%. Note that the CPI for the base year is always 100.

You purchased an IBM bond with a face value of $10,000 and an interest rate of 25%. Suddenly the market interest rate changed, which raised your bond price by $600. Based on the given information, calculate the current market interest rate (rounded to the nearest whole interest rate).

16% FEEDBACK: We need to solve this problem in two parts. First, we need to figure out the bond price when you purchased the bond at an interest rate of 25%. Let's say that the bond price was $x. Since your bond initially promised an interest rate of 25%, the following must be true: ($10,000 - $x) / $x × 100 = 25.Solving the above expression gives x= $8,000. So your bond price was $8,000 when the interest rate was 25%. Since your bond price has now increased by $600, your new bond price must be $8,600. This should be due to a decline in the interest rate. Next, use the formula for interest rate:R = ($10,000 - $8,600) / $8,600 × 100 = 16%So the current market interest rate must be 16%.

What year did the labor force participation rate of black women become greater than 60%?

1996 FEEDBACK: Looking at the labor force participation rate trend line for black women (pink trend line) we see that it exceeded 60% in 1996.

Which of the following recessions saw the highest unemployment rate changes among men?

2007-09 FEEDBACK: By examining the graph, we can see that the largest increase in unemployment rates among black and white men occurred from 2007-2009.The unemployment rate among black men increased from 10.0% in December 2007 to17.5% in June 2009 for a 7.5% increase. In December 2007, white men experienced a 4.4% unemployment rate. By June 2009, the unemployment rate was 9.7% for a 5.3% increase. This is one of the largest increases in unemployment rates among men in US history.

In which year did deflation occur?

2009 FEEDBACK: Deflation occurs when the inflation rate is negative. In 2009, the inflation rate was -0.32%.

The Dow Jones Industrial Average is an index of ____ firms found on the NYSE, which is a ____ market.

30; secondary FEEDBACK: The Dow Jones Industrial Average comprises 30 firms that represent different sectors of the economy. These firms are publicly traded on the NYSE, a secondary market that allows the sale of pre-owned stock.

What was the cyclical unemployment rate for white men in 2010?

4% FEEDBACK: In 2010, the unemployment rate for white men was 9%. The natural rate of unemployment is approximately 5%. We define cyclical unemployment as unemployment above the natural rate of unemployment. When you subtract the natural rate of unemployment—5%—from the prevailing unemployment rate— 9%—you have a 4% cyclical unemployment rate.

You have been hired to determine if unemployment is running too high. First you must determine the natural state of unemployment. You have been provided the data in the table below. Using the data above, the natural rate of unemployment is

4% FEEDBACK: There are three different types of unemployment, but only two are considered part of the natural rate—structural and frictional. Cyclical unemployment occurs when an economy is in recession, and is therefore not counted as part of the natural rate.

You deposit $600 in a savings account in your bank for a year. By the end of the year the value of your deposits increases to $625. What is the interest rate that your bank is offering on the savings account?

4.17% FEEDBACK: If the value of your deposit increases from $600 to $625, then the rate of return is [($625-600)/$600] x 100 = 4.17%

Which of the following statements is true?

As a borrower, you want issue or sell bonds for the highest price possible FEEDBACK: A lender wants to buy bonds for the lowest price possible because they want the highest possible interest rate on their savings. The borrower wants to sell bonds for the highest price possible so they can pay the lowest possible interest rate. The default risk is the risk that the borrower will not pay the face value of the bond on the maturity date. So the bond's interest rate will rise if there is concern about the borrower's ability to pay.

Standard & Poor's has several bond ratings. Which of the ratings below indicates the bond more likely to default?

B FEEDBACK: The bond rating provides information on the likelihood that the company will default on its bond payments. AAA is highest, while C is lowest. Of the choices above, BBB is considered lower-medium, but that's a higher rating than B, which is highly speculative.

Put the phrases in order from first to last to best illustrate the progression of a properly functioning loanable funds market.

Borrowing requires saving; investment requires borrowing; output (GDP) requires investment FEEDBACK: Saving is necessary for investment to take place. Investment requires borrowing money from the loanable funds market. Investment is a component of GDP and is necessary to sustain output growth. To start the process you must have funds in the loanable funds market, which comes from savers. Thus, borrowing requires saving. Borrowers may want to borrow, but unless there is savings, they have nothing to borrow.

We pay higher prices for TVs today than people used to pay 10 years ago. This is due to

Both inflation and a premium that we have to pay for the improved quality of the TVs that we buy today. FEEDBACK: The higher prices that we pay for goods over time is partly because of general inflation. But at the same time, the TVs that we buy today are of improved quality, such as high-definition picture, flat screen etc. These improved TVs are expensive to produce. So we do end up paying a premium for such better quality as well.

Assume that the residents of a nation become more patient (experience a reduction in their time preferences). In the long run, how will the lower time preferences affect the levels of capital and income growth in that nation?

Capital and income growth will both increase. FEEDBACK: Capital and income growth typically move in the same direction. Investment is tied directly to the purchase of capital goods.

Which of the following best explains why the United States has shifted from an agricultural economy to a service-based economy?

Changes in the nature of agricultural production mean that fewer farm workers are needed. FEEDBACK: The answer that best exemplifies the change from agriculture to service accounts for creative destruction—the introduction of new products and technologies that lead to the end of other industries and jobs. Changes in the production process allow farmers to produce much more food with far fewer workers.

How is it described when a person who's 45 years old saves a large amount of her income for retirement compared to other periods of their lifetime?

Consumption smoothing FEEDBACK: Most individuals earn more income than they spend on consumption during their 30s, 40s, and 50s. Those who save significant amount of their income during these years are said to smooth their consumption.

______ unemployment is the area in which policymakers can have their greatest impact.

Cyclical FEEDBACK: Cyclical unemployment, is caused by recessions, or economic downturns. This type of unemployment generates the greatest concern among economists and policymakers. It is the most serious type of unemployment because it means that jobs are not available for many people who want to work. Policymakers can pass legislation that will cut taxes and increase spending in the economy in order to lower cyclical unemployment. Structural unemployment would be better tackled by the states themselves since they can deal directly with the skills issues in their areas. Frictional unemployment is not that much of a concern to policymakers.

Which of the following choices does not match the financial tool with the objectives of the individual?

Dave wants to own part of a company, he should buy a bond from Goldman Sachs. FEEDBACK: Stocks and bonds each have different characteristics. Stocks are ownership shares while bonds are contracts that require the lender to be repaid a set amount at a given point in time. There is risk involved with both stocks and bonds, but a better rating for a bond indicates less risk. With higher risk, the borrower is required to pay a higher interest rate.

The labor force participation rate for white men has _________ since 1972.

Decreased FEEDBACK: As more baby boomers are retiring, and more men are going back to school, the labor force participation rate for men has decreased.

Let's say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. How will demand be affected if a ratings agency upgrades your bond rating to AA?

Demand will increase FEEDBACK: Investors are more likely to purchase iPong's bond if their bond rating increases. If the bond rating is upgraded, investors will view the bond as more attractive, and demand for the bond will increase.

In order to earn some extra money to pay for college, you have decided to open your own tattoo parlor one block from campus. You come up with a business plan and realize that you will need financing to get your business off the ground. You appear on a reality show where you pitch your idea to potential investors. Someone likes your business idea, and they write you a check to get things going. Is this financing option direct or indirect?

Direct FEEDBACK: Even though you are connected to your investor through the show, you are receiving the funds directly from that individual, the supplier of loanable funds, and not an intermediary.

In order to earn some extra money to pay for college, you have decided to open your own tattoo parlor one block from campus. You come up with a business plan and realize that you will need financing to get your business off the ground. You borrow money from classmates with the promise to repay them with interest in two years. Is this financing option direct or indirect?

Direct FEEDBACK: Your classmates hand you money to start your business. There is no intermediary involved in this case.

Suppose that you want to start a business and need to finance the capital. What channel(s) in the loanable funds market could you use?

Direct finance and indirect finance FEEDBACK: Direct finance uses savings from savers; stocks and bonds are issued in return. Indirect finance uses loans from banks derived from savings; repayment + interest is returned in exchange for the loan, it is not one of the channels.

Growth Rate

Economic growth is measured as the percentage change in real per capita GDP.

Suppose the country of Sylvania experienced a striking increase in its birth rates in the 1970s. Thus, an increasing part of the population of Sylvania entered in midlife around 2001. Which of the following figures correctly depicts the change in savings behavior in Sylvania in 2001?

Fig. 4 FEEDBACK: As the "baby boomers" reached midlife in Sylvania around 2001, they entered their prime earning years. As a result, their income level reached the highest levels around 2001 and so did their savings. This led to an increase in the supply of loanable funds in Sylvania and thus shifted the supply curve of loanable funds to the right.

_____ _____ are the demanders for loanable funds.

Firms and governments FEEDBACK: The market for loanable firms consists of suppliers (savers) and demanders (borrowers). Firms and governments finance their capital projects and spending by borrowing from the suppliers of loanable funds.

____________ are on the demand side and _____________ are on the supply side of the loanable funds market.

Firms and governments; households FEEDBACK: Firms need to borrow funds in order to invest in capital goods. The government also needs to borrow when taxes are not enough to pay for outlays. Households save and through loanable funds market channelize their savings in form of loans to those who are in need of funds.

Suppose you build an engine and sell it to the local body shop for $7,000. The shop puts the engine in a car and sells the car to a dealer for $20,000. The dealer sells the car to a customer for $35,000. Which of the following statements is true based on all of these transactions?

GDP increases by $35,000 FEEDBACK: GDP increases by the value of the finished vehicle which is $35,000. When you build the engine and sells it to the body shop. The mechanic has added a value of $7,000. Then ,the body shop installs the engine into the car, and sells it to the dealer. The shop has added a value of $13,0000($20,000-$7,000). When the car is sold to the consumer for $35,000, the value added by the dealer is $15,000. This $15,000 is the $35,000 sticker price minus the $20,000 value originally created by the mechanic and body shop. If we take these amounts and add them together, we get $7,000+$13,000+$15,000=$35,000. This is the same as the amount that GDP increased.

Which of these statements about GDP is not true?

GDP is the output produced by workers and resources owned by residents of a nation. FEEDBACK: It is Gross National Product and not Gross Domestic Product that measures the output produced by workers and resources owned by residents of a nation. Services are included in GDP, and GDP is indeed calculated using market values.

Which of the following would not be counted in the calculation of GDP?

Government spending on social security. FEEDBACK: Illegal activities, transfer payments, and services that are produced but not sold are not counted in GDP.Not all spending is counted in the calculation of GDP. This is because some types of spending do not represent production. This is the case with transfer payments like social security and welfare. Other things don't get counted because they are difficult to keep track of, especially if they are conducted in the underground economy—like your purchase of a counterfeit designer purse. Additionally, when you do something for yourself, rather than paying for it, this non-market activity does not count in GDP.

Which of the following transactions, if they were included in the calculation of GDP, would not lead to an overstated GDP figure?

Hiring a babysitter and paying her under the table. FEEDBACK: Paying a babysitter under the table, if included would actually boost GDP. Each of these transactions is either a used good—that is, produced in a prior year—or is an intermediate good. Therefore, their inclusion in GDP would overstate current GDP.

Which of the following is an example of direct finance?I. Apple stocksII. Microsoft bondsIII. A savings account in Citibank

I and II FEEDBACK: Direct finance occurs when firms sell securities like stocks or bonds directly to the public in exchange for funds. On the other hand, indirect finance involves savers depositing in banks funds that the banks can then lend out to borrowers.

Your bank offers to pay you a 3% interest rate on a one-year fixed-deposit saving account. The inflation rate is expected to be 2% by the end of the year. Which of the following will be true if you decide to keep the money in the bank and the inflation rate turns out to be 4% by the end of the year?

I will be worse off. FEEDBACK: You plan to deposit $100 in the saving account. If the bank pays you 3% interest, you will make $103 by the end of the year. But due to the inflation rate of 4%, now you will need $104 to buy things that you could have bought a year before for $100. Since your bank compensates you less than what you need to keep up with the inflation rate, you will be worse off in this case.

Which of the following statements is true?

If people are worried about the United States defaulting on the national debt, interest rates on U.S. Treasury securities will increase FEEDBACK: Bond financing requires firms to payback more than they borrowed. If a firm sells $10 million worth of 10-year bonds, the company takes on the obligation to pay $10 million plus interest in 10 years. If the firm cannot pay this debt, the owners may need to declare bankruptcy and no bond holder will be paid for bonds. With stocks, however, the owners can sell shares of the firm to others without the burden of debt. Securitization benefits borrowers because it lowers the cost of borrowing. If there is concern about defaulting on the debt, investors must be compensated for the higher risk in the form of a higher return on their investment.

Suppose you sign a two- year job contract with Wells Fargo stipulating that you will receive an annual salary of $93,500 plus an additional 2% over that in the second year to account for expected inflation. Based on this scenario, which of the following statements is true?

If the inflation rate turns out to be 3% rather than 2%, you will be worse off. FEEDBACK: If inflation 3 percent turns out to be greater than your salary, increase, 2%, then you the worker, will suffer because your salary will not allow you to afford the same basket of goods and services that you bought the previous year. If inflation, 1% turns out to be lower than your salary increase, then Wells Fargo is worse off. In a case like this the price at which a firm must pay their employee rose by more than the prices at which they could sell their goods.

What factor(s) shift the supply curve of loanable funds?

Income and wealth FEEDBACK: Most individuals, when they receive more income or wealth will save more. On a macroeconomic level, this means there will be a greater supply of loanable funds. Investor confidence and the productivity of capital both affect the demand for loans, not the supply.

Since 1972, labor force participation among women has generally ___________ while labor force participation among men has generally ___________.

Increased/Decreased FEEDBACK: Notice the trend lines for black women and white women both start below 50% in 1972. By 2015, the labor force participation rate among women is near 55-60%. Men have seen the opposite with a labor force participation rate above 70% in the 1970s to near or below 70% in the 2000s.

In order to earn some extra money to pay for college, you have decided to open your own tattoo parlor one block from campus. You come up with a business plan and realize that you will need financing to get your business off the ground. You fill out an application with an online company that specializes in start-up loans funded through a group of banks. Is this financing option direct or indirect?

Indirect FEEDBACK: The funding is being financed from a group of banks by the online company. The money has to travel through many different entities. It is an indirect loan because the supplier and demander of loanable funds are matched indirectly by the banker.

Which of the following is true of gross domestic product?

It can give us guidance on the living standards of a nation. FEEDBACK: GDP provides some insight into living standards. If GDP goes up, living standards tend to rise as well.

Suppose the price of a bond is initially $900 but increases to $950. What is happening to the interest rate on that bond?

It decreases. FEEDBACK: Bond prices and interest rates have an inverse relationship. When the price of a bond falls, interest rates rise. In this example, when the price of a bond falls, we see the interest rate rise.

Which of the following represents frictional unemployment?i. The demand for refrigerators falls when the economy enters a recession and refrigerator manufacturers lay off some of their workers, one of which is Anthonyii. John worked for General Motors who decides to close its U.S. factories and relocate its car manufacturing division to Mexico.iii. After quitting his job in Ohio to be closer to his family in California, Jake is now looking for a new job.

Jake FEEDBACK: Frictional unemployment occurs when there is a delay matching employers and employees. Jake falls into this category. Anthony is an example of cyclical unemployment, and John is an example of structural unemployment.

Jennifer earns $50,000 in her first job today while her mom used to make $15,000 in her first job in 1975. Jennifer is of the opinion that she makes more than her mom would have made if she started working today, while her mom thinks Jennifer would have earned less than she did had she started working in 1975. If the CPI today is 212 and the CPI in 1975 was 82, then, rounded to the nearest dollar.

Jennifer is correct because her mom's salary in today's dollars would be $38,780. FEEDBACK:. Given that the CPI in 1975 was 82, the CPI today is 212, and Jennifer's mom's salary in 1975 was $15,000, Jennifer's mom's salary in today's dollars would be ($15,000/82) x 212 = $38,780.

Jenny works in the house as a nanny. She gets paid once a month by the owner of the house. Since she thinks that is a lot of work, she's looking for another job. Therefore we can say that

Jenny counts as employed FEEDBACK: Jenny is in the labor force and she is employed. If she weren't getting paid to do the same work (for example, if she were the owner of the house and was doing all of the same work while looking for an outside job), she would be counted as unemployed.

Residents of several European countries spend less time working and more time on leisure activities than do people in the U.S. How is this great leisure time accounted for in Gross Domestic Product measurements?

Leisure time doesn't factor in a country's GDP. FEEDBACK: Leisure time, while valuable, doesn't get accounted for in GDP. This could be considered a shortcoming of GDP as a measurement of a country's standard of living.

Consumer Price Index (CPI)

Measure the overall cost of goods and services brought by a typical urban consumer.

Real GDP

Measures the value of goods produced in the economy valued at BASE market prices. Real GDP can only increase if output increases Sum of Pbase* Qcurrent

Nominal GDP

Measures the value of goods produced in the economy valued at CURRENT market prices. Nominal GDP can increase if output or price increases. Formula: Sum of Pcurrent*Qcurrent

Which of the following scenarios are not macroeconomic in nature?

Microsoft is considering buying another firm to help it expand its social media presence. FEEDBACK: When considering macroeconomics you need to look at the big picture. If a scenario deals with firms, towns, or individuals, then you are dealing with microeconomic subjects. When you move to the national level, now you're talking big. Topics that impact or reflect a nation are macroeconomic. Some of these topics include GDP, unemployment, and the central bank changing interest rates. Microsoft buying another firm to expand social media presence would be considered a microeconomic scenario.

Which of the following would not be responsible for a drop in the unemployment rate?

More and more stay at home moms coming back into the labor force in the search of jobs FEEDBACK: Someone who is unemployed is someone who is available for work and is looking for work. The unemployment rate can fall if some people who were looking for jobs become discouraged and give up looking for work. When workers become discouraged, they drop out of the pool of unemployed workers and, by definition, they are no longer counted as members of the labor force. People retiring would also lower the unemployment rate.

What factor(s) affect the demand for loanable funds?

Productivity of capital FEEDBACK: Recall the rule that a firm should borrow to fund an investment only if the expected return is greater than the interest rate on the loan. When capital is more productive, firms will get a greater expected return from new projects, and it's more likely that firms will want to borrow money to fund new projects. This would increase the demand for loanable funds. When capital is less productive, the opposite would occur.

The equation of exchange is helpful for determining the effect of money supply changes on the price level. Using this concept, which of the following statements is true?

Real GDP falls by 3% and there is no inflation, but the money supply grew by 5%.Therefore the change in velocity would be negative 8 percent The equation of exchange in rates of growth is %ΔM + %ΔV ≈ %ΔP + %ΔYIf real gdp grows at 3% and inflation is equal to 2%, with no change in velocity we would have the following %ΔM + 0 ≈ 2% + 3%. Thus %ΔM ≈ 5%. If real gdp falls by 3 percent with no inflation, and the money supply grows by 5 percent, then 5% + %ΔV ≈ 0 + -3%. So the %ΔV ≈ -8%.If real GDP increases by 3 percent, with no change in velocity, and money supply grows by 10%, then 10% + 0 ≈ %ΔP + 3%, so%ΔP ≈ 7%.

What occurs when the loanable funds market is in equilibrium?

Savings = Investment FEEDBACK: The loanable funds market does tend to move to equilibrium. (Recall that equilibrium occurs when the price is such that the quantity demanded equals the quantity supplied). This will occur at the interest rate where the amount of savings equals the amount of investment. At higher interest rates, savings will exceed investment while at lower interest rates the opposite occurs. Every dollar borrowed requires a dollar saved.

What's happened to the savings rate in the U.S. since 1980?

Savings are lower now than in 1980. FEEDBACK: In the early 1980s, the savings rate in the United States was about 10%. Since 2000 it has fluctuated, but has never been as high as 6%.

Which of the following does not represent differences between stocks and bonds?

Stocks provide investors with a set interest rate, while earnings from a bond fluctuate more. FEEDBACK: Those who own stocks do own part of the company, and stocks have provided higher rates of return than bonds. Bonds actually provide a set interest rate, while stocks do not, as stocks provide ownership in the company. If the company does well, the stock value can increase, sometimes by a large amount. But a stock's value could also decrease. Bonds can become worthless as well, however, if the company goes out of business. Bonds are generally safer than stocks, but since 1960, stocks have earned about twice the rate of return of bonds.

Creative destruction would be associated with which of the following types of unemployment?

Structural FEEDBACK: Creative destruction occurs when the introduction of new products and technologies leads to the end of other industries and jobs. As some jobs become obsolete, the result is structural unemployment, which is caused by changes in the industrial makeup (structure) of the economy. Although structural unemployment can cause transitional problems, it is often a sign of a healthy, growing economy.

In his song "Allentown," Billy Joel sings about the demise of the steel and coal industry in Pennsylvania. In areas like Allentown and much of the Midwest, manufacturing was once the largest employer, but many of those jobs have disappeared as technology has changed. What type of unemployment is the song about?

Structural FEEDBACK: The steel and coal industry closed down in Allentown, causing workers to seek new employment. They don't necessarily have the skills to match new jobs, meaning this represents structural unemployment. The song "Allentown" expresses how difficult it is for small communities when people have to adjust to changes in the structure of an economy. The focus of the song is on structural unemployment, which arises from factories closing in the town. Because the whole town was dependent on the factories, which were the biggest employers, after they closed, there were far fewer job opportunities for people in the community. Thus, Billy Joel sings about needing to find a new place to live. Structural unemployment may be a sign of a growing and dynamic economy, but it causes real pain for people who are caught in the middle of a dying industry.

Suppose that capital becomes more productive. What would we expect to happen?

The equilibrium interest rate and amount invested would both increase. FEEDBACK: Since the demand for loanable funds is increasing, the equilibrium amount of investment and the interest rate would increase.

Suppose Congress is considering an increase in the retirement age for U.S. citizens. Based on this, which of the following is a true statement?

The equilibrium interest rate would fall, and investment would increase. FEEDBACK: If U.S. workers start working longer, this would delay the dissaving period in their life and increase their savings. So supply would increase (shift outward). Demand would not change. The equilibrium interest rate would fall, and investment would increase. Real GDP would be greater, all else equal, due to the increase in investment. Basically, the new savings would become investment in capital.Thus, in the future there would be more tools for production in the United States, and output would be higher.

In January 2008, the U.S. unemployment rate dropped to 4.9%. However, employment also fell from the prior month. How could this have happened?

The labor force decreased. FEEDBACK: This is possible if some of the people who were employed or unemployed leave the labor force. Consider a simple economy with a labor force of 100 people, where 10 are unemployed and 90 are employed. Suppose 5 of the people who were employed lose their jobs and become unemployed, and the 10 previously unemployed workers get tired of looking for work and leave the labor force. Then, the final number in the labor force is 90, and 85 are employed and 5 are unemployed. Before the transition, we had an unemployment rate of 10%, and afterward the unemployment rate is 5.5%.

Rule of 70

The rule of 70 states that if the annual growth rate of a variable is x%, the size of that variable doubles approximately every 70 ÷ x years.

Which of the following is true when the economy is at full employment?

The unemployment rate is equal to the natural rate of unemployment. FEEDBACK: At any given time, the unemployment rate is equal to the natural rate plus the cyclical rate. Since a healthy economy will always have natural unemployment, the unemployment rate will never equal 0%. When the macroeconomic conditions are healthy—when gross domestic product (GDP) is growing normally—cyclical unemployment will be zero. During those times, the economy will produce its full employment output and all unemployment will be natural unemployment.

If the real GDP in a country is at a higher output level than full employment output, then which of the following is true?

The unemployment rate is lower than the natural rate. FEEDBACK: The unemployment rate equals the natural rate plus the cyclical rate. An economy can produce more than its full employment output only when resources are over employed. So the unemployment rate must be lower than the natural rate of unemployment and cyclical unemployment will not be positive.

Which of the following would NOT be found in the Dow Jones Industrial Average?

U.S. Government securities FEEDBACK: The Dow Jones Industrial Average comprises 30 private firms that are publicly traded on the NYSE. American Express, IBM, and General Electric are three of the 30 firms found in the index.

If your boss calls you into her office and offers you a promotion, which will include a 5% pay increase, how would you evaluate the value of your raise?

Very good, since the rate of inflation is 1%. FEEDBACK: When evaluating a raise, you need to account for the rate of inflation over the course of a year. If the inflation rate is greater than the percentage raise in your wage, then you are worse off, as your real income will fall. If the inflation rate is lower than the percentage raise in your wage, then you are better off, as your real income rises. Keep in mind that we want to examine real income and purchasing power as opposed to nominal income and purchasing power. If we think a raise of 5% is great when the inflation rate is higher than 5%, then we are suffering from money illusion.

Which of the following statements provides the clearest reason for why it is beneficial to the U.S. when China buys U.S. government bonds?

When China owns U.S. financial assets, they help to keep domestic interest rates low. FEEDBACK: The increased savings from China that come into the U.S. financial markets increase the supply of loanable funds. This puts downward pressure on the interest rate. To think of it another way, if the demand for U.S. Treasury bonds increases, then the price of those bonds increases. Recall that the price of a bond is inversely related to the interest rate. If the price of the bond increases, then the interest rate decreases.

Which of the following statements are NOT true about inflation?

When in the 2-4% range, it can be the sign of a weak economy. FEEDBACK: Looking at the definition, and how we use CPI to measure inflation, we can see that inflation means we have an overall price increase, not just a price increase for one or two items. With an overall increase, the price of some items may even fall while others are rising; as long as the net impact is an increase, we have inflation. The basket of goods represents the typical urban family, so not every consumer buys every item in the basket. For example, the price of higher education increases more than the overall inflation rate, yet not everyone is attending and paying for college, so this increase will affect college students more than other members of the population. Or, if the price of hay is rapidly increasing, that is not included in the CPI calculation because it's not purchased by the typical urban family. Deflation is a sign of an unhealthy economy, and hyperinflation leads to price confusion as well as other problems.

Gas prices typically rise every summer as more people travel during the summer months. If the economy is in a recession and your friend tells you that gas prices are still rising during the summer months, which of the following is true?

Your friend is correct, since gas prices can be increasing due to inflation. FEEDBACK: The price confusion problem of inflation occurs when it is hard to determine whether price changes are due to demand shifts or to inflation. Thus, the price of gas can fall during a recession as a result of a fall in demand, but at the same time it can rise as a result of general inflation.

The Loanable Funds Market

a (conceptual) interaction of borrowers and lenders determining the market interest rate and the quantity of loanable funds exchanged.

Mortgage-Backed Security (MBS)

a combination, or bundle, of mortgages. Securitization is the creation of a new security by combining otherwise separate loan agreements. For example, it is possible to create a $1 million mortgage-backed security by buying five separate $200,000 mortgages and then selling them together as a bundle.

Which of the following is a true statement?

a falling interest rate will lead to a movement along the demand curve for loanable funds FEEDBACK: When making decisions about saving and borrowing, people care about the real interest rate, because it is corrected for inflation. It is the rate of return in terms of real purchasing power. Profit-maximizing firms will borrow to fund an investment if and only if the expected return on the investment exceeds the interest rate on the loan. Savers will be more inclined to take their savings elsewhere if the rates of return on fine art purchases fell. In the loanable funds market, the interest rate is the price. Remember that price affects quantity demanded, and not demand. So the interest rate affects quantity demanded and is a slope factor, and involves a movement along the demand curve.

What phrase describes the situation that's occurring when the economic activity is declining? (or is growing at a negative rate?

an economic contraction FEEDBACK: An economy is said to be going through an economic contraction when it is shrinking. An economic expansion occurs when the economy is growing at a strong pace. The business cycle describes how there are economic expansions and contractions in an economy.

Say consumers buy two kinds of meat, beef and pork. If the price of pork doesn't change and the price of beef rises over time, then consumers will typically buy more pork and less beef. If the Bureau of Labor Statistics fails to capture such substitution between goods in the CPI calculation, then this will result in

an overestimation of both the CPI and the inflation rate. FEEDBACK: When beef becomes more expensive, people will use pork instead. So the pork price should get more weight and the beef price should get less weight in the CPI basket. If the CPI fails to adjust the weights following such a substitution, then the CPI would exaggerate the price of meat due to the higher price of beef. Thus, the CPI will get overestimated and the inflation rate calculated using the CPI will also get overestimated.

By approximately how much more did the unemployment rate increase for black men than white men during the 2007-2009 recession?

between 2 and 3% FEEDBACK: During the 2007-2009 recession, the unemployment rate increased for both groups. At the beginning of the recession, black men had an unemployment rate of 10% and by the conclusion of the recession; their unemployment rate was 17.5%. This is a 7.5% increase. At the beginning of the recession white men had an unemployment rate of 4.4% at and by the conclusion of the recession their unemployment rate was 9.7%. This is a 5.3% increase. If we subtract the change in the unemployment rate of the two groups, we get: 7.5% (black men) - 5.3% (white men) = 2.2%. So the difference in unemployment rates between black men and white men is between 2 and 3%.

Which of the following would not be included in the U.S. GDP?

clothes sold by my family on e-bay FEEDBACK: Commissions paid to financial companies for their services are included in GDP, although the value of the stock itself would not be included. Similarly, revenues earned from services by Las Vegas casinos are also included. A flu shot would be considered a good, so that's included in GDP as well. The clothes have already been produced and sold, so they are not included in GDP

Which of the following is the largest component of GDP?

consumer spending FEEDBACK: Most people spend a large majority of their income on consumption goods and services. Consumption goods include everything from groceries to automobiles.

Let's say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. If a ratings agency upgrades your bond rating to AA, how will this affect your cost of borrowing?

cost of borrowing will decrease FEEDBACK: The cost of borrowing is another way to reference the interest rate your company must pay on its bonds. The ratings upgrade will decrease iPong's cost of borrowing. Because prices and interest rates move in opposite directions, the increase in price implies a decrease in the interest rate that investors require. Lower interest rates make is cheaper for iPong to issue debt, since they don't have to pay as much in interest as they did before.

Fred Flintstone was laid off at the quarry because the nation is suffering from a recession

cyclical

Types of unemployment

cyclical, structural, seasonal, frictional

Refer to the table below. If 4 million of those who are currently unemployed become discouraged workers, the unemployment rate will _______________.

decrease to 6.7% FEEDBACK:The formula for the unemployment rate: To calculate the unemployment rate before workers become discouraged, begin by calculating the number of employed workers. Looking at the table, we see that the number employed is equal to part-time workers plus full-time workers = 27 + 113 = 140. The question tells you that 14 million people are looking for work. They will be counted as unemployed until they become discouraged workers. Therefore, the previous labor force = 140 + 14 = 154, and the unemployment rate before workers become discouraged = (14 ÷ 154) x 100 = 9.1%. To calculate the current unemployment rate, begin by considering the 4 million people who become discouraged, stop looking for jobs, and drop out of the labor force. When we account for the discouraged workers, the number of unemployed = 14 million - 4 million = 10 million. The new labor force = 140 + 10 = 150. Therefore, the new unemployment rate = (10 ÷ 150) x 100 = 6.7%. Thus we can see that the unemployment rate decreases to 6.7%.

The rate of inflation ______ between 1980 and 1983.

decreased FEEDBACK: The rate of inflation was around 14.8% in 1980. Smaller increases in the price level from year to year led to an inflation rate of approximately 4% by 1983.

The presence of secondary markets ______________ the interest rates that firms have to pay on bonds issued by them.

decreases FEEDBACK: The existence of secondary markets increases the demand for bonds. As a result, the price of bonds will increase, which implies that the interest rate will decrease.

The cyclical unemployment rate is defined as the ___ unemployment rates

difference between the existing (actual) and the natural FEEDBACK: Both structural and frictional unemployment are consistent with a growing, evolving economy. The root cause of cyclical unemployment is an unhealthy economy. Unlike structural unemployment and frictional unemployment, cyclical unemployment is not considered a natural type of unemployment. It is the difference between the existing unemployment rate and the natural rate.

Imagine you live on the planet Krypton. The loanable funds market on Krypton is thriving and life is good. However, the planet is very, very old and the great scientists and philosophers on the planet have begun discussing openly that the planet may be on the verge of destruction. Even if the great thinkers are wrong, the loanable funds market will change in the short term. Specifically, the supply of loanable funds is expected to ____________ and as a result the amount of economic output in the future is expected to _______________.

fall; decrease FEEDBACK: How will this alter the desire of people to save? If you thought your planet might be destroyed in the near future, would you bother to save for retirement or would you go on a shopping spree? The fear of destruction will create longer time preferences for the citizens of Krypton and thus, the supply of loanable funds will shift left. This means, even if the planet doesn't fall apart, there will be less economic output in the future.

Gross Domestic Product (GDP) is the total market value of all

final goods and services produced annually within a country's borders. FEEDBACK; Gross domestic product (GDP) is the market value of all final goods and services produced within a nation during a specific period of time—typically, a year. GDP is the primary measure of a nation's output. GDP is the sum of all the output from coffee shops, doctor's offices, software firms, fast-food restaurants, and all the other firms that produce goods and services within a nation's borders.

Ronald McDonald, who just graduated from clown school, is looking to find his first real job.

frictional

Below is data on the natural rate of unemployment and actual unemployment. The information provided above reflects an economy that is

healthy FEEDBACK: To determine the health of an economy, we can compare the actual rate of unemployment with the natural rate of unemployment. The natural rate is the typical rate of unemployment in a healthy, growing economy. Therefore, if actual unemployment equals the natural rate, the economy is healthy. If the actual rate of unemployment is lower than the natural rate, the economy is expanding past its long-run potential—eventually, unemployment will increase to the natural rate. If the actual rate of unemployment is higher than the natural rate, the economy is in a recession.

You purchased a bond issued by firm XYZ that was rated AA. After a few months you find out that the ratings of the bonds have changed to BBB. As a result, you can conclude that XYZ will pay ____________ interest rates on the new bonds that it will issue now.

higher FEEDBACK: As ratings of XYZ bonds have changed from AA to BBB, this implies that its grades have declined. So holding XYZ bonds now carries a higher default risk. Hence, XYZ will have to sell its bonds at a lower price now, which implies paying higher interest rates on the new bonds that it issues.

Many interest rates in the United States recently fell. Which of the following factors could not have been the cause? Correct!

increase in the demand for loanable funds FEEDBACK: The possible causes are an increase in supply of loanable funds and a decrease in demand for loanable funds. Either of these events would cause a surplus of loanable funds, putting pressure on interest rates to fall. An increase in demand for loanable funds would cause a shortage in the market for loanable funds. This would lead to the opposite effect: an increase in the interest rate.

Automobile manufacturers are planning to adopt a new technology that will increase their overall productivity by 30%. As a result, the amount of equilibrium investment will ________________ and equilibrium interest rate will _________________ in the loanable funds market.

increase; increase FEEDBACK: Consider an equilibrium situation. An increase in capital productivity will imply higher expected returns and thus an increase in the demand for loans. Since interest rates haven't changed, this will shift the demand curve of loanable funds to the right. At the new equilibrium point, both the investment level and the interest rate will be higher compared to the old equilibrium.

Assume you received a 4% raise in 2013. In addition, the CPI in 2013 was 240. Your real wage in 2013 ___________.

increased FEEDBACK: The inflation rate between 2012 and 2013 was 3.48%. Your raise was only 4%. Therefore, your real wage decreased by 0.3%.

Suppose Microsoft's new gaming system is a commercial success. All else being equal, the price of Microsoft stocks ____ and the Dow Jones Industrial Average _____.

increases; increases FEEDBACK: The commercial success of a new gaming system by Microsoft could cause an increase in demand for Microsoft stocks. The increase in demand raises the stock price, and, holding all else equal, the Dow Jones Industrial Average will increase as well.

Holding other factors constant, when baby boomers retire and they begin to switch from savings to consumption, which of the following is likely to increase?

interest rates FEEDBACK: As the largest demographic begins to retire and switches from savings to consumption, holding other factors constant, the supply of loanable funds to produce factories and roads and to provide protection will decrease. Interest rates will increase as a result.

Suppose the economies of China and India have begun to slow down very rapidly. Based on this scenario,

interest rates on loanable funds will increase. FEEDBACK: This decreases their citizens' income and wealth. In turn, these citizens decrease their savings in their country and also in the United States. The supply of loanable funds decreases as savings decrease. When the interest rate rises, the quantity of investment decreases. Firms will borrow less to build and expand their businesses. This decrease in investment means that future output, or GDP, will be lower in the United States.

Which component of GDP includes inventory changes?

investment FEEDBACK: Investment also includes all purchases by businesses that add to their inventories. For example, in preparation for the Christmas buying season, an electronics retailer will order more TVs, cameras, and computers. GDP rises when business inventories increase. GDP is calculated this way because we want to measure output in the period it is produced. Investment in inventory is just one more way that firms spend today to increase output in the future.

Suppose you watch a show about flowers on televison, and you bought a greenhouse in order to grow and sell flowers, then the greenhouse would be counted as __ when measuring GDP.

investment spending FEEDBACK: Investment is private spending on tools, plant, and equipment used to produce future output. Investment can be something as simple as the purchase of a shovel, a tractor, or a personal computer to help a small business produce goods and services for its customers. But investment also includes more complex endeavors, such as the construction of large factories. The greenhouse would be considered investment spending.

GDP per capita

is a measure of the total output of a country that takes into account GDP and divides it by the number of people in the country

A person is unemployed if he

is a member of the civilian labor force, out of work, and actively seeking work. FEEDBACK: The government counts somebody in the official statistics as unemployed if they are actively seeking work. Children under the age of 16 would not be counted as unemployed.

Gross Domestic Product (GDP)

is the total market value of all final goods and services produced in the economy in a given period of time, usually one year

Which of the following would be an example of someone experiencing cyclical unemployment?

landscapers laid off in response to drop in new housing construction during a recession FEEDBACK: Someone who changes jobs to be closer to their family would be considered frictional, because they would be in between jobs. The coal miners are structural due to changes in how the industry is run. The ski resort workers fall under seasonal. The landscapers are an example of cyclical because their unemployment is a result of a significant reduction in spending in the economy.

You purchased a Microsoft bond for $500, which promises to pay you 5% interest. If the market interest rate is currently 7% and you want to sell your bond, you can expect to receive

less than $500. FEEDBACK: We know that bond price and interest rate move in opposite directions. This implies that if interest rate in the market increases from 5% to 7%, the bond price will decrease. A 5% interest on a $500 bond implies an interest payment of $25 after its maturity. If the interest rate is now 7%, then in order to earn $25 interest, you can buy a bond with a price of less than $500.

In the market for loanable funds, _____ flow to borrowers from banks.

loans FEEDBACK: One way that borrowers finance investment is to borrow loanable funds from banks. This is indirect finance and takes the form of a loan.

Which of the following would not be a use for GDP data

measuring inflation FEEDBACK: GDP data is often used to measure economic growth, living standards, and business cycles. Even though Real GDP is adjusted for inflation, GDP is not necessarily used as a measure of inflation.

Your friend currently works as an accountant in a public accounting firm in a small town called Stillwater in Minnesota. He is offered a job in New York City with a salary of $95,000. Your friend calls you and tells you that he is excited about the new job offer, which gives him a raise from his current salary of $50,000. Based on your knowledge of economics, you think that your friend has

no reason to be excited unless his real salary in New York City is higher than that in Stillwater. FEEDBACK: More money doesn't mean that one can afford a better standard of living unless we calculate the real wage. In this case, your friend is experiencing money illusion, since he is irrationally interpreting nominal change in his salary as a real change.

Bonnie Austin, age 30, used to work part time in a local restaurant. This year she quit her job to take care of her five-month-old daughter. She is currently not looking for a job. The survey conducted by the Bureau of Labor Statistics today will count Bonnie as

not in the labor force. FEEDBACK: A person will be counted as unemployed only if he or she is actively seeking work. Stay-at-home parents are not counted as unemployed because they are not looking for work. Bonnie will not be counted a part of the official labor force until she decides to go back to work.

The business cycle consists of several stages or phases. Which is the accurate sequence?

peak, contraction, trough, expansion FEEDBACK: The peaks and troughs divide the business cycle into two phases: expansions and contractions. An economic expansion occurs from the bottom of a trough to the next peak, when economic activity is increasing. After a certain period, the economy enters a recession, or an economic contraction—the period extending from the peak downward to the trough. During this phase, economic activity is declining. During expansions, jobs are relatively easy to find and average income levels climb. During contractions, more people lose their jobs and income levels often fall.

Data on the natural rate of unemployment and actual employment are provided in the table below. Based on these numbers, the amount of cyclical unemployment in the economy is

positive FEEDBACK: Cyclical unemployment occurs during recessions, when actual unemployment is higher than the natural rate. During temporary expansions, with unemployment below the natural rate, cyclical unemployment is negative. If the actual unemployment rate is higher than the natural rate, cyclical unemployment must be positive. If actual unemployment is below the natural rate, cyclical unemployment must be negative. If the rates are the same, cyclical unemployment is zero.

Let's say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. If a ratings agency upgrades your bond rating to AA, how will this affect the price of your bond?

price will increase FEEDBACK: As with other goods, the increase in demand will lead to an increase in the price of the bond.

From an economist's perspective, which of the following would not be considered as investment spending?

purchase of shares in Wal Mart FEEDBACK: When most people hear the word investment, they think of savings, stocks, or bonds. But in macroeconomics investment refers to private spending on tools, plant and equipment used to produce future output. It also includes the building of a new home. Investment also includes purchases by businesses that add to their own inventories, and also counts products that are produced but not sold in the specific year.

An increase in the interest rate will result in an increase in the

quantity supplied of loanable funds and movement up along the supply curve of loanable funds. FEEDBACK: If the interest rate increases, this implies that the returns from loans will be greater in the future. Thus, an increase in interest rate will increase the amount that households are willing to save. This is the loanable-funds version of the law of supply. This will result in an increase in the quantity supplied of loanable funds and hence a movement up along the same supply curve of loanable funds to a higher quantity of savings.

Suppose nominal GDP in 1967 was $1 trillion and nominal GDP in 1977 was $2 trillion, The 1967 and 1977 price indexes were 100 and 250 respectively. Based on these numbers

real GDP decreased over the ten years. FEEDBACK:For 1967, we divide $1 trillion by 100, and then multiply by 100. Real GDP for 1967 is $10 billionFor 1977, we divide $2 trillion by 250, and then multiply by 100. Real GDP for 1977 is $8 billion. Comparing the 2 years, we can see that Real GDP has decreased.

If you wanted to compare economic well-being over time and across countries, the data you would use is:

real per capita GDP FEEDBACK: Per capita GDP allows us to compare the economic well-being across countries, but only during a particular year. Real GDP measures changes in output, adjusted for changes in prices over time. Countries with higher levels of real GDP from one time period to the next have grown economically. We therefore use real per capita GDP (real GDP divided by population) to see how economic well-being changes across countries over time.

If time preferences among U.S. consumers become stronger, then we can expect consumption of which of the following to decrease?

retirement plans FEEDBACK: An increase in time preferences means that consumers want goods and services sooner rather than later. Of the possible answers, retirement is difficult to receive sooner for younger people, while cars and vacations can be consumed sooner rather than later.

Many goods and services are illegally sold or legally sold but not reported to the government. If we increased efforts to count those goods and services, GDP would _____________.

rise FEEDBACK: GDP would increase as a result of these efforts, because the value of these unreported goods and services are currently not being calculated in GDP. For example, many babysitters do not report their income from babysitting jobs. If there were a way to include all the earned income from babysitters in the United States, GDP would increase.Also, any work that is unpaid, such as a family member caring for an older relative or a stay-at-home mom cooking meals for her family, is not counted in GDP, even though something of value is being produced. Efforts to count these goods and services would also increase GDP.

Scooby Dooby is looking for a job during the winter since Kings Island is closed until spring

seasonal

What is the term that describes a company's combining several home mortgages together and selling them as a new financial instrument?

securitization FEEDBACK: Securitization is the creation of a new security (financial instrument) by combining otherwise separate loan agreements. These new financial instruments caused problems when banks didn't fully understand the risks of widespread default, which ended up occurring significantly during the Great Recession. Overall, however, securitization can lead to lower interest rates for borrowers and new opportunities for lenders.

In exchange for savings, borrowers issue _____.

stocks and bonds FEEDBACK: When firms and governments directly finance capital, they borrow loanable funds from savers. In return, savers are issued stock and bonds from firms and bonds from governments.

Paul Bunyan lost his job as a lumberjack because the timber company he works for decided to just buy chainsaws

structural

Technological advancements in online banking, have led to its widespread use. As a result, many bank tellers have become unemployed. This is an example of __________ unemployment.

structural FEEDBACK: Structural unemployment is caused by changes in the industrial make-up or structure of the economy. Technological advancements in online banking have made the jobs of many bank tellers obsolete.

Which of the following best describes the relationship between imports and exports? Import spending is _____________ GDP and export spending is _______________ GDP.

subtracted from; added to FEEDBACK: Since exports are produced in your country they are counted as production. It doesn't matter who buys them. Imports are made elsewhere so you don't count these as part of your country's production.

A change in Americans' habits makes people less patient and more susceptible to instant gratification, causing their time preferences to become stronger.Therefore we can say in the loanable funds market:

supply curve shifts left FEEDBACK: In the loanable funds market, supply comes from savings. If people are more impatient, then they will prefer to consumer sooner rather than later. What does this imply about how much they will save?

There is a widespread fear that the Social Security retirement system will collapse. As a result, people begin to assume that they will need to pay their own way in retirement. Therefore in the loanable funds market:

supply curve shifts right FEEDBACK: If one retirement safety net isn't there, people will now have to consider creating another one. People are more likely to plan for the future. As time preferences decrease, the supply of loanable funds will increase.

Suppose that U.S. citizens suddenly become wealthier. As a result, the ____ for/of loanable funds ____, and borrowers are able to issue ____ stocks and bonds to finance capital improvements.

supply; increases; more FEEDBACK: Wealth is a factor that influences the supply of loanable funds. When wealth increases, the supply of loanable funds also increases. Borrowers are now able to obtain more loanable funds to make capital purchases.

Suppose the prices of homes go up by 10 % and the prices of concert tickets rise by 20%, which will have the larger impact on the CPI?

the change in house prices FEEDBACK: The average consumer spends a much larger portion of their income on housing as compared to concert tickets, so the increase in the price of homes will have a larger impact on the CPI.

Which of the following are not parts of a bond?

the default risk FEEDBACK: Bond prices are tied to the interest rate. However, how much people pay for bonds is determined in the bond market; the price of a bond is not fixed. As conditions surrounding the borrower change, things like the risk of default, the price, and interest rate can also. When you buy a bond, you buy the right to be repaid the par value on the date of maturity by the person or company whose name is on the bond.

Which of the following situations would increase the labor force participation rate?

the government increasing the retirement age FEEDBACK:If the retirement age increases, this increases the amount of people in the labor force. If more workers file for disability, this means that they leave the labor force, and this would lower the labor force participation rate. The same applies to more people going back to school full time and more people becoming stay at home parents.

Suppose a law is passed in Congress limiting the amount of ownership of foreign debt? Based on this we would expect

the interest rate on treasury bonds will increase FEEDBACK: The demand will decline for bonds since the new laws limit foreign demand. The price of treasury bonds will decline, because with a decrease in demand, the new equilibrium price will be lower. A lower price means that the government will sell each bond for fewer dollars, so it will be paying higher interest rates to the bond owner.

Even when inflation rates are high, you don't see vending machines on your school campus adjusting prices frequently. This is an example of

the menu costs of inflation. FEEDBACK: When overall prices change due to inflation, it becomes expensive for some businesses to print new menus, post new prices in their vending machines, etc. Thus, inflation imposes a direct cost on these firms. On the other hand, if these firms don't change their prices following inflation, then they have to continue to charge the lower prices and thus accept an indirect cost of inflation.

What does the "par value" of a bond represent?

the price of the bond at maturity FEEDBACK: The par value (sometimes called face value) of a bond is the value of the bond at maturity. In other words, it's the amount due to the holder of the bond at repayment. One needs to know the par value, along with the initial purchase price of the bond, to determine the interest rate.

Which of the following would be included in the U.S. GDP?

the sale of a song written by a Californian to a customer in Kansas FEEDBACK: A song that is sold is considered a sale of a good. It is included in the U.S. GDP. Bolts to be used in tires would be considered an intermediate good, so they are not included in GDP, since the value of the tires will be included in the final market value of the vehicle. The sale of financial assets are not included in GDP either.

Which of the following would be studied by a macroeconomist?

the unemployment rate FEEDBACK: Whether a local business decides to hire another worker is a microeconomic decision, as it involves one business. Microsoft's decision, even though it's considering expanding its business into a new country, is also related only to Microsoft. Since it's not aggregated, this would be considered by a microeconomist. Whether airline companies are colluding, while it involves multiple companies, is also studied by a microeconomist. It involves just one sector of the economy, the airline industry, and it doesn't involve aggregation across industries.

You work as a consultant to firms deciding whether to borrow funds to invest in new projects. For each of your clients listed in the table, suppose that you have determined the interest rate they can borrow at, and also the expected rate of return on their investment. Which of these firms should you tell to NOT go ahead with their investment?

the water park FEEDBACK: How do you know which projects are worth investing in? Compare the cost of borrowing against the expected rate of return. If a firm can earn more through the project than it will cost them in interest payments, then it is justified in going ahead with it.

Which of the following is not a component of Gross Domestic Product?

transfer payments FEEDBACK: Using the expenditure method, GDP is the sum of consumption, investment, government spending, and net exports. Transfer payments are payments the government makes to households not for consideration, such as welfare payments, social security, and unemployment insurance. They do not count as GDP, since they are not direct purchases of new goods and services.

Which of the following would NOT be studied by a macroeconomist?

why the price of lemonade decreased FEEDBACK: Macroeconomists study aggregated markets, so they would study inflation (the increase in all prices), the gross domestic product (aggregate output for an economy), and the exchange rates, which show the prices of currencies in other countries. The price of lemonade changing is dealing with just one market.

Which of the following would indirectly provide financing to borrowers?

your savings account in the local bank FEEDBACK: What does it mean to indirectly provide financing to a borrower? For this to happen you can't just lend the funds to the borrower. The funds must go through another organization before the borrower receives them. In other words, they go through an intermediary who matches savers to borrowers, such as banks. A savings account at your local bank and a financial intermediary such as a credit union are two such entities that provide money to borrowers as intermediaries