ECON 201 Test 2 Review

In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 237 for 2015. President Hoover's 1931 salary was equivalent to a 2015 salary of about a. $4,965. b. $1,169,408. c. $1,057,894. d. $16,080,001.

b. $1,169,408.

Which of the following provide benefits to society at large and not just to the person(s) who pursues it? a. Both technological knowledge that is a public good and education b. Technological knowledge that is a public good, but not education c. Education, but not technological knowledge that is a public good d. Neither education, nor technological knowledge that is a public good

a. Both technological knowledge that is a public good and education

Consider a closed economy. If national saving is greater than zero, which of the following must be true? a. Either public saving or private saving must be negative. b. Y - C - G > 0 c. Investment is negative. d. Y - C- G < 0

b. Y - C - G > 0

51. Which of the following is the correct formula for calculating the consumer price index? a. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 2] × 100 b. [(price of basket of goods and services in current year/price of basket in base year)]× 100 c. [(price of basket of goods and services in current year − price of basket in base year)/price of basket in base year] × 100 d. [(price of basket of goods and services in base year/price of basket in current year)] × 100

b. [(price of basket of goods and services in current year/price of basket in base year)]× 100

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is a. a mutual fund. b. an insurance company. c. a diversified company. d. an equity-financed company.

b. an insurance company

Substitution bias

consumers may change their purchasing habits away from goods that have increased in price

43. The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from a. 80 to 100. b. 40 to 80. c. 10 to 20. d. 1 to 10.

d. 1 to 10

Which of the following is an explanation for the existence of frictional unemployment? a. Efficiency wages b. Minimum-wage laws c. Unions d. Job search

d. Job search

Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills is called a. the natural rate of unemployment b. cyclical unemployment c. structural unemployment d. frictional unemployment

d. frictional unemployment

A policy that increases saving will a. worsen economic growth, but improve health outcomes. b. worsen economic growth and health outcomes. c. improve economic growth but worsen health outcomes. d. improve economic growth and health outcomes.

d. improve economic growth and health outcomes.

A larger budget deficit _________ the interest rate and ____________ investment

increases; reduces

The catch-up effect refers to the idea that

it is easier for a country to grow fast and so catch-up if it starts out relatively poor

The theory of efficiency wages explains why

it may be in the best interest of firms to offer wages that are above the equilibrium level

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

$800

frictional unemployment

unemployment that occurs when people take time to find a job

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

Scenario 26-1. Assume the following information for an imaginary, closed economy. ​ GDP $170,000 Taxes $23,000 Government Purchases $31,000 National Saving $17,000 For this economy, investment amounts to

$17,000

The following table presents information about a closed economy whose market for loanable funds in equilibrium. GDP: 7.3 trillion Consumer Spending: 5.2 trillion Taxes Minus Transfers: 1.1 trillion Government Purchases: 0.7 trillion The quantity of loanable funds demanded is

1.4 trillion

Suppose that the adult population in the country of Atlantis is 140 million. If 90 million people are employed and 10 million are unemployed, then

40 million are not in the labor force

Income bias

Interest groups that represent the upper-middle to upper classes are much more likely to form. Interest groups that represent the lower-middle to lower class are less likely to form.

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which contract is better at 7% interest?

Second

Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?

Substitution bias and introduction of new goods

What basket of goods and services is used to construct the CPI?

The goods and services that are typically bought by consumers are determined by government surveys

49. What would happen, all else equal, in the market for loanable funds if the government were to decrease the tax rate on interest income?

There would be an increase in the equilibrium quantity of loanable funds.

On which of these bonds is the prospect of default most likely? a. A junk bond b. A municipal bond c. A U.S. government bond d. A corporate bond issued by Proctor & Gamble Corporation

a. A junk bond

Other things the same, which of the following would increase productivity? a. An increase in either human or physical capital b. An increase in human capital but not an increase in physical capital c. An increase in physical capital but not an increase in human capital d. Neither an increase in human capital nor an increase in physical capital

a. An increase in either human or physical capital

Which of the following can be measured by the level of real GDP per person? a. Productivity and the standard of living b. Productivity but not the standard of living c. The standard of living but not productivity d. Neither the standard of living nor productivity

a. Productivity and the standard of living

Cole, a financial advisor, has told his clients the following things. Which of his statements is NOT correct? a. "U.S government bonds generally pay a higher rate of interest than corporate bonds." b. "The interest received on corporate bonds is taxable." c. "U.S. government bonds have the lowest default risk." d. "If you purchase a municipal bond, you can sell it before it matures"

a. U.S. government bonds generally pay a higher rate of interest than corporate bonds

Which of the following counts as part of the supply of loanable funds? a. Bank deposits and purchases of bonds b. Bank deposits but not purchases of. bonds c. Purchases of bonds but not bank deposits d. Neither purchases of bonds nor bank deposits

a. bank deposits and purchases of bonds

Crowding out occurs when investment declines because a budget a. deficit makes interest rates rise. b. deficit makes interest rates fall. c. surplus makes interest rates rise. d. surplus makes interest rates fall.

a. deficit makes interest rates rise.

Other things being constant, when a firm sells new shares of stock, the a. supply of the stock increases and the price decreases. b. supply of the stock decreases and the price increases. c. demand for the stock increases and the price increases. d. demand for the stock decreases and the price decreases.

a. supply of the stock increases and the price decreases.

46. Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than a. $8,225.06. b. $7,920.94. c. $7,672.58. d. $6,998.98.

b. $7,920.94.

Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year. 40. Refer to Scenario 24-1. Mia's son current year income in 1944 dollars is a. $513,000. b. $244,604. c. $298,033. d. $19,025

b. 244,604

Of the following groups, who is eligible for unemployment insurance benefits? a. The unemployed quit their jobs b. The unemployed who were laid off because their previous employers no longer needed their skills c. The unemployed who were fired for cause d. The unemployed who just entered the labor force

b. The unemployed who were laid off because their previous employers no longer needed their skills

53. Which of the following is a certificate of indebtedness? a. Both stocks and bonds b. Stocks but not bonds c. Bonds but not stocks d. Neither stocks nor bonds

c. Bonds but not stocks

Suppose that a large number of people who used to work or seek work no longer do either. Other things the same, this makes a. the number of people unemployed rise but does not change the labor force. b. the number of people unemployed rise but makes the labor force fall. c. both the number of people unemployed and in the labor force fall. d. the number of people unemployed fall but does not change the labor force

c. both the number of people unemployed and in the labor force fall

44. Daniel puts $9,000 into each of two different assets. The first asset pays 20 percent interest and the second pays 10 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 7 years? a. $4,500 b. $10,800 c. $15,300 d. $18,000

d. $18,000

50. Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company. a. Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. b. Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. c. Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. d. Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

d. Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Which of the following statements is correct about the relationship between inflation and interest rates? a. There is no relationship between inflation and interest rates. b. The interest rate is determined by the rate of inflation. c. In order to fully understand inflation, we need to know how to correct for the effects of interest rates. d. In order to fully understand interest rates, we need to know how to correct for the effects of inflation.

d. In order to fully understand interest rates, we need to know how to correct for the effects of inflation.

If the price of Italian shoes imported into the United States increases, then a. both the GDP deflator and the consumer price index will increase. b. neither the GDP deflator nor the consumer price index will increase. c. the GDP deflator will increase, but the consumer price index will not increase. d. the consumer price index will increase, but the GDP deflator will not increase.

d. the consumer price index will increase, but the GDP deflator will not increase.

The future value of a deposit in a savings account will be larger a. the smaller the risk is b. the lower the interest rate is. c. the smaller the initial deposit is d. the longer a person waits to withdraw the funds

d. the longer a person waits to withdraw the funds

A shift of the demand curve from D1 to D2 (right to left) is called a ___________ in the demand for loanable funds

decrease

A shift of the supply curve from S1 to S2 (from right to left) is called a ___________ in the _________ of loanable funds

decrease; supply

Unmeasured Quality Change (CPI)

improvements in the quality of goods in the basket increase the value of each dollar; CPI overstates increases in the cost of living

increase in the government's budget surplus means public saving is

positive and increasing

the natural rate of unemployment

the unemployment rate that arises from the effects of frictional plus structural unemployment

Introduction of new goods

When a new good is introduced, consumers have more variety from which to choose, and this in turn reduces the cost of maintaining the same level of economic well-being

45. Which of the following statements is correct? a. Human capital per worker is a determinant of productivity. b. A nation cannot be highly productive in producing goods and services without abundant quantities of natural resources. c. Human capital and technological knowledge are the same thing. d. All technological knowledge is proprietary.

a. Human capital per worker is a determinant of productivity.

54. Refer to Table 28-1. How many in the sample are unemployed? Allen: Unpaid stay-at-home dad. Has not looked for a job in several years Ben: College president Allison: Part-time welder. Actively looking for full-time work Brittany: Self-employed full-time wedding singer Cathy: Full-time physician's assistant Calvin: Retired finance professor. Last applied for work 10 weeks ago Diane: Laid-off fork-lift operator expecting to be recalled David: Works for a bicycle store. Age 70 Evelyn: Manager of health food store Eli: Museum guard. Was not at work last week due to illness Flora: Has never been employed. Looked for a job last week Frank: Fired from job as an investment banker. Last looked for work three weeks ago a. 5 b. 4 c. 3 d. 2

d. 2

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves