econ midterm 2

By "eyeballing" several graphs, it appears that the CPI index today is about 245 and the CPI index for 1971 is about 42. Thus, as a measure of inflation, this would indicate that inflation has increased over this time-frame by about:

580%

Nina wants to buy and operate an ice-cream truck but does not have the financial resources to start the business. She borrows $5,000 from Max to whom she promises to pay an interest rate of 7%, and gets another $10,000 from David to whom she promises a third of her profits. What best describes the situation?

David is a stockholder and Max is a bondholder.

The male labor participation rate in the U.S. has been ________ over the past fifty years while the female labor participation rate has been __________ over the past fifty years

Decreasing, Increasing

True or False: An increase in the price of farm machinery would increase both the CPI and the GDP deflator.

False

True or False: The difference between commodity money and fiat money is that one has inherent value and the other is money that is used to buy an Italian car.

False

You agree to borrow money at a fixed rate of interest for one year from the local bank. During that year, inflation was higher than you or the bank expected. Did the banker gain what he expected to on this loan?

In economic terms, the banker earned less than he planned. In accounting terms, the banker earned the interest on the loan.

According to the quantity theory of money and the Fischer effect, if the central bank increases the rate of money growth...

Inflation and the nominal interest rate both increase

per capita output is an important "yardstick" of economic growth because

It removes that portion of the economic growth that is due to population growth.

According to the Fischer effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate?

The real interest rate stays the same and the nominal interest rate goes up

True or False: Each of us are in the habit of managing loans on a regular basis because whenever you have paper money in your wallet you hold a loan between you and the Fed.

True

True or False: Using the data from problem 7, the labor force was: 155,654,000

True

Which bond would you expect to pay a higher interest rate?

a bond that repays the principle in 2040

Suppose Intel is considering building a new computer chip-making factory. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel's decision about whether to build the factory? a. The increase in interest rates could increase Marginal Costs above Marginal Benefits b. The increase in interest rates could increase Marginal Benefits above Marginal Costs c. The increase in interest rates would mean that Intel would have additional costs.

both a and c

If Intel has enough funds of its own to pay for the new factory without borrowing, would an increase in interest rates still affect Intel's decision about whether to build the new factory? a. No, because Intel does not need to borrow the funds. b. Yes, because Intel's opportunity costs for the use of their funds has increased. c. If Intel can make more money loaning out its own funds then if they build the new factory, they should.

both b and c

If inflation turns out to be less than everyone expects, who benefits?

creditors

When the government runs a budget deficit it causes interest rates to rise which causes private investment to fall. The term for this is:

crowding out

We tend not to like inflation because:

nflation distorts relative prices and quality which makes it difficult for markets to allocate resources to the best use. Inflation distorts taxes such as capital gains, income taxes, and interest income taxes. Inflation causes an arbitrary redistribution of wealth.

According to the principle of money neutrality, ___________ variables are affected by changes in the quantity of money.

nominal

A change in the tax laws to encourage Americans to save more would shift the supply of loanable funds to the ______. As a result, the equilibrium interest rate would _____.

right, decrease

If a popular weekly podcast on personal finance convinces more Americans that they should save more for retirement, the _____ curve for loanable funds would shift, driving the equilibrium interest rate _______.

supply, down

True or False: When the government has a budget surplus, it causes an increase supply of loanable funds which leads to lower interest rates which stimulates investment.

true

According to the quantity theory of money, which variable in the quantity equation (M x V = P x Y) is the most stable over long periods of time?

velocity

Per one of the articles discussed in class regarding California raising the minimum wage: "According to calculations by Jeffrey Clemens, an economics professor at the University of California, San Diego, "The key question is what fraction of these workers will be lifted to the new minimum and what fraction will lose their jobs"." "One leading economist on minimum wage issues said an increase from $10 to $15 would reduce employment [increase unemployment] among the least-skilled workers by at least 5 to 10 percent."

"According to calculations by Jeffrey Clemens, an economics professor at the University of California, San Diego, "The key question is what fraction of these workers will be lifted to the new minimum and what fraction will lose their jobs"." "One leading economist on minimum wage issues said an increase from $10 to $15 would reduce employment [increase unemployment] among the least-skilled workers by at least 5 to 10 percent."

In 1971, gasoline was about 40 cents per gallon. Using your answer in problem 7 (which means you better double check your answer for problem 7), what would a gallon of gasoline in 1971 cost in today's dollars?

$2.33

Per figure 34.1 of your textbook, the size of M2 compared to M1 is about

4 times larger

The money supply includes all of the following except: Paper currency such as a dollar bill Metal coins such as a penny Lines of credit accessible with credit cards Bank balances accessible with debit cards

Lines of credit accessible with credit cards

In general, income is the money earned by providing labor or by lending money, while capital gains are the realized profit from the sale of an asset. Which of the following is not a capital gain? Money gains realized from the sale of a house Money gains realized from the sale of stock Money gains realized by earning interest on money that was deposited into the bank Money gains realized from the sale of an antique

Money gains realized by earning interest on money that was deposited into the bank

The difference between currency and money is:

Money includes currency and some other things like checking accounts

Which is one of the three problems in measuring the cost of living? Quantifiable quality change Substitution bias Introduction of old goods Confusion in the general population between the CPI and the PPI

Substitution bias

what is secular growth

The average long-term general increase in the output of the economy

Which bond would you expect to pay a lower interest rate? A bond from the U.S. federal government A bond from the State of Florida A bond from the state of confusion Since the economy in the State of Florida is as diverse as the U.S. economy, they should be the same

A bond from the US federal government

Which type of worker is more likely to be affected by cyclical rather than structural unemployment? A carpenter that works housing construction A hospital administrator A nuclear power plant operator An economics professor

A carpenter that works housing construction

The two general categories that trigger a downturn in the economy (a recession) are:

Unnatural causes and Natural causes

If one looks at the two charts in Figure 29.3 of your textbook (it's the same for both the 21st edition and 22nd edition) entitled "Actual and Potential Real GDP and the Unemployment Rate", what kind of observation could be made:

When the Unemployment Rate decreases, Real GDP increases.

If the business community becomes more optimistic about the profitability of capital (and thus wishes to purchase new manufacturing equipment), the _____ curve for loanable funds would shift, driving the equilibrium interest rate ______.

demand, up

If an electronics company lowers the price of fingerprint recognition equipment it sells the FBI, its price reduction will affect:

the gdp deflator but not the cpi

If the Fed decreases the supply of money (such as by an open-market sale of government bonds), then the supply curve (representing the supply of money) shifts

to the left and the value of money increases

The producer price index and the consumer price index measures approximately the same economic phenomena as:

gdp deflator

per capita output is

output of a country divided by the total population

The quantity theory of money states that if the money supply is reduced, while velocity and real GDP are held constant, what must also reduce to balance the equation?

price level

The classical economics principle of money neutrality states that changes in the money supply do not influence _________ variables and is thought most applicable in the _____ run. That is why we tend to see variables s

real, long

If the passage of an investment tax credit encouraged firms to invest more, this would shift the demand curve for loanable funds to the ______. As a result, the equilibrium interest rate would ______.

right, increase

In regard to the market for loanable funds, which is not true? As interest rate rises, the quantity demanded declines As interest rate rises, the quantity supplied increases The demand curve for loanable funds slopes upward The supply curve for loanable funds slopes upward

the demand curve for loanable funds slopes upwards

Most economists believe that minimum wage laws create unemployment. This is because:

- Compared to the equilibrium level, it causes a higher quantity of labor to be supplied while causing a smaller quantity of labor to be demanded. -The demand for unskilled labor tends to be elastic. (Elastic means that a small price change causes a big change in quantity.)

Which is not true? Stocks are bought and sold on stock exchanges (like the NYSE) Stock prices are determined by the principle of supply and demand A stock index (like the S&P 500) is an average of a group of stock prices A stock is a loan to a company

A stock is a loan to a company

Which of the following is not true?: Even if the economy is on a steady long-run growth path, there are inevitably fluctuations around that trend. These fluctuations around the trend are called business cycles. A business cycle is a short-run, temporary upward or downward movement of economic activity, or real GDP, that occurs around the growth trend. Business cycles are a recent phenomenon on the U.S. economic scene.

Business cycles are a recent phenomenon on the U.S. economic scene.

Which has a greater effect on the consumer price index (CPI), a 10 percent increase in the price of chicken or a ten percent increase in the price of a fighter jet?

Chicken, because chicken is included in the government's basket of goods of the typical consumer and a fighter jet is not.

Which of the following is not true? Under-employed workers are counted as employed. Discouraged workers (those that have given up looking for work) are counted as part of the labor force. The government's calculation of the unemployment rate treats part time workers and full time workers the same. None of the above

Discouraged workers (those that have given up looking for work) are counted as part of the labor force.

Which of the following is not true? Fort Knox is where we store the gold that backs the US Dollar. Nothing physical like gold or silver "backs" the US Dollar. Money is "backed" by a belief that the government will keep the value of a dollar stable so that it can reliably be used in commerce. In the U.S., we rely on two tools to stabilize the value of the dollar: monetary policy and fiscal policy

Fort Knox is where we store the gold that backs the US Dollar.

If the price of a Chevrolet Camaro (a car produced in the U.S.) increases, which is not affected?

PPI CPI, GDP deflator are affected

People hold currency for three reasons, one of which is the transactions motive (i.e., the need to conduct a transaction using currency). Of the following, which would have the smallest transactions motive? A drug dealer A gambling bookie The purchasing department of IRSC A political campaign fundraiser

The purchasing department of IRSC

The explanation of how the price level is determined and why it changes over time is called the quantity theory of money. According to this theory

The quantity of money available in the economy determines the price level The growth rate in the quantity of money available determines the inflation rate

You agree to borrow money at a fixed rate of interest for one year from the local bank. During that year, inflation was higher than you or the bank expected. How did this affect the real interest rate?

The real interest rate was lower

Changes in productivity and changes in wages determine whether inflation may be coming. As such,

There will be no inflationary pressures if wages and productivity increase at the same rate

To balance the equation for the quantity of money theory, if there is an increase in the quantity of money, then: There would have to be a decrease in the velocity of money There would have to be an increase in the price levels (inflation) There would have to be an increase in the quantity of output There would have to be any combination of the above

There would have to be any combination of the above

Consider the following statement: One difference between the GDP deflator and the CPI is that the CPI is comprised of a fixed basket of goods while the goods and services measured by the GDP deflator changes all the time to reflect those that are currently produced.

This is true

True or False: The Bureau of Labor Statistics announced that in January 2013, of all adult Americans, 143,322,000 were employed, 12,332,000 were unemployed, and 89,008,000 were not in the labor force. Based on this, the adult population was 244,662,000.

True

True or False: Using the data from problem 7, the labor force participation rate was: 63.6%

True

True or False: Using the data from problem 7, the unemployment rate was: 7.9%

True

You deposit $4,000 in a savings account, and a year later you have $4,400. Meanwhile the CPI index rises from 200 to 206. In this case, the nominal interest rate is ___ percent, and the real interest rate is _____ percent.

10,7

Which would you expect to pay the highest interest rate? A bond from a large, established, diversified corporation such as Coca-Cola A bond from a startup software company that is operated from someone's garage A diverse portfolio of a mutual fund of municipal bonds They should be the same

A bond from a startup software company that is operated from someone's garage

Which type of worker is likely to be affected by structural rather than cyclical unemployment? A worker involved in the manufacturing of gasoline engines. A newspaper reporter A welder on a manufacturing assembly line

All of the above to varying degrees

An increase in the price of aluminum would increase the CPI, the PPI, and the GDP deflator because:

Aluminum is purchased by households for use in the kitchen Aluminum is purchased by businesses for use in manufacturing Aluminum is contained in many final goods sold by businesses.

Which of the following is false? - Cyclical unemployment is the deviation of unemployment from its natural rate usually during a business cycle - The natural rate of unemployment is the normal level of unemployment around which the unemployment rate fluctuates - If you are a full time student but have a part time job, you are considered part of the labor force - Structural unemployment is long-term unemployment that occurs because of changes in the structure of the economy and cannot be resolved by macro policies

If you are a full time student but have a part time job, you are considered part of the labor force

According to the quantity theory of money, we expect that the value of money (like the value of all goods and services in a competitive market) is determined by supply and demand. Therefore, what is the effect of an increase in the quantity of money?

It reduces the value of the money

The difference between nominal interest rate and real interest rate is:

Nominal interest rate equals real interest rate plus inflation

Which of the following is true or most true? - Unemployment occurs when people are looking for a job and cannot find one. - The unemployment rate is the percentage of people in the economy who are both able to and looking for work but who cannot find jobs. - Cyclical unemployment is unemployment resulting from fluctuations in economic activity. - Structural unemployment is unemployment caused by a change in the institutional structure of an economy or by an economic restructuring making some skills obsolete.

all of the above

In the news articles discussed in class regarding increasing the minimum wage and its impact on automation...

- The February 2021 Congressional Budget Office study estimated that raising the federal minimum wage to $15 an would cause employment to be reduced (or unemployment to be increased) by 1.4 million workers. - The same Congressional Budget Office study said that increasing the minimum wage would increase job losses and that "Young, less educated people would account for a disproportionate share of those reductions in employment. - The same CBO study stated "When the cost of employing low-wage workers goes up, the relative cost of ... investing in machines and technology goes down. Some employers would therefore respond to a higher minimum wage by shifting toward those substitutes and reducing their employment of low-wage workers. An increase in the minimum wage will result in less workers and more automation in restaurants."

Which of the following is not true?: The top of a business cycle is called the peak. A recession is generally considered to be a decline in real output that persists for more than two consecutive quarters of a year. The bottom of a recession or depression is called the trough. An expansion is an upturn that lasts at least two consecutive years.

An expansion is an upturn that lasts at least two consecutive years.

As discussed in this chapter, investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit. Why would you conclude that it's difficult to implement both of these policies at the same time?

Because doing both at the same time results in less money that the government can spend in the short term

Which of the following is not true? Banks and other financial intermediaries help make the market for loanable funds fluid and ease transactions by helping match one person's savings with another person's investment. The market for loanable funds works like any other competitive market with many buyers and many sellers. The market for loanable funds is comprised of those who want to save (the suppliers of funds) and those who want to borrow (the demanders of funds) Where the supply curve for loanable funds and the demand curve for loanable funds intersect determines the size of the budget deficit.

Where the supply curve for loanable funds and the demand curve for loanable funds intersect determines the size of the budget deficit.

Hyperinflation tends to occur when the government runs a large budget _______, which the central bank finances with a substantial monetary _________.

deficit, expansion