Exam #3
Which of the following is part of mandatory outlays? A. Social Security B. defense spending C.government employee salaries D. infrastructure maintenance
Social Security and Medicare outlays: are funded by income tax. have increased in size recently. are used to make sure working-age adults stay healthy. are part of discretionary spending.
Why is a secondary market for securities important? A. It increases the value of securities. B. It protects buyers from decreases in the value of the security. C. It decreases the incentive for people to sell and devalue securities. D. It encourages firms to sell only to the most responsible buyers.
Correct answer: A, It increases the value of securities. Securities are more valuable when people know they can resell them someday. Imagine if before buying an asset, you were told you could never sell it. You would only buy it for a very low price, since it would be a risky purchase.
What is true about equilibrium in the market for loanable funds? A. Savings = Investment B. Interest rate = Inflation C. Investment = Interest Rate D. Savings = GDP
Correct answer: A, Savings = Investment In equilibrium, quantity demanded = quantity supplied. In the loanable funds market, quantity demanded is investment (money borrowed) and quantity supplied is savings.
How does modern growth theory model technology and technological change? A. Technology change is endogenous and depends on factors that currently exist in the economy. B. Technology changes faster in less-developed countries and convergence will occur. C. Technological advances occur at faster rates with a stronger government. D. Technology grows exponentially.
Correct answer: A, Technology change is endogenous and depends on factors that currently exist in the economy. Modern growth theory realizes that institutions have an effect on how technological progress and innovation occur. Thus, technology is now endogenous, meaning it depends on the current state of an economy
When economists use the phrase "economic growth," what are they referring to? A. percentage changes in real GDP per capita B. nominal GDP growth C. real GDP growth D. average GDP across nations
Correct answer: A, percentage changes in real GDP per capita It's important to distinguish between growth and per capita growth.
Income taxes in the United States can be described as: A. progressive. B. regressive. C. flat. D. U-shaped.
Correct answer: A, progressive. Progressive taxation means that higher incomes are charged higher tax rates. Your first few dollars are taxed little (if at all), but marginal dollars that you earn at higher income levels are taxed at higher rates.
Land, labor, and capital are considered A. resources. B. technology. C. institutions. D. investments.
Correct answer: A, resources. Resources are the inputs used to produce goods and services. Resources are in important factor (but not the only factor) which affects economic growth.
You buy a $10,000 Microsoft bond for $7,500; what is your rate of return after 1 year? A. 50% B. 33% C. 75% D. 25%
Correct answer: B, 33% Remind students that the rate of return (or interest rate) is calculated as: Interest rate = R = (face value - initial price) / initial price So, in this example: 33% = ($10,000 - $7,500) / $7,500
Which is an example of indirect finance? A. Ashley closes her account at Green Bank. B. Ethan deposits money in Blue Bank, and Jenna takes out a loan from Blue Bank. C. Lindsay buys a bond from a large pharmaceutical company. D. Derek buys 100 shares of stock at the initial public offering of a company.
Correct answer: B, Ethan deposits money in Blue Bank, and Jenna takes out a loan from Blue Bank. Indirect finance is when banks act as intermediaries between lenders and borrowers. Ethan did not directly loan his money to Jenna, but the bank needs savers like Ethan so it can lend money to Jenna.
How will an increase in time preferences affect the loanable funds market? There will be a(n): A. increase in the supply of loanable funds. B. decrease in the supply of loanable funds. C. increase in the demand of loanable funds. D. decrease in the demand of loanable funds
Correct answer: B, decrease in the supply of loanable funds. An increase in time preferences means that people are less patient (they are more impatient). This means that consumption now is much more important and later is not considered. Thus, today's spending will increase, and today's savings will decrease. The decrease in savings causes the decrease in supply of loanable funds.
Social Security and Medicare outlays: are funded by income tax. have increased in size recently. are used to make sure working-age adults stay healthy. are part of discretionary spending.
Correct answer: B, have increased in size recently. The reason for the increase in the size of outlays is due to a change in demographics. Our society is aging, boomers are retiring, and people are living longer. Why not (a)? Social Security and Medicare are forms of payroll taxes, but they are separate from regular "income tax."
The period in time in which per capita GDP for the world started to increase faster than it had in the rest of history began during what years? A. 800s B. 1490s C. 1800s D. 1950s
Correct answer: C, 1800s The 1800s and the Industrial Revolution were the time period of explosive economic growth (compared to the rest of history). This growth rate continues today.
Which of the following is FALSE regarding deficits? A. Deficits grow when outlays increase. B. Deficits tend to grow during recessions. C. Deficits grow when revenues increase. D. Recent U.S. budget deficits are large in a historical context.
Correct answer: C, Deficits grow when revenues increase. All other things being equal, a deficit would shrink if revenues increased.
Why are the proper institutions important for creating economic growth? A. People only work for higher standards of living when they are required to do so. B. Institutions spread the wealth around so people don't have to work as hard. C. Institutions create the incentive structure in which growth can occur. D. Institutions force people to increase productivity.
Correct answer: C, Institutions create the incentive structure in which growth can occur. With the right institutions, people are given the incentive to innovate and increase production.
Why is technological advancement important for economic growth? A. It increases leisure time. B. It increases prices, helping producers. C. It allows us to produce more output while using fewer resources. D. It allows us to sustain a population while consuming fewer amounts of goods and services.
Correct answer: C, It allows us to produce more output while using fewer resources. When we can make MORE output with LESS capital, labor, and land, growth occurs and quality of life improves. In addition, you could imagine that inputs can go on to produce other goods that we never produced before because fewer goods are needed to produce certain goods.
In the second Solow model, how were technology advances modeled? A. Technology depended on institutions in the country. B. Technology was fixed over time. C. Technology shocks were considered random and exogenous. D. Technology grew at a steady rate for most countries.
Correct answer: C, Technology shocks were considered random and exogenous. If prices and wages both change at the same rate, nothing changes in real terms. However, they both went up, so that is a nominal (nonadjusted) increase. Exogenous = occurs from the outside.
Which of the following is true? A. The United States generally has a budget surplus. B. National debt is the same as deficit. C. The national debt is the sum of yearly budget deficits. D. A deficit will occur when revenues exceed outlays.
Correct answer: C, The national debt is the sum of yearly budget deficits. Deficits occur when outlays > revenue. The sum of deficits is the national debt.
The original Solow model focused on what as the main source of economic growth? A. labor B. education C. capital D. effective government
Correct answer: C, capital The original model basically said that for growth to occur, capital investment is necessary.
If the annual growth rate of an economy is 7%, how long will it take for income to double? A. 5 years B. 6 years C. 8 years D. 10 years
Correct answer: D, 10 years This illustrates the Rule of 70; take 70 divided by the growth rate percent to see how long it takes for the variable growing at that rate to double its original value. When explaining the rule of 70 to students, make sure to point out that it is an approximation.
What role do banks play in financial markets? A. Banks affect the money supply by minting new currencies B. Banks set the interest rate C. Banks sell stocks to the government D. Banks act as financial intermediaries between borrowers and savers
Correct answer: D, Banks act as financial intermediaries between borrowers and savers Banks help connect borrowers (demanders) and savers (suppliers) of funds. This helps encourage trade and keeps the financial markets active.
Where does the supply of funds in the loanable funds market come from? A. Banks printing money B. Firms borrowing money for investment C. Government tax revenues from citizens D. Consumers saving their money at banks
Correct answer: D, Consumers saving their money at banks In this market, consumers supply funds by saving, and firms (and other borrowers) demand funds to borrow.
In the basic consumption-smoothing model, when are consumers dissaving? A. During prime earning years B. In their 20s and 30s C. Very early in life D. Late in life
Correct answer: D, Late in life Dissaving means spending more then you're earning (without borrowing). For example, a retiree spending his retirement savings.
What is an advantage of a firm selling stocks instead of selling bonds? A. Bonds are usually sold by new companies, and stocks make a firm seem established. B. Stocks are only sold once at the initial public offering. C. Firms can manipulate stock prices easily. D. Stocks don't burden the firm with future debts that must be paid.
Correct answer: D, Stocks don't burden the firm with future debts that must be paid. With a bond, you have to pay it back at some later date. You don't have to do this with a stock. Rather, the stock owner is now part owner of the company.
According to the idea of diminishing marginal product, where will capital have the highest marginal productivity? A. in countries with a large amount of labor B. in countries with a small amount of labor C. in countries with a large amount of capital D. in countries with a small amount of capital
Correct answer: D, in countries with a small amount of capital Diminishing MP says that if there is already a large amount of an input, additional inputs of that type will have lower MP. Adding capital where there is very little or no capital will greatly increase productivity at the margin.
The interest rate on a bond is: A. paid by the buyer to the seller. B. equal to the dollar price of the bond adjusted for inflation. C. directly related to the dollar price of the bond. D. inversely related to the dollar price of the bond.
Correct answer: D, inversely related to the dollar price of the bond. Suppose there is a $1,000 bond. If you buy it at a low price of $750, the interest rate is high at 33 percent. If you buy it at a high price of $900, the interest rate is lower at 11 percent. Lower priced (with a higher interest rate) bonds are usually riskier.
The interest rate can be thought of as: A. the rate at which banks loan funds. B. the return on a capital investment. C. the real rate of inflation. D. the price of money.
Correct answer: D, the price of money. Savers receive an interest rate as payment for lending their funds to borrowers. Borrowers pay an interest rate when they take out a loan.
