Test 2 Econ.

Shifts in Savings Curve (+/-) 1. change in national savings 2. change in government budget 3. change in household saving

+, +, + (note that negative occurs with budget deficit)

Shifts in Investment Curve (+/-) 1 Change in VMP of capital 2. Change in price of production units 3. change in price of capital goods 4. change in technology 5. change in taxes paid by firms 6. change in relative price of a firm's output

+, - , - , +, -, +

Money has three principal 1. 2. 3.

1. medium of exchange 2. Unit of account 3. store of value

When the central bank buys $1,000,000 worth of government bonds from the public, the money supply A) increases by more than $1,000,000. B) increases by $1,000,000. C) increases by less than $1,000,000. D) decreases by $1,000,000.

A

Which of the following is an example of the life-cycle motive for saving? A)Leslie puts $400 per month in her 401(k)-retirement account. B)Ann sets aside $200 per month in case she has to pay for a new roof for her house. C)Gerry and Terry put $2,000,000 in a trust fund that will go to their children when they die. D)Tom keeps $15,000 in a money market account to pay expenses in case he loses his job.

A

State whether each of the following is a capital inflow or capital outflow from the perspective of the U.S. A)When a Peruvian buys a U.S. government bond B)When an American buys stock in a French company C)When the Chinese government buys bonds issued by an American company

A) Capital Outflow B) Capital Outflow C) Capital Inflow

Y = C + I + G +NX Consumption Expenditure + Investment spending + government purchases of goods and services + Net Exports What is Y?

Aggregate income

Carlos purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is_____, the coupon rate is _____, and the term of this bond is _____. A) $400; 40 percent; four years B) $10,000; 4 percent; four years C) $10,000; $400; 4 percent D) $10,400; 4 percent; four years

B

If the United States has a $300 billion net capital inflow, then there must be a A) trade surplus of $300 billion. B) trade deficit of $300 billion. C) trade surplus of $600 billion. D) net capital outflow of $300 billion.

B

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ______ net capital inflows and ______ the equilibrium domestic real interest rate. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

B

Private saving equals ____; public saving equals ______; national saving equals ____. A) 100; 200; 100 B) 100; 100; 200 C) 200; 100; 300 D) 200; 100; 500

B

Which of the following events will increase the domestic real interest rate in an open economy? A) An increase in domestic saving B) A decrease in the domestic saving C) A decrease in the profitability of capital investments in the domestic economy D) An increase in net capital inflow

B

Occurs when government spending equals net tax receipts

Balanced budget

What occurs when customers believe one or more banks might be bankrupt

Banking Panics

Trading good directly

Barter

An increase in net taxes (taxes paid by the private sector to the government less transfer payments and interest payments made by the government to the private sector) will A)increase private saving. B)decrease public saving. C)increase public saving. D)reduce investment in new capital equipment.

C

At each value of the domestic interest rate, decreases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows. A) increase; increase; increase B) increase; increase; decrease C) increase; decrease; increase D) decrease; decrease; decrease

C

If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving ______ and public saving ______. A) increases; increases B) increases; decreases C) does not change; increases D) does not change; decreases

C

Suppose that Jordan wins $100,000 in the lottery. If he uses that money to pay off his mortgage, his wealth would_____; if he puts that money in his checking account, his wealth would_____. A. increase by $100,000; not change B. not change; increase by $100,000 C.increase by $100,000; increase by $100,000 D.increase by $100,000; not change

C

the interest rate that is applied to the principal to determine the coupon payments

Coupon rate

After the Federal Reserve increases reserves in the banking system, banks create new deposits through multiple rounds of lending and accepting deposits until the A) Federal Reserve requires them to stop. B) deposit insurance limit is reached. C) actual reserve-deposit ratio is greater than the desired reserve-deposit ratio. D) actual reserve-deposit ratio is equal to the desired reserve-deposit ratio.

D

Han pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Han sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Han receives is A) $10,000 B) $700 C) greater than $10,000 D) less than $10,000.

D

Holding other factors constant, if state income tax is replaced with a consumption tax, then the real interest rate will ______ and the equilibrium quantity of saving and investment will _______. A) increase; increase B) not change; not change C) increase; decrease D) decrease; increase

D

If the principal amount of a bond is $10,000,000, the coupon rate is 7 percent, then the annual coupon payment made to the holder of the bond is ____________. A) $10,000,000 B) $300,000 C) $400,000 D) $700,000.

D

In an open economy, a decrease in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

D

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $2,000 per year. He has no other opportunities. He should A) purchase the truck only if the real interest rate is less than 2 percent. B)not purchase the truck if the real interest rate is greater than 2 percent. C)purchase the truck if the real interest rate is greater than 10 percent. D)purchase the truck if the real interest rate is less than 10 percent.

D

Steve earns $1,000 per week and spends $850 per week on living expenses, puts $50 in a savings account, and buys $100 worth of shares in a stock mutual fund. Steve's savings are _____, and Steve's saving rate is _____. A)$50; 5.0 percent B)$50; 5.9 percent C)$100; 10 percent D)$150; 15 percent

D

Stock prices increase when expected future dividends _____, interest rates _____, and/or the risk premium _____. A) increase; increase; increases B) increase; increase; decreases C) decrease; decrease; increases D) increase; decrease; decreases

D

The Cub Scouts and Girl Scouts have so far sold 300 tickets for their upcoming raffle, but they sell an additional 32 tickets every day. The ______ is a stock variable, and the ______ is a flow variable. A)number of tickets sold each day; number of tickets sold so far B)number of tickets sold so far; total number of tickets sold by the time of the raffle C)number of tickets sold each day; total number of tickets available D)total number of tickets sold by the time of the raffle; number of tickets sold each day

D

Which of the following is a stock variable? A. Saving B. Income C. Consumption D. Wealth

D. wealth

Adding one worker increases output by less than the previous worker added. Assumes non-labor inputs are held constant.

Diminishing returns to labor

Who reviews economic conditions and sets monetary policy?

Federal Open Market Committee

Firms that extend credit to borrowers using funds raised from savers

Financial Intermediaires

Value defined per unit of time ex; income, spending, saving, wage

Flow Value

Is the excess of government net tax collections over spending

Government budget surplus

Saving to meet long-term objectives—such as retirement, college attendance, or to purchase a home,—is called ______ saving.

Life-Cycle Saving

Any asset that can be used in making purchase

Money

Private savings plus public savings

National Saving

relates cyclical unemployment changes to changes in the output gap

Okun's law

Governments bonds by the Fed to the public decreases reserves and money supply

Open-Market purchase

Government bonds by the Fed to the public decreases reserves and money supply

Open-Market sale

Saving for protection against setbacks - such as loss of job, medical emergencies

Precautionary saving

Principal (1 + c) c = coupon rate

Price at maturity

Household saving + Business Saving

Private saving

The amount the public sector's income that is not spent on current needs

Public Saving

Money stock times velocity equals nominal GDP M x V = P x Y

Quantity equation

National Saving Formula

S = Y - C - G

Value defined at a point in time ex: wealth, debt

Stock Value

The amount of savings that would occur at each possible real interest rate

Supply of national saving (s)

Value of a country's exports minus the value of its imports

Trade balance / Net exports (NX)

A measure of the speed at which money changes hands in transactions for final goods and services

Velocity

Holding other factors constant, if a change in tax laws discourages people from saving more for retirement, then the real interest rate will ______ and the equilibrium quantity of saving and investment will _____. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

a

Holding other factors constant, if a change in tax laws discourages people from saving more for retirement, then the real interest rate will ______ and the equilibrium quantity of saving and investment will _____. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

b

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar) for the stock today if you require an 8 percent return? A) $60 B) $62 C) $67 D) $70

b

Cash or similar assets held by banks

bank reserves

Saving to leave an inheritance - such as mainly higher income groups

bequest saving

a legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments

bond

A decrease in the perceived riskiness of Company A stock ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

c

Lisa owns a beautiful diamond ring she purchased for $2,500. When she has it appraised, she learns that it is now worth $3,000. Based on this information A)Lisa's saving this year has increased by $500. B)Lisa's saving this year has decreased by $500. C)Lisa has experienced a $500 capital gain. D)Lisa's wealth is unchanged.

c

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S. ______ and there is a capital ______ the United States. A) imports increase; outflow from B) imports decrease; inflow to C) imports increase; inflow to D) exports increase; outflow from

c

increase the value of existing assets

capital gains

purchases of domestic assets by foreign households and firms

capital inflows

decreases in the value of existing assets

capital losses

purchases of foreign assets by domestic households and firms

capital outflows

saving + capital gains - capital losses

change in wealth =

the periodic interest payments to the bondholder

coupon payments

The amount of savings borrowed at each possible real interest rate

demand for investment expenditure (I)

Spreading one's wealth over a variety of investments to reduce risk

diversification

A regular payment received by stockholders for each share they own is called a:

dividend

holds less bank reserves than deposits

fractional reserve banking system

short-term unemployment related to matching of workers and jobs

frictional unemployment

is the excess of government spending over net tax collections

government budget deficit

purchases or sales of real and financial assets across international borders

international capital flows

debts that one owes

liabilities

the date when the principal amount will be repaid

maturation date

Currency held by public + bank deposits

money supply

A financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets

mutual fund

capital inflows - capital outflows

net capital inflows (KI)

The amount originally lent

principal amount

Nominal interest rate minus rate of inflation

real interest rate

the lowest wage a worker would accept for a given job

reservation wage

Bank reserves divided by total deposits

reserve-deposit ratio

The rate of return investors require to hold risky assets minus the rate of return on safe assets

risk premium

Current Income minus spending on current needs

saving

Saving divided by income

saving rate

a claim to partial ownership in a firm

stock (equity)

long-term chronic unemployment in normal conditions - perhaps skills are outdated

structural unemployment

Negative trade balance; imports > exports

trade deficit

Positive trade balance; exports > imports

trade surplus

extra revenue that an added worker generates

value of marginal product (VMP)

the value of assets minus liabilities

wealth