ch. 12,13

Last year, real GDP in an imaginary economy was $125 billion and the population was 5 million. This year, real GDP is $132 billion and the population was 5.2 million. What was the growth rate of real GDP per person during the year?

1.54% Last year, real GDP per capita was $125 billion/5 million = $25,000. This year, it is $132 billion/5.2 million = $25,384. The rate of growth is calculated as 100 * ((GDP per person in the current year - GDP per person last year)/ GDP per person last year) = 100*(($25,384 - $25,000)/ $25,000) = 1.54%.

Which of the following bonds has the highest risk of default (or credit risk)

A junk bond . Bonds issued by financially shaky corporations, or junk bonds, have the highest risk of default and thus pay very high interest rates.

Which of the following can increase both productivity and income?

An increase in the savings rate.

Which of the following can increase both productivity and income?

An increase in the savings rate. Encouraging saving and investment is one way that a government can stimulate growth and, in the long run, raise the country's standard of living.

Other things the same, when an economy increases its saving rate, consumption increases now and production rises later.

False

Purchases of capital goods are excluded from GDP.

False

The United Kingdom is an advanced economy, and over the past century its rate of economic growth has been higher than that of the United States.

False

The fact that in Canada, real GDP per person was $2,397 in 1870 and $38,370 in 2010 implies that every year, the growth rate was 2.00% per year.

False

Suppose the government runs a budget surplus. This means that government expenditures are greater than tax revenue, which reduces the supply of loanable funds available to finance investment by households and firms.

False budget surplus is an excess of tax revenue over government spending. It contributes to national saving as the government saves the difference by retiring some of the outstanding government debt. Thus the amount of loanable funds increases. As a result, the supply curve for loanable funds shifts to the right causing the equilibrium real interest rate to decrease and the equilibrium quantity of loanable funds to increase.

Consider a closed economy, in which S = (Y - T - C) + (T - G) holds. What does this identity imply if the government's tax revenue is equal to its expenditures?

National saving and private saving are equal The government receives T in tax revenue and spends G on goods and services. If T = G, then S = (Y - T - C), which means that national saving equals private saving.

The fact that in the United States, real GDP per person was $4,044 in 1870 and $47,210 in 2010 implies that every year the United States had the growth rate of 1.77% per year

False If real GDP per person, beginning at $4,044, were to increase by 1.77% for each of 140 years, it would end up at $47,210. However, real GDP per person did not rise exactly 1.77% every year: Some years it rose by more, other years it rose by less, and still other years it fell. The growth rate of 1.77% per year ignores short-run fluctuations around the long-run trend and represents an average rate of growth for real GDP per person over many years.

Countries that have had higher output growth per person have typically done so without higher productivity growth.

False One of the Ten Principles of Economics is that a country's standard of living depends on its ability to produce goods and services. A nation can enjoy a high standard of living only if it can produce a large quantity of goods and services. Americans live better than Nigerians because American workers are more productive than Nigerian workers. The Japanese have enjoyed more rapid growth in living standards than Argentineans because Japanese workers have experienced more rapid growth in productivity.

Suppose an economy experiences an increase in its saving rate. The higher saving rate leads to a higher growth rate of productivity in the long-run.

False The accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital. As a result, although higher saving leads to higher growth for a period of time, growth eventually slows down as capital, productivity, and income rise.

The traditional view of the production process is that capital is subject to constant returns.

False The traditional view of the production process is that capital is subject to diminishing returns: As the stock of capital rises, the extra output produced from an additional unit of capital falls.

The short-run effects of an increase in the saving rate include a higher growth rate of productivity and a lower growth rate of income.

False The short-run effects of an increase in the saving rate include a higher level of productivity, a higher growth rate of productivity, and a higher growth rate of income.

Which of the following countries is a middle-income country, which over the past century had a higher rate of economic growth than the United States

Mexico

Which of the following most accurately describes the factors affecting productivity?

Natural resources, technology, physical capital, and human capital.

Which of the following must be true if Y = (C + I + G

Net exports (NX) are zero.

Consider two economies with diminishing returns to capital. The economies are identical except one has a higher capital per worker than the other. Suppose that the saving rates in both countries increase.

Over the next few years, the growth rate of real GDP per worker will be higher in the country that started with less capital per worker.

Consider a closed economy with a government deficit and positive investment. Which of the following is correct?

Private saving is positive; public saving is negative

Suppose that productivity grew faster in Country A than in Country B, while the population and total hours worked remained the same in both countries.

Real GDP per person grew faster in Country A than in Country B Both population growth and productivity growth contribute in growth of real GDP. If there is no population growth, whereas productivity grows faster in Country A than in Country B, then real GDP per person must grow faster in Country A than in Country B.

Which of the following must be true if S = (Y - C - G)

Such an economy is closed.

Suppose you have to choose between two bonds. The interest rate on one bond is 5% and the interest rate on the other is 2%. Which of the following is likely to be true about these bonds?

The 2% bond is a municipal bond, and the 5% bond is a U.S. government bond.

Which of the following explains the effect of an investment tax credit on the market for loanable funds

The demand curve for loanable funds shifts to the right causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.

What would happen in the market for loanable funds if the government increased the tax on interest income?

The equilibrium interest rate would rise. Other things being the same, a higher tax on interest income would discourage saving at each real interest rate level. As a result, the supply curve of loanable funds would shift to the left causing the equilibrium interest rate to increase and the equilibrium quantity of loanable funds to decrease.

Consider the market for loanable funds, which is initially in equilibrium. Suppose the government allows workers to increase the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts. Which of the following describes the effect of this change on the market for loanable funds?

The interest rate would decrease and the quantity of loanable funds would increase. Other things being the same, if people can increase their tax-deferred savings, the amount of loanable funds increases at each real interest rate level. As a result, the supply curve of loanable funds shifts to the right causing the equilibrium interest rate to decrease and the equilibrium quantity of loanable funds to increase.

Which of the following explains the relationship between the nominal and real interest rates

The nominal interest rate is the rate reported by banks, whereas the real interest rate is the nominal one corrected for inflation.

If a country's saving rate declined, then other things the same, in the long run, the country would have lower productivity and lower real GDP per person.

True

In a closed economy, if saving rises in some period, then in that period consumption falls and investment rises.

True

Japan is an advanced economy, and over the past century its rate of economic growth has been higher than that of the United States.

True

Suppose that Congress repeals an investment tax credit (increase taxes). The demand curve for loanable funds shifts to the left causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to decrease

True

The assumption of a closed economy applies to the world economy.

True

In the long run, the higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables

True Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while. As the higher saving rate allows more capital to be accumulated, in the long run, the benefits from additional capital become smaller and growth slows down. Reaching this long run can take quite a while. Studies of international data on economic growth show that increasing the saving rate can lead to substantially higher growth for a period of several decades.

If the government were to decrease the tax rate on interest income, there the equilibrium amount of loanable funds would increase and the equilibrium interest rate would decrease.

True Other things being the same, a lower tax on interest income would encourage saving at each real interest rate level. As a result, the supply of loanable funds curve would shift to the right causing the equilibrium interest rate to decrease and the equilibrium quantity of loanable funds to increase.

Which of the following statements is consistent with the fact that capital in an economy is subject to diminishing returns?

When workers have a relatively small quantity of capital, giving them an additional unit of capital increases their productivity by a relatively large amount.

A potential downside to a policy that increases investment from abroad is that it _____

does not have the same effect on all measures of economic prosperity.

A public policy that increases saving and investment increases future labor productivity because the policy ____

increases the capital stock.

A domestic downside to a policy that increases education is that _______

people must forgo current wages to invest in education

Other things the same, when interest rates fall,

people would tend to borrow more causing the quantity demanded of loanable funds to increase.

In a small closed economy investment is $50 billion and private saving is $45 billion. What are public saving and national saving

public saving is $5 billion, and national saving is $50 billion National savings is a sum of private saving and public saving. Thus public saving is the difference between national savings and private saving: $50 billion - $45 billion = $5 billion. At the same time, the accounting identity S = I shows that national saving and investment are equal for the economy as a whole. Thus national saving, S = $50 billion.

According to the definitions of private and public saving, if Y, C, and G remained the same, a decrease in taxes would

reduce public saving and raise private saving.

Other things the same, when interest rates increase,

the quantity of loanable funds supplied increases, whereas the quantity of loanable funds demanded decreases.

As an alternative to issuing bonds as a means of raising funds, a corporation could

use equity finance.