Chapter 25 & 26 Economics Test Review

Over the past century in the United States, real GDP per person has grown on average by about what percent?

2%

What is a bond?

A certificate of indebtedness.

What is a stock?

A claim to partial ownership.

What is budget deficit?

A shortfall of tax revenue from government saving. This is -(public saving), G-T

What is the Market for Loanable Funds?

A supply-demand model of the financial system.

What is health care expenditure? How does it help productivity?

A type of investment in human capital. Healthier workers are more productive.

What is a Budget Surplus?

An excess of tax revenue over government spending. This is public saving, T - G

In per-worker terms? What does an increase in N/L cause in Y/L?

An increase in Y/L

What does an increase in K/L create?

An increase in Y/L

What do investment incentives do for loanable funds?

An investment tax credit increases the demand for them, which raises the equilibrium interest rate and increases the equilibrium quantity of loanable funds.

What are some examples of financial intermediaries?

Banks and mutual funds

How is knowledge a public good?

Because ideas can be shared freely, which increases the productivity of many.

Why are some countries, such as Saudi Arabia, rich?

Because they have an abundance of natural resources. Saudia Arabia has lots of oil.

What types of investment do sellers loan?

Bonds, Savings Account, CD

What are some examples of what households do with saving?

Buy corporate bonds or equities, purchase a certificate of deposit at the bank, buy shares of a mutual fund, let accumulate in saving or checking in accounts.

How can government increase productivity in regards to education?

By promoting education and by promoting public schools and subsidized loans for college.

What does public saving do in relation to the market for loanable funds?

If positive, it adds to national saving and the supply of loanable funds. If negative, it reduces national saving and the supply of loanable funds.

What can the government do to raise saving and investment?

Implement policies

What does each year of schooling do for one's wage?

Increases it by 10%

What are mutual funds?

Institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds.

What are financial markets?

Institutions through which savers can directly provide funds to borrowers.

What are financial intermediaries?

Institutions through which savers can indirectly provide funds to borrowers.

How does one increase K?

Investment

When a society decides to increase its quantity of physical capital, the society...

Is in effect deciding to consume fewer goods and services in the present.

What does more natural resources allow?

It allows a country to produce more Y (real GDP)

What does changing all inputs in the production function by the same percentage cause?

It causes the output to change by that percentage.

What happens to the debt-GDP ratio during peacetime?

It falls

How does investment from abroad help poor countries?

It helps them generate enough saving to fund investment projects themselves and helps them learn state of the art technologies.

What does improvements in technology do to "A"?

It increases A.

What does K/L mean?

It is the capital per worker.

What does "A" do to the production function?

It multiplies the function F ( ).

What does a fall in the interest rate do to loanable funds? What does this do?

It reduces the cost of borrowing, which increases the quantity of loanable funds demanded.

What happens to the debt-GDP ratio during wartime?

It rises

What does "A" stand for in production function?

Level of technology

What is Physical Capital?

Machines, equipment, etc.

What does an increase in the interest do to savings? What does this do?

Makes saving more attractive, which increases the quantity of loanable funds supplied.

What happens when people fear their capital may be stolen by criminals or confiscated by a corrupt government?

There is less investment, including from abroad, and the economy functions less efficiently.

What do saving incentives do to loanable funds? What does this do?

They increase the supply of loanable funds, which reduces equilibrium interest rate and increases the equilibrium quantity of loanable funds.

In a closed economy, national savings equals

Y minus C minus G

What does productivity equal?

Y/L, or Real GDP/Quantity of labor

What is the production function?

Y=AF (L, K, H, N)

Accumulating capital a. requires that society sacrifice consumption goods in the present. b. allows society to consume more in the present. c. decreases saving rates. d. involves no trade offs.

b. allows society to consume more in the present.

Other things the same, when an economy increases its saving rate a. consumption and production rise now. b. consumption rises now and production rises later. c. consumption falls now and production rises later. d. consumption falls now and production falls later.

c. consumption falls now and production rises later.

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else, a. their consumption expenditures are being financed by someone else's saving. b. their consumption expenditures are being financed by someone else's investment. c. their investment are being financed by someone else's saving. d. their saving is being financed by someone else's investment.

c. their investment are being financed by someone else's saving.

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

credit risk

Productivity is the amount of goods and services a. an economy produces. It is not linked to a nation's economic policies. b. an economy produces. It is linked to a nation's economic policies. c. produced for each hour of a worker's time. It is not linked to a nation's economic policies. d. produced for each hour of a worker's time. It is linked to a nation's economic policies.

d. Produced for each hour of a worker's time. It is linked to a nation's economic policies.

Which of the following are residents of rich countries like to have in greater quantities, or better quality, than residents of poor countries. a. Housing b. healthcare c. life expectancy d. all of the above

d. all of the above

Institutions that help to match one person's saving with another person's investment are collectively called the...

financial system

What do firms borrow loanable funds for?

Equipment, factories, etc.

What savings can supply loanable funds?

Households with extra income.

What does H stand for?

Human Capital

What does population growth do for technology?

More people equals more scientists, inventors, engineers, which means more frequent discoveries and faster technological progress.

Productivity is higher when the average worker has what?

More physical capital, human capital, and natural resources.

What does N stand for?

Natural resources

What is trade similar to? Why?

New technologies because it improves productivity and living standards.

Do countries have to have a lot of N to be rich?

No, for example, Japan imports the N it needs.

Productivity is defined as the quantity of what?

Output per worker

What are inward-oriented policies?

Policies that aim to raise living standards by avoiding interaction with other countries (tariffs, limits on investment from abroad).

What are outward-oriented policies?

Policies that promote integration with the world economy.

What is the Catch-up Effect?

Poorer countries are able to grow faster than rich countries.

The one variable that stands out as the most significant explanation of large variations in living standards around the world is what?

Productivity

If workers already have a lot of K, what happens if you give them more?

Productivity changes fairly little.

What does an advance in knowledge boost? How?

Productivity, because it allows society to get more output from technology.

What do households borrow loanable funds for?

Purchasing new houses

What does L stand for?

Quantity of labor

What is national saving? What is the formula?

The portion of national income that is not used for consumption or government purchases. Private saving + public saving. Y - C - G

What is investment?

The purchase of new capital. (In Economics, investment is NOT the purchase of stocks and bonds)

What is a good measure of the government's indebtedness relative to its ability to raise tax revenue?

The ratio of government debt to GDP

When a nation's workers are very productive what happens?

Real GDP is large when income is high.

A nation's standard of living is best measured by its what?

Real GDP per person.

What does Y stand for?

Real GDP, the quantity of output produced.

What does the supply of loanable funds come from?

Savings

What is technological knowledge?

Society's understanding of the best ways to produce goods and services.

What types of investment do buyers own?

Stocks, gold, real estate

What is public saving? What is the formula?

Tax revenue less government spending. T - G (total taxes - government purchases)

What is the main reason for living standards rising in the long run?

Technological progress

When doing a supply-demand model of the financial system, what must one assume?

That there is only one financial market where all savers deposit their saving in the market and all borrowers take out loans from this market.

What does H/L mean?

The average workers human capital.

What are examples of financial markets?

The bond market and the stock market

What is crowding out?

The government borrows to finance its deficit, leaving less funds available for investment.

What is the financial system?

The group of institutions that helps match the saving of one person with the investment of another.

What are natural resources?

The inputs into production that nature provides, such as land, mineral deposits, etc.

What is Human Capital?

The knowledge and skills workers acquire through education, training, and experience.

When productivity grows rapidly, what happens?

The living standards grow rapidly.

What is private saving? What is the formula?

The portion of household's income that is not used for consumption or paying taxes. Y - T - C

The source of the supply of loanable funds a. is saving and the source of demand for loanable funds is investment b. is investment and the source of demand for loanable funds is saving. c. and the demand for loanable funds is saving. d. and the demand for loanable funds is investment.

a. is saving and the source of demand for loanable funds is investment.