Econ Test 2 revised

If the interest rate is 7% and the average inflation rate is 2.5%, what is the approximate future real value of $45,000 in five years? $36,110 $47,700 $63,115 $56,078

Correct! $56,078

Martha is considering acquiring another piano for her piano academy. The cost of a new Steinway grand is around $148,000. Pianos depreciate at a rate of about 5% per year, and the academy's investment fund typically earns a return of about 10% per year. Additional revenues obtained through the increased teaching capacity enabled by the piano and renting the piano out for performances are expected to be about $30,000 per year. Calculate the maximum price the piano academy is willing to pay for the piano.

200,000

Consider the owner of a local boutique. She is deciding if she should upgrade the storage and display containers. The total cost is $2,000, and the depreciation rate is 8% per year. The expected increase in next year's revenue resulting from the investment is $400. Assume an interest rate of 5%. What is the present value of the stream of revenue due to the upgrades? Round to the nearest dollar.

3.077

In 2003, Julia Roberts was paid a then-record shattering $25 million for her role in the film Mona Lisa Smile. The CPI that year was 184. In 2013, Sandra Bullock was paid $70 million for the film Gravity. The CPI in 2013 was 233. Convert Julia Roberts' salary into 2013 million dollars. Round answer to integer

32

Management at TJX Companies is deciding whether to build a new goods distribution center. The distribution center will cost $60 million to build; the estimated additional first year revenue will be $5 million. The distribution center will last 50 years, with a depreciation rate of 5% per year. The opportunity cost of this investment is predicted to be 7% interest earned. What is the present value of the stream of payments resulting from this potential new goods distribution center? Round to the nearest million.

42

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on the proposed project. Up-front cost: $250,000 Next year's revenue: $25,000 Real interest rate: 4% Depreciation rate: 6% What is the present value of the stream of payments from this project? $250,000 $0 $275,000 $625,000

Correct Answer $250,000

Henry Ford's $5 per day wage led to: (i) an increase in the number of workers willing to work at the Ford plant. (ii) workers who were more dedicated to their work. (iii) unemployment. (iv) lower total labor costs. (i) and (ii) (ii) and (iii) (i), (ii), and (iv) (i), (ii), (iii), and (iv)

Correct Answer (i), (ii), (iii), and (iv)

Structural unemployment can be caused by: (i) efficiency wages. (ii) union-determined wages. (iii) minimum wage laws. (iv) job protection regulations. (i), (ii), and (iv) (ii) and (iii) (i), (ii), (iii), and (iv) (ii), (iii), and (iv)

Correct Answer (i), (ii), (iii), and (iv)

How can dissaving in the current period be funded? (i) borrowing from friends (ii) bank loans (iii) previous savings (iv) current income earned (ii) and (iii) (i), (ii), and (iii) (ii), (iii), and (iv) (i), (ii), (iii), and (iv)

Correct Answer (i), (ii), and (iii)

The aggregate production function Y = f(L, H, K) shows that economic growth can occur if: (i) labor force participation rates fall. (ii) human capital stays constant. (iii) education and worker skills improve. (iv) the depreciation rate increases. (i) only (i) and (iv) (i), (ii), (iii), and (iv) (iii) only

Correct Answer (iii) only

Meredith has purchased a guaranteed income certificate (GIC) in Canada. This financial instrument pays her 1% interest per year. However, inflation during the same year is 2%. What was Meredith's nominal interest rate on her GIC? 3% -1% 1% 2%

Correct Answer 1%

The Industrial Revolution led to: (i) increased intellectual pursuits. (ii) increased production of food. (iii) economic growth. (iv) a rise in inventions. (iii) only (i) and (ii) (iii) and (iv) (i), (ii), (iii), and (iv)

Correct! (i), (ii), (iii), and (iv)

The news of an impending recession in the economy will lead to a:(i) fall in consumption. (ii) rise in precautionary saving. (iii) rise in national saving. (iv) rise in consumption. (i) and (iii) (ii) only (i), (ii), and (iii) (i), (ii), (iii), and (iv)

Correct! (i), (ii), and (iii)

Why is building a new house for personal use counted as investment? sales of existing homes are also investment. you could be using the house to gain rental income, thus it is an increase in productive capacity. the benefits of living in the house outweigh the upfront costs. you might be able to run an at‑home business.

Correct! you could be using the house to gain rental income, thus it is an increase in productive capacity.

Even if inflation exists, your purchasing power from one period to the next will stay intact if: you do not receive a pay rise. your pay rise exactly matches the rate of inflation. the rate of inflation is less than 1%. you buy the same goods and services that you bought last year.

Correct! your pay rise exactly matches the rate of inflation.

In Canada, the Ontario government provides a tax credit to firms that spend on scientific research and experimental development. This tax credit will: shift these firms' production functions upward through innovation and creative ideas. reduce the amount of money firms spend on research and development. increase the marginal cost of producing each unit of output. shift these firms' production functions downward by the amount of the tax credit.

shift these firms' production functions upward through innovation and creative ideas.

Both the CPI and the GDP deflator measure changes in the prices of goods and services and tend to change in similar ways over time. In the third quarter of 2018, the CPI rose by 1.5% from the previous quarter, while the GDP deflator rose by only 0.7% over the same period. What might explain the difference? Changes in the GDP deflator reflect changes in the prices of all domestically‑produced goods and services—and so may understate inflation. Changes in the CPI, on the other hand, reflect changes in the prices of the goods and services in the fixed basket. Changes in the CPI reflect changes in the prices of the goods and services in the fixed basket—and so may overstate inflation. Changes in the GDP deflator, however, reflect changes in the prices all domestically‑produced goods and services. The CPI is a price index and so more accurately captures true inflation, whereas the GDP deflator captures not only price increases but increases in real output. The greater increase in the CPI thus implies that real output rose more slowly than the price level. The CPI is a pure price index and thus accurately captures inflation. The GDP deflator is weighted by the market value of the total consumption of each domestically‑produced good and service. As a result, the GDP deflator understates changes in the cost of living.

Correct Answer Changes in the CPI reflect changes in the prices of the goods and services in the fixed basket—and so may overstate inflation. Changes in the GDP deflator, however, reflect changes in the prices all domestically‑produced goods and services.

Li Wei owns a homebuilding company. During a severe downturn in the housing market, he has to fire many of his subcontractors. What type of unemployment is this example? Frictional Cyclical Structural

Correct Answer Cyclical

A food-processing factory decides to increase wages by 50% above what their competitiors are paying. They find that fewer workers quit or call in sick and that they have lower spoilage rates as a result of the more consistent, productive workforce. Their competitors respond by raising wages as well. The quantity of labor supplied in the industry increases to take advantage of the higher wages, but the employers do not choose to hire additional workers. The higher wage results in _________________ unemployment. Structural Cyclical Frictional

Correct Answer Structural

A typical family owns more cell phones and fewer landline telephones than it did a decade ago. The average price of a cell phone plan is lower than that of a residential line. The bias represented in this scenario is ____________ Substitution Quality improvements New products

Correct Answer Substitution

If the government lowers the corporate tax rate, then the ______ loanable funds shifts to the _______ . demand for; right supply of; left demand for; left supply of; right

Correct Answer demand for; right

When real interest rates rise, consumption will shift: only if income rises as well. downward if the income effect outweighs the substitution effect. downward if the substitution effect outweighs the income effect. downward if there is saving.

Correct Answer downward if the substitution effect outweighs the income effect.

In the loanable funds market, the supply of loanable funds is positively sloped because the higher the real interest rate, the: smaller the benefits of saving. lower the profitability of investment projects. higher the profitability of investment projects. greater the benefits of saving.

Correct Answer greater the benefits of saving.

How does maturity transformation impact long‑term investment spending? increases long‑term investment by making it possible to extend long‑term loans even when no savers are willing to make a long‑term loan. increases long‑term investment by convincing savers to promise they will not withdraw their money for the length of the loan. decreases long‑term investment by limiting the use of short‑term deposits to short‑term loans only. increases long‑term investment by having investors take out a series of short‑term loans successively, repaying each previous loan, until the long‑term project is completed.

Correct Answer increases long‑term investment by making it possible to extend long‑term loans even when no savers are willing to make a long‑term loan.

The U.S. savings rate has fallen from an annual rate of around 13% in the mid‑1970s to 6% at the end of 2018. The fall in savings will likely? increase a family's ability to weather economic shocks. lead to a decline in investment. result in faster economic growth. oster more innovation and gains in productivity.

Correct Answer lead to a decline in investment.

Suppose your roommate's parents open a college savings account to pay for her college expenses. Opening a college savings account... shifts the demand curve for loanable funds to the right, increases the neutral interest rate and increases the equilibrium quantity of loanable funds. shifts the demand curve for loanable funds to the left, decreases the neutral interest rate and decreases the equilibrium quantity of loanable funds. shifts the supply curve of loanable funds to the right, decreases the neutral interest rate and increases the equilibrium quantity of loanable funds. has no effect on the loanable funds market.

Correct Answer shifts the supply curve of loanable funds to the right, decreases the neutral interest rate and increases the equilibrium quantity of loanable funds.

Refer to the following statistics. Based on these statistics, the level of business investment is: Inventories: $12 million Housing: $400 million Equipment: $500 million Business structures: $350 million Intellectual property: $700 million $1,550 million. $500 million. $1,562 million. $1,050 million.

Correct! $1,550 million.

A new assembly line robot with a price tag of $2.5 million is expected to depreciate by 3% at the end of next year. The real interest rate is 2.5%. What is the user cost of the robot for one year? $62,500 $75,000 $137,500 $12,500

Correct! $137,500

What is Iceland's real GDP if its nominal GDP is $25.9 billion (in current US$) and the GDP deflator is 124.5? $25.9 billion $24.5 billion $20.8 billion $32.2 billion

Correct! $20.8 billion

In 1979, when the consumer price index was 72.58, men earned a median income of $11,779 per year. If the consumer price index in 2015 was 236.99, how much was $11,779 in 2015 dollars? $42,959 $3,607 $38,461 $11,779

Correct! $38,461

In 1989, a four-year college degree would set you back $26,902. The consumer price index was 123.94 in January 1989. If the current consumer price index is 251.1, what is the cost of the four-year degree in current dollars? $13,278.51 $26,902 $41,224.41 $54,502.92

Correct! $54,502.92

Which of the following is a smart saving strategy? (i) Maintain strict control of budgets. (ii) Minimize fees paid on retirement or investment accounts. (iii) Engage in precautionary saving. (iv) Ensure that the value of assets is lower than the value of debt. (i) and (iii) (iv) only (i), (ii), and (iii) (i), (ii), (iii), and (iv)

Correct! (i), (ii), and (iii)

Which people are not counted as part of the official measure of the labor force in the United States? (i) individuals under the age of 16 (ii) retirees (iii) institutionalized people (iv) those who are not working but getting job training (i) only (ii) and (iii) (iii) only (i), (ii), and (iii)

Correct! (i), (ii), and (iii)

In order to be considered unemployed, a person must: (i) be part of the working-age population. (ii) be actively looking for work. (iii) not have been self-employed. (iv) must be noninstitutionalized. (iii) and (iv) (i), (ii), and (iv) (i) and (ii) (ii) and (iv)

Correct! (i), (ii), and (iv)

Which of the following tasks are performed by banks? (i) Print new money. (ii) Provide zero-interest loans. (iii) Create long-term loans from short-term deposits. (iv) Pool savings from many savers. (i) and (ii) (iii) and (iv) (i) and (iv) (iii) only

Correct! (iii) and (iv)

You purchase a certificate of deposit that earns an advertised rate of 1.75% interest per year. What is your real rate of return if the actual inflation rate is 1.9%? 3.65% -0.15% 1.75% 0.15%

Correct! -0.15%

You open a savings account that pays 1.67% interest a year. What is your real rate of return if the actual inflation rate is 1.67%? 0% -1.75% 1.67% 3.34%

Correct! 0%

If a $100 million increase in total income leads to a $62 million increase in consumption, the slope of the consumption function is: negative 0.62 zero 0.38

Correct! 0.62

Total consumption is $1,400 when income is $1,600, and total consumption increases to $1,900 when income is at $2,400. What is the marginal propensity to consume? 0.83 1.6 0.37 0.63

Correct! 0.63

Consider the following financial information for The Procter & Gamble Company stock. What is Procter & Gamble's price-to-earnings ratio? Procter & Gamble Stock price per share: $124.57 Earnings per share: $4.32 Price-to-book ratio: 6.8649 538.14 4.32 18.15 28.84

Correct! 28.84

In May 2019, Texas reported a civilian labor force of 14,012,711. The number of employed people was 13,516,387. What was the unemployment rate? 4.9% 5.3% 3.5% 96.5%

Correct! 3.5%

Which of the following is an example of hyperinflation? An economy experiences over 10% economic growth in one year. There is deflation of 20% in an economy. An economy experiences inflation of more than 7,500% in one year. Economic growth decreases by more than 15% in one year.

Correct! An economy experiences inflation of more than 7,500% in one year.

Small differences in economic growth rates can lead to large differences in standards of living. Why is this the case? Because of the cumulative effects of small differences in growth rates on real GDP over hundreds of years. It is due to accounting errors. Over time, small differences in growth rates do not lead to large differences in real GDP per person. It follows from convergence theory.

Correct! Because of the cumulative effects of small differences in growth rates on real GDP over hundreds of years.

Why does an anticipated change in income lead to no change in consumption for a consumption smoother? The consumer is not aware of anticipated changes in future income. Consumption is based on permanent income, which is already factored into anticipated future changes in income. There are high tax rates on anticipated changes in future income. There is a failure of the permanent income hypothesis.

Correct! Consumption is based on permanent income, which is already factored into anticipated future changes in income.

Kia Motors announces a plan to produce Kia automobiles in Pakistan. How does this change economic growth in Pakistan? Economic growth is negatively affected. Economic growth increases due to an investment in education. Economic growth increases due to an increase in labor. Economic growth increases due to capital accumulation.

Correct! Economic growth increases due to capital accumulation.

The government passes a new investment tax credit initiative. Which input in the production function changes, and what is the effect on economic growth in the country? The capital stock increases, and economic growth is positively affected. The capital stock decreases, and economic growth is negatively affected. Human capital is enhanced, and economic growth is positively affected. Technological advance occurs, but there is no effect on economic growth.

Correct! The capital stock increases, and economic growth is positively affected.

Deposit insurance is: a guarantee that you will get your money back, even if the bank collapses. a method by which banks rank borrowers based on their credit scores. personal insurance you can buy to ensure that you can pay back any loans you take from a bank. insurance that is sold by banks.

Correct! a guarantee that you will get your money back, even if the bank collapses.

If Larry is a hand-to-mouth consumer and has just received a gift of $350, we can expect Larry to exhibit: a large change in consumption. a small change in consumption. a large change in saving. no change in MPC.

Correct! a large change in consumption.

Which of the following would lead to a slowdown in economic growth? a reduction in the birth rate coupled with an increase in the retirement rate of a population an increase in innovation in the economy an increase in capital accumulation coupled with technological advancement the institution of a savings tax credit

Correct! a reduction in the birth rate coupled with an increase in the retirement rate of a population

With the advent of cloud computing, different units within a business now share data much more easily. The sharing of data with their suppliers and distributors is also much more streamlined. This is an example of: a rise in technology leading to an increase in efficiency. a rise in productivity causing an improvement in technology. a rise in human capital leading to an increase in capital accumulation. reduced inefficiency in production.

Correct! a rise in technology leading to an increase in efficiency.

If there is a temporary rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption. a small increase; a large increase a large increase; a large increase no change; a large increase a large increase; no change

Correct! a small increase; a large increase

Southeast Asian countries experience high temperatures and high humidity during the monsoon seasons. This makes working conditions difficult. Because air conditioners are expensive and consume a lot of electricity, an alternative air cooler called an Eco-cooler was invented. This device does not use electricity, is made from readily available soda bottles, and works by funneling air into a room. This scenario is an example of: a technological innovation that can increase labor productivity and thus increase economic growth. a rise in productivity causing an increase in technology. a decrease in the labor force participation rate in Southeast Asian countries. the development of human capital.

Correct! a technological innovation that can increase labor productivity and thus increase economic growth.

The law of diminishing returns means that: additional investments in physical capital will significantly boost output in wealthier countries with already existing large capital stocks. the economic growth rates of wealthier countries must always exceed the economic growth rates of poorer countries. additional investments in physical capital are not as productive as additional investments in human capital. additional investments in physical capital do not boost output in wealthier countries with already existing large capital stocks.

Correct! additional investments in physical capital do not boost output in wealthier countries with already existing large capital stocks.

WinSun, a Chinese firm, began producing 3-D printed houses in late 2013. These houses were produced in a fraction of the time it would take to produce a house in the regular way and at a much lower cost. This is an example of: an advance in technology leading to a rise in productivity. a rise in productivity causing an advance in technology. a movement to the left along the same production function. a movement to the right along the same production function.

Correct! an advance in technology leading to a rise in productivity.

You run a factory that makes leather shoes. You opt to pay your workers twice the going wage in order to reduce tardiness and shirking and to increase workers' morale and effort. This scenario is an example of: a minimum wage. an efficiency wage. discouraged workers. cyclical unemployment.

Correct! an efficiency wage.

A bank run can happen when: a bank lends only to creditworthy borrowers. people believe that a bank run is likely. a bank is increasing in size. a bank is owned by the government.

Correct! people believe that a bank run is likely.

A firm that prepares and mails customer notices on behalf of banks has recently shifted from manually addressing letters to using a computer program that automatically inserts customer addresses and prepares letters. Thus, the production time for each letter has decreased from four minutes to just 30 seconds. This scenario is an example of: the effects of an investment tax credit. a rise in productivity causing an improvement in technology. an improvement in technology leading to a rise in productivity. a labor-intensive production method.

Correct! an improvement in technology leading to a rise in productivity.

David is looking for a full-time job in the insurance industry. He is able to find only a 10-hour per week job as a fill-in insurance agent. Davis can be described as: unemployed. a discouraged worker. a marginally attached worker. an involuntary part-time worker.

Correct! an involuntary part-time worker.

One of the important tasks that banks perform is to: create long-term loans from short-term deposits. provide high-interest returns on deposits and charge low-interest rates on loans. raise the risk that interest rates will change over time. print new money for the government.

Correct! create long-term loans from short-term deposits.

The permanent income hypothesis implies that retired consumers with savings but no income will fund excess permanent consumption by: borrowing. dissaving. saving. not paying taxes.

Correct! dissaving.

One of the reasons that ideas can lead to sustainable and long-term economic growth is that they: do not depreciate with use. cannot be copied. are always copyrighted to their inventors. can be shared only within the domestic borders of a country.

Correct! do not depreciate with use.

The user cost of capital is the: extra cost associated with using one more machine next year. real interest rate. price of the machine plus forgone interest. total cost of purchasing one more machine next year.

Correct! extra cost associated with using one more machine next year.

Banks solve information problems by: finding out the necessary details about a borrower's creditworthiness. providing daily news updates to lenders. removing all chances of loan defaults. clearly explaining interest rate charges on loans

Correct! finding out the necessary details about a borrower's creditworthiness.

Holding everything else equal, the _____ the interest rate on saving, the _____ the future value of that saving. higher; greater higher; lower lower; greater lower; the more negative

Correct! higher; greater

The U.S. Department of Education sponsors the i3 program (Investing in Innovation), which provides grants to educational institutions and schools that have a proven track record of high student achievement. This is an example of a government program designed to build: physical capital. labor resources. human capital. physical factories and plants.

Correct! human capital.

The equilibrium interest rate in the loanable funds market is at the neutral interest rate when the economy is: in neutral. experiencing very high inflation. above its potential. below its potential.

Correct! in neutral.

Consider the scenario: Household incomes rise 6% this year, but income growth is expected to return to its normal growth rate of 2% next year. For consumption smoothers, the consumption _____________________ amount. For hand‑to‑mouth consumers, the consumption ___________________ amount. The total consumption ________________________- decreases by a large, increases by a small, unknown increases by a large, increases by a large, increases by a large increases by a small, increases by a large, increases moderately decreases by a small, increases by a small, increases by a small

Correct! increases by a small, increases by a large, increases moderately

The steady state in the Solow growth model occurs when: depreciation reaches zero. savings increases in the economy. investment equals depreciation. capital accumulation begins.

Correct! investment equals depreciation.

People value liquidity because it allows you to quickly convert assets into cash without much loss in value. it means your investments are safe from the risk of losing value. it allows you to convert assets to cash if you are willing to give up a significant amount of value. it requires that money be kept in an investment until it can be repaid.

Correct! it allows you to quickly convert assets into cash without much loss in value.

Banks spread the risk of lending money across many borrowers by: lending only to risky borrowers in the market. borrowing from the government. lending to a diverse array of borrowers. charging high-interest rates to cover the risk of any loan defaults.

Correct! lending to a diverse array of borrowers.

The rational rule of consumption is to consume more today if the: price of consumption today exceeds the dollar-plus-interest in the future. marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future. marginal benefit of a dollar of consumption today is less than the marginal benefit of spending a dollar plus interest in the future. real interest rate in the future is expected to be higher than the real interest rate today.

Correct! marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

The opportunity cost of an extra dollar of consumption today is the: same as the marginal benefit of consuming the dollar in the future. marginal benefit of consumption today. average benefit from consumption today and in the future. marginal benefit of consuming a dollar-plus-interest in the future.

Correct! marginal benefit of consuming a dollar-plus-interest in the future.

The CPI changes from 100 to 125. This means that: consumers are now able to purchase 25% more goods and services. overall prices are now 25% higher than they used to be. the base year index has changed from 100 to 125. the GDP deflator has also risen from 100 to 125.

Correct! overall prices are now 25% higher than they used to be.

Which of the following encourages the development of new ideas and inventions? negative economic growth patents capital accumulation government control of resources

Correct! patents

The GDP deflator is an index that tracks the: price that businesses pay over time for the inputs used in the production process. average price that consumers pay over time for a representative basket of goods and services. highest prices consumers pay over time for imported goods and services. price of all goods and services produced domestically.

Correct! price of all goods and services produced domestically.

A constant returns to scale production function means that if all inputs are increased by 75%, this should lead to output: rising by 75%. rising by more than 75%. falling by less than 75%. falling by more than 75%.

Correct! rising by 75%.

Respond based on your finding in the previous question . Based on the marginal principle, the owner should _______________ this investment because the marginal benefit is ________________ than the marginal cost. should, greater should not, less

Correct! should, greater

Suppose that a CPI basket includes avocadoes, pineapples and oranges. Avocadoes become very expensive, and consumers substitute away from avocadoes and buy hummus instead. If the CPI basket does not change to reflect the move away from avocados, the result is: understated inflation. the failure to capture real variables versus nominal variables. substitution bias. quality bias

Correct! substitution bias.

Technological advancement is NOT represented by which of the following? the invention of robotic meal preparation the invention of the light bulb the adoption of an existing technology by new firms the creation of new apps designed to enhance efficiency and reduce wastage in production lines

Correct! the adoption of an existing technology by new firms

Net wealth is: the amount by which income exceeds bills. the real interest rate on saving. equivalent to total consumption. the amount by which assets exceed debts.

Correct! the amount by which assets exceed debts.

What is the permanent income hypothesis? the idea that the marginal propensity to consume does not change over time the idea that people choose how much to consume based on their long-term average income the idea that temporary changes in income lead to the largest changes in total consumption the idea that people choose how much to consume based on their current income

Correct! the idea that people choose how much to consume based on their long-term average income

Even though deposit insurance existed, the United States experienced a major financial crisis from 2007 to 2009 because: banks refused to honor the deposit insurance scheme. the deposit insurance system failed during that time. there was a run on shadow banks, which were not covered by deposit insurance. there was excess competition from other countries.

Correct! there was a run on shadow banks, which were not covered by deposit insurance.

Maturity transformation occurs when banks: provide payment services. assess the creditworthiness of borrowers. use long-term loans to create short-term deposits. use short-term loans to create long-term loans.

Correct! use short-term loans to create long-term loans.

An involuntarily part-time worker is one who: is marginally attached to the labor force. has taken a part-time job in order to go to school full-time. works full-time but wants to find a part-time job. works part-time but wants to find a full-time job.

Correct! works part-time but wants to find a full-time job.