Macro TEST 3
Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?
$100(1 + .04)10
If an American-based firm opens and operates a new clothing factory in Honduras, then it is engaging in
foreign direct investment.
In recent decades, Americans have increased their purchase of stocks of foreign-based companies. The Americans who have bought these stocks were engaged in
foreign portfolio investment.
The CPI and the GDP deflator
generally move together.
Malthus predicted that the power of population growth was
greater than the power of the earth to produce subsistence. His forecast was off the mark.
The nominal interest rate tells you
how fast the number of dollars in your bank account rises over time.
The real interest rate tells you
how fast the purchasing power of your bank account rises over time.
If a tax is placed on tires, then i.the equilibrium quantity of tires will decrease. ii.a deadweight loss will be created. iii.the producer surplus will decrease.
i, ii, and iii
In the simple circular-flow diagram, with households and firms, GDP can be computed as the
income received by households, in the form of wages, rent and profit.
By definition, equity finance
is accomplished when firms sell shares of stock.
Other things the same, when the interest rate rises, people would want to lend
more, making the quantity of loanable funds supplied increase.
Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?
$100.96
Scenario 26-1. Assume the following information for an imaginary, closed economy. Refer to Scenario 26-1. For this economy, investment amounts to
$15,000.
The following table pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. The cost of the basket in Year 1 was
$225.
Nate collected Social Security payments of $220 a month in Year 1. If the price index rose from 90 to 108 between Year 1 and Year 2, then his Social Security payments for Year 2 should have been
$264.
If in some year nominal GDP was $20 billion and the GDP deflator was 50, what was real GDP?
$40 billion
Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?
$500/(1.06)2
What was country A's GDP in 2019?
$7,253
If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is
1 percent.
The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from
1 to 10.
The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:
1. Fix the basket 2. Find the prices 3. Compute the basket's cost 4. Choose a base year and compute the index 5. Compute the inflation rate.
The following table pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. If Year 1 is the base year, then the CPI for Year 2 was
104.4
The following table lists the per gallon prices of gas and milk for the months of April, May, and June. Assume that the typical consumer buys 60 gallons of gas and 4 gallons of milk each month, and that April is the base period. Refer to Table 24-3. What is the consumer price index for May?
167
Over the past century in the United States, real GDP per person has grown, on average, by about
2 percent per year.
Suppose you win a small lottery and you are given the following choice: You can (1) receive an immediate payment of $10,000 or (2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is
3 percent, but not if the interest rate is 4 percent.
Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?
3 years
The following table pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. Refer to Table 24-1. If Year 1 is the base year, then the inflation rate in Year 2 was
4.4 percent.
Which of the following is a certificate of indebtedness?
Bonds but not stocks
Japan is
an advanced economy, and over the past century its rate of economic growth has been higher than that of the United States.
Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is
an insurance company.
Suppose a country increases trade restrictions. This country would be pursing
an inward-oriented, which most economists believe has adverse effects on the economy.
If the demand for loanable funds shifts to the right, then the equilibrium interest rate
and quantity of loanable funds rise.
Two of the economy's most important financial intermediaries are
banks and mutual funds.
If the Apple corporation sells a bond it is
borrowing directly from the public.
If the government eliminates a tax on a good with a perfectly elastic supply, who benefits most?
buyers
The demand for gasoline is inelastic and the supply of gasoline is elastic. Therefore,
buyers bear most of the incidence of a tax on gasoline.
For the purpose of calculating GDP, investment is spending on
capital equipment, inventories, and structures, including household purchases of new housing.
When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures
capital investment.
If Alan is risk-averse, then he will always
choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5.
Real GDP is the yearly production of final goods and services valued at
constant prices.
In an economy where net exports are zero, if saving rises in some period, then in that period
consumption falls and investment rises.
The loss to society resulting from a tax includes the
deadweight loss.
A newspaper article informs you that most businesses reduced production in the last quarter but also sold from their inventories during the last quarter. Based on this information GDP likely
decreased.
Crowding out occurs when investment declines because a budget
deficit makes interest rates rise.
Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then the
demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.
The price of a stock will rise if the
demand for the stock rises.
A $2.00 increase in the size of a tax on a good will only cause the price for buyers to increase by $2.00 if
demand is perfectly inelastic.
The curve becomes flatter as the amount of capital per worker increases because of
diminishing returns to capital.
The traditional view of the production process is that capital is subject to
diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries.
The traditional view of the production process is that capital is subject to
diminishing returns.
If total spending rises from one year to the next, then
either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both.
To determine who bears the greater share of a tax burden, we compare the
elasticity of supply to the elasticity of demand.
Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is
no greater than 10.83 percent.
The GDP deflator is the ratio of
nominal GDP to real GDP multiplied by 100.
Core CPI is
the CPI excluding food and energy.
Other things the same, which bond would you expect to pay the lowest interest rate?
A bond issued by a state with a very good credit rating
Which of the following provide benefits to society at large and not just to the person(s) who pursues it?
Both technological knowledge that is a public good and education
Figure 26-2 The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2?
Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories.
Which of the following measures how the level of well-being in a country has changed over time?
Growth rate of real GDP per person
Which of the following statements accurately describes catch-up growth?
In one generation, China will be one of the richest countries in the world, if China's GDP per person continues to grow 9% per year.
Which of the following countries benefited significantly from the catch-up effect in the last half of the twentieth century?
South Korea
Which of the following topics are more likely to be studied by a macroeconomist than by a microeconomist?
The percentage of the labor force that is out of work and differences in average income from country to country
Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.
This stock is undervalued; you should consider adding it to your portfolio.
Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?
Victor's but not Irene's
Which of the following methods of picking stocks is not consistent with fundamental analysis?
Viewing individual stock prices as unpredictable
Janet is a farmer. Which of the following are included in her human capital?
What she's learned from experience but not her tractor
An organization that tries to encourage the flow of investment from advanced countries to poor countries is the
World Bank.
Net exports equal
Y − (C + I + G).
The graph shows the market for textbooks. If the government introduces a tax of $20 a textbook, then the price paid by buyers
increases to $80 a textbook.
Japan's status as a rich nation is attributable to
international trade, but not to Japan's domestic quantities of natural resources.
The catch-up effect refers to the idea that
it is easier for a country to grow fast and so catch-up if it starts out relatively poor.
Educational attainment tends to be
low in countries with high population growth.
According to the efficient markets hypothesis, worse-than-expected news about a corporation will
lower the price of the stock.
If real GDP doubles and the GDP deflator doubles, then nominal GDP
quadruples.
Long-term bonds are
riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
Given that Monika's income exceeds her expenditures, Monika is best described as a
saver or as a supplier of funds.
Two common measures of the overall level of prices are
the GDP deflator and the consumer price index.
At harvest time the supply of wheat is perfectly inelastic. If the government taxes wheat at $1 a bushel, then
the seller pays the entire tax.
The demand for apple pies is perfectly elastic. If the government taxes apple pies at $1 a pie, then
the seller pays the entire tax.
If the efficient markets hypothesis is correct, then
the stock market is informationally efficient.
Greg learns how to bake from his grandmother. This is an example of
human capital, but not technological knowledge.
The following table contains data for country A for the year 2019.
−$32
What was the growth rate of real GDP for 1930?
−8.62%. Real GDP is a better gauge of economic well-being than nominal GDP.
In national income accounting, we use which of the following pairs of terms interchangeably?
"Public saving" and "government tax revenue minus government spending"
In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 237 for 2015. President Hoover's 1931 salary was equivalent to a 2015 salary of about
$1,169,408.
Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is
$515.00.
Suppose the consumer price index was 184 in Year 1 and 198.17 in Year 1. The nominal interest rate during this period was steady at 5.8 percent. What was the real interest rate during this period?
-1.9 percent
Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is
5 percent.
If the consumer price index was 100 in the base year and 106 in the following year, then the inflation rate was
6 percent.
What are the GDP deflator and the inflation rate for 1931?
9.16, −10.3
Figure 26-3 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. Refer to Figure 26-3. Which of the following movements shows the effects of households' decision to save more?
A movement from Point C to Point F
Which of the following actions best illustrates moral hazard?
A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.
Which of the following actions best illustrates adverse selection?
A person who has narrowly avoided many accidents applies for automobile insurance.
Derek recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the highest risk?
A portfolio with an average annual rate of return of 14%.
Which of the following correctly identifies the flow of dollars?
A, L, N, and B
Atlas Corporation is in sound financial condition. It sells a long-term bond. Which of the following make the interest rate on this bond lower than otherwise?
Atlas' sound finances but not the long term of the bond.
Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?
Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.
The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?
C
The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the
CPI better reflects the goods and services bought by consumers.
Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country B has a population of 2,000, of whom 1,800 work 6 hours a day to make 270,000 final goods.
Country A has lower productivity and lower real GDP per person than country B.
The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?
D
Suppose the demand for specialty car license plates is perfectly inelastic and the supply curve for specialty license plates is upward sloping. A tax is imposed on specialty license plates. Which of the following is true?
Drivers pay all of the tax.
Which of the following best illustrates diversification?
Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services.
Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?
Interest rates rise and truck prices rise.
Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the following makes the price of FineLine Corporation Stock fall?
Only the interest rate rising
Suppose the interest rate is 7 percent. Consider four payment options:Option A: $500 today.Option B: $550 one year from today.Option C: $575 two years from today.Option D: $600 three years from today.Which of the payments has the highest present value today?
Option B
A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?
Option C
Which of the following is a source of market risk?
Real GDP varies over time and sales and profits move with real GDP.
For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that
S = I + NX.
In answering which of the following questions would you find it necessary to calculate a present value?
Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years?
From 1960 to 1990, in which of the following countries has investment resulted in economic growth sufficiently higher than that in the United States?
South Korea
Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in his retirement account. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?
Stan
The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyer and seller?
The buyer will pay more of the tax than the seller pays.
A country with a relatively low level of real GDP per person is considering adopting two policies to promote economic growth. The first is to decrease barriers to trade. The second is to restrict foreign portfolio investment. Which of these policies do most economists say promote growth?
The first but not the second
What basket of goods and services is used to construct the CPI?
The goods and services that are typically bought by consumers as determined by government surveys
Out of the following economic statistics, which is the best measure of economic prosperity?
The level of real GDP
Which of the following items is the one type of household expenditure that is categorized as investment rather than consumption?
The purchase of a new house
Which of the following is included in the calculation of GDP?
The purchase of tutoring services from a tutor who holds citizenship outside the country but resides within the country.
Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?
The real interest rate is the nominal interest rate minus the rate of inflation.
Which of the following can be measured by the level of real GDP per person?
The standard of living but not productivity
Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?
The supply of loanable funds shifted left.
Which of the following is an example of human capital?
The things you have learned this semester
If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals
[(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100.
The consumer price index tries to gauge how much incomes must rise to maintain
a constant standard of living.
Industrial machinery is an example of
a factor of production that in the past was an output from the production process.
Other things the same, as the maturity of a bond becomes longer, the bond will pay
a higher interest rate because it has more risk.
Northwest Wholesale Foods sells common stock. The company is using
equity financing and the return shareholders earn depends on how profitable the company is.
If the price of a dress is four times the price of a pair of shoes, then a pair of shoes contributes
exactly one-fourth as much to GDP as does a dress.
One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI
fails to account for the introduction of new goods.
Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded
fall, and investment spending fall.
A company called Fresh Juice makes orange juice and sells it at its store. The orange juice produced by the company belongs to the category of
final goods.
In the United States, nominal interest rates were
high in the 1970s and low in the 1990s.
Other things the same, a country that increases its savings rate will have
higher future capital and higher future real GDP per person.
Index funds typically have a
higher rate of return and lower costs than managed mutual funds.
During periods of deflation, the real interest rate will be
higher than the nominal interest rate.
By far the largest category of goods and services in the CPI basket is
housing.
For an economy as a whole,
income must equal expenditure.
Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has
increased measured GDP by the value added by the restaurant's preparation and serving of the meals.
A mutual fund
is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of both stocks and bonds.
Recently, Venus's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, and graphing wealth on each horizontal axis, Venus's utility function
is upward sloping and her marginal utility function is downward sloping.
For a given elasticity of demand, the less elastic the supply, the
larger the share of a tax paid by the sellers.
GDP is defined as the
market value of all final goods and services produced within a country in a given period of time.
The consumer price index is used to
monitor changes in the cost of living over time.
In a closed economy, what remains after paying for consumption and government purchases is
national saving.
The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called
natural resources.
The slope of the demand for loanable funds curve represents the
negative relation between the real interest rate and investment.
The behavior of market prices over time indicates that natural resources are
not a limit to economic growth.
Unemployment compensation is
not part of GDP because it is a transfer payment.
Changes in real GDP reflect
only changes in the amounts being produced.
If the demand curve for a good is horizontal, a tax is levied on this product is
paid entirely by sellers.
The inflation rate is defined as the
percentage change in the price level from the previous period.
The buyers pay all of a tax when the demand is
perfectly inelastic.
The equipment and structures available to produce goods and services are called
physical capital.
A tax
places a wedge between the price paid by the buyers and the price received by the sellers.
An increase in the government's budget surplus means public saving is
positive and increasing.
Productivity is the amount of goods and services
produced for each hour of a worker's time. It is linked to a nation's economic policies.
The one variable that stands out as the most significant explanation of large variations in living standards around the world is
productivity.
Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a
speculative bubble.
One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called
substitution bias.
If buyers pay more of a tax than do the sellers,
supply is more elastic than demand.
An understanding of the best ways to produce goods and services is called
technology.
If the price of Italian shoes imported into the United States increases, then
the GDP deflator will increase, but the consumer price index will not increase.
The key determinant of the standard of living in a country is
the amount of goods and services produced from each hour of a worker's time.
National saving is
the total income in the economy that remains after paying for consumption and government purchases.
If net exports is a negative number for a particular year, then
the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.
