Dr. K Midterm
How do banks engage in specialization and division of labor?
Banks coordinate the collection of lenders' funds and employ specialists in risk assessment to ensure that the funds are safely used.
Suppose your weekly earnings (the number on your paychecks) decrease by 2 percent over the course of a year and prices in the economy fall by 3 percent. In this case, your nominal earnings have _____ and your real earnings have _____. Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices
Because prices fell more rapidly than your earnings, the purchasing power of your earnings has increased. so fallen, risen
Suppose your weekly earnings (the number on your paychecks) increase by 2 percent over the course of a year and prices in the economy rise by 3 percent. In this case, your _____ earnings have increased and your _____ earnings have decreased.
Because prices rose more rapidly than your earnings, the purchasing power of your earnings has decreased. so nominal, real
Suppose your weekly earnings (the number on your paychecks) increase by 3 percent over the course of a year and prices in the economy rise by 2 percent. In this case, your nominal earnings have _____ and your real earnings have _____.
Because prices rose more slowly than your earnings, the purchasing power of your earnings has increased. risen, risen
According to the Fisher effect, a 5% decrease in the expected inflation rate results in:
a 5% decrease in nominal interest
What is inflation?
a general increase in prices and fall in the purchasing value of money.
The main reason people save during their working years is:
a preference toward a smooth consumption path over time.
What is a real price?
a price that has been corrected for inflation
Suppose there is a natural disaster and the capital stock decreases to 100. What is most likely to occur to the growth rate of output per capita as the country begins to rebuild?
a) The nation will reach a steady state at the point where the Investment and the depreciation are equal .that is at 500 output and 400 capital. The answer is 500 units. b) The growth rate of output per capita will increase as the country benefits from high marginal product of capital As the nation starts to rebuild the growth rate per capita will be increasing at a higher rate and the nation will benefit from it. The answer is "C".
An investment tax credit results in
an increase in the demand for loanable funds and an increase in the interest rate.
The crowding-out effect of government borrowing refers to a decrease in:
both private consumption and private investment.
What does the term money neutrality mean?
changes in the money supply have no real effects on the economy in the long run
Assume that the production function for a country is given by 𝑌=𝐾‾‾√Y=K and annual investment is given by the function 𝐼=𝛾×𝑌I=γ×Y where γ=0.290, and that the yearly depreciation rate is 4.83%. Suppose that this year, the output in the country is 1, and a neighbor country's output is 50% higher. Calculate the time it would take for the country's output to catch up with its neighbor's output. Assume the neighbor country's economy is neither growing nor shrinking.
https://www.chegg.com/homework-help/questions-and-answers/assume-production-function-country-given-y-squareroot-k-annual-investment-given-function-l-q16188803
Use the production function graph to answer the questions.
https://www.chegg.com/homework-help/questions-and-answers/use-production-function-graph-answer-questions-calculate-marginal-product-first-unit-capit-q34208798
A
ideas. all of our knowledge about how to combine capital and labor to produce valuable output. better ideas means more outputs from the same inputs
Higher interest rates typically _____ saving, ceteris paribus
increase
During a financial crisis in the early 2000s, the government of Argentina partially froze bank accounts for a year. Given the supply of savings and the demand to borrow functions, we would expect this action to cause the interest rate to:
increase and borrowing to decrease.
Which best describes technological knowledge?
knowledge used to produce goods and services
If the economy experiences unexpected inflation, then the actual rate of return will be _____ than its equilibrium rate, and wealth will be distributed from _____.
less, borrowers to lenders
What is the catch‑up effect concerning developed and developing countries?
may grow faster than developed countries because they lack the most basic tools and capital investment leads to higher productivity growth.
Nominal GDP is defined as GDP
measured at prices that prevailed during the year GDP was measured
Monetizing the debt occurs when a government:
pays off its debts by printing money.
structural unemployment
persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs
K
physical capital. all of the factories, tools and so forth
Which of the following correctly represents deflation?
pi < 0
More of which three factors could increase the speed of technology growth in the future?
population, incentives, ideas.
The aggregate production function with GDP as output includes four inputs
population, or labor, human capital, or skills and education of workers, physical capital, or the plants and equipment used by firms, and technology.
During the financial crisis, because of high leverage, losses on mortgages:
pushed banks toward insolvency.
When using the quantity theory of money to analyze the relation between inflation, money, real output, and prices, we typically assume that:
real output and the velocity of money are constant.
For savers, the role of financial intermediaries is to:
reduce the default risk on money they save and lend.
In the market for loanable funds:
savers supply loanable funds and borrowers demand loans
The supply of loanable funds comes from _____, and the demand for loanable funds comes from _____.
saving; investment
Frictional unemployment is best defined as:
short-term unemployment caused by difficulties of matching employees to employers.
Which of the following would likely cause a shortage in the loanable funds market?
strict limits on interest rates
Suppose that a computer manufacturer has decided to close a factory in Austin, Texas, and open a new factory in Thailand, where production costs are lower. What would best describe the type of unemployment faced by the no longer employed workers in Austin?
structural unemployment. This type of unemployment would be persistent and long term, having originated from a structural change, like the transition from a manufacturing economy to a service economy.
Which of the examples provides the best evidence that inflation has occurred?
A person whose salary has increased is able to purchase fewer goods and services.
Which is NOT an example of a major reason that funds are borrowed to make large investments in physical capital and human capital?
A woman chooses to borrow funds to buy a new car rather than choosing to withdraw funds from her savings to pay in cash.
Technology
The application of scientific knowledge for practical purposes
What is the neutrality of money with respect to the quantity theory of money?
The money supply can affect the growth rate of prices (inflation) in the long run. The money supply cannot affect the growth rate of real GDP in the long run. The money supply can affect the growth rate of the real GDP in the short run.
real interest rate
The nominal interest rate minus the inflation rate
Does not create incentives for growth
A command (non-market economy), civil economy
A $10,000 face-value bond costs $9,250 and matures in one year. If the interest rate on similar bonds rises by 2%, what is the approximate price change for this bond?
The price of the bond falls to $9,082.
At an 8% interest rate, the quantity of savings is $250 billion. What would the quantity of savings be if the interest rate fell to 5%?
$190 billion
Consider the following table that shows hypothetical purchases made over the last year in the United States: Purchase Cost Military tank $1,000,000 College tuition $25,000 Commercial harvester $90,000 Copiers for State Department $20,000 Donuts $1,000 Samsung smartphones (from Korea). $12,000 Family minivan $30,000 New 4-bedroom home $400,000 Using the national spending approach to GDP, total government spending is:
1,020,000
1. Consider an economy with the production function 2. Squaring both sides and solving for 𝐾K yields 3. Substituting 𝐾K into the steady state equation gives Solve this equation for 𝑌.Y. Divide both sides by 𝑌Y and put everything on the other side to solve for 𝑌.Y. Once you do this, use this equation to answer the question about the economy in the steady state. 4. What will make a country richer in the long run?
1. 𝑌=𝐴𝐾‾‾√Y=AK 2. 𝐾=𝑌2/𝐴2 3.𝛾𝑌=𝛿𝑌2/𝐴2 4. doubling total factor productivity
The U.S. GDP in 2003 was $11,142.2billion, and the previous year the GDP was $10,642.3 billion. What was the rate of growth in GDP in 2003?
11,142.2-10,642.3=499.9 499.9/10,642.3=4.7%
An emerging country has a real GDP of $1560.4 billion. After one year, real GDP has grown to $1607 billion. In percentage terms, what is the growth rate? Please round your answer to the nearest whole number.
1607-1560.4=46.6 46.6/1560.4= 2.9%
Solow Growth Model
A model showing how saving, population growth, and technological progress determine the level of and growth in the standard of living. Y=F(A,K,eL)
Suppose the real GDP growth rate is 3.5 percent and the growth rate of the population is 1.4 percent. The real GDP growth per capita must be equal to:
= Real GDP growth rate - Population growth rate Where, Real GDP growth rate = 3.5% Population growth rate = 1.4% Real GDP per capita growth rate = 3.5% - 1.4%= 2.1%
Country A and Country B start with the same GDP per capita of $50,000. Country A's GDP per capita grows at a constant rate of 2.8% and Country B's GDP per capita grows at a constant rate of 1.4%. Compute the difference in GDP per capita for these two countries after 100 years, in thousands of dollars.
As per rule of 70, the country A GDP to double in years = 70/2.8=25 years it will take to double GDP So Country A GDP after 100 years = 50*2^4=800 as it doubles every 25 years the country B GDP to double in years = 70/1.4=50 years it will take to double GDP So Country B GDP after 100 years = 50*2^2=200 as it doubles every 50 years Compute the difference in GDP per capita for these two countries after 100 years= 800-200=600
The Rule of 70
Doubling time (in years) = 70/(percentage growth rate).
Consider the graph. Suppose the production function and investment curves shift from Y1 to Y2 and from investment1 to investment2 . Which change is the most likely cause of this shift?
The shift is due to: an advancement in technology.
All else equal, which scenario would exhibit a country with the most economic growth?
Froland, a country known to be able to resolve most trials and legal issues within a year
To calculate GDP, we use the market value of:
Gross domestic product is the market value of all finished goods and services produced within a country in a year.
Figure: Market for Loanable Funds
If the interest rate is 5% in this market for loanable funds, then: savings exceed borrowing demands by $100 million.
Why is the demand for loanable funds downward sloping?
More people borrow money when interest rates are low than when they are high.
Creates incentives for growth
Private Property Ownership, A Market Economy, legally protected investments
Which statement accurately characterizes the distribution of real GDP per capita internationally?
Real GDP per capita varies greatly across countries.
Ruritania's Ministry of Economics has considered various plans to stimulate economic growth in the kingdom. Which proposal would have the best chance of success? Which source of productivity growth does the best proposal directly influence?
To increase the general level of skills in the labor force, subsidize tuition to enable more people to attend college. human capital
Consider a Solow growth model with the formulation 𝛿=0.0175 investment=0.192𝐾‾‾√Y=0.384𝐾‾‾√,δ=0.0175 investment=0.192KY=0.384K, Where𝛿δis the rate of depreciation,𝐾Kis level of capital, and Y is the level of output. Adjust the line labeled Depreciation and the function labeled Investment to be consistent with the given model.
What is the steady‑state level of capital? steady‑state level of capital: 120.3 What is the steady‑state output? steady‑state output: 4.2
Figure: Loanable Funds Contraction
Which of the following reasons could cause the supply curve for loanable funds to shift to the left from S1LF to SLF in the figure? Consumers become less patient.
Because of money illusion, inflation often confuses:
consumers, workers, and firms.
A seasonal worker saves more when her income rises and saves less when her income falls. This behavior is referred to as
consumption smoothing
_____ is a decrease in the average level of prices, whereas _____ is a reduction in the inflation rate.
deflation, disinflation
Margaret owns a stuffed animal shop. At first, it is just her daughter Allison and her hand‑sewing stuffed bears, stuffed sharks, and stuffed giraffes in the spare bedroom. Over time, Margaret decides to rent a larger shop and hire more workers to help out, increasing to a staff of 20 people. Everything is still hand sewn. She notices, however, that her stuffed animal output increased much more than tenfold despite her work force increasing by that amount. However, any more than 20 workers slows down production.
economies of scale.
The labor force is made up of:
employed and unemployed workers
In the market for loanable funds, _____ coordinates between the savers and borrowers.
financial intermediaries
Which of the following do economists consider an investment?
the construction of a new factory
Gross national product (GNP) is the market value of all
the finished goods of all the residents of a country regardless of their geographical location
ceteris paribus
the growth in the money supply and the velocity of money are constant
According to the quantity theory of money, the major cause of inflation in the long run is an increase in:
the growth rate of the money supply
Many economists think that effective institutions are essential for economic growth. In this context, what are institutions?
the laws, social norms, and conventions of a culture
eL
the people input to the solow growth model. L represents labor and e represents education. the more educated people are the more effective their labor is. e *L represents human capital.
economies of scale
the property whereby long-run average total cost falls as the quantity of output increases
In a macroeconomic context, choose the best definition for the term velocity.
the rate at which money circulates through an economy.
human capital
the skills and knowledge gained by a worker through education and experience
physical capital
the stock of equipment and structures that are used to produce goods and services
Find the velocity of money when 𝑀=$522, 𝑃=105, and 𝑌R=$23.
v=4.63
Which of the following programs could help overcome structural unemployment?
worker retraining, limitations to unemployment benefits, and job-search assistance
We know that a country reaches a steady state when investment equals depreciation. This means
𝛾𝑌=𝛿𝐾
