ECN 313 FINAL STUDY GUIDE

If R is the real interest rate, w is the real wage, MPK is the marginal product of capital, and MPL is the marginal product of labor, which of the following conditions informs the profit-maximizing firm how much capital to invest?

R = MPK

the explanation for the upward sloping supply of labor curve is that

as the wage rises, the opportunity cost of leisure rises, so people work more

The government's intertemporal budget constraint assumes that the budget is:

balanced in the last period

When all depositors converge on a bank to remove their deposits there is a

bank run

the Great Recession began in ____ and ended in ____

began December 2007 ended in June 2009

Free flow of international assets is desirable because it allows countries to:

borrow from abroad when times are bad in order to smooth spending

The acronym "CDO" stands for

collateralized debt obligation

Since 1970, the federal government budget has been in surplus only during the

Clinton administration

Which of the following goods would you NOT believe the law of one price to hold? a. grapefruits b. airplanes c. movies on DVD d. house cleaning services e. nails

d. house cleaning services

In 2006, investment ________ from about ________ percent of GDP to ________ percent by early 2010.

fell; 20; less than 13

Gt -Tt is called the ____, and Gt + iB - Tt is called the ____

primary deficit; total deficit

The economic meaning of the intertemporal budget constraint is that:

the present discounted value of the government's budget must balance.

We can use the arbitrage equation:

to analyze investment in capital, financial assets, and human capital.

What are reasons to trade currencies?

-to buy and sell foreign goods -to buy and sell foreign financial instruments -to hold currencies as foreign assets in their own right

During the Great Recession, the unemployment rate peaked at:

10%

According to data in the text, the user cost of capital in the United States is ________ percent.

10.0

If the real interest rate is 4 percent, the marginal product of capital is 2 percent, the depreciation rate is 10 percent, the tax rate is 25 percent, and capital gain is 1 percent, what is the user cost of capital?

17.3 percent

Consider Figure 18.1. The federal government ran a surplus during the period:

1998-2002

Consider Figure 18.2. During which of the following periods did the federal government run a budget surplus?

1998-2002

Consider Figure 18.1. The federal government ran a surplus during the period:

1998-2002.

___, housing prices collapsed following a decade of rapid increase

2006

In 2011, the ratio of federal governement spending to GDP in the United States was about

24%

In 2018, the ratio of all levels of government spending to GDP in the United States was about ________ percent.

38

The ratio of ALL levels of government spending to GDP in the United States is about:

40%

According to data in the text, which is the country with the highest user cost of capital?

France

According to data in the text, the country with the highest user cost of capital is ________ and ________ has the lowest user cost of capital.

France; Switzerland

The government's intertemporal budget constraint in the simple two-period case is:

G1+G2/(1+i)+(1+i)B1=T1+T2/(1+i)

Which of the following represents the government's budget constraint?

Gt + Trt + iBt = Tt + ∆Bt+1 +∆Mt+1

If we assume that Tr = ∆M = 0, which of the following represents the government's budget constraint?

Gt + iB = Tt + ∆Bt

If we assume that Trt=0andΔMt+1=0Trt=0andΔMt+1=0 , which of the following represents the government's budget constraint?

Gt+iBt=Tt+triangleBt

According to data in the text, which of these is the country with the lowest corporate tax rate?

Ireland

According to data in the text, which of these is the country with the lowest user cost of capital?

Ireland

Which investment bank collapsed in September 2008?

Lehman Brothers

Which of the following countries has negative government debt?

Norway

Which of the following is true? -Q9

Q9

When capital depreciation is included in the arbitrage equation for capital, the user cost of capital is given by:

R+d-(change pk/pk)

The user cost of capital with a corporate income tax is given by which of the following?

R+d-trianglePk/Pk / 1-t

Of the following countries, the one with the smallest annual government spending-to-GDP ratio in 2017 was:

South Korea.

The acronym "TARP" stands for:

Troubled Asset Relief Program

Consider the government's intertemporal budget constraint: A--> [G1 + (G2/1+i)] + B--> [(1+i)B1] = C--> [T1 + (T2/1+i)] Term A is the _____, and Term B is the _____,

[G1 + (G2/1+i)] is present discounted value of government spending; [(1+i)B1] initial debt

A stable exchange rate is desirable because it:

allows individuals and firms to make plans over time.

Consider Figure 20.1. During the period 2008-2009, the U.S. dollar ________ relative to the euro and ________ relative to the U.K. pound.

appreciated; appreciated

Consider Figure 20.1. In the period 2007-2009, the euro ________ relative to the U.K. pound and ________ relative to the U.K. pound after 2011. Q1 Graph

appreciated; remained somewhat unchanged

buying at a low price in one counrty to sell at a higher price somewhere else to make a profit is called

arbitrage

The important tool introduced in Chapter 17 on investment is the:

arbitrage equation.

In the equation RxPk=MPK+trianglePk; trianglePk is the ________ and Pk is the ________.

capital gain; initial price of capital

The budget balance is the:

difference between tax revenue and government spending.

The difference between the primary and total deficits is that the primary deficit:

excludes spending on interest.

If domestic saving is less than domestic investment, then investment can be financed by

foreign saveing

the difference between imports and exports is

foreign saving

For the profit-maximizing firm, if the real interest rate is greater than the marginal product of capital, the firm should:

get rid of some capital.

The federal government's largest expenditure in 2018 was:

health

The housing bubble was probably not fueled by

high unempoloyment

the "natural rate of unemployment" is the unemployment rate that would prevail

if the economy were in neither a boom nor a recession

In 2018, the largest single source of U.S. federal government revenue was:

individual income taxes.

In the intertemporal budget constraint, the term (1+I)B1 is called the:

initial debt.

When a bank's assets cannot cover its liabilities, the bank is:

insolvent

What is the fed funds rate?

interest rate charged by banks for overnight loans

If capital gain rises, a firm should:

invest in more capital.

During recessions ________ disproportionately to ________.

investment falls; consumption

if the income taxes on wages increase, the labor supply curve will shift left, but what happens to the unemployment rate?

it is ambiguous because some workers drop out of the workforce

With the foreign interest rate in the IS model, an increase in the domestic interest rate causes ________ because ________.

leftward movement along the IS curve; it leads to appreciation of the domestic real exchange rate (lowering net exports) and causes domestic investment to fall

One reason we are interested in investment is its:

link to long-term economic growth.

A decline in the corporate income tax will ________ and the firm will ________.

lower the capital user cost; invest in more capital

An increase in a firm's capital gains will ________and the firm will ________.

lower the capital user cost; invest in more capital

securitization is defined as

lumping large numbers of financial instruments together and selling pieces to different types of investors

The investment share of GDP has a ________ relationship to the user cost and a(n) ________ relationship to the capital depreciation rate.

negative; positive

If there is an appreciation of the real exchange rate:

net exports will fall.

The real exchange rate measures the:

number of foreign goods required to purchase a single unit of a domestic good.

The system used by the social security program is called

pay-as-you-go

the idea that you value receiving $1000 today more than in 10 years in the future is called

present discounted value

wage rigidity

prevents the labor market from realizing equilibruim

In the arbitrage equation, a profit-maximizing firm can choose between ________ and ________.

putting money in a bank; investing in new capital

The user cost of capital equals the:

real interest rate + the depreciation rate − the capital gain.

The arbitrage condition for capital demonstrates that under profit-maximizing conditions:

returns to a bank account are equal to the return to capital.

In macroeconomics, investing includes purchases of:

roads.

The federal government usually finances its budget deficit by:

selling government bonds

The federal government usually finances its budget deficit by:

selling government bonds.

the name given to low quality loans is

subprime loans

in the "bathtub model of unemployment, in the steady state:

the change in unemployment is zero

The user cost of capital is:

the cost of using one more unit of capital.

The net change in employment is

the difference between job creation and job destruction

When it takes fewer euro to buy one dollar

the euro has appreciated

When it takes fewer euro to buy one dollar:

the euro has appreciated.

To extend the short run to include a more sophisticated version of the trade balance, we include:

the gap between the domestic and foreign real interest rates.

____ simply states that, in the long run, individual goods must sell for the same price in all countries

the law of one price

the rate at which one currency is exchanged for another is called:

the nominal exchange rate

The rate at which one currency is exchanged for another is called:

the nominal exchange rate.

The government debt is:

the outstanding stock of bonds that have been issued in the past.

The economic meaning of the intertemporal budget constraint is that

the present discounted value of the government's budget must balance

The unemployment rate is defined as

the ratio of unemployed members of the labor force to the total labor force

France, Italy, Germany, the United Kingdom, and Spain all use the same currency, called the:

they don't use all the same currency

Why might a country choose to maintain a fixed exchange rate?

to help it maintain low and stable inflation

Which of the following explains why the law of one price might NOT hold?

transportation costs

Which of the following best describes the short run relationship between monetary policy and net exports?

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