ECON 201 Exam 1 prep

What services does a strong legal system perform that help an economy achieve strong economic growth?

A good legal system facilitates contracts and protects private parties from expropriating one another.

Which of the following is considered a growth disaster?

Argentina

How are life expectancies and infant mortality rates related to countries' real GDP per capita?

Better GDP = better health

Which country had the fastest economic growth over this time period? (2000-2019) China -> $2.77 (2000) -> $14.30 (2019) UK -> 2.31 (2000) -> 3.19 (2019) U.S. - 13.74 (2000) -> 19.98 (2019)

China

How is the level of competition and openness within markets related to a country's economic growth?

Competitive and open markets are one of the best ways to encourage the efficient organization of resources

What is the largest expenditure component of GDP?

Consumption

How does the level of honesty within a government influence the economic growth of a country?

Corruption is like a tax that bleeds resources away from productive entrepreneurs.

Intermediate goods

DO NOT EQUAL INPUTS

In the loanable funds market, who is usually the supplier and who is usually the demander?

Entrepreneurs demand loanable funds and savers supply loanable funds.

Which of the following is not a final good?

Fresh vegetables purchased by a restaurant

GDP per capita:

GDP divided by the population (standard of living)

How is a country's living standard measured?

GDP per capita = GDP/population

How much variation exists in real GDP per capita across countries of the world - a little, not much, or a lot?

GDP varies enormously among nations

Which of the following transactions would be included in the GDP of the U.S.?

Honda produces cars in Ohio

Which term in the national spending equation for measuring GDP represents private spending on tools, plant, and equipment used to produce future output? Y = C + I + G + NX

I

How is a country's political stability related to its economic growth?

In many nations, civil war, military dictatorships, and anarchy have destroyed the institutions necessary for economic growth.

1When did the world begin to experience significant economic growth rates?

Industrial Revolution 1760-1840

T-notes

Maturities range from 2 to 10 years; they pay interest every 6 months.

T-bills

Maturities range from a few days to 26 weeks; they pay only at maturity

Avoid huge fees

Mutual funds charge fees on your investment. Even small fees can add up to large differences in returns over time

Most common assets in the US

Stock Dividends Mutual Funds and ETFs Employee sponsored plans Share certificates/certificate

Tesla announced plans to invest approximately $775 million in an expansion of its gigafactory in Texas, which will include 5 new facilities, including a cell test lab. This type of activity can BEST be categorized as:

investment

What does GDP measure?

market value

For an investor, corporate bonds are ____ than government bonds, and a credit card loan is ____ than a mortgage loan

more risky; more risky

the bad economic news

nothing guarantees economic growth

what is the rule of 70?

number of years to double = 70/growth rate

studies show that passive investing:

outperforms most mutual funds

stock

ownership, higher selling price, dividends, "newly issued" stock, stock index

Business cycle

peak -> recession -> trough -> expansion

GDP adds up the value of finished goods and services but does not subtract the value of "bads" such as:

pollution, changing supplies of natural resources, loss of animal or plant species, and crime

Mutual funds

pool money from many customers and invest it in many firms, in return for a fee

dividends

portion of earnings to stockholders "passive investing"

How is the market value of all production determined?

price and quantity

Government purchases include all of the following EXCEPT:

social security benefits paid by the federal government

investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

government

the governing body of a nation, state, or community.

Define GDP

the market value of all finished goods and services produced within a country in a given time period

What is the formula for economic growth?

the rule of 70

Between year 1 and 1750, the economic growth of countries around the world

varied very little, because all countries had a very low GDP per capita

the good economic news

you can raise standards of livings by promoting business and economic growth

Problems with GDP

•GDP does not count nonpriced production when valuable goods and services are produced but no monetary payment is made. •GDP adds up the value of finished goods and services but does not subtract the value of "bads" •GDP does not count the health of nations.

Active investing

"Active funds" are run by managers who try to pick stocks

Passive investing

"Passive funds" simply attempt to mimic a broad stock market index, such as the S&P 500.

Currently Jamaica's real GDP per capita is $4,500. If Jamaica's economy maintains a 5% annual growth rate over the next 42 years, how large will it's economy be in the next 42 years?

$36,000

rate of return

(face value-price/price) X 100

percent change formula

(new value - old value / old value) X 100

Across all savings assets, what are differences in terms of

-Diversification -Risk -Rate of return

How to pick stocks

1.) Buy and hold 2.) diversify

The Market for Loanable Funds

1.) The demand and supply of loanable funds 2.) Interest rates

Two most common ways to split GDP

1.National spending approach: Add up the components of spending. 2.Factor income approach: Add up the income generated by producing goods and services.

Suppose you invest $1,000 in the stock market. According to the rule of 70, a sum of money invested at 7% would double in:

10 years

T-bonds

30-year bonds; they pay interest every 6 months.

Suppose the Chief FInancial Officer of a company is interested in raising funds for a major investment by issuing bonds of varying maturity to investors. One of the longer-term bonds being issued can be purchased for $35,000 per bond and pays $2,759 annually to the investor. What is the annual interest rate on this bond (round to two decimals)?

7.86%

If the Real GDP per capita in the U.S. is about $60,000, and the economic growth rate is 2%, how many years will it take for the economy to reach a real GDP per capita of $240,000?

70 years

If the current Real GDP per capita in the U.S. is about $60,000, and the economic growth rate is 2%, how many years will it take for the economy to reach a real GDP per capita of $240,000?

70 years

A bond that has the face value of $400 maturing in one year is available for purchase for $370. What is the interest rate. What is the interest rate offered on the bond?

8.11%

Which of the following would cause the real GDP per capita within a country to increase?

Stronger property rights

Institutions

The "rules of the game" that structure economic incentives.

Gross National Product

The market value of all finished goods and services produced by a country's permanent residents, wherever they are located, within a year.

Which of the following is a finished good?

Tires purchased by you for your car

What are capital goods

Tools, buildings, machinery, equipment, and vehicles

government bonds

Treasury securities are desirable because they are easy to buy and sell, and the U.S. government is unlikely to default.

Which of the following would increase the consumption component of U.S. real GDP?

You purchase a vacation at Disney World in Florida

corporate bonds

a corporation acknowledges its debt by issuing a bond, or corporate IOU

The NBER defines a recession as

a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Real GDP is

adjusted for changes in the price level

If Harley Davidson Motor Company purchases brakes to put on its moterbikes, and several pliers for its workers to use, the purchases of brakes are______ and the purchases of pliers are ______.

an intermediate good and not included in GDP; a final good and included in GDP

real variables

anything that can be changed because of prices and inflation

An American company owns a fast-food store in Lima, Peru. The value of the goods and services produced in the store

are included in Peruvian GDP, but not U.S. GDP

3 types of borrowers

businesses and households

4 components of of the national spending approach

consumption, investment, government, and net exports

Bonds

corporate bonds and government bonds

nominal GDP

current GDP

ETF

exchange-traded fund

businesses

expand or start a business (capital investment)

long-run macroeconomics challenges

firms need to borrow money even the most successful businesses need to borrow money to expand

Today, some countries have living standards between $45,000 and $65,000 while other countries have living standards between $4,500 and $6,500. From a statistical perspective, in countries with the higher standards we should expect to see

greater per capita consumption levels

What is the most accurate answer to this question: Today, how does the living standard of the U.S. compare to other countries around the world? On average, people in the U.S.

have a living standard that is higher than about 50% of the world population

nominal variables

have not been adjusted for changes in price

No free lunch principle

higher returns come at the price of higher risk

households

homes and education (households save the most money)

property rights

if you produce something like land and buildings, it is your right to keep it

real GDP

inflation adjusted GDP