Econ 222 Exam 2

GDP

Y= C+I+G+NX Y= GDP C= consumption I= investment G= government purchases NX= net exports

Private saving

- income that households have left after paying for taxes and consumption Y-T-C

Government budget surplus

- increase supply of loanable funds - reduce interest rate -stimulates investments

Natural resources

- inputs into the production of goods and services - provided by nature such as oil coal minerals

Nominal intrest rate

- interest rate as usually reported -without a correction for the effects of inflation

Government budget deficit

- interest rate rises - investment falls

Human capital

- knowledge and skills that workers acquire through education, training, and experience

Real GDP per person

- living standard -vary widely form country to country

Poor countries

- low productivity -even small amounts of capital investment increase workers productivity

Determinants of productivity

- physical capital per worker - human capital per worker - natural resources per worker - technological knowledge

Credit risk

- probability of default - probability that the borrower will fail to some of the interest or principal - higher interest rates for higher probability of default

Interest rate rises

- quantity demanded declines - quantity supplied increase - demand curve slopes downward -supply curve slopes upward

Physical capital

- stock of equipment and structures -used to produce goods and services

Public saving

- tax revenue that the government has left after paying for its spending T-G

Consumer Price Index (CPI)

-Measure of overall level of prices -measure of the overall cost of goods and services

Closed economy

-NX=0

CPI

-Reflects prices of goods and serves bought by consumers - Compares price of a fixed basket of goods and services

Identity

-an equation that must be true because of the way the variables in the equation are defined - clarify how different variables are related to one another

Catch-up effect

-countries that start off poor tend to grow more rapidly than countries that start off rich

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. 2004 3$ per pound 2$ per toy 2005 1$ per pound 7$ per toy 2006 4$ per pound 5$ per toy The cost of the basket in 2006 was $9 $130 $140 $270

$130

In the economy of Talikastan in 2015, consumption was $700, exports were $200, government purchases were $300, imports were $150, and investment was $400. What was Talikastan's GDP in 2015? a. $1350 b. $1450 c. $1050 d. $1750

$1450

A U.S.-owned automobile factory uses $100,000 worth of parts purchased from foreign countries along with U.S. inputs to produce 30 cars worth $20,000 each. Twenty of these cars are sold and 10 are left in inventory. How much did these actions add to GDP? a. $300,000 b. $500,000 c. $600,000 d. $700,000

$500,000

In 2014, the Packers produced 20 field goals at $3 each and 100 touchdowns at $7 each. In 2015, they made 15 field goals at $4 each and 105 touchdowns at $10 each. What was real GDP in 2015 using 2014 as the base year? a. $760 b. $780 c. $1,080 d. $1,110

$780 -Real GDP uses base year prices

Last year the imaginary nation of Freedonia had a population of 2,800 and real GDP of 16,800,000. This year it had a population of 2,700 and real GDP of 15,390,000. About what was the growth rate of real GDP per person between last year and this year? -5.3% -5% 5% 5.3%

- 5%

Indexation

- Automatic correction by law or contract - of a dollar amount

Bond

- Certificate of indebtedness -date of maturity, when the loan will be repaid - rate of interest, paid periodically until the date of maturity - principal=amount borrowed

Growth rate

- How rapidly real GPD per person grew in the typical year

Market for loanable funds

- Market : those who want to save supply funds : those who want to borrow to invest demand funds

Producer price index PPI

- Measure of the cost of a basket of goods and services bought by firms - Changes in PPI are often thought to be useful in predicting changes in CPI

Open economy

- NX not equal to 0

Productivity

- Quantity of goods and services -Produced form each unit of labor input -growth in productivity is the key determinant of growth in living standard

GDP deflator

- Ratio of nominal GDP to real GDP -Reflects prices of all goods and services produced domestically -Compares the price of current produced goods and services

Technological knowledge

- Societys understanding of the best way to produce goods and services

Diminishing returns

- benefit form an extra unit of an input -Declines as the quantity of the input increase

Tax treatment (for bonds)

-interest on most bonds is taxable income - municipal bonds missed by state and local government owners are not required to pay federal income tax on the interest income

Real interest rate

-interest rate corrected for the effects of inflation = Nominal interest rate - Inflation rate

Equity finance

-sale of stock to raise money

Budget surplus

- excess of tax revenue over government spending T-G>0

In the long run, higher savings rate

- higher level of productivity - higher level of income - not higher growth in productivity or income

Calculating CPI

1. "Fix the basket" -which prices are most important to the typical consumer 2. Find the prices 3. Compute the baskets cost -Same basket of goods - isolate the effects of price changes 4. Chose a base year and compute the Cpi -base year= benchmark Price of basket of goods in current year ------------------------------------ X 100 Price of basket in base year Inflation in year 2= CPI in year 2 - CPI in year 1 ----------------------------- CPI in year 1

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. 2004 1$ per pound 2$ per toy 2005 1$ per pound 7$ per toy 2006 4$ per pound 5$ per toy If the base year is 2004, then the CPI in 2004 was 0 1 80 100

100

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. 2004 $3 pp 2$ p toy 2005 $1 pp 7$ p toy 2006 4$pp 5$ p toy If the base year is 2004, then the CPI in 2005 was 88.9 90 100 112.5

112.5

barber shop produces 192 haircuts a day. Each barber in the shop works 8 hours per day and produces the same number of haircuts per hour. If the shop's productivity is 2 haircuts per hour of labor, then how many barbers does the shop employ? 8 12 16 None of the above is correct

12

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. 2004 3$ pp 2$ p toy 2005 1$pp 7$ p toy 2006 4$pp 5$ p toy If the base year is 2004, then the inflation rate in 2005 was -44.5% -12.5% 12.5% 44.5%

12.5

Last year real GDP in the imaginary nation of Oceania was 561.0 billion and the population was 2.2 million. The year before, real GDP was 500.0 billion and the population was 2.0 million. What was the growth rate of real GDP per person during the year? 12 percent 10 percent 4 percent 2 percent

2 percent

Hit-It produces 320 baseball bats per day using 2 workers who each work 8 hours per day. What is HitIt's productivity? 320 baseball bats 160 baseball bats per hour 20 baseball bats per hour None of the above is correct

20 bats per hour

For a closed economy, GDP is $18 trillion, consumption is $13 trillion, taxes are $2 trillion, and the government runs a deficit of $1 trillion. Private saving is ____ trillion and national saving is ___ trillion 3; 1 3; 2 2; 3 2; 2

3;2

Price of a loan

= real interest rate - borrowers pay for a loan - lenders receive on their saving

T

= taxes minus trasfer payments S= Y-C-G S= (Y-T-C)+(T-G)

We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have identical characteristics except that Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation. Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York. Bond A has a term of 1 year and Bond B has a term of 5 years. All of the above are correct.

Bond a has a term of 1 year and bond b has a term of 5 years

Real GDP per person is $10,000 in Country A, $20,000 in Country B, and $30,000 in Country C. The saving rate increases by the same rate in all three countries. Other things equal, we would expect that all three countries will grow at the same rate Country A will grow the fastest Country B will grow the fastest Country C will grow the fastest

Country A will grow the fastest

Sam, an American citizen, prepares meals for his family at home. Ellen, a Canadian citizen, commutes to the U.S. to help prepare meals at a restaurant in Idaho. Whose value of services preparing meals is included in U.S. GDP? a. Sam's and Ellen's. b. Sam's but not Ellen's. c. Ellen's but not Sam's. d. Neither Sam's nor Ellen's.

Ellens' but not Sams

Higher savings rate

Fewer resources- used to make consumption goods -more resources- to make capital goods -capital stock increase -rising productivity - more rapid growth in GDP

One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold for $3.00 to consumers. A second bag of flour is sold for $1 to a grocery store who sells it to a consumer for $2.00. Taking these four transactions into account, what is the effect on GDP? a. GDP increases by $3.00. b. GDP increases by $5.00. c. GDP increases by $6.00. d. GDP increases by $7.00.

GDP increased by $5.00

Inflation Rate

Inflation in year 2= CPI in year 2 - CPI in year 1 ----------------------------- CPI in year 1

Inflation rate

Percent change in the price index (from the preceding period)

Which of the following will increase a country's real GDP per person? imposing restrictions on foreign trade and foreign investment imposing restrictions on foreign trade and reducing restrictions on foreign investment reducing restrictions on foreign trade and imposing restrictions on foreign investment reducing restrictions on foreign trade and foreign investment

Reducing restrictions on foreign trade and foreign investment

Nation Savings (S)

S= Y-C-G S=I I=Y-C-G

Which of the following bond buyers did not buy the bond that best met his or her objective? Jackie wanted a bond with a high interest rate and was willing to take a lot of risk. She purchased a junk bond. Andrew wanted a bond that would allow him to legally avoid paying federal income taxes. He purchased a municipal bond. Suzy wanted to purchase a bond whose seller was unlikely to default. She purchased a bond that Standards and Poor's rated a low credit risk. Cecilia held long-term bonds rather than short-term bonds to avoid risk.

Suzy wanted to purchase a bond whose seller was unlikely to default. She purchased a bond that Standards and Poors rated a low credit risk

Budget deficit

T-G< 0

Which of the following is an example of a produced factor of production? a plant in which automobiles are assembled skills that people accumulate in high school and college skills that people accumulate through experience in the workplace all of the above

all of the above

Amount in todays dollars =

amount in year T dollars x Price level today ----------------------- Price level in T years

Which of the following can explain faster growth of real GDP in country A than in Country B? both greater population growth and greater productivity growth in Country A greater population growth in Country A, but not greater productivity growth in Country A greater productivity growth in Country A, but not greater population growth in Country A neither greater population growth nor greater productivity growth in Country A

both greater pop growth and greater productivity growth in country A

In a closed economy, if Y remained the same, but G rose, T rose by the same amount as G, and C fell but by less than the increase in T, what would happen to private and national saving? national saving would fall and private saving would rise national saving would rise and private saving would fall both national saving and private saving would fall both national saving and private saving would rise

both national saving and private saving would fall

Which of the following is an example of physical capital? the available knowledge on how to make semiconductors a taxi-cab driver's knowledge of the fastest routes to take bulldozers, backhoes, and other construction equipment all of the above are correct

bulldozers, backhoes, and other construction equipment

Daniel owns a coffee kiosk. All of his employees work 8 hours per day. In 2011, he employed 6 people who produced a total of 912 cups of coffee each day. In 2012, he hired a seventh employee and production increased to 1008 cups of coffee each day. In Daniel's kiosk, productivity increased by about 10.5% increased by about 9.5% decreased by about 5.6% decreased by about 5.3%

decrease by 5.3%

Suppose that the U.S. undertakes a policy to increase its saving rate. This policy will likely have no impact on the growth rate of real GDP per person. decrease the growth of real GDP per person for a few years. increase the growth of real GDP per person for several decades. permanently increase the growth rate of real GDP per person.

decrease the growth of real GDP per person for a few years

Suppose that in some country the price of silver increased from $30 per ounce to $31 per ounce during a time when the overall price level increased by 5 percent. During this period, the real price of silver increased decreased stayed the same there is not enough information

decreased

Suppose over the last five years that the price of recycled aluminum increased from $800 a ton to $900 a ton. Over the same time a measure of the overall price level increased from 120 to 138. The real price of recycled aluminum increased, so it became scarcer increased, so it became less scarce decreased, so it became scarcer decreased, so it became less scarce

decreased so it became less scarce

All else equal, when people become more optimistic about a company's future, the supply of the stock and the price will both rise supply of the stock and the price will both fall demand for the stock and the price will both rise demand for the stock and the price will both fall

demand for the stock and the price will both rise

Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds, so Skyline likely will demand funds from the financial system by buying bonds demand funds from the financial system by selling bonds supply funds to the financial system by buying bonds supply funds to the financial system by selling bonds

demand funds by selling bonds

A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will demand the required funds by buying bonds. demand the required funds by selling bonds. supply the required funds by buying bonds. supply the required funds by selling bonds.

demand the required funds by selling bonds

Susan switches from going to Speedy Lube for an oil change to changing the oil in her car herself. Which of the following is correct? The value of changing the oil is included in GDP whether Susan pays Speedy Lube to change it or changes it herself. b. included in GDP if Susan pays Speedy Lube to change it but not if she changes it herself. c. included in GDP if Susan changes it herself, but not if she pays Speedy Lube to change it. d. not included in GDP whether Susan pays Speedy lube to change it or she changes it herself

included in GDP if Susan pays speedy lube to change it but not if she changes it herself

In the long run, a higher saving rate cannot increase the capital stock means tha people must consume less in the future increases the level of productivity none of the above is correct

increase the level of productivity

Raise future productivity

invest more current resources in the production of capital

Kathleen is considering expanding her dress shop. If interest rates rise she is ___ likely to expand. This illustrates why ___ of loanable funds slopes ___. less; supply; downward more; supply; upward less; demand; downward more; demand; upward

less; demand; downward

If a reform of the tax laws encourages greater saving, the result would be ___ interest rates and ___ investment. higher; greater higher; less lower; greater lower; less

lower; greater

The logic behind the catch-up effect is that workers in countries with low incomes will work more hours than workers in countries with high incomes the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital none of the above is correct

new capital adds more to production in a country that doesn't have much capital

Suppose an economy's production consists only of corn and soybeans. In 2010, 20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel. In 2009, the price of corn was $2 per bushel and the price of soybeans was $1 per bushel. Using 2009 as the base year, it follows that, for 2010, a. nominal GDP is $50 b. nominal GDP is $100

nominal GDP is $100

Suppose that real GDP grew more in Country A than in Country B last year. Country A must have a higher standard of living than country B Country A's productivity must have grown faster than country B's Both of the above are correct None of the above are correct

none of the above are correct

Country A and country B both increase their capital stock by one unit. Output in country A increases by 10 while output in country B increases by 8. Other things the same, diminishing returns implies that country A is richer than Country B. If Country A adds another unit of capital, output will increase by more than 10 units richer than Country B. If Country A adds another unit of capital, output will increase by less than 10 units poorer than Country B. If Country A adds another unit of capital, output will increase by more than 10 units poorer than Country B. If Country A adds another unit of capital, output will increase by less than 10 units

poorer than country B. If country A adds another unit of capital, output will increase by less than 10 units

Which of the following best illustrates the human capital of a survivor stranded on an island? the fishing poles she has produced the invention of a better fishing lure the fresh fruit and fish on and around the island her previous training in a survival course

previous training in a survival course

Suppose the government finds a major defect in one of a company's products and demands that the product be taken off the market. We would expect that the supply of existing shares of the stock and the price will both rise. supply of existing shares of the stock and the price will both fall. demand for existing shares of the stock and the price will both rise. demand for existing shares of the stock and the price will both fall.

price and demand of the stock will fall

An increase in the government's budget surplus means public saving is greater than $0 and increasing public saving is greater than $0 and decreasing public saving is less than $0 and increasing public saving is less than $0 and decreasing

public saving is greater than $0 and increasing

A larger budget deficit raises the interest rate and investment reduces the interest rate and investment raises the interest rate and reduces investment reduces the interest rate and raises investment

raises the interest rate and reduces investment

Country A and country B both increase their capital stock by one unit. Output in country A increases by 12 while output in country B increases by 15. Other things the same, diminishing returns implies that country A is richer than Country B. If Country A adds another unit of capital, output will increase by more than 12 units. richer than Country B. If Country A adds another unit of capital, output will increase by less than 12 units. poorer than Country B. If Country A adds another unit of capital, output will increase by more than 12 units. poorer than Country B. If Country A adds another unit of capital, output will increase by less than 12 units.

richer than country b. if country A adds another unit of capital, output will increase by less than 12 unit

We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have identical characteristics except that the credit risk associated with Bond A is lower than the credit risk associated with Bond B Bond A was issued by the Apple corporation and Bond B was issued by the city of Houston Bond A has a term of 20 years and Bond B has a term of 2 years all of the above are correct

the credit risk associated with bond A is lower than the red risk associated with bond B

If there is a surplus of loanable funds, then the quantity demanded is greater than the quantity supplied and the interest rate will rise the quantity demanded is greater than the quantity supplied and the interest rate will fall the quantity supplied is greater than the quantity demanded and the interest rate will rise the quantity supplied is greater than the quantity demanded and the interest rate will fall

the quantity supplied is greater than the quantity demanded and the interest rate will fall