ECON 2305 Exam 2

Suppose there is an increase in the minimum wage. True or False: The amount of unemployment in this industry falls as a result of the increase in the minimum wage.

False The amount of unemployment is equal to the difference between the quantity of labor supplied and the quantity of labor demanded. From the graph, you can see that the difference between these two values increases as a result of the increase in the minimum wage.

A short-order cook who loses his job when a new restaurant opens across the street is more likely to experience ___________________ unemployment.

short term

You would expect a bond issued by the federal government and a bond issued by New York State to pay different interest rate because of differences in the bonds' ______________________________

tax treatment

You would expect a bond that repays the principal in year 2040 and a bond that repays the principal in year 2020 to pay different interest rates because of differences in the bonds' ________________

term

Chapter 12: Production and Growth

#2 - 17

Chapter 13: Saving, Investment, and the Financial System

#20 -

Suppose the interest rate is at the equilibrium rate. Complete the following table with how much each student will have a year later after the investment projects pay their return AND loans have been repaid.

1) 7>4, Carlos lends, 1000+(1000*0.07) = $1070 2) 7=7, Felix neither borrows nor lends, earns same amount as before, 1000+(1000*0.07) = $1070 3) 7<15, Janet borrows another 1000 at the interest rate of 7% (to be repaid) and earns 15 on both this borrowed amount and the funds she already has, (2000+(2000*0.15)) - (1000+(1000*0.07)) 2300-1070 = $1230

Suppose the interest rate is 6 percent. Among these three students, the quantity of loanable funds supplied would be $___________, and quantity demanded would be $______________.

1. $1000 2. $2000 r>4, Carlos would want to lend his $1000 r<7, Felix would want to borrow $1000 r<15, Janet would want to borrow $1000

At an interest rate of ________%, the loanable funds market among these three students would be in equilibrium. At this interest rate, __________ would want to borrow, and ___________ would want to lend.

1. 7% 2. Janet 3. Carlos 7>4, Carlos would want to lend 7 = 7, Felix would neither borrow nor lend 7<15, Janet would want to borrow

Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students' investment projects: Carlos: 4 Felix: 7 Janet: 15 Complete the following table with how much each student will have a year later when the project pays its return.

1. Carlos = 1000 + (1000*0.04) = $1040 2. Felix = 1000 + (1000*0.07) = $1070 3. Janet = 1000 + (1000*0.15) = $1150

Suppose that one day the economy opens itself to international trade and, as a result, starts importing autos and exporting aircraft. This would cause the demand for labor in the auto manufacturing industry to ______________ and the demand for labor in the aircraft manufacturing industry to _____________. .

1. Fall 2. Rise

Societies choose what share of their resources to devote to consumption and what share to devote to investment. Some of these decisions involve private spending; others involve government spending. 1. Laundromats buying washing machines 2. People buying food 3. Firms buying automobiles for delivery services 4. People buying newspapers

1. Investment 2. Consumption 3. Investment 4. Consumption

For each form of government spending, indicate whether it represents consumption or investment. 1. Building tunnels 2. Buying military equipment 3. Building airports 4. Paying salary to public elementary school teachers

1. Investment 2. Investment 3. Investment 4. Consumption

What can the government of a relatively poor country do to promote economic prosperity? Check all that apply.

1. Minimize corruption among government officials. 2. Give inventors and authors exclusive, temporary rights to market and sell their creations. 3. Establish and enforce strong property rights.

Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. This belief would cause people to save __________ today, which would ________________ private saving and_________________ the supply of loanable funds. This would____________ the effect of the reduction in public saving on the market for loanable funds.

1. More 2. Increase 3. Increase 4. Reduce

Given your answers to the previous task, indicate whether each of the following is considered money in the U.S. economy. 1. Mexican peso 2. U.S. penny 3. Plastic credit card 4. Diamond

1. No 2. Yes 3. No 4. No

Economists in Funlandia, which has a closed economy, have collected the following information about the economy for a particular year: Y = 11500 C = 7000 T = 1300 G = 1900 The economists also estimate that the investment function is: In = 3200 - 100r Where "r" is the country's real interest rate, expressed as a percentage Complete the following table by calculating private saving (PRS), public saving (PS), national saving (NS), investment (In), and the equilibrium real interest rate (ERIR).

1. PRS = Y - T - C PRS = 11500 - 1300 - 7000 = 3200 2. PS = T - G PS = 1300 - 1900 = -600 3. NS = PRS + PS NS = 3200 + (-600) = 2600 4. In = NS In = 2600 5. In = 3200-100r 2600 = 3200-100r 100r = 600 r = 6 ERIR = 6%

Which of the following statements accurately describes the effect of the increase in government borrowing? Check all that apply.

1. Private saving increases by less than $20 billion. 2. National saving decreases by less than $20 billion. 3. Public saving decreases by exactly $20 billion.

Indicate whether each of the following descriptions represents saving or investment, as defined by a macro-economist. 1. This occurs when a person's income exceeds his consumption. 2. This occurs when a person or firm purchased new capital.

1. Saving 2. Investment

The size of the labor force is ____________________, and the labor force participation rate is __________%.

1. Size of labor force = #Employed + #Unemployed Size of labor force = 148434000 + 8296000 = 157130000 2. Labor force participation rate = (Labor Force/Adult Population) * 100 Labor force particpation rate = (157130000/250801000) * 100 = 62.7%

Indicate whether each of the following functions as a medium of exchange, a unit of account, or a store of value in the U.S. economy. Check all that apply. 1. Mexican peso 2. U.S. penny 3. Plastic credit card 4. Diamond

1. Store of value 2. Medium of Exchange, Unit of Account, and Store of Value 3. None 4. Store of Value

What would you need to know in order to judge which of these two policies would be a more effective way to raise investment? Check all that apply.

1. The response of private saving to changes in the government budget deficit 2. The elasticity of private saving with respect to the after-tax real interest rate

Which of the following situations represent saving. Check all that apply.

1. You use your $200 paycheck to buy stock in AT&T. 2. Your roommate earns $100 and deposits it in his account at a bank.

In 2015, the Bureau of Labor Statistics (BLS) announced that of all adult Americans, 148,834,000 were employed, 8,296,000 were unemployed, and 93,671,000 were not in the labor force. What is the adult population?

Adult population = #Employed + #Unemployed + #Not in Labor Force Adult Population = 148,834,000 + 8,296,000 + 93,671,000 = 250,801,000

Suppose GDP (Y) is $9 trillion, taxes (T) are $1.9 trillion, private saving (PRS) is $0.6 trillion, and public saving (PS) is $0.3 trillion. Assuming the economy is closed, complete the following table by calculating consumption, government purchases, national saving, and investment. 1. Consumption (C) 2. Government Purchases (G) 3. National Saving (NS) 4. Investment (In=NS)

Assuming the economy is closed, complete the following table by calculating consumption, government purchases, national saving, and investment. 1. C = Y - T - PRS C = 9 - 1.9 - 0.6 = $6.5 trillion 2. G = T - PS G = 1.9 - 0.3 = $0.6 trillion 3. NS = PRS + PS NS = 0.6 + 0.3 = $0.9 trillion 4. In = NS (In a closed economy) In = $0.9 trillion

True or False: If the extra output produced from an additional unit of capital rises as the stock of capital rises, the country is possibly overinvesting in capital.

False

Structural unemployment is sometimes said to result from a mismatch between the job skills that employers want and the job skills that workers have. To explore this idea, consider an economy with two industries: auto manufacturing and aircraft manufacturing. Assume that workers in these two industries require similar amounts of training, and they can choose which industry to train for at the beginning of their careers. True or False: Wages in the auto manufacturing industry would be less than those in the aircraft manufacturing industry.

False

True or False: A country is possibly over-investing in human capital if people are not educated enough to fill existing job openings.

False A country could overinvest in human capital if people were too highly educated for the jobs they could get—for example, if the best job a Ph.D. in philosophy could find is managing a restaurant.

In the 1990s and the first decade of the 2000s, investors from the Asian economies of Japan and China made significant direct and portfolio investments in the United States. At the time, many Americans were unhappy that this investment was occurring. True or False: It was better for the United States not to receive this foreign investment because it shrunk the capital stock.

False The United States benefited from the Chinese and Japanese investment because it made our capital stock larger, increasing our economic growth.

Most countries, including the United States, import substantial amounts of goods and services from other countries. True or False: Countries with the least amount of international trade tend to have the highest standard of living.

False There are substantial gains from trade. To be able to afford to purchase goods from other countries, an economy must generate income. By producing many goods and services, then trading them for goods and services produced in other countries, a nation maximizes its standard of living.

When the Fed buys bonds in open-market operations, it _________________ the money supply.

Increases

A more elastic demand for loanable funds would result in national saving changing by ____________ as a result of the increase in government borrowing.

More

If the Fed wants to decrease the money supply, it can _______________ the reserve requirement.

Raise

Suppose that society decided to increase consumption and reduce investment. Less investment leads to _____________ economic growth in the long run.

Slower

The more elastic the supply of loanable funds, the _________________ the change in national saving as a result of the increase in government borrowing.

Smaller

What is the opportunity cost of investing in human capital?

The goods or resources that could be produced if not investing in human capital

What is the opportunity cost of investing in capital?

The loss of consumption that results from redirecting resources toward investment

In many developing nations, young women have lower enrollment rates in secondary school than do young men. Which of the following observations are consistent with greater educational opportunities for young women leading to faster economic growth in these countries? Check all that apply.

There are external benefits associated with greater knowledge in a country.

Which of the following statements are true about groups in society that would benefit from or be hurt by this change? Check all that apply.

There might be a transition period in which workers and owners in consumption-good industries would receive higher incomes.

Adam Smith wrote, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things." True or False: A fair administration of justice would encourage saving and investment through the enforcement of property rights, thereby promoting economic growth.

True

International data show a positive correlation between income per person and the health of the population. True or False: Individuals with higher incomes have better access to clean water, medical care, and good nutrition, and healthier individuals are likely to be more productive than sick ones.

True

Investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit. True or False: It is difficult to implement both of these policies at the same time because reducing taxes on private spending has the effect of increasing the government budget deficit.

True

Many workers hold large amounts of stock issued by the firms at which they work. True or False: A person might not want to hold stock in the company where he works because he should diversify his holdings to reduce his overall risk.

True From an employee's point of view, owning stock in the company for which she or he works can be risky. The employee's wages or salary is already tied to how well the firm performs. If the firm has trouble, the employee could be laid off or have to take a salary cut. If the employee owns stock in the firm, then there is a double whammy—the employee is out of a job or gets a pay cut and also loses value in the stock. So owning stock in one's own employer is a very risky proposition.

True or False: If Intel has enough of its own funds to build the new factory without borrowing, an increase in interest rates still affects Intel's decision about whether to build the factory.

True Even if Intel uses its own funds to build the factory, the rise in interest rates still matters. There is an opportunity cost on the use of the funds. Instead of investing in the factory, Intel could use the money to purchase bonds and earn the higher interest rate available there. Intel will compare its potential returns from building the factory to the potential return from the bond market. If interest rates rise, so that bond market returns rise, Intel is again less likely to invest in the factory.

True or False: It would have been better for Americans to have made this investment because then they would have received the returns on the investment themselves.

True It would have been better for Americans to make the investments themselves because then they would have received the returns on the investment, instead of the returns going to China and Japan

Between January 2010 and January 2016, U.S. employment increased by 12.1 million workers, but the number of unemployed workers declined by only 7.3 million. True or False: The labor force has increased.

True The labor force is the sum of the employed and the unemployed. Thus, the fact that employment increased by 12.1 million while unemployment declined by 7.3 million implies that the labor force grew by 4.8 million workers

Indicate what happens to the unemployment rate and the employment-population ratio in each of the following scenarios. 1. Many previously laid-off workers find jobs in new startup firms as the economy expands. 2. After an unsuccessful search, some laid-off workers quit looking for new jobs. 3. Numerous students graduate from college but cannot find work. 4. A stock market crash leads to large-scale lay-offs of workers aged 55 and above, who decide to retire instead of looking for new jobs.

Unemployment Rate: 1. Decreases 2. Decreases 3. Increases 4. Increases Employment-Population Ratio 1. Increases 2. Stays the same 3. Stays the same 4. Decreases

Indicate what happens to the unemployment rate and the labor-force participation rate in each of the following scenarios. 1. After an unsuccessful job search, Carlos gives up looking and retires. 2. Deborah quits her job to become a stay-at-home mom. 3. Felix has a birthday, becomes an adult, but has no interest in working. 4. Janet dies working long hours at the office.

Unemployment Rate: 1. Decreases 2. Increases 3. Stays the same 4. Increases Labor-Force Participation Rate 1. Decreases 2. Decreases 3. Decreases 4. Decreases

What is the unemployment rate?

Unemployment rate = #Unemployed/#Labor Force Unemployment rate = (8296000/157130000) * 100 =5.3%

Suppose the government borrows $20 billion more next year than this year. a) Use the orange line (square point) to graph the new supply of loanable funds as a result of this government policy to borrow $20 billion more next year than this year. b) As a result of this policy, the equilibrium interest rate _____________

a) Supply line moves to the left b) Rises The increase in government borrowing by $20 billion reduces the supply of loanable funds at each interest rate by $20 billion, so the new supply curve is represented by a leftward shift of the initial supply curve of exactly $20 billion. As a result of the shift, the new equilibrium real interest rate rises due to the increase in government borrowing.

Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate "r" If a student's expected rate of return is greater than "r", he or she would choose to _______________

borrow Each student would compare the expected rate of return on his or her own project with the market rate of interest (r). If the expected rate of return is greater than "r", the student would borrow. If the expected rate of return is less than "r" the student would lend.

You would expect a bond of the U.S. government and a bond of an Eastern European government to pay different interest rates because of differences in the bonds' ________________

credit risk

If the Fed wants to increase the money supply, it can __________________ the interest rate it pays on reserves.

decrease

The International Property Rights Index (IPRI) scores countries based on the legal and political environment and how well property rights are protected. Countries with better property rights protection generally have _______________ income per person than those with poor property rights enforcement.

higher

When the FOMC decreases its target for the federal funds rate, the money supply will ____________________ .

increase

Suppose that Intel is considering building a new chip-making factory. Assume that Intel needs to borrow money in the bond market. It is less likely for Intel to build the new factory if interest rates ________________

increase If interest rates increase, the cost of borrowing money to build the factory rises, so the returns from building the new plant may not be sufficient to cover the costs. Thus, higher interest rates make it less likely that Intel will build the new factory.

If people decide to hold less currency after a rash of pick-pocketing, the money supply _____________________ .

increases

You would expect a bond from Coca-Cola to pay a _________________ interest rate as compared to a bond from a software company you run in your garage.

lower