Econ Exam #3

Other things the same, as the maturity of a bond becomes longer, the bond will pay

a higher interest rate because it has more risk.

Aisha would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

a. 14 percent

Figure 26-3 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.

a. A movement from Point C to Point F

An economist claims that changes in information technology and unemployment insurance have reduced unemployment. Which of these changes affect frictional unemployment?

a. Both the changes in information technology and unemployment insurance

Octavia does not currently have a job, but she has applied for several jobs in the previous week. Eve is an unpaid stay-at-home mom who has not searched for work in recent years. Who does the Bureau of Labor Statistics count as "not in the labor force"?

a. Eve but not Octavia

Meredith is looking for work as a computer programmer. Her prospects are good but so far she has not taken a job. Julie is looking for work in a steel mill. Every time Julie shows up for an interview, there are more people looking for work than there are openings. She realizes that it has been that way for a long time.

a. Meredith is frictionally unemployed, and Julie is structurally unemployed.

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

a. Option 2; Option 3; Option 1

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be

a. higher interest rates and lower investment.

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the company's executives may take on greater risks than stockholders desire. This example illustrates

a. moral hazard and firm-specific risk.

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

a. option A.

A bond buyer is a

a. saver. Bond buyers may sell their bonds prior to maturity.

Frictional unemployment is thought to explain relatively

a. short spells of unemployment, while structural unemployment is thought to explain relatively long spells of unemployment.

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

b. $800

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

b. $859.09

In 2018 the Bureau of Labor Statistics reported that there were 57.4 million people over age 25 whose highest level of education was some college or an associate degree. Of these, 36.3 million were employed and 1.2 million were unemployed. What were the labor-force participation rate and the unemployment rate for this group?

b. 65.3% and 3.2%

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures

b. capital investment.

You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds

b. is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.

Other things the same, a higher interest rate induces people to

b. save more, so the supply of loanable funds slopes upward.

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

b. speculative bubble.

The labor-force participation rate measures the percentage of the

b. total adult population that is in the labor force.

In national income accounting, we use which of the following pairs of terms interchangeably?

c. "Public saving" and "government tax revenue minus government spending"

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

c. 5 percent.

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

c. Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.

If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?

c. Saving and the interest rate

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in his retirement account. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

c. Stan

Who of the following is not included in the Bureau of Labor Statistics' "employed" category?

c. Those waiting to be recalled to a job from which they had been laid off

Figure 26-3 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.

c. a decrease in the supply of loanable funds.

If Alan is risk-averse, then he will always

c. choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5.

Table 27-1 Matt's Utility Function Wealth (Dollars) 50,000/51,000/52,000/53,000 Utility 7,000/7,250/7,499/7,746

c. his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse.

By definition, equity finance

c. is accomplished when firms sell shares of stock.

The source of the supply of loanable funds

c. is saving and the source of demand for loanable funds is investment.

In a closed economy, what remains after paying for consumption and government purchases is

c. national saving.

If the government's expenditures exceeded its receipts, it would likely

c. sell bonds directly to the public.

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

c. the firm-specific risk, but not the market risk of his portfolio.

Unions contribute to

c. the natural rate of unemployment but not frictional unemployment.

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?

d. 7 percent

Derek recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the highest risk?

d. A portfolio with an average annual rate of return of 14%.

Wanda quit her job because she was unhappy at work. Arnold was laid off from his landscaping job because his company was downsizing. Who is eligible for unemployment insurance benefits?

d. Arnold but not Wanda

Figure 27-1 The following figure shows a utility function for Britney.

d. Britney is risk averse.

Tatiana is waiting to be recalled to a job from which she was laid off. Ivan was fired but has not looked for work during the last two months. Who does the Bureau of Labor Statistics count as "unemployed"?

d. Tatiana but not Ivan

Suppose that a large number of people who used to work or seek work no longer do either. Other things the same, this makes

d. both the number of people unemployed and in the labor force fall.

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

d. demand for existing shares of the stock and the price will both fall.

The unemployment rate is computed as the number of unemployed

d. divided by the labor force, all times 100

Efficiency wages

d. increase productivity but increase unemployment.

When the government's budget deficit increases the government is borrowing

d. more and public savings falls.

The amount of unemployment varies

d. substantially over time and across countries

Collective bargaining refers to

d. the process by which unions and firms agree on the terms of employment.

If the efficient markets hypothesis is correct, then

d. the stock market is informationally efficient.

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

d. $1,123.50