econ midterm 1

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new growth theory

A model of​ long-run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

economic growth model

A model that explains growth rates in real GDP per capita over the long run.

Why would countries that isolate themselves rather than participating fully in the global economy be hurting their own​ people?

Countries that isolate themselves miss out on foreign investment and access to better technology

In the circular flow of expenditure and​ income, why must the total value of production in an economy equal the total value of​ income?

Every penny spent on a good or service must end up as​ someone's income.

T/F: Production will take place more quickly and efficiently when firms are not restricted by the rule of law

False

T/F: Without the rule of​ law, firms will be sued and forced to pay damages if they fail to carry out a contract

False

T/F In years when people buy many shares of​ stock, investment will be high and, therefore, so will gross domestic product (GDP)

False: Investment as a component of GDP refers to the purchase of physical and human capital and​ inventory, not stock purchases.

T/F: Corporate profits are much too​ high: Most corporations make profits equal to 50 percent of the price of the products they​ sell.

False: The largest component of gross domestic income is​ wages, which are about three times as large as profit

How does channeling savings into investment support economic​ growth?

Firms can acquire funds to invest in new capital and new​ technologies, which increases worker productivity and thus economic growth

Which of the following is an argument to be made that globalization hurts rather than helps some​ economies?

It can result in unemployment and lower incomes for workers in industries that compete with foreign imports

Why might having such a large agricultural sector be considered an economic problem for​ India?

It is an economic problem for India because low levels of labor productivity result in low levels of income

What is the shadow economy?

It is the part of the economy where the buying and selling of goods and services is concealed from the government.

household survey vs. establishment survey

The household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measures total employment in the economy.

When an unemployed person drops out of the labor​ force, it...

does not affect the employment-population ratio.

As people move from working in the agricultural sector to other more productive​ sectors...

economic growth will automatically increase

​"The rule of​ law" refers to the ability of a government to

enforce the laws of the​ country, particularly with respect to protecting property rights and enforcing contracts

Technological progress is affected by

entrepreneurship, new software developments, private property rights, investment in capital

without contract enforcement

firms may have difficulty finding investors willing to provide them with the funds they need to expand, firms may be reluctant to enter into agreements with other​ firms, resulting in slower and more inefficient production, and bribery and government corruption are more likely to exist.

Businesses demand loanable funds because

firms need to borrow funds for new​ projects, such as building new factories or carrying out new research projects.

In the United​ States, what is a key source of funds for​ start-up firms bringing new technologies to​ market?

funding from venture capital firms

final good or service

good or service purchased by a final user

Crowding out occurs when

governments must borrow funds which causes interest rates to rise and thus private investment is reduced

In the​ circular-flow diagram, who supplies factors of production in exchange for​ income?

households

Which of the following categories make up about​ three-quarters of the market​ basket?

housing, transportation, and food

Real GDP per hour worked is determined by

human​ capital, physical​ capital, and technology

Increases in the minimum wage will

increase unemployment among teenagers.

households supply loanable funds because of the

interest income received from the borrowers

real interest rate=

interest rate-inflation rate

The unemployment rate in the United States is usually​ ________ than the unemployment rates in most other​ high-income countries, partly because the United States has​ _________ requirements for the unemployed to receive government payments.

lower; more stringent

During an economic​ expansion, we would normally expect the​ employment-population ratio to increase as the unemployment rate falls because

more people are likely to be employed

In an economy with rising​ prices, compared to the base​ year...

nominal GDP is larger than real GDP in years after the base year.

Inflation can affect the distribution of income because

people with incomes rising faster than the rate of inflation enjoy an increasing purchasing​ power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.

If the GDP deflator in 2012 has a value of​ 98.0, then...

prices have decreased 2 percent between the base year and 2012.

Which of the following is not a​ "loanable fund"?

real estate

value added refers to

the additional market value a firm gives to a product and is calculated as the difference between the sale price and the price of intermediate goods.

Many economists prefer (household or establishment)

the establishment survey because it is determined by actual payroll records rather than unverified answers.

In determining whether to borrow​ funds, firms compare the rate of return they expect to make on an investment with

the interest rate they must pay to borrow the necessary funds

When the economy is at full​ employment, unemployment is equal to

the natural rate of unemployment.

The difference between the nominal interest rate and the real interest rate is

the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.

If inflation is expected to​ increase,

the nominal interest rate will increase.

The​ state's unemployment rate could have increased at the same time that employment in the state was increasing because

the number of discouraged workers and other people not previously counted as unemployed entered the labor force.

trade dispute

the situation that occurs when two countries impose tariffs and​ non-tariff barriers on each other

The natural rate of unemployment is

the sum of structural unemployment and frictional unemployment.

real GDP

the value of final goods and services evaluated at base-year prices

Which of the following factors determines the supply of loanable​ funds?

the willingness of households and governments to save

When an unemployed person drops out of the labor​ force, the unemployment rate...

understates the true degree of joblessness in the economy.

The unemployment rate is calculated as

unemployment rate= (number of unemployed/labor force)*100

You can expect there to be a close relationship between productivity gains and increases in real wages because

unit costs fall when more goods are produced per​ worker, so prices can​ fall, thereby increasing the value of real wages.

nominal GDP

value of final goods and services evaluated at current-year prices

An important conclusion to draw from the​ circular-flow diagram is that

we can measure GDP by calculating the total value of expenditures on final goods and​ services, or we can measure GDP by calculating the value of total income.

foreign direct investment

when a firm builds or purchases a facility in a foreign country

foreign portfolio investment

when an individual or a firm buys stocks or bonds issued in another country

Aren't savings already​ investment? If​ not, what type of investment is the Factsheet referring​ to?

​No, investment, as used in this​ context, refers to expenditure on new capital and new technology

How is GDP deflator calculated?

GDP Deflator=(Nominal GDP/Real GDP)*100

When a significant fraction of domestic production takes place in​ foreign-owned facilities, a​ country's difference between GDP and GNP is as​ follows:

GDP will be much larger than GNP (Gross National Product)

How does the size of a​ country's GDP affect the quality of life of the​ country's people?

Generally, the more goods and services people​ have, the better off they are.

Why does the shadow economy​ matter?

Having a large shadow economy may be a sign that government policies are making it difficult for many businesses to operate openly.

Why do economic growth rates​ matter?

High levels of sustained economic growth reduce infant mortality, When a country sustains high growth​ rates, life expectancy at birth increases, and High growth rates coincide with improved living standards

The role of the entrepreneur becomes much more important in the new growth theory—the endogenous growth model—than in the traditional economic growth model because

In the new growth​ theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies.

Why would incomes in agriculture be lower than incomes outside​ agriculture?

Incomes in agriculture would be lower if worker productivity is higher outside agriculture than in agriculture

Briefly explain how a poor country might benefit from foreign portfolio investment or foreign direct investment.

It can give​ low-income countries access to technology and funds that otherwise would not be available.

Why might replacing legal restrictions on firing workers with unemployment insurance​ (which is the approach used in the United​ States) increase economic​ growth?

It would make it easier for firms to get rid of workers who it no longer needs or who are not productive in their job and Firms may hire more workers if they can fire workers with low productivity or those who are a poor fit for the job

Even perfectly anticipated inflation imposes costs.​ Why?

Menu costs, Paper money loses its purchasing power by the rate of inflation, and Some wages will fail to keep up with anticipated inflation

How does real GDP deal with the problem inflation causes with nominal​ GDP?

Real GDP separates price changes from quantity changes, Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years, and By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced

What do people gain when the economy experiences growth and improved​ productivity?

Real wages increase when workers produce more output per hour, In​ general, increased productivity and economic growth are the key to rising living standards, and Workers receive higher real wages that allow them to buy more of the goods and services that firms produce.

Briefly explain how the financial system channels savings into investment.

Savers provide funds to firms by buying the​ firms' stocks and bonds and by depositing funds in banks

Which argument is correct in terms of promoting​ long-run economic​ growth?

Steven Landsburg because saving funds the investment spending needed for​ long-run economic growth

transfer payments =

T - G - S public

What are the possible negative effects of taxing business payrolls rather than taxing​ incomes?

Taxing business payrolls is likely to​ reduce the number of workers hired and​ lower the return to working​ (and saving and​ investing)

Which of the following is not one of the conditions someone needs to meet to be counted as​ unemployed?

They had worked only one hour per week during the previous four weeks.

T/F: If laws are not well​ enforced, buyers and sellers may be hesitant to participate in market transactions

True

T/F: Over the past 20​ years, other​ high-income countries have actually fallen further behind the United States in terms of real GDP per capita.

True

T/F: Without the rule of​ law, bribery and corruption are more likely to exist

True

T/F: A wage rising slower than the rate of inflation is actually​ falling

True. If wages are increasing slower than the average price of goods and​ services, purchasing power falls.

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the​ next?

When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities.

private saving =

Y + TR - C - T

investment spending =

Y - C - G (Y=C+I+G)

Does increasing productivity automatically increase​ growth?

Yes, increasing productivity should automatically increase growth as measured by real GDP per capita.

Suppose that the inflation rate turns out to be much lower than most people expected. In that​ case,

a borrower will lose from the situation while a lender will gain.

tax perk

a decrease in a firm's tax obligation

contract enforcement

binding, and individuals and businesses that do not fulfill their end of the bargain will face repercussions

​Long-run growth in GDP is determined by

capital, labor​ productivity, and technology

Holding all else​ constant, a federal government budget deficit will

decrease the supply of loanable funds and increase the equilibrium real interest rate


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