Exam 2 ch. 9-10

FALSE statements

-An improvement in the budget balance increases the demand for financial capital. -Lower interest rates can lead to private investment being crowded out. -A trade balance in surplus increases the supply of financial capital. -If private savings is equal to private investment, then there is neither a budget surplus nor a budget deficit.

Decide whether each statement is an input in the aggregate production function for GDP.

-a large amount of oil discovered in Texas. -recent graduate with engineering degree. -upgrade of computers for mike's motors.

not a output

-contributions to social security. -bonds issued by an automaker. -decreased property taxes.

whats true about savings-investment spending

-national savings are the combined value of all private savings and the budget balance -budget balance can be either positive or negative

whats false about saving-investment spending

-outflows of funds can only be generates by countries with a larger GDP per capita than the country receiving the funds. -national budget deficits are not included in the calculation of national savings.

Formula for investment

= GDP - Consumption - Government

Real GDP growth rate

= nominal GDP growth - inflation

Real GDP per capita

= real GDP / population

Rule of 70

=70/ percent of increase or decrease

Adjust the graph to show how a $25.8 billion dollar increase in the government's budget deficit affects the hypothetical loanable funds market below, holding all else equal.

The deficit increases the demand for loanable funds and shifts the demand curve to the right; increasing the interest rate and crowding out investment spending.

Which effect below characterizes the relationship between inflation expectations and nominal interest rates?

The fisher effect

Which of the statements best describes the idea of economic convergence?

lower GDP per captia countries will catch up with higher GDP per capita countries

when the preceding term is combined with all of the privately held savings from across the country, it is know as the

national savings

How are investment and national saving related in an economy, where the savings and interest are the same?

national savings equals investment

labor productivity

output per worker

When considering economic growth, many policy makers focus on real gross domestic product (GDP) per capita since it takes into account the potentially distorting effects of

population change

governments play an indirect role in private savings and investment through

regulating the financial system

due to an increase in revenues after a tax hike, the united states is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades

shift in demand

as a result of a stock market boom, individuals begin to feel richer and spend more while also saving less

shift in supply

human capital

the skills and knowledge gained by a worker through education and experience

what are the two aspects of efficiency that the equilibrium of market for loanable funds exhibits.

-Investment projects that are financed by savers have larger rates of return than projects that do not receive financing. -Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.

the government's direct role in creating human capital is primarily focused on

improving the education system

Jack decides to build a chateau in the mountains of Colorado and operate it as a ski resort. He secures funding from a local commercial bank after discussing his business plan with the bank. He promises to pay back the principal plus interest over the next 20 years.

loans

Calopolis, a college town inn northern california, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations

shift in demand

china decides to reduce it's capital investment in the united states, as it expects low returns due to a weak U.S. economy

shift in supply

a share of ownership in a company

stock

Lyle and Shane start a business selling pencil sharpeners to elementary schools. Their company becomes an instant success, and they decide to allow people to start buying a small share of their company. This gives individuals who buy shares the right to vote in company decisions and a small percentage of the profits.

stocks

If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

the business will not take out the loan

Stagflation

the combination of inflation and falling aggregate output

physical capital

the human-made resources used to create other goods and services

Caleb has completed a prototype garlic-peeling device that he hopes to sell to the public. Caleb decides to have his startup issue securities that offer buyers the promise to pay a specified amount of interest each year plus the principal in five years.

bonds

difference between the amount the government collects and how much it spends is known as the

budget balance

if the government spends more money than it takes in through taxes, it will experience a

budget deficit

if the government spends less money than it takes in through taxes, it will experience a

budget surplus

the net amount of funds coming into a country is the

capital inflow

Which of these statements best summarizes the impact of the Fisher effect?

consumers consider future inflation

the governments direct role in the production of physical capital is primarily focused on

developing infrastructure

The purpose of growth accounting is to

estimate the contribution each component of the aggregate production function makes to overall economic growth.

Collaboration with Congress during the Clinton Administration allowed for an aggressive deficit-cutting plan to pass. As a result, the government was able to reach a balanced budget at the end of the 90's.

increased because the cost of borrowing decreased.

Which of the terms acts as the "price" in the market for loanable funds?

interest rate

The fundamental relationship between savings and investment spending is that

investment spending and savings are always equal

Any large, sustainable increase in real GDP must be due to steadily increasing

labor productivity

an agreement between a lender and a borrower

loan

Rand Capital Corporation, a financial industry conglomerate, pools together several hundred home mortgages and sells shares in them to groups of investors. However, many investors decide against this option because of the risk involved and the difficulty of assessing the quality of such a large number of individual mortgages.

loan-backed securities

Audrey wants to buy a new car but does not have enough cash. She gets funding from her local bank with the promise that she will make monthly payments for the next three years to repay the original amount lent to her plus 6% interest.

loans

TRUE statements

An increase in government spending can crowd out private investment. An increase in private consumption may crowd out private investment.

economic growth is important to understand because

It is closely tied to standard of living.

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Quantity supplied will increase

financial intermediary

a financial institution that transforms investor funds into financial assets

technological progress

an increase in efficiency gained by producing more output without using more inputs

funds that are kept in a bank that must be relinquished upon the owner's request

bank deposit

A promise to pay issued by a borrower with annual interest payments and a principal payment at maturity.

bond