Macro Exam 2

Ceteris paribus, how much will the government collect in annual tax revenue from this tax, per year? A. 5 million B. 10 million C. 15 million D. 20 million

A. 5 million

Consider two bonds: X and Y. Ceteris paribus, we would expect the yield on Bond X to be greater than the yield on Bond Y if the two bonds have identical characteristics except that: A. Bond Y was issued by the United States Treasury; whereas Bond X was issued by a financially weak corporation. B. Bond Y was issued by a country currently experiencing a financial crisis associated with a disastrous war; whereas Bond X was issued by the US Treasury C. Bond Y was issued by a corporation in a country currently experiencing inflation of 3 percent per annum; whereas Bond X was issued by a country experiencing inflation of 1 percent per annum. D. None of the above is correct. In each scenario Bond X would be the lower-yielding bond.

A. Bond Y was issued by the United States Treasury; whereas Bond X was issued by a financially weak corporation.

In the Loanable Funds Market Model, ceteris paribus, which of the following events would best explain an increase in interest rates, together with a decrease in investment? A. the government went from running a budget surplus to running a budget deficit. B. private investors anticipate a higher return on their private-sector investments in the future. C. the government reduced the tax rate on savings income. D. none of the above is correct.

A. the government went from running a budget surplus to running a budget deficit

cable television is an example of (low-congestion goods)

nonrival and excludable

search engines, on air TV, (public goods)

nonrival and nonexcludable

Suppose you were evaluating three assets: A, B, and C. Suppose you learned that the long-run average annual compounded rate of return for the three assets were as follow: A= 9.5%, B= 4.95%, and C= 6.25%. Ceteris paribus Asset ________ is most likely a diverse portfolio of US common stocks; Asset _____ is most likely a diverse portfolio of US corporate bonds; and Asset _______ is most likely a portfolio of US Treasury securities.

A; C; B SBT: stocks get highest rate of return, then bonds, and then treasury

Ceteris paribus, what is the deadweight loss form this tax? A. 1 million B. 2 million C. 2.5 million D. 5 million

C. 2.5 million

Which of the following is the best example of a good or service that would be considered non-rival and non-excludable? A. your breakfast B. a congested interstate highway C. the US Navy D. enrollment in EC202

C. The US Navy

suppose a thirty year bond with a $10,000 face value pays a 0.0% annual coupon (at the end of the year_), has 1 year left to maturity, and has a discount rate of 0.0%. Ceteris paribus, it follows that the current market price of the bond should be _______. A. more 10,000 B. 10,000 C. less than 10,000 D. the market price of the bond cannot be determined from the information given

B. 10,000

Ceteris paribus, if the government imposes an excise tax on a good, then the price paid by buyers will __________ while the (net) price paid by sellers will ___________. A. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

B. increase, deacrease

Suppose earlier this morning, your broker recommended you sell German federal government bonds from your personal investment portfolio. Ceteris paribus, it follows that she thinks the market is currently _______ German bonds, and she expects German bond prices to _______ in the future. A. over pricing; increase B. over pricing; decrease C. under pricing; increase D. under pricing; decrease

B. over pricing; decrease

Which of the following best describes the economic concept of "deadweight loss"? a. the decrease in total surplus resulting from the removal of excise tax. b. the decrease in total surplus resulting from the "distortion" to the market from a tax. c. the increase in total surplus resulting from the removal of an excise tax. d. the increase in total surplus resulting from the "distortion" to the market from a tax.

B. the decrease in total surplus resulting from the distortion to the market from a tax.

In the Loanable Funds Market Model, ceteris paribus, it typically follows that when the federal government runs a budget deficit, there will be _____________ pressure on interest rates and ________________ pressure on private investment. This is referred to as __________________. A. upward; upward; crowding out B. upward; downward; crowding out C. downward; downward; financial intermediation D. downward; upward; financial intermediation

B. upward; downward; crowding out

Suppose a ten-year bond with a 10,000 face value face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 6.5%. Which of the following would give you the present value- i.e. the price of the bond? A. Present Value = $10,500/(1.065) 2 B. Present Value = [$500/(1.065)] + [$500/(1.065) 2 ]+ ... +[$500/(1.065) N ], where N = ∞(infinity). C Present Value = [$500/(1.065)] + [$500/(1.065) 2 ] +[$10,000/(1.065) 2 ] D. Present Value = [$500/(1.065)] + [$500/(1.065) 2 ]

C Present Value = [$500/(1.065)] + [$500/(1.065)^2 ] +[$10,000/(1.065)^2 ] Face value of bond = $10,000 Annual coupon rate = 5% or 0.05 Annual coupn payment = Face value * Annual coupon rate = $10,000 * 0.05 = $500 Discount rate = 6.5% or 0.065 There is 2 years left to maturity of the bond. Since, two years has left to maturity of the bond, the bond holder will receive two annual coupon payments. Thus, the price of the bond will be equal to the sum of the present value of these two coupon payments and the present value of the face value of the bond. Calculate the pice of the bond - Price = [Annual coupon payment/(1 + r)n] + [Annual coupon payment/(1+r)n] + [Face value of bond/(1 + r)n] Price = [$500/(1+0.065)1] + [$500/(1+0.065)2] + [$10,000/(1+0.065)2] Price = [$500/(1.065)] + [$500/(1.065)2] + [$10,000/(1.065)2]

Suppose a ten-year bond with a 10,000 face value face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 6.5%. Further suppose you purchase this bond, but then, after you purchase it, you discover that the credit (i.e. "default risk") on the bond has increased. Ceteris paribus, it follows that the present value (i.e. market price) would_________________, and the yield would ________________. A. increase, decrease B. increase, increase C. decrease, increase D. decrease, decrease

C. decrease, increase

Suppose a ten-year bond with a 10,000 face value face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 6.5%. Further suppose you purchase this bond, but then, after you purchase it, you discover that the inflation risk on the bond has increased. Ceteris paribus, it follows that the present value (i.e. market price) would_________________, and the yield would ________________. A. increase, decrease B. increase, increase C. decrease, increase D. decrease, decrease

C. decrease, increase

According to Coarse Theorem, ceteris paribus, if ______________, and ____________, then private parties can solve externality problems on their own- i.e. without government taxes or subsidies. A. property rights are well defined; transaction costs are high in some meaningful economic sense B. property rights are poorly defined; transaction costs are high in some meaning economic sense C. property rights are well defined; transaction costs are low in some meaningful economic sense D. property rights are poorly defined; transaction costs are low in some meaningful economic sense

C. property rights are well defined; transaction costs are low in the some meaningful economic sense

When an economist refers to "an efficient allocation of resources," she typically means __________ is maximized. A. consumer surplus, but not producer surplus B. producer surplus, but not consumer surplus C. the sum of consumer and producer surplus D. consumer surplus minus producer surplus

C. the sum of consumer surplus and producer surplus

For a closed economy- i.e. an economy in which there are no international transactions- GDP is $12 trillion, consumption is $7 trillion, taxes are $3 trillion, and the government runs a budget deficit of $1 trillion (assume transfer payments are zero.) It follows that private saving is ______________, and national savings is_____________. A. 5 trillion; 3 trillion B. 5 trillion; 1 trillion C. 2 trillion; 3 trillion D. 2 trillion; 1 trillion

D. 2 trillion; 1 trillion private saving= Y-(T-TR)-C >> 12-3-7 = 2 million national savings=private savings + public savings>> 2 + (-1) = 1

Suppose your economist tells you the "free market" demand for X is given by: P=30-3X; and the "free market" supply of X is given by P=10+2X. Ceteris Paribus, the equilibrium quantity exchanged in this market is __________ and the equilibrium price is _________. A. 20, 50 B. 8, 6 C. 8, 26 D. 4, 18

D. 4; 18 set P=P and solve for X, then plug X back in

Suppose the market for pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve. Now suppose that an excise tax, to be collected by pizza sellers, is imposed on this market. Ceteris paribus, it follows that the Consumer Surplus will ______________, and the Producer Surplus will __________. A. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

D. Decrease, Decrease

The primary economic function of the "financial system" is to provide "financial intermediation," which means: A. keeping the inflation rate at zero, ceteris paribus. B. keeping the inflation rate at the Treasury's "target rate", ceteris paribus. C. matching one person's consumption expenditures with another person's capital expenditures. D. Matching one person's borrowing with another person's saving

D. Matching one person's borrowing with another person's saving

Let Pa be the current market price of a U.S. Treasury Bond. Let Pr be the "fundamental" value of that bond. Let r be the long-run average annual compounded rate of return on common stocks, and b be the long run annual compounded rate of return on corporate bonds. Finally, let E be a random error term. Which of the following characterizes the Efficient Markets Hypothesis? A. Pa= Pr + r + E B. Pa= Pr + E - b C. Pa= (Pr + E) x (r-b) D. Pa=Pr+E

D. Pa=Pr+E

Ceteris paribus, goods with "positive externalities" tend to be ________ by the free-market private sector; thus, in modern developed economies these goods are often _________ by the government. A. over-supplied; taxed B. under-supplied; taxed C. over-suppplied; supplied or otherwise subsidized D. under-supplied; supplied or otherwise subsidized

D. under-supplied; supplied or otherwise subsidized

Ceteris Paribus

a Latin phrase that means "all other things held constant"

Ceteris paribus, the primary advantage of investing in mutual funds over individual stocks or bonds is that mutual funds:

allow investors with relatively small amounts of money to diversify their investment portfolios

Coarse Theorem

even in the presence of externalities, an economy can always reach an efficient solution as long as transaction costs are sufficiently low

Suppose you overheard a conversation in which an economist referred to the "free-rider problem" It is most likely the case that she was referring to a situation in which an individual:

received a publicly-provided good or service without paying taxes for it.

food, clothing, cars, house (private goods)

rival and excludable

fish in the sea, atmosphere, public waterways (common goods)

rival and nonexcludable

Loanable Funds Theory

suggests that the market interest rate is determined by the factors that control supply of and demand for loanable funds