Macro Exam 2

In a closed economy, national savings are equal to_____

Investment

You have two options. Option A is that you can have $500 in two years. Option B is that you can have $600 in three years. Assume an interest rate of 3%.

Option A: 500/ (1+.03)2 = 500/1.0609 =$471.30 Option B: 600/(1+.03)3 =600/(1.092727) =$549.08 Option B is the better option

What is the marginal productivity of capital?

The additional output resulting from one more unit of capital. It is the change in output over the change in capital. (MPk = ΔY/ΔK)

Which of the following statements is false? a) It is possible to have a high standard of living without an abundance of natural resources b) A nation cannot increase its standard of living if the population is growing c) Increases in the productivity of labor lead to increases in the standard of living d) Economic freedom has a significant effect on the standard of living

b) A nation cannot increase its standard of living if the population is growing

A "reservation wage" is the a) highest wage the firm is willing to pay b) lowest wage the worker is willing to accept to enter the labor force c) tip necessary to get a waiter to reserve a table d) competitive equilibrium wage

b) lowest wage the worker is willing to accept to enter the labor force

Which of the following is not a potential cause of greater human capital? a) better formal education b) more books per household c) more work experience and learning by doing d) more training

b) more books per household

The price of credit is ______ a. The amount a firm takes out as a loan b. The interest rate c. $5 d. The price of consumption in the future

b. The interest rate

Suppose the federal government increases the marginal tax rate on interest income and dividend income. -Which side of the loanable funds market will this directly affect: willingness to invest (borrow) or willingness to save (lend)? -Will this increase or decrease the willingness identified?

-This affects the willingness to save (lend) -This decreases the willingness to save

What are the causes of economic growth?

1. Productivity of labor a) capital stock - savings and investment b) technology - innovation c) human capital - experience, training 2. Institutions - government (private property rights)

Suppose the adult population is 100 people, 8 of whom are unemployed and 72 are employed. What is the unemployment rate?

10 %

How many years will it take to double for the following growth rates? 1% 10% 3.5% 4%

70/1= 70 years 70/10= 7 years 70/3.5= 20 years 70/4= 17.5 years

Suppose the adult population is 100 people, 8 of whom are unemployed and 72 are employed. What is the labor force participation rate?

80 %

According to the Romer podcast, diminishing returns to capital can be offset by a) more capital b) more labor c) more discovery and innovation d) more natural resources

c) more discovery and innovation

Which of the following future values would have the lowest present value? a) receiving $100 in one year b) receiving $100 in two years c) receiving $100 in three years d) Cannot determine without the interest rate

c) receiving $100 in three years

Which of the following would have the lowest present value? a) receiving $150 in one year b) receiving $200 in 2 years c) receiving $250 in 3 years d) cannot determine without interest rate

d) cannot determine without interest rate

What is the technological progression on the aggregate labor market? a) decrease in the wage, and decrease in employment b) decrease in the wage, and increase in employment c) increase in the wage, and decrease in employment d) increase in the wage and increase in employment

d) increase in the wage and increase in employment

When social security was introduced, a) investment demand increased b) investment demand decreased c) savings supply increased d) savings supply decreased

d) savings supply decreased

What is indirect finance?

Indirect finance is where a person puts their money in to the bank and then the bank loans it out to firms. The person finances the firm but it does not pick exactly who they are financing. Firms are ultimately borrowing from households.

What is the key to sustained economic growth?

Innovation and creation of new ideas (i.e technological progress). Want to encourage innovation. Economic freedom- encourage specialization and trade.

What are the ultimate causes of economic growth?

Institutions and economic freedom (5 things): Private property -Dependable legal system -Rule of law -Freedom of contract -Competitive and open markets

What does the efficient market hypothesis say?

It says that asset prices reflect all available/public information

Draw the Labor Market graph. What group makes up each curve? Show the equilibrium point

Labor Supply-consists of workers. As the wage increases, more people want to work Labor Demand-consists of firms. As the wage increases, they want to hire less

Present Value Formula

PV= FVt/(1+r)^t

Calculate the following. If r=10%, what is the present value of $150 in 10 years?

PV= FVt/(1+r)^t 150/(1+.1)^10 =$57.83

What is the difference between passive and active saving?

Passive saving is buying stocks and holding on to them no matter what. Active saving is also known as day trading and it is where trying to time the market by buying low and selling high. A managed fund is paying someone to actively save for you.

Draw the loanable funds market. Which groups of people are included with which curve

Savings Supply-includes households because they are net savers Investment Demand-includes firms because they are net borrowers

Why is saving-not spending-crucial for the success of the economy?

Savings leads to investment which leads to increase in capital accumulation which leads to future productivity of labor which leads to a higher future standard of living.

Why are some countries rich and others poor?

Some countries are rich because they have good institutions and economic freedom. Good institutions lead to good incentives which leads to an increase in productivity (tech, capital stock, human capital) which leads to an increase in productivity in labor which leads to a higher standard of living.

Direct finance occurs in the stock and bond markets. True or False?

TRUE

For a long time, poverty was the norm. It is only recently that many people have a higher standard of living. True or False?

TRUE

How do technology improvements lead to more employment?

Technology improvements lead to an increase in the productivity of labor which lead to an increase in the willingness to hire which leads to an increase in wage and an increase in labor.

What are the proximate causes of economic growth?

The Factor of Production: Technology/innovation (knowledge production), capital stock, human capital (productive knowledge and skills)

How did Social Security slow economic growth?

The introduction of Social Security lead to a decrease in the willingness to save which lead to an increase in interest rates which lead to a decrease in investment which lead to a decrease in capital accumulation which lead to a decrease in the growth rate.

Labor demand is determined by ______________________________________

The productivity of labor

What are the two purposes of the credit market?

To facilitate flow of credit from lenders to borrowers and to coordinate household saving and firm investment

If the number of discouraged workers increases (holding employment and population constant), then the official unemployment rate will decrease. True or False?

True

Lifetime income is more equally distributed than annual income. True or False?

True

The current price of a stock is the best predictor of its future price. True or false?

True

You cannot get rich from the stock market by observing publicly available information. True or False?

True

The supply of labor is also known as the willingness to ____________; the demand for labor is known as the willingness to __________________

Work; hire

Why does political instability and insecurity of property rights retard economic growth? a) Fear that private property will be confiscated substantially reduces the incentive of individuals to invest and create wealth b) When property rights are insecure, foreign investors are more willing to invest in the country c) Savings flow into a country if individuals fear property is insecure d) Political instability and corruption can enhance the coordinating power of the market

a) Fear that private property will be confiscated substantially reduces the incentive of individuals to invest and create wealth

Suppose Congress were to reduce the corporate tax rate. What would happen in the credit market? a) Interest rates would rise and investment would rise b) Interest rates would rise and investment will fall c) Interest rates would fall and investment would rise d)Interest rates would fall and investment will fall

a) Interest rates would rise and investment would rise

Based on "How Government stoked the Mania," which of the following statements is false? a) The government fought hard to limit sub- prime loans b) Government policies helped to increase the demand for housing and sub-prime mortgage loans c) The government forced banks, Fannie Mae and Freddie Mac to provide more mortgage loans to low income households d)Mortgage-baked securities sold by Fannie Mae and Freddie Mac had an implicit guarantee of government backing

a) The government fought hard to limit sub- prime loans

According to the Romer podcast, which of the following policies will lead to the most discovery and innovation within the domestic economy? a) allowing foreign direct investment to many firms along with open trade b) allowing foreign direct investment to one firm along with trade protection c) forbidding foreign direct investment along with open trade d) forbidding foreign direct investment along with trade protection

a) allowing foreign direct investment to many firms along with open trade

If the credit supply curve shifts to the right, this represents a) an increase in the willingness to save b) a decrease in the willingness to save c) an increase in the willingness to invest d) a decrease in the willingness to invest

a) an increase in the willingness to save

How Sixpack stops looking for work because he believes his prospects are so poor he is unlikely to find a job. The Bureau of Labor Statistics would classify Joe as a) not in the labor force b) on layoff c) unemployed d) employed as a household worker

a) not in the labor force

A meta-idea is a) a really big idea b) an idea about how to create more idea c)an idea from the nation of Meta d) an idea from metaphysics

b) an idea about how to create more idea

An increase in the capital stock occurs through a) research and development b) investment and savings c) the price level d) the mentos market

b) investment and savings

Which of the following equations best describes the generation of new ideas? a) ideas per year X incentives - population b) population X incentives X ideas per year c) population + incentives + ideas per year d) ideas/population + incentives

b) population X incentives X ideas per year

Which of the following would increase innovation and technological progress? a) a decrease in the population b) strong links between innovators and business c) the abolition of patent laws d) a culture that discourages investors, entrepreneurs, and artists

b) strong links between innovators and business

If there are diminishing returns to capital, a) increase in the capital stock eventually decrease output b) the marginal increase in output gets smaller as the capital stock increase c) capital produces fewer goods as it ages d) new ideas are not as useful as old ideas

b) the marginal increase in output gets smaller as the capital stock increase

Which of the following is not consistent with the efficient market hypothesis? a) Stock prices should follow a random walk b) Managed funds should consistently outperform indexed funds c) The only thing that affects the price of a stock is unexpected events d) There is little point in spending many hours studying the business pages looking for undervalued stocks

b) Managed funds should consistently outperform indexed funds

What is the difference between capital and consumer goods?

Capital goods- investment goods and they lead to an increase in future consumption. Examples: factories and more pizza ovens. Consumer goods- consumption goods and can be consumed right now. Examples: iPhones, pizza, and tshirts

What is the difference between capital and human capital?

Capital is the machines used to produce output, physical tools (i.e machinery). Human capital is defined as the productive knowledge and skills (i.e education, training, experience)

When government savings are above 0, there is a budget deficit. True or False?

FALSE. When government savings are above 0, there is a budget surplus. When government savings are below 0, there is a budget deficit. When government savings equals 0, there is a balanced budget.

If you are calculating the growth rate for years that are 12 years apart, the growth rate formula would be Y12 = (1+g)11 True or false?

FALSE; The growth rate would be Y12 = (1+g)12

A higher level of employment is always associated with a higher level of overall happiness. True or False?

False

A permanent increase in investment leads to permanently higher growth rate. True or False

False

According to the Landsburg article "Be Fruitful and Multiply," parents enjoy most of the benefits of children but bear few of the costs. Consequently, most parents have too many children from a societal perspective. True or false?

False

Adam Smith's concept of the Invisible Hand is basically Darwin's concept of the survival of the fittest applied to the market place. True or false?

False

Hurricane Katrina was good for the US economy. true or false?

False

If one sector of the labor market unionizes and bargains collectively to raise the union wage, then the... a) unionized employment will decrease and the non-union wage will increase b) unionized employment will decrease and the non-union wage will decrease c) unionized employment will increase the non-union wage will increase d) unionized employment will increase and the non-union wage will decrease

b) unionized employment will decrease and the non-union wage will decrease

Due to the catch up effect a) savings eventually catches up with investment b) investment usually catches up with savings c) it is possible for rich countries to achieve a higher growth rate than poor countries d) it is possible for poor countries to achieve a higher growth rate than rich countries

d) it is possible for poor countries to achieve a higher growth rate than rich countries

An increase in unemployment insurance will a) lower the reservation age and decrease the unemployment rate b) lower the reservation age and increase the unemployment rate c) raise the reservation wage and decrease the unemployment rate d) raise the reservation wage and increase the unemployment rate

d) raise the reservation wage and increase the unemployment rate

In saving for retirement, one should a) start late, and only save when you feel like it b) buy stock in just a few companies c) ignore the effects of future inflation and future tax increases d) shift out of stocks and into bonds as one approaches retirement

d) shift out of stocks and into bonds as one approaches retirement

Using the rule of 70, how much larger would Roschelle's income be in 35 year if she were to experience a 4 percent increase in income per year? a) twice as large b) three times as large c) four times as large d) five times as large

c) four times as large

Which of the following is not conductive to economic growth? a) rule of law b) private property rights c) government corruption d) well-functioning legal system

c) government corruption

The introduction of Social Security reduced the growth rate of the economy though a) the construction and housing sector b) the commodity market c) its effect in the credit market d) losing the key to the mythical "lock box"

c) its effect in the credit market

According to the author of Ignoring Economics , the gap in unemployment rates between young and old, skilled and unskilled and between racial groups is due to a) discrimination b) corporate greed c) minimum wage laws d) too few unions

c) minimum wage laws

In a closed economy, national savings a) is usually greater than investment b) is usually less than investment because of the leakage of taxes c) must equal investment d) must equal government tax revenue

c) must equal investment

When determining government savings, what is the formula? a. Taxes - Government spending b. Government spending - taxes c. Taxes - Government purchases d. Government purchases - taxes

c. Taxes - Government purchases (Sgov = T - G)

R* is the only interest rate where the amount of money firms are willing to __ is the same as the amount that households are willing to __

Borrow (invest); Lend (save)

Why is it a bad idea to pay someone to manage your mutual fund?

Efficient Market Hypothesis- asset prices reflect all public information (cannot get rich from public information ; Historical prices are irrelevant). -only new information will permanently change the share price -share prices follow a random walk (drunkard walk)

At the end of WW2 North and South Korea shared the same culture, geography, natural resources, population density, capital stock, level of human capital, productivity of labor and standard of living. However, today the standard of living in South Korea is over 10 times larger than in North Korea. Why is this? What are the ultimate causes of growth?

Labor productivity and institutions. Change in institutions: NK changed to the communist govt and SK changed to a democracy. Workers in SK were given incentives to work so their willingness to work increased. With this increase, it increased the productivity of labor over time. This increased standard of living because when you are producing more, the economy is growing. Both intimate causes of growth contributed to SK's standard of living today. North Koreans have little to no incentive to work and therefore do not contribute to the economy. This has kept them with a smaller standard of living than SK