Macro final all test and quiz answers

The quantity equation (in percentage change form) is

%ΔM + %ΔV = %ΔP + Δ%Y

. Country XYZ is rich; i.e. it has a high living standard (as measured by real per capita GDP); whereas Country ABC is poor. Ceteris paribus, which of the following is most likely to explain the difference in the standard of living between these two countries?

. Country XYZ has a more educated labor force than ABC. C Answer: C, Chapter 20 and Lecture #16 - I went over this explicitly in Lecture #16. Education, investment in capital (plant and equipment) and R&D leading to technological change will increase labor productivity, and thus real GDP, and thus real per capita GDP, and thus the standard of living. See, specifically slide #6 from Lecture #16. Also, see the first paragraph of Chapter 20 of Mankiw. (Recall from the calculation of GDP that imports decrease, and exports increase, GDP, making "B" and "D" incorrect.)

Tax burden will always be shared evenly between consumers and producers

. False, it depends on the elasticity of the demand and supply curves

When a $2 tax is levied on buyers of a good, the price that buyers pay after the tax increases by

. Less than $2

Which of the following is true of markets characterized by positive externalities?

. Social value exceeds private value, and market quantity is less than the socially optimal quantity.

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

. eliminate some, but not all, of the risk of her portfolio. As discussed in class, diversification can help you lower some risk (those firm-specific risk, or like basket-specific risk to eggs...). But not all the risk can be eliminated, like market risk (nobody can get away with it no matter how you diversify).

. If a Pennsylvania gun manufacturer raises the price of rifles (not a consumer good) it sells to the U.S. Army, its price hikes will increase

. the GDP deflator but not the CPI C. Explain: US army expenditure (national defense) is part of government spending, which is included in GDP calculation as well as GDP deflator. However it is not in the consumer basket (as indicated by the question) so it will not change CPI. It is a question from our textbook.

. If the efficient markets hypothesis is correct, then

. the stock market is informationally efficient. Option A is a specific comment that might be true but not quite relevant to the efficient market hypothesis (EMH). The opposite of C is correct, i.e. economists usually assume stock prices follow a random walk (not quite predictable). B is correct, and this is why no one can take advantage of the publicly available information to make profit (since all people know it and everyone would go for that profit and it will be driven out within no time.)

GDP is defined as the

. value of all final goods and services produced within a country in a given period of time.

. Which statement is correct about "Crowding Out" effect? A. It occurs when governments run budget deficit. B. An increase in the supply of private savings and investment C. Interest rates will decrease. D. The private investment will go up.

A We went over this explicitly in class and it is on the 2nd ppt of this week. Please make sure you could conduct the analysis using the national saving identity and the loanable fund market model. You are welcome to ask me anytime if there are any questions.

Which of the following agencies calculates the CPI?

A. Bureau of Labor Statistics

If money is neutral and the money supply rises, which of the following rise?

A. dollar wages Explanation: Money is neutral, so only nominal variable will be influenced but not real variables, and monetary policy is ineffective (in real world usually not the case especially for the short run, but in theory if you assume neutrality, then yes.)

. Because every transaction has a buyer and a seller,

A. every transaction contributes equally to an economy's income and to its expenditure. A Explain: as I mentioned in class, someone's expenditure will be another party's income in the economy, and we have expenditure and income component method to calculate GDP, A is correct. B is not correct since both methods will work and not really one is more important than the other. For C, never said that and definitely not true. D, not necessarily. (FYI, only in a perfectly competitive market will firm get zero profit, however in a macro economy there are different market structures, like monopoly market, oligopoly market, monopolistic competitive market etc., firms in those market receive positive profit.)

According to our Wednesday class, the real GDP per capita can be decomposed to

APL x LFPR

. Suppose in 1961 your grandfather earned $12,000, and the CPI in 1961 was 30. In 2012, the CPI was 230. Ceteris paribus, it follows that your grandfather's salary in 2012 dollars equals

A. $15,650 B. $18,900 C. $92,000 D. $360,000 C. Chapter 16 and Lecture #15 - This follows from the manner in which nominal figures are converted to real figures: V in 2012 = $12,000 x (230/30) =$92,000. See Mankiw, p. 338.

Ceteris paribus, the primary advantage of a stock or bond mutual fund over individual stocks and bonds, respectively, is that mutual funds:

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

. What basket of goods and services is used to construct the CPI?

B. the goods and services that are typically bought by consumers as determined by government surveys

Suppose that in some state the civilian, non-institutionalized adult population is 4million, the labor force participation rate is 75%, and 250,000 people are unemployed. What is the unemployment rate (to the nearest tenth)?

C. 8.3% Explanation: Refer to the definition of unemployment rate. Here it is (0.25million / (75%*4 million) = 8.3%

. Which of the following is true of markets characterized by positive externalities?

C. Social value exceeds private value, and market quantity is less than the socially optimal quantity. Explanation: With positive externality, the goods will be under-supplied, i.e. the market quantity is less than the socially optimal quantity. That is why government subsidizes the demand or supply side in the market (like the elementary education example) to make the demand or supply curve shift to the right and in new equilibrium a higher quantity (socially optimal quantity) could be achieved.

. Because capital is subject to diminishing returns, higher saving and investment does not necessarily lead to higher

C. growth rate in the long run. Explanation: This is from Chapter 17. Because of the diminishing return law, as a country invest more gradually in the long run, the extra output of a new unit of capital invested (marginal output of capital) tend to be lower, this gives us possibly a output(or income) growth rate not as high as before in the long run. The economy will still grow (GDP will still increase year by year), but just not as fast as before, as the country accumulating its wealth. Think about the "catching up effect" we mentioned in class.

In a market economy, government intervention

C. may improve market outcomes in the presence of externalities

The supply of money increases when

C. the Fed makes open-market purchases The Federal Reserve controls the money supply as we discussed in class (Remember, the money supply curve is a vertical line). So basically if Fed changes the monetary policies somehow, money supply will be influenced.

What good is not excludable but rival?

Common resource

Most goods and services produced at home

D. and most goods and services produced illegally are excluded from GDP.

. Currently, in the U.S. economy, the largest component on the expenditures side of the GDP equation is typically _____; whereas on the income side of the equation the largest component is typically _____.

D. consumption; wages and salaries

When a tax is levied on a good, the buyers and sellers of the good share the burden,

D. regardless of how the tax is levied.

A closed economy has income of $1100, government spending of $300 tax of $250, and investment of $350. What is private saving?

D. $400

. Which of the following events would most likely explain a general increase in interest rates and a decrease in private investment in the loanable funds model, ceteris paribus?

The U.S. federal government budget deficit increases. D Chapter 18 - An increase in the budget deficit reduces the supply of savings to the private sector and thus puts upward pressure on interest rates and downward pressure on private investment - i.e. "crowding out" would occur;

A closed economy has income of $1000, government spending of $200 tax of $150, and investment of $250. What is private saving? a. $ 100 b. $200 c. $300 d. $400

a. $ 100 b. $200 c. $300 d. $400 C Explanation: Our GDP equation for closed economy: Y = C + I + G + NX (with NX =0) From definition, national saving S = Y - C -G As we decompose it by plus and minus the aggregate tax (T) on right, S = Y - C - G = Y - C-+ T - T -G = (Y -C -T) + (T -G) = Private saving + Public saving In the question we know Y = 1000, G =200, T= 150, I = 250. From Y = C+I+G, we can get aggregate consumption is C = Y- I- G = 1000 - 250 -200 =550 Therefore private saving is S_private = Y - C - T = 1000 - 550 -150 = 300.

. A closed economy has income of $1000, government spending of $200 tax of $150, and investment of $250. What is aggregate consumption?

a. $ 400 b. $450 c. $550 d. $650 C Explanation: Our GDP equation for closed economy: Y = C + I + G + NX (with NX =0) From Y = C+I+G, we can get aggregate consumption is C = Y- I- G = 1000 - 250 -200 =550

One way to characterize the difference between compounding and discounting is to say that

c. the process of compounding produces a future value, whereas the process of discounting produces a present value. This is about the definition. Make sure you don't memorize it in the opposite way.

An important function of the U.S. Federal Reserve is to

control the supply of money.

The forces that make market economies work are

d. supply and demand.

. A nation's standard of living is determined by

d. the productivity of its workers.

To characterize "club goods", we say they have some special characteristics. These special characteristics are referred to as _______ and _______.

non-rival; exclusive

Given what you know about the yield on various bonds, on which of the following bonds is the prospect of default least likely, ceteris paribus?

A bond issued by the U.S. Treasury

Suppose the following figures represent (in trillions of U.S. dollars) the components of nominal GDP for the United States in year t-n: Consumption = $8.4; Investment = $1.6; Exports = $1.4; Imports = $2.4; and Government purchases = $2.0. From this information it follows that nominal GDP in year t-n was

A. $10.6 B. $11.0 C. $12.0 D. $15.8 The answer follows from the expenditure method of calculating GDP; GDP=C+I+G+NX; GDP=8.4+1.6+2.0-1.0=11.0.

. Suppose the following figures represent (in trillions of U.S. dollars) the components of nominal GDP for the United States in year t: Wages and Salaries = $8.3; Corporate Profits and Proprietors' Income = $2.7; Rent = $0.7; Interest = $0.4; and Net taxes, depreciation, and statistical discrepancy = $2.5. From this information it follows that nominal GDP in year t was

A. $9.6 B. $11.0 C. $12.1 D. $14.6 The answer follows from the income method of calculating GDP; GDP=Wages+Profits+Rent+Interest+Other Items=8.3+2.7+0.7+0.4+2.5=14.6.

Suppose the consumer price index (CPI) accurately measures inflation. At the end of 2013 the U.S. CPI was 233, and at the end of 2014 it was 235, then, ceteris paribus, what was the rate of inflation (or deflation) in 2014?

A. (2/233) x 100% = 0.86% Chapter 16 and Lecture #10 - Using the CPI to define inflation results in the following inflation measure: (CPIt+1 - CPIt)/CPIt = ΔCPI/CPIt = (2/235) x 100% = 0.86%. We did a calculation like this in Lecture #10.

Which of the following is not included in M1?

B. $100 in your savings account This measurement of money stock in the economy is introduced in lecture 30. I(t's a similar idea as measuring unemployment). Make sure that you know what's in M1 and what's in M2

Based on the quantity equation, if Y = 3,000, P = 3, and V = 4, then M =

B. $2,250. Use the quantity equation (M*V=P*Y). You get the result. Make sure you know how it works and memorize it.

. Suppose you read the following headline in the Wall Street Journal: "Brisk Jobs Growth Puts Fed on Notice" (3/7-8/15, p. A1), and suppose in the article you read that the Labor Department's "official" "unemployment rate [U-3] fell [in February] to 5.5% ..." Ceteris paribus, one would reasonably expect the:

B. Department's U-6 rate to be greater than 5.5%. Chapter 20 and- This follows from the government's various definitions of the unemployment rate. Since U-6 includes categories of unemployment or underemployment that are excluded from U-3, it is typically greater than U-3. See Mankiw, Table 2, p. 415. The conclusion is: unemployment rates measured by different standards will have the following relationship: unemp_rate_U-3 < unemp_rate_U-4 < unemp_rate_U-6

When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more than production in Russia (that is, Russian GDP).

B. False

Binding price floor creates shortage.

B. False Should be surplus

Which of the following statements most accurately reflects the Bureau of Labor Statistics' (BLS) calculation of its standard, U-3, the unemployment rate?

B. People working part time are counted as "employed" by the BLS in its official (or U-3) unemployment rate.

Which of the following is not a monetary rule?

B. Quantitative easing

8. If the Google Corporation sells a bond it is

B. borrowing directly from the public. B Explanation: Basically in financial markets governments or firms borrow DIRECTLY from the public, while as financial intermediaries, there is an intermediation (such as bank, mutual funds), then it involves indirect borrowing. Notice C and D are definitely wrong because the question describes a bond rather than stock.

In a system of 100-percent-reserve banking,

B. commercial banks do not influence the supply of money. As we discussed in class, if the required reserve rate is 100% percent, commercial banking system cannot creat any additional credit in the economy, thus do not amplify the mony supply (money multiplier 1/R =1)

. Money

B. could be the most liquid asset According to the text, fiat currency (modern society money, also a part of M1) has no intrinsic value. It could not be a very good store of value when there is severe inflation, so A is wrong, also C (Commodity money has intrinsic value). B is not very rigorous (M1 and M2 could have different liquidity), but is the best answer given in the question. Think about other assets like your house, laptops and cars etc. All of them are not as liquid as money.

. If the price of a US treasury bond go up, ceteris paribus, the yield of this bond will

B. decrease Explanation: Just remember for bonds, Yield = Coupon payment/Price (This is really a simplified version but for us now it is enough.)

Use the following information to answer questions #22 through #23. Suppose state XYZ has a total population of 4,500,000, and a working-age population of 4,000,000 citizens. Of the working age population, there are 1,000,000 people who are not employed and not actively seeking work. There are 2,600,000 people who are employed. There are also 400,000 people who are not employed but who are actively seeking work. 22. What is the official unemployment rate in XYZ?

A. (400,000/(400,000+2,600,000)) x 100% = 13.3% Answer: A, Chapter 20 and Lecture #16 - This just follows from the calculation of the unemployment rate, to wit: UR=Unemployed/Labor Force; where Labor Force = Employed and Unemployed or: (400k/(400k+2,600k)x100; see Mankiw, pp. 410-413. We went over this problem explicitly in the Lecture #16. See also Questions for Review #1, Multiple Choice #1-#2, and Problems and Applications #1, p. 429.

The table below reports nominal and real GDP for the U.S. from 1929 to 1932. Year Nominal GDP Real GDP 1929 103.6 977 1930 58.7 725.8 1931 91.2 892.8 1932 76.5 834.9 What are the GDP deflator and the inflation rate for 1932?

A. 1091.37, 10.3 B. 9.16, -10.3 C. 1091.37, 11.5 D. 9.16, -11.5 B. Explain: Be really careful about the formulas and calculation. GDP deflator for 1932 = nominal GDP for 1932/ real GDP for 1932 *100 =76.5/834.9 *100 = 9.16 To calculate inflation rate for year 1932, we need GDP deflator for the previous year, i.e. 1931. GDP deflator for 1931 = nominal GDP for 1931/ real GDP for 1931 *100 =91.2/892.8*100 = 10.215 Inflation rate for 1932 = (GDP deflator for 1932 - GDP deflator for 1931) / GDP deflator for 1931 *100 = (9.16 -10.215)/10.215*100 = -10.33 Notice that the inflation rate is negative (about -10.3 percent), meaning that there was actually a deflation (general price level went down) back in 1932.

If in an economy, the inflation rate is 8 percent and the nominal interest rate is 5.5 percent, then the real interest rate is

A. 2.5% B. .45% C. -2.5% D. 13.5% C. Explain using fisher equation r+%(delta)p=i here %(delta)p=8 (=(pi) a more commonly used notation) so i=5.5%, so r= i - pie = 5.5%-8%= -2.5%

Which of the following combinations would unambiguously put upward pressure on the yield of a bond, ceteris paribus?

A. An increase in the default risk and an increase in the inflation risk.

Which of the following is true of markets characterized by negative externalities?

A. Social value is less than private value, and market quantity exceeds the socially optimal quantity. As we discussed in class, when there exists negative externality, market tends to over produce the good because private value is higher than social value. This is why we need a correction tax to lower the supply and adjust the equilibrium quantity to a social efficient level.

Which of the following statement is correct? A. Technological progress could yield ways to avoid limits of natural resources. B. Countries that start off poor tend to grow more rapidly than countries that start off rich. C. ranking of countries by income can change substantially over time only because of 0.3% annual differences in GDP per capita growth rates. D. All above are correct.

A. Technological progress could yield ways to avoid limits of natural resources. B. Countries that start off poor tend to grow more rapidly than countries that start off rich. C. ranking of countries by income can change substantially over time only because of 0.3% annual differences in GDP per capita growth rates. D. All above are correct. D. Please refer to our discussion in class.

You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency

B. has no intrinsic value. The money fulfills the function of medium of exchange. In modern countries, people now use sth. called fiat currency. I mentioned this in class that it does NOT have intrinsic values, so when there is high inflation it is not a good way to store value. Notice gold and silver were used as money in the past (they are no longer considered as money now), they are commodity money which has intrinsic value. Barter is also mentioned in class, which means exchange between goods and services without money. It is considered very inconvenient and the introducing money in the economy solves this problem.

Which of the following is not correct? A. The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power. B. The consumer price index is used to monitor changes in the cost of living over time. C. The consumer price index is used by economists to measure the inflation rate. D. The consumer price index is used to measure the quantity of goods and services that the economy is producing.

A. The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power. B. The consumer price index is used to monitor changes in the cost of living over time. C. The consumer price index is used by economists to measure the inflation rate. D. The consumer price index is used to measure the quantity of goods and services that the economy is producing. D. Explain: D is measured by indicators like GDP.

Other things the same, an increase in velocity means that

A. Transactions per dollar increase so the price level rises.

When a tax is placed on a product, the price paid by buyers

B. rises, and the price received by sellers falls.

Economists call an institution designed to oversee the banking system and regulate the quantity of money in the economy

A. a central bank. Only A is mentioned in class... and this is a definition of central bank.

Efficiency wages create a labor

B. surplus and so increase unemployment B Recall that we talked about efficiency wages in the structural unemployment part. There are three possible explanations / reasons why the market wage rate is higher than the natural equilibrium wage rate. There are: minimum wage law, union, and efficiency wage rate offered by some firms. We discussed in class why firms may want to offer efficiency wage and used Mr. Henry Ford's famous example. Because of these possible reasons, the wage rate is higher than equilibrium rage, this will cause a surplus in the labor market (there are more labor supplied under this artificially-higher wage rate but not as many job opportunities offered). Therefore there will be some unemployment. Refer to explanation of the last question in quiz 10.

. If a production function has constant returns to scale, output can be doubled if

A. all of the inputs double. A Explanation: According to the textbook, the production function generally is written like this: Y=A F(L,K,H,N) Many production functions have a property called constant returns to scale. This property implies that as all inputs are doubled, output will exactly double. This implies that the following must be true: xY=A F(xL, xK, xH, xN) Where x = 2 if inputs are doubled. Notice technology (A) is NOT considered as a factor of production or input, but rather than just given to us (think about this as the technology level we now have, usually it evolves slowly overtime and individuals cannot do too much about it but just take it as given). So we do not double input. But notice that technology has influence on the ENTIRE output level, meaning that if A double but ceteris paribus, the output will double as well.

. Which of the following is most likely to be considered rival and excludable?

A. an aircraft carrier B. the Raleigh municipal Fire Department C. the Federal Bureau of Investigation D. your breakfast D. your breakfast

If the Apple Corporation sells a bond it is

A. borrowing directly from the public. Explanation: Basically in financial markets governments or firms borrow DIRECTLY from the public, while as financial intermediaries, there is an intermediation (such as bank, mutual funds), then it involves indirect borrowing. Notice C and D are definitely wrong because the question describes a bond rather than stock.

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

A. capital investment. Explanation: In class I used the example of starting up a restaurant, basically it's the same idea. This kind of activities is considered as investment because it is the starting point of production and will bring future returns. This kind of activities are giving up the use of resources today for consumptions (like go party for fun or dining out today), but rather spend on these goods to start up this business and produce, in order to have future income flow tomorrow. Think about the education you are taking now, it is also an investment (you could use your money and time resource for other immediate use today, but you didn't do so. You invest on yourself and accumulating your human capital, so in the future you could have a higher income return).

The market for wheat is characterized by an inelastic demand and an elastic supply. What would happen to the deadweight loss of a tax, ceteris paribus, if the demand became even more inelastic?

A. decrease This question is from past quiz with a slight change.

Unemployment that exists because it takes time for workers to search for the job that suits them best is called

A. frictional unemployment, which partly accounts for the natural unemployment rate. A Explanation: the definition of frictional unemployment is given by the question. Structural unemployment is where, at a given wage, the quantity of labor supplied exceeds the quantity of labor demanded. It could be caused by the minimum wage rate etc.

. Refer back to the previous question. Suppose you purchase this bond, but then, after you purchase it you discover that the default risk on the bond has decreased. Ceteris paribus, it follows that the present value (or market price) would _____, and the yield would _____.

A. increase; decrease A Chap 19, Lectures #22 and #24 - Both the bond price and yield (i.e. yield = coupon/price) are functions of the default risk. As we discussed in class, when the default risk decreases, the discount rate in the denominator of the bond price formula decreases, and thus the bond price, i.e. the present value, will increase, and the yield will decrease. See Mankiw, pp. 394-395.

National defense is a classic example of a public good because

A. it is difficult to exclude people from receiving the benefits from national defense once it is provided.

The classical principle of monetary neutrality states that changes in the money supply do not influence_____ variables and is thought most applicable in the _____run.

A. real, long

When a tax is levied on a good, the buyers and sellers of the good share the burden regardless of how the tax is levied. Moreover,

A. the party with lower elasticity bears more tax burden. B. the deadweight loss is relatively low if the price elasticity is low. C. it is possible for the government to have less tax revenue if tax size increases. D. all above are correct. D. All are correct.

According to the Efficient Market Hypothesis, ceteris paribus, if a company were to release information that was worse than "Wall Street expected" (i.e. a piece of unexpected information were about to release to the general public), then it follows that:

A. the price of the company's stock would most likely fall within a very short time. A Chapter 19 and Lecture #25 and 26 - Note that B is inconsistent with the hypothesis (people could not possibly make money using publicly available information), and C has bonds moving in the opposite direction from which they would move following unexpected bad news, which would signal an increase in default risk.

Suppose the consumer price index (CPI) accurately measures inflation, and assume that the CPI increased from 100 in 1983 to 233 in 2013. If your nominal annual salary increased from $40,000 to $100,000over that same period of time, then, ceteris paribus

A. your real purchasing power has increased between 1983 and 2013. A Chapter 16 and Lectures #10 and #11 -In this case the nominal wage is rising at a faster rate than the price level - prices more than doubled - i.e. they increased from 100 to 233, a factor of 2.33; while income increased by a factor of 2.50 - i.e. 100,000/40,000 = 2.50. Hence the real purchasing power of your income has increased. See Mankiw p. 338.

The market for gluten-free bread is characterized by an elastic demand and an inelastic supply. What would happen to the deadweight loss of a tax, if the supply would also be elastic?

B.increase

The market for gluten-free bread is characterized by an inelastic demand and an elastic supply. What would happen to the deadweight loss of a tax, if the demand curve became more elastic ?

B.increase B. Explain: Please refer to the textbook p.161. The general result would be "higher elasticity, higher DWL", because if people respond to price change a lot (either demand or supply side or both) due to the tax, more transactions are prevented and therefore causing a higher welfare decrease, i.e. higher DWL. Also remember the tax burden result (textbook p.127), if one has lower elasticity, she has less flexibility to adjust quantity and therefore bear higher tax burden.

The supply curve and demand curve expressions in a good market is given as 12=Qs and p= 10-Qd. what will be the quantity sold/bought in the market be?

C. 0 This is a little tricky. You might end up wondering the result you get is Q*=12 and P* = -2 using the techniques we talked about in class. BUT always remember values for P and Q can NEVER be negative in our discussion (they can only be in the first quadrant and its boundary), so this is actually NOT a reasonable market equilibrium solution. Future, draw the demand-supply curves out to convince yourself: There is NO intersection for these two curves in the first quadrant (including the axes). Intuitively, the demand in this market is very low, such that there is actually no traction fulfilled in the market. Therefore, the 'equilibrium' quantity is 0 (no transaction).

In Lecture #12, we saw that the standard of living is a function of labor productivity. Ceteris paribus, which of the following factors below would most likely lead to an increase in labor productivity and hence the standard of living?

C. A better-educated workforce. Education is explicitly included on the list of items that enhance labor productivity in the notes to Lecture#12. Note that A and B represent increases in transfer payments, the funding for which creates a deadweight loss with no off-setting increase in output, and the EITC is designed to encourage work.

Under the assumption of constant return to scale and given production function as what we saw in class: Y = A*F (L, K, H, N), if all inputs of factors of production are tripled (i.e. Y_new = A*F (xL, xK, xH, xN) where x=3) and ceteris paribus, then what will happen to the output?

C. New output will be exactly the same as three times of the original output, i.e. Y_new = 3*Y.

Consider five individuals with different occupations. Mary provides legal advice wants knives sharpened Clark grows tomatoes wants legal advice Nathan styles hair wants tomatoes Polly brews beer wants knives sharpened Paul sharpens knives wants beer Which of the following pairs of individuals has a double coincidence of wants?

C. Polly and Paul

. Imagine you work as a professional trader. You and get the price of a 5-year US Treasury bond (with a face value $500) as $489 using the bond pricing equation. However you find its price is $475 currently in the bond market. So you probably would think that

C. This is a good chance for me to purchase more of this bond. C Buy cheap and sell expensive

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

C. capital investment

Given the progressive nature of the U.S. federal tax system, it follows that _______ is (are) _______ distributed than _______.

C. disposable income; more equally; gross income This is displayed in the third and fourth diagrams in Lecture #12. Taxation is progressive - i.e. the rich pay much more in taxes than the other income groups, and transfer payments are extensive; thus disposable income is much more equally distributed than gross income

Given the three primary types of unemployment we discussed in Lecture #17, it makes sense to think of the natural rate of unemployment as the sum of _____ and _____ unemployment.

C. frictional; structural

Given the progressive nature of the U.S. federal tax system, it follows that _______ is (are) _______ distributed than _______.

C. gross income; less equally; disposable income C. This is displayed in the third and fourth diagrams in Lecture #12. Taxation is progressive - i.e. the rich pay much more in taxes than the other income groups, and transfer payments are extensive; thus disposable income is much more equally distributed than gross income.

Suppose the U.S. Congress passed, and the president signed, legislation that encouraged U.S. taxpayers to consume more and save less. As a likely consequence of this legislation, the loanable funds model would predict, ceteris paribus:

C. higher interest rates and less investment. C Chapter 18 - More consumption and less saving would lead to a decrease in the supply of loanable funds, which would in turn increase interest rates and decrease investment - i.e. "crowding out" would occur. Diagrammatically, this would look like Figure 4 on p. 385 in Mankiw. See also Questions for Review #6, Multiple Choice #4-#5, and Problems and Applications #8, pp. 390-392.

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because

C. the CPI better reflects the goods and services bought by consumers

. Ceteris paribus, an increase in the price of French wine (a good in the CPI basket and imported from France) would increase ______ for US.

C. the CPI but not the GDP deflator. C. Explanation: Remember the definition of GDP. It is always the wealth created within that country. From Y = C + I + G + (X-M), one can see that we would like to EXCLUDE the fraction of imported goods (M) when calculating GDP because it is NOT wealth or value created in this country. Therefore, if import price changed the GDP deflator should not change because the calculation of GDP deflator is based on current year GDP basket of goods. On the other hand, as wine is a kind of common consumption good (therefore highly possible to be in the CPI basket, and from the implication of the question it is a member of CPI basket actually). Therefore, its price going up will change the CPI.

GDP is defined as the

C. value of all final goods and services produced within a country in a given period of time.

. If the consumer price index is 200 in year 1980 and 300 today, then $ 600 in 1980 has the same purchasing power as ___ today.

C.900 C. Explain: Using the formula Vx/CPIx = Vy/CPIy (nominal value in year x over price level i.e. CPI in year x, should be equal to nominal value in year y over price level in year y.) Therefore V_today = (V_1980 * CPI_today)/ CPI_1980 =$600*300/200 =$900 Another way of thinking about this is that, the ration of nominal value between 2 years should be equal to the general price level (CPI) ratio between these two years. So: CPIx/CPYy = Vx/Vy i.e. Vx = Vy * CPIx / CPI y, which gives the same result.

To fully understand how taxes affect economic well-being, we must

D. compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.

An open-market sale

D. decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public. D This is basically what we discussed in class. The Fed sells us treasuries (government bonds) to the bank or general public in bond market (that's why it's called a sale) and 'take away' dollas from the economy. B discribes the other direction of the open market operation (open market purchase).

When a tax is levied on a good, the buyers and sellers of the good share the burden regardless of how the tax is levied. Moreover,

D. it depends on the price elasticities of demand and supply and the party with lower elasticity bears more tax burden.

You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?

D. sixty cents × (1962 CPI / today's CPI) D. Be very careful about which is which on the numerator and denominator.

. Because consumers can sometimes substitute cheaper goods for those that have risen in price,

D. the CPI overstates inflation D Explain: Substitution bias as we discussed in class will overestimate inflation. Please refer to the textbook explanation (p.333)

Which of the following headlines is more closely related to what microeconomists study than to what macroeconomists study?

D. the price of gasoline rises due to rising oil prices. D Explain: the first 3 are more closely related to macroeconomics

A nation's standard of living is determined by

D. the productivity of its workers. D Explanation: Standard of living is summarized by real GDP per capita (a one number proxy), from lecture we know it depends on 2 things: productivity of worker and labor force participation rate. And in last week we emphasized the importance of higher productivity, also education which is important for rising labor productivity. This is also what government policy should focus on.

. A recent news report noted that the average amount of money taken during a bank robbery is currently $7,604. In 1997, the figure was over $12,000 (see, for example, WSJ, Feb. 5, 2013, p. A3). In 1997 the Consumer Price Index (CPI) was 160.5. In December 2012, the CPI was 230. Ceteris paribus, this information suggests that:

D. the purchasing power of the money taken in the average bank robbery has decreased over time. Chap 16 and Lecture #15 - This one should be easy: Since the inflation was positive between 1997 and 2012 (i.e. (230/160.5)>0), and the nominal value of the take declined, it follows that the real value fell as well. See Mankiw, pp. 337-338.

When the money market is drawn with 1/P on the vertical axis, an increase in the money supply causes the equilibrium value of money

D. to decrease, while the equilibrium quantity of money increases. D Refer to the money market diagram. If money supply curve (vertical) shifts right, it will make the equilibrium price of money (money value which is 1/P) goes down. Then the value of money falls. Equilibrium quantity on the other hand increases.

Suppose the consumer price index (CPI) accurately measures inflation, and assume that the CPI increased from 100 in 1983 to 233 in 2013. If your nominal annual salary increased from $40,000 to $100,000over that same period of time, then, ceteris paribus:

D. your real purchasing power has increased between 1983 and 2013. Chapter 16 and Lectures #10 and #11 -In this case the nominal wage is rising at a faster rate than the price level - prices more than doubled - i.e. they increased from 100 to 233, a factor of 2.33; while income increased by a factor of 2.50 - i.e. 100,000/40,000 = 2.50. Hence the real purchasing power of your income has increased. See Mankiw p. 338.

The New York Federal Reserve Bank A. is a private cooperation. B. president always gets to vote at the FOMC meetings. C. is one of 12 regional Federal Reserve Banks. D. All of the above are correct.

D

Use the following information to answer questions #22 through #23. Suppose state XYZ has a total population of 4,500,000, and a working-age population of 4,000,000 citizens. Of the working age population, there are 1,000,000 people who are not employed and not actively seeking work. There are 2,600,000 people who are employed. There are also 400,000 people who are not employed but who are actively seeking work. 23. What is the labor force participation rate in XYZ?

D. ((400,000+2,600,000)/4,000,000)) x 100% = 75.0% D Answer: D, Chapter 20 and Lecture #16 - This just follows from the calculation of the labor force participation rate: LFPR = Labor Force/Working-age Population = (3,000,000/4,000,000)x100=75 percent; see Mankiw, pp. 410-413. Again, we did this explicitly in Lecture #16. See also Questions for Review #1, Multiple Choice #1-#2, and Problems and Applications #1, p. 429.

Binding price ceilings create surpluses.

False Explanation: Draw a graph to convince yourself that it is actually shortage. It should be pretty straightforward.

When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more than production in Russia (that is, Russian GDP).

False Explanation: I used the question from the textbook (which had a wrong answer earlier and we corrected it.) Here the country we look into is Russia but the logic is exactly the same. Please refer to page 359 of textbook and make sure you understand (Feel free to ask me anytime if you need further explanations)

When a $2 tax is levied on buyers of a good, the price that buyers pay after the tax increases by

Less than $2 Explanation: since there is no other specifications, it would just be a normal demand supply diagram. Although no other information given, we would still know that this $2 tax will be eventually shared between buyers and sellers.

Which of the following is an example of a positive externality?

Hillary's newly cut lawn makes her neighborhood more attractive.

The demand for a good or service is determined by

a. those who buy the good or service.

. Economists have developed models of risk aversion using the concept of

a. utility and the associated assumption of diminishing marginal utility.

. Which of the following might cause the demand curve for an inferior good to shift to the left?

an increase in the price of a complement

Economic variables whose values are measured in monetary units are called

b. nominal variables.

The labor force equals the

b. number of people employed plus the number of people unemployed.

. When a tax is placed on a product, the price paid by buyers

b. rises, and the price received by sellers falls.

The discovery of a large new reserve of crude oil will shift the __ curve for gasoline, leading to a ____ equilibrium price.

b. supply, lower

You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

c. 2.5 percent. Explanation: See the solution of last question in Quiz 12.

Which of the following is correct? a. Risk-averse people will not hold stock. b. Diversification cannot reduce firm-specific risk. c. The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return. d. Stock prices are determined by fundamental analysis rather than by supply and demand.

c. The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return.

In which case below is the real interest rate the highest?

c. the nominal interest rate = 2% and inflation = -1% use fisher equation

Which of the following does NOT add to U.S. GDP? a. Air France buys a plane from Boeing, the U.S. aircraft manufacturer. b. General Motors builds a new auto factory in North Carolina. c. The city of New York pays a salary to a policeman. d. The federal government sends a Social Security check to your grandmother.

d. The federal government sends a Social Security check to your grandmother.

The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Since the benefit that each citizen receives from having an educated community is a public good, which of the following would not be correct?

d. The private market is the best way to supply education.

. An open-market sale

d. decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public. D Expanation: Notice here is an open market sale, which is just the opposite operation of open market purchase.

If the business community becomes more pessimistic about the profitability of capital, the ___ curve for loanable funds would shift, driving the equilibrium interest rate ____.

d. demand, down D This is an old question from last quiz with minor change (Please refer to the explanation on that question). Make sure that you understand the loanable fund market model and who are the demand and supply side.

. If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase

d. the GDP deflator but not the CPI

If the consumer price index is 200 in year 1980 and 300 today, then $ 600 in 1980 has the same purchasing power as ___ today.

d.900

Suppose the yield on a ten-year U.S. Treasury note was 2.05% on February 14, 2015. Now suppose that the next morning you read the following headline in the Wall Street Journal: "Republican Leadership in Congress Will Not Shut Down Government Over Debt Limit." Further suppose that bond traders interpret the increase in the federal debt ceiling as a decrease in the default risk associated with U.S. Treasury securities. Ceteris paribus, it follows that the yield on the ten-year note will _____; while the coupon payment on the ten-year note will _____.

decrease, remain unchanged Again, bond prices move in the opposite direction of the default risk, and bond yields move in the opposite direction of bond prices. However, the coupon payment on the bond does not change. See above.

Suppose the market for pizza is characterized by a downward sloping demand curve and an upward sloping supply curve. Now suppose 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 deadweight loss will _______.

decrease; increase

quiz 13 question 3

do it

quiz 4 question 2

do it

test 1 questions 1-3

do it

test 1 questions 24-25

do it

test 2 question 25

do it

As the size of a tax increases, the tax revenue will first decrease, then increase

false

Risk averse people have increasing marginal utility over wealth and hate risk.

false Explanation: False. Should be decreasing marginal utility over wealth.

Inflation going up tends to make lender better off and borrower worse off

false Explanation: Should be the reverse. When inflation go up, according to Fisher equation, real interest rate tend to fall down if nominal rate fixed. This is not a good news for lender since they receive the interest payment. One way to deal with this problem is indexation, i.e. make the contractual nominal interest rate adjusted to inflation rate.

test 1 questions 14-17

look them up

The primary economic function of the financial system is to provide "financial intermediation," which means:

matching one person's saving with another person's investment.

For an economy as a whole,

the market value of production must equal expenditure. B. Explain: Expenditure component method tells us that the expenditure in the whole economy equals the wealth we created, i.e. GDP measured in market value. For b, think about people buying house (also I never mentioned it this way) c. Income component has four things, not only wage but also interest, rent and profit (remember in the circular flow diagram we see that factors of productions are owned by households, so their income comes from all these four). d. for sure not necessarily

Producer surplus increases when the price increases.

true

. When we measure and record economic value, we use money as the

unit of account. Measuring value is using money as a unit of account. Say I want to know how much my car worth now and go to an auto center. The stuff there gives me an evaluation of my car. Clearly this is not a medium of exchange nor a store of value.

Suppose a ten-year bond with a $1,000 face value pays a 4.5% annual coupon (at the end of the year), has 3 years left to maturity, and has a discount rate of 6.5%. Which of the following would give you the current present value - i.e. the price - of the bond?

D. Present Value = [$45/(1.065)] + [$45/(1.065)2] +[$45/(1.065)3] +[$1,000/(1.065)3] D Don't forgot the face value at the end of the period. Also just FYI in real world bond coupon payment is usually semi-annual. We make it annual payment for simplicity.

Which of the following does NOT add to U.S. GDP?

D. The federal government sends a Social Security check to your grandmother. D Explain: the last one is an example for government transfer payment, as I mentioned in class. A the air plane is manufactured in US (seems Boeing do not have oversea factories) so it is a part of US net export (actually export).

The data on hyperinflation show a clear link between the quantity of money and

D. The price level. D Hyperinflation is a situation where there is a huge increase in the general price level of that economy. Zimbabwe for example suffered this problem in the history and the reason was government printing too much money ( M increase). And you know that from the quantity equation, P will hike given other things not changing.

Which of the following statements is correct?

D. There could be some difference between income and expenditure ways calculating GDP due to statistical discrepancy. D There was a typo in C... I meant to type subsidy. But C is not right anyways as we see in class that labor force participation rate is stable (decreasing actually) over the past decade. So as we talked about in class, increase labor productivity is important to increase real GDP per capita, and investing on research or education is needed due to this, rather than persuade people to work more. D is correct because if you look at the tables on the 5/8 pages of lecture 10 slides, there is a term adjusting statistical discrepancy after which the GDPs calculated by the two methods we learnt are equal.

Suppose Raymond and Victoria attend a charity benefit and participate in a silent auction. Each has in mind a maximum amount that he or she will bid for an oil painting by a locally famous artist. This maximum is called

D. Willingness to pay

Movie tickets and DVDs are substitutes. If the price of DVDs decreases, what happens in the market for movie tickets?

a. The demand curve shifts to the left.

The demand curve for beer is downward sloping. When the price of beer is $3, the quantity demanded is 150. If the price rises to $5, what happens to consumer surplus in this market?

A. It falls by more than $300. B. It falls by less than $300 C. It rises by more than $300. D. It rises by less than $300. B. (This is a very similar question to the one from Textbook p.151) Explanation: Draw the demand curve on the draft paper and make the market price increase. You can find that the change in consumer surplus is a trapezoid within a rectangle which has a size of 300 ($). That is saying consumer surplus falls less than $300.

Given the manner in which we calculate the "standard of living," and the various types of unemployment, ceteris paribus, it follows that the ______ is a direct determinant of a country's standard of living; and ______ in a modern developed economy.

A. Labor Force Participation Rate; some degree of frictional unemployment is inevitable A Chapter 20 and Lectures #16-#17 - As noted in slide #4 of Lecture #16, the labor force participation rate, along with productivity, directly influences the standard of living. Also, as noted in Lecture #17, frictional unemployment is a not altogether undesirable element of modern developed economies, and the natural rate is in the neighborhood of 5+ percent not zero. See Mankiw, pp. 412-417, and Questions for Review #3 on p. 429.

Economic variables whose values are measured in monetary units are called

A. Nominal variables. Consider the classical dichotomy mentioned in the text. This is the definition of nominal variable. I might confuse it a bit by mentioning that the real variable could also be using dollars to measure (like real GDP), but still option A would be the best one to choose. The definition of real variable is: variables measured in physical units. Recall our simple example in class. That 2-person economy, the real output (real GDP) is say, 2 apples.

Suppose earlier this morning, your broker recommended you sell Greek government bonds. It follows that she thinks the market is currently _______ Greek debt, and she expects Greek bond yields to _______ in the future.

A. over-pricing; increase 9. Answer: A, Chapters 18 and 19 and Lectures #12 and #13 - If she recommends a "sell," then she expects a decrease in the market value of the bonds - i.e. they are currently over-priced - and a decrease in their future price will increase yields. (We did a problem like this one in Lecture #13.) Further explanation: This question is tricky. Again, notice that the price of bond is determined by bond demand and supply like any other goods in a free market. The bond pricing formula helps us to uncover the present value (a reasonable price) of the bond, which may vary slightly (you could think that the discount rate is subjective, i.e. varies slightly with different people.) In equilibrium however, the market price for bond should be equal to the result we get from the bond pricing formula. If the bond is currently considered 'underpriced' (the prevailing market price is lower than the price obtained from the bond pricing formula), one could think of it as a 'disequilibrium'. So in the near future, people tend to buy more since it is now relatively cheap, and thus demand will go up (demand curve shifts to right), driving up the market price of bond, ceteris paribus. If a bond is considered 'overpriced', the reverse logic will apply. Also, knowing the inverse relationship between bond price and yield, we get the answer A. A useful conclusion is that: if all other conditions the same, bond with lower risk usually have higher price (since people tend to be risk averse and prefer less risk then demand more lower risk bond), thus lower yield for those low-risk bond.

If the business community becomes more optimistic about the profitability of capital, the ___ curve for loanable funds would shift, driving the equilibrium interest rate ____.

A. supply, up B. supply, down C. demand, up D. demand, down C Explanation: Quite a few of you got wrong on this question, I will talk about this loanable fund market model more next Monday. This is a question from the textbook (Chapter 18) The question says that business people are getting more optimistic about tomorrow, therefore it implies that they would probably expand their businesses or there would be more new businesses started up in the future because of this optimistic view. Now think about which curve will shift? The demand curve in loanable fund market. (Remember who are the demand side in this market? those business people who need money to expand). Demand goes up, ceteris paribus, the price of the loanable funds (which is just the real interest rate) will go up. Therefore B is correct. For questions asking you the interest rate changes based on loanable market model, the steps are the same as what we learnt in the first few weeks (1) Determine which curve shifts, (2) To which direction, (3) Find the new intersection and thus the new equilibrium.

Which of the following quantities decrease in response to a tax on a good?

A. the equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good

Suppose a country called Eutopia only produces two goods: pencils and cups. In 2014, it produces 10 pencils and 4 cups, in 2015 it produces 14 pencils and 6 cups. Prices in 2014 for pencils and cups are $2 and $2, and are $3 and $4 in 2015. Also, the consumer basket is chosen by the official in Eutopia as 2 pencils and 3 cups, while the base year is chosen to be 2014. What is the CPI for Eutopia in 2015?

B. 1.8 B Following the steps we discussed in class to get CPI. As can be seen the consumer basket is given to you, as well as prices for different years. Then, The CPI basket expenditure for base year 2014 is $2*2+$2*3 = $10 The CPI basket expenditure for 2015 is $3*2 + $4*3 = $ $18 Therefore, CPI for 2015 is $18/$10 = 1.8 (or 180 if multiplied by 100 but it is not provided in the question) If you get 1.65... it is probably the GDP deflator_2015 = Nominal GDP2015/Real GDP2015 = (14*$3+6*$4)/ (14*$2+6*$2) = $66/$40 = 1.65. (or 165 if multiplied by 100 using the definition from textbook). I intentionally put the information in the first paragraph to distract you... in fact if you see you need to calculate CPI, the only things you care are the consumer basket and prices, and you can definitely ignore the output information unless you are asked to calculate GDP deflator or nominal/real GDP.

You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

B. 2.5 percent. B This is the same as what we did in today's class. You need to use Fisher equation twice to get the result. Firstly given r =4% inflation=2%, nominal interest rate is i=4%+2% = 6%. Then there is a 25% marginal tax rate, the nominal interest rate after tax is (1-25%)*6% =0.75*6% =4.5% Then, the after-tax real interest rate is (using Fisher equation again): r_aftertax = 4.5% -2% = 2.5% The textbook has a similar example about this inflation cost issue on page 474.

7. Suppose that an economy produces 20,000 units of good A which sells at $3 a unit and 40,000 units of good B which sells at $1 per unit. Production of good A contributes

B. 3/2 times as much to GDP as the production of good B. Explain: be careful about your calculation. Good A value is 20k*$3=$60k Good B value is 40k*$1 = $40k =3/2 *60k =3/2 * value of Good A. Therefore B is correct.

. You deposit $2000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 208. In this case, the nominal interest rate is ___ percent, and the real interest rate is ___ today.

B. 5, 1

. Suppose you were told that you could invest in three assets: (1) a large diversified portfolio of common stocks, such as the Standard and Poor's 500 Index; (2) a large diversified portfolio of U.S. corporate bonds; and (3) a portfolio of 10-year U.S. Treasury notes. Given what you know about the relative default risks associated with these assets, which of the following rankings of their long-run average annual compounded rates of returns (from highest to lowest) is correct? A. (1) > (3) > (2) B. (2) > (1) > (3) C. (1) > (2) > (3) D. (3) > (2) > (1)

C

Harry buys a bond issued by Dell, Inc., which uses the funds to buy new machinery for one of its factories. In the language of macroeconomics,

D. Harry is saving, Dell is investing. D Explanation: Harry (as a member of Household sector) is supplying the "loanable fund" which he would not spend for consumption now (he buys bond and will receive that amount of money plus interest rate for further consumption), therefore this is a SAVING activity. Dell Inc. on the other hand, is a producer. It uses the money from household to buy new factors of production to produce new values in the economy. This activity is considered as INVESTING in Macroeconomics.

An American buys a pair of shoes manufactured in Italy. How do the U.S. national income accounts treat the transaction?

D. Net exports fall, while GDP is unchanged. D Explain: This is almost exactly the example I gave in class (the French wine one). Recall Y = C + I + G + NX = C + I + G + (X-M). Here import increase, M goes up, and this makes NX (net export) goes down. Also consumption C increase. These two change have exactly the same amount with opposite direction, therefore D is correct.

quiz 4 question 1&2

Look it up bitch

. Which of the following offers the best example of financial intermediation?

Ms. Y makes a deposit at a commercial bank and the bank uses this money to make an auto loan to Mr. X.

Which of the following statements is correct? a. A corporation receives a monetary payment every time its shares of stock are traded by stockholders on organized stock exchanges. b. When a corporation sells bonds as a means of raising funds it is engaging in debt finance. c. A share of stock is an IOU. d. The two most important financial markets in the economy are the stock market and financial intermediaries

a. A corporation receives a monetary payment every time its shares of stock are traded by stockholders on organized stock exchanges. b. When a corporation sells bonds as a means of raising funds it is engaging in debt finance. c. A share of stock is an IOU. d. The two most important financial markets in the economy are the stock market and financial intermediaries. B Explanation: Financial markets are where firms and governments can directly borrow from public, and these assets can also be traded in those markets. Two examples we mentioned in class are stock market and bond market. Financial intermediaries are a third party that can mitigate between borrowers and lenders. Commercial banks and mutual fund are two examples.

Which of the following is correct? a. Risk-averse people will not hold stock. b. Diversification cannot reduce firm-specific risk. c. The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return. d. Stock prices are determined by fundamental analysis rather than by supply and demand.

a. Risk-averse people will not hold stock. b. Diversification cannot reduce firm-specific risk. c. The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return. d. Stock prices are determined by fundamental analysis rather than by supply and demand. C Option A is not really mentioned anywhere. Although people are generally considered risk averse, stocks are still held by a lot of people but how big the fraction of stock in their portfolio is really determined by how risk averse a person could be. B is a wrong statement (opposite is correct). C is the graph shown in class, i.e. return and risk go hand in hand usually. (Higher return usually implicate higher risk.) D is wrong, the opposite is correct. Fundamental analysis is a way to help you discover the true underlying value of an asset (stock, bond, etc.), but the price is always determined by the demand and supply. Under efficient market hypothesis, the price of a stock would be very close (equal in an ideal world) to the underlying value of a stock.

In a competitive market, the price of a product a. is determined by buyers, and the quantity of the product produced is determined by sellers. b. is determined by sellers, and the quantity of the product produced is determined by buyers. c. and the quantity of the product produced are both determined by sellers. d. None of the above is correct.

a. is determined by buyers, and the quantity of the product produced is determined by sellers. b. is determined by sellers, and the quantity of the product produced is determined by buyers. c. and the quantity of the product produced are both determined by sellers. d. None of the above is correct. D

Which of the following might cause the demand curve for an inferior good to shift to the right? a. an decrease in the price of a substitute b. an increase in the price of a complement c. an increase in income d. None of the above is correct.

a. an decrease in the price of a substitute b. an increase in the price of a complement c. an increase in income d. None of the above is correct. D. This is a tricky question. The substitute/complement relationship still holds for inferior good, and notice the direction of demand curve shifting when income changes. Therefore, none of A, B or C is correct.

If the government removes a binding price ceiling from a market, then the price paid by buyers will

a. increase, and the quantity sold in the market will increase.

A price ceiling is a. often imposed on markets in which "cutthroat competition" would prevail without a price ceiling. b. a legal minimum on the price at which a good can be sold. c. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling. d. None of the above is correct.

a. often imposed on markets in which "cutthroat competition" would prevail without a price ceiling. b. a legal minimum on the price at which a good can be sold. c. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling. d. None of the above is correct. D. Government want to impose price ceiling probably because the price is too high. A market price higher than competitive equilibrium price is caused by possibly strong market force on the supply side (lack of competition, think about Microsoft), but rather what option A has said. Option B is the definition of price floor. Also, notice that seller do not want a binding price ceiling which will give them a lower price compared to scenario without a price ceiling, hence C is wrong.

In a market economy, supply and demand are important because they a. play a critical role in the allocation of the economy's scarce resources. b. determine how much of each good gets produced. c. can be used to predict the impact on the economy of various events and policies. d. All of the above are correct.

a. play a critical role in the allocation of the economy's scarce resources. b. determine how much of each good gets produced. c. can be used to predict the impact on the economy of various events and policies. d. All of the above are correct. D