Practice midterm 2

The real interest rate is the a. interest rate corrected for inflation. b. interest rate as usually reported by banks. c. difference between the interest rate charged by banks on the loans they make and the interest rate paid by banks to their depositors. d. difference between the average dividend yield on stocks and the average interest rate on bonds.

a. interest rate corrected for inflation.

Accumulating capital a. requires that society sacrifice consumption goods in the present. b. allows society to consume more in the present. c. decreases saving rates. d. involves no tradeoffs.

a. requires that society sacrifice consumption goods in the present.

Which of the following statements is true? a. Productivity is calculated as hours worked divided by output produced. b. Americans have a higher standard of living than Indonesians because American workers are more productive than Indonesian workers. c. Both A and B are correct. d. None of the above are correct.

b. Americans have a higher standard of living than Indonesians because American workers are more productive than Indonesian workers.

Suppose there are constant returns to scale. Now suppose that over time a country doubles its workers, its natural resources, its physical capital, and its human capital, but its technology is unchanged. Which of the following would double? a. both output and productivity b. output, but not productivity c. productivity, but not output d. neither productivity nor output

b. output, but not productivity

Which of the following statements is correct? a. The total income in the economy that remains after paying for consumption and government purchases is called private saving. b. The sum of private saving and national saving is called public saving. c. For a closed economy, the sum of private saving and public saving must equal investment. d. For a closed economy, the sum of consumption, national saving, and taxes must equal GDP

c. For a closed economy, the sum of private saving and public saving must equal investment.

If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $1,000, a. it must increase its required reserves by more than $150. b. its total reserves initially increase by $120. c. it will be able to make new loans up to a maximum of $880. d. None of the above is correct

c. it will be able to make new loans up to a maximum of $880.

If there is shortage of loanable funds, then a. the supply for loanable funds shifts right and the demand shifts left. b. the supply for loanable funds shifts left and the demand shifts right. c. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium. d. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

c. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.

The logic behind the catch-up effect is that a. workers in countries with low incomes will work more hours than workers in countries with high incomes. b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital. c. new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital. d. None of the above is correct.

c. new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital.

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of these things make the price of FineLine Corporation Stock fall? a. both the interest rate rising and the revenue announcement b. neither the interest rate rising nor the revenue announcement c. only the interest rate rising d. only the revenue announcement

c. only the interest rate rising

LOOK AT GRAPH On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L). The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher level of productivity. b. In the long run, a higher saving rate leads to a higher level of income. c. In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a higher growth rate of income. d. All of the above are correct.

d. All of the above are correct.

Which of the following is correct? a. The maturity of a bond refers to the amount to be paid back. b. The principal of the bond refers to the person selling the bond. c. A bond buyer cannot sell a bond before it matures. d. None of the above is correct.

d. None of the above is correct.

An open-market sale a. increases the number of dollars and the number of bonds in the hands of the public. b. increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public. c. decreases the number of dollars and the number of bonds in the hands of the public. 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. decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.

Which of the following measures how the level of well-being in a country has changed over time? a. level of nominal GDP per person. b. growth rate of nominal GDP. c. growth rate of real GDP. d. growth rate of real GDP per person

d. growth rate of real GDP per person

Wealth is redistributed from debtors to creditors when inflation was expected to be a. high and it turns out to be high. b. low and it turns out to be low. c. low and it turns out to be high. d. high and it turns out to be low.

d. high and it turns out to be low.

The primary economic function of the financial system is to a. keep interest rates low. b. provide expert advice to savers and investors. c. match one person's consumption expenditures with another person's capital expenditures. d. match one person's saving with another person's investment.

d. match one person's saving with another person's investment.

The aggregate-demand curve shows the a. quantity of labor and other inputs that firms want to buy at each price level. b. quantity of labor and other inputs that firms want to buy at each inflation rate. c. quantity of domestically produced goods and services that households want to buy at each price level. d. quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level.

d. quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level.

The Fed's control of the money supply is not precise because a. Congress can also make changes to the money supply. b. there are not always government bonds available for purchase when the Fed wants to perform open-market operations. c. the Fed does not know where all U.S. currency is located. d. the amount of money in the economy depends in part on the behavior of depositors and bankers.

d. the amount of money in the economy depends in part on the behavior of depositors and bankers.

Other things the same, which of the following could explain an increase in productivity? a. either an increase in human capital or an increase in physical capital b. an increase in human capital but not an increase in physical capital c. an increase in physical capital but not an increase in human capital d. neither an increase in human capital nor an increase in physical capital

a. either an increase in human capital or an increase in physical capital

Monetary neutrality means that a change in the money supply a. does not change real variables. Most economists think this is a good description of the economy in the short run and in the long run. b. does not change real variables. Most economists think this is a good description of the economy in the long run but not the short run. c. does not change nominal variables. Most economists think this is a good description of the economy in the short-run and the long run. d. does not change nominal variables. Most economists think this is a good description of the economy in the long run but not the short run.

b. does not change real variables. Most economists think this is a good description of the economy in the long run but not the short run.

An important function of the U.S. Federal Reserve is to a. set the debt ceiling. b. fund Congressional spending. c. control the supply of money. d. mint coins.

c. control the supply of money.

Suppose the Congress and president decreased the maximum annual contributions limits to retirement accounts and at the same time reduced the budget deficit. What would happen to the interest rate? a. It would decrease. b. It would increase. c. It would stay the same. d. It might do any of the above.

d. It might do any of the above.

During recessions investment a. falls by a larger percentage than GDP. b. falls by about the same percentage as GDP. c. falls by a smaller percentage than GDP. d. falls but the percentage change is sometimes much larger and sometimes much smaller

a. falls by a larger percentage than GDP.

An economic expansion caused by a shift in aggregate demand causes prices to a. rise in the short run, and rise even more in the long run. b. rise in the short run, and fall back to their original level in the long run. c. fall in the short run, and fall even more in the long run. d. fall in the short run, and rise back to their original level in the long run

a. rise in the short run, and rise even more in the long run.

Most economists use the aggregate demand and aggregate supply model primarily to analyze a. short-run fluctuations in the economy. b. the effects of macroeconomic policy on the prices of individual goods. c. the long-run effects of international trade policies. d. productivity and economic growth

a. short-run fluctuations in the economy.

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than a. $8,225.06. b. $7,920.94. c. $7,672.58. d. $6,998.98.

b. $7,920.94.

If over a short time there is an increase in the number of people retired and a decrease in the number of people working, then productivity a. and real GDP per person rise. b. rises but real GDP per person falls. c. falls and real GDP per person rises. d. and real GDP per person fall.

b. rises but real GDP per person falls.

Which of the following both make the interest rate on a bond higher than otherwise? a. the interest it pays is taxed and it was issued by a financially strong corporation b. the interest it pays is taxed and it was issued by a financially weak corporation c. the interest it pays is tax exempt and it was issued by a financially strong corporation d. the interest it pays is tax exempt and it was issued by a financially weak corporation

b. the interest it pays is taxed and it was issued by a financially weak corporation

Assume the following information for an imaginary, closed economy. GDP = $5 trillion consumption = $3.1 trillion government purchases = $0.7 trillion taxes = $0.9 trillion Suppose, for this economy, the relationship between the real interest rate, r, and investment, I, is given by the equation I = 10.78 - 3.03r. (If, for example, r = 10, this means that the real interest rate is 10 percent.) The equilibrium real interest rate for this economy is a. 3.19 percent. b. 3.00 percent. c. 3.16 percent. d. 7.14 percent.

c. 3.16 percent.

Bank regulators impose capital requirements in order to a. increase the amount of leverage in the economy. b. provide an incentive for banks to hold risky assets. c. ensure banks can pay off depositors. d. increase the probability of a credit crunch.

c. ensure banks can pay off depositors.

Diminishing marginal utility of wealth implies that the utility function a. has increasing slope and a person is risk averse. b. has increasing slope and a person is not risk averse. c. has decreasing slope and a person is risk averse d. has decreasing slope and a person is not risk averse.

c. has decreasing slope and a person is risk averse