ECO 155 TEST: Chapters 6-9.

Based on the transactions that take place in the scenario that follows, how much would be added to U.S. GDP for 2012? Scenario: In May 2012 a used car dealership bought a classic car for $2,000. The dealership cleaned it up, repaired it, and eventually sold it to you in August 2012 for $3,200. You are a permanent U.S. resident, and the dealership is located in the United States and owned by a permanent U.S. resident.

$1,200

Which event would cause the equilibrium quantity of savings to decrease?

An upward shift in the supply of loanable funds. → A decrease in supply in the market for loanable funds would shift the supply curve to the left, causing the quantity of savings to fall.

A recession is a significant, widespread decline in real income and _____.

Employment.

Which statement is NOT given in the textbook as a problem associated with using GDP as a measure of output and welfare?

GDP does not count the purchase of corporate stock.

_____ capital is the productive knowledge and skills that workers acquire through education, training, and experience.

Human

The market value of the output produced in the United States by a permanent resident of another country is included in:

U.S. GDP only.

All else equal, lower _____ rates usually result in _____ savings.

interest; less

The capital stock neither grows nor shrinks when:

investment is equal to depreciation.

Economic growth is positive when:

investment is greater than depreciation.

If GDP for a certain economy is $1,510 billion at the end of year 1 and it grows by 6 percent, what will be the GDP at the end of year 2?

$1,600.60

Which timeline puts the events leading to the financial crisis of 2007-2008 in proper chronological order?

-High leverage in the shadow banking system -Falling asset prices -Reduction in the amount of lending in the economy.

What are the institutions of economic growth?

-Property rights -Honest government -Political stability -A dependable legal system -Competitive and open markets

Suppose the production function for an economy is Y = √K, and that γ = 0.25 and δ = 0.05. If the present capital stock is equal to 16, new investment in capital will be equal to:

1. → γY = 0.25 × √16 = 0.25 × 4 = 1.

Suppose the production function for an economy is Y = √K, and that γ = 0.25 and δ = 0.05. If the present capital stock is equal to 25, in the next period the capital stock will equal:

25. → 25 + (0.25 × √25) - (0.05 × 25) = 25 + 1.25 - 1.25 = 25.

Suppose that in a certain economy, the growth rate of the population is 1.2 percent and the real GDP growth per capita is 2.1 percent. The real GDP growth rate must be equal to:

3.3 percent. (growth rate of the population + real GDP growth per capita = real GDP growth rate).

Suppose the production function for an economy is Y = √K, and that γ = 0.25 and δ = 0.05. If the present capital stock is equal to 25, the current level of output is:

5.

_____ in the market for loan-able funds determines the equilibrium interest rate.

Trading

The market value of the output produced in another country by a permanent U.S. resident would be included in:

U.S. GNP only.

What is the Solow model?

Y = F(A, K, eL) is the Solow model. The variable A represents ideas, the variable K represents physical capital, and the variables eL represent skill-adjusted labor.

What does Y, K, γ, and δ represent?

Y is output, K is the capital stock, γ is the fraction of output that is invested as new capital, and δ is the fraction of the capital stock that wears out or depreciates.

Nissan has decided to open a factory in Missouri in an effort to avoid tariffs. The cars produced in that plant are:

added to U.S. GDP.

Purchases of stocks and bonds:

are not included in GDP because they are not part of production of goods and services.

Investment is the purchase of new _____ goods.

capital

Suppose two assets are equally risky but have different prices. In this case, demand for the _____ asset would increase and its price would _____.

cheaper; rise

One study estimates that if India used the human and physical capital that it does have as efficiently as the United States uses its capital, it would be four times richer than it is today. This demonstrates the importance of _____ and open markets as an institution.

competitive.

Crowding-out is the decrease in private _____ and investment that occurs when government borrows more.

consumption

If the interest rates offered on savings accounts increases from 5 percent to 10 percent, then the price of an equally risky one-year maturity zero-coupon bond with a face value of $1,000 will:

fall from $952 to $909.

Suppose your weekly earnings (the number on your paychecks) decrease by 2 percent over the course of a year and prices in the economy fall by 3 percent. In this case, your nominal earnings have _____ and your real earnings have _____.

fallen; risen.

The _____ the interest rate, the smaller the quantity of funds demanded for _____.

higher; investment → The demand curve for borrowing is downward sloping.

Net exports are the value of exports minus the value of _____.

imports

GDP does not measure the distribution of _____.

income.

The growth in leisure time in the United States over the past four decades:

is an improvement in well-being that is not reflected in GDP.

The rule of 70 states that if the annual growth rate of GDP per capita is x percent, then what?

it will take (70 divided by x) years for it to double.

Suppose your weekly earnings (the number on your paychecks) increase by 2 percent over the course of a year and prices in the economy rise by 3 percent. In this case, your _____ earnings have increased and your _____ earnings have decreased.

nominal; real.

Ideas are:

non-rivalrous.

GDP does not count _____ production.

nonpriced

The marginal _____ of capital is the increase in output caused by the addition of one more unit of capital.

product

The product (2011 prices × 2010 quantities) is equal to:

real GDP in 2010 if 2011 is the base year.

Standards of living rise as _____ rises.

real GDP per capita

An increase in government borrowing:

reduces private consumption. → This effect is referred to as crowding-out.

At the steady state the capital _____ is neither increasing nor decreasing.

stock

The factors that influence economic growth are:

technological change, improvements in the skill adjusted quantity of labor, and increases in the amount of capital.

A patent is a government grant of:

temporary monopoly rights. (Patents exist to help those who bear the costs of development receive more of the benefits.)

Suppose the production function for an economy is Y = √K, and that γ = 0.25 and δ = 0.05. If the present capital stock is equal to 36:

the economy is shrinking. → In this case, investment is equal to 0.25 × √36 = 1.5, and depreciation is equal to 0.05 × 36 = 1.8, so investment falls short of depreciation.

A reliable way to achieve faster growth in real GDP per capita is to increase:

the growth rate of human capital. (This would shift the production function upward so that investment would exceed depreciation and the economy would grow.)

Equilibrium in the market for loanable funds determines:

the interest rate and the quantity of loanable funds.

If you cook breakfast at your home on Saturday morning

the market value of the ingredients that you purchased is included in GDP.

The equation Y = C + I + G + NX is referred to as:

the national spending approach to GDP calculation.

All else equal, if consumers decide to save less:

the supply curve in the market for loanable funds will shift to the left. → This would decrease the supply of loanable funds, and the interest rate would rise.

To compute the growth rate of GDP from 2010 to 2011, you need:

two numbers, the GDP at the end of 2010 and the GDP at the end of 2011.

The supply curve for savings is _____ because as the _____ rate rises, the quantity of savings will also rise.

upward sloping; interest

Suppose the production function for an economy is Y = √K. Which equation is equivalent to the amount of output that is invested in new capital?

γY → This could also be written as γ√K.

Suppose that in a certain economy, the real GDP growth rate is 0.9 percent and the growth rate of the population is 1.2 percent. The real GDP growth per capita must be equal to:

−0.3 percent. (real GDP growth rate - growth rate of the population = real GDP growth per capita).

Which activity BEST describes how GDP is calculated?

Summing the market value of all final goods and services.

Real GDP per capita:

varies enormously among nations.

Suppose the production function for an economy is Y = √K, and that γ = 0.25 and δ = 0.05. If the present capital stock is equal to 25:

The economy is in a steady state.

Suppose the production function for an economy is Y = √K, and that γ = 0.25 and δ = 0.05. If the present capital stock is equal to 25, new investment in capital will be equal to:

1.25.

If per capita GDP is $1,000 and government officials want to increase it to $8,000 within 21 years, at what approximate rate does it have to grow?

10%.

_____ exports are the value of exports minus the value of imports.

Net.

The factor income approach to measuring GDP states that GDP equals the sum of employee compensation, rent, interest, and _____.

Profit.

A _____ is a significant, widespread decline in real income and employment.

Recession.

_____ is income that is not spent on consumption goods.

Savings

_____ knowledge is knowledge about how the world works that is used to produce goods and services.

Technological

Which event would cause the equilibrium quantity of savings to increase?

a rightward shift in the demand for loanable funds → An increase in demand in the market for loanable funds would shift the demand curve to the right, causing the quantity of savings to rise.