ECO CH 10
The two key factors that cause labor productivity to increase over time are
the quantity of capital per hour worked and the level of technology.
The federal government reduces the tax on corporate profits (assume no change in the federal budget deficit or budget surplus).
3
An increase in the real interest rate results in little increase in private saving by households.
4
The Bureau of Economic Analysis (BEA), part of the federal government, might not want to take on this responsibility. Which one of the following is the most appropriate reason for the BEA's refusal?
Because it is part of the government, the BEA could be pulled into politics with the dating of recessions.
Source: McKinsey Global Institute, "Global growth: Can Productivity Save The Day in an Aging World?," January 2015. It is likely that McKinsey & Company was referring to growth in
real GDP per capita.
Which of the following is the best measure of the standard of living of the typical person in a country?
real GDP per person
A more cautious approach might be advisable in particular industries where
sales are particularly cyclical.
Which of the following changes will ensure that an economy experiences sustained economic growth?
technological change
Source: Corning, Inc., "Form 10-K" (Annual Report), 2010, p. 34. Gorilla glass is used on the screens of iPhones and many other portable electronic devices. Its sales may have been less affected by the business cycle than sales of some of the firm's other products, such as screens for LCD televisions or ceramics used in automobile emission systems, because
the demand for portable electronic devices was less affected than the demand for televisions and automobiles.
From a trough to a peak, the economy goes through
the expansionary phase of the business cycle.
India has been able to experience rapid economic growth since 1991 despite poor educational and health care systems because
the government scaled back central planning, reduced regulations, and introduced market-based reforms.
In determining whether to borrow funds, firms compare the rate of return they expect to make on an investment with
the interest rate they must pay to borrow the necessary funds.
Potential real GDP is
the level of GDP attained when all firms are producing at capacity.
Which of the following factors determines the supply of loanable funds?
the willingness of households and governments to save
What is the best use of the rule of 70 among those listed below?
to judge how rapidly real GDP per capita is growing over long time periods
Source: "The Onrushing Wave," Economist, January 18, 2014. You can expect there to be a close relationship between productivity gains and increases in real wages because
unit costs fall when more goods are produced per worker, so prices can fall, thereby increasing the value of real wages.
As the economy nears the end of an expansion, which of the following typically occurs?
{All of the above occur.} A. The profits of firms will be falling. B. Wages are usually rising faster than prices. C. Interest rates are usually rising.
Why might the unemployment rate continue to rise during the early stages of a recovery?
{Because both (a) and (c) are true.} A. Employment growth may be slow relative to the growth in the labor force. B. The number of discouraged workers may continue to increase. C. Some firms continue to operate well below their capacity even after a recession has ended.
When the government begins to run a budget surplus,
{all of the above hold true.} savings and investment increase. the equilibrium interest rate decreases and the quantity of loanable funds increases. Your answer is not correct. the supply of loanable funds curve shifts to the righ
Which of the following equals the amount of public saving?
Government tax revenue minus the sum of government purchases and transfer payments to households.
Increases in real GDP per capita increase life expectancy at birth.
I agree with this statement.
Consider the importance of growth LOADING... in GDP, particularly real GDP per capita, to the quality of life of a country's citizens. Indicate whether you agree or disagree with each of the following statements. Increases in real GDP per capita do not increase the amount of goods and services available to a country's citizens.
I disagree with this statement.
Increases in real GDP per capita mean people will have a lower portion of leisure time over the course of their lives.
I disagree with this statement.
Use the graph to help determine which one of the following statements regarding flucuations in real GDP is true:
In the first half of the twentieth century, real GDP had much more severe swings than in the second half of the twentieth century.
Suppose you had a choice between living in the United States in 1900 with an income of $1 comma 056 comma 000 per year or in the United States in 2018 with an income of $59 comma 000 per year. Assume the incomes for both years are measured in 2018 dollars.
In which year would you have the highest real income? [1900] In which year would you have the better standard of living? [2018]
Which of the following does NOT lead to long-run economic growth?
Increase in average wages
Consider the following goods.
More than, f-150 less than, mcdonalds more than, chevron's less than, huggies more than, boeing
"Real GDP in 2016 was $16.7 trillion. This value is a large number. Therefore, economic growth must have been high during 2016." Do you agree or disagree with this statement?
No, I do not agree
Source: Neil Shah, "Americans' Debt-Cutting Levels Off," Wall Street Journal, December 11, 2014. Does this information indicate that the U.S. economy was close to the end of an economic expansion in late 2014?
No, because debt will normally increase near the end of an expansion.
Consider the following choices. Which one of the following choices is correct?
Recessions were more severe and lasted longer in the first half of the twentieth century and became shorter and milder in the second half.
Many economists agree that this difference is due to all of the following reasons except:
Since the 1950s, people have become more rational and control their spending behavior countercyclically.
Source: John Hilsenrath, "Grand Central: A Letter of Stingy American Consumers," Wall Street Journal, June 2, 2015. Which argument is correct in terms of promoting long-run economic growth?
Steven Landsburg because saving funds the investment spending needed for long-run economic growth.
TR =
T - G - S{pub}
Government Budget Balance
T - G - TR
S{pub} =
T - G - TR
Use the graph to help determine which one of the following statements is true:
The average American in the year 2006 could buy nearly eight times as many goods and services as the average American in the year 1900.
The financial system - either financial markets or financial intermediaries - provides savers and borrowers with all of the following except:
The financial system provides security to savers by warranting that their funds are fully insured against loss.
What will be the effect of an increase in business taxes on the quantity of investment by firms and the economy's capital stock in the future?
The quantity of investment will decrease and the economy's future capital stock will decrease.
Think about the relationship between economic prosperity and life expectancy.
The size of the health care sector in a less developed country is [smaller than] the size of the health care sector of a developed country.
Which of the following describes the effect of the business cycle on the inflation rate and the unemployment rate?
The unemployment rate increases and the inflation rate falls during recessions.
Does this fact affect the conclusion about whether the pre-reform or post-reform Scrooge had a more positive impact on economic growth?
Uncertain
G =
Y - C - I
Suppose you can receive an interest rate of 7 percent on a certificate of deposit (CD) at a bank that is charging borrowers 15 percent on new car loans. Which one of the following choices does not explain why you might be unwilling to loan money directly to someone who wants to borrow from you to buy a new car, even if that person offers to pay you an interest rate higher than 7 percent?
You are better at assessing risks than the usual financial institutions.
A government that collects more in taxes than it spends experiences
a budget surplus.
The low point of economic activity is called
a trough.
Typically, when will the National Bureau of Economic Research (NBER) announce that the economy is in a recession?
a year or more after the recession has begun
The period between the low point of economic activity and the following high point is called
an expansion.
Which of the following changes does not cause an increase in the quantity of goods and services that can be produced by one worker, or in one hour of work?
an increase in the number of workers
The fact that the equilibrium quantity of loanable funds may increase along with an increase in the real rate of interest
assumes that demand for loanable funds increases with supply remaining unchanged.
Source: Amartya Sen, "Why India Trails China," Wall Street Journal, June 19, 2013. Education and healthcare are important for economic growth because
a well-educated and healthy workforce has higher productivity.
If the government changes its tax policy and taxes only real interest payments and not nominal interest payments,
both saving and investment increase.
When firms expand during recessions, they
cannot be certain when recovery will occur and know they could experience prolonged losses.
Source: "Financial System Soundness," International Monetary Fund Factsheet, March 2013. A weak financial system might make economic growth difficult, since
capital investment, essential for rapid economic growth, is often financed by borrowed funds and an unstable financial system leads to difficulty attracting loanable funds.
The firm's observation is
consistent with economic theory explaining long-run economic growth.
Source: Greg Ip, "Politicians Should Pay Heed to Productivity Problem," Wall Street Journal, July 22, 2015. The claim of this article is
consistent with economic theory that explains that long-run economic growth is dependent on increases in real GDP per capita.
Source: Robert J. Samuelson, "Is the Economy Experiencing another Great Moderation?" Washington Post, June 4, 2014. Consumers may have been willing to assume more debt, and banks and other lenders may have been willing to make loans more freely, during the Great Moderation because
consumer incomes were generally rising, and repayment prospects were good.
Which of the following is not a reason that the economy is considered to have been more stable in the 1950dash2007 period than in other periods?
continually falling oil prices
Holding all else constant, a federal government budget deficit will
decrease the supply of loanable funds and increase the equilibrium real interest rate.
Consider the graph on the right to answer the following questions:
decrease; decrease; decrease; decrease
If the government changes its tax policy and taxes only real interest payments and not nominal interest payments, the equilibrium real interest rate will _____ and the equilibrium quantity of loanable funds will _____.
decrease; increase
Recessions cause the inflation rate to _________, and the unemployment rate to _________.
decrease; increase
The financial system of a country is important for long-run economic growth because
firms need the financial system to acquire funds from households.
Businesses demand loanable funds because
firms need to borrow funds for new projects, such as building new factories or carrying out new research projects.
How much does the quantity of loanable funds supplied increase with the increase in the interest rate from i1 to i2?
from L1 to L2
How much would the quantity of loanable funds demanded have increased if the interest rate had remained at i1?
from L1 to L3
Potential real GDP
grows over time
In particular, the size of the health care sector in a developing country
grows with economic prosperity as life expectancy increases.
Which of the following is not a service that the financial system provides for savers and borrowers?
guaranteeing savers high rates of return
India's labor force has been gradually shifting out of the low-productivity agricultural sector into the higher-productivity service and industrial sectors. This shift is
increasing India's real GDP per capita because the shift is towards higher-productivity sectors.
Households supply loanable funds because of the
interest income received from the borrowers.
When households increase their consumption in anticipation of future tax decreases, all of the following hold, except that
investment increases.
What is the rule of 70?
is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.
The increase in real GDP per capita ________ the true increase in living standards.
is likely to be smaller than
The computation of the average annual growth rate of real GDP
is more complex when examining data for a long period of time than when examining data for only a few years.
During the last half of the twentieth century, the U.S. economy experienced
long expansions, interrupted by relatively short recessions.
Real GDP
new/old
Economists and policymakers think that India's growth rates may
not be sustainable because of poor education, poor medical care, and poor infrastructure.
These actions might have made the severe recession of 2007-2009 more likely because
once incomes began to fall, people could not pay their debt, and banks suffered losses as repayments fell.
Which of the following are financial securities that represent promises to repay a fixed amount of funds?
bonds
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Growth rate of real GDP
((RGDP{this year} - RGDP{last year})/RGDP{last year}) x100
S{pvt} =
(Y + TR) - (C + T)
Number of years to double
70/Annual growth rate
Which of the following is not a "loanable fund"?
Real estate.
Which one of the following expressions shows the investment-saving equality?
S = Y - C - G
I =
Y - C - G
What are the names of the following events in a business cycle? a. The high point of economic activity is called
a peak.
The period between the high point of economic activity and the following low point is called
a recession.
Purchases of which types of goods are business cycles most likely to affect?
durable goods
Refer to the graph on the right to answer the following questions:
increase; increase
Potential GDP is
sometimes greater, sometimes less, and sometimes equal to actual real GDP.
A decrease in the real interest rate results in a substantial increase in spending on investment projects by businesses.
1
The federal government eliminates 401(k) retirement accounts.
2
What is the general relationship between the business cycle and unemployment and inflation?
During an expansion, unemployment falls and inflation increases.
