Econ Exam 2
Who calculates the unemployment rate?
BLS
What is a financial intermediaries?
Banks
A rational, optimizing economic agent will use the ________ rate while calculating the economic cost of a loan. A) real interest C) exchange B) nominal interest D) tax
A
An individual may borrow a certain sum of money from any of the three banks in his town. Bank 1 offers him loans at an annual rate of 5%, Bank 2 offers him loans at an annual rate of 3% per year, and Bank 3 offers him a loan at an annual rate of interest of 10%. A rational individual will: A) borrow from Bank 2. B) borrow from Bank 1. C) borrow from Bank 3. D) be indifferent about borrowing from any of the three banks.
A
Assuming all else equal, a decrease in the real interest rate will cause: A) a downward movement along the credit demand curve. B) an upward movement along the credit demand curve. C) the credit demand curve to shift to the left. D) the credit demand curve to shift to the right.
A
Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit demand curve shifts to the left? A) Both equilibrium rate of interest and quantity of credit will decrease. B) The equilibrium rate of interest will increase and the quantity of credit will decrease. C) Both equilibrium rate of interest and quantity of credit will increase. D) The equilibrium rate of interest will decrease and the quantity of credit will increase.
A
If an individual borrows $200 at an annual rate of interest of 10%, what is the total amount that they will have to repay after one year? A) $220 B) $210 C) $20 D) $200
A
Institutions that channel funds from suppliers of financial capital (savers) to users of financial capital (borrowers) are referred to as: A) financial intermediaries. C) mutual funds. B) deposit insurance committees. D) central banks.
A
What will happen to the demand curve for workers in steel mills if some technology that increases their productivity is introduced assuming all else equal? A) It may cause a rightward shift in the demand curve of the workers. B) It will cause a leftward shift in the demand curve of the workers. C) It will cause a downward movement along the demand curve of the workers. D) It will cause an upward movement along the demand curve of the workers.
A
Which of the following equations is correct? A) Not in the labor force = potential workers - employed workers - unemployed workers B) Not in labor force = unemployed workers - employed workers C) Not in labor force = unemployed workers D) Not in labor force = potential workers - employed workers
A
Which of the following is likely to shift the demand curve for coffee workers to the left, assuming all else equal? A) A decrease in the price of coffee C) An increase in the price of coffee B) An increase in the wage rate D) A decrease in the wage rate
A
Which of the following statements is true? A) If a firm deposits a sum of $500 in a bank, the sum is a part of the bank's liability. B) If a bank lends a sum of $600 to a firm, the sum is a part of the bank's liability. C) If a firm deposits a sum of $500 in a bank, the sum is a part of the bank's assets. D) If a bank lends a sum of $200 to a household, the sum is a part of the bank's liability.
A
A worker is unemployed if he: A) is working from home and drawing a weekly salary. B) does not have a job and has been actively looking for one in the prior four weeks and is available for work. C) has been working part-time and has been actively looking for full-time work. D) does not have a job and is not actively looking for a job
B
An employed individual is one who: A) is performing household chores for free. B) has a full-time or part-time paid job. C) has been actively looking for jobs. D) was previously employed but has quit his job voluntarily.
B
An employed individual is one who: A) was previously employed but has quit his job voluntarily. B) has a full-time or part-time paid job. C) is performing household chores for free. D) has been actively looking for jobs.
B
A bank run occurs when: A) the central monetary authority regulates the functioning of banks. B) a bank's assets exceeds its liabilities. C) a bank experiences an extraordinarily large volume of withdrawals. D) a bank sells its assets to its own stockholders.
C
As a firm hires more and more workers: A) the value of marginal product of the additional workers eventually increases. B) the marginal product of the additional workers remains the same. C) the value of marginal product of the additional workers eventually decreases. D) the value of marginal product of the additional workers remains the same.
C
Assuming all else equal, if households are optimistic about their future income, it is likely to cause a(n): A) upward movement along their credit demand curve. B) downward movement along their credit demand curve. C) rightward shift of their credit demand curve. D) leftward shift of their credit demand curve.
C
Demand deposits are termed so because: A) most consumers want to open such accounts as they are greatly in demand. B) there are no limitations on the amount of money that can be deposited into such accounts. C) depositors can withdraw money from such deposits at any point of time. D) depositors can demand any rate of interest on such deposits.
C
If the annual inflation rate in an economy is " ", then $1 borrowed at the beginning of a year will have the same purchasing power as ________ dollars at the end of the year. A) B) (1/ ) C) (1 + ) D) (1 - )
C
If the number of employed workers in an economy is 8 million, the number of potential workers in the economy is 12 million, and the number of adults not in the labor force is 1 million, the number of unemployed people in the economy will equal: A) 5 million. B) 1 million. C) 3 million. D) 7 million.
C
Refer to the figure above. If the government institutes a minimum wage rate at $30, the number of peopled unemployed in the market will be: A) 20 units of labor. C) 10 units of labor. B) 15 units of labor. D) 25 units of labor.
C
Refer to the figure above. If there is downward wage rigidity in the market, what will be 8) the amount of unemployment in the market after the demand curve shifts to LD2? A) 5 units of labor B) 20 units of labor C) 10 units of labor D) 15 units of labor
C
The slope of the labor demand curve can be attributed to the Law of: A) Decreasing Opportunity Cost. B) Increasing Opportunity Cost. C) Diminishing Marginal Productivity of Labor. D) Increasing Marginal Productivity of Labor.
C
The transfer of short-term liabilities into long-term investments is called: A) intertemporal transformation. B) risk transformation. C) maturity transformation. D) investment restructuring.
C
The value of a worker's marginal product: A) equals the average product of a firm divided by the marginal product of the worker. B) is the maximum price at which a product can be sold in a market. C) is the additional revenue that the worker brings in to the firm. D) is the increment in total cost of a firm when the worker is hired.
C
A bank is insolvent when: A) its stockholders' equity exceeds its total assets. B) its total assets exceed its total liabilities. C) its stockholders' equity exceeds its total liabilities. D) its total liabilities exceed its total assets.
D
All else equal, a decrease in government borrowing is likely to cause a(n): A) rightward shift of the credit demand curve. B) upward movement along the credit demand curve. C) downward movement along the credit demand curve. D) leftward shift of the credit demand curve.
D
Deposit made by the public into a checking account are referred to as: A) current deposits. C) overdraft. B) stockholders' equity. D) demand deposits.
D
If the nominal interest rate in an economy is 6%, and the rate of inflation in the economy is 4%, the real interest rate in the economy is: A) 24%. B) 1.5%. C) 10%. D) 2%.
D
If the number of potential workers in a country is 25 million, and the size of the labor force in the country is 17 million, the number of adults not in the work force will equal: A) 43 million. B) 17 million. C) 25 million. D) 8 million.
D
If the number of potential workers in an economy increases while the size of the labor force remains unchanged, ________. A) the natural rate of unemployment will increase B) the labor force participation rate will increase C) the labor force participation rate will remain unaffected D) the labor force participation rate will fall
D
The credit demand curve is the schedule that reports the relationship between the quantity of credit demanded and ________ in an economy, assuming all else equal. A) the annual inflation rate B) the nominal rate of interest C) the average tax rate D) the real rate of interest
D
The real interest rate is given by: A) the nominal interest rate adjusted for changes in exchange rate. B) the nominal interest rate adjusted for tax rates. C) the nominal interest rate adjusted for income changes. D) the nominal interest rate adjusted for inflation.
D
Which of the following equations is correct? A) Real interest rate = Nominal interest rate + Inflation rate B) Real interest rate = Nominal interest rate / Inflation rate C) Real interest rate = Nominal interest rate × Inflation rate D) Real interest rate = Nominal interest rate - Inflation rate
D
Which of the following is a role of the Federal Deposit Insurance Corporation in the United States? A) It controls the real rate of interest. B) It determines the monetary policy of the country. C) It monitors the money supply. D) It safeguards deposits held with banks.
D
Which of the following is likely to shift the credit demand curve of an automobile manufacturer to the right, assuming all else equal? A) An increase in the real interest rate B) A plan to decrease production and exit from existing markets C) A decrease in the real interest rate D) A plan to increase production and expand to newer markets
D
Which of the following is likely to shift the labor supply curve to the right, assuming all else equal? A) A rise in the wage rate B) A fall in the population of the country due to a natural disaster C) A fall in the wage rate D) A rise in the immigration of workers in search of better work opportunities
D
What does the nominal interest rate not account for?
inflation
In a closed economy savings and ________ are equal.
investment
What is an institutional bank run?
is a case where large firms and other financial institutions lose confidence in a weak bank and withdraw their money.
What is the marginal product of labor?
is the additional output contributed by an additional worker
What does a recession do to people?
reduce people's desire to borrow and increase their desire to save more.
What is the value of the marginal product of labor?
simply the MPL multiplied by the unit price of the output, it can be thought of as the marginal revenue a worker contributes to a firm.
In the labor marker, households _______ labor, while firms _________ labor.
supply, demand
What is the natural rate of unemployment?
the long term average level of unemployment in the economy.
What is the principal?
the original amount of a loan.
What is a bank run?
when a bank experiences an extraordinarily large volume of withdrawals driven by a fear that the bank will run out of liquid assets to pay back depositors.
How is the optimal amount of labor to hire determined?
where VMPL = W.
What is said to be cyclical unemployment?
Differences between the natural and actual rate of unemployment
What does the labor force consist of?
Employed + Unemployed
Who manages banks when they become insolvent and insures deposits up to $250,000?
Federal Deposit Insurance Incorporation (FDIC)
If engineers unionize themselves and negotiate a wage that is $30 higher than the market clearing wage, what will be the impact on the employment level? Calculate the number of engineers that would be unemployed and show your work.
If engineers form a union and bargain for wages $30 above the equilibrium wage, 60 engineers would be willing to work but the firms would not hire any engineers. This will result in unemployment. Extent of unemployment = 60 - 0 = 60 engineers. Hence, 60 engineers will be unemployed in the market.
What does a bank's liabilities include?
(1) demand deposits (2) short-term borrowing (3) long-term debt.
What does a bank do?
(1) identifies profitable lending opportunities (2) engages in maturity transformation (3) transfers risk from depositors to the bank's shareholders and the government.
What can downward wage rigidity be caused by?
(1) minimum wage laws (2) collective bargaining (3) efficiency wages.
What can the demand for credit be affected by?
(1) perceived business opportunity (2) household preferences and expectations (3) government policy (e.g. deficit borrowing).
What does a bank's assets include?
(1) reserves (2) cash equivalents (3) long term investments (e.g. loans).
What are the 3 things economies can grow from?
1. capital accumulation 2. effective labor accumulation 3. technological progress
What are the 3 categories of unemployment?
1. frictional 2. structural 3. cyclical
How many unemployment measures are there and which is the official unemployment rate?
6 and U-3 is the official one
An individual plans to borrow a sum of $10,000 for one year. The nominal interest charged on the borrowed sum is 6%. If the rate of inflation in the economy is 10%, then is it a good idea for this person to take the loan? Why or why not? Support your answer with the Fisher Equation
A rational individual should make his borrowing decisions on the basis of the real interest rate and not the nominal interest rate. Annual real interest rate in this case = 6% - 10% = -4%. Hence, for every $100 that he borrows, after adjusting for inflation, he is actually paying back $96 after the end of the year (in terms of purchasing power). Hence, borrowing at an annual nominal interest rate of 6% when the annual rate of inflation is 10% is a good idea, and he should take the loan.
Consider two economies: A and B. The nominal interest rate is the same in both economies, but the rate of inflation is higher in economy B. Which of the following statements will then be true? A) The real interest rate will be higher in economy B. B) The real interest rate will be higher in economy A. C) The real interest rate will be the same in both economies. D) Whether the real interest rate is higher in economy A or B will depend on the number of borrowers in both economies.
B
If the labor force participation rate in an economy is 50%, and there are 100 million potential adult workers in the economy, the size of the labor force in the economy will equal: A) 2 million. B) 50 million. C) 100 million. D) 10 million.
B
If the number of unemployed workers in an economy is 4 million, and the size of the labor force in the economy is 16 million, the unemployment rate in the economy is: A) 30 percent. B) 25 percent. C) 4 percent. D) 8 percent.
B
In a frictionless labor market: A) there is always a surplus of workers. B) the wage adjusts instantly to clear the market. C) there is always a shortage of workers. D) the ongoing wage rate does not change for long periods of time.
B
One of the biggest risks of maturity transformation is that: A) it can increase the rate of inflation. C) it reduces the profitability of banks.B) it can lead to bank runs. D) it discourages savings.
B
The annual price of a loan is referred to as the: A) principal. C) service tax. B) rate of interest. D) discount value.
B
The opportunity cost of current consumption is: A) the inflation rate. C) real wage rate. B) the real interest rate. D) nominal wage rate.
B
The size of the labor force is equal to the: A) number of employed workers minus the number of unemployed workers in the country. B) number of employed workers plus the number of unemployed workers in the country. C) number of unemployed workers in the country. D) number of employed workers in the country.
B
The unemployment rate is defined as the: A) percentage of civilian non-institutionalized population aged 12 or over that is unemployed. B) percentage of labor force that is unemployed. C) percentage of civilian non-institutionalized population aged 14 or over that is unemployed. D) percentage of total population that is unemployed.
B
Wages that are above the wage that workers would accept, where the premium is paid to increase worker productivity, are referred to as: A) wage floors. B) efficiency wages. C) productivity wages. D) wage ceilings.
B
Which of the following explains why frictional unemployment exists in an economy? A) It arises because job search is completely a supply side phenomenon in the labor market, and firms make no attempts to advertise for the vacancies they have. B) It arises because it takes time for an unemployed worker to find a firm with a well-matched job vacancy. C) It arises because most of the workers shirk at work. D) It arises because unemployment benefits encourage workers not to look for jobs.
B
Which of the following is a part of the potential work force of a country? A) People on active duty in the military. B) Civilian non-institutionalized people aged 16 years and above C) Children aged 15 and lower D) Institutionalized people
B
__________ refers to any factor that keeps the market wage above the level that would clear the labor market. A) Wage discrimination C) Price ceiling B) Wage rigidity D) Wage stability
B
Which of the following statements is true of the unemployment rate in a country? A) It normally increases during periods of economic expansion and decreases during periods of economic recession. B) It normally decreases during periods of both economic expansion and recession. C) It normally decreases during periods of economic expansion and increases during periods of economic recession. D) It is not correlated with the level of economic activity in a country.
C
Which of the following statements is true? A) There will be no change in unemployment if there is a leftward shift in the labor demand curve and there is wage rigidity, everything else remaining unchanged. B) There will be an increase in unemployment if there is a leftward shift in the labor demand curve and there is no wage rigidity, everything else remaining unchanged. C) Unemployment will be higher if there is a leftward shift in the labor demand curve and there is downward wage rigidity in the labor market, everything else remaining unchanged. D) Unemployment will be higher if there is a leftward shift in the labor demand curve and there is no wage rigidity, everything else remaining unchanged.
C
If the government thinks that engineers are underpaid in the country and fixes a minimum wage of $50 per hour, what will be the impact on the employment level? Calculate the number of engineers that would be unemployed and show your work.
If the government fixes a minimum wage at $50 per hour, which is higher than the equilibrium wage rate, the quantity supplied of engineers will exceed the quantity demanded of engineers. This will cause unemployment. The extent of unemployment = 40 - 20 = 20 engineers. 20 engineers will be unemployed if the government fixes a minimum wage at $50 per hour.
Who doesn't the official unemployment rate factor in?
Involuntary part-time and discouraged workers
What's economic growth?
It refers to the percentage change in real GDP from year to year. - GDP grows in exponential fashion; it builds upon past growth much like how your savings account has a compounding interest rate.
How to find labor force participation rate?
Labor force/ potential workers
Who is unemployed?
People who: (1) had no job (2) but were available for work (3) and actively searched for worker in the prior four weeks.
How to find out who is not in labor force =
Potential workers - Labor Force
Gary, Kevin, and Joshua are three individuals who were previously employed but do not have jobs now. Gary lost his job a year ago. Although he would like to have a job, he has given up looking for one as he thinks there are no suitable jobs available for him. Kevin was working as a finance teacher, but quit his job a few months back to become a stock broker. Ever since he quit his job, he is unable to get a new one, although he is actively seeking. Joshua was employed in a steel mill. He lost his job when the labor union in his mill demanded a hike in wages. Classify the three individuals according to their type of unemployment.
Since Gary previously had a job but has stopped looking for one now, he can be considered a discouraged worker. Discouraged workers are potential workers who have stopped looking for jobs since they think there are none available for them. Kevin is unemployed because it is taking time for him to find a suitable job. Hence, Kevin can be said to be frictionally unemployed. Such unemployment arises because workers have imperfect information about available jobs and need to engage in a time-consuming process of job search. Joshua is unemployed because the labor union in his workplace demanded higher wages. When wages are above the market clearing wage, there is a fundamental mismatch between the quantity demanded and quantity supplied of labor. Unemployment caused because of this mismatch is referred to as structural unemployment.
In what area don't we usually see diminishing returns to because it tends to grow exponentially?
Technology
What is the equilibrium wage rate and employment level in the market?
The equilibrium wage is determined by the intersection of the labor demand curve LD1 and labor supply curve LS1. Hence, the equilibrium wage rate in the market is $40 per hour and the equilibrium employment level is 30 engineers.
Describe three functions that banks perform as financial intermediaries
The three functions that banks perform as financial intermediaries are: a. Banks identify good investment options. b. Banks transform short-term liabilities like deposits, into long-term investments. c. Banks transfer risk from depositors to the bank's stockholders and, in some cases, to the government.
How to find the U-3 unemployment rate?
Unemployed/Labor Force
What does an increase in capital, human capital, or technology have on the aggregate production function?
Will result in greater output.
What do financial intermediaries provide?
a bridge between demanders of credit (borrowers) and suppliers of credit (savers).
What can the supply for credit be affected by?
a change in the savings motivation of households and firms.
What can downward wage rigidity cause?
a persistent surplus of labor, which we can think of as unemployment.
What is the purpose of the real interest rate?
adjusts the nominal interest rate for inflation.
Who is a potential worker?
anyone in the civilian non-institutionalized population age 16 and over.
How can the real interest rate be calculated?
as r = i - 𝝿 , where we subtract the inflation rate from the nominal interest rate. We refer to this as the Fisher equation.
How can demand for labor be affected?
by a change in (1) output prices (2) input prices (3) technology (as these all affect the value of marginal product of labor) (4) demand for output (derived demand).
How can the supply of labor be affected?
by a change in (1) tastes/preferences/social norms (2) opportunity cost of time (3) population changes (e.g. immigration).
What is the nominal interest rate?
i, is the annual cost of a loan.
How is the number of workers hired by a firm determined?
determined by the relationship between the value of the marginal product of labor (VMPL) and the wage (W)
What does the natural rate of unemployment include?
frictional and structural unemployment