ECON Final

Which concept does the sentence "price of an asset rises above what appears to be its fundamental value " desscribe?

"speculative bubble." If the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble. Stock market bubbles arise in part because investors are willing to pay more than a stock is worth today if they expect others to pay even more for it tomorrow.

Jame deposited $1,000 into an account five years ago. The first year she earned 7% interest, the second year the interest rate was 6%, and the third year the interest rate was 5%. How much money does she have in her account today?

$1,190.9. The future value in three years taking into account the fact that every year the interest rate is different is as follows: (1 + Interest Rateyear1) × (1 + Interest Rateyear2) × (1 + Interest Rateyear3) × Present Value. Thus in three years, Anna's account earns (1 + 0.7) × (1 + 0.06) × (1 + 0.05) × $1,000 = $1190.91.

What is the future value of $1000 put into an account that earns 1% interest for 10 years?

$1000 × (1 + 0.01)10. Incorrect. Future value is the amount of money in the future (say, n years) that an amount of money today ($X) will yield, given prevailing interest rates (r). Thus the formula to compute the future value is $X × (1 + r)n = $1000 × (1 + 0.01)10.

Which of the following would fit an economist's definition of "money"?

$20 bill. Economists have a more specific definition of the word "money" than the general public. Economists use the word "money" to refer to the set of assets in an economy that people regularly use to buy goods and services from other people. This is different than an asset, such as a large house or financial assets like stocks and bonds, which might be valuable but are not regularly exchanged directly. These assets would contribute to one's wealth, but people do not commonly accept houses, stocks, or bonds as forms of payment. You would need to sell these assets for cash in order to make purchases, however a $20 bill is cash that is generally accepted as a form of payment for goods and services.

In 2019, Econland GDP was $1500. Its investment rate was 20% of GDP, government deficit was $80 and savings was $500. What is Econland net capital outflow?

$200. Recall the GDP and national savings equations Y = C + I + G + NX S = Y - C - G Note I = 1500 * 0.2 = 300. Let's plug in the values we have: 1500 = C + 300 + 80 + NX 500 = 1500 - C - 80 From the second equation we find that consumption is: C = 1500 - 500 - 80 C = 920 Now, let's calculate trade balance: NX = 1500 - 920 - 300 - 80 NX = 200 Recall net exports equal capital outflows. Thus, Econland's capital outflow in 2019 is $200.

Ana purchases 20 stocks of Labareda Breads Inc. for 2$ each. In 2019 she sold 8 stocks for 6$ each. If inflation that year is 8%, what is her real capital gains that year ?

30.72$. Ana sold 8 stocks for 6$ and each one costed 2$. Her nominal capital gain is: (6$ - 2$) * 8 = 32$ However, the question is asking for her real capital gains. To do it, you adjust all the stock prices to current period dollars: 6$*1 = 6$ 2$*(1+8%) = 2.16$ Her capital gains is: (6$ - 2.16$)*8 = 30.72$

Suppose that you deposited $200 in the bank. In one year, the bank statement shows that you have $210 in your account. What interest rate did your account earn?

5percent. Here, $200 is the future value of $210 in one year: (1 + r) × $200 = $210. This implies, the interest rate, r = ($210 - $200)/$200 = 5%.

Suppose Chinedu bought 240 shares of Jumia Inc. stock at $10 per share. A year later, he sells two-thirds of his shares for $20 a share. What is Chinedu's after-tax nominal gain if the tax rate on nominal capital gains is 40% and the inflation rate is 5%?

960. By selling his Jumia stocks at $20 per share, Chinedu makes a gain of $10 per share. Before-tax, his total gain is (240*2/3)*10 = 1,600. After-tax, his take-home gain is 1,600*(1-0.4) = 960.

If a bank has just enough reserves to meet the required reserve ratio of 25 percent, and receives a deposit of $800, it has initially experienced a

$600 increase in excess reserves and a $200 increase in required reserves. If a bank receives a deposit of $800 dollars, and has a required reserve ratio of 25%, then it will be required to keep $800 X 25% = $200. This means that the bank experiences a $200 increase in required reserves. The remaining 75% of the deposit is, initially before it is loaned out, considered part of excess reserves because the bank is not required to hold these funds. This means the bank experiences an initial increase of $800 X 75% = $600 increase in excess reserves. The bank, if it so desires, can lend out these excess reserves as loans, or keep the excess reserves in anticipation of future loans.

Suppose that the adult non-institutionalized population of California is 30 million. If 18 million people are employed and 1.5 million are unemployed, then _____ are in the labor force of California and the unemployment rate is ______ .

19.5 million, 7.69%. ⇒ Labor force = Employed + Unemployed = 18m + 1.5m = 19.5m ⇒ Unemp.Rate= Unemployed/(Labor Force) ×100 = 1.5m/19.5m ×100=7.69%

Assume that a new car is worth 2,200,000 Kenyan shillings in Kenya, and the nominal exchange rate between Kenya and South Africa is 5 Kenyan shillings per South African rands. If purchasing-power parity holds, the price of the same car in South Africa will be:

440,000 rand. Given that the purchasing power parity holds, the car must sell for the same price in both South Africa and Kenya. If a rand is worth 5 shillings, then a car worth 2,200,000 shillings in Kenya is worth 2,200,000/5 = 440,000 rand. Alternatively one can determine that a shilling is worth 0.2 rand and multiply this number by the value in shillings of the car.

Diminishing marginal utility means that

A $1 gain increases utility by less than a $1 loss decreases it. Feedback: A popular choice for a utility function with decreasing marginal utility is u(x)=ln(x) where x can be seen as your income. Suppose your income is $5. Then, your utility is u(5) = ln(5) = 1.609. Now, suppose you win one dollar. In this case, your utility increase from u(5) = 1.609 to u(6) = 1.7917. In contrast, if you would lose $1, your utility decreases from u(5) = 1.609 to u(4) = 1.386. Decreasing marginal utility means that your loss in utility is larger than your gain in utility. Please note that we do not expect you to know that u(x)=ln(x) displays decreasing marginal utility. Unfortunately, compass does not allow us to use graphs in our explanations. Therefore, I had to choose a numerical example.

Select the statement that is not true about economic fluctiations

A depression is a mild recession. A depression is a more severe economic downturn than a recession and not a milder one. All the other options are stylized facts about how economic fluctuations behave.

What will be the initial reaction of a decrease in consumer confidence in the economy?

Aggregate demand shifts to the left. A reduction in consumer confidence decreases consumption (C) at any given price level (P), shifting the aggregate demand (AD) curve left (recall AD = C + I + G + NX).

Which of the following can cause a shift in the short run aggregate supply curve but not the long run aggregate supply?

Changes in Expected Price Level. A decrease in the expected price level shifts the short-run aggregate-supply curve to the right. An increase in the expected price level shifts the short-run aggregate-supply curve to the left. Changes in expected price level do not shift the long run aggregate supply.

Recall the identity: YP = MV According to the quantitative theory of money:

Changes in M does not affect Y and V, only P. The quantitative theory of Money tells us that: The Velocity of money(V) is stable over time, not affected by any variable in the model. Money is neutral, it does not affect real variables such as the economy's output (Y) Changes in the quantity of Money (M) will affect the price level in the economy (P).

Suppose in 2019 US households increased their consumption of foreign beans. Everything else constant this causes:

Demand for dollars to move left. Increase in consumption of foreign beans is an import. Everything else constant an increase on imports causes net exports to decrease (NX = EX - IM). When net exports fall the demand for dollars decrease as exporters needs to exchange less of foreign currency for the domestic currency.

Which of the following cannot cause a shift in the aggregate demand curve?

Changes in labor. Shifts Arising from Changes in Consumption: An event that causes consumers to spend more at a given price level (a tax cut, a stock market boom) shifts the aggregate-demand curve to the right. An event that causes consumers to spend less at a given price level (a tax hike, a stock market decline) shifts the aggregate-demand curve to the left. Shifts Arising from Changes in Investment: An event that causes firms to invest more at a given price level (optimism about the future, a fall in interest rates due to an increase in the money supply) shifts the aggregate-demand curve to the right. An event that causes firms to invest less at a given price level (pessimism about the future, a rise in interest rates due to a decrease in the money supply) shifts the aggregate-demand curve to the left. Shifts Arising from Changes in Government Purchases: An increase in government purchases of goods and services (greater spending on defense or highway construction) shifts the aggregate-demand curve to the right. A decrease in government purchases on goods and services (a cutback in defense or highway spending) shifts the aggregate-demand curve to the left. Shifts Arising from Changes in Net Exports: An event that raises spending on net exports at a given price level (a boom overseas, speculation that causes a currency depreciation) shifts the aggregate-demand curve to the right. An event that reduces spending on net exports at a given price level (a recession overseas, speculation that causes a currency appreciation) shifts the aggregate-demand curve to the left.

In Mexico, real GDP per person was $1,285 in 1900 and $18,258 in 2017. The growth rate was 2.29% per year. Which of the following is true?

Correct. If real GDP per person, beginning at $1,285, were to increase by 2.29% per year for 117 years, it would end up at $18,258. However, real GDP per person did not rise exactly 2.29% every year: Some years it rose by more, other years it rose by less, and in other years it fell. The growth rate of 2.29% per year ignores short-run fluctuations around the long-run trend and represents an average rate of growth for real GDP per person over many years.

Suppose that Ghana would like its currency (the cedi) to appreciate relative to that of Nigeria. The Central Bank of Ghana should

Decrease the money supply, which would cause the price level to fall. When Ghana increases its money supply, prices increase as a result. Not only the number of domestic goods that a cedi can buy decreases, but the number of Nigerian goods that a cedi can buy decreases. Note also that the number of naira that one cedi can buy also decreases, i.e. the cedi depreciates. Therefore, if Ghana wants its currency to appreciate, it must reduce its money supply, decreasing the overall level of prices as a consequence.

Which of the following central bank actions would increase the money supply?

Decreasing the discount rate. Reserve requirement, discount rate and open market operation are three major monetary policies used by central banks. To increase money supply, central banks could lower reserve requirement, decrease discount rate, or buy bonds in the open market.

Suppose the government wants to use fiscal policies to decrease aggregate demand by $5 billion. And suppose MPC is 0.75. Assume there is no crowding out effect. How much would the government have to change government spending by?

Decreasing the government spending by $1.25 billion Response Feedback: The government should use contractionary fiscal policies. So they would decrease the government spending. 5 / Multiplier = 5 * (1-MPC) = 5 * 0.25 = 1.25

Please choose the most accurate answer for the question: What data are included in fundamental analysis of the value of a stock?

Dividends, the expected final sale price, and the ability of the corporation to earn profits. Incorrect. Fundamental analysis is the study of a company's accounting statements and future prospects to determine its value. It is based on the study of the company's dividends, the expected final sale price of its stock, and the ability of the company to earn profit.

If investment and consumption together equal GDP, national savings are:

Equal or smaller than investment. Recall the GDP equation. Y = C + I + G + NX If GDP equal consumption plus investment: C + I = C + I + G + NX G + NX = 0 G = -NX Since government spending is at least positive: G >= 0 -NX >= 0 NX <= 0 Now recall the national savings identity: S = I + NX S - I = NX <= 0 S - I <= 0 S <= I

Suppose you borrow 700$ dollars due one year. Real interest is 2% per year and inflation is expected to be 3%, so that you and the bank agree to a 5% nominal interest rate. At the end of the year, inflation turned out to be 6%! Is this good or bad news?

Great news. The bank paid you interests for borrowing money. Incorrect. You and the bank agreed upon 5% nominal interest because the bank expected 3% inflation and the target real interest was 2%. However, inflation ended up being 6%. Using the Fisher equation we can find the actual real interest that you end up paying: nominal interest ~ real interest + inflation real interest ~ nominal interest - inflation real interest ~ 5% - 6% real interest ~ -1% You end up with negative real interests - meaning you took a loan and paid back, in real values, less than the principal. Indeed you paid $735 dollars to the bank at the end of the year - but those $735 end-of-year dollars are worth less than the $700 start-of-the-year dollars you borrowed.

Assume that a closed economy had public saving of -$3 trillion and private saving of $5 trillion. What are national saving and investment for this country?

In a closed economy, national savings is a sum of private saving and public saving: (-$3 trillion) + $5 trillion = $2 trillion. At the same time, the accounting identity S = I shows that national saving and investment are equal for the economy as a whole. Thus, investment, I = $2 trillion.

Higher saving rate in an economy always leads to a higher growth rate of productivity in the long-run.

Incorrect. The accumulation of capital is subject to diminishing returns. The more capital an economy has, the less additional output the economy gets from an extra unit of capital. As a result, although higher saving leads to higher growth for a period of time, growth eventually slows down as capital, productivity, and income rise.

Suppose the government wants to use fiscal policies to decrease aggregate demand by $5 billion. And suppose MPC is 0.75. Which of the following policies should the government use?

Increasing taxes or decreasing government spending. The Government should use contractionary fiscal policies to decrease aggregate demand. So they should increase taxes or decrease government spending.

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 20 percent. If the Fed lowers the reserve requirement to 10 percent and at the same time buys $20 billion worth of bonds, then by how much does the money supply change?

It rises by $1,200 billion. Under these assumptions, if the banking system holds $200 billion in reserves, then a reserve requirement of 20 percent implies that the banking system has had $1,000 billion in deposits. If the fed lowers the reserve requirement to 10 percent, then banking system is only required to hold 0.1 X $1,000 billion = $100 billion in deposits, and can thus lend out the remaining $100 billion of the original $200 billion. Meanwhile, if the Fed buys $20 billion worth of bonds, this will result in another $20 billion in new money. The money multiplier is 1/0.1 = 10. This means the money supply will increase by 10 X ($100 billion + $20 billion) = $1,200 billion.

Which of the following is not a reason why a fall in price level increases the quantity of goods and services demanded?

Money is neutral so it doesn't affect real variables. This question addresses the reasons why aggregate demand is downward sloping which are the 3 effects: wealth effect, interest rate effect and exchange rate effect.

Jon buys stock in a company in Argentina. Monica purchases coffee from the same country. Both Jon and Monica are American residents. Whose purchase, by itself, increases Argentina's net capital outflow?

Monica's. Jon purchases stock from a foreign company - a foreign portfolio investment in Argentina's economy. From Argentina's perspective, that is capital inflow. Thus, Jon purchase reduces Argentinas net capital outflow. Monica purchasing coffee from Argentina will count as export for that country. That is an increase to its net exports. Recall that a country net export equal it's net capital outflow. Thus, Monica purchase increase Italy capital outflow.

Suppose a world with two economies, Econland and Mathland. There is overall suspicious that interest rates in Mathland will increase by the end of the year. What does Econland's citizens expect to happen to its real exchange rates and net capital outflow?

Net capital outflow increases; exchange rates decrease. Response Feedback: When interest rates in foreign economies increase, net capital outflow will increase because investing in the other economy becomes more attractive. This simultaneously causes the demand for loanable funds and the supply of domestic currency to increase. The increase of supply of Econland's currency will cause it to depreciate, hence exchange rates go down.

The hard drives in Google's data center are examples of

Physical capital. The stock of equipment and structures used to produce goods and services is called physical capital, or just capital.

Last year, a chocolate factory made 60,000 bars employing 100 workers, each of whom worked 8 hours per day. This year, the factory produced 70,000 toys, employing 80 workers, each of whom worked 10 hours per day. What can you say about factory's productivity?

Productivity increased by 16.7%.

In the open economy macroeconomic model, if national savings decrease due external factors:

Real interest rates go up; net capital outflow goes down; real exchange rates go up. When savings decrease, the supply of loanable funds decreases, causing interest rates to go up. Net capital outflows decreases as investments in the domestic economy gets a higher return. As net capital outflows decreases, the supply of dollars decrease and real exchange rates increase.

Suppose the new elected government of Econland passes a bill to greatly facilitate foreign investments on its economy. According to the open-economy macroeconomic model, this will cause:

Real interest rates to decrease and real exchange rate to increase. According to the open-economy macroeconomic model, this bill will cause an influx of foreign capital. Hence net capital outflow decreases (NCO = CO - CI). This will affect both the market of loanable funds and the market of foreign currency exchange. Market of Loanable Funds: The reduction of capital outflow reduces the demand for funds. Therefore, real interest rates fall. Market of Foreign Currency Exchange: The reduction of capital outflow reduces the supply of domestic currency. Hence, real exchange rates increase.

When the Fed adds more money to the economy, the money supply curve shifts to the ________, causing the equilibrium price level to ________ and the value of money to ________.

Right, increase, decrease. When the Fed adds more money (for example through the purchase of bonds), it shifts the money supply to the left. Since money demand has not changed, 1/P which represents the value in terms of goods and services of a dollar decreases and prices increase.

Julia uses part of her income to buy stocks at the NYSE. This transaction is an example of

Savings. At the household level, savings is the left-over income after paying for taxes and consumption. Savings can take various forms such as buying stocks or bonds.

Suppose due natural disaster, the denizens of Econland will save less and take less risks investing abroad. Everything else constant, how does this natural disaster affect the equilibrium amount of loanable funds and real interest rates in Econland?

The amount of funds decreases; the effect on interest is ambiguous.. National savings is the domestic supply of loanable funds. With lower savings the supply of funds decreases. From this channel, interest rates go up and the amount of funds decreases. If denizens of Econland are less prone to invest abroad, this will reduce net capital outflows, moving the demand for loanable funds left. From this channel, the amount of loanable funds decreases but interest rates go down. Both channels reduce equilibrium amount of loanable funds, but since they affect interests in opposite direction, its overall effect is ambiguous.

A U.S. phone company wants to build a new factory in Canada. In the open economy model, this causes:

The demand of loanable funds in the US to decrease. A US company building a new factory abroad classify as capital outflow. In the open economy model, net capital outflow affects both the market for loanable funds and the market for domestic currency. Market for Loanable Funds: The company will demand funds to finance the investment. Therefore, demand for funds should increase, not decrease. Market for Domestic Currency: When the company builds the factory abroad it will exchange US dollars for Canadian dollars. Hence, it increases the supply of US dollars in the international exchange markets.

Suppose the government imposes tax laws that discourage its citizens to save. How does this change affect the equilibrium interest rate and the equilibrium amount of loanable funds?

The equilibrium interest rate and the equilibrium amount of loanable funds both decrease. When firms are discouraged to invest, their demand for loanable funds decreases, i.e., shifts to the left. Consequently, the equilibrium interest rate and equilibrium amount of loanable funds both decrease.

Assume we had a simple economy that only produced mangoes. The velocity of money is 50 and 1000 mangoes are produced. What must be true for the price if the quantity of money increases from 400 to 800? (Assume everything else stays constant)

The price must increase by 100% c. The price of mangoes goes up from $20 to $40 d. both b and c (CORRECT) The quantity theory of money boils down to this simple formula: M*V=P*Y. Given M=400, V=50 and Y=1000, we can solve for P using the previous formula. Then, P=20. Using the same formula, when M increases to 800, we get P=40. Therefore, the price goes up from $20 to $40, which is also equivalent to a 100% increase.

Suppose Econland economy only has one good, apples, and uses dollars ($) as means of exchange. Initially, it produces 300 apples, each apple costs $4 and each dollar circulates on average 12 times. What happens if the production of apples increase to 600, assuming the velocity of money stays unchanged ?

The price of each apple falls to $2. Using the quantitative identity: 300x4=12M. M=100. There are $100 dollars in this economy and there is no reason for this amount to change when output change. Since V is stable, when the economy has more apples, they become more affordable. Finally, price adjusts to 600P = 1200. P=$2

Troy is looking for work after school, but everywhere he fills out an application, the managers say they always have a lot more applications than open positions. Ben has a business degree. Several companies have made him offers, but he thinks he might be able to find a job in a more desirable location.

Troy is structurally unemployed, and Ben is frictionally unemployed. Troy can't find work at the going wage indicating a surplus of workers created by above equilibrium wages, this is structural unemployment. Ben can find jobs, but is searching for a good match, this is frictional unemployment.

True or False? "According to the open-economy macroeconomic model, protectionist trade policy, by restricting imports, reduces trade deficit (or induces a trade surplus)".

True. According to the open-economy macroeconomic model, a protectionist trade policy affects the economy by increasing net exports (recall NX = EX - IM). This causes the demand for domestic currency in the foreign currency exchange market to increase. Since the supply of dollars in this market is inelastic with respect to real exchange rates (a vertical curve), all the adjustment is done by appreciation of domestic currency. Net exports and net capital flows remain unchanged.

When a large, well-known corporation sells bonds, it means that the corporation wishes to borrow directly from the public.

True. Correct. When large corporations, the federal government, or state and local governments need to borrow to finance the purchase of a new factory, a new jet fighter, or a new school, they usually do so by issuing bonds.

True or False? "When both real and nominal exchange rates increase, domestic goods become less attractive both for domestic and foreign consumers"

True. Recall the difference between real and nominal exchange rates. Nominal exchange rates are how much you can acquire of foreign currency F$ with one unit of domestic currency D$. When domestic consumer imports foreign goods and when foreign consumer imports domestic goods: Domestic Consumer trades D$ for F$ and F$ for imported foreign goods. Foreign Consumers trades F$ for D$ and D$ for domestic foreign goods. When nominal exchange rates are higher, domestic consumers acquires more F$ and imported goods gets cheaper. Thus, domestic goods become less attractive. Meanwhile, the foreign consumer will obtain less D$ and less domestic goods, therefore they become less attractive. Real exchange measures the opportunity cost of obtaining a certain good or basket of goods in your country given you could be importing the goods from other countries. When real exchange rates are higher, the opportunity cost of obtaining the good in the home country increases, therefore they are less attractive. Note real exchange rates are adjusted for the relative price of the good in each economy - thus they are the same for consumers domestic and foreign.

According to Friedman and Phelps, If the Fed pursues an expansionary monetary policy, in short run

actual inflation will be higher than expected inflation. In short run, with an expansionary monetary policy, actual inflation will be higher, but expected inflation is still low. Unemployment will be lower than its natural rate.

In 2020 the US dollar is appreciating at fast pace. All else equal, which of the following could cause this in the open-economy macroeconomic model?

US consumers increased their purchase of foreign supplies. "Foreign investors are purchasing US treasury bonds causing US net capital outflow to fall": Correct. The purchase of US treasury bonds by foreign investor is capital inflow which causes net capital outflow to fall. When net capital outflow falls, the supply of dollars in exchange currency markets fall and exchange rates increase. "US consumers increased their purchase of foreign supplies": Incorrect. This causes imports to increase and net exports to decrease. When net exports decrease the demand for domestic currency in exchange currency markets decreases, causing exchange rates to fall. "US consumers are saving more": Incorrect. IF US consumers saves more, the supply of loanable funds increases. This will push real interest rates down and increase net capital outflow. When net capital outflow increase, the supply of dollars in exchange currency markets increase and exchange rates decrease.

Suppose that more Econland people decides to take vacations abroad and more foreigners purchase Econland government bonds. How each event affect Econland's net exports and capital flows?

Vacations reduces capital outflows; Foreign portfolio investments decreases net exports.

Which of the following is an example of "leather shoe cost" of inflation:

You do groceries earlier than what you would have otherwise. The " shoe leather cost" of inflation refers to the inconvenience of not being able to keep cash with you because it loses value over time. Rushing to do groceries before money lose value is an example of one such inconvenience.

Which of the following bonds has the highest risk of default?

a junk bond

Assume a gallon of milk costs 50 cedi and 500 naira, respectively in Ghana and Nigeria. If the purchasing power parity holds, what is the nominal exchange rate between the two countries?

a. 1 cedi per 10 naira b. Both a and d (CORRECT) d. 1 naira per 0.1 cedi

According to classical macroeconomic theory,

a. Changes in the money supply affect nominal variables but not real variables. b. "Money is a veil". c. If the quantity of money in the economy doubles, everything will cost twice as much and everyone's income would be twice as high which means the changes will only be nominal. d. All of the above are correct. (CORRECT) Response Feedback: All the three statements represent the classical theory of monetary neutrality which in a sense means that money doesn't matter in the classical world. Nominal variables may be the first things we see when we observe an economy because economic variables are often expressed in units of money. But more important are the real variables and the forces that determine them. According to classical theory, to understand these real variables, we need to look behind the veil.

Which of the following is not an explanation for the upward slope of the short run aggregate supply curve?

a. sticky prices b. sticky wages c. misperceptions about relative prices d. none of the above (CORRECT) Response Feedback: All three theories suggest that output deviates in the short run from its natural level when the actual price level deviates from the price level that people had expected to prevail. Whether the upward slope of the aggregate-supply curve is attributable to sticky wages, sticky prices, or misperceptions, these conditions will not persist forever. Over time, nominal wages will become unstuck, prices will become unstuck, and misperceptions about relative prices will be corrected. In the long run, it is reasonable to assume that wages and prices are flexible rather than sticky and that people are not confused about relative prices.

Derrick worked part time for his mother's business without pay. Tyler was absent from work because he had the flu. The Bureau of Labor Statistics counts

both Derrick and Tyler as employed. People who work part time for a family business and people temporarily absent from work due to weather, illness, or vacation are both counted as employed.

According to the Efficient Markets Hypothesis, you should

buy a diversified portfolio. According to the Efficient Market Hypothesis, stock prices reflect all available information. Therefore, changes in the stock prices cannot be predicted by reading the Wall Street Journal. If prices reflect all available information, then the best you can do it is buy a diversified portfolio.

Suppose that the Bureau of Labor Statistics predicts that the number of jobs for nurses will grow faster than most occupations, while the number of jobs for oil workers will decline. This change in the labor market would lead to

frictional unemployment created by sectoral shifts.

Assume a 12 oz Pepsi bottle costs 3.75 cedi and 30 naira respectively in Ghana and Nigeria. Assume as well that 1 cedi can buy 10 naira. Then

check phone

According to Friedman and Phelps, If the Fed pursues an expansionary monetary policy, in long run

expected inflation and actual inflation will be both higher, and unemployment is back to its natural rate. Response Feedback: In the long run, expected inflation rises, short run Phillips curve shifted to the right. The new intersection point between short-run Phillips curve and long-run Phillips curve is the new equilibrium, which implies the unemployment is back to its natural rate.

Junk bonds are bonds that have been resold many times.

false. Financially shaky corporations raise money by issuing junk bonds, which pay very high interest rates to compensate for the high risk of default.

According to the efficient markets hypothesis, building a portfolio based on a published list of the "most respected" companies is likely to produce a better-than-average return.

false. The efficient markets hypothesis implies that all stocks are fairly valued all the time and that no stock is a better buy than any other.

Suppose a US firm opens a new computer factory in India. This is an example of

foreign direct investment

If the average education level of workers in country A increases, country A may have higher productivity because workers have higher ____

human capital

If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $50 million worth of government bonds, bank reserves

increase by $50 million and the money supply eventually increases by $500 million. If the reserve ratio is 10 percent, and banks hold no excess reserves and individuals do not hold currency, then the money multiplier is 1/0.1 = 10. When the Fed purchases $50 million in government bonds, there is initially $50 million of new money in the economy in the hands of the public. The public then deposits this money in banks since they do not seek to hold currency. This causes reserves to rise by $50 million, and the money supply eventually increases, in total, by $50 X 10 = $500 million.

Any change in the economy that alters the natural level of output shifts the long-run aggregate-supply curve. Because output in the classical model depends on ____________ , capital, ___________ , and technological knowledge, we can categorize shifts in the long-run aggregate-supply curve as arising from these four sources.

labor; natural resources. Because the long-run aggregate-supply curve reflects the classical model of the economy we developed in previous chapters, it provides a new way to describe our earlier analysis. Any policy or event that raised real GDP in previous chapters can now be described as increasing the quantity of goods and services supplied and shifting the long-run aggregate-supply curve to the right. Any policy or event that lowered real GDP in previous chapters can now be described as decreasing the quantity of goods and services supplied and shifting the long-run aggregate-supply curve to the left.

Assume that a closed economy had public saving of -$3 trillion and private saving of $5 trillion. What are national saving and investment for this country?

national savings is $2 trillion and investment is $2 trillion. In a closed economy, national savings is a sum of private saving and public saving: (-$3 trillion) + $5 trillion = $2 trillion. At the same time, the accounting identity S = I shows that national saving and investment are equal for the economy as a whole. Thus, investment, I = $2 trillion.

South Korea's status as a rich nation is attributable to international trade, but not to its domestic quantities of natural resources.

true

The Fed has decreased the money supply through open market operations. Which of the following has occurred?

open market sales, and bank reserves decrease. In order to decrease the money supply, the Fed will have to conduct open market sales of government bonds. When individuals purchase bonds from the Fed, they will use currency, most often withdrawn from their bank accounts. Since this money ends up in the hands of the Fed, the money is no longer circulating in the general public. This means the money supply has decreased, and since some of that money came from bank accounts, reserves and lending will decrease as well.

In a closed economy, the national saving S = (Y - T - C) + (T - G). In this identity, what does (Y - T - C) represent?

private saving

Which of the following concepts does the level of real GDP divided by hours worked over that year measure?

productivity for a given year

Suppose that neither workers in the paper industry nor workers in the furniture industry are unionized. If workers in the paper industry unionize, the supply of workers in the furniture industry will

rise, reducing the wages of workers in the furniture industry. If workers in the paper industry unionize, then they will bargain to raise the wages of workers in the paper industry. This increase in wages reduce the demand for workers in the paper industry and so some of them will lose their jobs. Some of those who lose their jobs will search for jobs in the furniture industry. This search raises the supply of workers in the furniture industry and so reduces wages in the furniture industry.

The theory of purchasing-power parity might fail in some instances because

some goods and services may not always be easily tradable. One of the reasons why the purchasing power parity might fail is the fact that some goods might not easily be traded. For instance, very similar haircuts in New York and London might have different prices, due to the fact that one cannot easily trade one haircut for the other. Another reason why this theory might fail is also the fact that some goods are not always perfect substitutes for each other, for example, a German car and a US car.

Which of the following concepts do we use to describe the phenomenon that insured people tend to be less careful than uninsured people about their risky behavior?

the moral hazard problem. Moral hazard refers to the fact that after people buy insurance, they have less incentive to be careful about their risky behavior because the insurance company will cover much of the resulting losses. Insurance companies cannot perfectly distinguish between high-risk and low-risk customers, and cannot monitor all of its customers' risky behavior.

A bond's credit risk is __

the probability that the borrower will fail to pay some of the interest or principal. Correct. One of the important characteristic of a bond is the probability that the borrower will default, or fail to pay some of the interest or principal. Such a probability is called credit risk.

Which of the following statements about public policies pursuing free trade is true?

they can lead to greater economic growth

The long-run Phillips curve illustrates the conclusion that

unemployment does not depend on money growth and inflation in the long run. Response Feedback: The long-run Phillips curve is a vertical line on the natural unemployment rate, establishing that, in the long run, unemployment does not depends on inflation.

The long run aggregate supply curve is

vertical in the long run. Because the price level does not affect the long-run determinants of real GDP, the long-run aggregate-supply curve is vertical. In other words, in the long run, the economy's labor, capital, natural resources, and technology determine the total quantity of goods and services supplied, and this quantity supplied is the same regardless of the price level.

According to Friedman, A long-run Phillips curve should be

vertical. Recall long-run aggregate demand&supply graph. The long-run supply curve is vertical, which implies the vertical long-run Phillips curve.

Rising inflation does not necessarily affect negatively most people's real incomes because:

wage inflation goes together with price inflation. Rising prices are usually followed by a rise in wages as well. Therefore, while nominal incomes change as a result of wage inflation, real incomes tend to not change.