econ midterm 1
new growth theory
A model of long-run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.
economic growth model
A model that explains growth rates in real GDP per capita over the long run.
Why would countries that isolate themselves rather than participating fully in the global economy be hurting their own people?
Countries that isolate themselves miss out on foreign investment and access to better technology
In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?
Every penny spent on a good or service must end up as someone's income.
T/F: Production will take place more quickly and efficiently when firms are not restricted by the rule of law
False
T/F: Without the rule of law, firms will be sued and forced to pay damages if they fail to carry out a contract
False
T/F In years when people buy many shares of stock, investment will be high and, therefore, so will gross domestic product (GDP)
False: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.
T/F: Corporate profits are much too high: Most corporations make profits equal to 50 percent of the price of the products they sell.
False: The largest component of gross domestic income is wages, which are about three times as large as profit
How does channeling savings into investment support economic growth?
Firms can acquire funds to invest in new capital and new technologies, which increases worker productivity and thus economic growth
Which of the following is an argument to be made that globalization hurts rather than helps some economies?
It can result in unemployment and lower incomes for workers in industries that compete with foreign imports
Why might having such a large agricultural sector be considered an economic problem for India?
It is an economic problem for India because low levels of labor productivity result in low levels of income
What is the shadow economy?
It is the part of the economy where the buying and selling of goods and services is concealed from the government.
household survey vs. establishment survey
The household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measures total employment in the economy.
When an unemployed person drops out of the labor force, it...
does not affect the employment-population ratio.
As people move from working in the agricultural sector to other more productive sectors...
economic growth will automatically increase
"The rule of law" refers to the ability of a government to
enforce the laws of the country, particularly with respect to protecting property rights and enforcing contracts
Technological progress is affected by
entrepreneurship, new software developments, private property rights, investment in capital
without contract enforcement
firms may have difficulty finding investors willing to provide them with the funds they need to expand, firms may be reluctant to enter into agreements with other firms, resulting in slower and more inefficient production, and bribery and government corruption are more likely to exist.
Businesses demand loanable funds because
firms need to borrow funds for new projects, such as building new factories or carrying out new research projects.
In the United States, what is a key source of funds for start-up firms bringing new technologies to market?
funding from venture capital firms
final good or service
good or service purchased by a final user
Crowding out occurs when
governments must borrow funds which causes interest rates to rise and thus private investment is reduced
In the circular-flow diagram, who supplies factors of production in exchange for income?
households
Which of the following categories make up about three-quarters of the market basket?
housing, transportation, and food
Real GDP per hour worked is determined by
human capital, physical capital, and technology
Increases in the minimum wage will
increase unemployment among teenagers.
households supply loanable funds because of the
interest income received from the borrowers
real interest rate=
interest rate-inflation rate
The unemployment rate in the United States is usually ________ than the unemployment rates in most other high-income countries, partly because the United States has _________ requirements for the unemployed to receive government payments.
lower; more stringent
During an economic expansion, we would normally expect the employment-population ratio to increase as the unemployment rate falls because
more people are likely to be employed
In an economy with rising prices, compared to the base year...
nominal GDP is larger than real GDP in years after the base year.
Inflation can affect the distribution of income because
people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.
If the GDP deflator in 2012 has a value of 98.0, then...
prices have decreased 2 percent between the base year and 2012.
Which of the following is not a "loanable fund"?
real estate
value added refers to
the additional market value a firm gives to a product and is calculated as the difference between the sale price and the price of intermediate goods.
Many economists prefer (household or establishment)
the establishment survey because it is determined by actual payroll records rather than unverified answers.
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
When the economy is at full employment, unemployment is equal to
the natural rate of unemployment.
The difference between the nominal interest rate and the real interest rate is
the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.
If inflation is expected to increase,
the nominal interest rate will increase.
The state's unemployment rate could have increased at the same time that employment in the state was increasing because
the number of discouraged workers and other people not previously counted as unemployed entered the labor force.
trade dispute
the situation that occurs when two countries impose tariffs and non-tariff barriers on each other
The natural rate of unemployment is
the sum of structural unemployment and frictional unemployment.
real GDP
the value of final goods and services evaluated at base-year prices
Which of the following factors determines the supply of loanable funds?
the willingness of households and governments to save
When an unemployed person drops out of the labor force, the unemployment rate...
understates the true degree of joblessness in the economy.
The unemployment rate is calculated as
unemployment rate= (number of unemployed/labor force)*100
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.
nominal GDP
value of final goods and services evaluated at current-year prices
An important conclusion to draw from the circular-flow diagram is that
we can measure GDP by calculating the total value of expenditures on final goods and services, or we can measure GDP by calculating the value of total income.
foreign direct investment
when a firm builds or purchases a facility in a foreign country
foreign portfolio investment
when an individual or a firm buys stocks or bonds issued in another country
Aren't savings already investment? If not, what type of investment is the Factsheet referring to?
No, investment, as used in this context, refers to expenditure on new capital and new technology
How is GDP deflator calculated?
GDP Deflator=(Nominal GDP/Real GDP)*100
When a significant fraction of domestic production takes place in foreign-owned facilities, a country's difference between GDP and GNP is as follows:
GDP will be much larger than GNP (Gross National Product)
How does the size of a country's GDP affect the quality of life of the country's people?
Generally, the more goods and services people have, the better off they are.
Why does the shadow economy matter?
Having a large shadow economy may be a sign that government policies are making it difficult for many businesses to operate openly.
Why do economic growth rates matter?
High levels of sustained economic growth reduce infant mortality, When a country sustains high growth rates, life expectancy at birth increases, and High growth rates coincide with improved living standards
The role of the entrepreneur becomes much more important in the new growth theory—the endogenous growth model—than in the traditional economic growth model because
In the new growth theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies.
Why would incomes in agriculture be lower than incomes outside agriculture?
Incomes in agriculture would be lower if worker productivity is higher outside agriculture than in agriculture
Briefly explain how a poor country might benefit from foreign portfolio investment or foreign direct investment.
It can give low-income countries access to technology and funds that otherwise would not be available.
Why might replacing legal restrictions on firing workers with unemployment insurance (which is the approach used in the United States) increase economic growth?
It would make it easier for firms to get rid of workers who it no longer needs or who are not productive in their job and Firms may hire more workers if they can fire workers with low productivity or those who are a poor fit for the job
Even perfectly anticipated inflation imposes costs. Why?
Menu costs, Paper money loses its purchasing power by the rate of inflation, and Some wages will fail to keep up with anticipated inflation
How does real GDP deal with the problem inflation causes with nominal GDP?
Real GDP separates price changes from quantity changes, Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years, and By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced
What do people gain when the economy experiences growth and improved productivity?
Real wages increase when workers produce more output per hour, In general, increased productivity and economic growth are the key to rising living standards, and Workers receive higher real wages that allow them to buy more of the goods and services that firms produce.
Briefly explain how the financial system channels savings into investment.
Savers provide funds to firms by buying the firms' stocks and bonds and by depositing funds in banks
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
transfer payments =
T - G - S public
What are the possible negative effects of taxing business payrolls rather than taxing incomes?
Taxing business payrolls is likely to reduce the number of workers hired and lower the return to working (and saving and investing)
Which of the following is not one of the conditions someone needs to meet to be counted as unemployed?
They had worked only one hour per week during the previous four weeks.
T/F: If laws are not well enforced, buyers and sellers may be hesitant to participate in market transactions
True
T/F: Over the past 20 years, other high-income countries have actually fallen further behind the United States in terms of real GDP per capita.
True
T/F: Without the rule of law, bribery and corruption are more likely to exist
True
T/F: A wage rising slower than the rate of inflation is actually falling
True. If wages are increasing slower than the average price of goods and services, purchasing power falls.
Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
private saving =
Y + TR - C - T
investment spending =
Y - C - G (Y=C+I+G)
Does increasing productivity automatically increase growth?
Yes, increasing productivity should automatically increase growth as measured by real GDP per capita.
Suppose that the inflation rate turns out to be much lower than most people expected. In that case,
a borrower will lose from the situation while a lender will gain.
tax perk
a decrease in a firm's tax obligation
contract enforcement
binding, and individuals and businesses that do not fulfill their end of the bargain will face repercussions
Long-run growth in GDP is determined by
capital, labor productivity, and technology
Holding all else constant, a federal government budget deficit will
decrease the supply of loanable funds and increase the equilibrium real interest rate
