ECON Test 2

Suppose the government finds a major defect in one of a company's products and demands that the product be taken off the market. We would expect that

demand for existing shares of the stock and the price would both fall

People who buy newly issued stock in a corporation such as Crate and Barrel provide

equity finance and so become part owners of Crate and Barrel

Stock in Creole Cuisine Restaurants at $25 per share. Creole Cuisine had $5 a share and a dividend yield of 5%. The dividend is

$1.25 and price-earnings ratio is 5

Valeria is a closed economy, where consumption totals $3 billion, tax payments are $300 million, and government spending is $1 billion, and GDP is $5 billion. Private saving amounts to

$1.7 billion and Valeria's government runs a budget deficit

In the economy of Talikastan in 2015, consumption was $700, exports were $200, government purchases were $300, imports were $150, and investment was $400. what was GDP in 2015?

$1450

If the same year nominal GDP was $20 billion and the GDP deflator was 50, what was real GDP?

$40 billion

Suppose in the year 2000 Ken earned $60000. If the CPI in the year 2000 was 172.2 and in 2015 was 236.7, what is the minimum level of income Ken would have needed to earn in 2015 to have maintained the same standard of living he had 2000.

$82,474

in the base year, the GDP deflator is always

100

Which of the following changes in the price index produces the greatest rate of inflation: 106 to 112; 112 to 118; or 118 to 124?

106 to 112

In 1931, the price of a movie ticket was $.25. The CPI was 15.2 in 1931, and 210 in 2008. Using 2008 prices, the real price of a movie in 1931 was

3.45

the price index was 120 in 2012 and 126 in 2013. What was the inflation rate?

5%

Gross domestic product adds together many different kinds of goods and services into as single measure of the value of economic activity. To do this, GDP makes use of a. market prices b. statistical estimates of the value of goods and services to consumers c. prices based on the assumption that producers make no profits d. the maximum amount consumers are willing to pay

a

If the CPI was 110 this year and 100 last year, then a. the cost of the CPI basket of goods and services increased by 10 percent this year b. the price level increased by 110% this year c. the inflation rate for this year was 10% higher than the inflation rate for last year d. all of the above

a

In addition to a. performing financial intermediation, banks are important in that help create a medium of exchange b. serving a financial markets, mutual funds are important in that they help create a store of value c. serving a stores of value, stocks and bonds also serve as media of exchange d. all of the above

a

On which of these bonds is the prospect of default most likely a. a junk bond b. a municipal bond c. a US government bond d. a corporate bond issued by Proctor and Gamble Corporation

a

Rosa deposits $100 in a bank account that pays an annual interest rate of 20%. A year later, after accumulated $20 interest, she withdraws her $120. Rosa's purchasing power a. did not change if the inflation rate was 20% b. decreased if the inflation rate was -5 percent c. increased if the inflation rate was 22% d. more than one of the above is correct

a

Suppose that over the past year, the real interest rate was 3 percent, the CPI was 126.2 at the beginning of the year, and the CPI was 129.5 at the end of the year. It follows that a. the dollar value of savings increased at 5.6 percent, and the purchasing power of savings increased at 3 percent b. the dollar value of savings increased at .4 percent, and the purchasing power of savings increased at 3% c. dollar value of savings increased at 3 percent, and the purchasing power of savings increased at 5.6% d. the dollar value of savings increased at 3%, and the purchasing power of savings increased at .4%

a

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called a. credit risk b. interest risk c. term risk d. private risk

a

We associate the term debt finance with a. the bond market, and we associate the term equity finance with the stock market b. the stock market, and we associate the term equity finance with the bond market c. financial intermediaries, and we associate the term equity finance with financial markets d. financial markets, and we associate the term equity finance with financial intermediaries

a

Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable funds? a. the demand for loanable funds shifts right b. the demand for loanable funds shift left c. the supply of loanable funds shifts right d. the supply of loanable fund shift left

a

Which of the following statements is correct? a. the expected future profitability of corporation influences the demand for that corporation's stock b. when a corporation sells stock as a means of raising funds it is engaging in debt finance c. the owners of bonds sold by the Microsoft Corporation are part owners of that corporation d. all bonds, are, by definition, perpetuities

a

Which of the following statements is correct? a. The CPI can be used to compare dollar figures from different points in time b. the percentage change in the CPI is a measure of the inflation rate, but the percentage change in the GDP deflator is not a measure of the inflation rate c. compared to the consumer price index, the GDP deflator is the more common gauge of inflation d. the GDP deflator better reflects the goods and services bought by consumers than does the CPI

a

if congress increased the tax rate on interest income, investment

and saving would decrease

A steel company sells some steel to a bicycle company for $150. The bicycle company uses the steel to produce a bicycle, which it sells for $250. Taken together, these transactions contribute a. $150 to GDP b. $250 to GDP c. between $250 and $400 to GDP, depending on profit earned by bicycle company when it sold the bicycle d. $400

b

Changes in real GDP reflect a. only changes in prices b. only changes in amounts being produced c. both changes in prices and changes in the amounts being produced d. neither changes in price nor changes in amounts

b

Considers a small economy in which consumers buy only two goods: apples and pears. In order to compute the consumer price index for the economy for two or more consecutive years, we assume that a. the number of apples bought by the typical consumer is equal to the number of pears bought by the typical consumer each year b. neither the number of apples nor the number of pears bought by the typical consumer changes from year to year c. the percentage change in the price of apples is equal to the percentage change in the price of pears from year to year d. neither the price of apples nor the price of pears changes from year to year

b

GDP and GNP are identical when a. exports and imports exactly balance b. all domestic production is by domestically owned producers and no foreign production is carried out by domestic producers c. production by domestic producers in other countries is greater than production by foreign producers domestically d. there are no taxes

b

GDP excludes most items that are produced and sold illegally and most items that are produced and consumed at home because a. the quality of these items in not high enough to contribute to GDP b. measuring them is so difficult c the government wants to discourage the production and consumption of these items d. these items are not reported on income tax forms

b

GDP is used as the basic measure of a society's well being. A better measure of economic well being of individuals in a society is a. saving per person b. GDP per person c. government expenditures per person d. investment per business firm

b

Municipal bonds pay a relatively a. low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax b. low rate of interest because of their low default risk and because the interset they pay is not subject to federal income tax c. high rate of interest because of high default risk d. high rate of interest because of their low feaul of risk

b

Recent changes in methods used to compute the CPI have made the a. upward bias in the CPI inflation rate more severe than it used to be b. upward bias in the CPI inflation rate less severe than it used to be c. downward bias in the CPI inflation rate more severe than it used to be d. downward bias in the CPI inflation rate less severe than it used to be

b

Suppose that an economy produces 20000 unites of good A which sells at $3 a unit and 40000 units of good B which sells for $1 a unite. Production of good A contributes a. 1/3 times as much to GDP as production of good B b. 3/2 times as much to GDP as the production of good B c. 3 times as much to GDP as the production of good B d. 2/3 times as much to GDP as production of good B

b

US GDP a. includes production of foreigners working in US and production by US residents working in foreign countries b. includes production of foreigners working in the US bu excludes production by US residents working in foreign countries c. excludes production of foreigners working in US, but includes production of US residents working in foreign countries d. excludes both

b

The primary advantage of mutual funds is that they a. always provide the highest return b. always allow people to beat the market c. allow people to diversify and reduce risk d. allow people to diversify , which increases risk and return

c

Which of the following is correct? a. the GDP deflator is better than the CPI at reflecting the goods and services bought by consumers b. the CPI is better than the GDP deflator at reflecting goods and services bought by consumers c. The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers d. the GDP deflator is more commonly used as a gauge of inflation than CPI

b

Which of the following is not a question macroeconomists address? a. why is average income high in some countries but low in others? b. Why does the price of oil rise when war erupts in the Middle East? c. Why do production and employment expand in some years and contract in others? d. Why do prices rise rapidly in some periods of time while they are more stable in others?

b

Which of the following is not correct? a. if you buy a bond from a corporation, you can sell the bond to someone else before it matures b. term refers to the scheduling of periodic interest rate payments on a bond c. a bond is an IOU d. there are millions of different bonds in the US economy

b

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct? a. private and public savings are both positive b. private saving is positive; public is negative c. private saving is negative; public is positive d. both are negative

b

for the actual economy, total expenditures on goods and services by households does not equal GDP because a. household spending exceeds their incomes b. household expenditures on goods and services falls short of GDP, since households save for the future. c. household expenditures include only goods, since services are intangible and cannot be measured accurately d. household expenditures on goods and services are made using borrowed funds

b

According the circular-flow diagram, GDP a. can be computed as payments firms make to factors of production plus revenues they receive from the sales of goods and services b. can be computed as the revenue firms receive from the sales of goods and services minus the payments they make to factors of production c. can be computed as either the revenue firms receive from the sales of goods and services of the payments firms make to factors of production d. can be computed as the payments firms make to factors of production, but not as revenues they receive from the sales of goods and services

c

For an economy as a whole, income must equal expenditure because a. the number of firms is equal to the number of households in an economy b. individuals can only spend what they earn each period c. every dollar of spending by some buyer is a dollar of income for some seller d. every dollar of saving by some consumer is a dollar of spending by some other consumer

c

For the purpose of calculating GDP, investment is spending on a. stocks, bonds, and other financial assets b. real estate and financial assets such as stocks and bonds c. capital equipment, inventories, and structures including household purchasing of new housing d. capital equipment, inventories, and structures, excluding household purchases of new housing

c

In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct. a. the base year is always the first year b. it is necessary to designate a base year only in the simplest case of two goods c. the value of consumer price index is always 100 in the base year d. the base year is always the year in which the cost of the basket was highest among the years for which computations are being made

c

In the CPI, goods and services are weighted according to a. how long a market has existed for each good or service b. the extent to which each goods or service is regarded by the government as a necessity c. how much consumers buy of each good or service d. the number of firms that produce and sell each good or service

c

Macroeconomists study a. the decisions of individual households and firms b. the interaction between households and firms c. economy-wide phenomena d. regulations imposed on firms and unions

c

Sam, and American citizen, prepares meals for his family at home. Ellen, a Canadian citizen, commutes to the US to help prepare meals at a restaurant in Idaho. Whose value of services preparing meals is included in US GDP? a. Sam and Ellen b. Sam, but not Ellen c. Ellen, but not Sam d. Neither Sam or Ellen

c

Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct? a. the newspaper was correct in all circumstances b. the newspaper is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute CPI. c. the newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI d. the newspaper is incorrect

c

The substitution bias in the consumer price index refers to the a. substitution by consumers toward new goods and away from old goods b. substitution by the consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods c. substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive d. substitution of new prices for old prices in the CPI basket of goods and service from one year to the next

c

Which of the following is not an example of a durable good a. fridge b. car c. suit d. furnace

c

Which of the following is not correct? a. by saving a larger portion of its GDP, a country can raise its output per worker b. savers supply their money to the financial system with the expectation that they will get it back with a return at a later date c. financial intermediaries are the only type of financial institution d. the financial system helps match people's saving with other people's borrowing

c

Which of the following statements about recessions is true? a. an old rule of thumb defining recession is two consecutive quarters of falling nominal GDP b. recessions occur and regular intervals and last standard amounts of time c. there is no ironclad rule for the declaration of recessions d. recessions are associated with low unemployment and high income

c

a closed economy a. does not in engage in intl trade of goods and services b. does not engage in intl borrowing of lending c. both A and B d. engages in intl borrowing and lending

c

the CPI differs from the GDP deflator in that a. the CPI is a price index, while the GDP deflator is an inflation index b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator c. increases in the prices of foreign produced goods that are sold to US consumers show up in the CPI but not in the GDP deflator d. increases in the prices of domestically produced goods that are sold to the US government show up in the CPI but not in the GDP deflator

c

the CPI is a measure of the overall cost of goods and services bought by a. a typical consumer, and the CPI is computed and report by the Department of Treasury b. typical consumers and typical business firms, and the CPI is computed and reported by Department of Treasury c. typical consumer, and the CPI is computed and report by Bureau of Labor Statistics d. typical consumers and typical business firms, and the CPI is computed and reported by the Bureau of Labor Statistics

c

the GDP deflator is the ratio of a. real GDP to nominal GDP multiplied by 100 b. real GDP to inflation rate multiplied by 100 c. nominal GDP to real GDP multiplied by 100 d. nominal GDP to the inflation rate multiplied by 100

c

A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called a. inventory goods b. transitory goods c. final goods d. intermediate goods

d

A mutual fund a. a financial institution that stands between savers and borrowers b. is a financial intermediary c. allows people with small amounts of money to diversify their holdings d. all of the above

d

Babe Ruth earned $80000 in 1931. Today, baseball players earn more than 400 times that. However prices have risen since 1931. We can conclude that a. the best baseball players today are 400 times better of than Babe Ruth in 1931 b. because prices have also risen, the standard of living of baseball stars hasn't changed since 1931 c. one cannot make judgments about standard of living based on changes in price and changes in incomes d. one cannot determine whether baseball stars enjoy a higher standard of living than Babe Ruth did 1931 without additional information regarding increases in prices since 1931

d

In the calculation of CPI, tea is given greater weight than beer if a. the price of tea is higher than the price of beer b. it costs more to produce tea than it costs to produce beer c. tea is more readily available than beer to the typical consumer d. consumers buy more tea than beer

d

Norberto is opening a bicycle shop, and his monthly expenditures to get the shop up and running exceed his monthly income. Norberto is best described as a a. saver or as a supplier of the funds b. saver or as a demander of funds c. borrower of as a supplier of funds d. borrower or as a demander of funds

d

Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. this change in behavior, by itself, has a. reduced measured GDP b. not affected measured GDP c. increased measured GDP by the value of the restaurant meals d. increased measured GDP by the value added by the restaurant's preparation and serving of the meals

d

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basket's cost was $80; in 2013, the basket's cost was $84; and in 2014, was $87.60. The value of the CPI was a. 100 in 2012 b. 105 in 2013 c. 109.5 in 2014 d. all of the above

d

Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units. Suppose that a current estimate of the value of the condo owners' housing services is the same as the rent they previously paid. What happens to GDP as a result of this conversion? a. GDP necessarily increases b. GDP necessarily decreases c. GDP is unaffected because neither the rent nor the estimate of the value owner-occupied housing services is included in GDP d. GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced in GDP by the estimate of the value of owner occupied housing services

d

Suppose private saving in a closed economy is $12b and investment is $10b. a. national saving must equal $12b b. public saving must equal $2b c. the government budget surplus must equal $2b d. the government budget deficit must equal $2b

d

The economy's inflation rate is the a. price level in the current period b. change in the price level from previous period c. change in the GDP from previous period d. percentage change in the price level from the previous period

d

The primary economic function of the financial system is to a. keep interest rates low b. provide expert advice to savers and investors c. match one person's consumption expenditures with another person's capital expenditures d. match one person's saving with another person's investment

d

Which of the following correctly lists what is included in consumption component of GDP? a. household purchases of services and household purchases of nondurable goods but not any household purchases of durable goods b. household purchases of nondurable goods and durable goods other than residential construction, but not household purchases of services c. household purchases of services, nondurable goods, and all durable goods d. household purchases of services, nondurable goods, and durable goods other than residential construction

d

Which of the following is not correct? a. The CPI gives economist a way of turning dollar figures into meaningful measures of purchasing power b. the CPI is used to monitor changes in the cost of living over time c. The CPI is used by economists to measure inflation rate d. the CPI is used to measure the quantity of goods and services that the economy is producing

d

Which of the following statements about GDP is correct? a. GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy's output of goods and services b. money continuously flows from households to firms and then back to households, and GDP measures the flow of money c. GDP is generally regarded as the best single measure of a society's well being d. all of the above

d

the basic tools of supply and demand are a. useful only in the analysis of economic behavior in individual markets b. useful in analyzing the overall economy, but in analyzing individual markets c. central to microeconomic analysis, but seldom used in macroeconomics d. central to macroeconomic analysis as well as to microeconomic analysis

d

A Texas household receives a SS check for $1500, which is used to purchase $40 pair of shoes made in Thailand by a Thai firm, a $1240 television by a Korean firm in Korea, and $220 on groceries from a local store. How does this affect US GDP?

increases by $220

WHat would happen if market for loanable funds if government were to increase the tax on interest income

interest rates would rise

Kathleen is considering expanding her dress shop. If interest rates rise she is

less likely to expand. This illustrates why the demand for loanable funds slopes downwrad

A budget surplus

reduces the government's debt

Long-term bonds are

riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds

If the government's expenditures exceeded its receipts, it would likely

sell bonds directly to the public