Exam 2 Review
The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. The price of a 1975 golf ball in 2005 dollars is...
$0.73
The CPI was 96 in 1982, and the CPI was 208 in 2010. How much money would you have needed in 2010 in order to buy what you could have bought with $500 in 1982?
$1,083.33
Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 214.5 for 2009. Ruth's 1931 salary was equivalent to a 2009 salary of about
$1,128,947
Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2008. The price index was 17.6 in 1944 and 184 in 2008.Refer to Scenario 24-3. Sue Holloway's 1944 income in 2008 dollars is
$125,454.55
For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?
$2 trillion and $1 trillion respectively
In the economy of Ukzten in 2010, consumption was $3000, GDP was $5500, government purchases were $1000, imports were $2000, and investment was $1000. What were Ukzten's exports in 2010?
$2,500
If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?
$2,591.85
In the economy of Ukzten in 2010, consumption was $2000, exports were $800, GDP was $4800, government purchases were $840, and investment was $1400. What were Ukzten's imports in 2010?
$240
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 two transactions contribute
$250 to GDP
Assume the following information for an imaginary, closed economy.GDP = $200,000; consumption = $120,000; government purchases = $35,000; and taxes = $25,000.Refer to Scenario 26-2. For this economy, private saving is equal to
$55,000
In the economy of Ukzten in 2010, consumption was $5000, exports were $100, government purchases were $900, imports were $200, and investment was $1000. What was Ukzten's GDP in 2010?
$6,800
What is the future value of $750 one year from today if the interest rate is 2.5 percent?
$768.75
What is the future value of $800 one year from today if the interest rate is 7 percent?
$856.00
Which of the following is not correct? (A) Countries that have had higher output growth per person have typically done so without higher productivity growth. (B) A country's standard of living and its productivity are closely related. (C) Productivity refers to output produced per hour of work. (D) Increases in productivity can be used to increase output or leisure.
(A) Countries that have had higher output growth per person have typically done so without higher productivity growth.
Which of the following involves financial intermediation? (A) a bank makes a loan (B) a household buys stock issued by a corporation (C) a foreign government purchases U.S. government bonds (D) All of the above are correct.
(A) a bank makes a loan
If Robert is risk-averse, then he will always (A) choose not to play a game where he has a 50 percent chance of winning $1 and a 50 percent chance of losing $1. (B) choose not to play a game where he has a 75 percent chance of winning $1 and a 25 percent chance of losing $1. (C) choose to play a game where he has a 52 percent chance of winning $1 and a 48 percent chance of losing $1. (D) All of the above are correct.
(A) choose not to play a game where he has a 50 percent chance of winning $1 and a 50 percent chance of losing $1.
Compared to bondholders, stockholders... (A) face higher risk and have the potential for higher returns. (B) face higher risk but receive a fixed payment. (C) face lower risk and have the potential for higher returns. (D) face lower risk but receive a fixed payment.
(A) face higher risk and have the potential for higher returns.
Which of the following actions best illustrates adverse selection? (A) A person adds risky stock to his portfolio. (B) A person who has narrowly avoided many accidents applies for automobile insurance. (C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. (D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.
(B) A person who has narrowly avoided many accidents applies for automobile insurance.
Which of the following actions best illustrates adverse selection? (A) A person adds risky stock to his portfolio. (B) A person who has narrowly avoided many accidents applies for automobile insurance. (C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. (D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.
(B) A person who has narrowly avoided many accidents applies for automobile insurance.
Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year. Based on this scenario, which of the following statements is correct? (A) GDP would definitely increase, despite the fact that GDP includes leisure. (B) GDP would definitely increase because GDP excludes leisure. (C) GDP could either increase or decrease because GDP includes leisure. (D) GDP could either increase or decrease because GDP excludes leisure.
(B) GDP would definitely increase because GDP excludes leisure.
Bond buyers... (A) must hold their bonds until maturity. or (B) may sell their bonds prior to maturity.
(B) May sell their bonds prior to maturity.
You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct? (A) The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. (B) The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. (C) The interest rates on the two loans are the same (D) There is not enough information to determine which loan has the higher interest rate.
(B) The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B.
Which of the following people purchased the correct asset to meet his or her objective? (A) Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza. (B) Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric. (C) Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda. (D) All of the above
(B) Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.
Which of the following changes would increase the present value of a future payment? (A) a decrease in the size of the payment (B) a decrease in the time until the payment is made (C) an increase in the interest rate (D) All of the above are correct.
(B) a decrease in the time until the payment is made
For a risk averse person... (A) the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. (B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. (C) the utility function exhibits the property of increasing marginal utility. (D) the utility function gets steeper as wealth increases.
(B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
Since 1965 GDP growth averaged...
3% per year
If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest rate is
5%
For an imaginary economy, the value of the consumer price index was 140 in 2006 and 149.10 in 2007. The economy's inflation rate for 2007 was
6.5%
If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation rate is
6.5%
Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is...
8%
In 1972, one could buy model rocket engines for $1.50 each. If those same engines cost $2.50 each today, then which pair of CPIs would make the engine prices in today's dollars the same for both years?
90 in 1972 and 150 today
The government sending your grandfather his Social Security check represents what?
A transfer payment
What is the catch-up effect?
All other things equal, relatively poor countries tend to grow faster than relatively rich countries
What is a certificate of indebtedness?
Bonds but not stocks
Country A experienced a growth rate of real GDP per person of 4 percent per year throughout the 1900s. In view of other countries experiences during this time country A's growth was
Exceptionally high
One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI
Fails to account for the introduction of new goods.
Other things equal, relatively poor countries tend to grow
Faster than relatively rich countries
In recent decades Americans have increased their purchase of stocks of foreign-based companies. The Americans who have bought these stocks were engaged in...
Foreign portfolio investment
The market value of all final goods and services produced within a country in a given period of time
GDP
Gasoline is considered a final good if it is sold by a
Gas station to a motorist in Los Angeles
If one wants to know how the material well-being of the average person has changed over time in a given If country, one should look at the...
Growth rate of real GDP per person
Suppose that Slovenia undertakes a policy to increase its saving rate. This policy will likely lead to...
Higher GDP growth for a period of several decades.
Knowledge and skills that workers acquire through education, training, and experience.
Human Capital
The things you have learned this semester are considered what?
Human Capital
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
Increased measured GDP by the value added by the restaurant's preparation and serving of the meals.
One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold for $3.00 to consumers. A second bag of flour is sold for $1 to a grocery store who sells it to a consumer for $2.00. Taking these four transactions into account, what is the effect on GDP?
Increases by $5.00
The CPI differs from the GDP deflator in that
Increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.
When the quality of a good improves while its price remains the same, the purchasing power of the dollar
Increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
The value of goods added to a firm's inventory in a certain year is treated as
Investment, since GDP aims to measure the value of the economy's production that year
Martin, a U.S. citizen, travels to Mexico and buys a newly manufactured motorcycle made there. His purchase is included in
Mexican GDP but not U.S. GDP
Production of goods and services valued at current prices
Nominal GDP
If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise, nominal GDP, real GDP, both or neither?
Nominal GDP but not real GDP
Suppose an economy produces only eggs and ham. In 2009, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham sold at $4 per pound. In 2010, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2009,
Nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.
Transactions involving items produced in the past, such as the sale of a 5-year-old automobile by a used car dealership or the purchase of an antique rocking chair by a person at a yard sale, are
Not included in current GDP because GDP only measures the value of goods and services produced in the current year.
Changes in the GDP deflator reflect
Only changes in prices
If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is...
Overvalued so you should not consider buying it.
The equipment in a factory is an example of what?
Physical Capital
A measure of the cost of a basket of goods and services bought by firms
Producer Price Index (PPI)
Production of goods and services valued at constant prices
Real GDP
A country reported a nominal GDP of $85 billion in 2010 and $100 billion in 2009. It also reported a GDP deflator of 100 in 2010 and 105 in 2009. Between 2009 and 2010,
Real output and the price level both fell
If Congress instituted an investment tax credit, the interest rate would
Rise and saving would rise.
If the supply for loanable funds shifts to the left, then the equilibrium interest rate...
Rises and the quantity of loanable funds falls.
Other things the same, as the number of stocks in a portfolio rises, risk............and the standard deviation of the return............
Risk decreases and the standard deviation of the return falls
A bond buyer is a
Saver
What is included in the investment component of GDP?
Spending on new business equipment such as power tools but not spending on stocks and bonds
In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by
Surveying consumers.
A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end of the second quarter, and holds the others in its warehouse. How will the 200,000 unsold DVDs be treated in the GDP statistics?
The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-quarter GDP.
If the price of Italian shoes imported into the United States increases, then
The consumer price index will increase, but the GDP deflator will not increase.
What could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds?
The demand for loanable funds shifted leftward.
What could explain an increase in the interest rate and an increase in the equilibrium quantity of investment?
The demand for loanable funds shifted right.
What does CPI measure?
The overall level of prices & the overall cost of goods and services bought by a typical consumer.
"When workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly." This statement is made under the assumption that...
The quantities of human capital, natural resources, and technology are being held constant.
In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct?
The value of the consumer price index is always 100 in the base year.
A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result...
U.S. investment and GDP increase, but German GDP is unaffected.
Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because
When a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.
GDP equation
Y=C+I+G+NX
Gross Domestic Product (GDP) measures
the total income of everyone in the economy
Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket's cost was $50; in 2004, the basket's cost was $52; and in 2006, the basket's cost was $54.60. The value of the CPI in 2004 was
104.00
Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After Elwood repaid the loan in full, Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could before he loaned Elwood the $5,000. From this, we can conclude that the rate of inflation during the year was
14%
If the nominal interest rate is 6 percent and the rate of inflation is 4 percent, then the real interest rate is
2%
In which of the following cases would there be an effect on the value of the U.S. consumer price index, but not on the value of the U.S. GDP deflator? (A) All of the truck tires that are produced by a certain company in South Korea are sold to the U.S. military, and the price of these tires decreases. (B) All of the truck tires that are produced by a certain company in California are sold to the U.S. military, and the price of these tires decreases. (C) Most of the bananas that are produced by a certain company in Honduras end up in U.S. grocery stores, and the price of these bananas increases. (D) Most of the earth-moving machines that are produced by a certain company in Illinois are exported to other countries, and the price of these machines increases.
(C) Most of the bananas that are produced by a certain company in Honduras end up in U.S. grocery stores, and the price of these bananas increases.
Which of the following is an example of financial intermediation? (A) John buys shares of stock issued by a fast food company. (B) A foreign government buys bonds issued by the U.S. Treasury. (C) Susan makes a deposit at a bank and the bank uses this money to make an auto loan to Ferguson. (D) None of the above
(C) Susan makes a deposit at a bank and the bank uses this money to make an auto loan to Ferguson.
Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds? (A) The demand for loanable funds shifted rightward (B) The demand of loanable funds shifted leftward (C) The supply of loanable funds shifted rightward (D) The supply of loanable funds shifted leftward
(C) The supply of loanable funds shifted rightward.
Which of the following games might a risk-averse person play? (A) a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 (B) a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 (C) a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 (D) a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1
(C) a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1
Suppose the interest rate is 4 percent. Which of the following has the greatest present value? (A) $100 today plus $190 one year from today (B) $150 today plus $140 one year from today (C) $200 today plus $90 one year from today (D) $250 today plus $40 one year from today
(D) $250 today plus $40 one year from today
Which of the following actions best illustrates moral hazard? (A) A person adds risky stock to his portfolio. (B) A person who has narrowly avoided many accidents applies for automobile insurance. (C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. (D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.
(D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.
We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that... (A) Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation. (B) Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York. (C) Bond A has a term of 20 years and Bond B has a term of 1 year. (D) All of the above
(D) All of the above
Which of the following values would be included in U.S. GDP for 2009? (A) the rent that Sean, an American citizen, would have paid on his home in New York in 2009 had he not owned that home (B) the rent that John, an American citizen, paid on his apartment in San Francisco in 2009 (C) the value of the legal services provided by Juan, an attorney and a Mexican citizen, who lived in Houston and practiced law there in 2009 (D) All of the above would be included in U.S. GDP for 2009.
(D) All of the above would be included in U.S. GDP for 2009.
Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new machinery for one of its breweries. (A) Fran and Miller are both investing. (B) Fran and Miller are both saving. (C) Fran is investing; Miller is saving. (D) Fran is saving; Miller is investing.
(D) Fran is saving; Miller is investing.
The efficient markets hypothesis implies that (A) building a portfolio based on a published list of the "most respected" companies is likely to produce a better-than-average return. (B) if a stock rose in price last year, it is likely to rise in price this year. (C) managed mutual funds should generally outperform indexed mutual funds. (D) None of the above are correct.
(D) None of the above are correct.
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income? (A) The supply of and demand for loanable funds would shift right. (B) The supply of and demand for loanable funds would shift left. (C) The supply of loanable funds would shift right and the demand for loanable funds would shift left. (D) None of the above is correct.
(D) None of the above is correct.
Which of the following countries benefited significantly from the catch-up effect in the last half of the twentieth century? (A) Ethiopia (B) United States (C) Canada (D) South Korea
(D) South Korea
George lived in a home that was newly constructed in 2005 for which he paid $200,000. In 2008 he sold the house for $225,000. Which of the following statements is correct regarding the sale of the house? (A) The 2008 sale increased 2008 GDP by $225,000 and had no effect on 2005 GDP. (B) The 2008 sale increased 2008 GDP by $25,000 and had no effect on 2005 GDP. (C) The 2008 sale increased 2008 GDP by $225,000; furthermore, the 2008 sale caused 2005 GDP to be revised upward by $25,000. (D) The 2008 sale affected neither 2008 GDP nor 2005 GDP.
(D) The 2008 sale affected neither 2008 GDP nor 2005 GDP.
Other things the same, which bond would you expect to pay the highest interest rate? (A) a bond issued by the U.S. government (B) a bond issued by Microsoft Corporation (C) a bond issued by the state of Montana (D) a bond issued by a new chain of Brazilian-style restaurants
(D) a bond issued by a new chain of Brazilian-style restaurants
Allied Business Consultants employs five researchers that each work 8 hour days. In one day the researchers prepare 60 reports for its 10 largest clients. What was Allied Business Consultants' productivity?
1.5 reports per hour
