Macro Exam #2 practice problems
If $100 is saved at an annual interest rate of 10%, the return in one year will be:
$110
T or F: Time preference is the same from person to person
False
Suppose Ford Motors is considering whether to invest in building a new factory. Suppose real interest rates rise. Suppose now that Ford has enough cash on hand to pay for the factor upfront. Will a rise in interest rates make it less likely that Ford will build the factory?
No, because Ford doesn't have to borrow to finance the investment project.
What is the lifecycle theory of savings?
People tend to borrow during the early years of their lifetimes, save during their prime working years and disease during they retirement years
Why does South Korea have a higher level of real GDP per capita than North Korea?
South Korea has a better system of incentives than North Korea
Suppose Ford Motors is considering whether to invest in building a new factory. Suppose real interest rates rise. Suppose Ford does not have enough cash on hand to pay for the factory upfront and therefore will need to borrow. Will a rise in interest rates make it less likely that Ford will buy a factory?
Yes, because Fords out-of-pocket cost of borrowing to finance the investment project has risen
Which is NOT an institution that leads to sustained long-term economic growth?
a more equal income distribution
Financial intermediation can break down as a result of:
bank panics
In financial markets, which group best represents the demand side of the market?
borrowers
The shadow banking system includes each of the following except: a-hedge funds b-money market funds c-derivatives d-commerical banks
commercial banks
Crowding out occurs because the government increases the demand for loanable funds, drives up interest rates, and causes:
consumption and investment to fall
Stock shares represent _____ and bonds represent _____
corporate ownership; corporate debt
Which statement is TRUE of the effects of corruption? a-corruption helps promote economic growth b-corruption reduces the incentive to build wealth by imposing a tax on entrepreneurs c-corruption raises investment by making it easier to run a business d-corruption is the best way for the government to obtain revenues needed to run growth-promoting policies
corruption reduces the incentive to build wealth by imposing a tax on entrepreneurs.
If the demand for loanable funds decrease, the quantity of loanable funds exchanged will:
decrease
If the supply of loanable funds increases, ceteris paribus, interest rates will:
decrease
An increase in government borrowing will cause the:
demand for borrowing to shift outward
If the government decides to drastically increase spending (and by extension the budget deficit) during an economic recession, it will increase the _____ loanable funds and _____ equilibrium interest rates.
demand for; increase
When business firms become more pessimistic about the state of the economy, the:
demand to borrow shifts inward
When industries are limited by the size of the domestic market, opening trade to the world markets will likely lead to _____ and _____ real GDP per capita in the domestic country.
economies of scale; increase
The loanable funds market is the market where:
equilibrium interest rates are determined by the actions of borrowers and lenders
What is a service that banks specialize in providing?
evaluating the quality of investment opportunities
T or F: GDP per capita does not vary much amount nations.
false
Which of the following institutions channels loanable funds from savers to borrowers? a-congress b-financial intermediaries c-the treasury department d-the internal revenue service
financial intermediaries
Which of the following is (are) NOT an institution of economic growth? a-property rights b-a dependable legal system c-competitive and open markets d-free riding behavior
free riding behavior
All else equal, time preference is the desire to:
have goods and services sooner rather than later
According to the consumption-smoothing theory, people with a longer life expectancy:
have higher savings rates in their lifetimes than those with shorter life expectancy
A country that has enforceable property rights, a non corrupt political system, abundant factors of production, and a change in leadership and form of government every few years should suspect that economic growth will be _____ because _____.
high; most of the institutions needed for growth are in place
Countries that have higher per capita GDP tend to have:
higher levels of all three factors of production
Increases in minimum wage will most likely lead to:
higher unemployment
Other things being equal, a person typically has the largest pool of savings:
immediately before retirement
Saving is:
income that is not spent on consumption goods
Savings is:
income that is not spent on consumption goods
An increase in the demand for borrowing will cause the equilibrium quantity of borrowing to:
increase
If the demand for loanable funds increases, interest rates will:
increase
If the demand for loanable funds increases, the quantity of loanable funds exchanged will:
increase
In general, increases in a country's wealth will cause infant survival rates to:
increase
In the accompanying figure, if the demand for loanable funds increases from DLF to D1LF and the supply of loanable funds remains the same, the equilibrium interest rate will:
increase to i1
If the supply of loanable funds increases and the demand for loanable funds increases at the same time, interest rates will:
increase, decrease or remain the same
An investment tax credit will cause the interest rate to _____ and borrowing to _____.
increase; increase
The difference between per capita GDP in North Korea and South Korea is due to:
institutions
People will usually save more if the interest rate:
is higher
Which of the following is NOT a role of commercial banks? a-facilitate the payment system b-spread risk c-evaluate business ideas d-issue government bonds
issue government bonds
The buyer of a bond is a:
lender
Which is NOT an example of physical capital: a-tractors b-computers c-money d-cell phones
money
US farms today produce _____ output using _____ lands as the did in 1950.
more; less
What temporary policy is often used by government to combat the decreased investment demand during a recession
offering an investment tax credit
The supply of savings is positively sloped because:
people are enticed to forgo consumption when interest rates are higher
Property rights are important institutions for encouraging investment because:
people won't invest if they feel their property is at risk and that they may not receive a return on their investment
A FedEx truck is an example of:
physical capital
The stock of tools, including machines, strictures and equipment, used to produce output is called:
physical capital
Countries with high GDP per capita tend to have a lot of:
physical capital; human capital, and technological knowledge per worker.
During the financial crisis, because of high leverage, losses on mortgages:
pushed banks toward insolvency
Junk bonds are bonds:
rated lower than BBB-
Financial intermediaries:
reduce the cost of moving savings from savers to borrowers and investors
Relative to Japan, Argentina was ______ 1950 and _______ in 2000.
rich; poor
Which of the following can be defined as saving according to economics? a-microsoft sells stock at an initial public offering b-andrea finances her new car through an auto loan c-general motors issues corporate bonds d-sandra purchases a certificate of deposit from a bank
sandra purchases a certificate of deposit from a bank
Fluctuations in income cause most people to:
save
What do we call income that is NOT spent on consumption goods?
savings
Refer to the figure of the loanable funds market. At an interest rate of 3% in this market, there is a _____ of loanable funds of _____.
shortage; $320
Refer to the figure which shows real GDP per capita over time in different regions of the world. The chart shows that:
significant growth has occurred in some regions only since 1950
Over the past few decades, the US economy has switched from a primarily manufacturing economy to a service economy. Many individuals working in manufacturing positions lost their jobs, and many new jobs opened up in services. For those who lost jobs in manufacturing, this is an example of:
structural unemployment
When individuals become more willing to save, the:
supply of savings shifts outwards
If the government raises taxes on investment returns, then:
the demand for loanable funds will decrease and the equilibrium interest rate will decrease
Time preference is:
the desire to have goods and services sooner rather than later (all other things being equal)
The demand to borrow function shows the relationship between borrowing money and:
the interest rate
Which variable is determined in the market for loanable funds?
the interest rate
Businesses will take out additional loans only if:
the interest rate is less than the expected rate of retune on their investment
The lifecycle theory of savings predicts individuals will save during:
the middle years of life
Between 1978 and 1983, food production in China rose by 50% and 170 million people rose above the international poverty line. This occurred because of the:
the return to private property rights in farming
Individual savings contributes to:
the supply of loanable funds
If the interest rate in the market for loanable funds is below the market-clearing rate, then:
there will be a shortage of savings and demanders will bid the interest rate up as they compete to borrow
Which of the following is NOT a reason firms and individuals borrow? a-they desire to have equal income and spending every period b-they want to smooth consumption c-debt is often necessary for large purchases d-they believe their return will be greater than the interest rate
they desire to have equal income and spending in every period
Which of the following functions is NOT performed by commercial banks?
they organize initial public offerings for firms
Which of the following is NOT a characteristic of stocks that are sold at initial public offerings? a-they transfer ownership of the company b-they are being sold for the first time c-they represent ownership of government-run enterprises only d-they allow the firm selling the stock to acquire funds for investments
they represent ownership of government-run enterprises only
An increase in the supply of savings will cause the interest rate:
to decrease
T or F: Countries that have corrupt government tend to have lower real GDP per capita.
true
Institutions and incentives are _____ causes, and factors of productions are _____ causes of the wealth of nations.
ultimate; immediate
The presence of discouraged workers causes the measured unemployment rate to be:
understated
What population categories go into the formula for the unemployment rate?
unemployed and employed
The savings supply curve is:
upward sloping
Countries with higher per capita GDP have institutions that make it in people's self-interest to invest in:
all of the factors of production
Which of the following wold be the most likely to cause an increase in the demand for loanable funds? a-a decrease in consumption b-a decrease in the interest rate c-an increase in government borrowing d-an increase in savings
an increase in government borrowing
