Chapter 6 & 7 quiz

Explanation: If investments are more profitable, firms will want to get more funds to invest, so the demand for loanable (borrowed/saved) dollars will increase. In the market for loanable dollars, an increase in the profitability of investments overall will be revealed in

an increase in the demand for loanable dollars.

Explanation: Compounding is the process where the value of an investment increases because the earnings on an investment earn interest as time passes. Future value = Payment × (1 + r)n. The present value of a $1,000 payment received two years from now at 5 percent annual interest will be less than $900 because of

compounding.

Explanation: This means that Ford automobiles produced in Mexico are not counted in the U.S. GDP, but Honda automobiles produced in Ohio are counted in the U.S. GDP. In measuring gross domestic product, goods produced by foreign firms in the United States are

counted, but goods produced by American firms in foreign countries are not counted.

Explanation: The computation of the GDP is done in two distinct ways. One way is to count all those things for which people pay money. This is called the expenditures approach. The expenditures approach adds up all of the following: consumption, investment, government spending on goods and services, and net exports (net exports = exports - imports). The other approach, which counts all those ways in which people earn money, is called the income approach. Gross domestic product is counted using two methods: one which counts all the ways people _____ money and another which counts all the ways people _____ money.

earn, spend

Explanation: Economists have argued for many years that the CPI overstates the cost of living. The degree of that overstatement has been the subject for significant economic research. Part of the problem in resolving the agreed-upon problems is that any correction has the effect of reducing Social Security checks and increasing taxes. The consumer price index (CPI) is a heavily criticized measure of inflation because

it consistently overstates the increase in the cost of living.

Explanation: The real interest rate is the rate of interest after inflation expectations are accounted for. When evaluating whether or not to make an investment one should focus on the _____ because doing so takes into account anticipated inflation.

real interest rate

Explanation: Present value is the interest-adjusted value of future payment streams. Two amounts paid apart from one another in time are equal in present value if the money paid now could be invested at an appropriate interest rate and generate an amount that turns out to be equal to a higher amount that is paid later. When evaluating a business decision, an economist will often resort to the use of present value because

the investment occurs in one time period and the profits in another.

Explanation: The inflation rate is the percentage increase in the consumer price index. Inflation is measured using _________ in a price index.

the percentage year-to-year increase

Explanation: Using Excel: PV(rate,nper,pmt,[fv],[type]) = PV(6%/12,60,500,[fv],[type]) = $25,863. A 60-month car loan (where no down payment was made) with a 6 percent interest rate and a monthly payment of $500 would allow the borrower to buy a

$25,863 car.

Explanation: One reason that real gross domestic product is not synonymous with social welfare is because it does not count do-it-yourself production. Second, real GDP does not see that leisure is valuable. Third, what people buy is not considered important in the computation of GDP. Fourth, growth in the population can change the per capita real GDP, and fifth, although we can sacrifice environmental quality of life for economic gain, we would not necessarily be better off. One problem with using real gross domestic product as a measure of social welfare is that

it fails to count home production.