ECON 202 TEST 2

45. Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?

1,500, deficit

10. The country of Meditor, a small country with a closed economy, uses the merit as its currency. Recent national income statistics showed that it had GDP of $600 million merits, no government transfer payments, taxes of $150 million merits, a budget surplus of $40 billion merits, and investment of $100 billion merits. What were its consumption and government expenditures on goods and services?

$390 million merits and $110 million merits

56. Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

$725.62. It would be lower if the interest rate were higher.

5. Last quarter in a closed economy GDP was 200,000. Expenditures on capital goods such as business equipment and structures was 19,000, inventory rose 1,000, and new construction of homes was 8,000. Consumption was 135,000 and taxes were 32,000. What was public saving?

-5,000

12. A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

11% but not 12%

24. Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

8 percent

39. If the inflation rate is 2 percent and the real interest rate is 7 percent, then the nominal interest rate is

9 percent

21. If an economy is closed and if it has no government, then

national saving = private saving.

22. ​Which of the following is a good measure of economic prosperity?

​The level of real GDP

46. For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that

S = I + NX.

76. Which of the following statements is correct?

Technological knowledge is a determinant of productivity.

50. Which of the following statements best describes the economist's view of finance and the financial system?

The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.

14. A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

The second is lowest; the third is highest.

52. Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?

The supply of loanable funds shifted left.

25. Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

This means its present value is more than its price. You should consider adding the stock to your portfolio.

81. Which of the following statements is correct?

Unlike corporate bonds and stocks, checking accounts are a medium of exchange.

Scenario 25-1. An economy's production form takes the form Y = AF(L, K, H, N). 13. Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property, then it is possible that the specific form of the production function is

Y =2(LKHN)1/4

60. You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

You receive the payment 2 years from now and the interest rate is 4 percent.

1. In which of the following instances is the present value of the future payment the largest?

You will receive $1,000 in 5 years and the annual interest rate is 5 percent.

38. If the demand for loanable funds shifts to the left, then the equilibrium interest rate

and quantity of loanable funds falls.

23. If in a closed economy Y = $11 trillion, which of the following combinations would be consistent with national saving of $3 trillion?

C = $7 trillion, G = $1 trillion

65. Which of the following is an example of physical capital?

bulldozers, backhoes and other construction equipment

40. In an economy where net exports are zero, if saving rises in some period, then in that period

consumption falls and investment rises.

58. Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

decrease some, but not all, of the risk of her portfolio.

68. Daniel owns a coffee kiosk. All of his employees work 8 hours per day. In 2011, he employed 6 people who produced a total of 912 cups of coffee each day. In 2012, he hired a seventh employee and production increased to 1008 cups of coffee each day. In Daniel's kiosk, productivity

decreased by about 5.3 percent

8. If there is a shortage in the market for loanable funds, what happens to desired saving and desired investment as the interest rate moves to its equilibrium value?

desired saving rises and desired investment falls

70. Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

illustrates adverse selection; the example with Brad illustrates moral hazard.

79. The notion that our ability to conserve natural resources is growing more rapidly than their supplies are dwindling is supported by the fact that

inflation-adjusted prices of most natural resources have been stable or fallen over time.

42. By definition, equity finance

is accomplished when firms sell shares of stock.

31. Human capital is

knowledge and skills that workers have acquired.

77. In 2014, real GDP per person in Bangladesh was

less than it was in the U.S. in 1870.

9. An increase in capital will increase real GDP per person

more in a poor country than a rich country. The increase in real GDP per person will be the same whether the addition to capital is from domestic or foreign investment.

62. The logic behind the catch-up effect is that

new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital.

28. Proprietary technology is technology that is

not widely used because it is known or controlled only by the company that discovered it.

18. Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

speculative bubble.

75. The efficient markets hypothesis implies

that all stocks are fairly valued all the time and that no stock is a better buy than any other.

20. Which of the following is the largest?

the future value of $250 at 2% interest for 3 years

27. Refer to Figure 26-3. What, specifically, does the label on the vertical axis, i, represent?

the real interest rate

33. Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

the risk-return tradeoff. insurance. diversification ALL OF THE ABOVE ARE CORRECT

49. Economists have developed models of risk aversion using the concept of

utility and the associated assumption of diminishing marginal utility.

63. David recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the lowest risk?​

​A portfolio with an average annual rate of return of 5%.

11. An increase in the budget deficit would cause a

shortage of loanable funds at the original interest rate, which would lead to rising interest rates.

15. Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.

80. Waldo works eight hours and produces 7 units of goods per hour. Emerson works six hours and produces 10 units of goods per hour.

Emerson's productivity and output are greater than Waldo's.

16. Refer to Figure 26-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 8 percent, the inflation rate is 3 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be

D2

30. Some people argue that there are two advantages to holding mutual funds. The first is that mutual funds provide an inexpensive way to hold a diversified portfolio. The second is that because of their expertise mutual fund managers should be able to consistently beat the market. Which of the following does the evidence show?

Diversification does reduce risk, but mutual funds do not typically outperform the market.

32. Which of the following is a correct way to measure productivity?

Divide the quantity of output by the number of hours worked.

26. Which of the following is not consistent with the efficient market hypothesis?

News has no effect on stock prices.

29. If the supply of loanable funds shifts to the right, then the equilibrium interest rate

falls and the quantity of loanable funds rises.

53. Megan is a landscaper. Which of the following are included in her physical capital?

her landscaping equipment, but not her knowledge of landscaping learned in college

6. Suppose there are constant returns to scale. Now suppose that over time a country doubles its workers, its natural resources, its physical capital, and its human capital, but its technology is unchanged. Which of the following would double?

output, but not productivity

41. Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

$23,328.00

4. In 2013, XYZ Corporation had total earnings of $500 million and XYZ retained 20 percent of its earnings for future investments. If the price of a share of XYZ stock is $70 and if 100 million shares of its stock is outstanding, then what is the price-earnings ratio?

14.0

47. Countries that grew the fastest over the last 100 or so years had average growth rates of real income per person of about

2.5 percent per year.

2. In 2011, the imaginary nation of Maconia had a population of 8,200 and real GDP of 210,500. Maconia had 5% growth in real GDP per person. In 2012 it had a population of 8,400. To the nearest dollar what was real GDP in Maconia in 2012?

226,416

44. If Huedepool Beer runs into financial difficulty, the stockholders as

part owners of Huedepool are paid after bondholders get paid.

72. Jerry has the choice of two bonds, one that pays 5 percent interest and one that pays 2 percent interest. Which of the following is most likely?

The 2 percent bond is a municipal bond, and the 5 percent bond is a U.S. government bond.

34. You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard.

66. Which of the following is correct?

The level of real GDP per person is a good gauge of economic prosperity, and the growth rate of real GDP per person is a good gauge of economic progress.

54. Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

These are both examples of adverse selection.

67. Which of the following changes would increase the present value of a future payment?

a decrease in the interest rate

59. Which of the following nations experienced average rates of economic growth of less than 2 percent over the last 100 years or so?

a. Bangladesh b. Pakistan c. United Kingdom d. All of the above are correct.

61. Risk

a. can be reduced by placing a large number of small bets rather than a small number of large bets. b. can be reduced by increasing the number of stocks in a portfolio. c. Both A and B are correct.

73. After a corporation issues stock, the stock

a. cannot be resold. b. can be resold only if the corporation wants to buy it back. c. can be resold on exchanges; the resale will raise additional funds for the corporation. d. None of the above are correct.

19. Writing in the Wall Street Journal in 2009, economist Jeremy Siegel argued that, in the years leading up to the financial crisis of 2008-2009,

a. financial firms acted in too risky a fashion. b. the Federal Reserves's efforts to rein in the risky behavior of certain financial firms were inadequate. c. falling house prices "crashed the banks and the economy." d. All of the above are correct.

48. Investment from abroad

a. is a way for poor countries to learn the state-of-the-art technologies developed and used in richer countries. b. is viewed by economists as a way to increase growth. c. often requires removing restrictions that governments have imposed on foreign ownership of domestic capital. d. All of the above are correct.

57. Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment and saving?

an expansion of eligibility for Individual Retirement Accounts

55. Other things the same, if a country raises its saving rate, when is productivity growth higher?

as the economy moves toward the long run, but not in the long run.

Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. ​ 7. Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 5 percent, then the equilibrium nominal interest rate is

between 11 percent and 13 percent.

Scenario 26-3. Assume the following information for an imaginary, open economy. Consumption = $1,000; investment = $200; net exports = -$50;taxes = $230; private saving = $225; and national saving = $150. 35. Refer to Scenario 26-3. This economy's government is running a

budget deficit of $75.

51. The real interest rate is the

interest rate corrected for inflation.

37. The saws, lathes, and drill presses that woodworkers at Cedar Valley Furniture use to produce furniture are called

physical capital.

69. Because of its effect on the amount of capital per worker, in the short term an increase in the working population is likely to

reduce productivity. Other things the same, this decrease will be larger in a poor country.

43. Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

rise, and investment spending fall.

36. Economists disagree as to whether

stock prices reflect rational estimates of a company's true worth.

64. Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see

the demand for bank stocks fall which would reduce the prices of bank stocks.

3. A change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment when

the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic.

71. In which of the following cases can we be certain that a natural resource has become scarcer?

the demand for the resource has decreased and the supply of the resource is unchanged

78. Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?

the interest rate would decrease and the quantity of loanable funds would increase.

17. Refer to Figure 25-1. Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2011, then it will definitely remain at point A in 2012 if, between 2011 and 2012,

the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology remain constant.

74. After 2012 when the U.S. economy recovered,

​the budget deficit shrank, and the increases in the debt-to-GDP ratio became smaller.