ECON103 Exam 3

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? $2.0 million $1.5 million $2.5 million $3.5 million

$1.5 million

If the interest rate is 5% and the average inflation rate is 1.8%, what is the approximate future value of $100,000 in five years? $105,000 $85,428 $117,057 $127,628

$117,057

A new assembly line robot with a price tag of $2.5 million is expected to depreciate by 3% at the end of next year. The real interest rate is 2.5%. What is the user cost of the robot for one year? $62,500 $75,000 $137,500 $12,500

$137,500

A large industrial washer system costs $69,000 and is expected to depreciate by 15% at the end of next year. The real interest rate is 7%. What is the user cost of the washer system for one year? $15,180 $4,830 $10,350 $5,520

$15,180

Calculate the user cost of capital of a machine that costs $5000 and depreciates at a rate of 25%, when the expected real interest rate is 5%. $5000 $150 $1500 $500

$1500

Refer to the following statistics. Based on these statistics, the level of business investment is:Inventories: $52 millionHousing: $600 millionEquipment: $989 millionBusiness structures: $500 millionIntellectual property: $800 million $2,289 million. $989 million. $1,300 million. $2,341 million.

$2,289 million.

If the average marginal propensity to consume is 0.8, then a $10 million increase in total income will lead to a _____ increase in consumption. $80 million $0.8 million $8 million $2 million

$8 million

Refer to the following statistics. Based on these statistics, the level of business investment is:Equipment: $2.5 billionBusiness structures: $2 billionIntellectual property: $4 billionInventories: $0.2 billionHousing: $3 billion $2.5 billion. $8.7 billion. $8.5 billion. $6 billion.

$8.5 billion.

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project. Up-front cost: $300,000 Next year's revenue: $15,000 Real interest rate: 8% Depreciation rate: 10% What is the present value of the stream of payments from this project? $383,333 $83,333 $315,000 $18,000

$83,333

Which of the following is a smart saving strategy?(i) Maintain strict control of budgets.(ii) Minimize fees paid on retirement or investment accounts.(iii) Engage in precautionary saving.(iv) Ensure that the value of assets is lower than the value of debt. (i) and (iii) (iv) only (i), (ii), and (iii) (i), (ii), (iii), and (iv)

(i), (ii), and (iii)

What is your permanent income marginal propensity to consume (MPC) if your income permanently changes by $50,000 and your consumption increases by $45,000? 0.1 1.11 0.9 1.25

0.9

When trade is voluntary, who gains from it? Either the seller or the buyer gains but not both. Both the seller and the buyer gain, although not necessarily equally. Both the seller and the buyer must gain equal amounts. Neither the seller nor the buyer gains, but society in general gains

Both the seller and the buyer gain, although not necessarily equally.

Why does an anticipated change in income lead to no change in consumption for a consumption smoother? The consumer is not aware of anticipated changes in future income. Consumption is based on permanent income, which is already factored into anticipated future changes in income. There are high tax rates on anticipated changes in future income. There is a failure of the permanent income hypothesis.

Consumption is based on permanent income, which is already factored into anticipated future changes in income.

The Federal Reserve's lender-of-last-resort function has been curtailed over time by the: public. very financial institutions that it is meant to serve. governor of the Federal Reserve. Dodd-Frank Act

Dodd-Frank Act

Which of the following statements is TRUE regarding economic efficiency? Efficient outcomes will make everyone better off. Efficient outcomes are also equitable. Efficient outcomes rarely make everyone happy. Efficiency is associated with minimizing economic surplus.

Efficient outcomes rarely make everyone happy.

True or False: A permanent increase in income has a higher effect on consumption than a temporary increase in income, because of the motive to smooth consumption.

True

True or False: The consumer's response to changes in the current and future income is motivated by consumption smoothing.

True

How might deflation set off further deflation? Falling prices can increase the nominal interest rates in the economy and reduce consumption. If prices are falling in the economy, this will cause a decrease in the number of goods exported from the country and thus cause prices to fall further. Falling prices may cause people to defer spending in expectation of further lower prices, and this leads to more deflation. Falling prices cause firms to increase production, and the increase in supply causes prices to fall further.

Falling prices may cause people to defer spending in expectation of further lower prices, and this leads to more deflation.

Which of the following statements describes a means-tested government program? All persons are able to receive benefits after they reach 66 years of age. Zain is eligible to receive benefits because he is disabled. Hua Xing can receive benefits if she is too young to be head of a household. Holly is eligible for benefits only if her household income is below $10,000 per year.

Holly is eligible for benefits only if her household income is below $10,000 per year.

Why might maintaining an interest rate ceiling in an economy be a bad idea? Instituting a nominal interest rate ceiling also effectively institutes a real interest rate ceiling. If inflation rises and the real interest rate falls, this will stifle consumption and investment. If deflation occurs and the real interest rate rises, it will discourage consumption and investment. It becomes impossible to calculate the real interest rate.

If deflation occurs and the real interest rate rises, it will discourage consumption and investment.

Which of the following statements is FALSE regarding economic efficiency? Efficient outcomes will not make everyone happy. If it is efficient, it is also equitable. Efficient outcomes have the possibility of making everyone better off. The most efficient outcome is the one with the greatest economic surplus.

If it is efficient, it is also equitable.

Which of the following is NOT one of the main concerns about putting a high priority on economic efficiency? Demand reflects ability to pay and not solely marginal benefit. Incentives for efficiency can reduce innovation. Efficient results can be unfair. Efficiency focuses on outcomes, but means also matter.

Incentives for efficiency can reduce innovation.

_____ is often used as a measure of the equality or inequality of opportunity rather than using equality or inequality of outcomes. Childhood household income Permanent income Intergenerational mobility Wealth

Intergenerational mobility

In what way can the Federal Reserve's lender-of-last-resort function actually lead to more financial chaos? It encourages businesses to engage in risky projects. It undermines monetary policy. It can lead to banks taking increased risks. The public may expect increased bank failures.

It can lead to banks taking increased risks.

Why does the Federal Reserve target inflation rather than unemployment? The inflation rate is an easy target to attain. Full employment is not an attainable target. It would be poor optics for the Fed to intentionally increase unemployment. The inflation rate does not change much.

It would be poor optics for the Fed to intentionally increase unemployment.

According to diminishing marginal utility, which of the following people would gain the highest marginal benefit from an extra $100 of income? Jokum, a professional football star with an annual household income of $1 million Julia, a single mother of three young children with an annual household income of $18,000 Clive, head of a three-person household with an annual household income of $100,000 Clara, a single person with an annual household income of $20,000

Julia, a single mother of three young children with an annual household income of $18,000

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate, machine B costs $10,000 and depreciates at a rate of 20%, machine C costs $20,000 and depreciates at a rate of 10%, and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 5%. Machine A Machine B Machine C Machine D

Machine B

Which of the following is an example of an in-kind transfer? Junko receives an old-age pension from her former employer. Tomasi is eligible for an income supplement because he lost his job. Ellen is eligible for income because she had a type of accident that qualifies. Martin receives housing from the government due to his low income.

Martin receives housing from the government due to his low income.

The neutral interest rate occurs when the economy is: at its potential. experiencing very high inflation. above its potential. below its potential.

at its potential.

How do people's beliefs about the distribution of wealth in the United States compare to the actual distribution of wealth in the country? People have an accurate view of the distribution of wealth. People believe the distribution of wealth is more equal than it actually is. People believe the distribution of wealth is more unequal than it actually is. People believe the distribution of wealth is changing rapidly and becoming more equal.

People believe the distribution of wealth is more equal than it actually is.

Which of the following is NOT a reason for government failure? Elected officials are more concerned about reelection than efficiency. Government leaders are focused on enriching themselves. Regulators are overly focused on efficiency. Regulators act in the interest of the industries they regulate.

Regulators are overly focused on efficiency.

How do overnight reverse repurchase agreements work? The Open Market Trading Desk makes loans to banks and charges them an interest rate higher or lower than the discount rate. They set the exact federal funds rate that can be charged by financial institutions. They increase the amount of reserves held by financial institutions and thus allow banks to make more loans. The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

Why does a temporary change in income lead to only a small change in consumption for a consumption smoother? The MPC always tends to be low. The consumer prefers to focus on current consumption rather than future consumption. Temporary increases in income are heavily taxed. The consumer tends to spread a temporary spike in income over their lifetime.

The consumer tends to spread a temporary spike in income over their lifetime.

What happens to the investment line if the government institutes a tax break for funds invested? There is a movement up and to the left along the same investment line. There is a movement down and to the right along the same investment line. The investment line shifts to the right. The investment line shifts to the left.

The investment line shifts to the right.

How does the law of diminishing marginal utility relate to changing income? The marginal benefit of an extra dollar of income rises as income rises. The marginal benefit of an extra dollar of income falls as income rises. The total utility gained from a small income is higher than the total utility gained from a high income. The total utility gained from a high income is lower than the total utility gained from a low income.

The marginal benefit of an extra dollar of income falls as income rises.

The well-being score for Mario (income $20,000) is 5.6, and the well-being score for Lance (income $150,000) is 9.2. Across the two of them, total well-being is 14.8. The change in well-being for a $5,000 change in income for Mario is .4 and for Lance is .1. What net change in total well-being will occur if $5,000 of Lance's income is taken as tax and transferred to Mario through an income transfer? Total well-being will fall to 14.5 for a net loss of .3. Total well-being will remain constant at 14.8, but how it is distributed across Mario and Lance will change. Total well-being will rise to 15.1 for a net gain of .3. Total well-being will rise to 15.3 for a net gain of .5

Total well-being will rise to 15.1 for a net gain of .3.

Which of the following statements is based on normative analysis? We should protect the environment. The temperature in the office room is 22 degrees centigrade. When the burner beneath a pot of water on the stove is turned on, the water will heat up. Mario is 24 years old

We should protect the environment.

Which of the following is a negative result of redistributing income toward equality? Average income rises. The poor have a higher standard of living. Work incentives are reduced. Government expenses fall, and tax revenues rise.

Work incentives are reduced.

Which of the following tax systems is progressive? Corinne pays a 10% tax on the first $10,000 she earns plus _____ tax on any additional income. no a 5% a 10% a 25%

a 25%

Which of the following gifts is most like an income transfer rather than an in-kind transfer? membership in a gym for a year an antique book a custom-tailored suit with the recipient choosing fabric and style a gift card branded through one of the main credit card companies

a gift card branded through one of the main credit card companies

If Larry is a hand-to-mouth consumer and has just received a gift of $350, we can expect Larry to exhibit: a large change in consumption. a small change in consumption. a large change in saving. no change in MPC

a large change in consumption.

When eligibility for a government program is based on income and sometimes on wealth, the program is classified as _____ program. an income-limited a means-tested a poverty-tested a social insurance

a means-tested

The Federal Reserve was created after: a series of bank runs and bankruptcies. a period of very high unemployment. an extended period of economic stagnation. an increase in the inflation rate

a series of bank runs and bankruptcies.

If there is a temporary rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption. a small increase; a large increase a large increase; a large increase no change; a large increase a large increase; no change

a small increase; a large increase

The First Fundamental Theorem of Welfare Economics asserts that all competitive equilibria are Pareto efficient. welfare is maximized when social indifference curves are tangent to the PPF. welfare payments are a more efficient manner of redistributing income than trade on Pareto manifolds. any Pareto efficient allocation may be obtained as a competitive equilibrium.

all competitive equilibria are Pareto efficient.

When trade is voluntary, neither the buyer nor the seller will: gain from the trade. generate surplus. be worse off after the trade. need to make any payments

be worse off after the trade.

Voluntary exchange occurs when: either the buyer or the seller will gain from the trade with no loss to the other. either the buyer or the seller will gain from the trade at the expense of the other. society in general rather than the participants will gain from the trade. both the buyer and the seller will gain from the trade.

both the buyer and the seller will gain from the trade.

The Open Market Trading Desk is where the Federal Reserve: buys and sells government bonds. makes discount window loans to banks. issues requirements on excess reserves. issues statements on monetary policy changes.

buys and sells government bonds.

Improved economic efficiency: will always lead to more equitable outcomes for all. will never lead to more equitable outcomes for all will always provide benefits to the most deserving members of society could improve the equity of benefits if the gains are appropriately distributed

could improve the equity of benefits if the gains are appropriately distributed

The ceiling for the federal funds rate is set by the: repurchase agreements and interest on excess reserves. discount rate. open market trading desk. president of the country

discount rate.

The percent of each extra dollar of earned income that an income transfer recipient loses to higher taxes and lower government benefits is called the recipient's: benefit-reduction adjustment rate. effective marginal tax rate. transfer adjustment tax rate. leak transfer tax rate

effective marginal tax rate.

Government programs that are "means-tested" require: all citizens to be eligible for benefits regardless of income. the program to verify that it accomplishes its purposes through its activities. recipients to be examined to verify health status. eligibility to be based on income and sometimes on wealth.

eligibility to be based on income and sometimes on wealth.

Which of the following is NOT a source of market failure? excessive information externalities irrationality market power

excessive information

Equity refers to the _________ of the allocation of goods and services fairness costs efficiency benefits

fairness

The user cost of capital consists of: corporate taxes and depreciation. forgone interest and depreciation. the sum of all interest paid on business loans. domestic investment and foreign investment

forgone interest and depreciation.

In the loanable funds market, the supply of loanable funds is positively sloped because the higher the real interest rate, the: smaller the benefits of saving. lower the profitability of investment projects. higher the profitability of investment projects. greater the benefits of saving

greater the benefits of saving

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 3%, then the Fed will want the new real interest rate to be: higher. lower. equal to the inflation rate

higher

The costs of the redistribution of income include each of the following EXCEPT: administrative costs. higher taxes reduce work effort. higher prices for goods and services. tax avoidance and fraud

higher prices for goods and services.

The First Fundamental Theorem of Welfare Economics: shows that the allocation of resources generated by perfectly competitive markets results in all consumers attaining the same utility level. refers to the biblical observation that "the poor ye shall always have with you." implies that no intervention in the workings of markets can be justified on efficiency grounds. holds that the allocation of resources generated by perfectly competitive markets is Pareto efficient.

holds that the allocation of resources generated by perfectly competitive markets is Pareto efficient.

Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to decrease current consumption, but increase future consumption. increase both current consumption and future consumption. increase future consumption, but not current consumption. increase current consumption, but not future consumption

increase both current consumption and future consumption.

The borrowers in the loanable funds market are: savers. investors. suppliers of loanable funds. those who have excess funds available.

investors

When the allocation of resources is Pareto efficient, society is providing the greatest good to the greatest number. no consumer would prefer someone else's consumption bundle to his or her own. it is not feasible to make someone better off without making someone worse off. it is feasible to make someone better off without making someone worse off.

it is not feasible to make someone better off without making someone worse off.

If inflation is 0%, and a firm wants to lower real wages by 1%, it will need to: raise nominal wages by 1%. lower nominal wages by 1%. lower real wages by 2%. raise inflation by 2%.

lower nominal wages by 1%.

The global extreme poverty line of $1.90 per day is: the same as the U.S. poverty line. lower than the U.S. poverty line. higher than the U.S. poverty line. the same as the U.S. poverty line but adjusted for local price levels.

lower than the U.S. poverty line.

When the Federal Reserve purchases more long-term bonds, this: increases the discount rate. raises long-term bond interest rates. lowers long-term bond interest rates. increases the federal funds rate.

lowers long-term bond interest rates.

If there is an anticipated rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption. a small increase; a large increase a large increase; a large increase no change; a large increase a large increase; no change

no change; a large increase

The federal funds rate is the: interest rate the public pays on loans from banks. nominal interest rate that banks pay on overnight interbank loans. nominal interest rate minus the inflation rate. interest rate on loans from the Federal Reserve's discount window

nominal interest rate that banks pay on overnight interbank loans.

If unemployment is above its sustainable level, then the economy is: experiencing above normal growth rates. operating above capacity, and inflation will likely rise. operating below capacity, and inflation will likely fall. at potential GDP, and inflation is at its target level.

operating below capacity, and inflation will likely fall.

Measurement of economic efficiency is based on _____ and fails to consider the _____ that leads to the level of efficiency. monetary measures; result outcomes; process process; fairness impacts; monetary measure

outcomes; process

Most social insurance programs pay benefits that are based on: the severity of the negative outcome. the premium paid for the insurance. past earnings. family size

past earnings.

An income level below which a family is defined to be in poverty is known as the: poverty line. bottom quintile. relative poverty measure. needs-based indicator.

poverty line.

During recessions: precautionary savings rise. bequests rise. credit card bills fall. anticipated future income increases.

precautionary savings rise.

Forward guidance occurs when the Federal Reserve: provides information about the future course of monetary policy in order to influence expectations about future interest rates. follows the same future course of monetary policy that it has been following in the past. carries out open market operations to influence future interest rates. provides information about current monetary policy in order to influence expectations about future interest rates.

provides information about the future course of monetary policy in order to influence expectations about future interest rates.

If inflation is 0% and a firm wants to raise real wages by 1%, it will need to: raise nominal wages by 1%. lower nominal wages by 1%. lower real wages by 2%. raise inflation by 2%.

raise nominal wages by 1%.

For a borrower, an increase in the real interest rate has an uncertain effect on current consumption and increases future consumption. definitely reduces current consumption and increases future consumption. reduces current consumption and has an uncertain effect on future consumption. has an uncertain effect on both current and future consumption.

reduces current consumption and has an uncertain effect on future consumption.

The lower bound for the federal funds rate is set by the: repurchase agreements and interest on excess reserves. discount rate. open market trading desk. president of the country.

repurchase agreements and interest on excess reserves.

If the rate of depreciation increases, then user cost ________ and the desired capital stock ________. rises; falls rises; rises falls; falls falls; rises

rises; falls

The permanent income hypothesis implies that consumers whose incomes exceed their permanent consumption will engage in: borrowing. dissaving. saving. not paying taxes

saving.

When the FOMC conducts monetary policy, it sets the target range for the federal funds rate. interest on reserve balances rate. the overnight reverse repurchase agreement rate. open market operations.

the federal funds rate.

Competitive markets do NOT result in: the largest possible economic profit for firms. goods going to the consumers who will receive the highest marginal benefit from the good. the largest possible economic surplus. goods produced at the lowest possible marginal cost.

the largest possible economic profit for firms.

In the two-period model, r denotes current taxes. the nominal interest rate. real income. the real interest rate.

the real interest rate.

When economic efficiency rises, the _____, and the benefits _____ be spread across all the people. total gains may or may not exceed costs; will total gains may or may not exceed costs; may or may not total gains exceed the costs; will total gains exceed the costs; may or may not

total gains exceed the costs; may or may not

The user cost of capital is given by the following formula, where pK is the real price of capital goods, d is the depreciation rate, and r is the expected real interest rate. uc = (r + d)/pK uc = d pK/r uc = pK/(r + d) uc = (r + d)pK

uc = (r + d)pK

When market power is a significant force in a product market, the market tends to _____ compared to a market where there is no market power. underproduce be more efficient have lower prices overproduce

underproduce

The efficiency problem that results from market power is that the market: has side-effects. has too many producers. overproduces. underproduces

underproduces

Normative analysis focuses on making decisions based on: values. facts. relationships. predictions.

values