Exam 2 (Chapters 10-13)

Percentage Change in Purchasing Power =

(New quantity of tickets - Original quantity of tickets) / (Original quantity of tickets) x 100

GDP deflator =

(value of all goods and services produced in the economy this year using this year's prices / value of all goods and services produced in the economy this year using the base year's prices) x 100

The following table shows the average nominal interest rates on six-month Treasury bills between 1986 and 1990, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1986 to 1990. (All rates are rounded to the nearest tenth of a percent.) (Picture) According to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment?

1986 Real interest rate = Nominal interest rate - Inflation rate (Highest #)

Inflation between .....

= (CSPI in 2nd year - CSPI in 1st year) / (CSPI in 1st year) x 100

Output per Worker (Productivity) =

= Output / Labor Force

National Saving = (Budget Surplus)

= Private Savings + Public Savings = ( Y - C - T ) + ( T - G )

6

A bond's credit risk is the probability that the issuer will default on some of the interest or principal. The repayment prospects of a government engaged in a civil war are far less promising than those of a politically stable country such as Japan. Therefore, less politically stable governments tend to pay higher interest rates on the bonds they issue.

4

A firm can raise money only through an initial offering of its shares. Once the shares begin trading among stockholders on organized stock exchanges (such as the New York Stock Exchange), the proceeds from selling a stock accrue directly to the stockholders.

Which of the following are possible outcomes of rapid population growth?

A reduction in human capital per worker A reduction in capital per worker An increase in technological knowledge

3

An increase in the number of shares of stock a company issues represents an increase in the supply of the shares—it reduces the value of each share as the value of the company is thereby split into smaller units.

Suppose Gilberto decides to buy 100 shares of NanoSpeck stock. Which of the following statements are correct? Check all that apply.

An increase in the perceived profitability of NanoSpeck will likely cause the value of Gilberto's shares to rise.

Net Exports

Are equal to exports minus imports

Natural Resources

Are the inputs into the production of goods and services that are provided by nature, such as land, bodies of water, forests, and mineral deposits.

However, the CPI reflects only the prices of all goods and services

Bought by consumers

Exports

Category for the country in which the good or service originated

Imports

Category for the country that receives the good or service.

Government Purchases

Consist of any purchase by a state, local, or federal government

Consumption

Consists of expenditures by individuals on goods and services

Investment

Consists of spending on capital goods, household purchases of new housing, and (net) additions to inventories.

2

Corporations issue stock to raise money, a practice known as equity finance. Each share of stock represents partial ownership of the company, so financial investors' perceptions of the company's future profitability are reflected in the price of the firm's stock. The price of a stock is determined by the forces of supply and demand. If people expect a corporation to have unusually high profits in the future, demand for the stock increases, and its share price rises.

1

Debt finance is the sale of bonds to raise funds. Equity finance is the sale of stock. When a firm encounters financial difficulty, the firm is obligated to pay off bondholders before giving anything to stockholders. Stockholders, however, stand to gain more if a firm is profitable.

Closed Economy

Does not trade with the rest of the world, and, thus, its net exports are zero. Therefore, in this case, GDP is the sum of consumption, investment, and government purchases. To find the missing value of consumption, the national income accounting identity can be rearranged as follows:

Real Interest Rate

Equals the nominal interest rate minus the inflation rate.

Suppose NanoSpeck, a biotechnology firm, is selling stocks to raise money for a new lab—a practice known as _____ finance. Buying a share of NanoSpeck stock would give Gilberto _____ the firm. In the event that NanoSpeck runs into financial difficulty, _____ will be paid first.

Equity A claim to partial ownership in The bondholder

Calculo, a U.S. electronics company, produces a calculator at a plant in Indonesia on March 2, 2019. Calculo imports the calculator into the United States on May 10, 2019. An accountant starts a client's 2019 tax return on April 14, 2020, finishing it just before midnight on April 15, 2020. Chocolate Express, a Swiss chocolate company, produces a chocolate bar at a plant in Illinois on December 15, 2019. An elementary school student buys the chocolate bar on December 31. Treetopplers, a U.S. lumber company, produces wood at a plant in Oregon on September 12, 2019. It sells the wood to Buildit and Partners, a developer, for use in the production of a new house that will be built in the United States in 2019. (Note: Focus exclusively on whether production of the wood increases GDP directly, and ignore the effect of production of the new house on GDP.) Tasty's, a U.S. fast-food company, produces a hamburger at one of its many St. Louis locations on January 17, 2019. It sells the hamburger to a customer that same day.

Excluded Excluded Included Excluded Included

Net Exports =

Exports - Imports

The repeal of the previously existing tax credit causes the interest rate to _____ and the level of investment to _____.

Fall Fall

This causes the interest rate to _____, _____ the level of investment spending.

Fall Increasing

True or False: Gross domestic product (GDP) cannot be used to measure the economy's income.

False

Households earn income when _____ purchase _____ in markets for factors of production.

Firms Labor and Capital

An increase in the price of a Treewood Equipment feller buncher, which is a commercial forestry machine made in the U.S. but not bought by U.S. consumers A decrease in the price of a Chinese-made phone that is popular among U.S. consumers

GDP deflator CPI

Expenditure Approach

GDP is equal to the sum of consumption, investment, government purchases, and net exports

firms earn revenue when _____ purchase _____ in markets for goods and services.

Households Goods and Services

The accumulated weaving experience of the workforce A special technique that workers can use to create stronger textiles The looms used to weave the textiles The grasslands supporting the sheep whose wool is used for weaving

Human Capital per Worker Technological Knowledge Physical Capital per Worker Natural Resources per Worker

Productivity, or output per unit of labor input, is determined by four primary factors:

Human capital per worker Natural resources per worker Physical capital per worker Technological knowledge

Inflation Rate

In a given year is estimated by the percentage change in the GDP deflator between that year and the previous year.

Purchase Power =

Initial Deposit / Price

When a U.S. company purchases and imports electronic parts from China to use to produce MP3 players within the United States, this purchase increases the _____ component of GDP while also _____ net exports by the same amount. Therefore, the purchase of electronic parts from China causes _____ in US GDP.

Investment Decreasing No overall change

Ana borrows money to build a new lab for her engineering firm. Charles takes out a mortgage for a new home in Detroit. Dina purchases stock in Goohoo, an information technology company. Yakov purchases a corporate bond issued by a car company.

Investment Investment Saving Saving

_____ is the source of the demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded _____

Investment Increases

Manuel buys a new set of tools to use in his plumbing business. Hubert buys a sweater made in Guatemala. The state of Pennsylvania repaves highway PA 320, which goes through the center of Swarthmore. Hubert's employer assigns him to provide consulting services to an Australian firm that's opening a manufacturing facility in China. Kate gets a new video camera made in the United States.

Investment ( I ) Consumption ( C ) and Imports ( M ) Government Purchases ( G ) Exports ( X ) Consumption ( C )

GDP Deflator

Is a measure of the price level calculated by dividing nominal GDP by real GDP and multiplying by 100

An Economy's Labor Productivity

Is equal to the ratio of output to labor hours devoted to the production of the output

Physical Capital per Worker

Is equal to the ratio of physical capital to labor

Investment

Is spending on new capital, such as machines, equipment, tools, or buildings. Also note that spending on new residences is the one component of household expenditures that counts toward investment spending, rather than consumption, in national income accounting.

Physical Capital

Is the stock of tools, machinery, equipment, and structures that are used to produce goods and services.

Assuming that everything else is equal, a bond issued by the government of Japan most likely pays a _____ interest rate than a bond issued by a government that is engaged in a civil war.

Lower

Kyoko earns $800 per week working for Flyaway Airlines. Jacques earns $375 per week working for Pillmart Pharmacy. Jacques spends $400 to purchase air travel to Hawaii from Flyaway Airlines.

Market for factors of production Market for factors of production Market for goods and services

The gross domestic product (GDP) of the United States is defined as the _____ all _____ _____ in a given period of time.

Market value of Final goods and services produced Within the United States

Nominal GDP

Measures the value of current output using current prices Is the value of an economy's output measured in current prices.

Real GDP

Measures the value of output in the current year using prices from a base year Is the value of an economy's output after the impact of price changes has been removed

7

National saving is what's left over after you subtract household consumption and government spending from the economy's total income. At the household level, saving is what's left over after subtracting taxes paid and consumption from household income. Depositing unspent income in a bank is an act of saving, as is using unspent income to purchase stocks or bonds.

Gross Domestic Product (GDP)

Of the United States is defined as the market value of all final goods and services produced within the United States in a given period of time, such as a year or quarter.

Suppose you're in charge of establishing economic policy for this small island country. Which of the following policies would lead to greater productivity in the weaving industry? Check all that apply.

Offering free public education to every worker in the country Subsidizing research and development into new weaving technologies Encouraging saving by allowing workers to set aside a portion of their earnings in tax-free retirement accounts

Physical Capital per Worker =

Physical Capital in year / Labor in year

Suppose an American buys stock issued by an Argentinian corporation. The Argentinian firm uses the proceeds from the sale to build a new office complex. This is an example of foreign _____ investment

Portfolio

Which of the following policies are consistent with the goal of increasing productivity and growth in developing countries? Check all that apply.

Protecting property rights and enforcing contracts Providing tax breaks and patents for firms that pursue research and development in health and sciences

Foreign Direct Investment

Refers to a capital investment that is owned and operated by a foreign entity.

Foreign Portfolio Investment

Refers to an investment that is financed with foreign money but operated by domestic residents. Therefore, this is an example of foreign portfolio investment.

This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to _____ and the level of investment spending to _____

Rise Decrease

When the rate of inflation is less than the interest rate on Simone's deposit, the purchasing power of her deposit _____ over the course of the year.

Rises

_____ is the source of the supply of loanable funds. As the interest rate rises, the quantity of loanable funds supplied _____

Saving Increases

8

Saving is the source of the supply of loanable funds. Reducing the level of saving that households can shelter from income tax will discourage saving at each interest rate, causing the supply of loanable funds to shift to the left. There is a shortage of loanable funds at the initial interest rate. With more willing borrowers than lenders, the lenders will be able to raise the interest rate they charge for loans. As the interest rate rises, the quantity of loanable funds demanded decreases. The equilibrium interest rate rises, and the equilibrium quantity of loanable funds saved and invested falls.

This change in spending causes the government to run a budget _____, which _____ national saving.

Surplus Increase

Public Savings

T - G

5

The Dow Jones Industrial Average is not a stock exchange but a stock index, which represents an average of a group of stock prices. If optimism about corporate profits is economy wide, you would expect the major stock indexes such as the Dow Jones Industrial Average or the Standard and Poor's 500 to increase in value.

Public Saving

The amount of tax revenue that the government has left over after paying for its spending

Price Index

The cost of the market basket in the current year divided by the cost of the market basket in the base year, all multipled by 100.

Which of the following scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? Check all that apply.

The costs of overfishing and other overly intensive uses of resources The variety of goods available to consumers The value produced when you wash your own car at home The value of babysitting services, when the babysitter is paid in cash and the transaction isn't reported to the government The loss of enjoyment people incur when scenic land is converted to commercial use The leisure time enjoyed by households

Private Saving

The income that remains after households pay taxes and make consumption expenditures

Human Capital

The knowledge and skills that workers acquire through training, education, and experience. Human capital is distinct from technological knowledge, which is society's understanding of how the world works. Human capital measures the resources expended (years of training, education, or experience) transmitting society's technological knowledge to workers.

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply.

The quality of textbooks increased dramatically from 2017 to 2019, with textbook companies bundling new online study aids with their books, but this quality change is hard to measure. A new type of personal transporter, which made it easier to get around places like university campuses, became available for purchase. As the price of energy drinks increased relative to the price of coffee between 2017 and 2019, students decreased their consumption of energy drinks and increased their consumption of coffee. As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers. A new mobile device for personal computing became available for purchase. Energy drinks became increasingly popular on college campuses between 2017 and 2019 due to significant improvements in flavor, but this quality change is hard to measure.

Crowding Out

The reduction in the level of investment that occurs when the government borrows to finance a budget deficit. Thus, crowding out does not occur in this scenario.

9

The repeal of the previously existing investment tax credit will discourage firms from investing at every interest rate. The policy causes the demand for loanable funds to shift to the left. There is a surplus of loanable funds at the initial interest rate. As lenders lower their interest rates to attract borrowers, the quantity of loanable funds supplied decreases. The equilibrium interest rate falls, and the equilibrium quantity of loanable funds saved and invested falls.

National Saving

The total income in the economy that is left over after paying for consumption and government purchases. In a closed economy, subtracting consumption and government purchases from GDP also yields investment spending, so national saving equals investment

True or False: According to the previous table, the golfer with the highest PGA winnings in nominal dollars is the same as the golfer with the highest PGA winnings after adjusting for inflation.

True

True or False: The actual economy is more complicated than the simple one illustrated in this circular-flow diagram.

True

Budget Surplus.

When a government spends less than it collects in tax revenues, it runs a government budget surplus. Public saving is positive in the case of a budget surplus.

The Catch-Up Effect

When higher productivity growth in countries with less capital per person helps those countries grow faster and catch up to the per-capita incomes of countries with more capital per person.

National Savings (S ) =

Y - C - G Also = I

Private Savings =

Y - C - T

Consumption (C ) =

Y - G - I