Macroeconomics Exam 2 Review
The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial matters:
"Diversify."
The consumer price index and the GDP deflator are two alternative measures of the overall price level. Which of the following statements about the two measures is correct?
A change in the price of Korean televisions is reflected in the U.S. consumer price index but not in the U.S. GDP deflator.
Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.
This stock is undervalued; you should consider adding it to your portfolio.
In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?
When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.
Which of the following expressions must be equal to national saving for a closed economy?
Y - C - G
If a production function has constant returns to scale, output can be doubled if
all of the inputs double.
A stock index is
an average of a group of stock prices.
If the demand for loanable funds shifts to the left, then the equilibrium interest rate
and quantity of loanable funds falls
By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can
benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a
bond
A creditor of a corporation holds
bonds sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders.
As real interest rates fall, firms desire to
buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.
The inflation rate is calculated
by determining the percentage increase in the price index from the preceding period.
An index fund
holds all the stocks in a given stock index.
If the efficient market hypothesis is correct, then
index funds should typically beat managed funds, and usually do.
From the standpoint of the economy as a whole, the role of
insurance is to spread risks around more efficiently.
The financial system
involves bank accounts, mortgages, stock prices, and many other items. involves decisions and actions undertaken by people at a point in time that affect their lives in the future. coordinates the economy's saving and investment.
National saving
is the total income in the economy that remains after paying for consumption and government purchases.
The available evidence indicates that
outperforming the market on a consistent basis is extremely difficult to do.
The economy's inflation rate is the
percentage change in the price level from the previous period.
The CPI is more commonly used as a gauge of inflation than the GDP deflator is because
the CPI better reflects the goods and services bought by consumers.
Compared to stocks, bonds offer the holder
lower risk and lower potential return.
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
If the inflation rate is 2 percent and the real interest rate is 7 percent, then the nominal interest rate is
9%
Diversification of a portfolio
can eliminate firm-specific risk, but it cannot eliminate market risk.
According to the efficient market hypothesis
changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.
A closed economy
does not trade with other economies.
A country's human capital increases
if its workers become better educated or healthier.
A decrease in the price of domestically produced industrial robots will be reflected in
the GDP deflator but not in the consumer price index.
The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. Price of Peaches 2012 $11 per bushel 2013 $9 per bushel Price of Pecans 2012 $6 per bushel 2013 $10 per bushel Refer to Table 24-2. The cost of the basket in 2012 was
$225
The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. Price of Peaches 2012 $11 per bushel 2013 $9 per bushel Price of Pecans 2012 $6 per bushel 2013 $10 per bushel Refer to Table 24-2. The cost of the basket in 2013 was
$235
What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?
$1000/(1.06)^2
Technological knowledge refers to
available information on how to produce things.
In a closed economy, what does (Y - T - C) represent?
private saving
If a newly elected government takes actions that makes its country's courts more efficient and less corrupt, then
producers will have greater confidence that they will benefit from their efforts. producers are likely to be more specialized. buyers and sellers will be more likely to honor contracts.
Once an idea enters society's pool of knowledge, the idea becomes a
public good
In a closed economy, what does (T - G) represent?
public saving
In some countries it is time consuming and costly to establish ownership of property. Reforms to reduce these costs would likely
raise real GDP and productivity.
A budget surplus
reduces the government's debt.
Given that Monika's income exceeds her expenditures, Monika is best described as a
saver or as a supplier of funds.
If stock prices follow a random walk, it means
stock prices are just as likely to rise as to fall at any given time.
As the number of stocks in a person's portfolio increases,
the risk of the portfolio decreases, as indicated by the decreasing value of the standard deviation of the portfolio.
The word "efficient" in the term "efficient markets hypothesis" refers to the idea that
the stock market is "informationally efficient."
Recent changes in methods used to compute the CPI have made the
upward bias in the CPI inflation rate less severe than it used to be.
Janet is a farmer. Which of the following are included in her human capital?
what she's learned from experience but not her tractor
A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?
$500/(1 + r) + $10,500/(1 + r)^2
Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basket's cost was $80.00; in 2013, the basket's cost was $84; and in 2014, the basket's cost was $87.60. The value of the CPI was
100 in 2012. 105 in 2013. 109.5 in 2014.
The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. Price of Peaches 2012 $11 per bushel 2013 $9 per bushel Price of Pecans 2012 $6 per bushel 2013 $10 per bushel Refer to Table 24-2. If 2012 is the base year, then the CPI for 2012 was
100.0
The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. Price of Peaches 2012 $11 per bushel 2013 $9 per bushel Price of Pecans 2012 $6 per bushel 2013 $10 per bushel Refer to Table 24-2. If 2012 is the base year, then the CPI for 2013 was
104.4
The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. Price of Peaches 2012 $11 per bushel 2013 $9 per bushel Price of Pecans 2012 $6 per bushel 2013 $10 per bushel Refer to Table 24-2. If 2012 is the base year, then the inflation rate in 2013 was
4.4 percent
Which of these events would cause the consumer price index to overstate the increase in the cost of living?
Car makers benefit from a new technology that allows them to sell higher-quality cars to consumers with no increase in price. Energy prices decrease, and consumers respond by buying more gas and electricity. A new good is introduced that renders cellular telephones inferior and obsolete.
Suppose a basket of goods and services has been selected to calculate the consumer price index. In 2005, the basket of goods cost $108.00; in 2006, it cost $135.00; and in 2007, it cost $168.75. Which of the following statements is correct?
If the CPI is 156.25 in 2007, then 2005 is the base year.
Which of the following is a source of market risk?
Real GDP varies over time and sales and profits move with real GDP.
In an imaginary economy, consumers buy only razors and cologne. The fixed basket consists of 6 razors and 4 bottles of cologne. A razor cost $20 in 2009 and $25 in 2010. A bottle of cologne cost $30 in 2009 and $40 in 2010. Using 2009 as the base year, which of the following statements is correct?
The rate of inflation is 29.17% in 2010.
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.
By not taking into account the possibility of consumer substitution, the CPI
overstates the cost of living.
The identity that shows that total income and total expenditure are equal is
Y = C + I + G + NX.
Industrial machinery is an example of
a factor of production that in the past was an output from the production process. physical capital. something that influences productivity.
Fundamental analysis determines the value of a stock based on
dividends. the expected final sale price. the ability of the corporation to earn profits.
Productivity
explains most of the differences in the standard of living across countries.
Financial intermediaries are
financial institutions through which savers can indirectly provide funds to borrowers.
In determining living standards, productivity plays a key role
for both nations and individuals.
The possibility of speculative bubbles in the stock market arises in part because
future streams of dividend payments are very hard to estimate.
For any given year, the CPI is the price of the basket of goods and services in the
given year divided by the price of the basket in the base year, then multiplied by 100.
Productivity is defined as the quantity of
goods and services produced from each unit of labor input.
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.
Investment from abroad
is a way for poor countries to learn the state-of-the-art technologies developed and used in richer countries. is viewed by economists as a way to increase growth. often requires removing restrictions that governments have imposed on foreign ownership of domestic capital.
A municipal bond is
issued by state and local governments.
When the government has a budget surplus
it buys more of its bonds from the public than it sells to the public.
The primary economic function of the financial system is to
match one person's saving with another person's investment.
Rapid population growth
may depress economic prosperity by reducing the amount of capital which each worker has to work with.
The consumer price index is used to
monitor changes in the cost of living over time.
When you rent a car, you might treat it with less care than you would if it were your own. This is an example of
moral hazard.
Compared to short-term bonds, other things the same, long-term bonds generally have
more risk and so they pay higher interest rates.
Other things the same, bonds are likely to have higher interest rates if they have
no tax exemptions and long terms.
An important difference between the GDP deflator and the consumer price index is that
the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.
An increase in the price of Irish whiskey imported into the United States will be reflected in
the U.S. CPI, but not the U.S. GDP deflator.
We associate the term debt finance with
the bond market, and we associate the term equity finance with the stock market.
Changes in the producer price index are often thought to be useful in predicting changes in
the consumer price index.
The field of finance primarily studies
the implications of time and risk for allocating resources over time.
The consumer price index is subject to substitution bias because
the law of demand applies to most, if not all, goods
The future value of a deposit in a savings account will be larger
the longer a person waits to withdraw the funds. the higher the interest rate is. the larger the initial deposit is.