ECON 103 Exam practice questions

Refer to the following statistics. Based on these statistics, the level of business investment is: Inventories: $12 million Housing: $400 million Equipment: $500 million Business structures: $350 million Intellectual property: $700 million

$1,550 million. (Equipment + Business Structure + Intellectual property)

Suppose you want to realize a future value of $150,000 in 30 years on an investment you make. The average annual rate of return is 8.75%. What will be the present value of your investment?

$12,112

If the interest rate is 6% and the average inflation rate is 3.1%, what is the approximate future value of $75,000 in 20 years?

$132,852

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?

$137,500 (interest rate + depreciation x price) (2.5 + 3 x 2.5)

If the interest rate is 4%, what is the approximate future value of $15,000 in 10 years?

$22,204 (PV x (1 + R) ^ t)

Suppose falling interest rates in Australia discourage saving. What effect does this have on the consumption function in Australia?

A

In 1971, the cost of a four-year college degree from a public university was about $1,410. The consumer price index was 40.48 in January 1971. If the current consumer price index is 251.1, what is the approximate cost of the four-year degree in current dollars?

$8,746 (current CPI/ past CPI x Past price)

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?

$83,333 (1/ (1+r)^t x FV)

The news of an impending recession in the economy will lead to a: (i) fall in consumption. (ii) rise in precautionary saving. (iii) rise in national saving. (iv) rise in consumption.

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

The table shows consumer price index data for the United Kingdom. Based on this information, what is the rate of inflation in 2016? 2013- 98.2 2014- 99.6 2015- 100 2016- 101 2017- 103.6

1%

Refer to the following table. What was the approximate output gap in 1999? 1.2% -3.6% 3% 1.9%

1.9% ( actual - potential/ potential x 100)

Consider the following basket of goods: 50 bottles of milk, 100 avocadoes, 50 apples, and eight pineapples. Suppose that last year, each bottle of milk was $2.50, each avocado was $1.50, each apple was $0.75, and each pineapple was $4. This year, each bottle of milk is $2.50, each avocado is $1.80, each apple is $0.80, and each pineapple is $4.30. What is the inflation rate between last year and this year?

10.13% (quantity x price for both years then do CPI2- CPI 1/ CPI 1 x 100)

What is Sri Lanka's GDP deflator if its nominal GDP is $88.9 billion (in current US$) and the real GDP is $59.34 billion?

149.8 (divide nominal GDP by Real GPD x 100)

Why does an anticipated change in income lead to no change in consumption for a consumption smoother?

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

What happens to the investment line if the government institutes a tax break for funds invested?

The investment line shifts to the right.

Credit constraints limit the:

amount of money that people can borrow.

Suppose you want to realize a future value of $30,000 in 30 years on an investment you make. The average annual rate of return is 6%. What will be the present value of your investment?

$5,223

Suppose you have $5,000 to invest in a Treasury bill for 20 years. The average annual rate of return is 1.5%. What is the real future value of your investment after 20 years?

$6,734

What is Uganda's real GDP if its nominal GDP is $27.5 billion (in current US$), and the GDP deflator is 163.4?

$16.8 billion (Nominal GDP / GDP deflator x 100)

A new assembly line robot costs $1.2 million and is expected to depreciate by 10% at the end of next year. The real interest rate is 4.5%. What is the user cost of the robot for one year?

$174,000 (Interest rate + depreciation x cost)

In 1995, when the consumer price index was 152.38, women earned a median income of $12,130 per year. If the consumer price index in 2015 was 236.99, how much was $12,130 in 2015 dollars?

$18,865

If the interest rate is 5%, what is the approximate present value of $25,000 received in five years?

$19,588 (FV x 1/ (1+R) ^t)

The table contains information about Pfizer's stock. How much is Pfizer, as a company, worth?

$200.33 billion. (look for market cap)

The table contains information about Twitter's stock. When the stock market opened today, at what price was a share of Twitter stock traded?

$42.50 (look for open)

Which of the following tasks are performed by banks? (i) Print new money. (ii) Provide zero-interest loans. (iii) Create long-term loans from short-term deposits. (iv) Pool savings from many savers.

(iii) and (iv)

You purchase a certificate of deposit that earns an advertised rate of 1.75% interest per year. What is your real rate of return if the actual inflation rate is 1.9%?

-0.15% (Advertised rate - inflation rate= real rate of return)

Refer to the following table. What was the approximate output gap in 1998? -5.5% 1.2% -1.2% 3%

-1.2%

Refer to the following table. What was the approximate output gap in 1974? 3.3% -6.5% 2.1% 6.1%

-6.5% (actual - potential/ potential x 100)

The table shows the salary of a worker in India. The marginal propensity to consume (MPC) is:

0.53. (RISE/ RUN = CHANGE IN CONSUMPTION/ CHANGE IN INCOME)

If a $100 million increase in total income leads to a $62 million increase in consumption, the slope of the consumption function is:

0.62. (RISE over RUN= consumption / income)

You purchase a certificate of deposit and expect an inflation rate of 1.5% over the next year. Your nominal rate of interest is 2.25%. What is your expected real rate of return?

0.75% (nominal rate - inflation rate) ALWAYS DO THE OTHER NUMBER THAN INFLATION RATE FOR REAL RATE OF RETURN

Total consumption is $1,800 when income is $2,000, and total consumption increases to $2,600 when income is $3,000. What is the marginal propensity to consume?

0.8 (Change in consumption / change in income)

You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. What is your expected real rate of return?

0.85% (Nominal rate - inflation rate = real rate of return)

Consider the following data. What is the marginal propensity to consume?

0.9 (Change in consumption / change in income)

The table shows the salary of a worker in India. The level of saving in 2017 is:

50,290 rupees. (INCOME - CONSUMPTION)

The efficient market hypothesis states that:

at any point in time, stock prices reflect all publicly available information.

The table shows the salary of a construction worker in Japan. The level of saving in 2017 is:

18,000 euros. (Income - Consumption)

The table shows the salary of a worker in Japan. The level of saving in 2015 is _____ yen.

2.2 million (income - consumption)

Consider the following financial information for The Procter & Gamble Company stock. What is Procter & Gamble's price-to-earnings ratio?

28.84 (stock price / earnings per share)

The table shows consumer price index data for the United States. Based on this information, what is the rate of inflation in 2006? 2005- 195.27 2006- 201.56 2007- 207.34 2008- 215.25 2009- 214.57 2010- 218.08

3.22%

The neutral interest rate occurs when the economy is:

at its potential.

The table shows consumer price index data for the United States. Based on this information, what is the rate of inflation in 1991? 1990- 130.66 1991- 136.17 1992- 140.31 1993- 144.48

4.22%

What effect does a booming real estate market in China have on the consumption function in China?

A

You are a financial adviser. Your client, Mena, does not like risk and wants Federal Deposit Insurance Corporation (FDIC) insurance. Which of the following instruments should she invest in?

A bank savings account

You are a financial adviser. Your client, Archie, wants professional management of his investments but also wants a diversified portfolio. Which of the following investments is right for Archie?

A mutual fund

Which of the following will fall when the economy is expanding? Business confidence Consumer confidence Applications for unemployment benefits Nonfarm payrolls

Applications for unemployment benefits

Which of the following graphs shows the correct effect on the consumption function when consumer wealth increases?

B

Bond A is a five-year bond issued by a company with a very good credit rating. Bond B is a five-year bond issued by a different company in financial distress. Which of the following is likely?

Bond B will have a higher interest rate than Bond A.

Which of the following graphs shows the correct effect on the consumption function when consumer wealth decreases?

C

Which of the following shows the medium of exchange function of money?

Daniela goes to the store and purchases roses with U.S. dollars.

The Great Moderation refers to the: Stable level of inflation in the United States. Longstanding effect of the Great Recession. Increase in globalization. Decreased volatility of the U.S. economy.

Decreased volatility of the U.S. economy.

Sensing weaker future earnings, firm managers become cautious about investment. What is the effect on the loanable funds market?

Demand would shift to the left

Which of the following correctly shows the steps needed to calculate the inflation rate?

Find out what people typically buy, collect the prices from the stores where people shop, tally up the cost of the basket of goods and services, and calculate the inflation rate.

Which of the following is an investment?

Fred pays a contractor to add two new rooms to his house.

If an economy has a positive output gap of 1.5%, this means: GDP is 1.5% above potential GDP. GDP is 1.5% below potential GDP. unemployment is 1.5% above the natural rate of unemployment. inflation is 1.5% above the long-run rate of inflation.

GDP is 1.5% above potential GDP.

Which of the following will probably rise when the economy is in a recession? Employment Real retail sales Initial unemployment claims Real GDP growth

Initial unemployment claims

Which of the following correctly describes the business cycle? It refers to ups and downs in business revenue during expansions and recessions. It is the fluctuations of GDP around the potential output. It refers to excess unemployment during recessionary periods. It is the constant rise in GDP over time.

It is the fluctuations of GDP around the potential output.

During the Great Recession of 2007 to 2009, banks began to make fewer loans as they became wary of risky projects. Which of the following graphs shows the effect on the investment line?

Line would shift to the left

Which of the following graphs shows what would happen to the investment line if an investment project is expected to earn higher revenues over time?

Line would shift to the right

Refer to the data dashboard shown. Which indicator is a cross-check on GDP? Employment cost index Stock prices: S&P 500 Real GDI Business confidence

Real GDI

The United States experiences net financial outflows. Which graph shows the effect of this on the loanable funds market?

Supply shifts to the left

Which graph shows the effect of a government budget deficit on the loanable funds market?

Supply shifts to the left

The United States experiences net financial inflows. Which graph shows the effect of this on the loanable funds market?

Supply shifts to the right

An economy's potential output level is: The level at which no resources are available in the economy. The output that is possible when all resources are fully employed. The equivalent of the GDP at current market value. The output when unemployment is zero.

The output that is possible when all resources are fully employed.

Which of the following is correct about a financial instrument and its future value, keeping all other things constant?

Two correct answers: The longer the time to maturity of the instrument, the higher the future value. The higher the interest rate on the instrument, the higher the future value.

Which of the scenarios represents consumption spending?

You eat at a fancy restaurant for Valentine's Day.

Stock prices are an important macroeconomic indicator because they:

can predict changes in GDP.

In 1711, a company called the South Sea Company was set up as a merchant trader between Great Britain and South America. Although the company failed to make any real profits, the company's share price rose substantially in a very short time. Eventually, the share price collapsed and returned to the original sale price. This scenario describes:

a financial bubble.

If Marios is a consumption smoother and has just won a prize of $12,000, we can expect Marios to exhibit:

a small change in consumption.

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

If there is _____ rise in income, there will be an intermediate increase in total consumption in the economy.

a temporary

The liquidity of an asset is defined as the:

ability to quickly and easily convert the asset to cash, with little or no loss in value.

A bank run occurs when:

many bank customers try to withdraw their savings at the same time.

Even though deposit insurance existed, the United States experienced a major financial crisis from 2007 to 2009 because:

there was a run on shadow banks, which were not covered by deposit insurance.

The rational rule of consumption is to consume more today if the:

marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

A bond that is issued by a firm in financial distress is most likely to have:

default risk.

If the government lowers the corporate tax rate, then the ______ loanable funds shifts to the _______ .

demand for; right

Equilibrium in the loanable funds market determines the:

equilibrium real interest rate.

Hyperinflation is:

extremely high rates of inflation

An initial public offering occurs when a company:

first sells stock directly to the public.

Holding everything else equal, the _____ the interest rate on saving, the _____ the future value of that saving.

higher; greater

The benefit of an extra dollar of consumption is called the:

marginal benefit of consumption.

Menu costs are the:

marginal costs of adjusting prices.

Which of the following lists the functions of money?

medium of exchange, store of value, and unit of account

The real interest rate is the:

nominal interest rate minus the rate of inflation

If you see that the consumer price index this year is lower than the consumer price index last year, this means that:

on average, prices went down across the economy.

If you see that inflation between last year and this year is 3%, this means that:

on average, prices went up across the economy by 3%.

The four stages of the business cycle are:

peak, recession, trough, and expansion

The fundamental value of a business is the:

present value of the future profits it will earn

The GDP deflator is an index that tracks the:

price of all goods and services produced domestically.

Suppose that an economy is in a recession. You would expect to see the unemployment rate: Be equal to the equilibrium unemployment rate. Rise above the equilibrium unemployment rate. Fall below the equilibrium unemployment rate. Be zero.

rise above the equilibrium unemployment rate.

Based on Okun's rule of thumb, if you forecast that the output gap will decline from 0% to -3%, the unemployment rate will: fall by 1.5%. fall by 2%. rise by 1.5%. rise by 3%.

rise by 1.5%.

If the fundamental value of a stock is above the current market price of the stock, there will be a:

rise in the price and demand of its stock.

According to Okun's rule of thumb, for every 1% fall in the actual output below potential output, the unemployment rate: rises by 0.5%. falls by 0.5%. rises by 1%. falls by 1%.

rises by 0.5%.

In macroeconomics, the difference between saving and investment is that:

saving is the money left over after paying for spending, and investment is the purchase of new capital.

The three major pillars of the financial sector are the:

stock market, the bond market, and the banks.

Money illusion is the:

tendency to focus on nominal values instead of inflation-adjusted values.

An example of a leading indicator is: nonfarm payrolls. the stock market. unemployment insurance claims. unemployment.

the stock market.