ECONS102 Exam 2 WSU

The present value of $1 realized one year from now is: - $1 / (1 + r). - $1 × (1 + r). - 1 + r. - 1 / r.

$1 / (1 + r).

GDP deflator

Nominal GDP/Real GDP x 100

The three types of business investment are: - business investment, inventories, and housing investment. - consumption, exports, and imports. - spending on equipment, structures, and intellectual property. - rent, depreciation, and real interest.

spending on equipment, structures, and intellectual property.

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

If the interest rate is 6.75%, what is the approximate future value of $10,000 in five years? - $13,862 - $11,966 - $10,600 - $7,214

$13,862

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? - $89,743 - $132,852 - $240,535 - $42,340

$132,852

An advanced computer system for a multinational corporation costs $500,000 and is expected to depreciate by 4% at the end of next year. The real interest rate is 4%. What is the user cost of the computer system for one year? - $50,000 - $20,000 - $540,000 - $40,000

$40,000

A price index: - includes a base year. - is used to measure the cost of a market basket across different years. - is normalized so that it equals 100 in the base year. - All of these answers are true.

All of these answers are true

Expansions are periods when _____. - both real GDP and employment grow - real GDP grows, and employment shrinks - real GDP shrinks, and employment grows - both real GDP and unemployment grow

both real GDP and employment grow

The moral of the story of the Solow growth model is that: - capital accumulation is the key to sustained economic growth. - capital accumulation alone cannot lead to sustainable economic growth. - human capital growth does not lead to economic growth. - technological advance cannot sustain continuous economic growth.

capital accumulation alone cannot lead to sustainable economic growth.

An increase in perceived business opportunities will generally _____ the demand curve for loanable funds. - cause a leftward movement along - cause a leftward shift of - cause a rightward movement along - cause a rightward shift of

cause a rightward shift of

Unexpected inflation _____ lenders and _____ borrowers. - benefits ; hurts - hurts ; benefits - does not affect ; benefits - benefits ; does not affect

hurts ; benefits

Hedging against inflation means: - holding cash during periods of high inflation. - making oneself knowledgeable about the costs of inflation. - purchasing financial investments with returns that are protected against inflation. - purchasing goods and services only when prices are low.

purchasing financial investments with returns that are protected against inflation.

Many payments made by the U.S. government—such as Social Security payments—are tied to the consumer price index. To the extent that the index is biased upward, use of the CPI: - leads to lower benefits. - raises government expenditures. - lowers government expenditures. - prevents benefit recipients from profiting unfairly from these programs.

raises government expenditures.

A period of falling real GDP is the _____ of the business cycle. - peak - trough - expansion phase - recession phase

recession phase

All else equal, a nation that has a high rate of _____ will have a high rate of _____ and therefore a high growth rate of _____ capital. answer options: investment, savings, physical

savings; investment; physical

Cost-Benefit Principle

says that costs and benefits are the incentives that shape decisions

What kind of data adjustment removes the effect of sales spikes due to the holiday season? - nominal data - real data - seasonally adjusted data - annual data

seasonally adjusted data

The CPI changes from 100 to 200. This means that: - there is deflation. - overall prices have doubled. - the inflation rate has doubled. - the base year has changed.

overall prices have doubled.

Which factor will NOT increase productivity? - education - technological progress - new capital - population growth

population growth

The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called: - real GDP - Keynesian output. - structural output. - potential output.

potential output.

An example of a frictionally unemployed worker is a(n): - autoworker who is temporarily laid off because of a decline in sales. - geologist who is permanently laid off from an oil company because of a technological advance that makes his job obsolete. - worker at a fast-food restaurant who quits work to attend college. - real estate agent who leaves a job in Texas and searches for a similar, higher-paying job in California.

real estate agent who leaves a job in Texas and searches for a similar, higher-paying job in California.

Cyclical unemployment is a result of _____. - recessions and economic downturns - efficiency wages - union wages - the minimum wage

recessions and economic downturns

Based on Okun's rule of thumb, if you forecast that the output gap will decline from -2% to -4%, the unemployment rate will: - rise by 2%. - fall by 1%. - fall by 2%. - rise by 1%.

rise by 1%

Inflation is a: - rise in the overall level of prices. - rise in the economic growth rate. - decrease in the overall level of prices. - fall in the quality of a product.

rise in the overall level of prices

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

rises by 0.5%.

If the median value of initial unemployment claims is 400,000, which of the values of initial unemployment claims indicates a particularly strong economy? - 465,000 - 400,000 - 399,000 - 335,000

335,000

Which expression MOST accurately describes how to calculate the unemployment rate? - (Unemployed / Population) × 100 - (Unemployed / Employed) × 100 - (Unemployed / Labor force) × 100 - [(Unemployed − Employed) / Labor force] × 100

(Unemployed / Labor force) × 100

Which of the following is an economic cost of unemployment? (i) Unemployed people often accept lower wages when they eventually find work. (ii) Hysteresis occurs. (iii) The unemployment rate falls. (iv) Children whose parents are unemployed have lower academic outcomes.

(i) and (ii)

If there are 100 million people in the total population, a labor force of 50 million, and 47 million employed workers, the unemployment rate is _____. - 3% - 6% - 8% - 10%

6%

If the population and GDP increase by the same percentage, then real GDP per capita: - stays the same. - increases. - decreases. - may change, but one cannot be sure of the direction.

stays the same

The aggregate production function Y = f(L, H, K) shows that economic growth can occur if: (i) human capital increases. (ii) labor productivity falls. (iii) the capital stock in the country depreciates. (iv) the depreciation rate increases.

(i) only

Henry Ford's $5 per day wage led to: (i) an increase in the number of workers willing to work at the Ford plant. (ii) workers who were more dedicated to their work. (iii) unemployment. (iv) lower total labor costs.

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

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%. Over the next year, the actual inflation rate turns out to be 1.75%. What is your actual real rate of return?

0.5%

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. - 0.38. - negative. - zero.

0.62

A constant returns to scale production function is one where increasing all inputs by a certain proportion leads to output rising by: - a smaller proportion - the same proportion - exactly double the proportion - a larger proportion

the same proportion

Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function? - The slope will increase. - Autonomous consumption will increase. - The function will shift downward. - The slope will increase, and autonomous consumption will increase.

the slope will increase

An example of physical capital is a: truck that a company purchases for deliveries. worker who physically learns how to drive a truck his company buys. truck that a worker buys for personal use. radio that a truck driver installs in his truck for entertainment purposes.

truck that a company purchases for deliveries.

When real interest rates rise, consumption will shift: - upward if the substitution effect outweighs the income effect. - downward if there is saving. - downward if income rises as well. - upward if the income effect outweighs the substitution effect.

upward if the income effect outweighs the substitution effect.

For consumption smoothers, the marginal propensity to consume out of anticipated changes in income is: - always close to 1. - negative. - one. - zero.

zero

The price in the loanable funds market is the: - wage rate. - GDP deflator. - real interest rate. - consumer price index.

real interest rate

If the actual inflation rate is less than the expected inflation rate: - lenders gain and borrowers lose. - borrowers gain and lenders lose. - everyone benefits. - everyone is worse off.

lenders gain and borrowers lose.

If the interest rate is 4%, what is the approximate present value of $2,000 received in four years?

$1,710

The present value of a $110 payment in one year, given an annual 10% interest rate, is:

$100

Menu costs refer to the increased cost of: - food in a time of inflation. - eating out when inflation increases. - changing listed prices. - the minimum wage.

changing listed prices.

The catch-up effect would be largest in an economy where: - the initial level of capital is high. - foreign direct investment is not allowed. - capital accumulation is significant. - the initial level of capital is low.

the initial level of capital is low.

How can dissaving in the current period be funded? (i) borrowing from friends (ii) bank loans (iii) previous savings (iv) current income earned - (ii), (iii), and (iv) - (i), (ii), (iii), and (iv) - (i), (ii), and (iii) - (ii) and (iii)

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

Hand-to-mouth consumers: (i) spend more on necessities than on luxuries. (ii) save very little or nothing at all. (iii) purchase a large amount of luxury items. (iv) live paycheck to paycheck. - (iv) only - (iii) and (iv) - (i), (ii), and (iv) - (i) and (ii)

(i), (ii), and (iv)

A fixed nominal interest rate of _____ with _____ inflation will yield the highest real rate of return for a lender. - 7%; 2% - 9%; 5% - 10%; 7% - 19%; 15%

7%; 2%

If the average marginal propensity to consume is 0.75, then a $1 million increase in total income will lead to a _____ in consumption. - 75,000 increase - 750,000 decrease - 250,000 increase - 750,000 increase

750,000 increase

Suppose a labor market is described by the demand equation, Qd = 60 - 2w, and the supply equation, Qs = -10 + w, where Qd is the quantity demanded of labor, Qs is the quantity supplied of labor, and w is the wage (in dollars). If the government institutes a minimum wage of $25, how many workers will be employed in this market? - 5,000,000 - zero - 10,000,000 - 40,000,000

10,000,000

What is the GDP deflator if nominal GDP is $300 billion and real GDP is also $300 billion?

100

The median annual growth in the stock index is 7%. Which of the following annual stock index growth rates indicates a particularly strong economy? - 5% - 12.9% - -3% - 8.5%

12.9%

If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who are unemployed and have given up looking for a job, and 5 million people who are unemployed and seeking employment, then its labor force is _____ million.

140

You are given the choice of receiving $100 today or $115 one year from today. What annual interest rate will make you indifferent between these two choices?

15%

Which of the following is an investment? - Frank buys a used car. - Fred pays a contractor to add two new rooms to his house. - Dan purchases $6,800 worth of gold. - Ben's computer depreciates by 15%.

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. - inflation is 1.5% above the long-run rate of inflation. - GDP is 1.5% below potential GDP. - unemployment is 1.5% above the natural rate of unemployment.

GDP is 1.5% above potential GDP.

Which of the following people can be classified as "unemployed"? - Laura, who has been seeking employment for two months - Damien, who does not have a job but has not looked for work - Fred, who is on medical leave from his job - Jose, who is in the military

Laura, who has been seeking employment for two months

formula to find present value of future amount

PV= FV / (1 + r)^n Where: PV is the present value FV is the future value r is the interest rate per period (expressed as a decimal) n is the number of periods

How does money illusion cause nominal wage rigidity? - Since workers focus on nominal earnings and thus resent wage cuts, employers often choose to hold nominal wages constant rather than lower them. - Since workers focus on nominal wages, employers focus on matching the rate of wage increase with the rate of inflation. - Wages fall only when money illusion is present. - Money illusion leads to workers asking for fixed wage increases (and decreases) adjusted to the rate of inflation (or deflation).

Since workers focus on nominal earnings and thus resent wage cuts, employers often choose to hold nominal wages constant rather than lower them.

Which statement is likely to be TRUE if actual output equals potential output? - The actual unemployment rate equals the equilibrium unemployment rate. - The actual unemployment rate is above the equilibrium unemployment rate. - There is zero unemployment. - The equilibrium unemployment rate is above the actual unemployment rate.

The actual unemployment rate equals the equilibrium unemployment rate.

The government enacts regulation to institute enforceable property rights for business investment. Which input in the production function changes, and what is the effect on economic growth in the country? - Human capital is enhanced, and economic growth is positively affected. - The capital stock increases, and economic growth is positively affected. - Technology regresses, and economic growth stalls. - The capital stock decreases, and economic growth is negatively affected.

The capital stock increases, and economic growth is positively affected.

Which statement about the producer price index is TRUE? - The producer price index is just another term for the GDP deflator. - Changes in the producer price index generally follow changes in the consumer price index. - The producer price index measures the cost of a basket of goods typically purchased by producers of goods and services. - The producer price index shows how the cost of all purchases by urban families changes.

The producer price index measures the cost of a basket of goods typically purchased by producers of goods and services.

A group of people moves onto a forested piece of land (which has no established owner), cuts down all the trees, and acquires all the lumber on the land. Thereafter, the land is farmed until all the mineral properties of the soil are depleted. Ultimately, the land becomes a barren desert property. This is an example of: - a lack of established property rights leading to the depletion of a resource. - economic growth from agricultural innovation. - a lack of human capital leading to a depletion of a resource. - inadequate capital stock.

a lack of established property rights leading to the depletion of a resource.

Suppose a lake is overfished until the fish stock is depleted. This is an example of: - improper use of fishing equipment. - a lack of established property rights. - climate change. - inadequate labor as a resource.

a lack of established property rights.

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

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

a large increase; a large increase

An increasing return to scale production function is one where increasing all inputs by a certain proportion leads to output rising by: - exactly double the proportion. - the same proportion. - a smaller proportion. - a larger proportion.

a larger proportion

In the absence of a minimum wage, efficiency wages, or labor unions, a decline in the demand for labor will likely result in _____ if wages are flexible. - higher levels of employment - no changes in employment - a lower level of employment but likely no change in the unemployment rate - a lower level of employment and a higher unemployment rate

a lower level of employment but likely no change in the unemployment rate

Diminishing returns to physical capital mean that as more and more physical capital is combined with a fixed amount of human capital and a fixed technology, eventually: - GDP per worker declines. - GDP per worker grows. - additions to GDP per worker decline. - additions to GDP per worker increase.

additions to GDP per worker decline.

If there is _____ rise in income, there will be an intermediate increase in total consumption in the economy. - an announcement of a future - an anticipated - zero - no news of a

an announcement of a future

During the Great Recession, the United States Congress increased the length of time that unemployment benefits could be received from 52 weeks to 99 weeks. This change caused: - an increase in the costs for the government. - an increase in the labor force participation rate. - an increase in the number of employed people in the economy. - a decrease in unemployment.

an increase in the costs for the government.

Other things equal, expectations of lower income would _____ and shift the consumption function _____. - increase autonomous consumption; up - decrease the marginal propensity to consume; down - decrease autonomous consumption; down - increase the marginal propensity to consume; up

decrease autonomous consumption; down

If banks are worried about high default rates and institute new tough lending regulations, then the _____ loanable funds shifts to the _____. - supply of; right - demand for; left - demand for; right - supply of; left

demand for; left

If the government institutes a tax credit on funds invested, then the _____ loanable funds shifts to the _____. - supply of; left - demand for; left - demand for; right - supply of; right

demand for; right

Your university installs new computer systems in its labs. Each year, the value of these computers falls due to normal wear and tear. These costs are: - real interest rate costs - depreciation costs - up-front costs - the price of tuition

depreciation costs

The production function exhibits _____ returns to _____ capital. - increasing; physical - diminishing; physical - constant; physical - increasing; financial

diminishing; physical

Hyperinflation is: -a period of high money growth in an economy. - extremely high rates of inflation. - very high rates of economic growth. - inflation that occurs when the economy is in a recession.

extremely high rates of inflation

Thomas Malthus believed that: - technology in food production was the key to economic growth. - food production would require fewer and fewer resources in the future. - population growth was the key to economic growth. - food production would not exceed population growth and that this would lead to continuous subsistence living.

food production would not exceed population growth and that this would lead to continuous subsistence living.

Following a significant recessionary period in which there were periodic wage freezes, workers negotiate higher wages. However, the higher wages lead to a decrease in the number of new workers getting hired, so unemployment persists in the region. The scenario described here is an example of: - hysteresis. - frictional unemployment. - efficiency wages. - a government mandated minimum wage.

hysteresis.

When an economy is between the peak and the trough of a business cycle, it is: - in an expansion. - in a recession. - in a stable long-run growth trend. - at the beginning of an increase in total spending.

in a recession

People are likely to save the MOST ____, during their life cycle. - as they get closer to retirement - in their peak earnings years - the older they get - in their old age

in their peak earnings years

Shoe-leather costs are the: - effect of inflation on the prices of food, clothing, and other necessities. - increased cost of transactions due to inflation. - high price of leather goods. - effect of inflation on transportation costs.

increased cost of transactions due to inflation.

formula to find inflation rate from one year to another

inflation rate = CPI in the later year - CPI in the earlier year / CPI in the earlier year x 100

The major difference between the producer price index and the consumer price index is that the producer price index _____, and the consumer price index _____. - is based on retail prices; is based on wholesale prices - measures the cost of living of self-employed workers; measures the cost of living of salaried workers - generally registers a higher rate of inflation; generally registers a lower rate of inflation - is based on the cost of a market basket typically purchased by producers; is based on the cost of a market basket typically purchased by consumers

is based on the cost of a market basket typically purchased by producers; is based on the cost of a market basket typically purchased by consumers

A relatively low saving rate affects productivity growth by: - limiting the funds available for investment in physical capital - decreasing consumption spending and increasing investment in human capital - reducing the tax base and preventing the government from providing public goods - stimulating imports and increasing the trade defecit

limiting the funds available for investment in physical capital

Unemployment insurance can lead to: - a reduction in the government budget deficit. - fewer unemployment benefit claims. - an increase in the number of retirees. - longer unemployment durations.

longer unemployment durations

An increase in the number of marginally attached workers tends to: - raise the official unemployment rate. - lower the official unemployment rate. - lower the number of people who are frictionally unemployed. - increase the number of people who are structurally unemployed.

lower the official unemployment rate.

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

lower the profitability of investment projects.

The rational rule of consumption is to consume more today if the: - marginal benefit of a dollar of consumption today is less than the marginal benefit of spending a dollar plus interest in the future. - price of consumption today exceeds the dollar-plus-interest in the future. - real interest rate in the future is expected to be higher than the real interest rate today. - 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.

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.

The menu costs of inflation are the: - costs of information search with regards to new inflation rates. - lost interest earnings when holding cash. - marginal costs of adjusting prices. - overall costs of purchasing more inputs at higher prices.

marginal costs of adjusting prices.

The slope of the consumption function is the: - marginal propensity to consume. - marginal propensity to invest. - average level of consumption over time. - marginal propensity to import.

marginal propensity to consume.

The labor supply curve is positively sloped because: - more people are willing to work at low wages than at high wages. - more people are willing to work at high wages than at low wages. - employers are willing to hire more people at low wages than at high wages. - employers are willing to hire more people at high wages than at low wages.

more people are willing to work at high wages than at low wages.

Assuming a positive interest rate, the dollar amount of a future payment is _____ its present value. - exactly the same as - approximately the same as - less than - more than

more than

If a short-lived recession is expected, a consumption smoother will exhibit _____ in consumption. - a large decrease - a large increase - a rising rate of increase - no change

no change

If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will: - not change - rise - fall - be zero

not change

Suppose that a CPI basket includes avocadoes, pineapples and oranges. Avocadoes become very expensive, and consumers substitute away from avocadoes and buy hummus instead. If the CPI basket does not change to reflect the move away from avocados, the result is: - substitution bias. - understated inflation. - the failure to capture real variables versus nominal variables. - quality bias.

substitution bias

If the stock market crashes: - the aggregate consumption function will shift up. - the aggregate consumption function will shift down. - unplanned inventory investment will be negative. - GDP will increase.

the aggregate consumption function will shift down.

Periodic fluctuations of a country's real gross domestic product (GDP) are known as: - a recession. - the business cycle. - an expansion. - a trough.

the business cycle

The crowding-out effect is _____. - the negative effect of government budget deficits on private investment spending - the positive effect of government budget deficits on private investment spending - what happens when a company employs too many workers - the positive effect of government budget deficits on private saving

the negative effect of government budget deficits on private investment spending