Exam 3 Econ chapter 13, 14, 15 & 16

Chapter 14 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? A. $137,500 B. $12,500 C. $62,500 D. $75,000

A. $137,500

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. A. (i), (ii), and (iii) B. (i), (ii), (iii), and (iv) C. (ii) only D. (i) and (iii)

A. (i), (ii), and (iii)

Suppose falling interest rates in Australia discourage saving. What effect does this have on the consumption function in Australia? A. Consumption Function shifts up B. Consumption Function shifts right C. Consumption Function shifts left D. Consumption Function shifts down

A. Consumption Function shifts up

What effect does a booming real estate market in China have on the consumption function in China? A. Consumption Function shifts up B. Consumption Function shifts right C. Consumption Function shifts left D. Consumption Function shifts down

A. Consumption Function shifts up

A household consumption function is shown on the graph. Move the curve to the appropriate place to illustrate a decrease in the consumption function. Then, answer a question about the consequences of a decrease in the consumption function. Which statement is not a (general) consequence of a decrease in the consumption function? A. Unexpected changes in income will now result in a smaller change in the level of consumption. B. The marginal propensity to save is unchanged. C. This household now spends less for a given level of income. D. This household will now need more income to achieve a specific level of spending.

A. Unexpected changes in income will now result in a smaller change in the level of consumption. Consumption function shifts down

If Marios is a consumption smoother and has just won a prize of $12,000, we can expect Marios to exhibit: A. a small change in consumption. B. no change in MPC. C. a large change in consumption. D. zero change in saving.

A. a small change in consumption.

The first difference between John and Clarissa (the difference in expected future income) will either cause the aggregate demand curve to shift or not cause the aggregate demand curve to shift due to an economic theory. Which theory explains this change (or lack thereof)? A. permanent income hypothesis B. life‑cycle hypothesis C. rule of increasing marginal costs D. theory of bounded rationality C. theory of rational expectations

A. permanent income hypothesis

In macroeconomics, the difference between saving and investment is that: A. saving is the money left over after paying for spending, and investment is the purchase of new capital. B. saving is the money left over after paying for spending, and investment is the purchase of stocks and bonds. C. saving is created by the government, and investment is specific to firms. D. saving does not depend on income, but investment depends on profitability.

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

If a $100 million increase in total income leads to a $62 million increase in consumption, the slope of the consumption function is: A. 0.38. B. 0.62. C. negative. D. zero. *Consumption / Income

B. 0.62.

The table shows the salary of a worker in India. The level of saving in 2017 is: Year Real Income Real Consumption 2015 100,000 53,000 2016 105,000 55,650 2017 107,000 56,710 Income - Consumption = Savings A. 49,350 rupees. B. 50,290 rupees. C. 47,000 rupees. D. 53,000 rupees.

B. 50,290 rupees.

J. Mike has an opportunity to invest his $25,000 inheritance in ATM machines placed in busy gas stations across the United States. The annual economic costs associated with the ATMs are $1,500, while revenues are expected to be $3,250. The current annual yield on his next best alternative is 6.25%. Calculate the expected rate of return on the ATM investment and determine which investment will yield the highest annual return. A. There is not enough information to calculate his expected return on the ATM option. B. The expected rate of return on the ATM investment is 7%, which is higher than the 6.25% return on his next best alternative. C. The expected rate of return on the ATM investment is 7%, which is lower than the 6.25% return on his next best alternative. D. The expected rate of return on the ATM investment is 13%, which is higher than the 6.25% return on his next best alternative.

B. The expected rate of return on the ATM investment is 7%, which is higher than the 6.25% return on his next best alternative.

Which factor brings the supply and demand of loanable funds into balance? A. collective bargaining B. the real interest rate C. net capital outflows D. domestic investment E. the futures market for commodities

B. The real interest rate

Select the definition of consumption smoothing. A. borrowing in periods of high income and saving in periods of low income to make income less variable than consumption B. borrowing in periods of low income and saving in periods of high income to make consumption less variable than income C. borrowing in periods of low income and saving in periods of high income to make income less variable than consumption D. borrowing in periods of high income and saving in periods of low income to make consumption less variable than income

B. borrowing in periods of low income and saving in periods of high income to make consumption less variable than income

In January 2013, Lindsay's Lawn Service (LLS) had equipment valuing $8000.$8000. During 2013, LLS bought 3 new riding mowers for a total price of $6000.$6000. In December of 2013, the value of LLS's equipment equaled $13000. (a) What was LL's gross investment in 2013? (b) What was LLS's net investment in 2013? (c) What was LLS's depreciation in 2013?

(a) $6,000 (b) $ 5,000 (c) $1,000

A.)Suppose that CAT Inc. is currently selling zero‑coupon bonds, also called discount bonds, paying the bond owner $1,000 at the end of 11 year. If the current interest rate is 9% how much will this bond sell for today? Round to the nearest penny. (b) Suppose the interest rate increases by 1%. What is the new price of this bond? Round to the nearest penny. (c)Select the answer that best characterizes the relationship between the price of a bond and interest rate movements. A. Interest rates and bond prices are unrelated. B. Interest rates and bond prices move in the same direction. C. Interest rates and bond prices move in opposite directions.

(a) 917.43 (b)909.09 (c) C. Interest rates and bond prices move in opposite directions.

Consider the little country of Podunk. Many different economic variables influence the consumption decisions Podunkians make. Match each statement with the change it would produce on Podunk's consumption function. - A severe drought causes farmers to expect lower incomes in the fall. -Consumer spending patterns change and consumers spend a greater portion of new disposable income on consumption than in the past. -After several years in a deep recession, the latest projections from the Podunk Economic Council show the economy at last on an up-swing. -Low interest rates encourage more Podunkians to buy new cars. -Consumers spending patterns change and consumers save a greater portion of new disposable income on consumption than in the past. -Interest rated increase, reducing the amount Podunkians are willing to borrow.

-Shift down -Stepper _Shift up _shift up -Flatter _Shift down -

- The consumption function shows the relationship between consumption spending and - The slope of the consumption function is the - Changes in consumption can be predicted by multiplying the change in * Bank Choice -Marginal propensity to consumer -disposable income If the MPC=0.80MPC=0.80 and disposable income increases by $1000$1000, then consumption will increase by what amount? Assume that there is no multiplier effect.

-disposable income -marginal propensity to consume -disposable income -marginal propensity to consume -800

Label each description with the appropriate term. Any label can be used more than once, but each description requires only one term. 1. The reward a saver expects on loaned funds: 2. The cost a borrower pays for loaned funds: 3. The difference between the real interest rate and the nominal interest rate: 4. The percentage of disposable income that is kept as personal savings: 5. The term that indicates why most people need to be incentivized to save: 6.The result of consumption exceeding income over a particular period: Answer Bank Saving rates inflation rates dissaving interest rates time preferences

1. interest rate 2. interest rate 3. inflation rate 4. saving rate 5. time preferences 6. dissaving

The Wilson family has a disposable income of $90,000 annually. Currently, the Wilson family spends 80% of new disposable income on consumption. Assume that their marginal propensity to consume is 0.8 and that their autonomous consumption spending is equal to $10,000. What is the amount of the Wilson family's annual consumer spending?

10,000 + (0.8 x 90,000) = 82,000

Suppose that the least amount of goods and services that Zeke will consume in a year is $40,000.$40,000. Zeke tends to save $0.30$0.30 of every dollar of disposable income that he makes. Use the given line to graph Zeke's consumption function for disposable income levels between $0$0 and $200,000.$200,000. Move each endpoint to the appropriate spot on the graph.

Bottom Endpoint: (0, 40) Top Endpoint: ( 200, 180)

The table shows the salary of a worker in India. The marginal propensity to consume (MPC) is: Year Real Income Real Consumption 2015 100,000 53,000 2016 105,000 55,650 2017 107,000 56,710 * Consumption / income A. 0.47. B. 1.89. C. 0.53. D. 0.68.

C. 0.53.

Select each statement that is true about simple and compound interest. A. Interest that compounds daily will always produce a better return on a given investment than interest that compounds annually with the same interest rate. B. Compound interest will always produce a better return on an investment than simple interest. C. Compound interest is paid on both the principal and the interest that was earned previously. D. Simple interest is paid on interest that was earned earlier in the investment.

C. Compound interest is paid on both the principal and the interest that was earned previously. B. Compound interest will always produce a better return on an investment than simple interest.

This question has two parts and concerns the permanent income hypothesis. a. Which statement best defines the permanent income hypothesis? A. Consumer spending is proportional to the ratio of people in stable full‑time employment- that is, with "permanent" income-and people in unstable part‑time employment-that is, with "temporary" income. B. Consumer spending depends on the level of disposable income that people expect to have over the course of their lifetime. C. Consumer spending depends on both the income and wealth of people in the economy. D. When in a recession, although current consumer spending can be observed, future consumer spending cannot be predicted due to an unknown number of people leaving their temporary recession jobs for higher‑paying, permanent jobs that better fit their skills. b. According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending, and which would result in no change in consumer spending? I. A new technology is discovered that promises an increase in cheap computing power in the future. As a result, expected income rises. Consumer spending will ii. Firms announce that they expect more layoffs next year than were previously anticipated. Expectations for the rest of this year, however, do not change. Consumer spending will iii. The government unexpectedly gives each person in the economy an extra $1,000 tax refund. However, everyone in the economy expects that exactly this amount, in present value, will have to be paid back in the future in the form of taxes. Consumer spending will iv. Researchers announce that they anticipate a breakthrough in the effectiveness of training for low‑skill workers within the next decade. The new training method will allow these low‑skill workers to quickly and cheaply acquire valuable skills that will then place them in better‑paying jobs. Consumer spending will -immediately increase -no change -immediately decrease

C. Consumer spending depends on both the income and wealth of people in the economy. b. Immediately increase immediately decrease no change immediately increase

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

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

a. Autonomous consumption is A. consumption undertaken by society as a whole rather than particular individuals. B. consumption by firms rather than households. C. consumption that is unrelated to disposable income. D. consumption that is a function of disposable income. b. In the accompanying diagram, autonomous consumption is -20 -30 -40 c. Shift the consumption curve to show an autonomous decrease in consumption of 10.

C. consumption that is unrelated to disposable income. -40 Income = Expenditure Bottom endpoint: 0,0 Top Endpoint: (90, 90) Consumption Bottom Endpoint ( 0, 30) Top Endpoint ( 90, 60)

Credit constraints limit the: A. amount of saving that people can make. B. amount of money that banks can accept as deposits. C. interest rates that banks can charge. D. amount of money that people can borrow.

D. amount of money that people can borrow.

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

D. at its potential.

If the government lowers the corporate tax rate, then the ______ loanable funds shifts to the _______ . A. supply of; left B. demand for; left C. supply of; right D. demand for; right

D. demand for; right

Which of the statement best describes how problems in the loanable funds market affected production during the Great Recession? A. The demand for loanable funds shifted to the left, resulting in a shift of the long run aggregate supply curve also to the left, reducing output. B. There is no relationship between the Great Recession and the loanable funds market. C. The supply for loanable funds shifted to the right, increasing interest rates and shifting the aggregate demand curve to the left, reducing output. D. The equilibrium interest rate in the loanable funds market was too high, so firms could not afford to borrow enough to fund production. E. Banks held assets that dropped severely in value, and they were no longer willing to lend the cash they had, reducing loans to firms, lowering production.

E. Banks held assets that dropped severely in value, and they were no longer willing to lend the cash they had, reducing loans to firms, lowering production.

Suppose that the least amount of goods and services that Scott will consume in a year is $40,000. Scott saves $0.30of every dollar of income that he makes. Use the given line to graph Scott's consumption function for income levels between $0 and $200,000. Move each endpoint to the appropriate spot on the graph.

First endpoints bottom one (0, 40) Second Endpoint Top one (200, 180)

Suppose that there are three types of people: big spenders, thrifty spenders, and big savers. In one country, there are 500,000 big spenders, 1,000,000 thrifty spenders, and 500,000 big savers. The spending habits of each person within a group are the same. The table contains the spending habits of an individual in each group. Disposable Income $0 $40,000 Amount consumed by a big spender 30,000 60,000 Amount consumed by a thrifty spender $20,000 $40,000 Amount consumed by a big saver $10,000 $20,000 -What is a big spender's marginal propensity to consume? * consumption / income MPC: -What is a thrifty spender's marginal propensity to consume? Marginal Propensity to consume: -What is a big saver's marginal propensity to consume? marginal propensity to consume: -Recalling the number of people of each type in the country, draw the aggregate consumption function on the graph -What is the value of the multiplier for this economy? *1/ (1-0.5(which is MPC)) value of the multiplier:

MPC: 0.75 MPC: 0.5 MPC: 0.25 Bottom endpoint (0,40) Top Endpoint (200, 140) Value of the multiplier: 2