Exam 3

Question 1

The key indicator of a country’s living standard and economic well-being is

Answer 1

real GDP per person.

Question 2

Growth in real GDP per capita has been more rapid since the

Answer 2

mid-nineteenth century than before.

Question 3

The rise in average living standards experienced by most industrialized countries has been more rapid since 1950

Answer 3

than before 1950.

Question 4

Small differences in annual growth rates of real GDP generate large differences in real GDP over time because

Answer 4

of the power of compound interest.

Question 5

If an economy maintains a small rate of growth for a long period of time, then the size of the economy can

Answer 5

increase by a large amount.

Question 6

Government policies that increase the long-term economic growth rate by a small amount result in

Answer 6

large increases in average living standards.

Question 7

The key variable in determining changes in a country’s standard of living is the,

Answer 7

long-run rate of economic growth.

Question 8

the real GDP per person is

Answer 8

Average labor productivity times the proportion of the population employed equals

Question 9

Growth of real GDP per person is totally determined by

Answer 9

the growth of average labor productivity and the proportion of the population employed.

Question 10

Real GDP per person can increase if

Answer 10

the share of population employed and/or average labor productivity increases

Question 11

If the share of population employed in two countries is the same, average living standards will be

Answer 11

higher in the country with higher average labor productivity.

Question 12

If average labor productivity in two countries is the same, average living standards will be lower in the country with

Answer 12

the lower share of population employed.

Question 13

If average labor productivity in two countries is the same, average living standards will be higher in the country with the higher share

Answer 13

of population employed.

Question 14

One factor that contributed to the growth in the share of population employed in the United States between 1960 and 2008

Answer 14

was increased female labor force participation

Question 15

In the long run, increases in output per person arise primarily from

Answer 15

increases in average labor productivity.

Question 16

Human capital is the

Answer 16

talents, training, and education of workers.

Question 17

Workers should invest in additional human capital as long as

Answer 17

the marginal benefit exceeds the marginal cost.

Question 18

A firm pays for workers to take college classes,is an example of an

Answer 18

investment in human capital.

Question 19

The prediction that workers obtain additional training only when the rewards from the training are expected to exceed

Answer 19

the costs of the training (including the opportunity costs) is based on the cost-benefit principle.

Question 20

Getting a college degree is an example of

Answer 20

investing in human capital.

Question 21

When a firm builds a new factory,

Answer 21

this is an example of an investment in physical capital.

Question 22

An example of an investment in physical capital is

Answer 22

when a firm purchases new equipment for a manufacturing process.

Question 23

Physical capital is the

Answer 23

factories and machinery used to produce other goods and services.

Question 24

Increasing the capital available to the workforce

Answer 24

holding other factors constant, tends to increase total output while increasing average labor productivity.

Question 25

Providing a constant number of workers with additional capital with which to work will increase average

Answer 25

labor productivity at a decreasing rate.

Question 26

Because of diminishing returns to capital, there is a limit to the increases in average labor productivity

Answer 26

that can be gained from additional or improved physical capital.

Question 27

Usually an abundance of natural resources increases

Answer 27

average labor productivity.

Question 28

Most economists agree that technological advances are the single most important

Answer 28

source of productivity improvements.

Question 29

The introduction of new technologies to production is the most important source of

Answer 29

productivity improvement.

Question 30

Entrepreneurs are people who create

Answer 30

new economic enterprises.

Question 31

Business managers are people who

Answer 31

run businesses on a day-to-day basis.

Question 32

Entrepreneurs start new economic enterprises, while managers run

Answer 32

the enterprises on a day-to-day basis.

Question 33

Most political scientists and economists agree that

Answer 33

political instability is detrimental to economic growth.

Question 34

A political system that promotes the free and open exchange of

Answer 34

ideas increases average labor productivity.

Question 35

At the time it collapsed in 1991, the Soviet Union possessed all of the factors that increases in economic growth:

Answer 35

a highly educated worker force, a large stock of capital, and abundant natural resources

Question 36

Governments contribute to increased average labor productivity in each of the following ways by

Answer 36

establishing well-defined property rights, maintaining political stability, and allowing the free and open exchange of ideas.

Question 37

U.S. productivity growth has rebounded since 1995 largely as a result of advances in

Answer 37

information and communication technology.

Question 38

In the Soviet Union, firm managers had little incentive to reduce costs and produce

Answer 38

better products because of the absence of private property rights.

Question 39

An example of a government policy to increase human capital formation is

Answer 39

the provision of publicly-funded education.

Question 40

An example of a government policy to increase physical capital formation is

Answer 40

the construction of an interstate highway system.

Question 41

An example of a government policy to enhance technological progress is

Answer 41

government support for basic research.

Question 42

An example of a government policy to provide a framework within which the private sector can operate productively is

Answer 42

maintaining a well-functioning legal system.

Question 43

The benefits of economic growth are increased output per person, while the costs of economic growth are the consumption

Answer 43

sacrificed in exchange for capital formation.

Question 44

Saving equals

Answer 44

current income minus spending on current needs.

Question 45

The saving rate equals

Answer 45

saving divided by income.

Question 46

Wealth equals assets

Answer 46

minus liabilities.

Question 47

Wealth is the same as

Answer 47

net worth.

Question 48

Assets are anything of

Answer 48

value one owns.

Question 49

Liabilities are

Answer 49

the debts one owes.

Question 50

Saving is a flow and wealth is a

Answer 50

stock.

Question 51

Capital gains are increases in the value of existing assets, and capital losses are

Answer 51

decreases in the value of existing assets.

Question 52

Jay owns a classic car he purchased for $50,000. At a car rally he is offered $75,000 for the car by a knowledgeable classic car enthusiast. Based on this information Jay has experienced

Answer 52

a $25,000 capital gain.

Question 53

The change in wealth during a period equals

Answer 53

saving + capital gains - capital losses.

Question 54

High rates of saving today contribute to a higher standard of

Answer 54

living in the future.

Question 55

National saving is

Answer 55

saving by the entire economy.

Question 56

A nation’s saving equals

Answer 56

its current income less its spending on current needs.

Question 57

Where Y is GDP, C is consumption, I is investment, G is government spending, and there is no international trade, national saving equals

Answer 57

Y - C - G.

Question 58

Net taxes equal the amount that the private sector pays the government minus

Answer 58

the amount the private sector receives from the government.

Question 59

Payments by the government to the public for which the government receives no current goods or services in return

Answer 59

are called transfer payments.

Question 60

Social Security benefits, welfare payments, and farm support payments are examples of

Answer 60

transfer payments.

Question 61

Saving by households and businesses is

Answer 61

called private saving.

Question 62

If net taxes paid by households increase

Answer 62

private saving will decrease.

Question 63

The saving of the government sector is called

Answer 63

public saving.

Question 64

Where Y is GDP, C is consumption, I is investment, G is government spending, T is net taxes, and there is no international trade, public saving equals

Answer 64

T - G.

Question 65

Public saving is identical to the

Answer 65

government budget surplus.

Question 66

The excess of government spending over tax collections is the

Answer 66

government budget deficit.

Question 67

Public saving is negative when there is

Answer 67

a government budget deficit.

Question 68

Private saving is positive when after-tax income of households and businesses is greater than

Answer 68

consumption expenditures.

Question 69

When the government runs a budget deficit, it makes up the difference by issuing

Answer 69

bonds.

Question 70

When the government runs a budget surplus, it uses the funds to

Answer 70

pay down outstanding debt.

Question 71

The three broad reasons for saving, as identified by economists, are reasons relating to

Answer 71

the life-cycle, precaution, and bequests.

Question 72

Saving to meet long-term objectives—such as retirement, college attendance, or to purchase a home,—is called

Answer 72

life-cycle saving.

Question 73

Saving for protection against unexpected setbacks—such as the loss of a job or a medical emergency—is called

Answer 73

precautionary saving.

Question 74

Saving done for the purpose of leaving an inheritance is

Answer 74

called bequest saving.

Question 75

Other things equal, the combination of a high saving rate and a high real interest rate will result in the largest accumulation of

Answer 75

wealth over time.

Question 76

To the extent that households are target savers who save to reach a specific goal, an increase in the interest rate decreases household saving and a decrease in the interest rate increases

Answer 76

household saving.

Question 77

Empirical evidence indicates that higher real interest rates lead to

Answer 77

modest increases in savings.

Question 78

Firms will invest in new equipment whenever the expected cost of the equipment is

Answer 78

less than the expected benefit.

Question 79

The expected benefit of investment equals the value of

Answer 79

the marginal product of capital.

Question 80

The greater the flow of investment spending, the greater the increase in

Answer 80

the stock of capital.

Question 81

The real rate of interest measures the opportunity cost

Answer 81

of capital investment.

Question 82

Holding other factors constant, a decline in the price of new capital goods will

Answer 82

increase investment.

Question 83

In an economy without international trade, investment must equal

Answer 83

national saving.

Question 84

A real interest rate that causes the supply of saving to be equal to the demand for saving is an example of

Answer 84

the equilibrium principle.

Question 85

Crowding out is the tendency for increased government deficits to reduce

Answer 85

investment spending.

Question 86

In the United States saving is allocated to its most productive use by a decentralized

Answer 86

market-oriented financial system.

Question 87

Decentralized market-based financial systems improve the allocation of saving by

Answer 87

providing information and risk-sharing services.

Question 88

The financial system consists of financial intermediaries, such as

Answer 88

commercial banks, and financial markets, such as the stock market.

Question 89

Firms that extend credit to borrowers using funds from savers are called

Answer 89

financial intermediaries.

Question 90

Privately-owned firms that accept deposits from individuals and businesses and use those deposits to make loans are called

Answer 90

commercial banks.

Question 91

Financial intermediaries, such as commercial banks, help borrowers, particularly small borrowers, by providing

Answer 91

credit that might otherwise not be available.

Question 92

Two reasons savers keep deposits at banks are to earn

Answer 92

a return on their savings and to facilitate making payments.

Question 93

A bond is a legal promise to

Answer 93

repay a debt.

Question 94

The principal amount of a bond is

Answer 94

the amount originally lent.

Question 95

The maturation date of a bond is the date at which

Answer 95

the principal will be repaid.

Question 96

The coupon rate is the interest rate promised when a

Answer 96

bond is issued.

Question 97

Shares of stock are claims to

Answer 97

partial ownership of a firm.

Question 98

Stockholders receive returns on their financial investment in the form of

Answer 98

capital gains and dividends.

Question 99

A regular payment received by stockholders for each share they own is called

Answer 99

a dividend.

Question 100

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called

Answer 100

the risk premium.

Question 101

Stock prices increase when expected future dividends increase, interest rates decrease, and/or the risk premium

Answer 101

decreases.

Question 102

The practice of spreading one’s wealth over a variety of different financial investments in order to reduce overall risk is called

Answer 102

diversification.

Question 103

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called

Answer 103

a mutual fund.

Question 104

Money is any asset used to make

Answer 104

purchases.

Question 105

The direct trade of goods and services for other goods and services is called

Answer 105

barter.

Question 106

Money serves as a medium of exchange when it is used to purchase

Answer 106

goods and services.

Question 107

The main disadvantage of using money as a store of value is that other assets pay relatively higher rates of

Answer 107

interest than money.

Question 108

The three functions of money are serving as a

Answer 108

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

Question 109

Money serves as a basic yardstick for measuring economic value (a unit of account), allowing easy comparison of the relative prices of

Answer 109

goods and services.

Question 110

The M1 measure of money consists of the sum of

Answer 110

currency, checking deposits, and travelers’ checks.

Question 111

The M2 measure of money consists of the sum of

Answer 111

M1, savings deposits, small time deposits, and money market mutual funds.

Question 112

M1 differs from M2 in that M2 includes

Answer 112

savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.

Question 113

Savings deposits are excluded from the M1 measure of money and included in the

Answer 113

M2 measure of money.

Question 114

Money market mutual funds are excluded from the M1 measure of money and included in the

Answer 114

M2 measure of money.

Question 115

Credit card balances are not considered to be money primarily because

Answer 115

they are not part of people’s wealth.

Question 116

The amount of money in the United States is determined by the combined behavior of commercial banks and the public, as well as actions of

Answer 116

the Federal Reserve.

Question 117

Assets of the commercial banking system include

Answer 117

reserves and loans.

Question 118

Liabilities of the commercial banking system include

Answer 118

deposits.

Question 119

Bank reserves are cash and similar assets held to meet depositor

Answer 119

withdrawals or payments.

Question 120

100 percent reserve banking refers to a situation in which banks’ reserves equal

Answer 120

100 percent of their deposits.

Question 121

Banks hold reserves to meet depositor withdrawals

Answer 121

and payments.

Question 122

In a fractional-reserve banking system the reserve/deposit ratio equals

Answer 122

less than 100 percent.

Question 123

Commercial banks create new money through multiple rounds of

Answer 123

lending.

Question 124

When a bank makes a loan by crediting the borrower’s checking account balance with an amount equal to the loan money is

Answer 124

created.

Question 125

When the actual reserve/deposit ratio exceeds the desired reserve/deposit ratio banks make more

Answer 125

loans.

Question 126

When an individual deposits currency into a checking account bank reserves increase, which allows

Answer 126

banks to lend more and increases the money supply.

Question 127

If banks’ desired reserve ratio increases from 0.10 to 0.15, the public still desires to hold the same amount of currency, and the Fed takes

Answer 127

no actions, the money supply will decrease.

Question 128

The central bank of the United States is the

Answer 128

Federal Reserve System.

Question 129

he two main responsibilities of the Federal Reserve System are to conduct

Answer 129

monetary policy and to oversee financial markets.

Question 130

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through conducting

Answer 130

open-market operations.

Question 131

The most important tool of monetary policy is

Answer 131

open market operations.

Question 132

In an open-market purchase the Federal Reserve buys government bonds and the supply of bank reserves

Answer 132

increases.

Question 133

In an open-market sale the Federal Reserve sells government bonds and the supply of bank reserves

Answer 133

decreases.

Question 134

When the Fed sells government securities, the banks’ reserves will decrease and lending will contract, causing a decrease in

Answer 134

the money supply.

Question 135

An open-market purchase of government securities by the Fed will increase bank reserves, and the money supply will

Answer 135

increase.

Question 136

A rapidly growing supply of money will lead to

Answer 136

inflation.