Macroeconomics (Fall 2016) Quiz #2 Study Guide Note: Below is a list of study questions for the upcoming Quiz #2 (Tue., Nov 1). The quiz covers Chapter 5, Chapter 6, and Chapter 8 and supplementary handouts/materials presented in class/website and during in-class participation exercises. Please answer the questions (all of them or as many as you can) as a way of preparing for your quiz. Many of the study questions here will appear in the quiz. (Some of them could also appear in a slightly different format than shown here.) Since you don t know which ones will be in the quiz, it would be a good idea to answer all of them. Please don t ask me for the answers although you can ask me for clarification of the questions. Also, there could be some other questions on the quiz that are not found on this list. The best way to use this study guide is to try to answer all the questions as best as you can on your own and then compare your answers with those of your classmates. Then discuss why your answers are different so that you learn the reason why. Form a study group if you can. Prof. Rudy Ledesma. Circle the letter of the best (only one) answer. 1.At the broadest level, the financial system moves the economy s scarce resources from a. the rich to the poor. b. financial institutions to business firms and government. c. households to financial institutions. d. savers to borrowers. 2.The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called a. credit risk. b. interest risk. c. term risk. d. private risk. 3. The economy s two most important financial markets are a. the investment market and the saving market. b. the bond market and the stock market. c. banks and the stock market. d. financial markets and financial institutions. 4. Two of the economy s most important financial intermediaries are a. suppliers of funds and demanders of funds. b. banks and the bond market. c. the stock market and the bond market. d. banks and mutual funds. 5. A bond is a a. financial intermediary. b. certificate of indebtedness. c. certificate of partial ownership in an enterprise. d. None of the above is correct. 6. If Research in Motion, Inc. sells a bond it is a. borrowing directly from the public. b. borrowing indirectly from the public. c. lending directly to the public. d. lending indirectly to the public. 7. Stock represents a. a claim to a share of the profits of a firm. b. ownership in a firm. c. equity finance. d. All of the above are correct 8. The primary advantage of mutual funds is that they a. always make a return that "beats the market." b. allow people with small amounts of money to diversify. c. provide customers with a medium of exchange. 9. You observe a closed economy that has a government deficit and positive investment. Which of the following is correct? a. Private and public saving are both positive. b. Private saving is positive; public saving is negative. c. Private saving is negative; public saving is positive. d. Both private saving and public saving are negative. 1
10. If national saving in a closed economy is greater than zero, which of the following must be true? a. Either public saving or private saving must be greater than zero. b. Investment is positive. c. 11. In a closed economy, what does (T - G) represent? a. national saving b. investment c. private saving d. public saving 12. In a closed economy, what does (Y - T - C) represent? a. national saving b. government tax revenue c. public saving d. private saving 13. Net exports must equal zero for any economy a. that is closed. b. for which Y = C + I + G. c. for which S = Y - C - G. 14. Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, consumption equals 7,500 and government purchases equal 2,000. What are private saving, public saving, and national saving? a. 1,500, 1,000, and 500, respectively b. 1,000, 500, and 1,500, respectively c. 500, 1,500, and 1,000, respectively d. None of the above is correct. 15. For an imaginary closed economy, T = $5,000; S = $11,000; C = $50,000; and the government is running a budget deficit of $1,000. Then a. private saving = $10,000 and GDP = $54,000. b. private saving = $10,000 and GDP = $58,000. c. private saving = $12,000 and GDP = $67,000. d. private saving = $12,000 and GDP = $72,000. 16. The source of the supply of loanable funds a. is saving and the source of demand for loanable funds is investment. b. is investment and the source of demand for loanable funds is saving. c. and the demand for loanable funds is saving. d. and the demand for loanable funds is investment. 17. What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income (which encourages savings)? a. There would be an increase in the amount of loanable funds borrowed. b. There would be a reduction in the amount of loanable funds borrowed. c. There would be no change in the amount of loanable funds borrowed. d. The change in loanable funds is uncertain. 18. Suppose Congress or the government institutes an investment tax credit. What would happen in the market for loanable funds? a. The interest rate and investment would fall. b. The interest rate and investment would rise. c. The interest rate would rise and investment would fall. d. None of the above is necessarily correct. 19. Crowding out occurs when investment declines because a. a budget deficit makes interest rates rise. b. a budget deficit makes interest rates fall. c. a budget surplus makes interest rates rise. d. a budget surplus makes interest rates fall. 20. A change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment when a. the demand for loanable funds is more elastic and the supply of loanable funds is more inelastic. b. the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic. c. both the demand for and supply of loanable funds are more elastic. d. both the demand for and supply of loanable funds are more inelastic. 2
21. The inflation rate is calculated a. by determining the change in the price index from the preceding period. b. by adding up the price increases of all goods and services. c. by computing a simple average of the price increases for all goods and services. d. by determining the percentage increase in the price index from the preceding period. 22. If 2004 is the base year, then the inflation rate for 2005 equals a. b. c. d. 23. If the consumer price index was 88 in 2009, 95 in 2010, and 100 in 2011, then the base year must be a. 2009. b. 2010. c. 2011. d. The base year cannot be determined from the given information. 24. The price index was 120 in 2006 and 127.2 in 2007. What was the inflation rate? a. 5.7 percent b. 6.0 percent c. 7.2 percent d. 27.2 percent Table 6-1 The table below pertains to Pieway, an economy in which the typical consumer s basket consists of 10 bushels of peaches and 15 bushels of pecans. Year Price of Peaches Price of Pecans 2005 $11 per bushel $6 per bushel 2006 $9 per bushel $10 per bushel 25. Refer to Table 6-1. If 2005 is the base year, then the CPI for 2006 was a. 83.3. b. 100. c. 120. d. 240. 26. One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called a. price-change neglect. b. unmeasured quality change. c. substitution bias. d. relative bias. 27. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI a. fails to account for consumer spending on housing. b. accounts only for consumer spending on food, clothing, and energy. c. fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller percentages of their incomes on other goods. d. fails to account for the introduction of new goods. 28. The CPI and the GDP deflator a. generally move together. b. generally show different patterns of movement. c. always show identical changes. d. always show different patterns of movement. 3
29. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 214.5 for 2009. Ruth's 1931 salary was equivalent to a 2009 salary of about a. $5,874. b. $822,566. c. $1,128,947. d. $13,560,020. 30. If the nominal interest rate is 6 percent and the rate of inflation is 4 percent, then the real interest rate is a. -4 percent. b. 2 percent. c. 4 percent. d. 8 percent. 31. In a simple circular-flow diagram, firms use the money they get from a sale to a. pay wages to workers. b. pay rent to landlords. c. pay profit to the firms owners. 32. GDP is defined as the a. value of all goods and services produced within a country in a given period of time. b. value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. c. value of all final goods and services produced within a country in a given period of time. d. value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. 33. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these two practices, which of the following statements is correct? a. Only Ralph s payments are included in GDP. b. Ralph s payments as well as the estimated value of Mike s mowing services are included in GDP. c. Neither Ralph s payments nor the estimated value of Mike's mowing services is included in GDP. d. Ralph s payments are included in GDP, while the estimated value of Mike s mowing services is included in GDP only if Mike voluntarily provides his estimate of that value to the government. 34. Tim mows the yard for his neighbors. He spends $1 on gas and charges them $20 for each lawn he mows. What s the total contribution to GDP each time Tim mows a yard? a. $1 b. $19 c. $20 d. $21 35. Which of the following transactions would be included in GDP for 2010? a. In February 2010, Amanda sells a 1996 Honda Accord to her friend Isabella. b. In February 2010, Amanda buys a ticket to visit a zoo in Florida. She visits the zoo in April 2011. c. In December 2010, Isabella eats onions that she harvested from her backyard garden in October 2010. 36. A transfer payment is a payment made by a. consumers, but not in exchange for a tangible product. b. firms, but not in exchange for capital equipment. c. foreigners, but not in exchange for a domestically-produced good or service. d. government, but not in exchange for a currently produced good or service. 37. In the economy of Ukzten in 2010, consumption was $500, exports were $200, GDP was $1200, government purchases were $250, and investment was $300. What were Ukzten s imports in 2010? a. -$150 b. -$50 c. $50 d. $150 38. Which of the following is always measured in prices from a base-year? a. both nominal and real GDP b. nominal but not real GDP c. real but not nominal GDP d. neither nominal nor real GDP 4
39. The GDP deflator is the ratio of a. real GDP to nominal GDP multiplied by 100. b. real GDP to the inflation rate multiplied by 100. c. nominal GDP to real GDP multiplied by 100. d. nominal GDP to the inflation rate multiplied by 100. 40. A country s real GDP rose from 500 to 550 while its nominal GDP rose from 600 to 770. What was this country s inflation rate? a. 16.7% b. 20% c. -14.3% d. -20% Table 5-7 The table below contains data for the country of Togogo. The base year is 1974. Year Nominal GDP GDP Deflator 1974 $2000 100 1975 $3000 120 1976 $3750 150 1977 $6000 200 41. Refer to Table 5-7. From 1975 to 1976, a. inflation was 25% and output did not grow. b. inflation was 25% and output grew. c. inflation was 50% and output did not grow. d. inflation was 50% and output grew. 5