Economics Homework & Quizzes — Exam 2 (Part 2)

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The financial system of a country is important for long-run economic growth because
A. most firms rely on their own retained earnings and do not use the financial system
B. firms need the financial system to acquire funds from households
C. people can increase their wealth very quickly under a healthy financial system
D. firms that use the financial systems predominantly are being reckless

B. firms need the financial system to acquire funds from households

It is essential for economic growth that firms have access to adequate sources of funds, because otherwise firms will not be

able to invest in capital, adopt new technologies, and expand

The total value of saving in the economy must equal the total value of investment. Assume a closed economy, where:
I = Investment
S = Sprivate + Spublic
Sprivate = Private Saving
Spublic = Public Saving
C = Consumption Expenditure
G=Government Expenditure
Y= GDP
TR=Government Transfers
Which one of he following expressions shows the investment-saving equality?
A. S=Y-C-G
B. I=Y+TR-C-G
C. I=Y+TR-C-T
D. S=Y+T-TR-G

A. S=Y-C-G

Which of the following is not a "loanable fund"?
A. Mutual fund shares
B. Real estate
C. Bonds
D. Bank certificates of deposit

B. Real estate

Households supply loanable funds because of the
A. rent income they receive as resource owner
B. profit income earned from running a money-lending business
C. interest income received from the borrowers
D. wage income earned from working in the financial markets

C. interest income received from the borrowers

Businesses demand loanable funds because
A. loanable fund interest rates are always lower than the rate of return n their new investments
B. firms need to borrow funds for new projects, such as building new factories or carrying out new research projects
C. firms need to borrow funds so that they can pay the wage costs and other recurring expenses of the business
D. households charge a much higher rate of interest than the going rate of interest in the loanable funds market

B. firms need to borrow funds for new projects, such as building new factories or carrying out new research projects

When the budget deficit increases,
A. both savings and investment increase
B. both saving and investment decrease
C. saving increases and investment decreases
D. saving decreases while investment increases

B. both saving and investment decrease

Consider the following data for a closed economy:
Y= $15 trillion
C= $7 trillion
I= $3 trilion
TR= $1 trillion
T= $4 trillion
Use the data to calculate the following

A. Private saving: $ ___ trillion

5

Consider the following data for a closed economy:
Y= $15 trillion
C= $7 trillion
I= $3 trilion
TR= $1 trillion
T= $4 trillion
Use the data to calculate the following

B. Public saving: $ ____ trillion

-2

Consider the following data for a closed economy:
Y= $15 trillion
C= $7 trillion
I= $3 trilion
TR= $1 trillion
T= $4 trillion
Use the data to calculate the following

C. Government purchases: $ ____ trilion

5

Consider the following data for a closed economy:
Y= $15 trillion
C= $7 trillion
I= $3 trilion
TR= $1 trillion
T= $4 trillion
Use the data to calculate the following

D. The government budget balance is $ _____ trillion and as a result the government budget is in __________

-2 deficit

This Making the Connection claims that Ebenezer Scrooge promoted economic growth more when he was a miser and saved most of his income than when he reformed and began spending freely, Suppose, though, that most of his spending after he reformed involved buying food for the Cratchits and other poor families, Many economists believe there is a close connection between how much very poor people eat and how much they are able to work and how productive they are while working.

Does this fact affect the conclusion about whether the pre-reform or post-reform Scrooge has a more positive impact on economic growth?

Uncertain

Firms that act as financial intermediaries match households that have excess funds with firms that want to borrow funds. What other key services does the financial system provide to savers and lenders?
A. offers fixed and stable interest rates
B. allows savers to spread their money among many financial investments
C. collects and communicates information about borrowers to savers
D. insures assets up to $500,000
E. provides an easy method of exchanging a financial security for money
F. insures investments against decreasing in value

B. allows savers to spread their money among many financial investments C. collects and communicates information about borrowers to savers E. provides an easy method of exchanging a financial security for money

In a closed economy, the values for GDP, consumption spending, investment spending, transfer payments, and taxes are as follows:
Y = $13 trillion
C = $10 trillion
I = $4 trillion
TR= $3 trillion
T = $4 trillion

Using the information above, what is the value of private saving and public saving?
A. private saving equals $2 trillion and public saving equal $2 trillion
B. private saving equals $10 trillion and public saving equals $4 trillion
C. private saving equals $2 trillion and public saving equals $3 trillion
D. private saving equals $4 trillion and public saving equals $10 trillion

A. private saving equals $2 trillion and public saving equal $2 trillion

A country’s rate of economic growth is important because
A. an economy that grows to slowly fails to raise the living standards of its citizens
B. a slowly growing economy always invades its neighboring countries in search of wealth
C. an economy that grows too slowly is always involved in human rights violations
D. a slowly growing economy experiences very slow growth in population

A. an economy that grows to slowly fails to raise the living standards of its citizens

Recently, economists Carol Shiue and Wolfgang Keller of the University of Texas at Austin published a study of "market efficiency" in the eighteenth century in England, other European countries, and China. If the markets in a country are efficient, a product should have the same price wherever in the country it is sold, allowing for the effect of transportation costs. If prices are not the same in two areas within a country, it is possible to make profits by buying the product where its price is low and reselling it where its prices is high. This trading will drive prices to equality, Trade is most likely to occur, however, if entrepreneurs feel confident that their gains will not be seized by the government and that contracts to buy and sell can be enforced in the courts. Therefore, the more efficient a country’s markets were, the more its institutions would have favored long-run growth. Shuie and Keller found that in 1770, the efficiency of markets in England was significantly greater than the efficiency of markets elsewhere in Europe and in China.

This finding supports Douglas North’s argument concerning why the Industrial Revolution occurred in England because
A. the British monarchy did not trust the entrepreneurs and imposed heavy taxes on them
B. the efficient market system thrived due to a stable British parliament and an independent court system
C. the British courts failed miserably in protecting wealth and private property rights
D. the British government seized property and confiscated wealth, making it very risky for businesses

B. the efficient market system thrived due to a stable British parliament and an independent court system

Why do economic growth rates matter?

A. high levels of sustained economic growth reduce infant mortality
B. high growth rates coincide with improved standards
C. when a country sustains high growth rates, life expectancy at birth increases
D. all of the above
E. A and C only

D. all of the above

Which of the following countries is NOT currently considered an industrial country?

A. Spain
B. New Zealand
C. Canada
D. Brazil

D. Brazil

Prior to 1750 and the onset of Industrial Revolution, very little economic growth occurred in the world. What marks the beginning of the Industrial Revolution?

A. When Eli Whitney invented the cotton gin, textile production increased world-wide.
B. Adding mechanical power to the production process increased the quantity of goods each worker could produce
C. The newly-discovered spice trade routes opened up new markets for goods and increased demand for them
D. The smelting of iron ore increased the use of durable, metal tools which made farming more productive

B. Adding mechanical power to the production process increased the quantity of goods each worker could produce

Suppose two countries, Country A and Country B, have a similar real GSP per capita. Country A has an average economic growth rate of 2% and Country B has an average economic growth rate of 3.3%. In the long run, what can we predict about living standards in the two countries?
A. The countries will experience similar increases in their living standards
B. Country B’s living standards will increase much more rapidly in the long run
C. Country A’s living standards will increase much more rapidly in the long run
D Growth rates are not related to living standards

B. Country B’s living standards will increase much more rapidly in the long run

The most important factor in explaining increases in real GDP per capita in the long run is _____________________________

increases in productivity

Suppose you had a choice between living in the United States in 1900 with an income of $1,029,000 per year or int he United States in 2010 with an increase of $50,000 per year. Assume the incomes for both years are measured in 2000 dollars

In which year would you have the highest real income?
In which year would you have the better standard of living?

1900 2010

Think about the relationship between economic prosperity and life expectancy

The size of the health care sector in a less developed country is ______________ the size of the health care sector of a developed country.

In particular, the size of the health care sector in a developing country
A. falls since the developing country depends more on the advanced countries for their medical needs
B. growth with economic prosperity as life expectancy increases
C. grows as the government provides more subsidy
D. falls with economic prosperity as life expectancy increases

smaller than B. growth with economic prosperity as life expectancy increases

If real GDP equals $11,567 billion in 2006 and $11,916 billion in 2007, and assuming population is constant over those two years, how many years will it take for real GDP per capita to double? ________ years

23.2

The financial system–either financial markets or financial intermediaries–provides savers and borrowers with all of the following except:

A. the financial system provides security to savers by warranting that their funds are fully insured against loss
B. the financial system provides liquidity to savers by giving them the opportunity to buy and sell their financial securities
C. the financial system provides savers with facts and information about borrowers and about expected returns on the financial investments
D. the financial system provides risk sharing to savers by giving them the opportunity to diversify their funds among different investment choices

A. the financial system provides security to savers by warranting that their funds are fully insured against loss

Suppose you can receive an interest rate of 10 percent on a certificate of deposit (CD) at a bank that is charging borrowers 20 percent on new cars loans

Which one of the following choices does not explain why you might be unwilling to loan money directly to someone who wants to borrow from you to buy a new car, even if that person offers to pay you an interest rate higher than 10 percent?
A. your risk will be higher when the funds are not diversified among different investment alternatives
B. your funds would not be liquid
C. you have to spend time and incur expense to determine whether or not the borrower is likely to repay the loan
D. you are better at assessing risks than the usual financial institutions

D. you are better at assessing risks than the usual financial institutions

What is the general relationship between the business cycle and unemployment and inflation?

A. during a recession, unemployment and inflation increase
B. during an expansion, unemployment and inflation increase
C. during and expansion, unemployment falls and inflation increase
D. during a recession, unemployment and inflation decrease

C. during and expansion, unemployment falls and inflation increase

At the beginning of an expansion, which of the following is most likely to be true?

A. nominal wages increase
B. output decreases, and employment falls
C. the price level decreases
D. firms increase spending on capital goods

D. firms increase spending on capital goods

Which of the following is a true statement about long-run economic growth?

A. in general, low-income countries are catching up with high-income countries
B. small differences in economic growth rates result in big differences in living standards over time
C. world economic growth has continued at a steady pace since medieval times
D. more countries have per capita incomes greater than $20,000 than have per capita incomes less than $2,500

B. small differences in economic growth rates result in big differences in living standards over time

Economic growth will

A. slow down or stop if more capital per hour is used because of diminishing returns to capital
B. not be sustained if developing countries stop accumulating capital because of diminishing returns to capital
C. be faster if more capital per hour is used because of increasing returns to capital
D. not be affected because the key to economic growth is capital accumulation whether there are diminishing returns or not

A. slow down or stop if more capital per hour is used because of diminishing returns to capital

Some economics are able to maintain high growth rates despite diminishing returns to capital by using

A. better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns
B. a labor-intensive technology because labor, unlike capital, is not subject to diminishing returns
C. a larger proportion of capital, thereby making their production capital intensive, so the sheer volume of capital protects them from diminishing return to capital
D. a newer production method that, if used properly, produces increasing returns to capital

A. better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns

Henry Harteveldt, travel analyst t tech-consulting firm Forrester Research, says checking in a passenger at a kiosk costs an airline just 14 cents on average, compared with $3.02 using an agent. From 2000 to 2005, the share of passengers using such a kiosk at least once leapt from close to zero to 63%. But in 2006, that figure merely crept up to 66%

Assuming that Hartveldt’s data are correct, the implications of his analysis for future increases in labor productivity at the airlines are

A. probably higher, since high rates of productivity growth result from a better educated labor force and not from machines
B. probably the same, as the U.S. economy is still using information technology
C. probably lower, since the U.S. economy may not sustain such high rates of productivity growth that resulted from the growth of information technology
D. probably higher, since the U.S. economy is maintaining the high rates of productivity growth that resulted from the growth of information technology

C. probably lower, since the U.S. economy may not sustain such high rates of productivity growth that resulted from the growth of information technology

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