Econ 211 Exam 3 Mann UNL

The convergence hypothesis helps explain why

the income of high-income and lower-income countries get closer.

The economy has grown by 4% per year over the past 30 years. During the same period, the labor force has grown by 1% per year and the quantity of physical capital has grown by 5% per year. Each 1% increase in physical capital per worker is estimated to increase productivity by .4%. Assume that the human capital has not changed during the past 30 years. What is the growth rate of productivity?

3%

(Growth rate of productivity = Economy's growth rate - labor force growth rate)

The general increase in wages will result primarily in the

short run aggregate supply curve shifting to the left

Suppose that Maria wins a $7 million lottery and is trying to decide whether to take $2 million all at once or $7 million over 20 years. One bit of information Maria would need to know is what the prevailing _________ would be over the next 20 years.

interest rate

Planned investment spending is

negatively related to the interest rate

In an income-expenditure equilibrium

there is no unplanned inventory investment

Compared with bonds, stocks generally

provide a higher return and carry a higher financial risk

Economists say that long-run economic growth is almost entirely due to:

rising productivity

The short run in macroeconomic analysis is a period:

in which many production costs can be taken as fixed.

In a closed economy, the savings-investment spending identity is:

I = GDP - C - G

(C = consumer spending, G = government spending, I = investments including non-residential investments, residential investments, and change in inventories)

Physical capital includes:

machine tools

If private savings increase, the _________ loanable funds will _________, interest rates will _________, and the amount of borrowing will _________.

supply of, increase; decrease, increase

South Korea has real GDP per capita of $25,000, while England has real GDP per capita of $50,000. If real GDP per capita in South Korea grows at 7% and England's real GDP per capita grows at 3.5@, how long will it take for real GDP per capita in the two nations to converge?

20 years.

(Rule of 70, if growth rate is 2% gdp per capital will double in 35 years)

The budget balance equals

taxes minus government spending

The larger the marginal propensity to consume,

the larger the multiplier

Investment in human capital causes

an upward shift of the aggregate production function

If real GDP exceeds aggregate expenditures, the economy will

contract, reducing employment

The Efficient Market Hypothesis states that:

at any time stock prices are fairly valued, reflecting all available information

If disposable income increases:

there will be a rightward movement along the consumption function

The interest rate effect is the tendency for changes in the price level to affect:

interest rates, and thus the quantity of investment spending and consumption.

Suppose that consumer expectations improve. The aggregate demand curve will undergo a:

shift to the right

If Mega Corp. borrows $9,000 and agrees to pay the lender $10,000 in one year, the annual interest rate on the loan is approximately:

11.1%

r = (1/t)(A/P - 1)

Stagflation is a combination of:

increasing unemployment and increasing inflation

Among the public goods important for economic growth is/are:

political stability

Aggregate demand will NOT increase when:

interest rates increase

Aggregate demand increases when

government purchases of goods rise, when household wealth rises but prices are constant, and when the quantity of money increases

Which factor will NOT increase labor's productivity?

population growth

These factors increase labor's productivity:

technology, education, and new capital

The short-run aggregate supply curve slopes upward because a

higher aggregate price level leads to higher output, since most production costs are fixed in the short run.

Inventory investment is:

a part of unplanned investment spending and may either be positive or negative.

A recessionary gap will be eliminated because there is:

downward pressure on wages, shifting the short-run aggregate supply curve rightward

A negative demand shock can cause:

a recessionary gap

An inflationary gap will be eliminated because there is:

upward pressure on wages, shifting the short-run aggregate supply curve leftward

Inflationary and recessionary gaps are closed by

self-correcting adjustments that shift the short-run aggregate supply curve

According to the accelerator principle,

higher growth rate of real GDP leads to higher planned investment spending

A recessionary gap occurs if:

actual real GDP is less than potential output

In a simple, closed economy (no government or foreign sector), if the marginal propensity to save is 0.2, the marginal propensity to consume must be

.8 (MPS + MPC = 1)

Producing a short-run level of aggregate output that exceeds the economy's potential output results in

an upward adjustment in nominal wages

Planned investment spending does NOT depend on:

real GDP

The term human capital describes improvement

in a worker's skills made possible by education, training, and knowledge

In 2005, Airbus Co. purchased raw materials worth $400 million to manufacture airplanes for a total value of $900 million. in that year, Airbus Co. sold airplanes for a total value of $800 million. During 2005, Airbus Co. registered inventory investment of:

$100 million (inventory investment = value of planes manufactured - value of planes sold)

If overall inventories rise in a month because of unplanned inventory investment, it is most likely that

the economy is slowing down

Infrastructure includes:

the water supply system

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. How much is private saving?

3.5 trillion

(GDP - Consumption - Taxes = S(p))

An improvement in the business outlook of firms is a type of

positive demand shock and therefore shifts the aggregate demand curve to the right.

Which asset is the least liquid?

ownership of 1/4 of a privately held company

What asset is the most liquid?

cash

If other things are equal, an increase in aggregate (total) wealth will

increase autonomous consumption and shift the consumption function upwards

A decrease in aggregate demand will generate

a decrease in both the real GDP and the price level in the short run

Productivity is declining when:

population growth exceeds real GDP growth.

The most important determinant of consumer spending is:

disposable income

Potential output is the level of real GDP that

the economy would produce if all prices, including nominal wages, were fully flexible.

If real GDP doubles in 35 years, its average annual growth rate is approximately:

2%

Which factor is NOT a determinant of consumer spending?

investment spending

In the long run, nominal wages are

flexible, because contracts and informal agreements are renegotiated in the long run.

If MPC = 0.9, the multiplier is

10

(1/(1-MPC))

1/.1 = 10

Capital inflow is

the net inflow of funds into a country

Crowding out means that

private investment decreases when the government borrows money.

If the government increases its borrowing, then at every interest rate

there is an additional demand for funds

The rule of 70 indicates that a 6% annual increase in the level of real GDP would lead to the output doubling in approximately

12 years

According to the wealth effect, when prices decrease,

the purchasing power of assets increases and consumer spending also increases

When the price level decreases, firms in perfectly competitive markets will

decrease output

When the price level increases, firms in perfectly competitive markets will

increase output

The short-run aggregate supply curve may shift to the right if

productivity increases

Total factor productivity is

the amount of output produced from a given amount of factor inputs

The economy has grown by 4% per year over the past 30 years. During the same period, the labor force has grown by 1% per year and the quantity of physical capital has grown by 5% per year. Each 1% increase in physical capital per worker is estimated to increase productivity by .4%. Assume that the human capital has not changed during the past 30 years. What is the growth rate of physical capital?

4%

(Growth rate of physical capital = growth of physical capital - growth of labor force)

If the multiplier is 4, the marginal propensity to save is

.25

(MPS = 1/multiplier)