econ 2

Flashcard 1: Q: What is inflation? A: Inflation is the growth in the overall level of prices in the economy.

Flashcard 2: Q: What is deflation? A: Deflation occurs when overall prices fall, representing negative inflation.

Flashcard 3: Q: What is the average inflation rate in the U.S. since 1947? A: The average inflation rate in the U.S. since 1947 is about 3.5%.

Flashcard 4: Q: How is inflation measured in the U.S.? A: Inflation is measured using the Consumer Price Index (CPI), which tracks the price of a typical "basket" of goods and services purchased by consumers.

Flashcard 5: Q: What does the Bureau of Labor Statistics (BLS) do to measure inflation? A: The BLS determines the prices of goods and services purchased by a typical consumer and calculates the CPI to measure inflation.

Flashcard 6: Q: What is the Consumer Price Index (CPI)? A: The CPI is a measure of the price level based on the consumption patterns of a typical consumer and is used to calculate inflation.

Flashcard 7: Q: What is the GDP deflator, and how does it differ from the CPI? A: The GDP deflator measures the price level of all final goods and services in GDP, while the CPI only includes goods and services purchased by consumers.

Flashcard 8: Q: What are the three steps to computing a price index? A: 1. Define the basket of goods and services and their weights.
2. Determine the prices of goods and services across periods.
3. Convert to the index number for each period.

Flashcard 9: Q: How do you calculate inflation from the CPI? A: The inflation rate is the percentage change in the CPI from one period to another.

Flashcard 10: Q: What are "shoe-leather costs"? A: Shoe-leather costs refer to the resources wasted when people change their behavior to avoid holding money, such as going to the bank more often.

Flashcard 11: Q: What is "money illusion"? A: Money illusion occurs when people mistake nominal price changes (e.g., inflation) for real price changes and make decisions based on these mistaken perceptions.

Flashcard 12: Q: What are "menu costs"? A: Menu costs refer to the costs businesses incur when they have to change prices, such as printing new menus or adjusting labels.

Flashcard 13: Q: How does inflation create "price confusion"? A: Inflation makes it harder for consumers and businesses to distinguish between price changes caused by inflation and those caused by changes in demand or supply.

Flashcard 14: Q: What are tax distortions caused by inflation? A: Inflation can distort tax calculations, such as capital gains taxes, because tax laws often don't adjust for changes in the price level, leading to overtaxation of gains that are just due to inflation.

Flashcard 15: Q: What is the equation of exchange? A: The equation of exchange is M × V = P × Y, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP.

Flashcard 16: Q: What is the relationship between money supply growth and inflation? A: Inflation typically occurs when the growth rate of the money supply exceeds the growth rate of real GDP.

Flashcard 17: Q: What are two reasons governments might inflate the money supply? A: Governments might inflate the money supply due to large government debts or for short-term economic stimulation.

Flashcard 18: Q: What is hyperinflation? A: Hyperinflation is an extremely high and typically accelerating rate of inflation, often associated with a collapse of a country's currency.

Flashcard 19: Q: What causes inflation according to Milton Friedman? A: Milton Friedman stated that inflation is always and everywhere a monetary phenomenon caused by increases in a nation's money supply relative to real goods and services.

Flashcard 20: Q: How does inflation affect borrowers and lenders? A: Inflation benefits borrowers because they pay back loans with money that is worth less, while it harms lenders who receive less valuable repayments.

Flashcard 21: Q: What is "chained CPI" and how does it differ from traditional CPI? A: Chained CPI is an updated measure of the CPI that accounts for changes in consumer behavior and substitution between goods, providing a more accurate reflection of inflation for the typical consumer.

Flashcard 22: Q: Why is the CPI not always accurate? A: The CPI may overstate inflation due to substitution effects, changes in quality, and the introduction of new goods and services, which may not be reflected in the traditional basket.

Flashcard 23: Q: What are the economic effects of high inflation? A: High inflation leads to uncertainty, resource misallocation, increased costs of doing business, wealth redistribution, and can reduce the purchasing power of money.

Flashcard 24: Q: What can be the long-term impact of inflation on savings and investments? A: Inflation erodes the purchasing power of savings, so to maintain or grow savings, they need to earn a return that exceeds the inflation rate.

Flashcard 25: Q: What is the difference between nominal wages and real wages? A: Nominal wages are wages measured in current dollars, while real wages are adjusted for inflation to reflect the purchasing power of income.

Chapter 9

1. What is the loanable funds market?
The loanable funds market is the market where savers supply funds for loans to borrowers, and it includes institutions like stock exchanges, investment banks, and commercial banks.

2. What is the role of the loanable funds market in an economy?
It facilitates the process where firms and governments obtain financing for their operations through borrowing, supported by household savings.

3. What is the "price" of loanable funds?
The interest rate, which is the price of borrowing or lending funds, expressed as a percentage of the loan amount.

4. How is the interest rate related to the supply of loanable funds?
There is a direct relationship between the interest rate and the quantity of savings; as the interest rate increases, the supply of loanable funds increases.

5. What is the law of supply in the loanable funds market?
The law of supply states that the quantity of savings rises when the interest rate rises, and the quantity of savings falls when the interest rate falls.

6. How is the interest rate related to the demand for loanable funds?
There is an inverse relationship between the interest rate and the quantity of borrowing; as the interest rate rises, the quantity of borrowing falls.

7. What is the law of demand in the loanable funds market?
The law of demand states that the quantity of borrowings falls when the interest rate rises, and the quantity of borrowings rises when the interest rate falls.

8. What is the difference between nominal and real interest rates?
Nominal interest rate is the stated interest rate before inflation is taken into account, while real interest rate is the nominal rate adjusted for inflation.

9. How does inflation affect the real interest rate?
The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. If inflation is equal to the nominal rate, the real interest rate is zero.

10. What is the Fisher equation?
The Fisher equation is used to calculate the real interest rate:
Real Interest Rate = Nominal Interest Rate - Inflation Rate.

11. What factors shift the supply of loanable funds?
Factors include income and wealth, time preferences, and consumption smoothing.

12. How does income and wealth affect the supply of loanable funds?
An increase in income or wealth leads to an increase in savings, which shifts the supply of loanable funds to the right.

13. How do time preferences influence the supply of loanable funds?
People with stronger time preferences (preferring consumption now) tend to save less, reducing the supply of loanable funds. People with weaker time preferences save more, increasing the supply of loanable funds.

14. What is consumption smoothing?
Consumption smoothing refers to the practice of saving and borrowing to maintain a stable standard of living throughout one's life, despite varying income levels at different stages of life.

15. What factors shift the demand for loanable funds?
Factors include productivity of capital, investor confidence, and government borrowing.

16. How does the productivity of capital affect the demand for loanable funds?
When capital becomes more productive, the expected return on investment increases, which increases the demand for loanable funds.

17. What is investor confidence and how does it impact the demand for loanable funds?
Investor confidence refers to the expectations that businesses have about future economic activity. If businesses expect higher sales, they are more likely to borrow, increasing the demand for loanable funds.

18. How does government borrowing affect the demand for loanable funds?
Increases in government borrowing raise the demand for loanable funds, while decreases in government borrowing lower the demand.

19. What happens in the loanable funds market when the demand for loanable funds decreases?
A decrease in demand, such as during an economic slowdown, leads to a lower interest rate and less borrowing.

20. How does the supply of loanable funds change when a large portion of the population starts retiring?
As more people retire and begin dissaving, the supply of loanable funds decreases, which can lead to higher interest rates if demand remains constant.

21. How does a decrease in the supply of loanable funds affect the economy?
A decrease in the supply of loanable funds leads to higher interest rates, making borrowing more expensive, which can reduce investment and economic growth.

22. How can compound interest influence savings for retirement?
Starting to save early allows the savings to grow exponentially over time due to compound interest, maximizing wealth for retirement.

23. What is compound interest?
Compound interest is the process of earning interest on both the original amount saved and on the interest that has already been added to the account.

24. How does starting to save early affect wealth accumulation?
Starting to save early takes advantage of compound interest, leading to significantly higher wealth accumulation over time compared to saving later.

25. How does a decrease in the interest rate affect the supply and demand for loanable funds?
A decrease in interest rates leads to an increase in the demand for loanable funds (as borrowing becomes cheaper) and a decrease in the supply of loanable funds (as saving becomes less rewarding).

Chapter 10

1. How do financial markets help the economy?
Financial markets bring borrowers and lenders together, allowing savers to lend their funds to borrowers in exchange for interest, and borrowers to obtain the necessary funds for investments, thus facilitating economic activity.

2. What are financial intermediaries?
Financial intermediaries are firms that help channel funds from savers to borrowers, such as banks, which accept deposits and extend loans.

3. What is the difference between direct and indirect financing?
Indirect finance involves financial intermediaries like banks that mediate between savers and borrowers, while direct finance occurs when borrowers directly sell securities to savers without intermediaries.

4. What is a security in the context of direct finance?
A security is a tradeable contract that entitles its owner to certain rights, such as shares of stock or bonds, and is used by firms to obtain funds directly from savers.

5. How do financial markets contribute to the macroeconomy?
Financial markets provide funding to firms for producing goods and services, which helps drive economic activity. When financial markets fail, economic contractions can occur, as seen during the Great Recession.

6. What are the key financial tools for the macroeconomy?
The key financial tools include bonds, stocks, treasury securities, home mortgages, and private-sector securities created through securitization.

7. What is a bond?
A bond is a security that represents a debt to be paid by the issuer to the bondholder, and it is a tool of direct finance.

8. What three pieces of information are contained in a bond?
A bond includes the name of the borrower, the repayment date (maturity date), and the amount due at repayment (face value or par value).

9. What is the maturity date of a bond?
The maturity date is the date when the loan repayment for a bond is due and does not change after the bond is issued.

10. What is the face value of a bond?
The face value (par value) of a bond is the amount due at repayment, and it remains fixed when the bond is issued.

11. How is the interest rate of a bond determined?
The interest rate of a bond is calculated based on the rate of return, which compares the bond's price at inception with its face value at maturity.

12. What is the relationship between bond price and interest rate?
There is an inverse relationship between bond price and interest rate: as the price of a bond falls, the interest rate rises, and vice versa.

13. What is default risk in bond markets?
Default risk is the risk that the borrower will fail to pay the face value of a bond on its maturity date, and it affects the price and interest rate of the bond.

14. How does increased default risk affect bond prices?
Increased default risk leads to lower bond prices and higher interest rates, as investors demand higher returns for taking on more risk.

15. What is the role of bond ratings?
Bond ratings, provided by agencies like Standard and Poor’s, Moody’s, and Fitch, assess the default risk of bonds and help investors make informed decisions about the likelihood of a bond issuer defaulting.

16. What are stocks?
Stocks are ownership shares in a firm, and they are a tool of direct finance. Stockholders are partial owners of the firm and have some influence over its operations.

17. Why might a firm sell stocks instead of bonds?
A firm might sell stocks to avoid debt repayments required by bonds, as selling stock does not create an obligation to repay, unlike bond issuance.

18. How do stockholders differ from bondholders?
Stockholders are owners of the firm and can influence its operations, whereas bondholders are creditors who are entitled to fixed repayments but have no control over the firm’s decisions.

19. What is a secondary market in the context of financial securities?
A secondary market is a market where securities are traded after their initial sale, allowing investors to buy and sell securities such as stocks and bonds.

20. How do secondary markets affect security prices?
Secondary markets increase the demand for securities by making them easier to resell, which can raise their prices and lower the cost of borrowing.

21. What are the Dow Jones Industrial Average (DJIA) and the S&P 500?
The DJIA tracks 30 major U.S. companies, the S&P 500 tracks 500 large companies, and both are stock market indices that indicate the overall performance of the stock market.

22. What are treasury securities?
Treasury securities are bonds issued by the U.S. government to finance its national debt. They are considered low-risk because of the government’s low default risk.

23. What role do foreign holders play in U.S. Treasury securities?
Foreign individuals and governments hold a significant portion of U.S. Treasury securities, which helps finance the U.S. national debt.

24. What are home mortgages, and why are they important?
Home mortgages are loans used by individuals to finance home purchases. They have significant macroeconomic importance as they enable homeownership and contribute to the housing market.

25. What is securitization?
Securitization is the process of creating a new security by combining separate loan agreements into a single tradeable asset. It helps increase the availability of loanable funds and lower borrowing costs but can create risks that are hard to assess.

26. What are the benefits and drawbacks of securitization?
Securitization provides more loanable funds and lowers borrowing costs but can create risks if the new securities are difficult to evaluate.

27. What is the long-run return for financial assets like stocks?
Stocks tend to earn significantly more than other financial assets over the long run, though their returns are more volatile.

28. What was a key takeaway from this lecture?
The lecture emphasized the importance of saving, lending, and financial markets in the macroeconomy, with both direct and indirect finance playing major roles in funding economic activity.

Chapter 11

1. Why does economic growth matter?
Answer: Economic growth improves living standards, increases wealth, and leads to better nutrition, healthcare, education, and overall human welfare.

2. What was life like in the U.S. in 1900?
Answer: Life expectancy was 47 years, 140 of every 1,000 children died before their first birthday, and income in 2021 dollars was less than $5,500 per person.

3. What has changed in the U.S. since 1900?
Answer: Economic growth has led to higher living standards, longer life expectancy, and better overall quality of life.

4. How is economic growth measured?
Answer: Economic growth is measured by the percentage change in real per capita GDP.

5. What correlation does per capita GDP have with human welfare?
Answer: Higher per capita GDP generally correlates with better human welfare, including better nutrition, healthcare, education, and living standards.

6. What was the state of global wealth before the Industrial Revolution?
Answer: Most people were poor, and it was only after the Industrial Revolution that significant increases in income and living standards occurred.

7. What role did the Industrial Revolution play in economic growth?
Answer: The Industrial Revolution increased the rate of technical progress, leading to higher income growth and improved living standards.

8. How does economic growth compound over time?
Answer: Small, consistent growth rates can lead to large differences in wealth over time due to compounding effects.

9. What is the Rule of 70?
Answer: The Rule of 70 states that if the annual growth rate is x%, the size of the variable will double in approximately 70 ÷ x years.

10. How does a 2% annual growth rate affect income over time?
Answer: At a 2% annual growth rate, it takes 35 years for income to double due to the compounding effect.

11. How do resources and technology contribute to economic growth?
Answer: Resources (natural resources, physical capital, human capital) and technological advancements increase productivity and output, fostering economic growth.

12. What are the three key factors contributing to economic growth?
Answer: Resources, technology, and institutions.

13. What are the types of resources that contribute to economic growth?
Answer: Natural resources, physical capital, and human capital.

14. What is natural capital?
Answer: Natural resources include physical land, minerals, forests, and geographical advantages like climate, which contribute to economic wealth.

15. Why are natural resources not always sufficient for economic growth?
Answer: Some countries rich in natural resources (e.g., Liberia) remain poor due to poor institutions and governance, while other countries with few resources (e.g., Japan) are wealthy due to strong institutions.

16. What is physical capital?
Answer: Physical capital includes tools and infrastructure like factories, roads, bridges, and machinery that are used in the production of goods and services.

17. Why is physical capital important for economic growth?
Answer: Physical capital increases productivity, allowing more output with the same or fewer resources.

18. What is human capital?
Answer: Human capital refers to the knowledge, skills, and experience of the workforce, which contributes to productivity and economic growth.

19. How does education affect human capital and economic growth?
Answer: Education and training improve the skills and productivity of workers, thereby increasing the potential for economic growth.

20. What is technology's role in economic growth?
Answer: Technology improves efficiency by introducing new methods or techniques that increase output with the same or fewer resources, driving economic growth.

21. How does technology improve agricultural output?
Answer: Technological advancements like hybrid seeds, fertilizers, and irrigation methods have significantly increased crop yields, as seen in U.S. agriculture.

22. What role do institutions play in fostering economic growth?
Answer: Institutions, including laws, political stability, property rights, and market structures, create a conducive environment for investment, innovation, and sustainable economic growth.

23. What are the key institutions that affect economic growth?
Answer: Private property rights, political stability and rule of law, competitive markets, international trade, efficient taxes, and stable money and prices.

24. Why are private property rights important for economic growth?
Answer: Private property rights provide the incentive for individuals to invest and produce, knowing they will benefit from their work.

25. How do political stability and the rule of law affect economic growth?
Answer: Political stability and the rule of law encourage investment by providing a predictable environment, while political instability deters investment due to uncertainty.

26. What are competitive markets, and how do they foster growth?
Answer: Competitive markets encourage innovation, reduce prices, and allow resources to be allocated efficiently, leading to higher productivity and economic growth.

27. How does international trade promote economic growth?
Answer: Trade allows countries to specialize in what they do best and access goods and services they cannot produce efficiently themselves, increasing overall output.

28. Why is the flow of funds across borders important?
Answer: Access to global savings and investment opportunities increases the supply of loanable funds, lowering borrowing costs and encouraging investment and economic growth.

29. How do efficient taxes affect economic growth?
Answer: Efficient taxes fund government functions while minimizing the negative impact on production and consumption decisions, supporting long-term growth.

30. Why is stable money and prices important for economic growth?
Answer: Stable money and prices reduce uncertainty, encourage investment, and create a predictable environment for economic planning and growth.

31. How are some economists testing new ideas in developing countries?
Answer: Economists like Abhijit Banerjee, Esther Duflo, and Michael Kremer use randomized controlled trials (RCTs) to test the impact of different policies and incentives on economic outcomes.

32. What did Abhijit Banerjee, Esther Duflo, and Michael Kremer discover through their fieldwork?
Answer: They found that microloans in India had less impact on poverty reduction than expected, and providing fertilizer discounts was a more effective incentive to increase crop yields.

33. What books can help in understanding global poverty and economic growth?
Answer: "The Elusive Quest for Growth" by William Easterly and "Why Nations Fail" by Daron Acemoglu and James Robinson.

34. What are the main causes of long-run economic growth?
Answer: Resources, technology, and institutions are essential for long-run economic growth.

35. How did Taiwan's institutions contribute to its economic growth compared to Liberia?
Answer: Taiwan's stable political environment and strong institutions, like property rights and rule of law, fostered growth, while Liberia's instability and weak institutions hindered its development.

What is the value of the bond at maturity called?
A) Par
B) Price at inception
C) Real
D) Ending
E) Nominal

Answer: A) Par

Q6: What type of unemployment is caused by government policies such as unemployment compensation?
A) Lower frictional
B) Lower cyclical
C) Higher frictional
D) Higher structural
E) Lower structural

Answer: D) Higher structural

Q7: If the price index was 184 in 2004 and 226 in 2012, what can we say about tuition costs?
A) Tuition has increased more slowly than inflation.
B) Tuition has increased more rapidly than inflation.
C) Tuition has increased at about the same rate as inflation.
D) Nominal tuition has decreased.
E) Tuition suffers from money illusion due to inflation.

Answer: B) Tuition has increased more rapidly than inflation.

Q8: Every dollar borrowed:
A) Represents a dollar leaving the circular flow.
B) Requires a dollar to be saved.
C) Represents a piece of human capital.
D) Requires the supply of goods to increase.
E) Causes inflation.

Answer: A) Represents a dollar leaving the circular flow.

Q9: The greater the default risk, the ________ the bond's price.
A) Higher
B) Lower
C) Higher interest rate
D) Lower interest rate
E) Higher face value

Answer: B) Lower

Q12: What does compound interest mean?
A) Accumulating interest only on the principal.
B) Accumulating interest on both principal and accumulated interest.
C) Accumulating more interest regardless of repayment.
D) The demand for loanable funds is upward sloping.
E) Interest will grow but never exceed 13%.

Answer: B) Accumulating interest on both principal and accumulated interest.

Q13: If you feel richer after a pay raise that doesn’t keep up with inflation, this is an example of:
A) Menu costs.
B) Price confusion.
C) Future price uncertainty.
D) Money illusion.
E) Nominal income uncertainty.

Answer: D) Money illusion.

Q14: What would decrease a nation’s supply of loanable funds?
A) Increased purchases of domestic stocks by foreign investors
B) A rise in the national unemployment rate
C) A culture-wide revival of patience
D) Greater numbers of people choosing to keep working when they could retire
E) A wave of working adults entering their peak-earnings years

Answer: B) A rise in the national unemployment rate

Q15: Why might a firm sell bonds instead of stocks?
A) The owners don’t want the burden of bills to be paid.
B) The owners are trying to finance production.
C) The owners don’t want to give up ownership control.
D) There are more fees associated with issuing stocks.
E) Bonds are easier to issue than stocks.

Answer: C) The owners don’t want to give up ownership control.

Q16: Treasury securities are:
A) Securities backed by mortgages and student loans.
B) Riskier assets than most other investments.
C) Bought directly from foreign businesses.
D) Only available to foreign investors.
E) Bonds sold by the U.S. government to pay for the national debt.

Answer: E) Bonds sold by the U.S. government to pay for the national debt.

Q17: What does it mean when the actual unemployment is less than the natural rate of unemployment?
A) The economy is in a recession.
B) The economy is producing within its long-run capabilities.
C) The economy is in an expansion.
D) The economy must be experiencing low inflation.
E) The economy is in a boom.

Answer: C) The economy is in an expansion.

Q18: What problem does price confusion cause when the price of a product increases?
A) The market demand has increased, and the firm’s output should increase.
B) The price increase is due to inflation, and the firm’s output should increase.
C) The price increase is due to deflation, and the firm’s output should decrease.
D) The firm may mistakenly reduce output.
E) Prices fall overall, and the firm’s output should increase.

Answer: B) The price increase is due to inflation, and the firm’s output should increase.

1. Question: If healthcare costs make up 10% of total expenditures and they rise by 15% while the other components in the consumer price index remain constant, by how much will the price index rise?
Answer: The price index will rise by 1.5% (10% * 15% = 1.5%).

2. Question: In 2010, the residents of Greenland bought 1,000 golf balls for $2.00 each, 100 clubs for $50 each, and 500 tees for $0.10 each. In 2011, they bought 1,100 golf balls for $2.50 each, 75 clubs for $75 each, and 1,000 tees for $0.12 each. What is the CPI for each year, using 2010 quantities as the base year?
Answer:
CPI for 2010 = 100 (since it's the base year).
CPI for 2011 = (Cost of basket in 2011 / Cost of basket in 2010) 100
Cost of 2010 basket = (1,000 $2) + (100 $50) + (500 $0.10) = $7,050.
Cost of 2011 basket = (1,100 $2.50) + (75 $75) + (1,000 $0.12) = $8,495.
CPI for 2011 = ($8,495 / $7,050) 100 = 120.5.

3. Question: In 1991, the consumer price index (CPI) was 136.2, and in 2017, it was 243. How much money would you need in 2017 to have the same purchasing power as $1,000 in 1991?
Answer:
Use the formula:
Amount in 2017 = Amount in 1991 (CPI in 2017 / CPI in 1991)
Amount in 2017 = $1,000 (243 / 136.2) = $1,785.

4. Question: What is the equation of exchange and how can it help determine the effect of money supply changes on the price level?
Answer: The equation of exchange is:
MV = PY
Where:

• M = money supply

• V = velocity of money

• P = price level

• Y = real GDP
  It helps determine how changes in the money supply (M) affect the price level (P), assuming other factors remain constant.

5. Question: If real GDP grows at 3% and inflation is 2%, but there is no change in velocity, what can you conclude about the change in the money supply?
Answer: The money supply must have increased by 5% (3% growth in real GDP + 2% inflation).

6. Question: If real GDP falls by 3% and there is no inflation, but the money supply grew by 5%, what is the implied change in velocity?
Answer: The change in velocity is -8% (since the equation is MV = PY, and M increased by 5%, but Y decreased by 3%, the velocity must adjust by -8%).

7. Question: Real GDP increases by 3%, velocity does not change, and the money supply grows by 10%. What is the implied rate of inflation?
Answer: The implied inflation rate is 7% (since the money supply growth of 10% minus real GDP growth of 3% = 7% inflation).

8. Question: The money supply grows at 6%, velocity is constant, and inflation is 3%. What can you conclude about the rate of real GDP growth?
Answer: Real GDP must have grown by 3% (since inflation of 3% and money supply growth of 6% leaves 3% for real GDP growth).

9. Question: What is the Fisher equation, and how is it used?
Answer: The Fisher equation is:
(1 + i) = (1 + r)(1 + π)
Where:

• i = nominal interest rate

• r = real interest rate

• π = inflation rate
  The Fisher equation shows the relationship between nominal and real interest rates, taking inflation into account.

10. Question: The Ragged Mountain Running Shop (RMRS) in Charlottesville, Virginia, is considering expanding to new locations. If they borrow at a 7% interest rate, which locations will RMRS choose to open based on expected returns?
Answer: RMRS should choose the locations where the expected returns exceed the interest rate of 7%. The exact locations will depend on the specific expected return data provided.

11. Question: If a nation’s residents become more patient (reducing their time preferences), what will happen to the interest rate and investment level in that nation?
Answer: If people become more patient, the interest rate will likely decrease, and investment will increase, as people save more and the demand for loans decreases.

12. Question: How will lower time preferences in a nation affect the levels of capital and income growth in the long run?
Answer: Lower time preferences lead to more savings and investment, which will result in higher capital accumulation and greater income growth in the long run.

13. Question: In 2015, Wahooland experiences a rise in interest rates, but there is no change in the supply of loanable funds. What could be the reason for the rise?
Answer: The rise in interest rates could be due to an increase in the demand for loans, which raises the price of borrowing (interest rates).

14. Question: What can we conclude about investment and income levels in Wahooland if the interest rate rises but nothing changes with the supply of loanable funds?
Answer: The rise in interest rates in Wahooland suggests that investment will likely decrease since higher interest rates discourage borrowing. This could result in slower income growth compared to other nations like Wildcat Island, where the interest rate has remained stable.

15. Question: What has the question about Wahooland's rising interest rates taught us about the relationship between interest rates and economic prosperity?
Answer: It has shown that higher interest rates, while they may seem to signal a stronger economy, can actually hinder investment and potentially slow down economic growth, challenging the common notion that lower interest rates are always better.

16. Question: Real per capita GDP in China in 1959 was about $350, but it doubled to about $700 by 1978, when Deng Xiaoping started market reforms. What was the average annual economic growth rate in China from 1959 to 1978?
Answer: Use the formula for compound growth rate:
Growth rate= (Final GDP/Initial GDP) to the power of 1/Years −1

{Growth rate} = (700/300) to the power of 1/20 – 1= 0.0357 or 3.57%

17. Question: Chinese per capita real GDP doubled again in just seven years, reaching $1,400 by 1986. What was the average annual economic growth rate between 1979 and 1986?
Answer: Using the same formula for compound growth rate:
Growth rate = (1400/700) to the power of 1/7 −1 = 0.1041 or 10.41%

18. Question: The table below presents long-run macroeconomic data for two hypothetical nations, A and B. Assume that both nations start with real GDP of $1,000 per citizen. Fill in the blanks based on the data provided.
Answer: This question would require specific data to be filled in, such as growth rates or other macroeconomic variables.

19. Question: Use the data in the table below to compute economic growth rates for the United States for 2008, 2009, and 2010.
Answer: This question requires data from the specific table provided to calculate the growth rates for those years.

Question: What is the difference between nominal GDP and real GDP?
Answer: Nominal GDP is the total value of goods and services produced in an economy at current market prices, without adjusting for inflation. Real GDP is the value of goods and services produced in an economy, adjusted for inflation, to reflect the true value.

21. Question: How is the GDP deflator calculated, and what does it measure?
Answer: The GDP deflator is calculated by dividing nominal GDP by real GDP and multiplying by 100. It measures the level of prices in the economy and indicates how much prices have increased since the base year.

22. Question: What is the difference between the consumer price index (CPI) and the producer price index (PPI)?
Answer: The CPI measures the average change in prices paid by consumers for a basket of goods and services, while the PPI measures the average change in prices received by producers for their goods and services.

23. Question: What are the four components of GDP, and which one is the largest in most economies?
Answer: The four components of GDP are consumption (C), investment (I), government spending (G), and net exports (NX). In most economies, consumption is the largest component.

24. Question: How does an increase in interest rates affect the economy in the short run?
Answer: An increase in interest rates typically reduces borrowing and spending by businesses and consumers, leading to a decrease in investment and consumption, which can slow down economic growth.

25. Question: What is the role of the central bank in controlling inflation?
Answer: The central bank controls inflation by adjusting interest rates and managing the money supply. By raising interest rates, the central bank can reduce inflation, and by lowering interest rates, it can stimulate economic growth.

26. Question: What is the relationship between savings and investment in a closed economy?
Answer: In a closed economy, savings must equal investment. This is because there are no exports or imports to account for; thus, all savings must be used for domestic investment.

27. Question: What is the "crowding out" effect?
Answer: The crowding-out effect occurs when government spending increases, leading to higher interest rates, which in turn reduces private investment. This happens because the government borrows more money, raising the demand for loanable funds.

28. Question: How does a recession impact unemployment?
Answer: A recession typically leads to higher unemployment as businesses reduce production and lay off workers due to decreased demand for goods and services.

29. Question: What is the difference between frictional and structural unemployment?
Answer: Frictional unemployment occurs when individuals are temporarily between jobs or are entering the workforce, while structural unemployment happens when there is a mismatch between workers' skills and the jobs available.

30. Question: What are the main causes of inflation?
Answer: Inflation can be caused by demand-pull factors (increased demand for goods and services) or cost-push factors (increased production costs, such as wages or raw materials).

31. Question: What is the concept of the natural rate of unemployment?
Answer: The natural rate of unemployment is the level of unemployment that exists when the economy is at full employment, including frictional and structural unemployment but excluding cyclical unemployment.

32. Question: What is the business cycle, and what are its four main phases?
Answer: The business cycle refers to the fluctuations in economic activity over time. Its four main phases are expansion, peak, contraction (recession), and trough.

33. Question: What is the role of government in stabilizing the economy during a recession?
Answer: During a recession, the government can use fiscal policy (increasing government spending or cutting taxes) to stimulate demand, or monetary policy (lowering interest rates) to encourage borrowing and investment.

34. Question: What is the difference between a budget deficit and national debt?
Answer: A budget deficit occurs when the government’s spending exceeds its revenue in a given year, while national debt is the cumulative total of all past budget deficits that the government owes.

35. Question: What is the Phillips Curve, and what does it show?
Answer: The Phillips Curve shows the inverse relationship between inflation and unemployment. It suggests that lower unemployment is associated with higher inflation and vice versa.

36. Question: What is the role of expectations in inflation?
Answer: Expectations play a crucial role in inflation. If people expect prices to rise, they may demand higher wages, leading to higher production costs and, eventually, higher prices, creating a self-fulfilling inflationary spiral.

37. Question: How does trade affect GDP?
Answer: Trade can affect GDP by increasing exports, which contribute to a higher GDP. Imports, on the other hand, can subtract from GDP but also lead to access to cheaper goods and services for consumers.

38. Question: How does an increase in the money supply lead to inflation?
Answer: An increase in the money supply can lead to inflation if the growth in money outpaces the growth in the supply of goods and services. This causes demand to exceed supply, driving prices up.

39. Question: What is a recessionary gap, and how does it affect the economy?
Answer: A recessionary gap occurs when actual GDP is below potential GDP, indicating that the economy is underperforming, and there is unused capacity in the economy. This typically leads to higher unemployment and lower income levels.

40. Question: How does a government’s fiscal policy differ from its monetary policy?
Answer: Fiscal policy involves government spending and taxation decisions made by the government to influence the economy, while monetary policy is controlled by the central bank and involves managing interest rates and money supply to influence economic activity.