ECO 2307 EXAM 2

Question 1

National Spending Equation

Answer 1

= C+I+G

Question 2

Net Exports Equation

Answer 2

NX = Y - (C+I+G)

Question 3

A trade deficit is when

Answer 3

A country is spending more than it is lending, imports>exports, NX<0

Question 4

A trade surplus is when:

Answer 4

A country is lending more than it is borrowing, exports>imports, NX>0

Question 5

Balanced trade is when

Answer 5

Exports and imports are perfectly equal, NX=0

Question 6

Factors that influence NX:

Answer 6

(PEPCIT) Preference of goods, prices of goods, exchange rates, income levels, costs of transportation, trade policies

Question 7

NCO definition:

Answer 7

Purchase of foreign ASSETS from domestic residents minus the purchase of domestic ASSETS by foreigners

Question 8

NCO equals:

Answer 8

NX

Question 9

National Savings Equations (2)

Answer 9

= I + NX, = (Y-T-C) + (T-G)

Question 10

Appreciation of a dollar:

Answer 10

$1 buys MORE after exchange, I>E, exchange rate rises

Question 11

Depreciation of a dollar

Answer 11

$1 buys LESS after exchange, E>I, exchange rate falls

Question 12

Real Exchange Rate Formula:

Answer 12

(Nominal Exchange Rate x Domestic Price)/(Foreign Price)

Question 13

PPP states that:

Answer 13

One unit of currency should be able to purchase the same in another country

Question 14

Limitations of PPP (2):

Answer 14

Many goods are not easily traded, not always perfect substitutions

Question 15

Arbitrage:

Answer 15

Purchase and then sale of an asset for more than it was purchased for (marking up)

Question 16

Financial Systems:

Answer 16

Match one person’s saving to another’s investment

Question 17

Financial Markets are:

Answer 17

A DIRECT way to supply savings to someone who wants to borrow

Question 18

2 Financial Markets:

Answer 18

Bond market, stock market

Question 19

Financial Intermediaries are:

Answer 19

An INDIRECT way for savers to lend to borrowers (through banks, mutual funds)

Question 20

Public Saving Equation:

Answer 20

= T-G

Question 21

Private Savings Equation:

Answer 21

= Y-T-C

Question 22

Govt Surplus:

Answer 22

T>G

Question 23

Govt Deficit:

Answer 23

G>T

Question 24

Crowding Out Effect:

Answer 24

An increase in G or a decrease in T: raises “r” and decreases I

Question 25

Supply for LF comes from:

Answer 25

Savers (aka lenders)

Question 26

Demand for LF comes from:

Answer 26

Investors (aka borrowers)

Question 27

If QD falls, IR and QS:

Answer 27

Rises

Question 28

If QS falls, IR and QD

Answer 28

Falls; Rises

Question 29

Foreign Direct Investment Example:

Answer 29

Punch Pizza opens shop in Italy

Question 30

Foreign Portfolio Investment Example:

Answer 30

I buy stock in Dirty Hit

Question 31

Factors that influence NCO:

Answer 31

(RRG) RER on foreign/domestic assets, risks of holding assets abroad, govt policies

Question 32

What shifts the savings curve outward?

Answer 32

(CIGG) Consumption decreases, Income Tax Rate Increase, GDP increases, Govt Purchases Decreases

Question 33

Ricardian Equivalence:

Answer 33

Only apply to tax cuts not associated w govt spending

Question 34

Investment tax credit/subsidies make:

Answer 34

I shift outward

Question 35

What shifts the investment curve outward?

Answer 35

Marginal taxes on firms decline, expected future capital increases

Question 36

Determinants of Productivity:

Answer 36

Physical Capital, Human Capital, Natural Resources, Technological Knowledge

Question 37

Cobb Douglas Function:

Answer 37

= A x K^alpha x L^1-alpha, 0≤alpha≤1

Question 38

Rule of 70 Formula:

Answer 38

= 70/percentage GDP is growing by

Question 39

Diminishing Marginal Product States:

Answer 39

The benefit of one extra unit of output decreases as input increases by one unit

Question 40

Labor Productivity Function:

Answer 40

(A x K^alpha x L^1-alpha)/L

Question 41

Neoclassical model concludes that (pt1):

Answer 41

Diminishing MPK implies that the economy will
eventually reach a steady state where capital, income, and consumption per worker is constant

Question 42

Neoclassical model concludes that (pt2):

Answer 42

Differences in capital per worker can explain differences
in income per worker across countries

Question 43

Neoclassical model concludes that (pt3):

Answer 43

Low-income nations can take advantage of large gains to
capital accumulation relative to high-income nations and
eventually catch up (i.e. convergence!)

Question 44

Neoclassical model concludes that (pt4):

Answer 44

Differences in savings rates can explain differences in
income per worker, but cannot explain long-run difference
in the growth rate

Question 45

Neoclassical model concludes that (pt5):

Answer 45

Productivity growth overcomes diminishing MPK,
allowing countries to growth indefinitely

Question 46

Endogenous Growth Theory:

Answer 46

Technological progress and government policies can offset diminishing returns to capital

Question 47

Horizontal innovation

Answer 47

Expand the variety of products/inputs

Question 48

Vertical innovation

Answer 48

Increase the quality of products/inputs

Question 49

Factors that impact growth (6):

Answer 49

(PEHPFR)Education, health, property rights, political stability, free trade, R&D

Question 50

St Equation:

Answer 50

= s x Yt

Question 51

Ct Equation:

Answer 51

= (I - S)Yt

Question 52

Capital Accumulation Function:

Answer 52

= Kt+1 - Kt = sYt - dKt

Question 53

If there is an increase in income-tax rates, savings will shift:

Answer 53

Left

Question 54

If there is an income-tax rate cut, savings will move:

Answer 54

Right