Midterm: Quizzes (done)

Question 1

A model comparing income in the United States and Ethiopia is successful if it predicts the United States is richer than Ethiopia but not how much richer.

a. True
b. False

Answer 1

b. False

Page 10. To be truly successful, a model must also predict the magnitude of income differences between the two countries.

Question 2

The difference between a parameter and an exogenous variable is that:
a. a parameter is allowed to change over time, while an exogenous variable is fixed over time.

b. a parameter is an outcome of the model, while an exogenous variable is an input to the model.
c. a parameter is an input to the model, while an exogenous variable is an output of the model.
d. a parameter is fixed over time, while an exogenous variable is allowed to change over time.

Answer 2

d. a parameter is fixed over time, while an exogenous variable is allowed to change over time.

Pages 9-10. Both a parameter and an exogenous variable are given, but an exogenous variable can change over time so long as the model builder determines the way it changes. In contrast, the parameter is fixed.

Question 3

The difference between an exogenous and an endogenous variable is that:
a. an exogenous variable is an input to the model, while an endogenous variable is an outcome of the model.

b. an exogenous variable is an outcome of the model, while an endogenous variable is an input to the model.
c. an exogenous variable is fixed over time, while an endogenous varies over time.
d. an exogenous variable is an input to the model, while an endogenous variable changes over time as determined by the model builder.

Answer 3

a. an exogenous variable is an input to the model, while an endogenous variable is an outcome of the model.

Page 9-10. An exogenous variable is an input that is allowed to change over time at a rate predetermined by the model builder, whereas an endogenous variable is an output of the model.

Question 4

Which of the following is NOT a step that macroeconomists take to study aggregate economic questions?

a. Document the facts.
b. Include all possible variables from the real world to construct a comprehensive model.
c. Make assumptions about the real world to simplify the construction of the model.
d. Shock the model to make other predictions.

Answer 4

b. Include all possible variables from the real world to construct a comprehensive model.

Page 9. If macroeconomists were to consider every possible real world variable, the economist would need to include an infinite number of variables. Thus, assumptions are made to abstract the real world to a simpler model.

Question 5

Which of the following questions would a macroeconomist be most interested in answering?

a. Why do monopolies set higher prices?
b. Why do individuals substitute across goods when prices rise?
c. Why did prices rise in many countries in the 1970s?
d. Why is a single firm’s stock price rising?

Answer 5

c. Why did prices rise in many countries in the 1970s?

Page 5. Macroeconomists are most concerned about aggregate level data while microeconomists seek to analyze individual- and firm-level decisions.

Question 6

A U.S. citizen works for a U.S. company in Germany. The income earned by the citizen increases U.S. GDP.

a. True
b. False

Answer 6

b. False

Pages 19 and 20. GDP is the final goods and services produced in an economy. Here the good is produced in Germany and will increase German GDP.

Question 7

A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is

a. $200,000.
b. $150,000.
c. $100,000.
d. $50,000.

Answer 7

b. $150,000.

Pages 26. Value added is revenue generated by the producer minus the value of intermediate goods. The wood and steel are the intermediate goods.

Question 8

Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the inflation rate is approximately:

a. -50%
b. -28.3%
c. -6.2%
d. -2.7%

Answer 8

c. -6.2%

Pages 29-33; Table 2.4.
Real GDP 2014 using 2014 prices = 2,000x6 + 10x1,000=22,000
Real GDP 2015 using 2014 prices = 1,000x6 + 12x1,000=18,000
Percentage change = (18,000-22,000)/22,000= -18%

Real GDP 2014 using 2015 prices = 2,000x5 + 10x1,000=20,000
Real GDP 2015 using 2015 prices = 1,000x5 + 12x1,000=17,000
Percentage change = (17,000-20,000)/20,000= -15%

Percentage change in real GDP in chained prices benchmarked to 2015 is the average of the two growth rates = (-18 -15)/2 = - 16.5%

Nominal GDP 2014 = 2,000x6 + 10x1,000=22,000
Nominal GDP 2015 = 1,000x5 + 12x1,000=17,000

Percentage change in nominal GDP = (17,000-22,000)/22,000 = -22.7%

Percentage change in price level (inflation) = -22.7%+16.5%=-6.2%

Question 9

If real GDP increases by 2 percent and nominal GDP increases by 4 percent, then inflation is approximately 2 percent.

a. True
b. False

Answer 9

a. True

Page 33. The percentage change in nominal GDP is approximately the inflation rate plus the percentage change in real GDP.

Question 10

Recently, the largest share of GDP is:

a. consumption.
b. government purchases.
c. investment.
d. net exports.

Answer 10

a. consumption.

Page 21. Consumption accounts for 68.4 percent of GDP.

Question 11

Suppose we compare GDP per person in Uganda and the United States in two ways: first using the exchange rate method and second using the relative price-based conversion as well. Then, Uganda appears to be richer under the relative price-based conversion than with the exchange rate conversion.

a. True
b. False

Answer 11

a. True

Pages 36-37. Wages in poorer countries are usually lower than wages in rich countries. Thus, prices are lower in Uganda. This implies that adjusting by the ratio of U.S. to Ugandan prices will make Uganda’s GDP appear larger than if using only an exchange rate adjustment.

Question 12

This year a real estate agent helped you buy a house for $200,000 which was originally built in 1985. The agent’s commission was $12,000. How will this transaction affect this year’s GDP?

a. Consumption expenditures will increase by $212,000.
b. Consumption expenditures will increase by $12,000.
c. Investment expenditures will increase by $212,000.
d. Investment expenditures will increase by $12,000.

Answer 12

b. Consumption expenditures will increase by $12,000.

Pages 19 and 22. GDP measures the market value of final goods and services produced in an economy over a certain period. Thus, the value of a house built earlier does not get counted in this year’s GDP. The only new production is the service by the real estate agent who got paid a commission for that service.

Question 13

Under national income accounting, GDP equals

a. the goods produced in the economy.
b. the income earned in the economy.
c. the total purchases in the economy.
d. All of these choices are correct.

Answer 13

d. All of these choices are correct.

Page 20. Under national income accounting, production equals expenditure equals income.

Question 14

Until 1970, labor’s share of GDP has been relatively stable at approximately two-thirds of GDP.

a. True
b. False

Answer 14

a. True

Page 25. Figure 2.3 shows that from 1950 to 1970, labor’s share of GDP has remained between 65 percent and 70 percent.

Question 15

When comparing GDP across countries, it is better to use comparisons based on common prices than simply on exchange rate conversions.

a. True
b. False

Answer 15

a. True

Pages 36-37. Comparisons based on exchange rate adjustments alone tend to yield larger differences across countries than those adjusting for prices.

Question 16

When the trade balance is negative, domestic producers are exporting more goods than are being imported.

a. True
b. False

Answer 16

b. False

Page 22-23. The trade balance is exports minus imports. The trade balance is negative when imports exceeds exports.

Question 17

Which of the following counts as investment?

a. You buy a stock.
b. You buy a computer to use for fun at home.
c. You buy a new house.
d. All of these choices are correct.

Answer 17

c. You buy a new house.

Pages 21-22. Investment includes purchases of structures and equipment by businesses in addition to purchases of new homes. A computer for home counts as consumption.

Question 18

Which of the following does NOT increase the U.S. GDP?

a. The U.S. government purchases a tank from a U.S. company.
b. The U.S. government increases social security payments.
c. The U.S. government increases funding for tax policy at a U.S. university.
d. The French government purchases a tank from a U.S.-based company.

Answer 18

b. The U.S. government increases social security payments.

Page 22. Transfer payments do not increase GDP because nothing new is purchased. When the U.S. government purchases a tank from a U.S. company, this is a government purchase, which counts towards GDP. When the French government purchases a tank produced in America, this increases U.S. GDP as it is exported out of the country. Increasing funding for tax policy at a U.S. university is government-funded research, which also counts towards GDP.

Question 19

Which of the following is NOT an example of capital?

a. Machines at an automobile factory
b. An automobile factory building
c. Screws and bolts used for making cars at an automobile factory
d. A plant manager’s computer

Answer 19

c. Screws and bolts used for making cars at an automobile factory

Page 24-25. Screws and bolts are an intermediate good. Inputs used in the production process are not capital.

Question 20

After graduating college, you start a job making $40,000. Your earnings grow at a constant growth rate of 3 percent per year. When you retire 40 years later, you are earning approximately:
  41,000. 
  70,000. 
  100,000. 
  130,000.

Answer 20

130,000.

Page 50. Apply formula 3.7 where y0 equals 40,000, the growth rate is .03, and t equals 40.

Question 21

How quickly GDP doubles will depend on:
  the initial value of GDP. 
  the growth rate of GDP. 
  the current value of GDP. 
  all of these

Answer 21

the growth rate of GDP.

Page 51. The Rule of 70 implies that the time it takes for a variable to double depends only on its growth rate.

Question 22

If a variable is growing at a positive constant rate, when plotted on a ratio scale, the slope of the plot will be becoming steeper over time.
True
False

Answer 22

False

Page 52. When plotted on a ratio scale, constant growth appears as a straight line.

Question 23

If nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2?
  $1,000 
  $1,020 
  $1,050 
  $1,100

Answer 23

$1,050

Page 48; 58-60. Nominal GDP = Real GDP x Price level. Applying the second property of growth rates: growth rate of nominal GDP = growth rate of real GDP + growth rate of the price level. Growth rate of real GDP = growth rate of nominal GDP – growth rate of the price level. Growth rate of real GDP = 7% - 2% = 5%. The growth rate is the percentage change from year 1 to year 2: 5% = (real GDP in year 2 – 1,000)/1,000. Real GDP in year 2 = $1,050.

Question 24

If population and GDP are growing at the same rates, then per capita GDP does not grow.
True
False

Answer 24

True

Page 58. Growth rate formulas imply that the growth rate of per capita GDP is the growth rate of GDP minus the growth rate of population, which in this example is 0.

Question 25

If population doubles every 35 years, then the growth rate of population is
  1 percent. 
  2 percent. 
  3 percent. 
  4 percent.

Answer 25

2 percent.

Page 53. The Rule of 70 implies that the growth rate equals 70/35 = 2%.

Question 26

In 1990, a country’s per capita income was 1,000. By the year 2000, it was 1,650. The average annual growth rate was approximately 0.05.
True
False

Answer 26

True

Page 54. Apply formula 3.9 where yt is 1650, y0 is 1000 and t is 10.

Question 27

In 1994 your parents made an investment of $4,000. By 2015 the investment grew to $32,000. Assuming a constant rate of growth, what was the average annual growth rate of this investment?
https://bit.ly/3iTouZF

7%
10%
70%
100%

Answer 27

10%

Pages 52-53. The data above are plotted using a ratio scale. Since this is a straight line we can conclude that the growth rate is constant. We see that the investment doubles every 7 years (i.e. for 1994 - 2001 the investment grew from $4,000 to $8,000; or use formula 3.9 to verify). Therefore, we can estimate the growth rate using the rule of 70: 70/7 = 10%.

Question 28

In the last three hundred years, the standards of living between the richest and poorest countries have converged.
True
False

Answer 28

False

Page 47. The period since 1700 is known as the Great Divergence and is characterized by rising inequality across countries.

Question 29

Per capita GDP can grow at a negative rate.
True
False

Answer 29

True

Page 56. Several countries—mainly in Africa—have had a negative average annual growth rate.

Question 30

Which of the following is a cost of economic growth?
  Job loss in certain sectors 
  Increased income inequality 
  Global warming 
  All of these choices are correct.

Answer 30

All of these choices are correct.

Page 61. Economic growth is not without costs. Environmental destruction, inequality, and job losses are among some of the largest costs.

Question 31

Which of the following is an example of a ratio scale?
  1, 2, 3, 4, 5... 
  1, 3, 6, 9, 12... 
  1, 5, 25, 125, 625... 
  All of these choices are correct.

Answer 31

1, 5, 25, 125, 625…

Page 52. A ratio scale is one where the numbers exhibit a constant ratio. The ratio scale here has a constant ratio of 5.

Question 32

With an average annual growth rate of 5 percent per year, per capita income will increase by what factor over a century?
  16 
  32 
  64 
  126

Answer 32

126

Pages 50-51. Applying the Rule of 70 implies 70/5 = 14. Thus, income will double in 14 years. In a century, per capita income will double approximately 7 times, which is 100/14. Thus, GDP per capital will increase by a factor of 27

Question 33

According to the Solow model two countries will grow at different rates if:

a. both have the same steady-state level of output and the same capital stock below the steady-state level
b. both have different steady-state level of output and the same capital stock below the steady-state level
c. both have the same steady-state level of output and the same capital stock above the steady-state level
d. they are both in their steady states

Answer 33

b. both have different steady-state level of output and the same capital stock below the steady-state level

Pages 125-126. If two countries have different steady-state levels of output and the same capital stock then through the process of transition dynamics the country with the higher steady-state level of output will grow faster as it tries to reach that higher steady state.

Question 34

According to the principle of transition dynamics, which economy will grow fastest?

a. A poor country in steady state
b. A rich country in steady state
c. A country 10 years after a natural disaster destroyed most of the capital stock
d. The same country 1 year after the natural disaster destroyed most of the capital stock

Answer 34

d. The same country 1 year after the natural disaster destroyed most of the capital stock

Pages 122-123. The principle of transition dynamics says that an economy that is farther below its steady state will grow faster. The destruction of the capital stock places the economy further below its steady state 1 year after the destruction took place.

Question 35

An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause

a. the economy to converge to a new lower steady state.
b. the growth rate of output to rise initially as the economy begins to converge to the old steady state.
c. the growth rate of output to rise initially as the economy begins to converge to a new lower steady state.
d. the economy to enter a period of negative growth.

Answer 35

b. the growth rate of output to rise initially as the economy begins to converge to the old steady state.

Pages 109-110; 121-122. The diagram in Figure 5.1 indicates that if the capital stock is below the steady-state level of capital, the economy will proceed to the old steady-state level. Note that a shock to the level of capital will not shift any of the curves, and that the steady state remains unchanged in the long run. Because the economy is below steady state, growth is positive.

Question 36

Consider an economy described by the textbook Solow model with a production function. The economy is producing 100 units of output and the productivity parameter is equal to 1. If the depreciation rate is 6%, the investment rate is 6%, and there are 125 workers, the growth rate of the economy_____:

a. is positive because the economy is below its steady state.
b. is equal to zero because the economy is at its steady state.
c. is negative because the economy is above its steady state.
d. cannot be determined.

Answer 36

a. is positive because the economy is below its steady state.

Pages 111-112. Replace the given numbers in equation 5.7 and solve for the steady state level of capital: K* = 125. Therefore, Y* = 5 * 25 = 125. If the economy currently produces 100 units of output according to the Solow diagram it is below its steady state and the growth rate of the economy is positive.

Question 37

If an economy has a higher investment rate and a higher depreciation rate, the economy will have a higher level of output.
True
False

Answer 37

False

Pages 118-120. Imagine an economy with a given rate of depreciation and investment. An economy with higher rates will have depreciation and investment curves that are both higher in the Solow diagram. Whether the steady state is higher or lower depends on the magnitudes of the parameters. Thus, we cannot determine the output definitively—it may be higher, lower, or the same.

Question 38

If net investment is negative:

a. the economy is above its steady state and growth of output is positive.
b. the economy is above its steady state and growth of output is negative.
c. the economy is below its steady state and growth of output is positive.
d. the economy is below its steady state and growth of output is negative.

Answer 38

b. the economy is above its steady state and growth of output is negative.

Pages 109-111. Negative net investment implies depreciation is greater than investment. Thus, the economy has a capital stock that is decreasing because it is above steady state.

Question 39

Imagine increases in the parameters of the Solow model that are all identical in magnitude. Which one of the following parameters will result in the largest increase in steady-state output?
The investment rate
The productivity parameter
The amount of labor
They all will increase output by the same amount.

Answer 39

The productivity parameter

Page 112. Notice that the investment rate is raised to the power of .5, the labor force to the power of 1, and the productivity parameter to the power of 1.5. Thus, if the magnitudes of the increases are identical, the productivity parameter will have the largest impact on output in steady state.

Question 40

In the Solow diagram, an increase in the investment rate will cause a decrease in consumption for all levels of capital.
True
False

Answer 40

True

Page 111-112. Consumption is the difference between the production function and the investment curve. This distance is everywhere smaller as the investment rate increases.

Question 41

In the long run, the real interest rate is equal to the marginal product of capital.
True
False

Answer 41

True

Pages 108-109. The return to saving must equal the return to investment, which implies that the real interest rate equals the rental price of capital, which is equal to the MPK.

Question 42

Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes

a. the growth rate of output to fall temporarily and the level of GDP to fall permanently.
b. the growth rate of output to fall temporarily but leaves the level of GDP unchanged in the long run.
c. the growth rate of output to rise temporarily and the level of GDP to rise permanently.
d. the growth rate of output to rise temporarily but leaves the level of GDP unchanged in the long run.

Answer 42

a. the growth rate of output to fall temporarily and the level of GDP to fall permanently.

Pages 120-121. An increase in the depreciation rate causes the depreciation curve to pivot upward, resulting in a new lower steady state. Thus, the growth rate of output is rapidly negative at first and converges to zero as it approaches steady state.

Question 43

The Solow model is a static model and thus can only tell us the levels of our endogenous variables in steady state.
True
False

Answer 43

False

Page 106. The Solow model is a dynamic model. Although we can only mathematically solve for the endogenous variables in steady state, they are subscripted by time because the model holds at all points in time.

Question 44

The change in the capital stock is a flow variable.
True
False

Answer 44

True

Page 108. A flow variable is one that lasts only for one period. Capital alone is a stock variable, but the change in capital is a flow variable.

Question 45

The investment rate in a particular economy is a function of the amount of output (income) an economy generates each year.
True
False

Answer 45

False

Page 105. Although rich and poor countries often have different investment rates, the investment rate is an exogenously given parameter in the Solow model. Unless shocked, it does not change over time.

Question 46

The level of consumption:
is largest when the economy is in its steady state.
is largest when the economy is below its steady state.
is largest when the economy is above its steady state.
directly depends on the depreciation rate.

Answer 46

is largest when the economy is above its steady state.

Pages 104 and 111-112; Figure 5.2. Consumption is the difference between the amount produced and the amount invested. The amount invested depends on the investment rate and the production function, none of which depend on the depreciation rate. We can see from the figure that the difference between the output line and the investment line grows as capital increases.

Question 47

Total factor productivity explains a larger amount of the difference in income per capita in the Solow model than in the production model.
True
False

Answer 47

True

Pages 114-115. TFP explains a larger difference in the Solow model, because productivity influences output in both models but also influences capital accumulation in the Solow model.

Question 48

What is an explanation for why an economy eventually settles in steady state?

a. The production function exhibits diminishing returns to capital.
b. The capital stock depreciates at a constant rate.
c. Eventually, investment generated is equal to the amount of capital depreciated.
d. All of these choices are correct.

Answer 48

d. All of these choices are correct.

Pages 115-116. The first two arguments taken together imply the third argument. Diminishing returns implies the slope of the investment curve becomes smaller, while depreciation remains constant. At the intersection of the two curves, net investment is zero.

Question 49

Which of the following questions does the Solow model NOT help to explain?

a. Why do countries have different growth rates in the same time periods?
b. Why are some countries richer than other countries?
c. Why do countries sustain growth in the long run?
d. Will a country be richer if the investment rate is higher than another country, all else being equal?

Answer 49

c. Why do countries sustain growth in the long run?

Page 127. The Solow model helps us explain why some countries are richer than others are (different parameters) and why growth rates differ (transition dynamics). The Solow model does not generate long-run economic growth because the economy rests in steady state.

Question 50

The United States and Chile have both grown at about 2 percent per year for the last 40 years. By the principle of transition dynamics, what does this imply?
Both countries are below their steady states.
Both countries are above their steady states.
Both countries are at their steady states.
It implies nothing, because transition dynamics only tell us how an economy moves over time.

Answer 50

Both countries are at their steady states.

Page 124. The fact that most rich and poor countries grow at the same rate suggests that most countries have already reached their steady states. If a relatively poorer country like Chile were poor because of a bad shock, we would expect it to grow faster.

Question 51

Consider a bank with loans of $500, equity of $100, deposits of $500, investments of $400, cash and reserves of $50, and short-term debt of $200. How much long-term debt does this bank have?
  $150 
  $350 
  $50 
  $200

Answer 51

$150

Page 271. Assets are equal to Liabilities and Equity. The assets are comprised of loans, investments, and cash and reserves, which is equal to $950. The liabilities are comprised of deposits, short-term debt, and long-term debt. Knowing that equity is equal to $100, we can solve for long-term debt: Assets – equity – deposits – short-term debt, which equals $150.

Question 52

Equity is reported on the asset side of the balance sheet for a financial institution.
True
False

Answer 52

False

Pages 270-271. Equity represents the value of the institution to its shareholders or owners and hence is owed to someone else. Therefore, equity is reported on the liability side.

Question 53

Suppose that a hypothetical bank had loans of $500, deposits of $500, investments of $400, cash and reserves of $50, short-term debt of $200, and long-term debt of $150. The bank will become insolvent if the value of investments drops below:
  $150 
  $200 
  $250 
  $300

Answer 53

$300

Page 273. A bank is insolvent when assets are not sufficient to cover its liabilities. Assets are currently $950 and liabilities are currently $850. If assets fall below $850, then the bank will be insolvent. This implies that if investments fall by more than $100, the bank will become insolvent.

Question 54

Suppose that a hypothetical bank has a 20 percent capital requirement. The hypothetical bank has $500 in loans, $500 in deposits, $400 in investments, $100 in cash and reserves, and $250 in debt. In dollars, what is the bank’s capital requirement?
  $20 
  $100 
  $200 
  $250

Answer 54

$200

Pages 270-271. The capital requirement mandates the bank keep 20 percent of its total assets (loans plus investments plus cash and reserves).

Question 55

Suppose that last year a hypothetical bank had loans of $500, deposits of $500, investments of $400, cash and reserves of $50, short-term debt of $200, and long-term debt of $150. If the value of the bank’s investments decrease to $325 this year, what is the percentage change in equity from last year to this year?

• 10%
• 50%
• 75%
• 100%

Answer 55

-75%

Page 272. Assets are now $875 and liabilities are now $850. Therefore, equity is $25. This is a -75% (INSERT) change in equity.

Question 56

Which of the following is reported on the asset side on a bank’s balance sheet?
  Deposits 
  Short-term debt 
  Capital 
  Reserves

Answer 56

Reserves

Pages 270-271. Assets are items of the value that the institution owns. Reserves are what are required for the bank to hold under the reserve requirement plus any excess reserves.