chapter 9 economic growth, the financial system, and...

Chapter 9 Economic Growth, the Financial System, and the Business Cycle 9.1 LongRun Economic Growth

1.

Which of the following statements describes the experiences of the Boeing Corporation since it was established in 1916?

A)

little or no growth in the long run, and unaffected by the business cycle. B)

strong growth interrupted by periods of business cycle recession C)

strong uninterrupted growth in demand D)

little or no growth in the long run, but very vulnerable to the business cycle. Answer:

B Diff: 1

Type: MC

Page Ref: 694/274 Topic:

Long-run economic growth Skill:

Factual Objective:

LO1: Discuss the importance of long-run economic growth AACSB Coding:

Reflective Thinking Special Feature:

Chapter Opener: Growth and the Business Cycle at Boeing

2.

153

Chapter 9: Economic Growth, the Financial System, and the Business Cycle

Technological advances generally result in A)

increased life expectancy. B)

increased infant mortality rates. C)

increased average number of hours worked per day. D)

decreased incomes. Answer:

A Diff: 1

Type: MC



Conceptual Objective:



None

3.

A good measure of the standard of living is A)

total real GDP. B)

real GDP per capita. C)

154


total nominal GDP. D)

nominal GDP per capita. Answer:

B Diff: 1

Type: MC






None

4.

Since 1990, real GDP per capita has ___________ and this measure ___________the actual growth in standards of living in the U.S. over this time.

A)

decreased; overstates B)

decreased; understates C)

increased; understates D)

155


increased; overstates Answer:

C Diff: 1

Type: MC



Factual Objective:



None

5.

Since 1900, real GDP in the U.S. has grown A)

in a random unpredictable manner relative to the population. B)

more rapidly than the population. C)

more slowly than the population. D)

as rapidly as the population. Answer:

B Diff: 1

Type: MC

Page Ref: 697/277

156


Topic:


Factual Objective:


Analytic Skills Special Feature:

None

6.

If real GDP per capita measured in 2000 dollars was $6,000 in 1950 and $48,000 in 2010, we would say that in the year 2010, the average American could buy ________ times as many goods and services as the average American in 1950.

A)

12 times B)

1/8 times C)

4 times D)

8 times Answer:

D Diff: 1

Type: MC



Analytical Objective:

157




None

7.

If real GDP in a small country in 2005 is $8 billion and real GDP in the same country in 2006 is $8.3 billion, the growth rate of real GDP between 2005 and 2006

A)

is 3.6%. B)

is 3.0%. C)

is 3.75%. D)

cannot be determined from the information given. Answer:

C Diff: 2

Type: MC


Calculating growth rates

158


Skill:




None

8.

If real GDP per capita doubles between 2005 and 2020, what is the average growth rate of real GDP per capita? A)

15% B)

21% C)

4.7% D)

10.5% Answer:

C Diff: 2

Type: MC


Calculating growth rates Skill:




159


None

9.

If you invest $10,000 in a bond that earns 8% interest, how many years will it take to double your money? A)

8 years and 9 months B)

2 years and 6 months C)

8 years D)

1 year and 3 months Answer:

A Diff: 2

Type: MC






None

10.

160


If the growth rate of real GDP rises from 3% to 4%, the number of years required to double real GDP will decrease from

A)

11.2 years to 10.8 years. B)

23.3 years to 17.5 years. C)

23.3 years to 20 .6 years. D)

28.0 years to 21.0 years. Answer:

B Diff: 3

Type: MC






None

Table 91

Year

Real GDP (Billion of 2000

dollars)2002 $8,7002003 8,8752004 9,0002005 9,280

11.

161


Refer to Table 9-1. Calculate the growth rate of real GDP from 2004 to 2005 using the table above. A)

2% B)

3% C)

1% D)

4% Answer:

B Diff: 2

Type: MC






None

162


12.

Refer to Table 9-1. Calculate the average annual growth rate from 2002 to 2005 using the table above. A)

1.5% B)

1% C)

2% D)

3% Answer:

C Diff: 2

Type: MC






None

13.

Increases in real GDP since 1900 can actually underestimate growth in the standard of living for Americans since 1900 because

A)

goods and services are more expensive today as compared to 1900.

163


B)

the crime rate was higher in 1900 than it is today. C)

the quality of health care that exists today was not available in 1900. D)

the level of pollution in 1900 was much higher than it is today. Answer:

C Diff: 2

Type: MC






None

14.

Economist Robert Fogel has estimated that, by the year 2040, individuals in the United States will be spending A)

less time in the workforce and less time in leisure activities than they do today. B)

more time in the workforce and less time in leisure activities than they do today. C)

less time in the workforce and more time in leisure activities than they do today. D)

164


more time in the workforce and more time in leisure activities than they do today. Answer:

C Diff: 1

Type: MC



Factual Objective:



Making the Connection: The Connection between Economic Prosperity and Health

15.

If real GDP grows by 3% in 2005, 3.2% in 2006, and 2.5% in 2007, what is the average annual growth rate of real GDP?

A)

2.6% B)

3.1% C)

4.2% D)

2.9% Answer:

165


D Diff: 2

Type: MC






None

16.

Countries with high rates of economic growth tend to have A)

a labor force that is more productive. B)

a lower life expectancy at birth. C)

a declining incidence of business cycle fluctuations. D)

longer workweeks. Answer:

A Diff: 1

Type: MC


Long-run economic growth

166


Skill:

Factual Objective:



None

17.

According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%?

A)

less than 1 year B)

14 years C)

35 years D)

5 years Answer:

B Diff: 2

Type: MC


The Rule of 70 Skill:



Analytic Skills

167


Special Feature:

None

18.

The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as A)

human capital. B)

real GDP. C)

labor productivity. D)

technology. Answer:

C Diff: 1

Type: MC


Labor Productivity Skill:

Definition

168


Objective:



None

19.

Which of the following increases labor productivity? A)

inventions of new machinery, equipment, or software B)

an increase in the aggregate hours of work C)

decreases in the availability of computers and factory buildings D)

a decline in health of the population Answer:

A Diff: 1

Type: MC






None

169


20.

The total amount of physical capital available in a country is know as the country's A)

labor productivity. B)

capital stock. C)

investment. D)

savings. Answer:

B Diff: 1

Type: MC


Determinants of Economic Growth Skill:

Definition Objective:



None

21.

170


What two factors are the keys to determining labor productivity? A)

the average level of education of the workforce and the price level B)

technology and the quantity of capital per hour worked C)

the business cycle and the growth rate of real GDP D)

the growth rate of real GDP and the interest rate Answer:

B Diff: 1

Type: MC






None

22.

Which of the following is an example of human capital? A)

a college education B)

a factory building C)

171


a computer D)

a software program Answer:

A Diff: 2

Type: MC






None

23.

Human capital refers to which of the following? A)

the quantity of goods and services that can be produced by one worker or by one hour of work B)

manufactured goods that are used to produce other goods and services C)

the accumulated knowledge and skills workers acquire from education and training or from their life experiences D)

physical equipment that is made by human laborers, not machines Answer:

C Diff: 1

172


Type: MC






None

24.

Long-run economic growth requires all of the following except A)

increases in capital per hour worked. B)

political instability C)

technological change. D)

173


government provision of secure property rights. Answer:

B Diff: 1

Type: MC

Page Ref: 700-1/280-1 Topic:





None

25.

Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy?

A)

increases in labor force participation rates as workers who are out of the labor force pursue rising wages B)

an influx of immigrant labor into an economy without any accompanying technological change C)

growth in capital per hour accompanied by technological change D)

a shift of workers in the economy from the agricultural sector to the nonagricultural sector Answer:

C Diff: 2

Type: MC

Page Ref: 700/280

174


Topic:





Solved Problem: The Role of Technological Change in Growth

26.

Botswana's rapid growth can be explained by A)

an increase in labor force participation. B)

protection of private property and avoiding political instability. C)

investment in human capital from 1960 through 2007. D)

the movement of workers from the agricultural sector to the manufacturing sector. Answer:

B Diff: 2

Type: MC



Factual Objective:

LO1: Discuss the importance of long-run economic growth

175


AACSB Coding:


Making the Connection: What Explains Rapid Economic Growth in Botswana?

27.

Which of the following do not describe governmental policy actions that are helpful in supporting growth in an economy? Governmental policies that

A)

establish an independent court system that enforces contracts. B)

avoid playing any role in developing communication systems. C)

provide secure rights to private property. D)

facilitate the development of an efficient financial system. Answer:

B Diff: 2

Type: MC




176




None

28.

Potential GDP refers to A)

the extent to which real GDP is above or below nominal GDP. B)

the difference between the highest level of real GDP per quarter and the lowest level of real GDP per quarter within any given year.

C)

the level of GDP attained by the country with the highest growth in real GDP in a given year. D)

the level of GDP attained when all firms are producing at capacity. Answer:

D Diff: 1

Type: MC






None

29.

177


Growth in potential GDP is estimated to be about A)

8% per year. B)

3.5% per year. C)

2% per year. D)

5% per year. Answer:

B Diff: 1

Type: MC


Potential GDP Skill:

Factual Objective:



None

30.

178


Actual real GDP will be above potential GDP if A)

firms are producing above capacity. B)

firms are producing at capacity. C)

inflation is rising. D)

firms are producing below capacity. Answer:

A Diff: 2

Type: MC






None

31.

Three factors that affect China's airline industry's profitability and growth are A)

a lack of human capital, small investments in new planes, and the government's failure to liberalize the air travel market.

B)

an abundance of human capital, large investments in new planes, and the government's failure to liberalize the air

179


travel market. C)

a lack of human capital, large investments in new planes, and the government's failure to liberalize the air travel market.

D)

a lack of human capital, large investments in new planes, and the government's liberalization of the air travel market.

Answer:

C Diff: 2

Type: MC






An Inside Look: China's Airlines Are Falling to Translate Rapid Growth into Profits

32.

Which of the following would benefit China's airline industry in terms of profitability? A)

deregulating airline ticket prices B)

restricting the government sector from building airports C)

mandating that airlines only buy domestically produced aircraft D)

180


preventing foreign companies from supplying jet fuel Answer:

A Diff: 2

Type: MC







33.

Accumulating a greater number of inputs will ensure that an economy will experience economic growth. Answer:

True

False Diff: 1

Type: TF



181





None

34.

Increases in capital per hour worked cannot sustain high rates of economic growth unless accompanied by technological change.

Answer:

True

False Diff: 1

Type: TF






None

35.

Potential GDP is the maximum output a firm is capable of producing. Answer:

True

False Diff: 1

182


Type: TF


Potential GDP Skill:




None

36.

The growth rate of real GDP in the United States rises from 4.2% to 4.4%. Explain and calculate how this increase in the growth rate of real GDP affects the number of years it will take for real GDP to double.

Answer:

The "Rule of 70" states that the number of years it takes to double GDP is equal to 70 divided by the growth rate of real GDP. Given this formula, at a growth rate of 4.2%, it will take 70/4.2 = 16.67 years for GDP to double. If the growth rate increases by two-tenths of a percent (to 4.4%), the number of years it will take for GDP to double will decrease to 70/4.4 = 15.9 years.

Diff: 2

Type: SA






None

183


37.

How has economist Robert Fogel explained that economic growth is connected to life expectancy? Based on this connection, what country would you expect to have a longer life expectancy, the United States or India? Explain.

Answer:

According to Robert Fogel's research, countries with the lowest levels of GDP per capita also have the shortest life expectancies. Technological advances in medicine, agriculture, and water purification improve nutrition and increase incomes. Since economic growth in the U.S. has historically been greater than that in India, we would expect U.S. residents to have a longer life expectancy than residents of India. However, as India's economy begins to grow more dramatically, life expectancy in India is rapidly approaching that of the United States.

Diff: 2

Type: SA






Making the Connection: The Connection between Economic Prosperity and Health

38.

What is "human capital", and how does human capital affect labor productivity and economic growth? Answer:

Human capital is the accumulated knowledge and skills workers acquire from education and training or from their life experiences. Increases in human capital increase labor productivity, which will eventually increase real GDP per capita.

Diff: 1

Type: SA


184






Solved Problem: The Role of Technological Change in Growth

39.

What factors increase potential GDP? Include a definition of potential GDP in your answer. Answer:

Potential GDP is the level of GDP attained when all firms are producing at capacity. Growth in potential GDP is determined by growth in the labor force and the capital stock and by technological change. Capital investments accompany growth in the labor force, encouraging technological progress and increasing potential GDP.

Diff: 2

Type: SA






None

40.

When potential GDP increases, is it necessarily the case that real GDP increases as well? Explain. Answer:

185


An increase in potential GDP is a result of an expanding labor force, growth in the capital stock, and technological change. The actual level of real GDP may be higher or lower than potential GDP. If firms are all producing at capacity, we would expect potential GDP and real GDP to be equal. If firms are producing below capacity, we would expect real GDP to be below potential GDP. And if firms are temporarily producing above capacity, real GDP will be above potential GDP.

Diff: 2

Type: SA






None

9.2 Saving, Investment, and the Financial System

1.

Increasing the amount of consumption spending and reducing the amount of savings ____________ investment expenditures, and ____________economic growth in the economy.

A)

increases; decreases B)

decreases; decreases C)

decreases; increases D)

increases; increases Answer:

B Diff: 2

186


Type: MC




LO2: Discuss the role of the financial system in facilitating long-run economic growth. AACSB Coding:


Economics in YOUR Life!: If You Spend More, Will the economy Grow More?

2.

A firm can fund an expansion of its operations by A)

buying stock. B)

paying dividends. C)

issuing bonds. D)

loaning money. Answer:

C Diff: 1

Type: MC


Financial Securities Skill:

Conceptual

187


Objective:



None

3.

Which of the following is most liquid? A)

a mutual fund share B)

a corporate bond C)

a dollar bill D)

a government bond Answer:

C Diff: 1

Type: MC


Saving, Investment, and the Financial System Skill:




188


None

4.

When a mutual fund company issues mutual fund shares that it will buy back at a price that reflects the underlying value of the financial securities owned by the fund, this kind of mutual fund is called a(n) ________ mutual fund.

A)

liquid B)

stock and bond C)

closed-end D)

open-end Answer:

D Diff: 1

Type: MC






None

5.

Financial securities that represent promises to repay a fixed amount of funds are known as A)

insurance premiums.

189


B)

pension funds. C)

bonds. D)

stocks. Answer:

C Diff: 1

Type: MC


Financial Securities Skill:




None

6.

One difference between stocks and bonds is that A)

stocks are usually issued in electronic form, while bonds are usually issued in paper form.

190


B)

stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a promise to repay the purchase price of the bond.

C)

stocks are financial securities, while bonds are labor market securities. D)

stocks represent ownership in companies, while bonds represent ownership in banks. Answer:

B Diff: 1

Type: MC






None

7.

Which of the following is not a key service the financial system provides to borrowers and savers? A)

liquidity B)

risk sharing C)

information D)

191


risk exposure Answer:

D Diff: 1

Type: MC






None

8.

All else equal, how would you expect the price of one share of stock in Microsoft to change if there is news that Microsoft has lost a court battle over copyright infringement?

A)

The value of a share of stock in Microsoft will decrease in response to this information. B)

The value of a share of stock in Microsoft will be unaffected. C)

The value of a share of stock in Microsoft will change, but the impact of this information cannot be predicted. D)

The value of a share of stock in Microsoft will increase in response to this information. Answer:

A Diff: 1

Type: MC

192







None 9.

In a closed economy, which of the following components of GDP is not included? A)

net exports B)

investment C)

government spending D)

consumption Answer:

A Diff: 1

Type: MC


Open and Closed Economies Skill:



193



None

10.

In a closed economy, which of the following equations reflects investment? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)

A)

Y - C - T B)

Y - C - G C)

Y - T + TR D)

C + G -T Answer:

B Diff: 2

Type: MC






None

11.

In a closed economy, private saving is equal to which of the following? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)

194


A)

Y - C - T B)

Y - G - T C)

Y - C - T + TR D)

Y - G - T + TR Answer:

C Diff: 2

Type: MC






None

12.

195


In a closed economy, public saving is equal to which of the following? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)

A)

Y - C - T B)

T - G - TR C)

Y - C - T + TR D)

Y - G - T Answer:

B Diff: 2

Type: MC






None

Scenario 9-1

Consider the following data for a closed economy:

Y = $12 trillionC = $8 trillionI= $4 trillion

TR = $2 trillionT = $3 trillion

13.

196


Refer to Scenario 9-1. Based on the information above, what is the level of private saving in the economy? A)

$8 trillion B)

$3 trillion C)

$4 trillion D)

$5 trillion Answer:

B Diff: 3

Type: MC






None

14.

197


Refer to Scenario 9-1. Based on the information above, what is the level of public saving? A)

$2 trillion B)

$1 trillion C)

$0 D)

negative $1 trillion (a deficit of $1 trillion) Answer:

B Diff: 2

Type: MC






None

15.

In a closed economy, public saving plus private saving is equal to A)

taxes minus transfers. B)

investment. C)

198


the budget surplus. D)

the budget deficit. Answer:

B Diff: 2

Type: MC






None

16.

199


Under which of the following circumstances would the government be running a deficit? A)

G = $5 trillionT = $7 trillionTR = $1 trillion

B)


C)

G = $7 trillionT = $7 trillionTR = $0

D)


Answer:

D Diff: 2

Type: MC






None

17.

Under which of the following circumstances would private saving be positive in a closed economy? A)

200


Y = $9 trillionC = $5 trillionTR = $1 trillionG = $1 trillionpublic saving = $3 trillion

B)


C)


D)


Answer:

C Diff: 3

Type: MC




LO2: Discuss the role of the financial system in facilitating long-run economic growth.

201


AACSB Coding:


None

18.

What is investment in a closed economy if you have the following economic data?Y = $10 trillionC = $5 trillionTR = $2 trillionG = $2 trillion

A)

$3 trillion B)

$2 trillion C)

$5 trillion D)

cannot be determined without information on taxes (T) Answer:

A Diff: 2

Type: MC






None

202


19.

There is a government budget surplus if A)

T-Tr > G. B)

Tr < T. C)

G > Tr. D)

G > T. Answer:

A Diff: 2

Type: MC


Budget Deficit or Budget Surplus Skill:




None

203


20.

If government saving is negative, then A)

T - TR < G. B)

T > TR. C)

Y + TR < C - T. D)

G > T. Answer:

A Diff: 2

Type: MC






None

21.

When the government runs a budget deficit, we would expect to see that A)

G + TR < T. B)

204


investment will fall. C)

public saving is positive. D)

private saving will fall. Answer:

B Diff: 2

Type: MC






None

22.

Which of the following will increase investment spending in the economy, all else being equal? A)

an increase in the federal government surplus B)

an increase in the budget deficit C)

an increase in transfer payments D)

an increase in consumer dissavings Answer:

205


A Diff: 2

Type: MC






None

23.

Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds. A)

demanders; suppliers B)

suppliers; suppliers C)

demanders; demanders D)

206


suppliers; demanders Answer:

A Diff: 1

Type: MC


Demand and Supply of Loanable Funds Skill:




None

24.

The demand for loanable funds is downward sloping because the ______ the interest rate, the __________ the number of profitable investment projects a firm can undertake, and the _________ the quantity demanded of loanable funds.

A)

greater; greater; greater B)

lower; smaller; greater C)

lower; greater; greater D)

greater; smaller; greater Answer:

C Diff: 2

Type: MC

207







None

25.

If Ebenezer Scrooge spends rather than saves his vast wealth he will A)

promote economic growth because he is decreasing the amount of funds available for investment. B)

promote economic growth because he is increasing the amount of funds available for investment. C)

slow economic growth because he is increasing the amount of funds available for investment. D)

slow economic growth because he is reducing the amount of funds available for investment. Answer:

D Diff: 2

Type: MC




208




Making the Connection: Ebenezer Scrooge: Accidental Promoter of Economic Growth

26.

A government budget surplus from reduced government spending (no change in net taxes) will ________ the level of investment in the economy and ________ the level of saving (private plus public) in the economy.

A)

decrease; increase B)

increase; increase C)

increase; decrease D)

decrease; decrease Answer:

B Diff: 2

Type: MC


Crowding Out Skill:




None

27.

209


If consumers decide to be more frugal and save more out of their income, then this will cause A)

a shift in the supply for loanable funds to the right. B)

a movement along the supply for loanable funds curve to the right. C)

a shift in the supply for loanable funds to the left. D)

a movement along the supply for loanable funds curve to the left. Answer:

A Diff: 1

Type: MC






None

28.

Which of the following would you expect to increase the equilibrium interest rate? A)

a change from an income tax to a consumption tax B)

an increase in the budget deficit C)

210


an increase in the percentage of income after net taxes that households save D)

a decrease in the profitability of investment projects firms are considering Answer:

B Diff: 2

Type: MC






None

Figure 9-1

211


29.

Refer to Figure 9-1. Which of the following is consistent with the graph depicted above? A)

Technological change increases the profitability of new investment. B)

The government runs a budget surplus. C)

An expected recession decreases the profitability of new investment. D)

Households become spendthrifts and begin to save less. Answer:

A Diff: 2

Type: MC




212




None

Figure 9-2

30.


There is a shift from an income tax to a consumption tax. B)

New government regulations decrease the profitability of new investment.

213


C)

An expected expansion increases the profitability of new investment. D)

The government runs a budget surplus. Answer:

B Diff: 2

Type: MC






None

Figure 9-3

214


31.


Taxes are changed so that real interest income is taxed rather than nominal interest income. B)

An expected recession decreases the profitability of new investment. C)

Technological change increases the profitability of new investment. D)

The government runs a budget deficit. Answer:

A Diff: 2

Type: MC




215




None

Figure 9-4

32.

Refer to Figure 9-4. Which of the following is consistent with the graph depicted? A)

an increase in tax revenues collected by the government B)

an increase in household income C)

216


an increase in the proportion of income after net taxes used for consumption D)

an increase in transfer payments to households Answer:

C Diff: 2

Type: MC






None

33.

In comparison to a government that runs a balanced budget, when the government runs a budget deficit, A)

firm investment will fall. B)

household savings will fall. C)

the equilibrium interest rate will fall. D)

none of the above. Answer:

A Diff: 2

217


Type: MC


Crowding Out Skill:




None

34.

The response of firm investment to an increase in the government budget deficit is called A)

crowding out. B)

private dissaving. C)

income minus net taxes. D)

expansionary investment. Answer:

A Diff: 2

Type: MC


218


Crowding Out Skill:




None

35.

If the economy enters into a recession, the equilibrium quantity of loanable funds should ________ and the real interest rate should ________.

A)

rise; fall B)

fall; fall C)

fall; rise D)

rise; rise Answer:

C Diff: 2

Type: MC





219



None

Figure 9-5

36.

Refer to Figure 9-5. "Crowding out" of firm investment as a result of a budget deficit is illustrated by the movement from ________ in the graph above.

A)

C to A

220


B)

B to A C)

A to B D)

B to C Answer:

C Diff: 2

Type: MC


Crowding Out Skill:




None

37.

How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes) affect private saving in the economy?

A)

Private saving will increase by the amount of increase in the budget surplus. B)

Private saving will be unaffected by the increase in the budget surplus. C)

Private saving will decrease by less than the amount of increase in the budget surplus. D)

221


Private saving will decrease by the amount of increase in the budget surplus. Answer:

C Diff: 3

Type: MC






None 38.

How would changing a tax on nominal interest income to a tax on real interest income affect the supply of loanable funds?

A)

The supply of loanable funds would be unaffected. B)

The supply of loanable funds would increase. C)

The supply of loanable funds would decrease. D)

The supply of loanable funds would become steeper. Answer:

B Diff: 2

Type: MC

Page Ref: 710-1/290-1

222


Topic:





None

39.

How would the equilibrium interest rate respond to a change from an income tax to a consumption tax? A)

The equilibrium interest rate may rise or fall based on whether the demand or supply of loanable funds changes. B)

The equilibrium interest rate would fall. C)

The equilibrium interest rate would rise. D)

The equilibrium interest rate would be unaffected. Answer:

B Diff: 2

Type: MC





223


AACSB Coding:


None

40.

How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax?

A)

The equilibrium quantity of loanable funds may rise or fall based on whether household savings increase or decrease as a result of the change from an income tax to a consumption tax.

B)

The equilibrium quantity of loanable funds would fall. C)

The equilibrium quantity of loanable funds would be unaffected. D)

The equilibrium quantity of loanable funds would rise. Answer:

D Diff: 2

Type: MC






None

224


41.

Which of the following would encourage economic growth through increases in the capital stock? A)

a decrease in the government deficit B)

an increase in household savings C)

a change from an income tax to a consumption tax D)

all of the above Answer:

D Diff: 2

Type: MC






None

42.

If net taxes fall by $80 billion, we would expect A)

household savings to rise by less than $80 billion. B)

225


household savings to rise by $80 billion. C)

household savings to fall by more than $80 billion. D)

the government deficit to fall by $80 billion. Answer:

A Diff: 3

Type: MC






None

43.

Which of the following will not occur as the result of a decrease in net taxes? A)

a shift the supply of loanable funds to the left B)

decreased household saving C)

decreased government saving D)

all of the above

226


Answer:

B Diff: 3

Type: MC






None

44.

If the government decided to tax real interest income rather than nominal interest income, this change would cause the real interest rate to ____________ and the equilibrium quantity of loanable funds to _____________.

A)

rise; rise B)

rise; fall C)

227


fall; rise D)

fall; fall Answer:

C Diff: 2

Type: MC






Solved Problem: How Would a Consumption Tax Affect Savings, Investment, the Interest Rate, and Economic Growth?

45.

Countries without well-developed financial systems are able to sustain high levels of economic growth. Answer:

True

False Diff: 1

Type: TF





228


AACSB Coding:


None

46.

In an open economy, there is interaction with other economics in terms both trading of goods and services and borrowing and lending.

Answer:

True

False Diff: 1

Type: TF






None

47.

If there is public dissaving, investment spending in the economy will decline, holding all else constant. Answer:

True

False Diff: 2

Type: TF


229


Budget Deficit or Budget Surplus Skill:




None

48.

Using equations for public and private saving, demonstrate how total saving in the economy equals investment. Answer:

Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR. Adding private saving and public saving together yields (Y + TR - C - T) + (T - G - TR) = Y - C - G. In a closed economy (with no net exports), Y= C + I + G, so Y - C - G = I, and the sum of public and private savings is equal to investment.

Diff: 2

Type: SA






None

49.

Consider the following data for a closed economy:

a. Y = $12 trillionb. C = $8 trillionc. I= $3 trilliond. TR = $2 trillione. T = $3 trillion

230


Using the data provided, calculate the level of private saving and the level of public saving, and demonstrate their relationship to investment.

Answer:

Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR. Plugging in the appropriate numbers for private saving, private saving = Y + TR - C - T = $12t + $2t - $8t - $3t = $3 trillion. Using the identity for output in a closed economy, G = Y - C - I = $12t - $8t - $3t = $1t, so public saving = $3t - $1t - $2t = $0. Adding together private savings of $3 trillion and public savings of $0 yields savings of $3 trillion, which is exactly equal to investment of $3 trillion.

Diff: 3

Type: SA






None

50.

Briefly explain how the miserliness of Ebenezer Scrooge might actually be beneficial for economic growth. Answer:

231


Ebenezer Scrooge is known for his unwillingness to spend money. Refusing to use his money for consumption spending, Scrooge saves his money instead. This savings then becomes available for firms to borrow to finance the building of new factories or research and development. Since growth in the capital stock and technological advance are keys to economic growth, the "stingy" Scrooge may actually be beneficial for economic growth.

Diff: 2

Type: SA






Making the Connection: Ebenezer Scrooge: Accidental Promoter of Economic Growth

51.

Explain and show graphically how an increase in household savings affects the equilibrium interest rate and the equilibrium quantity of loanable funds.

Answer:

An increase in household savings increases the supply of loanable funds, shifting the supply of loanable funds curve to the right, as shown below. The increase in the supply of loanable funds results in a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds.

Diff: 2

Type: SA

232







None

52.

Explain and show graphically how government deficits can "crowd out" private investment. Answer:

When the government runs a deficit, public saving falls, reducing the supply of loanable funds and shifting the supply of loanable funds to the left, as shown below. The decrease in the supply of loanable funds results in an increase in the equilibrium interest rate, and a decrease in the equilibrium quantity of loanable funds, moving from point A to point B below. As the equilibrium interest rate rises, the quantity of loanable funds demanded by firms for investments in capital decreases. Increased government deficits raise interest rates, thereby "crowding out" private investment by firms.

Diff: 2

Type: SA

233







None

53.

Explain and show graphically how an increase in government spending affects the equilibrium interest rate in the market for loanable funds.

Answer:

234


When government spending increases, government saving (T - G - TR) falls. This decrease in government saving shifts the supply of loanable funds curve to the left, increasing the equilibrium interest rate as shown below.

Diff: 2

Type: SA






None

7.

If net taxes rise by $150 billion, would you expect household savings to fall by $150 billion, by more than $150 billion, or by less than $150 billion? Support your answer with a graph of the market for loanable funds.

Answer:

Private savings are equal to Y - C - T, so if taxes increase private savings will fall. When taxes increase, however, disposable income also falls, so households will consume less. With the increase in taxes and the decrease in consumption, savings will fall, but buy less than $150 billion. Some of the decrease in taxes will be reflected by reduced consumption, not simply reduced saving.

Diff: 3

Type: SA

235







Solved Problem: How Would a Consumption Tax Affect Savings, Investment, the Interest Rate, and Economic Growth?

9.3 The Business Cycle

1.

Which of the following explains the causes of the changes in the unemployment rate at the end of a recession? A)

Discouraged workers leave the labor force and this makes the unemployment rate rise. B)

Firms are hesitant to rehire laid off workers as they continue to operate below capacity. C)

Firms rapidly hire new workers at the first sign of on an increase in demand for their goods. D)

Discouraged workers return to the labor force and this makes the unemployment rate fall. Answer:

B Diff: 3

Type: MC


236


The Effects of Recession on the Economy Skill:


LO3: Explain what happens during a business cycle AACSB Coding:


None

2.

During the expansion phase of the business cycle, which of the following eventually increases? A)

employment B)

income C)

production D)


D Diff: 1

Type: MC


The Effects of Expansion the Economy Skill:



Reflective Thinking

237


Special Feature:

None

3.

During the recession phase of the business cycle, A)

income is usually rising. B)

interest rates are usually falling. C)

production is usually rising. D)

unemployment is usually falling. Answer:

B Diff: 1

Type: MC






None

4.

238


The period between a business cycle peak and a business cycle trough is called A)

recalculation. B)

expansion. C)

recession. D)

diffusion. Answer:

C Diff: 1

Type: MC


The Business Cycle Skill:




None

5.

From 1991 until 2001, the United States was in a period of A)

recession. B)

business cycle peaks. C)

239


business cycle troughs. D)

expansion. Answer:

D Diff: 1

Type: MC



Factual Objective:



None

6.

The period of expansion ends with a __________ and the period of recession ends with a ______________. A)

business cycle peak; business cycle peak B)

business cycle trough; business cycle trough C)

business cycle peak; business cycle trough D)

business cycle trough; business cycle peak Answer:

C Diff: 1

240


Type: MC






None

7.

What is the name of the organization that defines business cycle peaks and troughs in the United States? A)

Bureau of Labor Statistics B)

National Peak and Trough Committee C)

Federal Reserve D)

241


National Bureau of Economic Research Answer:

D Diff: 1

Type: MC



Factual Objective:



Making the Connection: Who Decides if the Economy is in a Recession?

8.

The longest recession since 1953 in the United States lasted for A)

16 months. B)

24 months. C)

eight months. D)

10 months. Answer:

A Diff: 2

Type: MC

Page Ref: 714/294

242


Topic:


Factual Objective:




9.

As the economy nears the end of an expansion, which of the following do we typically see? A)

rising firm profits B)

falling wages relative to output prices C)

rising interest rates D)

rising levels of firm investment Answer:

C Diff: 2

Type: MC




LO3: Explain what happens during a business cycle

243


AACSB Coding:


None

10.

As the economy nears the end of a recession, which of the following do we typically see? A)

increased spending on capital goods by firms B)

increasing interest rates C)

further decreases in consumer spending D)


A Diff: 2

Type: MC


The Effects of Recession on the Economy

244


Skill:




None

11.

Purchases of which of the following goods would be dramatically reduced during a recession? A)

refrigerators B)

ink pens C)

tomatoes D)

gasoline Answer:

A Diff: 1

Type: MC


Business Cycle and Durable Goods Skill:




245


None

12.

During a recession, spending on ________ tends to fall more dramatically than spending on ________. A)

food; cars B)

nondurable goods; durable goods C)

necessities; luxuries D)

durable goods; nondurable goods Answer:

D Diff: 2

Type: MC






None

13.

246


Purchases of Huggies diapers should A)

increase in recessions and remain constant in expansions. B)

decrease in recessions and increase in expansions. C)

increase in recessions and decrease in expansions. D)

remain fairly constant over the business cycle. Answer:

D Diff: 2

Type: MC






None

14.

The effect of a recession on a company like Boeing Aircraft is such that A)

the decline in sales is more short lived as compared to other firms. B)

sales decline more sharply for Boeing as compared to other firms. C)

247


there is no difference in the impact of the recession on its profits as compared to other firms. D)

profits fall less sharply as compared to other firms. Answer:

B Diff: 2

Type: MC






None

15.

Which of the following companies would you expect to be most negatively affected by the business cycle? A)

Dell Computer B)

Dole Foods C)

British Petroleum D)

Wal-Mart Answer:

A Diff: 2

248


Type: MC






None

16.

Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle.

A)

increase; increase further B)

increase; decrease C)

decrease; increase D)

249


decrease; decrease further Answer:

B Diff: 2

Type: MC






None

17.

Which of the following is a correct statement? A)

The CPI is a widely used measure of the inflation rate. B)

The PPI measures inflation as experienced by producers. C)

Real GDP is our best measure of economic growth. D)

Inflation is measured as the percent change in the CPI. Answer:

D Diff: 1

Type: MC


250


Confusing the Level Measurement with its Change Skill:




Don't Let This Happen to You!: Don't Confuse the Price Level and the Inflation Rate

18.

When the economy enters a recessionary phase of the business cycle, unemployment tends to A)

increase. B)

be unchanged. C)

decrease. D)

change in the same direction as the rate of inflation. Answer:

A Diff: 1

Type: MC





251



None

19.

As an economy begins to emerge from a recessionary phase of the business cycle, A)

inflation begins to fall. B)

unemployment falls immediately. C)

investment begins to fall. D)

unemployment continues to rise. Answer:

D Diff: 2

Type: MC




252




None

20.

Since the 1950s, A)

U.S. business cycle fluctuations have become milder. B)

the U.S. no longer experiences a business cycle. C)

U.S. business cycle fluctuations have becomes more volatile. D)

U.S. business cycle fluctuations have not changed. Answer:

A Diff: 1

Type: MC

Page Ref: 718-20/298-300 Topic:

The Business Cycle Since the 1950s Skill:

Factual Objective:



None

21.

253


Since 1950, expansions in the United States have become ________, while recessions have become ________. A)

shorter; longer B)

longer; longer C)

longer; shorter D)

shorter; shorter Answer:

C Diff: 1

Type: MC


The Business Cycle Since the 1950s Skill:

Factual Objective:



None

22.

254


Which of the following explains why fluctuations in real GDP have become less volatile in the United States since 1950?

A)

Services have become a smaller fraction of GDP since the 1950s. B)

Unemployment insurance and other government transfer programs are more prevalent since the 1950s. C)

The government has become more reluctant to intervene when real GDP declines and unemployment rises since the 1950s.

D)

Both B and C Answer:

B Diff: 2

Type: MC






None

23.

According to An Inside Look, China's airline industry A)

has underinvested in aircraft in the last 5 years. B)

255


has grown dramatically in the last 5 years. C)

has enjoyed strong profitability in the last 5 years. D)

has a very small aviation market as compared to the rest of the world. Answer:

B Diff: 2

Type: MC



Factual Objective:




24.

Economists have not found a way to predict when recessions will begin and end. Answer:

True

False Diff: 1

Type: TF

Page Ref: 712-21/292-301 Topic:


256


Factual Objective:



None

25.

The NBER's Business Cycle dating committee defines a recession as at least two consecutive quarters of falling real GDP.

Answer:

True

False Diff: 2

Type: TF


Defining a Recession Skill:

Factual Objective:




26.

At the end of an expansion, wages of workers are usually rising faster than prices. Answer:

True

False

257


Diff: 2

Type: TF



Factual Objective:



None

27.

Recessions have been more severe since the 1950s. Answer:

True

False Diff: 1

Type: TF

Page Ref: 718-720/298-300 Topic:


Factual Objective:



None

28.

258


How are unemployment, inflation, and the business cycle related? Answer:

A recessionary phase of a business cycle usually begins with decreased investment spending by firms or with reductions in household consumption spending. As spending decreases, firm sales decrease, and firms begin laying off workers, thereby increasing unemployment. As firms find it more difficult to sell their goods, they will also find it more difficult to raise prices, and the rate of inflation will be relatively low. As the economy moves toward the expansionary phase of the business cycle, firms begin to increase their investment, and households begin to increase their spending, and unemployment begins to fall. As spending increases, producers find it easier to raise prices, and the rate of inflation tends to rise during this expansionary phase.

Diff: 2

Type: SA






None

29.

259


How have government policies and programs affected the volatility of the business cycle in the United States since 1950? Explain and provide at least two specific examples of policies or programs that may have had an impact.

Answer:

Government programs like unemployment insurance and Social Security have helped to shorten recessions since they provide additional income to individuals who might not otherwise be able to continue consumption spending. Since the Great Depression, the federal government has also become more actively committed to maintaining low unemployment, which may have reduced the severity of recessions and prolonged expansions.

Diff: 2

Type: SA






None

260

chapter 9 economic growth, the financial system, and...

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