ECON 001 Exam #3 – Flashcards
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Rule of 70
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time to double almost equal to 70/growth rate (Sometimes Rule of 72)
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The Rule of 70 is only an approximation for...
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smaller growth rates (less than 10%)
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Determinants of Growth
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Labor Productivity (L), Capital Stock (K), Human Capital (H), Technology (A)
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Things that Hinder Growth
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War, Bad Government Policies
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Potential GDP
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Level of Y attained when all firms are operating with normal labor force under normal working hours (NO IDLE CAPITAL)
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The Difference Between Stocks and Bonds
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Companies must payoff bonds before dividends, but with bonds no ownership of the company
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3 Roles of Financial System
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Spreads Risk, Provides Liquidity, Provides Information
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Explain How the Financial System Provides Liquidity
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Makes it easier to get assets, Makes it easier to convert current assets to cash
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Explain How the Financial System Provides Information
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Prices (Stock prices are constantly updated)
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Spr=Y-T-C Y=C+I+G Spu=T-G I=Y-C-G S=Y-T-C+T-G S=I S=Y-C-G S=I
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Proof that Savings = Investment
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Suppose that in 2010, all prices in the economy double and that all wages and salaries have also doubled. In 2010, you
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are no better off or worse off than you were in 2009 as the purchasing power of your salary has remained the same.
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Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. If actual inflation turns out to be 7% over the loan period, then
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borrowers gain 1%
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When actual inflation is less than expected inflation
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borrowers lose and lenders gain
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Technological advances generally result in
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increased life expectancy
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If real GDP per capita measure in 2000 dollars was $6,000 in 1950 and $48,000 in 2000, we would say that in the year 2000, the average American could buy ______ times as many goods and services as the average American in 1950.
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8
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If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from
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23.3 years to 17.5 years
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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?
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2.90%
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Actual real GDP will be above potential real GDP if
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firms are producing above capacity
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Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth of the economy.
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decreases, decreases
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Liquidity refers to
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the ease in which a financial security can be traded for cash
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Borrowers are ________ of loanable funds, and lenders are _______ of loanable funds.
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demanders, suppliers
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Which of the following would you expect to increase the equilibrium interest rate?
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an increase in the budget deficit
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The response of investment spending to an increase in government spending is called
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crowding out
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How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax?
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The equilibrium quantity of loanable funds would rise.
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During the expansion phase of the business cycles, which of the following eventually increases?
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Production, Employment, Income
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A period of expansion ends with a _______ and the period of recession ends with a ______
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peak, trough
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What is the name of the organization that defines business cycles peaks and troughs in the United States?
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National Bureau of Economic Research
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Purchase of diapers should
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remain fairly consent over the business cycle
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Inflation tends to _______ during the expansion phase of the business cycle and _______ during the recession phase of the business cycle.
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increase, decrease
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Since the 1950s,
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U.S. business cycle fluctuations have become milder.
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What is one role the financial system does not provide?
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Creating Money
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According to the "catch-up" theory, poorer countries ought to have _______ growth rates compared to their richer counterparts.
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higher
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A constant increase in capital per worker cannot lead to long-run growth because capital per worker
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exhibits decreasing marginal returns
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What would be the result of a decrease in a government budget deficit?
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a decrease in supply
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What would be the result of an increase in taxes on business profits?
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a decrease in demand
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Suppose there is a financial crisis that reduces people's retirement funds. Identify what happens to the interest rate and amount of lending.
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a decrease in supply
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Suppose our federal government decides to increase the amount of lending that it spends holding taxes constant. Identify what happens to the interest rate and amount of lending.
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a decrease in supply
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Durable Goods
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goods lasting 3 years or longer
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Non Durable Goods
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goods lasting less than 3 years
