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Econ 100, Fall 2014
Exercise Set 11, ANSWERS
PRODUCTION AND GROWTH
If one wants to know how the material well-being of the average person has changed over time in a given country, one should look
at the
a. level of real GDP.
b. growth rate of nominal GDP.
c. growth rate of real GDP.
d. growth rate of real GDP per person.
ANS D
Over the last 90 years or so, in Turkey, real GDP per person has grown at an average annual rate of
a. 1%.
b. 2%.
c. 2.5%.
d. 5%.
ANS B
In some East Asian countries real GDP per person has grown at an average annual rate of 7%. This implies that real GDP per person
in those countries doubles about every
a. 15 years.
b. 10 years.
c. 20 years.
d. 25 years.
ANS B
The average amount of goods and services produced from each hour of a worker’s time is called
a. per capita GNP
b. productivity
c. human capital
d. per capita GDP
ANS B
Consider two countries. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country
B has a population of 2,000 of whom 1,800 work 6 hours a day to make 270,000 final goods
a. Country B has lower productivity, but higher real GDP per person than country B.
b. Country A has higher productivity, but lower real GDP per person than country B.
c. Country A has lower productivity and lower real GDP per person than country B.
d. Country A has higher productivity and higher real GDP per person than country B.
ANS C
Which of the following would be considered physical capital?
a. the pizza oven at the Liquidity Preferences Tavern
b. rivers on which goods are transported
c. the skills and knowledge of a barber
d. All of the above are correct.
ANS A
Which of the following would not be considered physical capital?
a. a new factory building
b. a computer used to help Mercury Delivery Service keep track of its orders
c. on-the-job training
d. a desk used in an accountant’s office
ANS C
Which of the following is human capital?
a. a student loan
b. the employee’s ability and understanding how to use the company’s accounting software
c. training videos for new corporate employees
d. All of the above are correct.
ANS B
Which of the following is considered human capital?
a. the comfortable chair in your dorm room where you read economics texts
b. the amount you get paid each week to work at the library
c. the things you have learned this semester
d. any capital goods that require a human to be present to operate
ANS C
Which of the following would be human capital (H) and physical capital (K) respectively?
a. for an accounting firm, the accountants knowledge of tax laws is H, and computer software is K
b. for a grocery store, grocery carts is H and shelving is K
c. for a school, chalkboard is H and desks are K
d. for a library, the building is H and the reference librarians’ knowledge of the Internet is K
ANS A
When economists speak of human capital, they are referring to
a.
the level of education and training that makes workers productive.
b.
the stock of accumulated experience and skills that make workers productive.
c.
the ability of workers to shift the production function representing output per worker.
d.
All of the above.
e.
Only a and b.
Answer: d
Which of the following describes an increase in technological knowledge? A farmer:
a.
sends his child to agricultural college and the child returns to work on the farm.
b.
hires another day laborer.
c.
buys another tractor.
d.
discovers that it is better to plant in the spring rather than in the autumn.
Answer: D
For an economy to double its income in twelve years, what percentage growth rate must it approximate?
a.
4.5
b.
5.5
c.
6.5
d.
7.5
e.
8.5
Answer: c
Which of the following increases the productivity of labor?
a.
increases in the interest rate
b.
decreases in the rate of investment
c.
increases in the budget deficit
d.
an increase in the capital stock
e.
increases in consumption spending
Answer: d
Productivity is usually measured as
a.
the change in output per unit change in hours worked.
b.
output per hour worked.
c.
the change in output per unit change in numbers employed.
d.
total output by all workers.
Answer: b
Higher living standards are best evaluated on the basis of all of the following aspects except
a.
interest rates
b.
educational achievement.
c.
income.
d.
life expectancy.
Answer: a
All of the following will cause an increase in GDP per capita except
a.
An increase in labor productivity.
b.
An increase in labor force participation rate.
c.
An increase in total number of hours worked.
d.
An increase in population growth rate.
Answer: d
If, in some European country, real GDP/person in 2011 is €18,073 and real GDP/person in 2012 is €18,635, what is the growth rate of
real output per person over this period?
a.
2.0 per cent
b.
3.1 per cent
c.
18.0 per cent
d.
18.6 percent
e.
5.62 per cent
Answer: B
Imagine a kitchen. It contains a cook, the cook's diploma, a recipe book, a stove and utensils, and some rabbit meat harvested from
the open countryside.
Link each object in the kitchen to a general category within the factors of production.
Answer: Cook = labor, diploma = human capital, recipe book = technological knowledge, stove and utensils = capital, rabbit meat =
natural resource.
SAVING IVESTMENT and the FINANCIAL SUSTEM
National saving (or just saving) is equal to
a.
none of these answers.
b.
investment + consumption expenditures.
c.
private saving + public saving.
d.
GDP - government purchases.
Answer: C
If government spending exceeds tax collections,
a.
there is a budget deficit.
b.
public debt will fall
c.
there is a budget surplus.
d.
private saving is positive.
e.
public saving is positive.
Answer: A
If GDP = €1,000, consumption = €600, taxes = €100, and government purchases = €200, how much is saving and investment?
a.
saving = €200, investment = €100
b.
saving = €100, investment = €200
c.
saving = €0, investment = €0
d.
saving = €200, investment = €200
Answer: D
If the public consumes €100 billion less and the government purchases €100 billion more (other things unchanging), which of the
following statement is true?
a.
Saving is unchanged.
b.
There is an increase in saving and the economy should grow more quickly.
c.
There is a decrease in saving and the economy should grow more slowly.
d.
There is not enough information to determine what will happen to saving.
Answer: A
Investment is
a.
the purchase of goods and services.
b.
the purchase of capital equipment and structures.
c.
when we place our saving in the bank.
d.
the purchase of stocks and bonds.
Answer: B
An increase in the budget deficit that causes the government to increase its borrowing shifts the
a.
supply of loanable funds to the right.
b.
demand for loanable funds to the right.
c.
demand for loanable funds to the left.
d.
supply of loanable funds to the left.
Answer: D
An increase in the budget deficit will
a.
raise the real interest rate and decrease the quantity of loanable funds demanded for investment.
b.
lower the real interest rate and increase the quantity of loanable funds demanded for investment.
c.
raise the real interest rate and increase the quantity of loanable funds demanded for investment.
d.
lower the real interest rate and decrease the quantity of loanable funds demanded for investment.
Answer: A
GDP is $5 trillion, taxes are $1.5 trillion, private savings is $0.5 trillion, and public saving is $0.2 trillion. Assume a closed economy.
Calculate consumption (C), government purchases (G), national saving, and investment.
ANSWER
We know Y = 5, T = 1.5, Sprivate = 0.5 = Y - T - C, Spublic = 0.2 = T - G.
Since Sprivate = Y - T - C, rearranging gives C = Y - T - Sprivate = 5 - 1.5 - 0.5 = 3.
Since Spublic = T - G, then rearranging gives G = T - Spublic = 1.5 - 0.2 = 1.3.
S = national saving = Sprivate + Spublic = 0.5 + 0.2 = 0.7.
Finally, since I = investment = S, I = 0.7.
Y
C
I
G
= 1,200, NX = 0
= 125 + 0.75(Y – T)
= I(r) = 200 – 10r, r is the interest rate in percentage points
= 150, and T
= 100
Please compute consumption (C), the equilibrium real interest rate (r), investment (I), and private and public saving, (Sp) and (Sg).
What happens to investment and the equilibrium real interest rate if G increases?
ANWERS
(a)
C = 125 + 0.75 (Y – T) = 125 + 0.75 (1200 – 100) = 125 + 0.75 x 1100 = 950.
(b) S = Y – C – G = 1200 – 950 – 150 = 100, and since S = I in the equilibrium of the goods market, I = 100 also, which means that 100
= 200 – 10 r, solving for which we find r = 10%.
(c) Draw a graph with real rate of interest measured along the vertical axis and saving and investment measured along the horizontal
axis. S is represented by a vertical line at 100, and I is represented by a downward sloping line which intersects the vertical axis at r =
20% and the horizontal axis at I = 200. The point of intersection between these two lines corresponds to I = S = 100 and r = 10%
d) Private saving = Disposable Income – Consumption = Y – T – C = 1200 – 100 – 950 = 150,
Public saving = T – G = 100 – 150 = – 50.
(e) As G increases, private saving does not change (because Y is constant) but public saving decreases (because public saving = T – G),
therefore total saving decreases. This means that investment must decrease also, which, everything else being the same, can happen only if real interest rate increases in the new equilibrium of the goods market.
Which of the following situations is investment? Saving? Explain.
a.
Your family takes out a mortgage and buys a new house.
b.
You use your €200 wage payment to buy stock in BP.
c.
Your friend earns €100 and deposits it in her account at a bank.
d.
You borrow €1,000 from a bank to buy a car to use in your pizza-delivery business.
a. INVESTMENT
When your family takes out a mortgage and buys a new house, that is investment, because it is a purchase of new capital.
b. SAVING
Using your €200 wage payment to buy stock in BP it is saving, because your income of €200 is not being spent on consumption
goods.
c. SAVING
When your friend earns €100 and deposits it in her account at a bank, that is saving, because the money is not spent on consumption goods.
d. INVESTMENT
When you borrow €1,000 from a bank to buy a car to use in your pizza-delivery business, that is investment, because the car is a
capital good.