Deck 5: Economic Growth, the Financial System and Business Cycles

Question 1

When production in an economy grows more quickly than the population in that economy, which of the following must be occurring?

A)Real GDP is falling.
B)Incomes are growing at a slower rate than the population.
C)Real GDP per capita is rising.
D)Living standards are falling.

Answer 1

Real GDP per capita is rising.

Question 2

What is 'human capital'?

A)A term used to describe the underground labour market.
B)Manufactured goods that are used to produce other goods.
C)Accumulated knowledge and skills acquired by a worker.
D)The manager or owner of a business.

Answer 2

Accumulated knowledge and skills acquired by a worker.

Question 3

Workers in ________ countries have ________ to work with than do workers in low income countries.

A)high income; less physical capital
B)high income; more physical capital
C)high income; more labour
D)low income; less labour

Answer 3

high income; more physical capital

Question 4

If, between 2007 and 2017, the economy's real GDP grew from $20 billion to $40 billion, the average growth rate in the economy was

A)3%.
B)7%.
C)20%.
D)100%.

Question 5

When the capital stock per hour worked:

A)increases, labour productivity in increases.
B)increases, labour productivity falls, as workers are being replaced with capital and machinery.
C)decreases, labour productivity increases.
D)increases, capital productivity increases.

Question 6

Which of the following is the best measure of the standard of living?

A)Nominal GDP for the whole economy.
B)Real GDP for the whole economy.
C)Nominal GDP per capita.
D)Real GDP per capita.

Question 7

Suppose that real GDP for 2017 was $10 000 billion and real GDP for 2018 was $9 500 billion. What is the rate of growth of real GDP?

A)-10%
B)1%
C)5%
D)-5%

Question 8

The only way the standard of living of the average person in a country can increase is by increasing ________ faster than ________.

A)production; population
B)income; population
C)population; production
D)population; income

Question 9

If GDP grew 3% in 2015, 2.8% in 2016 and 2.4% in 2017, then what is the average annual growth rate over this period?

A)5%
B)2)7%
C)4%
D)-2.2%

Question 10

Which of the following has not been a long-term trend in the Australian economy since 1901?

A)increasing nominal GDP
B)increasing real GDP
C)increasing unemployment rates
D)increasing real GDP per capita

Question 11

If GDP is currently $13 trillion and is growing at a rate of 2.6% per year, how long will it take GDP to reach $26 trillion?

A)about 15 years
B)about 17 years
C)about 27 years
D)about 30 years

Question 12

If GDP grows at a rate of 2.8% per year, approximately how long will it take for GDP to double in size?

A)12 years
B)21 years
C)23 years
D)25 years

Question 13

'Labour productivity' is the quantity of:

A)output that can be produced in one hour by several workers.
B)labour produced in one hour in an economy.
C)output produced in one hour by one worker.
D)output produced in one hour by one machine.

Question 14

Which of the following describes the growth in real GDP per person in Australia from 1901 to 2016?

A)It has decreased more times than it has increased.
B)It has increased by more than five times.
C)It has doubled.
D)Nominal GDP has increased but real GDP has slowly decreased.

Question 15

Over the past 100 years, economic growth has ________ health, and health has ________ economic growth.

A)improved; worsened
B)improved; improved
C)worsened; improved
D)worsened; worsened

Question 16

'Long-term economic growth' is a term used to describe the:

A)falling unemployment rates over time.
B)rising price level over time.
C)more rapid growth in population than of real output.
D)increasing trend in real GDP per capita.

Question 17

If an economy is growing at a rate of 2.3% per year, how long will it take the economy to double in size?

A)60 years
B)43 years
C)36 years
D)30 years

Question 18

'Labour productivity' will increase if the ________ increases and ________.

A)quantity of capital per hour worked; technological change occurs
B)quantity of labour per unit of capital; technological change occurs
C)quantity of capital per hour worked; immigration increases while capital is fixed
D)quantity of labour per unit of capital; immigration increases while capital is fixed

Question 19

Suppose that real GDP for 2017 was $10 000 billion and real GDP for 2018 was $11 000 billion. What is the rate of growth of real GDP?

A)11%
B)10%
C)5%
D)2%

Question 20

The 'rule of 70' states that:

A)it takes an economy 70 years to double in size.
B)the number of years it takes an economy to double is 70 divided by the growth rate.
C)the number of years it takes an economy to double is the growth rate multiplied by 70.
D)the number of years it takes an economy to double is the growth rate divided by 70.

Question 21

Outline the trend in real GDP per capita in Australia from 1901 to 2016.
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Question 22

What are financial securities that represent partial ownership of a firm?

A)bonds
B)shares
C)treasury bills
D)certificates of deposit

Question 23

Which of the following will result in an increase in labour productivity?

A)A decrease in the number of people attending institutions of higher education.
B)A decline in the amount of human capital per worker.
C)An increase in technology.
D)A decline in the capital stock per hour worked.

Question 24

'Labour productivity' increases when capital stock per person falls, as there is a trade-off between capital and labour.

Question 25

Potential GDP is always greater than real GDP in an economy.

Question 26

Explain why the increase in GDP per capita understates the whole effect of economic growth on the standard of living.
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Question 27

Outline the various actions the government sector could take to promote growth.
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Question 28

'Potential GDP' is defined as the:

A)maximum level of GDP that the economy can produce.
B)amount of GDP produced if there is a zero rate of unemployment.
C)level of GDP attained when all firms are producing at capacity.
D)amount of GDP produced when the economy is in equilibrium.

Question 29

Long-run economic growth:

A)is due to increases in capital productivity rather than labour productivity.
B)does not usually occur due to the economic recessions that occur as part of the business cycle.
C)depends more on increases in capital per hour worked than on technological change.
D)depends more on technological change than on increases in capital per hour worked.

Question 30

Suppose you are a highly regarded international economic advisor. You have been asked to assess the possibilities of growth in an African country. It is a country abundant in labour and some natural resources. The capital to labour ratio is low. It has a free market economy. You have found that this country does not have a very strong and healthy banking system; however, the political system is stable and the government does a good job protecting property rights. Assess this country's prospects for growth. Recommend two things that would enhance the country's growth.
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Question 31

If, as economist Alwyn Young has suggested, high economic growth rates in Singapore are not a result of technological progress, how are growth rates in Singapore expected to change over time?

A)Without technological progress, the high growth rates cannot be sustained.
B)As long as the labour force participation rate is rising, growth can still continue, despite a lack of technological progress.
C)As long as the amount of capital per hour worked continues to expand, the growth rate in Singapore will continue to rise at an increasing rate.
D)Agricultural workers will continue to expand their productivity, thereby allowing Singapore to achieve growth rates above those of higher-income countries.

Question 32

Use the 'rule of 70' to illustrate how small differences in growth rates can have a large impact on how rapidly the standard of living in a country increases.
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Question 33

The 'rule of 70' states that it takes approximately 70 years for a developing economy to become a developed economy once economic growth begins.

Question 34

Economic growth depends more on technological change than on increases in capital per hour worked.

Question 35

Which of the following would not increase potential GDP?

A)an increase in the size of the labour force
B)technological change
C)a fall in the rate of unemployment
D)new factories being built

Question 36

Which of the following is most likely to be able to sustain economic growth in an economy?

A)sustained increases in the labour force participation rate
B)technological change
C)increases in capital per hour worked
D)the accumulation of economic resources

Question 37

What factors determine labour productivity?
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Question 38

What is 'potential GDP'?
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Question 39

Long-run economic growth is measured by changes in real GDP per person over time.

Question 40

Potential GDP in Australia:

A)does not change much over time.
B)grows as the economy grows.
C)changes over the business cycle.
D)declines over time.

Question 41

What are financial securities that represent promises to repay a fixed amount of funds?

A)bonds
B)shares
C)savings accounts
D)certificates of deposit

Question 42

Let G = government purchases; T = taxes; TR = transfer payments. The budget surplus is defined as:

A)T - (G + TR)> 0.
B)T - (G + TR)< 0.
C)T + (G - TR)> 0.
D)T + (G + TR)> 0.

Question 43

Let Y = total income; C = consumption; G = government purchases; T = taxes; TR = transfer payments. Private saving is defined as:

A)Y + TR - C - T.
B)T + G + TR.
C)T - G + TR.
D)Y + TR + C - T.

Question 44

What is the term for a country with no trade and no borrowing and lending with other countries?

A)planned economy
B)closed economy
C)open economy
D)market economy

Question 45

Let I = investment; Y = total income; C = consumption; G = government purchases.
In a closed economy:

A)I = Y - C - G.
B)I = Y + C - G.
C)I = Y - C + G.
D)I = Y + C + G.

Question 46

How can public savings in the economy be increased?

A)raising taxes
B)raising government spending
C)lowering taxes
D)raising transfer payments

Question 47

In a closed economy, the relationship between saving and investment is that:

A)saving is greater than investment.
B)investment is equal to saving.
C)investment is greater than saving.
D)investment may be greater or smaller than saving.

Question 48

A federal budget surplus could be reduced by:

A)raising taxes.
B)lowering government spending.
C)increasing transfer payments.
D)lowering interest rates.

Question 49

Let G = government purchases; T = taxes; TR = transfer payments. The budget deficit is defined as:

A)T - (G + TR)< 0.
B)T - (G + TR)> 0.
C)T + (G - TR)< 0.
D)T + (G+ TR)< 0.

Question 50

Which of the following statements about the Australian federal budget is true?

A)In 2010, the federal budget was in deficit by $54 billion.
B)In 1996, the federal budget was in deficit by $5 billion.
C)In 2007, the federal budget was in surplus by $17 billion.
D)All of these options are correct.

Question 51

If taxes are more than transfer payments plus government spending, then there:

A)are positive savings.
B)is a balanced budget.
C)is a budget surplus.
D)is dissaving.

Question 52

A financial intermediary's main function is to match ________ with excess funds to ________ who want to borrow funds.

A)households; firms
B)firms; firms
C)households; households
D)firms; households

Question 53

If real GDP in a closed economy is $50 billion, consumption is $30 billion, and government purchases are $15 billion, what is investment?

A)$15 billion
B)$30 billion
C)$40 billion
D)$70 billion

Question 54

Let Y = total income; C = consumption; G = government purchases; T = taxes; TR = transfer payments. Public saving is defined as:

A)Y + TR - C - T.
B)T + G + TR.
C)T - G - TR.
D)Y + TR + C - T.

Question 55

If, in a closed economy, real GDP is $25 billion, consumption is $15 billion, and government purchases are $7 billion, what is the total saving in the economy?

A)$7 billion
B)$15 billion
C)$25 billion
D)$55 billion

Question 56

Which one of the following is not considered a financial intermediary?

A)a building society
B)a managed fund
C)an insurance company
D)a financial advisor

Question 57

Let Y = total income; C = consumption; G = government purchases; T = taxes; TR = transfer payments. Total saving in the economy can be expressed as:

A)Y + TR - C - T.
B)Y - T.
C)T - G - TR.
D)Y - C - G.

Question 58

Which of the following is not one of the key services provided by the financial system?

A)decreasing taxes
B)risk sharing
C)liquidity
D)information

Question 59

Let G = government purchases; T = taxes; TR = transfer payments. There is public dissaving if:

A)G + TR > T.
B)G + TR < T.
C)TR > G + T.
D)TR < G + T.

Question 60

What is the ease with which a financial security can be exchanged for money?

A)liquidity
B)the face value
C)risk
D)the rate of return

Question 61

Refer to Figure 5.1 for the following questions.
Figure 5.1

Refer to Figure 5.1. If the current real interest rate is 5%, which of the following is true?

A)The loanable funds market is in equilibrium.
B)There is a surplus of loanable funds in the market.
C)There is a shortage of loanable funds in the market.
D)The quantity of loanable funds being demanded in the market is less than $90 million.

Question 62

The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.

A)government
B)households
C)banks
D)firms

Question 63

If firms are anticipating that the profitability of new investments will be lower in the future, then the ________ curve for loanable funds will shift to the ________.

A)supply; right
B)supply; left
C)demand; right
D)demand; left

Question 64

A government budget surplus will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________.

A)supply; right; fall
B)supply; left; rise
C)demand; right; rise
D)demand; left; fall

Question 65

The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ number of investment projects are profitable, and the ________ the quantity of loanable funds demanded.

A)negative; greater; greater
B)negative; greater; lesser
C)negative; lesser; greater
D)positive; lesser; lesser

Question 66

Refer to Figure 5.1 for the following questions.
Figure 5.1

Refer to Figure 5.1. As a result of an increase in the government budget deficit, the ________ for loanable funds will ________, thereby ________ the equilibrium real interest rate and ________ the equilibrium quantity of loanable funds.

A)demand; rise; increasing; decreasing
B)supply; rise; decreasing; increasing
C)demand; fall; decreasing; decreasing
D)supply; fall; increasing; decreasing

Question 67

An increase in the real interest rate will:

A)decrease consumption and reduce investment.
B)decrease saving and investment.
C)increase investment and government spending.
D)decrease consumption and investment.

Question 68

In the model of the market for loanable funds, which of the following will not shift the supply curve for loanable funds?

A)expectations of high returns to investments
B)a decrease in taxation on interest earned on savings accounts
C)a government budget surplus
D)a government budget deficit

Question 69

A government budget deficit will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________.

A)supply; right; fall
B)supply; left; rise
C)demand; right; rise
D)demand; left; fall

Question 70

In the model of the market for loanable funds, which of the following will not shift the demand curve for loanable funds?

A)expectations of high returns to investments
B)the effect of technological change on profitability
C)lower interest rates
D)the expectation of a recession by businesses

Question 71

When is there a federal budget surplus?

A)the government spends more than it collects in taxes
B)the government spends less than it collects in taxes
C)the government spends the same amount it collects in taxes
D)taxes are too high

Question 72

When is there a federal budget deficit?

A)the government spends more than it collects in taxes
B)the government spends less than it collects in taxes
C)the government spends the same amount it collects in taxes
D)taxes are too high

Question 73

A decrease in the real interest rate does which of the following?

A)increases the demand for loanable funds
B)decreases saving
C)increases consumption spending
D)decreases the demand for loanable funds

Question 74

An increase in the real interest rate results in which of the following?

A)an increase in the demand for loanable funds
B)a decrease in the demand for loanable funds
C)an increase in the quantity of loanable funds supplied
D)Both B and C will occur as a result of an increase in the real interest rate.

Question 75

Refer to Figure 5.1 for the following questions.
Figure 5.1

Refer to Figure 5.1. Beginning at equilibrium, if the government budget deficit rises, which of the following would you expect to see?

A)The quantity of loanable funds demanded by firms will rise above $120 million.
B)The quantity of loanable funds demanded by firms will fall below $120 million.
C)The budget deficit will have no impact on the quantity of loanable funds demanded by firms.
D)The interest rate will fall below 4%.

Question 76

Refer to Figure 5.1 for the following questions.
Figure 5.1

Refer to Figure 5.1. An increase in the supply of loanable funds could result in which of the following combinations of the real interest rate and quantity of loanable funds at a new equilibrium?

A)The real interest rate is 5%, and the quantity of loanable funds is $150 million.
B)The real interest rate is 5%, and the quantity of loanable funds is $90 million.
C)The real interest rate is 3%, and the quantity of loanable funds is $150 million.
D)The real interest rate is 3%, and the quantity of loanable funds is $90 million.

Question 77

Using the market for loanable funds, which of the following has the potential to raise the real interest rate?

A)an increase in the demand for loanable funds
B)an increase in the quantity demanded of loanable funds
C)an increase in the supply of loanable funds
D)an increase in the quantity supplied of loanable funds

Question 78

The supply of loanable funds has a ________ slope because the greater the interest rate, the ________ the reward to savings, and the ________ the quantity of loanable funds supplied.

A)positive; lesser; lesser
B)positive; greater; lesser
C)negative; lesser; greater
D)positive; greater; greater

Question 79

If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________.

A)supply; right; fall
B)supply; left; rise
C)demand; right; rise
D)demand; left; fall

Question 80

Equilibrium in the loanable funds market determines the:

A)nominal interest rate.
B)current interest rate.
C)real interest rate.
D)expected interest rate.