ECON 104 EXAM 2 DAVE BROWN
QUESTIONS & VERIFIED ANSWERS
PASSED 100%
What is the great moderation - Correct Answer ✔✔ The "Great Moderation" is the
decrease in fluctuations in real GDP after 1950. This could be explained by the
increasing importance of services (which less affected by recession), the establishment
of unemployment insurance (which can keep consumption going with lower incomes),
active government stabilization policies, and increased stability of the financial system.
According to our growth model, we predicted convergence. What does this mean? -
Correct Answer ✔✔ t means that developing countries will "catch up" to industrialized
countries. Countries with lower real GDP per capita will have higher growth rates than
countries with higher real GDP per capita
Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP?C =
2,000 + 0.9YI = 2,500G = 3,000NX = 400 - Correct Answer ✔✔ Hint: In equilibrium, Y =
AE, where AE = C + I + G + NX. One equation, solve for Y.𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋𝑌 = 2,000
+ 0.9𝑌 + 2,500 + 3,000 + 4000.1𝑌 = 7,900𝑌 = 79,000The coefficient on Y is the MPC. In
this case, MPC = 0.9. That would mean the multiplier here is 10
Explain the broken window fallacy. - Correct Answer ✔✔ This is the belief that
destruction can stimulate the economy since damages must be repaired, forcing
spending to occur. This spending multiplies through the economy. The problem is that
there is a hidden opportunity cost. Instead of paying for damages, the people may have
bought other goods such as cars and clothing, which would have still stimulated the
economy. However, now they can't buy the clothes or car.This is sometimes related to
government spending - politicians often claim spending is good and that it creates jobs.
But we must look at the productive benefits of spending,rather than spending just for the
sake of trying to boost the economy - government spending is paid for by taxes, which
means consumers will foot the bill and have less disposable income to spend.
Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is
$32,000, what will the new equilibrium level of GDP be if government spending
increases to 2,500?C = 5,000 + (MPC)YI = 1,500G = 2,000NX = -500 - Correct Answer
✔✔ Hint: You have to first find the MPC using the original equilibrium level of
GDP.32,000 = 5,000 + (𝑀𝑃𝐶) × 32,000 + 1,500 + 2,000 − 50024,000 = (𝑀𝑃𝐶) ×
32,000𝑀𝑃𝐶 = 0.75With MPC = 0.75, plug in new G = 2,500 to get new equilibrium Y =
AE.𝑌 = 5,000 + 0.75𝑌 + 1,500 + 2,500 − 5000.25𝑌 = 8,500𝑌 = 34,000
examine the Solow Growth model below, which shows production functions
, What do the axes labels mean?2. What does this model mean for capital investment in
countries that currently have a small or largeexisting stock of capital? In other words,
how does this graph show diminishing returns?3. What does a movement from A to C
mean on this graph?4. What does a movement from B to C or from C to D mean on this
graph? - Correct Answer ✔✔ . On the horizontal axis, K/L means capital per hour
worked, or capital per worker.Remember that K (capital) is physical capital, such as
equipment or machinery. The vertical axis, Y/L, means Real GDP per hour worked, or
Real GDP per worker. This can also be called output per worker.2. The production
functions are upward-sloping. More capital investment leads to higher Real GDP per
worker. However, the functions are nonlinear - they get shallower moving left to right.
This means that if there is currently a small stock of capital, an increase in capital
investment will greatly increase output per worker. If there is already a large stock of
capital, the same amount of investment in capital will lead to a smaller increase in
output per worker. This is diminishing returns -continually increasing investment in
capital will result in smaller increases in productivity. For a country that already has a
large stock of capital, an increase in technology will likely lead to a larger increase in
output per worker compared to further capital investment.3. Moving from A to C means
there is an increase in capital per worker, but the level of technology stayed the same.4.
Moving from B to C or from C to D means there is an increase in technology, or
sometimes referred to as a technological advancement
1. What is the difference in private and public saving? 2. With public saving, when do
we see a budget surplus or deficit? 3. How does the government fund a budget deficit? -
Correct Answer ✔✔ 1. Saving occurs when more money is brought in than spent. (In
other words, it occurs when we don't spend all our income). Private savings is savings
by households, and public savings is savings by the government SPrivate is equal to all
household income that is not spent; household incomes derive from the payments for
factors of production (Y) and transfer payments (TR); households spend money on
consumption (C) and taxes (T). SPrivate = Y + TR - C - T The government saves
whatever it brings in but does not spend (this may be negative, known as dissaving).
Government "income" is taxes. Government spends on expenditures and transfer
payments. SPublic = T - G - TR 2. When SPublic is zero, the government spends as
much as it brings in; this is known as a balanced budget. When SPublic is positive, we
have a budget surplus When SPublic is negative, we have a budget deficit Usually, we
have a budget deficit 3. The government funds a deficit by selling treasury bonds to
individuals and financial institutions. The buyer of the bond gets paid interest.
What is "crowding out"? - Correct Answer ✔✔ When the government runs a deficit, it
must sell treasury bonds to fund the deficit. When households buy treasury bonds, it
decreases the amount of money available to be supplied in the market for loanable
funds. The lower supply results in a smaller equilibrium quantity of funds loaned in the
market. This would reduce the amount of private spending (private investment by firms).
This is the crowding out - lower private investment spending as the result of an increase
in government purchases.
QUESTIONS & VERIFIED ANSWERS
PASSED 100%
What is the great moderation - Correct Answer ✔✔ The "Great Moderation" is the
decrease in fluctuations in real GDP after 1950. This could be explained by the
increasing importance of services (which less affected by recession), the establishment
of unemployment insurance (which can keep consumption going with lower incomes),
active government stabilization policies, and increased stability of the financial system.
According to our growth model, we predicted convergence. What does this mean? -
Correct Answer ✔✔ t means that developing countries will "catch up" to industrialized
countries. Countries with lower real GDP per capita will have higher growth rates than
countries with higher real GDP per capita
Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP?C =
2,000 + 0.9YI = 2,500G = 3,000NX = 400 - Correct Answer ✔✔ Hint: In equilibrium, Y =
AE, where AE = C + I + G + NX. One equation, solve for Y.𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋𝑌 = 2,000
+ 0.9𝑌 + 2,500 + 3,000 + 4000.1𝑌 = 7,900𝑌 = 79,000The coefficient on Y is the MPC. In
this case, MPC = 0.9. That would mean the multiplier here is 10
Explain the broken window fallacy. - Correct Answer ✔✔ This is the belief that
destruction can stimulate the economy since damages must be repaired, forcing
spending to occur. This spending multiplies through the economy. The problem is that
there is a hidden opportunity cost. Instead of paying for damages, the people may have
bought other goods such as cars and clothing, which would have still stimulated the
economy. However, now they can't buy the clothes or car.This is sometimes related to
government spending - politicians often claim spending is good and that it creates jobs.
But we must look at the productive benefits of spending,rather than spending just for the
sake of trying to boost the economy - government spending is paid for by taxes, which
means consumers will foot the bill and have less disposable income to spend.
Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is
$32,000, what will the new equilibrium level of GDP be if government spending
increases to 2,500?C = 5,000 + (MPC)YI = 1,500G = 2,000NX = -500 - Correct Answer
✔✔ Hint: You have to first find the MPC using the original equilibrium level of
GDP.32,000 = 5,000 + (𝑀𝑃𝐶) × 32,000 + 1,500 + 2,000 − 50024,000 = (𝑀𝑃𝐶) ×
32,000𝑀𝑃𝐶 = 0.75With MPC = 0.75, plug in new G = 2,500 to get new equilibrium Y =
AE.𝑌 = 5,000 + 0.75𝑌 + 1,500 + 2,500 − 5000.25𝑌 = 8,500𝑌 = 34,000
examine the Solow Growth model below, which shows production functions
, What do the axes labels mean?2. What does this model mean for capital investment in
countries that currently have a small or largeexisting stock of capital? In other words,
how does this graph show diminishing returns?3. What does a movement from A to C
mean on this graph?4. What does a movement from B to C or from C to D mean on this
graph? - Correct Answer ✔✔ . On the horizontal axis, K/L means capital per hour
worked, or capital per worker.Remember that K (capital) is physical capital, such as
equipment or machinery. The vertical axis, Y/L, means Real GDP per hour worked, or
Real GDP per worker. This can also be called output per worker.2. The production
functions are upward-sloping. More capital investment leads to higher Real GDP per
worker. However, the functions are nonlinear - they get shallower moving left to right.
This means that if there is currently a small stock of capital, an increase in capital
investment will greatly increase output per worker. If there is already a large stock of
capital, the same amount of investment in capital will lead to a smaller increase in
output per worker. This is diminishing returns -continually increasing investment in
capital will result in smaller increases in productivity. For a country that already has a
large stock of capital, an increase in technology will likely lead to a larger increase in
output per worker compared to further capital investment.3. Moving from A to C means
there is an increase in capital per worker, but the level of technology stayed the same.4.
Moving from B to C or from C to D means there is an increase in technology, or
sometimes referred to as a technological advancement
1. What is the difference in private and public saving? 2. With public saving, when do
we see a budget surplus or deficit? 3. How does the government fund a budget deficit? -
Correct Answer ✔✔ 1. Saving occurs when more money is brought in than spent. (In
other words, it occurs when we don't spend all our income). Private savings is savings
by households, and public savings is savings by the government SPrivate is equal to all
household income that is not spent; household incomes derive from the payments for
factors of production (Y) and transfer payments (TR); households spend money on
consumption (C) and taxes (T). SPrivate = Y + TR - C - T The government saves
whatever it brings in but does not spend (this may be negative, known as dissaving).
Government "income" is taxes. Government spends on expenditures and transfer
payments. SPublic = T - G - TR 2. When SPublic is zero, the government spends as
much as it brings in; this is known as a balanced budget. When SPublic is positive, we
have a budget surplus When SPublic is negative, we have a budget deficit Usually, we
have a budget deficit 3. The government funds a deficit by selling treasury bonds to
individuals and financial institutions. The buyer of the bond gets paid interest.
What is "crowding out"? - Correct Answer ✔✔ When the government runs a deficit, it
must sell treasury bonds to fund the deficit. When households buy treasury bonds, it
decreases the amount of money available to be supplied in the market for loanable
funds. The lower supply results in a smaller equilibrium quantity of funds loaned in the
market. This would reduce the amount of private spending (private investment by firms).
This is the crowding out - lower private investment spending as the result of an increase
in government purchases.
