Macroeconomics Test: Private sector, GDP
1. Suppose a firm is considering the purchase of a machine which will increase its total revenues by $10,000. The machine costs $8,000 and has a useful life of one year. The interest rate is 10%. Should this investment be undertaken? Explain.
- I have $200 in the bank. The interest rate was 5% per year two years ago and is expected to remain the same for the next two years. Show work
- How much money will I have in two years ?
- How much did I put in the bank two years ago?
3. Compute current price of a $30 coupon government bond with a face valueof $1,000 maturing two years from today. Current interest rate is 4%.
- What is the yield to maturity (interest rate) on a $1,000-face-value discount bond maturing in one year that sells for $950?
5Explain why you would be more or less willing to buy Microsoft corporate bond in the following situations:
- The bond market becomes more volatile and risky relative to gold and real estate market
- Brokerage commissions on stocks fall
6. Which of the following is a final good or service?
a) diesel fuel bought for a delivery truck
b) fertilizer purchased by a farm supplier
c) a haircut purchased by an ESC student
d) Chevrolet windows purchased by a General Motors assembly plant
7. Suppose Nucor Steel sells $2,000 worth of steel to Ford, other producers sell $5,000 worth of other inputs to Ford; Ford then uses the steel and other inputs to make a Taurus which it sells to the car dealership for $15,000. The car dealership sells the car to a school teacher for $18,000. What is the total contribution to GDP made by this entire series of transactions?
8. Which of the following is/are included into the income measure of the US GDP?
a. profits of Randy the Illegal Drug-Dealer
b. salary of Jane, a US citizen accountant working in Korea
c. the value of a new garage Sam the School Teacher built himself in his back yard
d. amount of a cash gift an ESC student received from parents
e. salary of Maria, a citizen of Mexico, working legally at a dental office in Queens
9. US GDP can be found by:
a. Adding up all the spending on US-produced goods and services by business, government, households and foreigners, and subtracting imports.
b. Adding up the value of all final goods produced in the economy.
c. Adding up all of the income receipts of households, government, and business.
d. Summing up all the value-added at each stage of production
e. Any of the above
10. GDP in an economy is $5.1 billion. Consumer expenditures are $3.2 billion, government purchases are $1 billion, and net exports are $0.3 billion. Find gross private domestic investment. Show work.
11. GDP excludes:
a) the production of services c) the market value of unpaid work in the home
b) the production of nondurable goodsd) residential housing construction
12.GDP also excludes expenditures by:
A) businesses on pollution control equipment. C) government on military hardware.
B) business for travel and entertainment. D) consumers on used automobiles.
13. Suppose an island economy’s real GDP is $10,000 in 2013 and $12,000 in 2014. Assume that population was 100 people in 2013 and 110people in 2014. Show work.
- What is the growth rate of real GDP?
- What is the growth rate of real GDP per capita?
14. Which statement is correct?
a. During a recession spending on capital goods increases.
b. Generally, real output and employment show little variance over the business cycle.
c. Recessions have not been severe because economists and statisticians have been able to predict their occurrence and intensity with high accuracy.
d. The production of nondurable consumer goods is more stable than the production of durable consumer goods over the business cycle.
15. (extra credit) You are considering going to graduate school for a one-year master’s program. You have done some research and believe that the master’s degree will add $9,000 per year to your salary for the next 10 years of your working life, starting next year. From then on, after the next 10 years, it makes no difference. Completing the master’s program will cost you $50,000, which you would have to borrow at an interest rate of 6%. How would you decide if this investment in your education profitable? Write down your present value calculations without actually calculating the values.