Practice Questions –Chapters 12,13,14,15

Chapter 12

  1. What is productivity and how is it determined?
  2. Explain Diminishing Marginal Returns and the Catch Up Effect.
  3. Explain Foreign Direct Investment vs. Foreign Portfolio Investment
  4. Describe some forms of private spending that represent consumption, and some forms that represent investment; Describe some forms of government spending that represent consumption, and some forms that represent investment.
  5. International data show a positive correlation between political stability and economic growth.
  6. Through what mechanism could political stability lead to strong economic growth?
  7. Through what mechanism could strong economic growth lead to political stability?

Chapter 13

  1. Define financial system, financial markets, and financial intermediaries. What are the different types of financial markets? What are the different types of financial intermediaries?
  2. Explain budget surplus and budget deficit.
  3. What is the Market for Loanable Funds? Where do the supply and demand for loanable funds come from?
  4. Explain the nominal interest rate, the real interest rate, and what the inflation rate has to do with these interest rates.
  5. Explain the difference between saving and investment as defined by a macroeconomist.
  6. This chapter explains that investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit.
  7. Why is it difficult to implement both of these policies at the same time?
  8. What would you need to know about private saving in order to judge which one of these two policies would be a more effective way to raise investment?

Chapter 14

  1. Define present value, future value, and compounding. Give the equations for present value and future value.
  2. Define risk averse, diversification, idiosyncratic risk, and aggregate risk.
  3. Define efficient market hypothesis, informationallly efficient, and random walk.
  4. A company has an investment project that would cost $10 million today and yield a payoff of $15 million in four years.
  5. Should a firm undertake the project if the interest rate is 11%? 10%? 9% 8%?
  6. Can you figure out the exact cutoff for the interest rate between profitability and nonprofitability?
  7. About 400 years ago, native Americans sold the island of Manhattan for $24. if they had invested this money at an interest rate of 7% per year, how much would they have today?

Chapter 15

  1. Define labor force, unemployement rate, employement rate, labor force participation rate, natural rate of unemployment, and cyclical unemployment. Give the equations for the unemployment rate, employment rate, and labor force participation rate.
  2. Why are some people always unemployed? Define frictional unemployement, structural umemployement. Why is some frictional unemployment inevitable?
  3. What are efficiency wages? Name 4 theories as to why firms might want to pay high wages.
  4. Consider an economy with two labor markets, neither of which is unionized. Now suppose a union is established in one market.
  5. Show the effect of the union on the market in which it is formed. In what sense is the quantity of labor employed in this market an inefficient quantity?
  6. Show the effect of the union on the nonunionized market. What happens to the equilibrium wage in this market?