Question 1

Which of the following best describes long-run economic growth?

Accepted Answer

The process by which rising productivity increases the average standard of living over time.

Question 2

What is the most commonly used measure of the average standard of living in macroeconomics?

Accepted Answer

Real GDP per capita

Question 3

Potential GDP is defined as:

Accepted Answer

The level of real GDP attained when all firms are operating at capacity, with normal hours and a normal-sized workforce.

Question 4

If the growth rate of real GDP per capita is 2% per year, approximately how many years will it take for real GDP per capita to double according to the Rule of 70?

Accepted Answer

35 years

Question 5

Which formula correctly expresses the relationship between savings and investment in a closed economy?

Accepted Answer

$$Y - C - G = I$$

Question 6

Suppose a household earns $$Y$$, pays taxes $$T$$, receives transfer payments $$TR$$, and consumes $$C. $$What is the formula for private savings?

Accepted Answer

$$S_{private} = Y + TR - C - T$$

Question 7

Which of the following is NOT a key service provided by the financial system?

Accepted Answer

Price controls

Question 8

A bond is best described as:

Accepted Answer

A financial security promising to repay a fixed amount of funds.

Question 9

If the government increases taxes, what is the likely effect on the supply of loanable funds in the market for loanable funds?

Accepted Answer

The supply of loanable funds will decrease.

Question 10

Which of the following scenarios would most likely increase potential GDP?

Accepted Answer

An increase in the labor force and the creation of new technologies.

Question 11

Ebenezer Scrooge’s initial decision to save rather than consume can promote economic growth because:

Accepted Answer

It allows resources to be set toward investment, increasing productive capacity and future consumption.

Question 12

Which of the following best explains why investment is crucial for long-term economic growth?

Accepted Answer

Investment increases both physical and human capital, expanding the economy’s productive capacity.

Question 13

If the interest rate in the market for loanable funds rises, what is the most likely effect on the quantity of loanable funds demanded?

Accepted Answer

The quantity of loanable funds demanded will decrease.

Question 14

Which equation represents total savings in the economy, including both private and public savings?

Accepted Answer

$$S = Y - C - G$$

Question 15

A financial intermediary is:

Accepted Answer

A firm that borrows funds from savers and lends them to borrowers.

Question 16

If a country’s real GDP per capita grows at 3.5% per year, what is the approximate doubling time for real GDP per capita?

Accepted Answer

20 years

Question 17

Which of the following would shift the demand for loanable funds to the right?

Accepted Answer

An increase in expected profitability of investment due to new technology.

Question 18

Liquidity in the financial system refers to:

Accepted Answer

The ability of savers to quickly convert their investments into cash.

Question 19

If the government runs a budget deficit, what is the likely effect on public savings?

Accepted Answer

Public savings will be negative (dissaving).

Question 20

Suppose the economy’s real GDP per capita is $40,000 and grows at 2.5% per year. Using the Rule of 70, what will real GDP per capita be in 70 years?

Accepted Answer

$$320,000$$

Chapter 10: Investment and Economic Activity – Study Notes

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