Name: ____________________________________________

Economics Dr. Sauer

Homework #3 (50 points) For questions 1 30 (30 points), please indicate your answers on a scantron sheet. It is okay to work on your homework in groups, but each person must submit answers individually. For questions 31-35 (20 points), you may tear off that sheet to hand in. 1. True or False. Investment strategies of the get rich quick variety are consistent with sound economic principles. 2. Which of the following is an example of an individual, firm or government with the need of raising capital? a. A college student graduates and has no credit card debt. b. The US governments 2011 budget calls for spending more than it will collect in taxes. c. Phil quits his job to start his own consulting firm using his savings. d. The Apple company takes its first quarter profits and re-invests them in more Research & Development. 3. True or False. When it comes to investing and financial markets, behavioral economics tells us that people dont always behave rationally. 4. If a person doesnt spend all of the income that they earn, they have a need for a financial instrument that will help them a. raise capital. b. store and protect excess capital. c. insure against risk. d. speculate. 5. If Starbucks purchases a futures contract on coffee beans, they are using a financial instrument that helps them a. raise capital. b. store and protect excess capital. c. insure against risk. d. speculate. 6. True or False. Financial instruments are like any other good or service sold in the market in that they create value for both the buyer and seller. 7. Which of the following is an example of credit default swap? a. Jack borrows money from Jill. Jill does not charge him interest if he pays it back on time. b. Barney lends money to Ted. Lilly sells Barney an insurance policy that pays out if Ted doesnt pay back the loan. c. Amy borrows money from Rory. Amy lend that money to River. River defaults on the loan to Amy, but Rory is ultimately the one who suffers the financial loss. d. None of the above. 8. True or False. In financial markets, speculating refers to betting on long-run price movements. 9. The efficient markets theory says a. markets are self-correcting and there is no need for government intervention. b. asset prices (like stock prices) already reflect all available information. c. because people often act irrationally, the market needs to be regulated to be more efficient. d. asset bubbles (like the housing market) are very rare. 10. Which of the following is NOT a sound economic rule for guiding investment strategies? a. Save, invest, repeat. b. The amount of reward from an investment is directly related to the riskiness of the investment. c. Diversify. d. Invest with short-run goals in mind. 11. True or False. An earmark directs local government funding to a local project. 12. In relative terms, each individual federal subsidy is small. Even so, this becomes a problem because a. each causes an efficiency. b. they add up to a large amount of money. c. the benefits exceed the costs. d. the benefits are widely spread.

13. True or False. When economists come to a consensus on an economic policy the policy may or may not be passed by Congress. 14. True or False. Economic policies that are passed by Congress are always good for society as a whole. 15. One of the reasons that narrow, organized interests are so successful in getting subsidies is subsidies have a. concentrated costs and diffuse benefits. b. diffuse costs and concentrated benefits. c. high costs and high benefits. d. low costs and low benefits. 16. True or False. It is commonplace for firms and industries to seek out more regulation. 17. The process of creative destruction a. is harmful for all firms or industries. b. is beneficial for society as a whole. c. has large, diffuse costs. d. has small, concentrated benefits. 18. True or False. In the area of getting funding or subsidies from the federal government, very large organizations are the most successful. 19. True or False. A Luddite originally referred to a textile worker who opposed the creative destruction brought by textile factories. 20. Marcia likes the idea of expanding light rail in her community. When the new proposed route is released, it requires annexing some of the land from her favorite open space park. Marcia writes an email to the city zoning board lobbying for the route to go elsewhere. This is an example of the old phrase a. where you stand depends on where you sit. b. you can catch more flies with honey than vinegar. c. you cant judge a book by its cover. d. penny wise and pound foolish. 21. Which of the following is NOT a drawback to using GDP as a measure of well-being? a. It excludes non-paid work. b. It does not take into account environmental destruction. c. It subjectively values some occupations more than others. d. It does not include leisure time. 22. True or False. Most US recessions can be traced to some sort of economic shock. 23. The personal savings rate a. increased from the 1960s through the 1990s and then decreased in the recent recession. b. decreased from the 1960s through the 1990s and then increased in the recent recession. c. fluctuated up and down from the 1960s through the 1990s and then decreased in the recent recession. d. fluctuated up and down from the 1960s through the 1990s and then increased in the recent recession. 24. True or False. GDP and GDP per capita are used as measures of economic well-being.

25. The Paradox of Thrift says a. when households see their income decrease in a recession, they put off spending which is the responsible thing for a household to do, but this ends up harming the economy as a whole. b. when households increase their savings or thriftiness, they end up richer in the long run. c. when firms fire workers to save money, it actually costs them more when they have to pay to hire a new worker in the future. d. when the government borrows money, interest rates fall in the economy as a whole. 26. True or False. Anyone who doesnt have a job is classified as unemployed.

27. The size of government a. is measured by taking the ratio of government spending to GDP. b. in the US has historically been around 50% of GDP. c. is the same across countries. d. should be between 20% and 60% of GDP. 28. Which of the following is NOT correct regarding Fiscal Policy? a. It refers to actions by the Federal Reserve regarding the money supply and interest rates. b. It refers to actions by Congress regarding government spending and taxes. c. Its legislation has historically not been very successful at pulling the economy out of recession. d. Its legislation has historically been passed after the economy was already out of recession.

29. True or False. The size of the US economy is about $14 billion and it is the largest economy in the world. 30. The Current Account a. should always be in surplus. b. reflects the difference in the income the US earns from the rest of the world and the income the rest of the world earns from the US. c. is another name for the governments spending account. d. should always be zero.

Name: ___________________________________________

31. True story: While I was growing up, my best friends dad had made her a standing offer: if she eloped instead of having a big wedding he would give her $10,000 cash at that time. As we got older, he kept increasing his offer. By the time we graduated college, his offer was up to $25,000. In 2003, her boyfriend proposed. My friend was totally ready to accept the cash in lieu of a big wedding but her fianc wanted a big wedding. (how big? 532 people attended they needed to rent 2 ballrooms) If they had taken the cash and invested it at 8% in 2003, how much money would they have had on their 10th anniversary? Show your work.

32. At issue in a particular city vote is how much to spend, per person, on road repair next year. Among the 10,000 voters, 1,500 prefer to spend $300 per person; 2,800 prefer to spend $450 per person; 3,500 prefer to spend $800 per person; and 2,200 prefer to spend $1500 per person. How much does the median voter want to spend?

33. The following table contains the Consumer Price Index for the Denver area. Year 2005 2006 2007 2008 2009 CPI 190.9 197.7 202.029 209.903 208.548 Calculate the inflation rate between 2008 and 2009.

34. In the Denver area in August 2010, there were 1,268,700 employed people and 112,200 unemployed people. Calculate Denvers unemployment rate.

35. Using the data in this table, plot the US business cycle for the past 20 years.
US Economic Growth Rate 1.9 -0.2 3.4 2.9 4.1 2.5 3.7 4.5 4.4 4.8 US Economic Growth Rate 4.1 1.1 1.8 2.5 3.6 3.1 2.7 1.9 0 -2.6
5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Make some observations about the graph that you drew.