Chapter 25

True/False
Indicate whether the statement is true or false.

____ 1. Labour alone cannot produce sustained economic growth.

____ 2. Productivity measures the quality of goods and services that a worker can produce for each hour of work.

____ 3. Workers’ productivity depends on technological knowledge and human capital.

____ 4. The production function curve can be used to illustrate diminishing returns to capital.

____ 5. Investment in equipment that manufactures goods more productively can create economic growth in an
economy.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. The amount of goods and services produced from each hour of a worker’s time is called:
a. output
b. productivity
c. work quality
d. worker efficiency
____ 2. Australia’s annual growth rate of real GDP per person was 2.08 per cent for the period 1950–2000. Which of
the following statements is correct?
a. This means that Australia’s real GDP per person actually rose exactly 2.08 per cent every
year
b. This means that Australia’s real GDP per person actually rose less than 2.08 per cent every
year
c. This means that Australia’s real GDP per person actually rose more than 2.08 per cent
every year
d. This does not mean that Australia’s real GDP per person actually rose exactly 2.08 per
cent every year
____ 3. An improvement in technology between two dates is called
a. innovation
b. inventory investment
c. invention
d. technological process
____ 4. If Ernest Rutherford died and left $8000 to be invested for a period of 100 years to benefit medical students
and scientific research, how often would this money double if it were to earn 5 per cent per year for all years?
a. every 10 years
b. every 14 years
c. every seven years
d. every five years
____ 5. Although technological knowledge and human capital are closely related, there is an important difference.
Which of the following statements is correct?
a. Human capital is the society’s understanding about how the world works, whereas
technological knowledge is the resources spent transmitting this understanding to the
labour force
b. Technological knowledge is the bridge that links physical and natural resources with
human capital
c. Technological knowledge is the society’s understanding about how the world works,
whereas human capital is the resources spent transmitting this understanding to the labour
force
d. Technological knowledge is the society’s understanding of human capital
____ 6. The catch-up effect is the idea that:
a. savings will always ‘catch up’ with investment spending
b. other countries aid relatively poor countries so as to ‘catch them up’
c. it is easier for a country to grow fast if it starts out relatively poor
d. if investment spending is low, increased savings will help investment to ‘catch up’
____ 7. Reducing the rate of population growth is widely thought to:
a. be one way that less developed countries can try to raise their standard of living
b. not be an effective way for less developed countries to raise their standard of living
c. reduce the standard of living of less developed countries
d. cause a reduction in productivity
____ 8. Which of the following countries have a history of providing political stability and property rights to
international firms?
a. Italy, Australia, New Zealand
b. Japan, Australia, The United Arab Emirates
c. Malaysia, Congo and South Africa
d. Australia, Cameroon, The United Arab Emirates
____ 9. Economists believe that governments that encourage research and development through their policies do it
through which of the following methods?
a. protecting infant industries from overseas investment, public research funding
b. a patent system, university research funding, conferring intellectual property rights
c. a patent system, consumer subsidies, research funding
d. decreased migration, intellectual property rights, government research funding
____ 10. Population growth can:
a. promote economic growth as long as policies based on total GDP growth are in place
b. promote economic growth as long as policies based on GDP per capita are in place
c. improve worker productivity
d. create improved education for the nation
Chapter 26

True/False
Indicate whether the statement is true or false.

____ 1. The financial system consists of those institutions in the economy that help to match one person’s saving with
another person’s investment.

____ 2. Financial markets are the institutions through which a person who wants to save can directly supply funds to a
person who wants to borrow.

____ 3. The market for loanable funds can be modeled on a supply and demand schedule even though there are many
exogenous circumstances that affect the price of funds.

____ 4. Shares enable firms to raise debt financing as the firm is in debt to its owners.

____ 5. Investing in managed funds is an attempt to diversify risk across a range of investment options.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. The yield curve is a graph of the interest rate on bonds of different terms, with the term shown on the
horizontal axis and the interest shown on the vertical axis. Based on the discussion in chapter 10, what slope
would you expect the yield curve to have?
a. no slope – flat
b. a negative slope – downward-sloping
c. a positive slope – upward-sloping
d. negative at first, then positive
____ 2. Gina has the choice of two bonds, one that pays five per cent interest and one that pays 10 per cent interest.
Which of the following is most likely?
a. The 10 per cent bond has a shorter term than the five per cent bond
b. The 10 per cent bond is a government bond, and the five per cent bond is a junk bond
c. The 10 per cent bond is more risky than the five per cent bond
d. All of the above are equally likely
____ 3. All else being equal, when people become less optimistic about a company’s future, then:
a. the demand for the stock (and thus the price) rises
b. the demand for the stock (and thus the price) falls
c. the supply of the stock (and thus the price) rises
d. the supply of the stock (and thus the price) falls
____ 4. In a closed economy, national saving can be expressed by the equation S = (Y – T – C) + (T – G). What does
(Y – T – C) represent?
a. private saving
b. government tax revenue
c. public saving
d. investment
____ 5. Where Y is GDP, C is consumption, I is investment and G is government spending, if there is no international
trade, then national saving equals:
a. C + I + G
b. Y - C - G
c. Y + C + G
d. Y - C - I
____ 6. A budget surplus is created when the government:
a. spends more than it receives in tax revenue
b. buys back more bonds than it issues
c. receives more tax revenue than it spends
d. raises interest rates
____ 7. The supply and demand for saving are brought into equilibrium by adjustments of the ____ rate.
a. coupon
b. nominal interest
c. real interest
d. dividend
____ 8. The supply of loanable funds shows the:
a. quantity of loanable funds supplied at each possible nominal interest rate
b. equilibrium quantity of money that will be offered by savers at each possible nominal
interest rate
c. equilibrium quantity of money that will be offered by savers at each possible real interest
rate
d. quantity of loanable funds supplied at each possible real interest rate
____ 9. The demand for loanable funds is downward-sloping because:
a. as the interest rate falls, the demand for loanable funds increases
b. as the interest rate falls, the demand for loanable funds falls
c. as the interest rate rises, the quantity of loanable funds demanded rises
d. as the interest rate rises, the quantity of loanable funds demanded falls
____ 10. What would happen in the market for loanable funds if the government were to decrease the tax on interest
income?
a. the demand for loanable funds would increase
b. the demand for loanable funds would decrease
c. the supply of loanable funds would decrease
d. the supply of loanable funds would increase
____ 11. What would happen to investment if the government were to increase the tax on interest income?
a. investment spending would fall
b. investment spending would rise
c. investment would be unaffected
d. investment could rise, fall or remain unchanged
____ 12. The excess of government tax collections over government spending is:
a. the government budget surplus
b. national saving
c. national wealth
d. the government budget deficit
____ 13. Sony is thinking about investing in a new project. Suppose that the project costs $10 million and will yield the
company $20 million in 10 years. If the interest rate is five per cent, what is the present value of the yield in
10 years?
a. $9.5 million
b. $10.5 million
c. $12.3 million
d. $16.3 million
____ 14. Which of the following statements is not correct about notional accounting identity?
a. S = (Y – T – C) – (T – G)
b. S = Y – C – G
c. S = I
d. Y = C + I + G
____ 15. A company is looking to see what rate of return it is receiving from a project when the project’s initial
investment is $14 million today and will receive $18.5 million in four years.
a. 7.22 per cent
b. 32.14 per cent
c. 19.8 per cent
d. 6.2 per cent
Chapter 28

True/False
Indicate whether the statement is true or false.

____ 1. According to the theory of efficiency wages, firms operate less efficiently if wages are above the equilibrium
level.

____ 2. If the minimum wage is set above the equilibrium wage level, then less people could be hired compared with
the equilibrium level.

____ 3. Students are regarded as employed in studies and are recorded as unemployed, but not in the labour force.

____ 4. Surplus labour in the market creates pressure to increase market wages, in the absence of minimum-wage
legislation.

____ 5. A minimum wage, set above the market equilibrium wage, will create an excess supply of labour.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Cyclical unemployment refers to:

a. year-to-year fluctuations of unemployment around its natural rate
b. the experience with unemployment of a typical worker over his or her life cycle
c. long-term trends in unemployment
d. none of the above
____ 2. The labour-force participation rate:
a. equals one minus the unemployment rate
b. measures the percentage of the total adult population in the labour force
c. measures the percentage of the number of employed in the labour force
d. equals one minus the labour force
____ 3. Efficiency-wage theory suggests that to improve workers performance, firms should:
a. fire all existing workers and hire new ones
b. spend more money and effort on monitoring
c. raise wages above the market equilibrium level
d. give incentive pay to employees for dobbing in their fellow workers who are shirking
____ 4. A person quits her job in order to spend time looking for a better paying job. This is an example of:
a. frictional unemployment
b. cyclical unemployment
c. seasonal unemployment
d. structural unemployment
____ 5. Which of the following contributes to the natural rate of unemployment?
a. unions
b. efficiency wages
c. job search
d. all of the above
____ 6. Using the definition of unemployment, which of the following individuals would be unemployed?
a. a full-time student quits school, enters the labour market for the first time, and searches for
employment
b. an employee of General Motors Holden who is laid off because of an increased level of
car imports
c. your next-door neighbour who loses her job as a cleaner in a local hospital because of a
reduction in the health budget
d. all of the options given here would count as unemployed
____ 7. Suppose there are 10 million in the labour force, and 600 000 unemployed people. During the next month, 20
000 people lose their jobs and 30 000 find jobs. The new total of employed persons is ____ and the new
unemployment rate is ____. (Assume there are no new entrants into the labour force.)
a. 10.1 million; 5.8 per cent
b. 10 million; 6.1 per cent
c. 9.41 million; 5.9 per cent
d. 9.39 million; 6.1 per cent
____ 8. In 2010 in Australia, 11.1497 million people were employed, and 0.629 million people were unemployed. The
adult population was 18.014.150 million. Therefore, the labour force was:
a. 5.92 million
b. 11.012 million
c. 11.778 million
d. 16.324 million
____ 9. Which of the following statements is an example of moral hazard?
a. A car driver with car insurance drives more safely
b. A babysitter allows children to watch more television than the children’s parents would
wish
c. Buyers of private health insurance know more about their own health problems than do
health funds
d. Sellers of used cars know their cars’ defects whereas buyers often do not
____ 10. Who of the following would NOT be considered unemployed?
a. a new entrant to the labour force
b. a job leaver who is looking for a better job
c. an individual fired by her employer
d. a newly retired worker
Chapter 25
Answer Section

TRUE/FALSE

1. ANS: T PTS: 1 DIF: Easy TOP: The production function

2. ANS: F PTS: 1 DIF: Moderate
TOP: Productivity: Its role and determinants
3. ANS: T PTS: 1 DIF: Moderate TOP: Human Capital
4. ANS: T PTS: 1 DIF: Moderate
TOP: Diminishing returns and the catch-up effect
5. ANS: T PTS: 1 DIF: Moderate TOP: Physical Capital

MULTIPLE CHOICE

1. ANS: B PTS: 1 DIF: Moderate TOP: Why productivity is so important

2. ANS: D PTS: 1 DIF: Moderate TOP: Economic growth around the world
3. ANS: D PTS: 1 DIF: Easy TOP: Technological knowledge
4. ANS: B PTS: 1 DIF: Moderate
TOP: FYI: The magic of compounding and the rule of 70
5. ANS: C PTS: 1 DIF: Difficult TOP: Technological knowledge
6. ANS: C PTS: 1 DIF: Moderate
TOP: Diminishing returns and the catch-up effect
7. ANS: A PTS: 1 DIF: Moderate TOP: The control of population growth
8. ANS: B PTS: 1 DIF: Difficult TOP: Investment from abroad
9. ANS: B PTS: 1 DIF: Difficult TOP: Research and development
10. ANS: B PTS: 1 DIF: Difficult TOP: The control of population growth
Chapter 28
Answer Section

TRUE/FALSE

1. ANS: F PTS: 1 DIF: Moderate TOP: The theory of efficiency wages

2. ANS: F PTS: 1 DIF: Difficult TOP: The theory of efficiency wages
3. ANS: F PTS: 1 DIF: Moderate TOP: How is unemployment measured?
4. ANS: F PTS: 1 DIF: Difficult TOP: The theory of efficiency wages
5. ANS: T PTS: 1 DIF: Easy TOP: Unions and collective bargaining

MULTIPLE CHOICE

1. ANS: A PTS: 1 DIF: Easy TOP: Introduction

2. ANS: B PTS: 1 DIF: Easy TOP: How is unemployment measured?
3. ANS: C PTS: 1 DIF: Moderate TOP: The theory of efficiency wages
4. ANS: A PTS: 1 DIF: Moderate TOP: Job search
5. ANS: D PTS: 1 DIF: Moderate TOP: Why is there unemployment?
6. ANS: D PTS: 1 DIF: Moderate TOP: How is unemployment measured?
7. ANS: C PTS: 1 DIF: Difficult TOP: How is unemployment measured?
8. ANS: C PTS: 1 DIF: Easy TOP: How is unemployment measured?
9. ANS: B PTS: 1 DIF: Difficult
TOP: FYI: The economics of asymmetric information
10. ANS: B PTS: 1 DIF: Moderate TOP: How is unemployment measured?
Chapter 26
Answer Section

TRUE/FALSE

1. ANS: T PTS: 1 DIF: Easy TOP: Introduction

2. ANS: T PTS: 1 DIF: Easy TOP: Introduction
3. ANS: T PTS: 1 DIF: Easy TOP: The market for loanable funds
4. ANS: F PTS: 1 DIF: Easy TOP: The stock market
5. ANS: T PTS: 1 DIF: Easy TOP: Managed funds

MULTIPLE CHOICE

1. ANS: C PTS: 1 DIF: Difficult TOP: The bond market

2. ANS: C PTS: 1 DIF: Difficult TOP: The bond market
3. ANS: B PTS: 1 DIF: Moderate TOP: The stock market
4. ANS: A PTS: 1 DIF: Difficult TOP: Some important identities
5. ANS: B PTS: 1 DIF: Easy TOP: Some important identities
6. ANS: C PTS: 1 DIF: Moderate TOP: Some important identities
7. ANS: C PTS: 1 DIF: Moderate
TOP: Supply of and demand for loanable funds
8. ANS: D PTS: 1 DIF: Moderate
TOP: Supply of and demand for loanable funds
9. ANS: D PTS: 1 DIF: Difficult
TOP: Supply of and demand for loanable funds
10. ANS: D PTS: 1 DIF: Difficult
TOP: Supply of and demand for loanable funds
11. ANS: A PTS: 1 DIF: Moderate TOP: Policy 1: Taxes and saving
12. ANS: A PTS: 1 DIF: Easy
TOP: Policy 3: Government budgets: Surplus or deficit?
13. ANS: C PTS: 1 DIF: Difficult TOP: FYI: Present value
14. ANS: A PTS: 1 DIF: Moderate
TOP: The meaning of saving and investment
15. ANS: A PTS: 1 DIF: Moderate TOP: FYI: Present value