Question 1

In 2007, the nominal Gross Domestic Product (GDP) of a small Asian country was 5% and the real GDP growth was 2%. What was the rate of inflation for this country?

Accepted Answer

The rate of inflation for this country is 3%.
Key Takeaway: The nominal GDP of a country measures the value of all the goods and services produced expressed in current prices. Real GDP measures the value of all the goods and services produced expressed in the prices of some base year. Nominal GDP growth = real GDP growth + inflation. Therefore, inflation = 5% -2% = 3%.

Question 2

A country's national economy has shown an 8% growth over the past 4 years. Before that, the economy moved from recession to stagnation over a period of 10 years. What is this economic fluctuation referred to?

Accepted Answer

This economic fluctuation is referred to as a business cycle.
Key Takeaway: A business cycle charts the overall fluctuation in economic and production activities in a society. These activities experience growth and recession with periods of stagnation and are usually measured using a number of indices such as the real gross domestic product (GDP).

Question 3

Employees at the Jackson factory have been given a substantial income raise of over 5%. As a result, the real income of these employees has risen which lead directly to an increase in the consumption of goods. What is this effect referred to?

Accepted Answer

Income effect refers to an increase in the consumption of goods due to an increase in real income.
Key Takeaway: When the real income of workers increases, the individual worker's ability to purchase consumer goods increases too. This is referred to as the income effect. The income effect is also implicated in the worker spending more money on leisure activities such as sports and vacations.

Question 4

Over the past 8 years, the Zimbabwean currency has lost 90% of its value. This is an example of the ____________ effects of inflation on a local economy.

Accepted Answer

Loss of currency value is an example of the negative effects of inflation on a local economy.
Key Takeaway: When a currency loses its value, it diminishes purchasing power and has adverse effects on local economies. High inflation rates can lead to a local currency losing a great deal of its value if not kept in check. For example, a country with a collapsed agricultural output such as Zimbabwe will find its local currency devalued so much that it is rendered worthless for individuals to purchase goods and services.

Question 5

When calculating unemployment figures in a given population, economists count those:

Accepted Answer

Unemployment figures count those people who are looking for paid work.
Key Takeaway: In a given society, unemployment figures are only indirectly related to the number of people who are without work. In other words, those figures only count people who are actively seeking paid work. Unemployment figures do not count early retirees seeking extra income, those discourage after long searches, and prison inmates. The figures also do not count people in the military and people who are self-employed or wish to be self-employed.

Question 6

The following are types of unemployment EXCEPT:

Accepted Answer

Dynamic is NOT an example of unemployment.
Key Takeaway: Unemployment types include seasonal, structural and frictional unemployment. Seasonal unemployment is usually due to short-term factors such as tourist patterns, weather issues and college students breaking during the summer periods. Frictional unemployment is also of a short-term nature and is experienced by those who re-entering the labor market, finishing their education or are in-between jobs. Structural unemployment is of a more long-term nature and arises out of a mismatch between employers and workers.

Question 7

A small Latin American country has been running a trade deficit for the past few years. A trade deficit occurs when:

Accepted Answer

A trade deficit occurs when a government imports more than it exports.
Key Takeaway: Trade among countries often leads to greater competition, responds to differences in demands, and decreases costs. Trade deficits occur when governments import more goods (raw and manufactured) and services than they export. In the face of trade deficits, governments become indebted to foreign countries.

Question 8

What type of policy in finance is based off the decisions of the President and Congress?

Accepted Answer

Fiscal policy is based off the decisions of the President and Congress. These decisions usually relate to taxation, interest rates, and government spending, with the goals of full employment, price stability, and economic growth.

Question 9

What determines the size and rate of growth of the money supply that affects interest rates?

Accepted Answer

Monetary Policy determines the size and rate of growth of the money supply that affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in reserve. These actions are attempts to control the economy and inflation.

Question 10

What term presents macroeconomic statistics used by investors?

Accepted Answer

Economics indicators presents macroeconomic statistics used by investors. The goal is to interpret current or future investment possibilities and the overall health of the economy. However, it is nearly impossible to determine whether a specific company will grow its earnings. Most economic indicators, such as unemployment or Consumer Price Indexes are released monthly or yearly.

Question 11

What is caused by the decline of general price levels caused by the reduction in the supply of money or credit?

Accepted Answer

Deflation is caused by the decline of general price levels caused by the reduction in the supply of money or credit. Deflation often created when there is a reduction in government, personal, or investment spending. Deflation is usually accompanied by higher rates of unemployment due to lower product demand.

Question 12

What term is defined by slow economic growth, high unemployment, increased prices, and inflation?

Accepted Answer

Stagflation is defined as slow economic growth, high unemployment, increased prices, and inflation. These events happen simultaneously. The government tries to halt the process through monetary policies and fiscal policies.

Question 13

What is measured by the Consumer Price Index and Producer Price Index indicating the general upward price movement of goods and services?

Accepted Answer

Inflation is measured by the Consumer Price Index and Producer Price Index indicating the general upward price movement of goods and services. Inflation is the decrease in dollar value due to increased goods and service costs.

Question 14

Economists postulate that there is a relationship between inflation and unemployment within societies. They state that when the real GDP of a country is high, actual unemployment rate falls below its natural level. What effect does this have on inflation?

Accepted Answer

High real GDP leads to actual employment rates to fall and inflation to accelerate.
Key Takeaway: When the real GDP of a country is high (an indication of high economic activity), the actual unemployment rate falls below its natural level. This often leads to an acceleration of inflation due to a number of factors such as an artificial hike in wages.

Question 15

With the introduction of government-funded health programs for the elderly and the poor, private health insurers have lost a substantial portion of their insured clients to these programs. The introduction of government-sponsored spending that curbs private investment is referred to as:

Accepted Answer

The introduction of government-sponsored spending that curbs private investment is referred to as crowding-out.
Key Takeaway: Crowding-out occurs when government-sponsored investment in programs leads to a curb or a reduction in private investment. This is shown in health programs, for example, for the elderly and the poor. Private insurance companies essentially find themselves losing clients to the government programs.

Question 16

The aggregate quantity of raw and manufactured goods demanded by consumers increases when the:

Accepted Answer

The aggregate quantity of goods demanded by consumers increases when personal consumption increases.
Key Takeaway: The aggregate demand curve is influenced by a number of factors that include personal consumption, government spending, investment, and trade. As personal consumption increases, the aggregate quantity of raw and manufactured goods demanded by consumers also increases.

Question 17

What is defined as the current worth of a future sum of money given a specific rate of return?

Accepted Answer

Present value is defined as the current worth of a future sum of money given a specific rate of return. These funds are discounted at an appropriate interest rate. The higher the discount rate, the lower the present value of a given amount of money.

Question 18

What concept places a discount rate that gives a project a net present value that is equal to zero?

Accepted Answer

Internal rate of return places a discount rate that gives a project a net present value that is equal to zero. The IRR is used to evaluate, rank, and select from various investment projects. The internal rate of return is the average annual return earned through the life of an investment. If the internal rate of return is higher than the desired rate of return on an investment, then the project is a desirable one.

Question 19

What determines how much money deposited today be worth at a specified time in the future?

Accepted Answer

Future value determines how much money deposited today be worth at a specified time in the future. The future value is dictated by the type of interest and the amount of the current principle. Interest may be simple interest that is the interest on the principle deposited amount or compound interest that is interest on both the original deposited amount and subsequent interest earned.

Question 20

The going concern concept is defined as:

Accepted Answer

The going concern concept is an accounting concept that assumes the business is not shutting down in the foreseeable future and the financial statements are prepared in this manner.
Key Takeaway: The going concern principle in accounting is a concept in which the business is assumed to continue operating for the foreseeable future. Once it is declared that the business is no longer a going concern, a whole new set of accounting methods come into play.

Quiz 3: General Principles of Financial Planning