QCC – Fall 2024 Final Exam Questions – Non-Numerical Prof.

Ken Friedman
ECON 215 – Macroeconomics [email protected]

Chapter Nine – Economic Growth – NON-numerical

(Q#1) In the very long run, across the next fifty years, a country’s economic standard
of living as measured by Real GDP Per Person can grow steadily as a result of
sustained growth in one of the following three values. The correct focus of
growth policy will be to promote:
Correct focus of growth policy to promote in the very long run?
Promote labor productivity as it has the most sustained impact on Real GDP per
person in the long run.

(Q#2) The best answer to Q#1 is a consequence of which feature of any country’s
economy. Consider the long term growth in three aspects: total labor effort,
population and labor productivity. In the very long run:
In the very long run, total labor effort and population have diminishing returns,
whereas sustained improvements in labor productivity drive economic growth.
(Q#3) Consider the U.S. economy during two historical periods. The first is from
1865 to 1975 – the era of integrated steel and car production, with coal mines,
steel mills and car factories. The second is from 1975 until today – 2025 – the
era of computing and biotechnology, with software, artificial intelligence and
lab research. A major shift in the sources of labor productivity growth occurred
that reflect a greater resource emphasis today on:
 A shift to innovation and technology development, emphasizing software, AI, and
biotechnology as primary sources of productivity growth.

(Q#4) Consider a poor country with an under-developed economy with a very low
capital stock and a very low ratio of capital to labor. Thus, when expanding with
standard and conventional capital technology, it will operate in a region with
what marginal returns to conventional capital investment.
High marginal returns, as low initial capital stock means new investments are more
impactful.
(Q#5) Consider a poor country with an under-developed economy with a very low
stock of capital and a very low ratio of capital-to-labor (C/L). It now seeks to
invest trillions into its current capital stock. Which approach is likely best for
increasing the country’s living standards (Real GDP Per Person) through time?
Focus on investments in human capital (education, healthcare) and adopting
technologies suited to their stage of development.

(Q#6) Consider a wealth country with an advanced economy with a large capital
stock and a high ratio of capital to labor. Thus, when expanding with standard
capital technology from the past, it will operate in a region with what marginal
returns to conventional capital investment.
Low marginal returns, as capital is abundant, and additional investment yields
smaller increases in productivity.

(Q#7) Consider a prosperous country with an advanced economy and a substantial

stock of capital and thus an already high ratio of capital-to-labor (C/L). It now
seeks to invest trillions into its current capital stock. Which approach is best for
increasing this country’s living standards (Real GDP Per Person) through time?
Focus on innovation and advanced technologies to improve efficiency and create
new industries.

(Q#8) Until recently, the economy in China has grown steadily due to the deliberate
emphasis on low skill – low wage factory labor methods. However, China’s
economic standard of living is still comparatively low. To achieve a U.S. or
German standard of living what should be done in terms of its resource
use and methods.
Shift resources to high-skill, high-wage industries, with an emphasis on education,
R&D, and technological innovation.
(Q#9) What has been true about the long term growth rate and growth path follow-
ed by the advanced nations since 1750 – the dawn of the “industrial revolution”?
Growth has been relatively steady, driven by technological innovation,
industrialization, and productivity improvements.
(Q#10) When the government takes the lead and pro-actively guides, supports and
fosters technology advances and innovation, such as with the Internet, in aero-
space (NASA) or Covid19 vaccines, which theory of economic growth is utilized?
Endogenous growth theory, where public investment in technology and
infrastructure fosters innovation.
(Q#11) When the government plays a minor role and allows venture capital firms
to drive internet commerce with Amazon.com and PayPal and social media with
Facebook and Twitter then which theory of economic growth is utilized?
Neoclassical growth theory, focusing on free markets and private investment as
drivers of innovation.

(Q#12) The population on the African continent has grown enormously in the past
60 years and will continue to grow in this manner for the next 60 years.
What is the prediction of the Classical/Malthusian growth theory for this area?
Economic growth may be constrained by resource scarcity, leading to stagnation or
decline unless technological advancements occur.

(Q#13) The populations of Middle Eastern countries have grown tremendously in

the last 50 years and should continue to grow in future decades. Yet, these
countries may come to be lacking in food production resources, including arable
land and potable water. What is the prediction (and policy approach) of the
Neoclassical growth theory for this area?
Encourage trade and investment in technology to mitigate resource limits and
improve productivity.
(Q#14) The U.S. is gradually normalizing relations with Cuba. As Cuba is currently a
poor country by global standards, there is great hope that it will come to prosper in
the coming decades. Yet, Cuba currently greatly restricts and inhibits economic
freedom, including private property rights and unregulated markets. What do
economic growth models predict for this country’s future? Its’ prospects will likely:

Without reforms like enhancing economic freedom and property rights, growth will
be limited. Economic liberalization would improve prospects.
The following diagram is taken from the CFA (Chartered Financial Analyst) exam
from the year 2023: (this is the real world!)
CFA® 2023 Level II Curriculum, Volume 1, Module 9
(Q#15) Assume that a country wants to increase its labor productivity (real GDP per
hour of labor effort) by a gradual process of “capital deepening” – a doubling of its
capital to labor rate from $30 per hour to $60 per hour. This is due to some
difficulty in mobilizing investment funds. The best approach would be to operate:
Focus on steady investment in infrastructure and education, allowing productivity
to rise alongside capital deepening.

(Q#16) Now assume that the country seeks to surge its labor productivity to $32
per hour. The best approach would be to operate:
Adopt targeted technological investments and policies to incentivize efficient capital
use.

(Q#17) The best economics explanation for the answer to the previous question
on surging to $32 per hour would be:
Marginal returns to capital improve when complementary technologies and skilled
labor are introduced.
 Chapter 10-1 – The Financial System

[Q#1] What is the “product” being bought and sold in a financial market
for financial capital?
Financial capital – the funds used for investment.
[Q#2] What is the cost of the legal right to use investor money for a set period
of time?
Interest rate or dividends.

[Q#3] Which set of economic agents is the core and original source of the
monies or funds – the financial capital – that helps power the economy:
Households, through savings and investments.
[Q#4] Which set of economic agents facilitates the movement of money and funds
from suppliers of financial capital to users and investors of these funds?
Financial intermediaries, like banks and investment funds.

[Q#5] When the professional money managers for a bond market mutual fund
purchase newly issued Treasury bonds from the federal government and
proceed to collect interest payments from the government which is true?
They act as investors, earning returns through interest payments.

[Q#6] Consider the following values: interest payments, cash dividends, and
capital gains realized with stock sales. Which statement about them best
summarizes the role they play in the financial system:
These are returns on investments, incentivizing capital flow.

[Q#7] Both the Fed and the U.S. Treasury Department are charged with
monitoring the solvency of commercial banks. Consider the following
data for a regional bank:
March 1, 2022 May 15, 2023
Assets = Bond Investments $100 billion $70 billion
Liabilities = Customer Deposits $ 90 billion $ 80 billion
Net Worth =
 What happened to the financial status of the bank during this interval?
The bank's net worth decreased as bond investments declined faster than
liabilities (deposits).

Chapter 10-2 – Supply and Demand for Loanable Funds and Interest Rates
[Q#8] Households today are greatly concerned about their living standards
during their retirement years due to renewed price inflation with heightened
worries that living costs will be greater as well. There is also greater anxiety
about the long term viability of the Social Security and Medicare programs.
This will change their savings behavior as follows:
Households are likely to increase savings to prepare for future uncertainties.

[Q#9] Due to a renewed inflation “shock”, the economy experiences a 2nd

recession and declines rapidly with recession and, with rising unemployment,
labor compensation and household incomes drop steadily. What is the
predicted impact on consumption and savings.
Consumption decreases and savings may drop, as households have less
income.
[Q#10] Driven by optimism, the stock market booms as speculative sentiment
sweeps the country. As a result both current and future household wealth
suddenly rise strongly. Households have more money now and are fully
confident that they will have even more money in the future. Consider the
Wealth Effects on Savings. The prediction would be that Household Savings:
Savings tend to decrease, as households feel wealthier and spend more.
Begin with the following situation in the financial markets:
Rate of Return on Invested Capital = ROIC = 8%
Cost of Capital (= Real Rate of Interest) = k = 10%
[Q#11] What is likely true regarding the Demand for Loanable Funds:
Demand is low, as the cost of capital exceeds returns.
[Q#12] Now let the Real Rate of Interest decline to k = 6% while the Rate of
Return on Invested Capital increases to ROIC = 11%. The predicted impact and
the Demand for Loanable Funds for business capital investment would be:
Demand for loanable funds increases, as returns on investment exceed
borrowing costs.
[Q#13] Consider a major investment project where the rate of return on
invested capital was ROIC = 9% and the interest rate and cost of capital are
both at 7%. Now let the interest rate rise from k = 7% to k = 11% as the
FED acts to raise capital costs. The business project decision would shift from:
Investment projects become less viable, and funding may decline.

[Q#14] The current real interest rate is 3%. The equilibrium value consistent
with a balance between savings supply and investment demand is 6%.
What will happen in the market for loanable funds and why?
Excess demand for funds leads to upward pressure on interest rates.
[Q#15] Now continue from the previous question. Starting at the current rate
of 3%, how will banks act to restore the financial markets to equilibrium
if savings and investment balance at 6%:
Increase interest rates, encouraging more savings and balancing demand.

For the following questions, start with an equilibrium position within the Market
for Loanable Funds. Consider the economic changes in each question and then
determine the predicted change in the real rate of interest.

[Q#16] A revival of the Coronavirus pandemic leads to wide-spread panic in the

country and in the business sector. Both consumers and company owners
suffer a crises of confidence and public sentiment switches from optimism
over to pessimism. The impact on the Demand for Loanable Funds (DLF line)
and then the real rate of interest would be:
Demand for funds decreases, leading to lower interest rates.
[Q#17] Radical advances in the use of robots in production (robotics) takes
place. This has the effect of substantially reducing costs for business
companies and then increasing expected business profits. The impact on
the Demand for Loanable Funds (DLF line) and the real rate of interest
would be:
Demand for funds increases, driving interest rates higher.

[Q#18] The U.S. has massive current federal deficits and California alone may
have a $68 billion state deficit. The national (public sector) debt is therefore
growing strongly. An article wrote that:
“A rapidly expanding public debt would cause harm even in normal times”.
What will happen in the financial markets that might cause such harm?
Consider the demand for loanable funds and interest rates.
High debt may crowd out private investment, raising interest rates.

[Q#19] What feature in the global debt-credit markets might prevent the
“crowding out” of private investment from massive federal deficits.
Consider the supply of loanable funds and its response to interest rates.
Foreign capital inflows could offset domestic investment constraints.

[Q#20] Which best describes the conduct of government – economic agents in

the public sector – in obtaining the financial resources (money) to pay for
government programs and infrastructure and the possibility of a so-called
“crowding out” impact?
Governments may borrow extensively, limiting funds available for private
investors.
[Q#21] The major oil-producing countries begin to cooperate on production
quotas and suddenly the price of energy skyrockets upward. This has the
effect of substantially raising costs for business companies and then reducing
expected business profits. The impact on the Demand for Loanable Funds
(DLF line) and interest rates would be:
Demand for funds declines, lowering interest rates.
[Q#22] After being mired in a severe recession due to the Coronavirus, the
economy comes roaring back with a V-shaped recovery pattern. Public
sentiment for both consumer and companies shifts dramatically from
pessimism to confident optimism. The impact on the Demand for Loan-
able Funds (DLF line) and the Real Rate of Interest would be:
Demand for funds increases, pushing interest rates higher.
[Q#23] The stock market collapses due to spreading bank failures and along
with the shut-down of the federal gov’t due to the failure to raise the ceiling
for national debt. As a result current household wealth suddenly declines
strongly. Consider adjustments in the Supply of Loanable Funds in the
financial markets. The impact for Savings and the Real Rate of Interest will be:
Savings supply declines, causing interest rates to rise.
[Q#24] The Congress and the President recently implemented a multi-trillion
dollar stimulus package to prop up the U.S. economy. The current federal
deficit may soon exceed $2 trillion! Consider the following quote from an
article by an Economics professor:
“We should be very worried. We are talking about a level of debt that
would certainly be unprecedented in modern history or in history, period.
We are definitely at a tipping point.”
What might happen in financial markets that might cause such intense “worry”?
Consider the demand for loanable funds and interest rates.
Rising demand for funds leads to higher interest rates, potentially crowding
out private investment.
 Exam for Chapter 11 - The Monetary System

[Q#1] This College, QCC, issues a special currency to its students called
“Wyvern dollars”. Students can use this currency to purchase textbooks, school
supplies and cafeteria meals. However, when some student tried to use these
Wyvern dollars at local pizza shops their “money” was rejected.
Which function for money is most notably served in this scenario?
Medium of exchange, limited to specific transactions.

[Q#2] Two QCC students went to a Chinese restaurant for a shared meal and they
had $30 to spend between them together. Each one had a $10 bill and a $5 bill
in their purse/wallet. One proposed getting two appetizers at $5 each and two
main courses at $10 each. But the other recommended 3 appetizers at $5 each
and a deluxe dish for $15.
Which function for money is notably served in this scenario?
Unit of account, helping to compare and allocate resources.

[Q#3] There is a famous expression: “As good as Gold”. This suggests that gold is
a worthwhile commodity as you would always be able to purchase important
products with gold. This would be true throughout time and in any country.
Which function for money is most notably served in this scenario?
Store of value, ensuring purchasing power over time.

[Q#4] In recent years, two countries – Zimbabwe and Venezuela – experienced

severe and damaging hyperinflations, with extreme price inflation. In
situations like these, a $100 bill could be worth 1¢ one year later.
Which function for money is highlighted in this scenario?
Store of value, which is undermined in hyperinflation.
[Q#5] Consider the Federal Reserve System (the FED). Which best describes its role
in the U.S. economy and political system ? The FED
Ensures monetary stability, controls inflation, and supervises banks.

[Q#6] Consider the FED Board of Governors. How long does the appointment for
the Chair – currently Jerome Powell – last until the President can replace one?
4 years, renewable by the President.
[Q#7] The interest rate on a loan between two banks for just a single day is called:
Federal funds rate.