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Unformatted text preview: Econ 116 Fall 2007 Hour Exam 1 Solutions 1. True/False (a) True, including intermediate goods would lead to double count- ing. (b) False, the CPI indexes the prices of goods and services in a basket that would be purchased by a representative consumer and not all goods and services in the economy. (c) False, when social security pensions are indexed for inflation they typically use the CPI. (d) False, this is the definition of a bond. (e) False, this is the definition of equity financing. (f) True, a bank is a type of financial intermediary. (g) True, increased saving typically leads to increased investment which leads to a larger capital stock, so each worker has more capital to use and is therefore more productive. Since each worker is more productive they will produce more leading to more GDP per capita. (h) True, every dollar of investment must come from a saver, and in a closed economy the only saving is national saving, private plus government, since no money is invested from or loaned to other countries. (i) False, the development of mortage backed securities helped to spread out risk and increase diversification. (j) False, investment is a flow that measures the change in the capital stock, and a bond purchase does not represent a change in the physical stock of capital. (k) True, the inerest rate is determined by the supply of loanable funds from savers, and the demand for loanable funds by in- vestors....
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- Fall '07