202 Midterm discussion Fall 10

202 Midterm discussion Fall 10 - ECO 202, Lyons DISCUSSION...

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ECO 202, Lyons Fall 2010 DISCUSSION SHEET FOR MIDTERM EXAM - continued – Part I. Multiple choice . [56 points] Correct responses were indicated on your answer sheets: by a check mark where your answer was correct, and by a circle around the correct response where yours was incorrect. Note about first question, page 1: Because of a likely error in my presentation one day (which found itself incorporated into class notes), I may have misled some of you about the determinants of average living standards: the correct answer is “labor productivity and proportion of the population employed,” which was marked with a check. Because of my possible error in class, I accepted also “labor productivity and proportion of the population in the labor force,” which was marked with an OK. Notes on selected m/c questions on page 2. Frank’s snowmobile rental company. After other expenses are paid, Frank expects to receive $10 per rental to cover his (interest) cost of owning snowmobiles. With the real interest rate at 5% per year and the purchase price of a snowmobile at $15,000, the interest cost is $750 per year. To come up with the answer, compare the marginal contributions of additional snowmobiles to the interest cost which must be covered (per snowmobile). The first unit adds 90 rentals, or $900, so it is worthwhile to have one. The second unit adds 80 rentals, or $800; ditto. The third unit adds 70 rentals, at $700, less than the $750 alternative return (opportunity cost). Correct response is thus 2 snowmobiles . Private & national saving (with zero net exports) National saving is total income less current expenditures by households and government: Sn = Y – (C + G). Y and C are given, but G is not, so it must be deduced from other information provided. Government gross tax revenue is distributed among government savings (the surplus), transfers, and government expenditure; that is, 1,750 = 500 + 750 + G, which means that G = 500. Thus, Sn = 6,000 – (3,000 + 500) = 2,500 . Private saving is national saving less government saving, or Sp = 2,500 – 500 = 2,000 . Remember that when Net Exports (NX) are zero, all investment is financed from national saving, so Sn = I = 2,500. Vicki’s savings See also Essay 1 discussion: What is not spent (on current consumption) is saved, by definition; Vicki buys financial assets from her weekly income: $200 in the bank balance and $300 in mutual fund shares, so her saving per week is $500 , which is 1/3 of her income, a saving rate of 33.3% . Part II. Essay / Problem. One of two at 50 points. 1. Savings are made from the current flow of incomes received; specifically, savings are what is left over after expenditures are made to meet current needs. Savings add to wealth by increasing assets held as bank accounts, real property, stocks, bonds, and the like. If the household savings rate has dropped to about zero or 1%, then collectively American households
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202 Midterm discussion Fall 10 - ECO 202, Lyons DISCUSSION...

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