ECON 203 EXAM 2 QUESTIONS WITH VERIFIED SOLUTIONS LATEST UPDATE 2026
Economy-Wide Production Function Formula - Answers Y = A F(L, K, H, N)
Production Function: Y - Answers Real GDP or quantity of output.
Production Function: A - Answers The available production technology.
Production Function: L - Answers The quantity of labor.
Production Function: K - Answers The quantity of physical capital.
Production Function: H - Answers The quantity of human capital.
Production Function: N - Answers The quantity of natural resources.
Diminishing Returns - Answers Property where the benefit from an extra unit of input declines as
input increases.
Catch-up Effect - Answers The property whereby poor countries tend to grow more rapidly than rich
countries.
Government Influence on Resources - Answers Policies promoting saving, investment, education,
health, and free trade.
Loanable Funds Market: Supply - Answers National saving, upward sloping
Loanable Funds Market: Demand - Answers Gross private investment (I), downward sloping
Loanable Funds Market: Vertical Axis - Answers The real interest rate, price of borrowed funds
Loanable Funds: Shifters of Supply - Answers Changes in private saving incentives, government
budget deficits/surpluses, and changes in household consumption habits
Loanable Funds: Shifters of Demand - Answers Changes in investment tax credits, business
optimism/pessimism, new technology that raises return on capital
Closed Economy GDP Equation - Answers Y = C + I + G
Private Saving Formula - Answers Y - C - T
Public Saving Formula - Answers T - G
National Saving Formula - Answers (Y - C - T) + (T - G) or simply Y - C - G
Budget Deficit - Answers Occurs when government spending exceeds tax revenue (G > T).
Budget Surplus - Answers Occurs when tax revenue exceeds government spending (T > G).
National Saving and Investment (Closed Economy) - Answers National Saving must equal Investment
(S = I).
Direct Financial Links - Answers The bond market and the stock market.
Indirect Financial Links - Answers Financial intermediaries like banks and mutual funds.
Saving vs. Investment (Macroeconomics) - Answers Saving is unspent income; investment is
purchasing new physical capital.
Compounding Formula - Answers FV = PV × (1 + r)ⁿ
Discounting Formula - Answers PV = FV / (1 + r)ⁿ
Interest Rates and Discounting - Answers The higher the interest rate, the more heavily future
payments are discounted.
Market Risk - Answers Risk that affects all economic actors; it cannot be diversified away.
Firm-Specific Risk - Answers Risk that affects only a single company; it can be diversified away.
Risk Averse - Answers A dislike of uncertainty; preferring a certain outcome over a risky bet.
Risk Neutral - Answers Indifferent to risk; focusing solely on expected monetary value.
Risk Loving - Answers Preferring a risky prospect over a certain outcome with equal expected value.
Unemployment Data Source - Answers Calculated by the Bureau of Labor Statistics (BLS).
Three Labor Categories - Answers Employed, unemployed, and not in the labor force.
Labor Force Participation Rate Formula - Answers (Labor Force / Adult Population) × 100
Frictional Unemployment - Answers Unemployment resulting from the time it takes workers to
search for jobs.
Structural Unemployment - Answers Unemployment arising when wages are kept above equilibrium,
causing labor surplus.
Cyclical Unemployment - Answers Unemployment associated with short-run business cycle
fluctuations.
Natural Rate of Unemployment - Answers The normal rate around which the actual unemployment
rate fluctuates.
Discouraged Workers - Answers Individuals who want a job but have given up looking.
Wages Above Equilibrium - Answers Unions, minimum wage laws, and efficiency wages hold wages
up, causing unemployment.
Economy-Wide Production Function Formula - Answers Y = A F(L, K, H, N)
Production Function: Y - Answers Real GDP or quantity of output.
Production Function: A - Answers The available production technology.
Production Function: L - Answers The quantity of labor.
Production Function: K - Answers The quantity of physical capital.
Production Function: H - Answers The quantity of human capital.
Production Function: N - Answers The quantity of natural resources.
Diminishing Returns - Answers Property where the benefit from an extra unit of input declines as
input increases.
Catch-up Effect - Answers The property whereby poor countries tend to grow more rapidly than rich
countries.
Government Influence on Resources - Answers Policies promoting saving, investment, education,
health, and free trade.
Loanable Funds Market: Supply - Answers National saving, upward sloping
Loanable Funds Market: Demand - Answers Gross private investment (I), downward sloping
Loanable Funds Market: Vertical Axis - Answers The real interest rate, price of borrowed funds
Loanable Funds: Shifters of Supply - Answers Changes in private saving incentives, government
budget deficits/surpluses, and changes in household consumption habits
Loanable Funds: Shifters of Demand - Answers Changes in investment tax credits, business
optimism/pessimism, new technology that raises return on capital
Closed Economy GDP Equation - Answers Y = C + I + G
Private Saving Formula - Answers Y - C - T
Public Saving Formula - Answers T - G
National Saving Formula - Answers (Y - C - T) + (T - G) or simply Y - C - G
Budget Deficit - Answers Occurs when government spending exceeds tax revenue (G > T).
Budget Surplus - Answers Occurs when tax revenue exceeds government spending (T > G).
National Saving and Investment (Closed Economy) - Answers National Saving must equal Investment
(S = I).
Direct Financial Links - Answers The bond market and the stock market.
Indirect Financial Links - Answers Financial intermediaries like banks and mutual funds.
Saving vs. Investment (Macroeconomics) - Answers Saving is unspent income; investment is
purchasing new physical capital.
Compounding Formula - Answers FV = PV × (1 + r)ⁿ
Discounting Formula - Answers PV = FV / (1 + r)ⁿ
Interest Rates and Discounting - Answers The higher the interest rate, the more heavily future
payments are discounted.
Market Risk - Answers Risk that affects all economic actors; it cannot be diversified away.
Firm-Specific Risk - Answers Risk that affects only a single company; it can be diversified away.
Risk Averse - Answers A dislike of uncertainty; preferring a certain outcome over a risky bet.
Risk Neutral - Answers Indifferent to risk; focusing solely on expected monetary value.
Risk Loving - Answers Preferring a risky prospect over a certain outcome with equal expected value.
Unemployment Data Source - Answers Calculated by the Bureau of Labor Statistics (BLS).
Three Labor Categories - Answers Employed, unemployed, and not in the labor force.
Labor Force Participation Rate Formula - Answers (Labor Force / Adult Population) × 100
Frictional Unemployment - Answers Unemployment resulting from the time it takes workers to
search for jobs.
Structural Unemployment - Answers Unemployment arising when wages are kept above equilibrium,
causing labor surplus.
Cyclical Unemployment - Answers Unemployment associated with short-run business cycle
fluctuations.
Natural Rate of Unemployment - Answers The normal rate around which the actual unemployment
rate fluctuates.
Discouraged Workers - Answers Individuals who want a job but have given up looking.
Wages Above Equilibrium - Answers Unions, minimum wage laws, and efficiency wages hold wages
up, causing unemployment.
